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109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     109-575

======================================================================



 
            BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2006

                                _______
                                

 July 17, 2006.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

 Mr. Sensenbrenner, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 1956]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on the Judiciary, to whom was referred the bill 
(H.R. 1956) to regulate certain State taxation of interstate 
commerce; and for other purposes, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.
  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Business Activity Tax Simplification 
Act of 2006''.

SEC. 2. REMOVAL OF CERTAIN LIMITATIONS ON THE APPLICATION OF PUBLIC LAW 
                    86-272.

  (a) Solicitations With Respect to Sales and Transactions of Other 
Than Tangible Personal Property.--Section 101 of the Act entitled ``An 
Act relating to the power of the States to impose net income taxes on 
income derived from interstate commerce, and authorizing studies by 
congressional committees of matters pertaining thereto'', approved 
September 14, 1959 (15 U.S.C. 381 et seq.) is amended--
          (1) in subsection (a)(1) by striking ``of tangible'' and all 
        that follows through ``State; and'' and inserting the 
        following:
        ``or transactions, which orders are sent outside the State for 
        approval or rejection and, if approved, are--
                  ``(A) in the case of tangible personal property, 
                filled by shipment or delivery from a point outside the 
                State; and
                  ``(B) in the case of all other forms of property, 
                services, and other transactions, fulfilled from a 
                point outside the State;
        and'';
          (2) in subsection (c)--
                  (A) by inserting ``or fulfilling transactions'' after 
                ``making sales'';
                  (B) by inserting ``or transactions'' after ``sales'' 
                the other places it appears;
                  (C) by striking ``of tangible personal property'' the 
                first place it appears; and
                  (D) by striking ``, of tangible personal property''; 
                and
          (3) in subsection (d)(1) by striking ``the sale of, tangible 
        personal property'' and inserting ``a sale or transaction,''.
  (b) Application of Prohibitions to Other Business Activity Taxes.--
Title I of the Act entitled ``An Act relating to the power of the 
States to impose net income taxes on income derived from interstate 
commerce, and authorizing studies by congressional committees of 
matters pertaining thereto'', approved September 14, 1959 (15 U.S.C. 
381 et seq.) is amended by adding at the end the following:
  ``Sec. 105. Beginning with taxable periods beginning on or after the 
first day of the first calendar year that begins after the date of the 
enactment of the Business Activity Tax Simplification Act of 2006, the 
prohibitions of section 101 that apply with respect to net income taxes 
shall also apply with respect to each other business activity tax, as 
defined in section 4 of the Business Activity Tax Simplification Act of 
2006. A State or political subdivision thereof may not assess or 
collect any tax which by reason of this section the State or political 
subdivision may not impose.''.
  (c) Effective Date of Subsection (a) Amendments.--The amendments made 
by subsection (a) shall apply with respect to the imposition, 
assessment, and collection of taxes for taxable periods beginning on or 
after the first day of the first calendar year that begins after the 
date of the enactment of the Business Activity Tax Simplification Act 
of 2006.

SEC. 3. JURISDICTIONAL STANDARD FOR STATE AND LOCAL NET INCOME TAXES 
                    AND OTHER BUSINESS ACTIVITY TAXES.

  (a) In General.--No taxing authority of a State shall have power to 
impose, assess, or collect a net income tax or other business activity 
tax on any person relating to such person's activities in interstate 
commerce unless such person has a physical presence in the State during 
the taxable period with respect to which the tax is imposed.
  (b) Requirements for Physical Presence.--For the purposes of 
subsection (a), a person has a physical presence in a State only if 
such person's business activities in the State include any of the 
following, collectively and on more than 21 days in the aggregate, 
during such person's taxable year:
          (1) Being an individual physically in the State, or assigning 
        one or more employees to be in the State, except that the 
        following shall be excluded in determining whether such 21-day 
        limit has been exceeded:
                  (A) Activities in connection with a possible or an 
                actual purchase of goods or services, for consumption 
                by the person's business.
                  (B) Gathering news for print, broadcast, or other 
                distribution through the news media.
                  (C) Meeting government officials for purposes other 
                than selling goods or services, for consumption by such 
                government.
                  (D) Merely attending educational or training 
                conferences, seminars or other similar functions.
                  (E) Nonprofit participation in charitable activities.
          (2) Using the services of an agent (excluding an employee) to 
        establish or maintain the market in the State, if such agent 
        does not perform business services in the State for any other 
        person during such taxable year.
          (3) The leasing or owning of tangible personal property or of 
        real property in the State, except that the following shall be 
        excluded in determining whether such 21-day limit has been 
        exceeded:
                  (A) Tangible personal property located in the State 
                for purposes of being assembled, manufactured, 
                processed, or tested by another person for the benefit 
                of the owner or lessee, or used to furnish a service to 
                the owner or lessee by another person.
                  (B) Marketing or promotional materials distributed in 
                the State.
                  (C) Any property to the extent used ancillary to an 
                activity excluded from the computation of the 21-day 
                period based on paragraph (1) or (2).
  (c) Taxable Periods not Consisting of a Year.--If the taxable period 
for which the tax is imposed is not a year, then any requirements 
expressed in days for establishing physical presence under this Act 
shall be adjusted pro rata accordingly.
  (d) Exceptions.--
          (1) Domestic business entities and individuals domiciled in, 
        or residents of, the state.--Subsection (a) does not apply with 
        respect to--
                  (A) a person (other than an individual) that is 
                incorporated or formed under the laws of the State (or 
                domiciled in the State) in which the tax is imposed; or
                  (B) an individual who is domiciled in, or a resident 
                of, the State in which the tax is imposed.
          (2) Taxation of partners and similar persons.--This section 
        shall not be construed to modify or affect any State business 
        activity tax liability of an owner or beneficiary of an entity 
        that is a partnership, an S corporation (as defined in section 
        1361 of the Internal Revenue Code of 1986 (26 U.S.C. 1361)), a 
        limited liability company, a trust, an estate, or any other 
        similar entity, if the entity has a physical presence in the 
        State in which the tax is imposed.
          (3) Preservation of authority.--This section shall not be 
        construed to modify, affect, or supersede the authority of a 
        State to bring an enforcement action against a person or entity 
        that may be engaged in an illegal activity, a sham transaction, 
        or any perceived or actual abuse in its business activities if 
        such enforcement action does not modify, affect, or supersede 
        the operation of any provision of this Act or of any other 
        Federal law.
          (4) Certain activities.--With respect to the following, 
        subsection (b) shall be read by substituting ``at least one 
        day'' for ``more than 21 days in the aggregate'':
                  (A) The sale within a State of tangible personal 
                property, if delivery of the property originates and is 
                completed within the State.
                  (B) The performance of services that physically 
                affect real property within a State.
          (5) Exception relating to certain performances and sporting 
        events.--With respect to the taxation of the following, 
        subsection (b) shall be read by substituting ``at least one 
        day'' for ``more than 21 days in the aggregate'':
                  (A) A live performance in a State, before a live 
                audience of more than 100 individuals.
                  (B) A live sporting event in a State before more than 
                100 spectators present at the event.
  (e) Rule of Construction.--This section shall not be construed to 
modify, affect, or supersede the operation of title I of the Act 
entitled ``An Act relating to the power of the States to impose net 
income taxes on income derived from interstate commerce, and 
authorizing studies by congressional committees of matters pertaining 
thereto'', approved September 14, 1959 (15 U.S.C. 381 et seq.).

SEC. 4. DEFINITIONS.

  The following definitions apply in this Act:
          (1) Net income tax.--The term ``net income tax'' has the 
        meaning given that term for the purposes of the Act entitled 
        ``An Act relating to the power of the States to impose net 
        income taxes on income derived from interstate commerce, and 
        authorizing studies by congressional committees of matters 
        pertaining thereto'', approved September 14, 1959 (15 U.S.C. 
        381 et seq.).
          (2) Other business activity tax.--
                  (A) The term ``other business activity tax'' means--
                          (i) a tax imposed on or measured by gross 
                        receipts, gross income, or gross profits;
                          (ii) a business license tax;
                          (iii) a business and occupation tax;
                          (iv) a franchise tax;
                          (v) a single business tax or a capital stock 
                        tax; or
                          (vi) any other tax imposed by a State on a 
                        business for the right to do business in the 
                        State or measured by the amount of, or economic 
                        results of, business or related activity 
                        conducted in the State.
                  (B) The term ``other business activity tax'' does not 
                include a sales tax, a use tax, or a similar tax, 
                imposed as the result of the sale or acquisition of 
                goods or services, whether or not denominated a tax 
                imposed on the privilege of doing business.
          (3) State.--The term ``State'' means any of the several 
        States, the District of Columbia, or any territory or 
        possession of the United States, or any political subdivision 
        of any of the foregoing.
          (4) Tangible personal property.--The term ``tangible personal 
        property'' does not include computer software that is owned and 
        licensed by the owner to another person.

SEC. 5. EFFECTIVE DATE.

  Except as provided otherwise in this Act, this Act applies with 
respect to taxable periods beginning on and after the first day of the 
first year that begins after the date of enactment of this Act.

                          Purpose and Summary

    H.R. 1956, the ``Business Activity Tax Simplification Act 
of 2006,'' \1\ provides a bright-line physical presence nexus 
requirement in order for States to collect net income taxes or 
other business activity taxes on multistate enterprises. H.R. 
1956 would amend Public Law 86-272,\2\ enacted in 1959, which 
prohibits States from imposing taxes on the net income of 
interstate sellers of tangible personal property if the only 
business activity within the State consists of the solicitation 
of certain sales orders. H.R. 1956 lists the conditions that a 
business must meet in order to establish a physical presence 
for the purposes of a State imposing business activity taxes. 
It also cites those conditions that should be disregarded in 
determining whether a business has established physical 
presence within a State. H.R. 1956 promotes interstate commerce 
by creating certainty for both States and businesses to know 
when a business has a taxable nexus within a State.
---------------------------------------------------------------------------
    \1\ H.R. 1956 was introduced by Representative Bob Goodlatte (R-VA) 
on April 28, 2005.
    \2\ Pub. L. No. 86-272, 73 Stat. 555 (1959) (codified, as amended, 
at 15 U.S.C. Sec. 381 et seq. (2004)).
---------------------------------------------------------------------------

                Background and Need for the Legislation

    Legislation similar to H.R. 1956 was introduced in the 
107th \3\ and the 108th \4\ Congresses. On September 11, 2001, 
the Subcommittee on Commercial and Administrative Law held a 
hearing on H.R. 2526. While the hearing was adjourned 
prematurely due to the terrorist attacks in New York and 
Washington, D.C., testimony was received from the following 
witnesses: Stanely Sokul, Member of the Advisory Commission on 
Electronic Commerce and Principal of Davidson & Company; Fred 
Montgomery, Director of State and Local Tax of Sara Lee 
Corporation; Arthur Rosen, Chairman of the Coalition for 
Rational and Fair Taxation and partner at the law firm of 
McDermott, Will & Emery; and June Summer Haas, Commissioner of 
Revenue of the Michigan Department of Treasury.\5\ The 
Subcommittee, by voice vote, favorably reported the bill, as 
amended, to the full committee.\6\
---------------------------------------------------------------------------
    \3\ Internet Tax Fairness Act of 2001, H.R. 2526, 107th Cong. 
(2001) (introduced by Representative Bob Goodlatte (R-VA) on July 17, 
2001). In addition to the physical presence nexus requirements, this 
bill originally included a permanent ban on Internet access taxes, as 
well as a ban on multiple or discriminatory taxes levied on goods sold 
online.
    \4\ Business Activity Tax Simplification Act of 2003, H.R. 3220, 
108th Cong. (2003) (introduced by Representative Bob Goodlatte (R-VA) 
on October 1, 2003).
    \5\ Internet Tax Fairness Act of 2001: Hearing on H.R. 2526 Before 
Subcomm. on Commercial & Admin. Law of the H. Comm. on the Judiciary, 
107th Cong. 4-6 (2001) (Statement of Rep. Bob Barr, Chairman, Subcomm. 
on Commercial & Admin. Law of the H. Comm. on the Judiciary).
    \6\ The substitute amendment struck the title and Internet tax 
language in the bill and renamed the measure the ``Business Activity 
Tax Modernization Act of 2002.'' There was no further action on H.R. 
2526 in the 107th Congress.
---------------------------------------------------------------------------
    In the 108th Congress, the Subcommittee on Commercial and 
Administrative Law once again held hearings on business 
activity tax legislation, H.R. 3220. Testimony was received 
from: Rick Clyburgh, the Tax Commissioner for the State of 
North Dakota; Jamie Van Fossen, State Representative for the 
81st House District of the State of Iowa; Arthur Rosen, 
Chairman of the Coalition for Rational and Fair Taxation and 
partner at the law firm of McDermott, Will & Emery; and Vernon 
Turner, Corporate Tax Director of SmithField Foods, Inc.\7\
---------------------------------------------------------------------------
    \7\ Business Activity Tax Simplification Act of 2003, Hearing on 
H.R. 3220 Before the Subcomm. on Commercial & Admin. Law of the H. 
Comm. On the Judiciary, 108th Cong. 6-7 (2004) (Statement of Rep. Chris 
Cannon, Chairman, Subcomm. on Commercial & Admin. Law of the H. Comm. 
on the Judiciary).
---------------------------------------------------------------------------
    Most States and some local governments levy a range of 
business activity taxes on companies that either operate or 
conduct business activities within their jurisdictions. With 
the exception of Nevada, South Dakota, Washington, and Wyoming, 
all States and the District of Columbia levy general corporate 
income taxes. The rates for income taxes range from 1 percent 
in Alaska to 9.99 percent in Pennsylvania.\8\ In 2004, 
corporate income taxes imposed by the States accounted for only 
5.19 percent of all of the taxes collected by the States.\9\ 
Most States also require nonresident corporations to remit 
taxes if they reach out or otherwise ``purposefully avail'' 
themselves of the privilege of doing business in the taxing 
State. The conceptual and legal bases for this taxing authority 
are often somewhat tenuous, resting upon imprecise formulations 
and shifting jurisdictional theories. The determination of the 
outer limits of State taxing power over nonresident businesses 
has given rise to substantial litigation between State taxing 
authorities and multistate business enterprises. While State 
and local governments may tax transactions occurring within 
their jurisdictions, this authority is not unlimited. More 
specifically, the Constitution imposes constraints on a State 
is power to compel nonresident business entities to collect and 
remit taxes.
---------------------------------------------------------------------------
    \8\ Federation of Tax Administrators, Range of State Corporate 
Income Tax Rates (2005), http://www.taxadmin.org/fta/rate/
corp__inc.html.
    \9\ U.S. Census Bureau, State Government Tax Collections: 2004 
(2005), http://www.census.gov/govs/statetax/0400usstax.html.
---------------------------------------------------------------------------

        1. CONSTITUTIONAL LIMITATIONS ON STATE TAXING AUTHORITY

Dormant commerce clause

    The Commerce Clause of the Constitution authorizes Congress 
to ``regulate Commerce with foreign Nations, and among the 
several States.'' \10\ While the Commerce Clause establishes a 
predicate for Congressional regulation, the Supreme Court has 
also interpreted the Commerce Clause to create a negative 
limitation on State power to regulate in areas that might 
adversely affect interstate commerce. This limitation on State 
power is referred to as the Dormant Commerce Clause. Since 
State taxation of commerce may burden interstate commerce, the 
Court has placed constitutional constraints on State taxing 
authority.\11\
---------------------------------------------------------------------------
    \10\ U.S. Const. art. I, sec. 8, cl. 2.
    \11\ Ronald Rotunda, Modern Constitutional Law 135 (5th ed. 1998).
---------------------------------------------------------------------------
    The fullest legal explanation of Dormant Commerce Clause 
limitations on State taxing authority is contained in Quill 
Corp. v. North Dakota.\12\ Quill concerned North Dakota's 
attempt to require an out-of-state mail order catalog retailer 
to collect and pay a use tax on goods purchased for use within 
the State. Quill Corporation, a Delaware corporation, grossed 
more than $1 million a year in mail order catalog sales to 
North Dakota residents, but lacked a physical presence in the 
State. When North Dakota moved to compel Quill Corporation to 
collect and remit use taxes, the corporation resisted on the 
grounds that such action by the State was unconstitutional. The 
Supreme Court concluded North Dakota's efforts to compel a 
remote seller to collect and remit use taxes to that State 
without a physical presence or other ``substantial nexus'' 
violated the Commerce Clause.\13\ By requiring a remote seller 
to have a physical presence in the taxing State, the Court 
maintained a previously enunciated use tax safe harbor for 
remote vendors ``whose only connection with customers in the 
taxing State is by common carrier or United States mail.'' \14\
---------------------------------------------------------------------------
    \12\ 504 U.S. 298 (1992). While traditional ``brick and mortar'' 
sales outlets are required to collect State and local sales taxes, 
remote electronic sellers may escape State taxation if they lack a 
``substantial nexus'' with the buyer's State.
    \13\ The Quill Court reiterated the four part test enunciated in 
Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977), holding that 
State taxation survives Dormant Commerce Clause challenge if the tax:
    (1) is applied to an activity with a substantial nexus with the 
taxing state; (2) is fairly apportioned;
    (3) does not discriminate against interstate commerce and;
    (4) is fairly related to services provided by the State.
    Quill, 504 U.S. at 311.
    \14\ National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 
386 U.S. 753 (1967).
---------------------------------------------------------------------------

Due process clause

    The Fourteenth Amendment of the Constitution has been 
interpreted to limit the power of a State government to assert 
taxing jurisdiction over parties who do not reside in the forum 
State. A State statute imposing taxes on nonresident businesses 
will withstand Due Process challenge if the taxing State 
demonstrates ``some definite link, some minimum connection, 
between a State and the person, property or transaction it 
seeks to tax.'' \15\ As long as the business entity (be it a 
remote seller or a nonresident corporation) ``purposefully 
avails itself of the benefits of an economic market in the 
forum State, it may be subject to the State's jurisdiction even 
if it has no physical presence in the State.'' \16\
---------------------------------------------------------------------------
    \15\ Quill, 504 U.S. at 306 (quoting Miller Bros. Co. v. Maryland, 
311 U.S. 457, 463 (1940)).
    \16\ Id. at 307. See also International Shoe v. Washington, 326 
U.S. 310 (1945).
---------------------------------------------------------------------------
    To curb perceived prospective tax revenue losses, some 
States have begun to consider novel theories for expanding 
their taxing authority over remote sellers. For example, some 
tax officials have speculated that an Internet service provider 
(ISP), which connects consumers to the Internet, acts as an 
agent of online sellers and therefore creates a ``nexus'' for 
electronic merchants ``doing business'' in the taxing State. 
But, the existence of a plethora of conflicting jurisdictional 
taxing criteria for out-of-state businesses burdens interstate 
commerce.

                          2. PUBLIC LAW 86-272

    To provide a measure of jurisdictional clarity over State 
efforts to tax out-of-state businesses on sales of tangible 
goods, Congress passed Public Law 86-272 in 1959 \17\. This law 
prohibits States from imposing taxes on the net income of 
interstate sellers of tangible personal property if the only 
business activities within the State consist of:
---------------------------------------------------------------------------
    \17\ 15 U.S.C Sec. 381 et seq. (2004).
---------------------------------------------------------------------------
      (1) the solicitation of orders by such person, or his 
representative, in such State for sales of tangible personal 
property, which orders are sent outside the State for approval 
or rejection, and if approved, are filled by shipment or 
delivery from a point outside the State; and (2) the 
solicitation of orders by such person, or his representative, 
in such State in the name of or for the benefit of a 
prospective customer of such person, if orders by such customer 
to such person to enable such customer to fill orders resulting 
from such solicitation.
This law provides that a State lacks authority to tax a 
nonresident business if its only activities in the taxing State 
consist of the solicitation or delivery of orders for tangible 
personal property.

  3. CONTINUED LEGAL UNCERTAINTY FOR NONRESIDENT MULTISTATE BUSINESSES

    Enactment of Public Law 86-272 helped c1arify the necessary 
jurisdictional predicates for taxing nonresident corporations 
on the sale of tangible goods. However, this law did not 
resolve all questions in this area because it did not define 
the term ``solicitation,'' and state decisions have conflicted 
on this point. More critically, today's economy is drastically 
different from that of 1959 and is based much more upon 
services and commerce in intangible property. The rise of the 
digital, service-based economy has made nonresident sellers of 
intangible goods and services vulnerable to taxation by distant 
state and local taxing officials. For example, states have 
imposed business activity taxes on an out-of-state bank simply 
because these banks issued credit cards to state residents.\18\
---------------------------------------------------------------------------
    \18\ J.C. Penney National Bank v. Johnson, No. MI998-00497-COA-R3-
CV (Tenn. Ct. App. Dec. 17, 1999), appeal denied, (Tenn. May 8, 2000).
---------------------------------------------------------------------------
    The importance of the service sector to the United State's 
economy cannot be overlooked. The percentage of the economic 
output that is serviced based continues to increase every year. 
In 2005, the service sector of the country's GDP grew by 4.1 
percent, as opposed to the goods sector that grew at only 2.6 
percent. The group of industries including finance, insurance, 
real estate, rental, and leasing contributed 24 percent to the 
real GDP growth in 2005. Over the last 4 years, the service 
industries sector of the GDP has grown at a greater rate than 
that of the goods sector. It is important to encourage policies 
that nurture the growth of this vital sector of the Untied 
State's economy.\19\
---------------------------------------------------------------------------
    \19\ See Bureau of Economic Analysis, U.S. Department of Commerce, 
Services and Goods Sectors Strong in 2005: Advance Estimates of Gross 
Domestic Product (GDP) by Industry (April 27, 2006), http://
www.bea.gov/bea/newsrelarchive/2006/gdpind05.pdf
---------------------------------------------------------------------------
    The current situation of uncertainty concerning the tax 
liabilities of business and how aggressive the State revenue 
departments may become has ``placed a real drag on American 
business, hurting American job growth and harming the entire 
U.S. Economy.'' \20\ During the hearings held by the 
Subcommittee on Commercial and Administrative Law, Lyndon 
William testified that the current taxation standards have 
``lead to a great uncertainty and unpredictability in the 
manner in which multi-state businesses are taxed * * * '' \21\ 
A physical presence standard for the creation of a business 
activity taxing nexus would remove this taxing uncertainty by 
prohibiting states from taxing corporations if they lack 
tangible property or employees in the taxing jurisdiction for a 
set period of time within a taxing period. It would provide 
certainty regarding when a state can tax a business, providing 
the stability and predictability needed by business, especially 
small businesses.
---------------------------------------------------------------------------
    \20\ Business Activity Tax Simplification Act of 2003: Hearing on 
H.R. 3220 Before the Subcomm. on Commercial and Administrative Law of 
the H. Comm. on the Judiciary, 108th Cong. 8 (2004) (statement of 
Arthur Rosen, Chairman of the Coalition for Rational and Fair Taxation 
and partner at the law firm of McDermott, Will & Emery).
    \21\ Business Activity Tax Simplification Act of 2005: Hearing on 
H.R. 1956 Before the Subcomm. on Commercial and Administrative Law of 
the H. Comm. on the Judiciary, 109th Cong. 28 (2005) (statement of 
Lyndon Williams, Tax Counsel for Citigroup Corp).
---------------------------------------------------------------------------

                                Hearings

    The Committee's Subcommittee on Commercial and 
Administrative Law held one day of hearings on H.R. 1956 on 
September 27, 2005. Testimony was received from the following 
witnesses: Carey J. ``Bo'' Horne, President of ProHelp Systems, 
Inc. a home-based software business in South Carolina; Earl 
Ehrhart, State Representative for the 36th House District of 
the State of Georgia and National Chairman of the American 
Legislative Exchange Council; Joan Wagnon, Secretary of Revenue 
for the State of Kansas and Chair of the Multistate Tax 
Commission; and Lyndon D. Williams, Tax Counsel for Citigroup 
Corp. Additional material was submitted by other individuals 
and organizations.

                        Committee Consideration

    On December 13, 2005, the Subcommittee on Commercial and 
Administrative Law met in open session and ordered favorably 
reported the bill H.R. 1956, as amended, by a voice vote, a 
quorum being present. On June 28, 2006, the Committee met in 
open session and ordered favorably reported the bill H.R. 1956 
with an amendment by voice vote, a quorum being present.

                         Vote of the Committee

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee notes that there 
were no recorded votes during the committee consideration of 
H.R. 1956.

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee reports that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of rule XIII of the Rules of the House of 
Representatives is inapplicable because this legislation does 
not provide new budgetary authority or increased tax 
expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 1956, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974:

                                                     July 11, 2006.
Hon. F. James Sensenbrenner, Jr.,
Chairman, Committee on Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1956, the Business 
Activity Tax Simplification Act of 2005.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Sarah Puro 
(for the state and local impact) and Barbara Edwards (for 
federal revenues).
            Sincerely,
                                          Donald B. Marron,
                                                   Acting Director.
    Enclosure.

H.R. 1956--Business Activity Tax Simplification Act of 2005

    Summary: H.R. 1956 would amend current law to prohibit 
state and local governments from taxing certain business 
activities that are currently taxable. Specifically, it would 
prohibit those governments from taxing certain services, 
intangible goods, media activities, and some financial 
activities unless businesses have a ``substantial physical 
presence''--as defined in the bill--in a jurisdiction.
    CBO estimates that enacting H.R. 1956 would increase 
federal revenues by $106 million in 2007, by $1.2 billion over 
the 2007-2011 period, and by $3.1 billion over the 2007-2016 
period. The bill would have no other impacts on the federal 
budget.
    By prohibiting state and local governments from taxing 
certain business activities, H.R. 1956 would impose an 
intergovernmental mandate as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO estimates that the costs--in the form of 
forgone revenues--to state and local governments would exceed 
$1 billion in the first full year after enactment and would 
likely grow to about $3 billion, annually, by 2011. These costs 
would exceed the threshold established in UMRA for 
intergovernmental mandates ($64 million in 2006, adjusted 
annually for inflation).
    This bill contains no new private-sector mandates as 
defined in UMRA.
    Estimated effect on the Federal Government: The estimated 
budgetary impact of H.R. 1956 is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                     By fiscal year, in millions of dollars--
                                 -------------------------------------------------------------------------------
                                   2007    2008    2009    2010    2011    2012    2013    2014    2015    2016
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Estimated Revenues..............     106     225     280     301     319     340     355     367     379     390
----------------------------------------------------------------------------------------------------------------

    CBO expects that enacting H.R. 1956 would reduce payments 
of certain state and local taxes by corporations. These lower 
payments would, in turn, reduce deductions made by corporations 
for federal taxes and raise taxable income for federal 
purposes. State and local governments are expected to adjust 
their finances as a result of these lost revenues. They would 
likely achieve this through some mix of reduced spending and 
higher taxes and fees--both deductible and non-deductible. This 
response by state and local governments would mute, but not 
eliminate, the revenue gain to the federal government. CBO 
estimates that, on balance, H.R. 1956 would increase federal 
revenues by $106 million in 2007, by $1.2 billion over the 
2007-2011 period, and by $3.1 billion over the 2007-2016 
period.
    Intergovernmental mandates contained in the bill: H.R. 1956 
would amend current law to prohibit state and local governments 
from taxing certain business activities that are taxable under 
current law. Specifically, it would prohibit those governments 
from taxing certain services, intangible goods, media 
activities, and some financial activities unless businesses 
have a ``substantial physical presence''--as defined in the 
bill--in a jurisdiction.
    Current law (Public Law 86-272) and certain Supreme Court 
decisions prohibit states from levying a tax on the corporate 
(net) income tax of a company whose only activity in the state 
is pursuing and making sales that would be filled from outside 
the state (e.g., mail order sales). H.R. 1956 would expand the 
prohibition under Public Law 86-272 to certain other types of 
business activity taxes (BATs), including additional corporate 
income taxes, franchise taxes, single business taxes, capital 
state taxes, gross receipt taxes, and business and occupation 
taxes. Corporations currently pay these taxes to a state only 
if the state can establish ``nexus'' with the firm. (``Nexus'' 
is the connection between a firm and a state that allows the 
state to legally impose taxes on the firm.) H.R. 1956 would 
redefine ``nexus'' and preempt state laws that are different 
from that definition. Such a preemption would constitute a 
mandate as defined in UMRA and would result in forgone revenues 
to state and local governments because of the new definition.
    Specifically, provisions in the bill would:
           Define physical presence for firms not based 
        in a state;
           Establish a uniform nexus standard 
        nationwide--an entity would need to be physically 
        present in a state for 21 or more days to establish 
        nexus;
           Create ``carve outs'' from the 21-day 
        standard that would allow certain industries or 
        activities (including banking and media) to exceed the 
        standard without establishing nexus with a state;
           Expand the prohibitions in Public Law 86-272 
        to include certain taxes not based solely on the income 
        of a company (i.e., gross receipts taxes, franchises 
        taxes and business and occupation taxes); and
           Expand the applicability of Public Law 86-
        272 to services and intangibles (e.g., the trademark 
        for a retail store or the patent for a formula for 
        soda).
    Estimated direct costs of mandates to state and local 
governments: CBO estimates that enacting H.R. 1956 would result 
in revenue losses for states and some local governments and 
that such losses likely would total more than $1 billion in the 
first full year after enactment. We estimate that forgone 
revenues would grow to about $3 billion annually by 2011. These 
forgone revenues are about 2 percent of the total BATs 
collected by states in 2006 and about 4.5 percent of the amount 
expected to be collected in 2011, and would far exceed the 
threshold established in UMRA ($64 million in 2006, adjusted 
annually for inflation.) In 2005, states collected almost $650 
billion in total taxes. In the year following enactment, the 
revenue losses resulting from H.R. 1956 would total 
significantly less than one percent of total state tax 
collections and about 3 percent of collections from corporate 
income taxes.
    UMRA includes in its definition of the direct costs of a 
mandate the amounts that state and local governments would be 
prohibited from raising in revenues as a result of the mandate. 
The direct mandate costs of H.R. 1956 would be the tax revenues 
that state and local governments are currently collecting but 
would be precluded from collecting under the bill. Further, 
UMRA's definition of the net costs of a mandate excludes 
additional revenues that state and local governments might 
raise in reaction to enactment of that mandate.
    CBO expects that all states and some local governments 
would see an immediate revenue loss because they are currently 
collecting taxes from firms that would be exempt from taxation 
under the bill. This initial effect would likely exceed $1 
billion, annually, nationwide. Subsequently, it is likely that 
corporations would rearrange their business activities to take 
advantage of beneficial tax treatments that would result from 
the interaction of the new federal law and certain state taxing 
regimes. CBO expects that these reorganizations would occur 
during the first five years after enactment of the legislation 
and estimates that forgone revenues to state and local 
governments would likely total about $3 billion, annually, by 
2011.
    While virtually all states would lose revenues, about 70 
percent of the estimated losses would come from ten states: 
California, Florida, Illinois, Michigan, New Jersey, New York, 
Pennsylvania, Tennessee, Texas, and Washington. These states 
would experience the largest losses because of the size and 
organization of their economies, or the current structure of 
their state tax systems.
    Basis of estimate for intergovernmental mandates costs: CBO 
used information from a variety of sources to estimate the 
state revenue losses that likely would result from enactment of 
this legislation.\1\ Using data from the states, industry, and 
the Census Bureau, CBO estimated potential losses based on 
current receipts, projected receipts (when available), the 
industrial and commercial profile of state economies, and the 
structure of state taxing systems--including information from 
precedents issued by state tax departments.
---------------------------------------------------------------------------
    \1\ Although the bill's provisions also would affect collection of 
taxes by some local governments, CBO has not separately estimated the 
potential loss for such governments. Relatively few local governments 
(in fewer than 10 states) impose significant business taxes.
---------------------------------------------------------------------------
    States use a variety of rules to determine whether a 
company is subject to taxation--if it has nexus--and if so, how 
the activities in which that company engages are taxed. The 
differences in state taxing systems affect how much revenue 
each state or local government would likely forgo under the 
provisions of the bill. CBO examined both characteristics of 
the corporate tax structure of each state and data about the 
economic makeup of each state in order to estimate potential 
revenue losses.
    To estimate the costs of enacting H.R. 1956 to state and 
local governments, CBO first estimated the total amount of BATs 
paid by corporations in each state. Such taxes totaled about 
$60 billion in 2005. Since certain industries are significantly 
less likely to be operating from outside the state than others, 
CBO used information about the industrial and commercial makeup 
of states to calculate BATs that could be at risk if H.R. 1956 
is enacted. Overall, we estimate that about 75 percent of total 
income from BATs could be at risk under the bill. The portion 
at risk, however, would vary significantly from state to state.
    As noted above, CBO expects that states would lose only a 
small percent of BATs--about 2 percent in the first year after 
enactment and about 4.5 percent in 2011, nationwide. Further, 
those loses would be a very small percentage of total state tax 
collections. To calculate losses for 2006 and 2011, CBO 
estimated the likely percentage that states would lose based on 
their current tax systems and applied that to the BATs 
potentially at risk.
    Losses also would depend on the current characteristics of 
each state tax system. For example, a large state with a 
heavily information-based economy that does not currently 
require a company to have a physical presence to establish 
nexus and only assesses corporate income tax based on the 
amount of sales in the state would see a significant loss of 
revenue. In contrast, a small state that requires physical 
presence to establish nexus and that has a predominately 
agrarian or manufacturing economy would see a much smaller 
loss.
    In the absence of this legislation, it is possible that 
some state and local governments would enact new taxes or 
change the way they tax businesses. Since such changes are 
difficult to predict, for the purposes of estimating the direct 
costs of the mandate, CBO considered only the revenues from 
taxes that are currently in place and actually being collected 
or estimates for changes that are already in statute and will 
be implemented over the next five years.
    Impact on the private sector: The bill contains no new 
private-sector mandates as defined in UMRA.
    Estimate prepared by: Impact on State, Local, and Tribal 
Governments: Sarah Puro. Federal Revenues: Barbara Edwards. 
Impact on the Private Sector: Paige Piper/Bach.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis. G. Thomas Woodward, Assistant 
Director for Tax Analysis.

                    Performance Goals and Objectives

    The Committee states that pursuant to clause 3(c)(4) of 
rule XIII of the Rules of the House of Representatives, H.R. 
1956, provides a physical presence nexus standard that business 
would have to meet before a State could determine that the 
business is within the State's taxing jurisdiction for business 
activity taxes.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in article I, section 8 of the Constitution.

               Section-by-Section Analysis and Discussion

    The following discussion describes the bill as reported by 
the Committee.

Section 1. Short title

    This section sets forth the title of the bill as the 
``Business Activity Tax Simplification Act of 2006''.

Section 2. Removal of certain limitations on the application of Public 
        Law 86-272

    This section amends Public Law 86-272 by striking 
references to ``tangible personal property,'' thereby extending 
the prohibition on the imposition by States of net income taxes 
where the only business activity of a company is the 
solicitation of orders for a sale in that State. This section 
also extends the prohibition to ``other business activity 
taxes'' as defined in Section 4.

Section 3. Jurisdictional standard for State and local net income taxes 
        and other business activity taxes

    Subsection (a) presents the jurisdictional standard of 
``physical presence'' for State and local income taxes and 
other business activity taxes. Specifically, it provides that 
no State may impose a net income or other business activity tax 
on any business engaged in interstate commerce unless that 
business has a physical presence within the taxing jurisdiction 
during the taxable period.
    Subsection (b) provides that ``physical presence'' is 
established only if the business activities within the State 
include any of the following:
    (A) Being an individual physically within the State, or 
assigning one or more employees to be in the State, on more 
than 21 days. The following activities are disregarded in 
determining whether the 21-day limit has been exceeded:
     Activities in connection with possible purchase of 
goods or services, for consumption by the person's business.
     Gathering news for print, broadcast, or other 
distribution through the news media.
     Meeting government officials for purposes other 
than selling goods or services, for consumption by such 
government.
     Merely attending educational or training 
conferences, seminars or other similar functions.
     Nonprofit participation in charitable activities.
    (B) Using the services of an agent (excluding an employee) 
to establish or maintain the market in the State, if such agent 
does not perform business services in the State for any other 
person during such taxable year.
    (C) The leasing or owning of tangible personal property or 
of real property in the State, except that the following shall 
be excluded in determining whether the 21-day limit has been 
exceeded:
     Tangible property located in the State for 
purposes of being assembled, manufactured, processed, or tested 
by another person for the benefit of the owner or lessee, or 
used to furnish a service to the owner or lessee by another 
person.
     Marketing or promotional materials distributed in 
the State.
     Any property to the extent used ancillary to an 
activity excluded from the computation of the 21-day period 
under paragraph (1) or (2).
    Subsection (c) clarifies that any requirements for 
establishing physical presence for taxable periods not 
consisting of a year shall be adjusted pro rata.
    Subsection (d) delineates the exceptions to the bill's 
general requirements. It specifies that States are not 
prohibited from taxing the following: (a) entities incorporated 
or formed under the laws of the State or commercially domiciled 
in the State in question; (b) individuals domiciled in the 
State; (c) or the owner or beneficiary of an entity that is a 
partnership, an S corporation, a limited liability company, a 
trust, an estate or any other similar entity that has a 
physical presence in the State. Subsection (d)(3) stipulates 
that nothing in the bill is to be construed to supercede a 
State's authority to bring enforcement actions against entities 
or persons acting illegally. For example, a State will still be 
allowed to enforce its laws regarding tax shelters or ``sham 
transactions.''
    Further, the 21-day rule is reduced to one day for live 
performances and sporting events in a State when the audience 
is more than 100 individuals, when sales of tangible personal 
property are made within a State if the delivery is completed 
within the State, and for the performance of service that 
physically affects real property within the State.

Section 4. Definitions

    Section 4 sets forth the operative definitions for the Act. 
``Other business activity tax'' is specifically defined as:
           a tax imposed on or measured by gross 
        receipts, gross income, or gross profits
           a business license tax
           a business and occupation tax
           a franchise tax
           a single business tax or capital stock tax, 
        or
           any other tax imposed by a State on a 
        business for the right to do business in the State or 
        measured by the amount of, or economic results of, 
        business or related activity conducted in the State.
    The term excludes any sales, use or similar taxes imposed 
as the result of a sale or acquisition of a good. Further, 
subsection (4) excludes computer software owned and licensed by 
the owner to another person from the definition of tangible 
personal property.

Section 5. Effective date

    This section provides that the effective date for the Act 
begins on the taxable period beginning on or after the first 
day of the first year after the enactment of this Act.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                       ACT OF SEPTEMBER 14, 1956


 AN ACT Relating to the power of the States to impose net income taxes 
on income derived from interstate commerce, and authorizing studies by 
        congressional committees of matters pertaining thereto.

  Be it enacted by the Senute and House of Representatives of 
the United States of America in Congress assembled,

                TITLE I--IMPOSITION OF MINIMUM STANDARD

  Sec. 101. (a) No State, or political subdivision thereof, 
shall have power to impose, for any taxable year ending after 
the date of the enactment of this Act, a net income tax on the 
income derived within such State by any person from interstate 
commerce if the only business activities within such State by 
or on behalf of such person during such taxable year are 
either, or both, of the following:
          (1) the solicitation of orders by such person, or his 
        representative, in such State for sales [of tangible 
        personal property, which orders are sent outside the 
        State for approval or rejection, and, if approved, are 
        filled by shipment or delivery from a point outside the 
        State; and] or transactions, which orders are sent 
        outside the State for approval or rejection and, if 
        approved, are--
                  (A) in the case of tangible personal 
                property, filled by shipment or delivery from a 
                point outside the State; and
                  (B) in the case of all other forms of 
                property, services, and other transactions, 
                fulfilled from a point outside the State;
        and

           *       *       *       *       *       *       *

  (c) For purposes of subsection (a), a person shall not be 
considered to have engaged in business activities within a 
State during any taxable year merely by reason of sales or 
transactions in such State, or the solicitation of orders for 
sales or transactions in such State, [of tangible personal 
property] on behalf of such person by one or more independent 
contractors, or by reason of the maintenance of an office in 
such State by one or more independent contractors whose 
activities on behalf of such person in such State consist 
solely of making sales or fulfilling transactions, or 
soliciting orders for sales or transactions [, of tangible 
personal property].
  (d) For purposes of this section--
          (1) the term ``independent contractor'' means a 
        commission agent, broker, or other independent 
        contractor who is engaged in selling, or soliciting 
        orders for [the sale of, tangible personal property] a 
        sale or transaction, for more than one principal and 
        who holds himself out as such in the regular course of 
        his business activities; and

           *       *       *       *       *       *       *

  Sec. 105. Beginning with taxable periods beginning on or 
after the first day of the first calendar year that begins 
after the date of the enactment of the Business Activity Tax 
Simplification Act of 2006, the prohibitions of section 101 
that apply with respect to net income taxes shall also apply 
with respect to each other business activity tax, as defined in 
section 4 of the Business Activity Tax Simplification Act of 
2006. A State or political subdivision thereof may not assess 
or collect any tax which by reason of this section the State or 
political subdivision may not impose.

                           Markup Transcript




                            BUSINESS MEETING

                        WEDNESDAY, JUNE 28, 2006

                  House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:07 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable F. 
James Sensenbrenner, Jr. (Chairman of the Committee) presiding.
    [Intervening business.]
    Chairman Sensenbrenner. The next item on the agenda is H.R. 
1956, the ``Business Activity Tax Simplification Act.''
    [The bill, H.R. 1956, follows:]
    
    
    Chairman Sensenbrenner. In the absence of the gentleman 
from Utah, Mr. Cannon, who is the Chairman of the Subcommittee 
on Commercial and Administrative Law, the chair recognizes the 
gentleman from North Carolina, Mr. Coble, for a motion.
    Mr. Coble. I thank the Chairman.
    Mr. Chairman, the Subcommittee on Commercial and 
Administrative law reports favorably the bill, H.R. 1956, with 
an amendment, and moves its favorable recommendation to the 
full House.
    Chairman Sensenbrenner. Without objection, the bill will be 
considered as read and open for amendment at any point.
    And the Subcommittee amendment in the nature of a 
substitute, which the Members have before them, will be 
considered as read, considered as the original text for 
purposes of amendment, and open for amendment at any point.
    The chair recognizes the gentleman from North Carolina, Mr. 
Coble, to strike the last word.
    Mr. Coble. I thank the Chairman.
    Mr. Chairman and colleagues, H.R. 1956, the ``Business 
Activity Tax Simplification Act of 2005,'' is designed to 
create a clear and concise standard to determine when a 
business entity has a taxable nexus in a State.
    The Subcommittee on Commercial and Administrative law, 
under Chairman Cannon's leadership, held a hearing last 
September to learn more about the need for this bill and the 
likely effects it will have on the States, businesses, both 
large and small, and our constituents.
    This is not a new issue for the Subcommittee. We conducted 
hearings on this topic, you will recall, on both the 107th and 
108th Congresses, reporting legislation in the 107th Congress.
    I want to commend the diligent efforts of my colleague from 
Virginia, Mr. Goodlatte, the bill's sponsor, who has labored on 
this legislation for three Congresses.
    Prior to yielding my time to him, Mr. Chairman, I ask 
unanimous consent that Members may submit their written 
statements to be included in the record and to the extent I 
have time remaining, I yield to my colleague from Virginia.
    Chairman Sensenbrenner. Without objection, the gentleman's 
request is so ordered. And without objection, all Members may 
place opening statements in the record.
    The gentleman yields to the gentleman from Virginia.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    I thank the gentleman from North Carolina for yielding to 
me. My full written statement will be made a part of the 
record.
    I also want to thank the Chairman for scheduling this 
markup on the Business Activity Simplification Act. I 
introduced this legislation with my good friend and colleague, 
Congressman Boucher of Virginia, to provide a bright line rule 
to clarify the issue of when State and local authorities may 
impose business activity taxes on out-of-State entities.
    Many States and local governments levy corporate income 
franchise and other taxes on out-of-State companies that 
conduct business activities within their jurisdictions. While 
providing revenue for States, these taxes also serve to pay for 
the privilege of doing business in a State.
    However, with the growth of the Internet, companies are 
increasingly able to conduct transactions without the 
constraints of geopolitical boundaries. The growth of the high 
tech industry and interstate business-to-business and business-
to-consumer transactions raises questions over where multi-
State companies should be required to pay corporate income and 
other business activity taxes.
    Over the past several years, a growing number of 
jurisdictions have sought to collect business activity taxes 
from businesses located in other States, even though those 
businesses receive no appreciable benefit from the taxing 
jurisdiction and even though the Supreme Court has ruled that 
the Constitution prohibits a State from imposing taxes on 
businesses that lack substantial connections to the State.
    This has led to unfairness and uncertainty, generated 
contentious, widespread litigation, and hindered business 
expansion as businesses shy away from expanding their presence 
in other States for fear of exposure to unfair tax burdens.
    In order for businesses to continue to become more 
efficient and expand the scope of their goods and services, it 
is imperative that clear and easily navigable rules be set 
forth regarding when an out-of-State business is obliged to pay 
business activity taxes to a State.
    Otherwise, the confusion surrounding these taxes will have 
a chilling effect on e-commerce, interstate commerce generally, 
and the entire economy as the tax burdens, compliance costs, 
litigation and uncertainty escalate.
    Previous actions by the Supreme Court and Congress have 
laid the groundwork for a clear, concise and modern bright line 
rule in this area. In the landmark case of Quill v. North 
Dakota, the Supreme Court declared that a State cannot impose a 
tax on an out-of-State business unless that business has a 
substantial nexus with the taxing State.
    However, the court did not define what constituted a 
substantial nexus for the purposes of imposing business 
activity taxes.
    In addition, over 40 years ago, Congress passed legislation 
to prohibit jurisdictions from taxing the income of out-of-
State corporations whose in-State presence was nominal.
    Public Law 86-272 set forth clear, uniform standards for 
when States could and could not impose such taxes on out-of-
State businesses, when the businesses' activities involved the 
solicitation of orders for sales.
    However, like the economy of its time, the scope of P.L. 
86-272 is limited to tangible personal property. Our nation's 
economy has changed dramatically over the past 40 years and 
this outdated statute needs to be modernized.
    The Business Activity Tax Simplification Act both 
modernizes and provides clarity in an outdated an ambiguous tax 
environment. First, the legislation updates the protections of 
P.L. 86-272. In addition, our legislation sets forth clear, 
specific standards to govern when businesses should be obliged 
to pay business activity taxes to a State.
    The clarity that the Business Activity Tax Simplification 
Act will bring will ensure fairness, minimize litigation and 
create the kind of legally certain and stable business climate 
that encourages businesses to make investments, expand 
interstate commerce, grow the economy and create new jobs.
    At this time, I thank the Chairman for holding----
    Chairman Sensenbrenner. The time of the gentleman from 
North Carolina has expired.
    The gentleman from Michigan?
    Mr. Conyers. Mr. Chairman, I rise to oppose the legislation 
and speak in behalf of our Ranking Member, Mr. Watt, who is 
conducting a CBC meeting.
    If only the National Governors Association would support 
this bill, we would realize that it might have some real 
significance for the several States. But as drafted, what we 
are doing here is virtually creating tax shelters for non-
resident businesses doing a great deal of business in a State, 
while burdening the State's traditional brick and mortar 
companies.
    We are creating tax shelters in this bright line 
legislation, as it was referred. The exemption of non-resident 
businesses from State and local taxation allows out-of-State 
companies, who often conduct major economic activities within 
the State, to take full advantage of State resources while 
shifting all the State corporate income tax burden on the in-
State businesses.
    Thus, resident businesses that contribute to the community 
by creating jobs, paying other taxes, are now further burdened, 
or would be, while those companies headquartered elsewhere, but 
doing substantial business in a State would essentially get a 
free ride.
    This isn't fair. The National Governors Association 
describes this bill as a huge unfunded mandate that will result 
in the loss of billions of State dollars and that is across the 
country.
    But in my State of Michigan, the State treasurer did a 
revenue analysis, calculating a potential loss of more than 
$417.5 million annually if this legislation was enacted.
    In an era where our States are in desperate need for 
revenue for the protection of citizens, should we enact 
legislation that would reduce their funds? I think not. This is 
patently unfair legislation which would have a clear 
detrimental effect on State revenue.
    Please consider this with great care and I think the 
Committee will reject House Resolution 1956.
    I return my unused time.
    Chairman Sensenbrenner. Are there any amendments to the 
amendment in the nature of a substitute?
    Mr. Forbes. Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from Virginia, Mr. 
Forbes, for what purpose do you seek recognition?
    Mr. Forbes. I have an amendment at the desk.
    Chairman Sensenbrenner. The clerk will report the 
amendment.
    The Clerk. ``Amendment offered by Mr. Forbes to the 
Amendment in the Nature of a Substitute to H.R. 1956. Page 5, 
line 23, insert `warehoused in accordance with Article 7 of the 
Uniform Commercial Code, as in effect in the State,' after''--
--
    [The amendment by Mr. Forbes follows:]
    
    
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Forbes. Thank you, Mr. Chairman.
    Mr. Chairman, I want to first compliment Congressman 
Goodlatte for his hard work on this bill, which I think is an 
important bill, but there is one concern that I have with it 
and that is as it deals with public warehouses.
    Currently, public warehouses are not currently taxed on 
goods and products that are held for a third party. And under 
Article 7 of the UCC, they are classified as baileys for hire, 
but there is a real concern that this bright line that we are 
putting down with this bill could be misinterpreted as a green 
line and a green light for States to tax warehouses after the 
21-day period of time.
    This amendment would make it clear that when they are 
holding goods under Article 7 for distribution in interstate 
commerce, they would not be taxed under the provisions of the 
bill.
    However, I have had discussions with Congressman Goodlatte. 
It is my understanding that he is going to continue to work on 
trying to close this gap.
    And so, Mr. Chairman, I would request unanimous consent to 
withdraw the amendment and to yield the balance of my time to 
Congressman----
    Chairman Sensenbrenner. The amendment is withdrawn.
    Are there further amendments to the amendment in the 
nature----
    Mr. Scott. Mr. Chairman?
    Chairman Sensenbrenner. The gentleman from Virginia, Mr. 
Scott?
    Mr. Scott. Move to strike the last word.
    Chairman Sensenbrenner. The gentleman is recognized for 5 
minutes.
    Mr. Scott. Mr. Chairman, I just wanted to say this bill may 
not be perfect, but it certainly solves many problems that are 
worse than no bill at all.
    I would ask unanimous consent to introduce a letter from 
Smithfield Foods, near our district.
    Chairman Sensenbrenner. Without objection.
    [The letter follows:]
    
    
    Mr. Scott. That outlines part of the problems. And I will 
just recite a couple of paragraphs from the letter.
    One of the problems they encountered was in New Jersey. 
``The Department of Taxation in New Jersey stopped one of our 
trucks and demanded, in return, the release of the truck and 
its driver. The demand was made despite the fact that 
Smithfield has no physical presence in the State and that, in 
the end, New Jersey's Department of Taxation agreed that 
Smithfield owed no such taxes.''
    A full account and our response to questions was made 
available in the hearing record of the Subcommittee.
    Unfortunately, the story did not end there. Rather than 
being just an isolated incident, it happened again not long 
after the testimony.
    In December 2004, a truck belong to one of our subsidiaries 
was seized at a Costco distribution facility in New Jersey. To 
resolve the situation, they spoke to a person who was part of 
the special task force within the New Jersey Department of 
Revenue.
    That agent demanded $80,000 for the release of the truck. 
After hours of discussion, $13,400 was mutually agreed upon. 
And then, Mr. Chairman, they filed a refund and got most of 
their $13,400 back.
    I think, Mr. Chairman, this bill outlines a formula whereby 
everybody will know what the taxes are and it is a rational way 
of dealing with the situation and I would hope that we would 
pass the bill.
    And I would yield to my colleague from Virginia, if he 
wanted time.
    Mr. Goodlatte. I thank the gentleman for yielding.
    I just want to briefly respond to the gentleman from 
Virginia, Mr. Forbes. First of all, his interest in the issue 
regarding public warehouses is well taken.
    We have focused on this very closely, because it is our 
intention and our belief that the bill does not in any way 
jeopardize public warehouses and we certainly do not want that 
to happen.
    So we will continue to work with the gentleman and anybody 
else who is interested in having input on that to make sure 
that that is the case.
    We also have to be very careful that we do not change the 
treatment that private warehouses receive or others receive 
under the legislation. So we have to be very careful that we 
are not doing a carve-out for anybody.
    The purpose of this legislation is to create a clear bright 
line, not to create major exceptions under the rule.
    So with that understanding that we do want public 
warehouses to be treated the same under this law as they have 
been treated and remain competitive in the warehousing 
industry, I would look forward to working with the gentleman.
    Mr. Scott. Reclaiming my time.
    Mr. Chairman, again, I would say it is not perfect, but I 
think of all the problems that can occur without the bill, I 
think this is a rational way of dealing with a complex 
situation and my colleagues from Virginia, Mr. Goodlatte and 
Mr. Boucher, have done an excellent job working through as many 
details as possible.
    I think they have the best possible way to deal with the 
taxation situation and I would urge the Committee to adopt the 
bill.
    And yield back the balance of my time.
    Chairman Sensenbrenner. Are there amendments to the 
amendment in the nature of a substitute?
    Mr. Goodlatte. Mr. Chairman, I have an amendment.
    Chairman Sensenbrenner. The clerk will report the 
amendment.
    The Clerk. ``Amendment offered by Mr. Goodlatte of Virginia 
and Mr. Boucher of Virginia to the Amendment in the Nature of a 
Substitute to H.R. 1956. Page 5, strike line 9 through 16''----
    [The amendment by Mr. Goodlatte and Mr. Boucher follows:]
    
    
    Chairman Sensenbrenner. Without objection, the amendment is 
considered as read and the gentleman is recognized for 5 
minutes.
    Mr. Goodlatte. Mr. Chairman, very briefly. This is a 
technical amendment that clarifies the language in the bill 
regarding when the nexus of a person or business inside of a 
State can be attributed to an out-of-State business that would 
not otherwise have a nexus in the State.
    The original intent of the attribution provision in the 
bill was that attribution would only occur when an in-State 
person acted as an agent of an out-of-State business and was 
not performing business for anyone else.
    This amendment clarifies the language to ensure that it 
complies with the intentions behind that provision.
    And I yield back.
    Chairman Sensenbrenner. The question is on agreeing to the 
amendment offered by the gentleman from Virginia, Mr. 
Goodlatte.
    Those in favor will say, ``Aye.''
    Opposed, ``No.''
    The ayes appear to have it. The ayes have it. The amendment 
is agreed to.
    Are there further amendments? If not, without objection, 
the Subcommittee amendment in the nature of a substitute, laid 
down as the base text, is adopted, as amended.
    A reporting quorum is present. The question occurs on the 
motion to report the bill H.R. 1956 favorably, as amended.
    All in favor say, ``Aye.''
    Opposed, ``No.''
    The ayes appear to have it. The ayes have it and the motion 
to report the bill favorably, as amended, is agreed to.
    Without objection, the bill will be reported favorably to 
the House in the form of a single amendment, in the nature of a 
substitute, incorporating the amendments adopted here today.
    Without objection, the staff is directed to make any 
technical and conforming changes and all Members will be given 
2 days, as provided by the House rules, in which to submit 
additional dissenting, supplemental, or minority views.
    [Intervening business.]
    [Whereupon, at 1:40 p.m., the Committee was adjourned.]

                            DISSENTING VIEWS

    We strongly oppose H.R. 1956, the ``Business Activity Tax 
Simplification Act of 2005,'' which would impose a federal 
physical presence standard for determining when a state can 
impose a business activity tax. While proponents of H.R. 1956 
maintain that federal legislation is needed to clarify the 
nexus standard for state business activity taxes to minimize 
litigation, this legislation is more likely to have the 
opposite effect. In fact, if H.R. 1956 were enacted, it would 
legalize certain tax sheltering practices and income shifting 
methods. This legislation is strongly opposed by the National 
Governors Association, the National Association of Counties, 
and the National School Boards Association and the Center on 
Budget and Policy Priorities.\1\
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    \1\ Letter from Governor Mike Huckabee, Chairman of the National 
Governors Association and Governor Janet Napolitano, Vice Chair of the 
National Governors Association to Representative Sensenbrenner, 
Chairman of the House Judiciary Committee and Representative Conyers, 
Ranking Member of the House Judiciary Committee (March 19, 2006)(on 
file with the House of Representative Committee on the Judiciary, 
Democratic Staff). Letter from Larry Naake, Executive Direction of the 
National Association of Counties to Representative Sensenbrenner, 
Chairman of the House Judiciary Committee and Representative Conyers, 
Ranking Member of the House Judiciary Committee (March 28, 2006) (on 
file with the House of Representative Committee on the Judiciary, 
Democratic Staff). Letter from Michael A. Resnick, Associate Executive 
Director, National School Boards Association to Representative 
Sensenbrenner, Chairman of the House Judiciary Committee (June 27,2006) 
(on file with the House of Representative Committee on the Judiciary, 
Democratic Staff). Electronic letter from Martha Coven, Senior 
Legislative Associate, Center on Budge and Policy Priorities (June 20, 
2006) (on file with the House of Representative Committee on the 
Judiciary, Democratic Staff).
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    H.R. 1956 is problematic for several reasons. First, the 
proposed legislation would severely limit the ability of state 
and local governments to levy their corporate income and 
similar taxes on multi state corporations which are earning 
income within the state but lack a permanent or physical 
presence there. Second, while proponents claims that H.R. 1956 
will minimize litigation, in fact, the legislation would create 
reorganization opportunities that could provide new ground for 
litigation. Third, the legislation that is likely to result 
from the ``physical presence'' standard established by H.R. 
1956, would have a significant impact on the state revenue 
creating an issue of federalism and result in an unfunded 
mandate.

                     DESCRIPTION OF THE LEGISLATION

    H.R. 1956, introduced by Rep. Goodlatte in April 2005, 
would establish ``physical presence'' as the nexus standard for 
levying state and local business activity taxes on interstate 
commerce. Specifically, this legislation would preempt state 
law to provide that an out-of-state company must have a 
physical presence in a state before the state can impose 
franchise taxes, business license taxes, and other business 
activity taxes. The physical presence threshold is the minimum 
amount of activity a business must conduct in a particular 
state to become subject to taxation in that state.
    H.R. 1956 would also amend P.L. 86-272, which limits the 
power of states to impose net income taxes on interstate 
commerce. Under this legislation, P.L. 86-272 would apply to 
services and intangible property of all in state businesses. In 
addition, H.R. 1956 would generally require use of employees of 
services for more than 21 days per calendar year in a state to 
establish nexus. These regulations would exacerbate underlying 
inefficiencies because the nexus threshold for businesses--the 
21 day rule, which is higher than currently exists in most 
states--would increase the opportunities for businesses to 
manipulate their activities to avoid paying state taxes. 
Finally, H.R. 1956 would enumerate exempt activities, allowing 
certain tax shelters or income shifting methods that a number 
of states consider questionable.

                               BACKGROUND

    Generally, both in-state and out-of-state businesses that 
are ``doing business'' in a state, pay corporate income taxes 
(business activity taxes or BAT) on the money earned in that 
state. These taxes may only be imposed on those businesses that 
have a ``substantial nexus'' with the state. A state may, 
therefore, tax a transaction if there is an appropriate level 
of connection of the transaction to the state. BAT taxes differ 
from the obligation to collect sales or use taxes imposed on 
non-resident businesses. Both, however, are governed by the 
Constitution.
    The Due Process \2\ Commerce Clause \3\ of the U.S. 
Constitution limit a State from imposing tax liability or 
collection responsibilities on a business unless there is a 
substantial nexus with the state. \4\ Thus the issue of when a 
state has the authority to impose a tax upon an non-resident 
corporation depends upon whether that corporation has 
sufficient connection with the state to warrant the tax 
obligation. In Quill Corp. v. North Dakota,\5\ the Supreme 
Court set out a bright-line test of ``physical presence'' to 
satisfy the necessary connection with a state under the dormant 
commerce clause but explicitly limited that test to the duty of 
mail order houses to collect use taxes from customers. The 
Quill Court did not, however, clearly address the question 
whether ``physical presence'' is required to impose other types 
of taxes on non-resident businesses, including BAT, or under 
what standard.\6\
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    \2\ U.S. Const. Amend. XIV Sec. 1.
    \3\ U.S. Const. Art. I Sec. I 8, cl. 3.
    \4\ Generally, the Due Process Clause relates to the fairness of 
the tax burden and whether a business has sufficient contacts with the 
taxing jurisdiction to justify the tax. The Commerce Clause is 
concerned with the effect of the tax on interstate commerce. See Walter 
Hellerstein, Supreme Court Says No Use Tax Imposed on Mail-order 
Sellers . . . for Now, 77 J. Tax'n 120, 120 (Aug., 1992)
    \5\ 504 U.S. 298 (1992).
    \6\ Business interests argue that the Quill standard should apply 
to all taxes, while states have employed an apportionment standard that 
is based on what is referred to as ``economic nexus.'' The Supreme 
Court has refused to clarify whether ``economic nexus'' is sufficient 
under the Constitution. In Geoffrey, Inc. v. South Carolina Tax 
Commission, 313 S. C. 15, 437 S.E.2d 13, cert. denied, 510 U.S. 992 
1993, for example, the Supreme Court denied certiorari in a case in 
which the South Carolina Supreme Court found sufficient connection 
between a Delaware corporation and the state of South Carolina to 
justify a business activity tax. The Delaware corporation's contact 
with the state consisted of intangible property.
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I. H.R. 1956 limits the ability of state and local governments to levy 
        their corporate taxes on out-of-state companies

    Under current law, both in-state and non-resident 
businesses that are doing business in a state may be subject to 
business activity taxes on income earned in that state. Each 
state independently implements rules for economic activities--
which are not covered by P.L. 86-272--that establish nexus. 
State rules are very similar for most services and activities.
    The ``physical presence'' standard adopted by the bill 
favors businesses with limited physical presence but often with 
major economic activity within the state, while shifting the 
state corporate income tax burden to small businesses, 
manufacturing, and natural resource and service industries--
businesses that create jobs, pay local property taxes, and 
sponsor little league teams. Furthermore, out-of-state 
businesses often benefit substantially from public services 
provided by the states such as roads and police protection. In 
addition, these companies benefit from states in which they 
have no physical presence but do have customers and can 
reasonably be expected to pay some amount of business activity 
tax. For example, when an out-of-state bank makes mortgage 
loans in a state, the value of the houses that serve as 
collateral depends on the quality of local schools and the 
safety of the community. Furthermore, that same out of state 
bank would use the local court system is used if legal action 
necessary for non payment of loans. Each of these services is 
provided by the state, notwithstanding a company's physical 
presence in that state.
    The adoption of a physical presence standard will also 
permit the creation of tax shelters for non-resident businesses 
and discriminate against traditional ``brick and mortar'' 
companies within the state. A Congressional Research Service 
analysis of H.R. 1956 concludes:

         The new regulations as proposed in H.R. 1956 would 
        have exacerbated underlying inefficiencies because the 
        threshold for business--the 21-day rule, higher than 
        currently exists in most states--would increase 
        opportunities for tax planning leading to more 
        ``nowhere income.'' In addition, expanding the number 
        of transactions that are covered by P.L. 86-272 also 
        expands the opportunities for tax planning and thus tax 
        avoidance and possibly evasion.\7\

    \7\ See Congressional Research Service Report for Congress, 
RL32297, State Corporate Income Taxes: A Description and Analysis 
(March 23, 2004). (A copy is on file with the House of Representative 
Committee on the Judiciary, Democratic Staff).

    Finally, in an increasingly borderless economy, taxing 
authorities argue that a bright line standard is outdated, 
inappropriate, and would impede, rather than promote economic 
growth by encouraging business entities to evade their tax 
responsibilities.

II. Although proponents claim that H.R. 1956 could mitigate litigation, 
        it is more likely to provide new ground for litigation

    The proponents state that the legislation is needed to 
correct the trend of federal and state court decisions which 
strongly imply that ``physical presence'' is the nexus needed 
to levy business activity tax under the Constitution. 
Specifically, they claim that H.R. 1956 would establish a clear 
physical-presence nexus standard that would reduce the amount 
of litigation that is occurring. Instead, the legislation 
contains numerous undefined terms and confusing provisions that 
would no doubt spark litigation in the quest to ascertain what 
Congress meant. In H.R. 1956, physical presence is described 
as, ``Using the services of an agent (excluding an employee) to 
establish or maintain the market in the State, if such agent 
does not perform business in the State for any other person 
during such taxable year,'' with no explanation or 
interpretation of its meaning.\8\ among other things, the bill 
fails to elaborate on the meaning of such critical terms as 
``services,'' ``establish or maintain,'' ``market,'' or 
``perform business.''
---------------------------------------------------------------------------
    \8\ H.R. 1996, Section 3(b)(2).
---------------------------------------------------------------------------
    Additionally, the legislation is likely to spawn costly 
litigation by allowing new opportunities for businesses to 
reorganize in order to avoid taxes. The bill is drafted to 
limit physical presence to ``collectively and on more than 21 
days in the aggregate, during such person's taxable year,'' and 
to excluded those who are conducting, ``activities in 
connection with a possible or an actual purchase of goods or 
services for consumption by the person's business.'' \9\ This 
construction will likely spur corporations to shelter their 
profits from taxation by changing their business practices so 
that they fall within the guidelines of the legislation. In 
reaction, the states will be forced to use alternative means to 
enforce the state taxation laws. Further, many states have 
discretionary authority to treat in-state and out-of-state 
subsidiaries for tax purposes as if they are one corporation. 
To protect their revenues, the states are more likely to use 
this authority, creating addition litigation.
---------------------------------------------------------------------------
    \9\ H.R. 1956, Section 3.
---------------------------------------------------------------------------

III. H.R. 1956 reduces states tax revenue affecting the states ability 
        to provide traditional state and local government services and 
        is an unfunded mandate

    As a policy matter we would note that State and local 
governments work with the federal government, both providing 
essential government services like education and 
transportation. However, states are restricted from providing 
these services if their power of taxation is truncated or 
interfered with. Furthermore, it will be state officials and 
not Congress who will be held accountable if public services 
are reduced or personal income or property taxes are increased 
to compensate for the reduction in tax revenue resulting from 
the enaction of this legislation.
     H.R. 1956 would also create an enormous unfunded mandated 
resulting in a several billion dollar loss for state 
revenues.\10\ According to a survey conducted by the National 
Governors Association, the business activity tax proposal would 
cost states more than several billion annually. As state 
governments, unlike the federal government, are required to 
balance their budget, the lost of such a significant amount of 
revenue must be replaced by either increasing taxes or cutting 
programs. The Congressional Budget Office Cost estimates that 
the cost of this bill to state and local government would 
exceed $1 billion the first full year after enactment and would 
likely grow to approximately $3 billion annually in 2011. Thus, 
these costs would exceed the threshold under UMRA for 
intergovernmental mandates by $64 million in 2006.
---------------------------------------------------------------------------
    \10\ According to the CBO, ``While virtually all states would lose 
revenues, about 70 percent of the estimated losses would come from ten 
states: California, Florida, Illinois, Michigan, New Jersey, New York, 
Pennsylvania, Tennessee, Texas, and Washington.''
---------------------------------------------------------------------------

                               CONCLUSION

    H.R. 1956 is ill-considered legislation that would provide 
unnecessary tax exemptions resulting in a huge revenue loss to 
states. In an era when our states are in desperate need of 
revenue for the protection of our citizens, it seems 
irresponsible that should we enact legislation that would 
reduce their funds.

                                   John Conyers, Jr.
                                   William D. Delahunt.
                                   Howard L. Berman.
                                   Jerrold Nadler.
                                   Sheila Jackson-Lee.

                      ADDITIONAL DISSENTING VIEWS

    I oppose the BATSA bill in its current form. Although I 
believe that valid concerns have been raised by all 
stakeholders in this debate, I do not believe H.R. 1956 
adequately addresses those concerns or proposes a workable 
solution. Therefore, I respectfully dissent.
                                                    Melvin L. Watt.