Up at BAT, But It's A Long Way Home

Two lawmakers from Virginia say some states have gotten a little too greedy with business taxes and aim to fix that with a new bill. But they face at least one formidable critic.

Reps. Rick Boucher (D-Va.) and Bob Goodlatte (R-Va.) have reintroduced a bill that they say is designed to clarify the confusion surrounding what's called the "business activity tax," or BAT, that some states impose on out-of-state businesses.

The lawmakers cite examples of states gone tax-wild - they say some states take the position that a business whose trucks pass through the state six or fewer times annually without even picking up or delivering goods within that state is subject to the state's business taxes.

They add that there are states that say if a company has a Web site on a server in a particular state but no physical presence there, that company should have to pay activity taxes in that state.

But some groups, like the powerful National Governors' Association, argue that it's a really bad idea to impose a federal standard for determining when a state should tax a company. The group strongly opposes the bill because it says the measure would "encourage tax sheltering and discriminate against smaller and locally owned businesses, and cost states approximately $6.6 billion annually."

"This legislation essentially would shift the tax burden to small businesses and locally owned stores, while favoring out-of-state corporations and larger in-state companies with the means to exploit loopholes," said David Quam, director of NGA's Office of Federal Relations, in a statement.

The House Small Business Committee is holding a Thursday late-morning hearing on the matter. The panel's ranking member, Rep. Steve Chabot (R-Ohio), released a statement previewing the hearing that outlines his position on the matter: "Over the past several years, a growing number of states have sought to collect business activity taxes, dissuading many small businesses from expanding into those economies."

The International Franchise Association plans to weigh in at the hearing, saying franchised businesses would be especially hard hit by the BAT, calling them "unfair taxes." According to a 2008 study by PricewaterhouseCoopers, there are 909,000 franchise establishments in the United States, employing 21 million workers and generating $2.3 trillion in annual economic output for the nation.

David French, vice president of government relations for the franchise group, explained that the business activity tax wouldn't affect large franchisors like McDonald's which has a presence in every state. However, it would affect smaller franchisors that have a presence in only some states.

"The BAT has evolved into a more creative way to finance state revenues...and the ability of a state to reach beyond its borders and tax commerce that is in the intangible realm, including commerce that is electronic for example" is a great concern to us and others, he said. "It's a question about how far outside its borders a state can reach."

Also testifying at the hearing will be representatives from the National Marine Manufacturers Association, Consumer Electronics Association, North American Association of Food Equipment Manufacturers and the Direct Marketing Association.

By Sharon McLoone |  February 14, 2008; 10:00 AM ET Regulation Legislation
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