Clarification of States’ Taxing Power Will Provide More Certainty for Businesses

By August 9, 2012Taxation

Manufacturers of all sizes continue to be bombarded with unexpected and punitive tax assessments by states where they have no physical presence—that is, no plant and no employees in the state. This persistent and growing problem increases their tax burden and injects even more uncertainty into business planning.

Fortunately there is help in sight. Legislation currently pending in Congress—the “Business Activity Tax Simplification Act,” H.R. 1439—would establish a bright line, physical presence test clarifying when states can impose business activity taxes, e.g. state income tax, on out-of-state companies engaged in interstate commerce.

This is smart legislation. It would allow business taxpayers to make investment plans and hiring decisions without the threat of random state tax assessments and costly litigation. State business activity taxes are particularly problematic for small and medium size manufacturers. Typically these companies don’t have in-house tax departments to navigate their way through the time consuming paperwork associated with these taxes, which in some cases include penalties and interest.

Kudos to the Los Angeles Business Journal for an excellent article on one company’s experience with these random state taxes. Bobrick Washroom Equipment, a medium size manufacturer in North Hollywood, CA, spent $185,000 appealing one state’s tax assessment, and spent an additional $100,000 to settle the case. This is real money to a company that would rather spend it on expansion and job creation rather than lawyers and fees.

Policy makers would be wise to enact H.R. 1439 to help provide some tax certainty in a very uncertain tax climate.

Monica McGuire is senior director-tax policy, National Association of Manufacturers.

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