July 25, 2006

House delays vote on state corporate tax bill

WASHINGTON (Reuters) - The U.S. House of Representatives on
Tuesday postponed consideration of a bill to forbid states from
imposing corporate taxes on companies lacking a physical
presence within their borders.

House leadership and the bill's sponsors decided to delay a
vote on the measure until questions over its effect on state
revenues could be cleared up, said Kevin Madden, a spokesman
for House Majority Leader John Boehner.

"There were some misperceptions about its effect on states,
and it has been postponed in an effort to clear up those
misperceptions," Madden said, adding that he could not predict
when the bill may be taken up again.

The Business Activity Tax Simplification Act, sponsored by
Rep. Bob Goodlatte, a Virginia Republican, imposes a physical
presence standard for determining when a state can tax a
company earning income within its borders.

The bill would enable many Internet-based firms and other
sales and service companies with limited locations to avoid
paying corporate income taxes, gross receipts or other taxes in
states where they have no physical presence.

Under the bill, the business must lease or own real or
tangible property in the state or have more than one employee
in the state for more than 21 days in order for it to be
subject to state corporate taxes.

The National Governors Association, which opposes the bill,
says it would reduce collective state tax revenues by some $6.6
billion annually.

That could grow in future years as companies undertake
long-term tax planning to avoid paying state corporate taxes by
concentrating operations in certain states or setting up shell
companies in offshore locations, said David Quam, the
association's director of federal relations.

"This legislation essentially would shift the tax burden to
small businesses and locally owned stores, while favoring
out-of-state corporations and larger in-state companies with
the means to exploit loopholes," Quam said.

"This bill is neither clear nor fair, and its real legacy
would be to encourage tax sheltering and discriminate against
the local shop owner."

Proponents of the bill cite Congressional Budget Office
figures showing that the reduction in state tax revenues will
be only $1 billion in the first year. The resulting effect on
overall corporate profits and reduced deductions against
federal corporate tax liabilities will boost federal corporate
tax collections by $107 million in the first year, according to
the CBO.

The bill should be viewed as a fair and prudent tax cut for
businesses, said the Tax Foundation, which supports the bill.
It said a typical company with $5 million in Ohio-based sales
but no physical presence in Ohio would save the $13,000 that it
currently pays to Ohio. But the firm's federal tax payments
would rise by $4,550 if the bill were enacted.