One Informal Visit to Washington Results in $180K Tax Bill

Published February 26, 2014

In three hours, I’ll be testifying to the U.S. House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Administrative Law. The subject of the hearing is the Business Activity Tax Simplification Act (BATSA) of 2013, H.R. 2992, co-sponsored by Rep. Bob Goodlatte (R-VA) and Rep. Bobby Scott (D-VA).

What is BATSA? BATSA re-affirms the physical presence rule – the rule that states can impose corporate income taxes and other business activity taxes only on companies that have phyiscal presence in a state.

States are unfortunately becoming more aggressive about reaching beyond their borders to impose taxes on out-of-state companies with neither property nor employees in the state. Not only do these parochial actions harm the national economy, they’re bad tax policy because they violate the benefit principle that people should pay taxes where they receive benefits from government services.

You’ll hear more on my testimony later. But I wanted to share the story of a fellow witness at today’s hearing, Pete Vegas. We’ve tried to get the word out about Pete’s story since he first reached out to us in 2011. Pete runs a food manufacturing company, with facilities in California, Arkansas, and Texas, and they sell their products all over the country. While in Washington State on a personal trip, he stopped by an existing customer to say hi and introduce himself.

Later, revenue officials learned that Pete’s trucks were going into the state, so they sent what they call a nexus questionnaire (what I would call a fishing expedition) to Pete’s company, asking “How many times per year” did he visit Washington? Pete answered “once.” Big mistake. Washington then sent Pete an invoice for seven years of back taxes of their gross reciepts tax, the Business & Occupation Tax, plus interest and penalties — $180,000 in total. 

Pete’s a fighter and he appealed and ultimately won. (Hear his story in his own words here.)

But for every Pete Vegas who fights overly aggressive state tax actions, lots of businesses get trampled. Today, I’ll be explaining the physical presence rule and why it’s important, and why it’s constitutional and appropriate for Congress to set rules on the limits of state authority to tax multistate companies that have all their property and employees in other states. Stay tuned.

Joseph Henchman ([email protected]) is vice president of Legal & State Projects at the Tax Foundation.