On June 2, 2015, the U.S. House of Representatives Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law conducted a hearing on three state tax bills: the Mobile Workforce State Income Tax Simplification Act, the Digital Goods and Services Tax Fairness Act, and the Business Activity Tax Simplification Act.

Background

The Mobile Workforce State Income Tax Simplification Act of 2015 (“Mobile Workforce Act”) (H.R. 2315) would establish a national standard to protect traveling employees from nonresident state income tax withholding rules. It provides that wages of an employee are not subject to tax in any state other than the employee’s state of residence or a state in which the employee is present and performing duties for more than 30 days during a calendar year in which the wages are earned. The bill further provides that income not subject to tax under the Mobile Workforce Act is likewise not subject to income tax withholding and reporting requirements.

The Digital Goods and Services Tax Fairness Act of 2015 (H.R. 1643) (“DGSTFA”) would prevent any state or locality from imposing a multiple or discriminatory tax on the sale or use of a digital good or a digital service. The language of the bill excludes some services from the definition of “digital service,” and includes a sourcing hierarchy that is binding on sellers and states.

The Business Activity Tax Simplification Act (“BATSA”) was last introduced in 2013 during the 113th Congress (H.R. 2992) and has not yet been introduced in the 114th Congress. In general, BATSA would expand the existing federal protection against state income taxation to: (1) include income from all forms of property, including intangible personal property and services (currently, only sales of tangible personal property are protected); and (2) prohibit state taxation of an out-of-state entity unless such entity has a physical presence in the taxing state. The bill sets forth criteria for the determination of whether a person has a physical presence in a state, and adopts a Joyce apportionment methodology as opposed to a Finnigan methodology for certain combined and consolidated returns. 

Summary of Testimony

Judiciary Committee Chairman Goodlatte (R-VA) stated that all three bills address his belief that there should be “no regulation without representation.” Subcommittee Chairman Marino (R-PA), although stating his support for states’ rights, believes that “states should be sovereign within their borders only,” and that the complexity of current state law is a burden on businesses. Witness Grover Norquist, of Americans for Tax Reform, responded that “[s]tates don’t have rights. People have rights. States have power.” He also expressed his continued belief that “politicians love to tax people who can’t vote against them.”

The Mobile Workforce Act garners the broadest support. 

  • Rep. Johnson (D-GA) urged the subcommittee to take “quick action” to move this bill. Goodlatte said that this Act would have a minimal effect on state revenue.
  • Rep. Conyers (D-MI) stated that he does not believe that the Mobile Workforce Act as currently drafted addresses the needs of all stakeholders, and he suggested revisions to address the potential revenue loss to states.
  • Rep. Jeffries (D-NY) was the only Democrat who voiced opposition to the Mobile Workforce Act, expressing his concern that New York will bear a disproportionate revenue loss.
  • Witness Julie Magee, Commissioner of the Alabama Department of Revenue and current Chair of the Multistate Tax Commission (MTC), expressed her support for an  MTC proposal which includes a 20-day (not 30-day) threshold, and does not support the bill in its current form.
  • Witness Dan Crippen, from the National Governors Association, stated that passage of the bill will not lift the burden on businesses that must track employee travel days because businesses must know whether the employee falls below the day count threshold.
  • When asked by Rep. Ratcliffe (R-TX) whether the current system of claiming a credit in one’s state of residence for taxes paid to other states sufficiently relieves the filing burden that the Mobile Workforce Act seeks to address, Douglas Lindholm, of the Council On State Taxation, replied that credits do not address the filing requirement and that individuals who live in states with no state income tax are hit hardest because they do not receive a credit against the higher property and sales taxes that they pay in lieu of state income taxes.

Witness Jot Carpenter, from the CTIA and on behalf of the Download Fairness Coalition, expressed support for the DGSTFA, stating that congressional action is needed because “states and localities lack the ability and constitutional authority” to set up the appropriate multistate framework. Magee opposes DGSTFA stating that discriminatory taxes on digital goods is not currently a problem, and that the sourcing rules will effectively eliminate taxes on digital goods because there is no grant of authority to the destination states that would allow those states to tax remote sales.

Finally, Rep. Johnson said that BATSA is “too costly to the states,” citing a Congressional Budget Office assessment of $2 billion in revenue losses in the first year. Rep. Conyers agreed that BATSA is “thoroughly flawed legislation,” which “upends longstanding tax practices” and that Congress should “scrap BATSA and start over.” Magee expressed the states’ view that the cost of this bill is “just the tip of the iceberg.” Witness Arthur Rosen, of McDermott Will & Emery LLP, testified that income should be taxed where earned, which is the location that capital and labor are expended. He added that “BATSA would put American businesses on the same level as foreign companies that have no physical presence in the states.”

At the beginning of questioning, Rep. Marino asked all witnesses whether Congress has the constitutional authority to enact these laws. All witnesses agreed that it does. Although not on the agenda, the Marketplace Fairness Act and Permanent Internet Tax Freedom Act (PITFA) were both discussed during the hearing. Rep. Collins (R-GA) voiced his support for PITFA and stated that these bills have been in Committee long enough and it is time to mark them up and move on.