Many cash-strapped states have begun applying their corporate income tax to companies who have no physical presence in the state.
Catherine Monson found that out the hard way when her franchised company, Fastsigns, based in Carrollton, Texas, began getting bills from states like California, Pennsylvania and Wisconsin for corporate income tax for her franchise license.
“[T]hese days, states are increasingly trying to tax our franchise licenses. We can’t plan for these taxes. We don’t know whether a state is going to send us a bill. And when one does, it’s often an unhappy surprise,” Monson wrote.
States have started collecting corporate income tax from franchise companies. So while the headquarters may reside in one state and pay income tax there, other states with the franchise are asking for corporate tax as well.
Kenneth R. Switzer, the CFO for franchised Marco’s Pizza, said his company was asked to pay taxes in Wisconsin, despite not owning any businesses in the state.
“Because a single employee of ours visited the single store we franchise – but don’t own – in the state for less than 24 hours, Wisconsin says we must pay corporate taxes there,” Switzer wrote for The Hill.
Many business owners have come together to form the Interstate Tax Fairness Coalition to address the problem of interstate commerce taxation, describing the problem as an “outrage”.
“The corporate level taxes that are almost always imposed at the headquarters level are being imposed the states in which the corporations don’t have any employees or inventory or property,” the group’s spokesman Jeff Birnbaum told The Daily Caller News Foundation.
Today, there are about thirty states that will collect taxes on corporations “if they have a franchise license, they have a franchisee, or even if they have let’s say trucks that go through these other states,” Birnbaum added.
“It’s not necessarily states that are bankrupt,” the coalition’s attorney Maggi Lazarus told TheDC News Foundation. “Everyone is short on revenue at this point and so everybody is looking for revenue and unfortunately for companies that operate in interstate commerce, it’s often easier for a state to raise money from people who aren’t voting in their jurisdiction.”
Large companies, teemed with lawyers and resources, are typically able to contest the claims in court. For small businesses, however, it is not cost effective for them to sue and will typically pay the tax, however onerous or faulty it may seem.
“The problem for small business, is typically it’s not cost effective for them to litigate the issue,” the coalition’s attorney Maggi Lazarus told The Daily Caller News Foundation.
“For a small company, say they’re getting hit with $50,000 in taxes, it’s going to cost them significantly more than that to hire an attorney to fight it in the court. They usually don’t have the money so they typically are forced then to settle an audit.”
“Fastsigns has paid these tax assessments because doing so is less expensive than than filing legal challenges. Litigation would require man hours and lawyers we don’t have,” Monson said.
The Business Activity Tax Simplification Act seeks to address this tax loophole. The bill was advanced by the House Judiciary Committee last year, but has stalled since.
The issues stems from vagueness in the law. The Supreme Court’s decision in the Quill ruling established a precedent requiring “physical nexus,” though what that means for corporate income tax is not clear.
“Quill was decided in the context of sales and use taxes, rather than corporate income taxes, and so the question is is there a distinction between those two types of standard that would justify a different nexus standard,” Monson said.
Monson expressed hope that the issue could be included in some kind of overall tax deal that is being discussed for the next session of Congress.
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