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House delays vote on state corporate tax bill

Posted on: Tuesday, 25 July 2006, 18:44 CDT

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.

Source: REUTERS

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