Statement of Judiciary Committee Chairman Lamar Smith Full Committee Markup of H.R. 1439, the "Business Activity Tax Simplification Act of 2011"

Statement of Judiciary Committee Chairman Lamar Smith
Full Committee Markup of
H.R. 1439, the “Business Activity Tax Simplification Act of 2011”

Chairman Smith: Article One of the Constitution reflects the Founding Fathers’ judgment that interstate commerce should be regulated exclusively by Congress. 

The Commerce Clause was included in the Constitution to prevent individual states from imposing protectionist tax laws that discriminate against interstate trade and stifle the national economy. 

States remain free under the Tenth Amendment to set their own tax policy.  But state tax laws should not extend beyond the state’s borders and place a burden on interstate commerce. 

The Constitution’s prohibition of protectionist state laws is referred to as the dormant commerce clause.  In its 1992 opinion in Quill v. North Dakota, the Supreme Court clarified the dormant commerce clause’s constraints on state tax policy. 

The Quill court reaffirmed prior case law that held that a state may not require a business that lacks a physical presence in the state to collect and remit the state’s sales tax.  A contrary rule would allow a state to tax interstate transactions—a power reserved exclusively to Congress.

In reaffirming the “physical presence” test, the Quill court noted that “a bright-line rule in the area of sales and use taxes … encourages settled expectations and, in doing so, fosters investment by businesses and individuals.” 

Businesses are risk-averse without certainty about their tax liability.  Some economists have recently said that regulatory, tax, and other market uncertainty discourages American businesses from investing billions of dollars of side-lined capital and creating new jobs. 

The Quill case applies only to sales and use taxes.  Some states acknowledge that the physical presence test applies equally to corporate income and other business activity taxes.  But many states do not.  Those states impose income tax on out-of-state businesses with an “economic nexus” or other vague connection to the state.    

The lack of any uniform standard for an “economic nexus” test creates uncertainty and imposes a significant burden on American small businesses with interstate operations. 

On April 13, a Virginia-based franchisor testified before the Courts, Commercial and Administrative Law Subcommittee that every year, despite his best efforts, he cannot determine with certainty where his business has economic nexus and to which states his company owes income tax. 

Tax laws should be clear so that small businesses can anticipate their tax liability.  State income tax policies should provide enough certainty to enable a business to decide whether to engage in conduct that results in state tax liability before such liability accrues. 

No business should have to hold its breath and wait by the mailbox on January 1 to see which states will send it a tax bill. 

The Business Activity Tax Simplification Act gives certainty to businesses by clarifying where they owe income taxes.  It prohibits states with only a superficial connection to a business from taxing its income. 
This bill also updates Public Law 86-272, a sixty-two-year-old law that provides that a business lacks physical presence in a state if it employs traveling salespeople who sell tangible goods. 

Intangible goods are increasingly popular in our modern digital economy.  There is no principled reason to treat someone who sells tangible goods differently than someone who sells intangible goods for purposes of imposing a net income tax on the person’s employer.

Finally, this legislation establishes an apportionment rule that is consistent with the physical presence standard for states that require combined reporting of a corporate family’s income. 

I appreciate the bipartisan leadership of Mr. Goodlatte and Mr. Scott on this bill and the bipartisan support from other members of this Committee.