An eye-opening article in City Journal exposes the extent to which state tax agencies are now going in their efforts to
Revenue-hunting states have lately gone beyond raising their own taxes; now they’re trying to shake down firms and workers in other states. Stretching the limits of the U.S. Constitution’s Commerce Clause to the breaking point, local revenue agents have seized out-of-state trucks simply passing through their jurisdiction, refusing to release them until the firms that dispatched them fork over corporate income taxes. Finance departments have slapped out-of-state businesses with bills for thousands of dollars in corporate back taxes, based on little more than a single worker visiting the state sometime during the year. And tax agents have targeted employees who work remotely for in-state firms, claiming that they owe personal income taxes, even when they’ve never stepped foot in the taxing state.
Technological change has unleashed some of this unprecedented aggression. In a world where businesses can offer products to customers thousands of miles away, or sell sophisticated services, such as cloud computing, that seem to originate from nowhere, states that once levied business taxes only on physically present firms have been coming up with far broader definitions for what, and who, is taxable. At best, the states have inconsistently defined what falls under their tax jurisdiction; at worst, they’ve used the transforming technological landscape as an excuse to grab revenues from surprised (and outraged) new sources.
. . .
The Supreme Court has invited Congress to clean up this mess, and a handful of bills are circulating in Washington that offer clearer standards on what constitutes “tax nexus”—the state authority to tax a firm or an individual located elsewhere. Yet for years, Congress has put off passing any remedy, causing confusion, bitterness, and sometimes outright panic within the business community. As one corporate-finance officer put it to CFO recently: “The states are in a pure ‘money grab’ mode and don’t care about policy, the law, or fairness.”
. . .
New Jersey’s shakedown tactics have spread. California, Massachusetts, New York, Pennsylvania, Illinois, Nebraska, and Virginia have been among the states named in congressional testimony for trying to levy corporate taxes on firms whose only substantial connection is a visiting truck. In one typical case, when a small Milwaukee transportation firm, LTL Trucking, answered a Nebraska tax questionnaire by acknowledging that its trucks had driven through the state in recent years, it received a back-tax bill of $1,321, despite having no inventory, customers, or sales there.
. . .
In a universe of countless virtual connections, businesses find themselves exposed to state taxes in ways they might never have anticipated. For example, a survey by Bloomberg BNA, a division of Bloomberg that consults on tax and finance issues, found that 16 states now assess corporate taxes on businesses with websites hosted on independent servers in the state, regardless of whether the business itself is physically present. Similarly, all but six states said that they would tax an out-of-state firm if just one telecommuter worked for it from their territory. Half of those governments said that their corporate income taxes would kick in even if the company had zero sales in the state.
There's much more at the link. It's infuriating reading, but yet more evidence that Big Brother has gotten far too big for his boots at the state level, not just in federal government.
Time for a political house-cleaning. Remember in November!
Peter
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