Revenue-hunting states have lately gone beyond raising their own taxes; now theyre shaking down firms and workers in other states.
Stretching the limits of the U.S. Constitutions Commerce Clause — which limits how states can tax businesses from other places — local revenue agents have seized out-of-state trucks simply passing through their jurisdiction, refusing to release them until the firms that dispatched them fork over corporate income taxes.
Finance departments have slapped out-of-state businesses with bills for thousands of dollars in corporate back taxes, based on little more than a single worker visiting the state sometime during the year.
Technological change has unleashed some of this unprecedented aggression. In a world where businesses can sell sophisticated services, such as cloud computing, that seem to originate from nowhere, states that once levied business taxes only on physically present firms have been coming up with far broader definitions for what, and who, is taxable.
At best, the states have inconsistently defined what falls under their tax jurisdiction; at worst, theyve used the transforming technological landscape as an excuse to grab revenues.
In a 2011 CFO magazine survey, finance officers at large companies judged five states — California, Massachusetts, New Jersey, New York, and Michigan — as particularly assertive in going after out-of-state revenues.
"Given New Yorks onerous tax regulations, we are seriously going to consider whether we allow employees to travel to or participate in events in that state," the CEO of one out-of-state firm told Chief Executive recently. "We cant afford for N.Y. to become a tax nexus for us just because our employees participate in a conference in N.Y."
Until recently, one of the most aggressive assertions of tax nexus took place in New Jersey.
According to congressional testimony by owners of trucking companies beginning around 2000, revenue agents from New Jerseys department of taxation began descending on truck stops, weigh stations, and loading docks and waylaying trucks, demanding that the owners pay at least a $1,100 minimum corporate-franchise tax before letting the drivers proceed.
Many of the vehicles — about 40,000 were stopped — worked for companies with no connection to New Jersey, other than making a pickup or delivery there. New Jersey was, in essence, charging a $1,100 entry fee into the state.
In July 2007, the owner of a Hartsville, S.C. boating company that had sold some boats to independent New Jersey dealers got a call from a driver saying that revenue agents had seized his truck and were demanding back corporate taxes and penalty assessments of $46,200.
The company, Stingray Boats, had to wire the funds to get its truck released.
Stingray controller Barry Godwin later testified to Congress: "The manner in which the State of New Jersey acted is commonly defined as extortion."
While a spokesman for the American Trucking Associations says the states aggressive tax posture has moderated somewhat since Gov. Chris Christie took office in 2010 vowing to make the state more business friendly, under current law New Jersey could resume its program at any time.
In a universe of countless virtual connections, businesses find themselves exposed to state taxes in ways they might never have anticipated.
A survey by Bloomberg BNA, a division of Bloomberg that consults on tax and finance issues, found that 16 states now assess corporate taxes on businesses with websites hosted on independent servers in the state, regardless of whether the business itself is physically present.
Similarly, all but six states said that they would tax an out-of-state firm if just one telecommuter worked for it from their territory.
In one 2012 case, California deemed that a Massachusetts firm, Warwick McKinley, owed corporate taxes from 2006 through 2008.
Warwick had neither offices nor clients in the state, but it still had to pay because a California resident worked remotely for the firm.
Having a single employee in California, tax authorities decided, was enough to grant Warwick "substantial and enduring benefits and protections of the state."
Telecommuting can now be a tax trap for employees, too. New York State now considers those working remotely for New York—based businesses to owe income taxes on all their work, whether they visit the state or not.
New York employs a "convenience of the employer" rule to apply these taxes. It holds that any employee working remotely for a New York firm is effectively present in the state.
For businesses, the cost of fighting this new aggressiveness has now become as big an issue as the additional taxes themselves.
The Ohio-based franchiser for Marcos Pizza stores received a letter from Wisconsin tax authorities requiring the firm to file state corporate income-tax forms because Marcos licensed its name and format to a single independent store in Wisconsin.
The firms only other connection to Wisconsin was an employee who had visited the franchise for a single day.
"The ensuing hunt for documents and figuring out how to comply with Wisconsin laws ended up costing us over 40 man-hours and thousands of dollars," Marcos chief financial officer, Kenneth R. Switzer, wrote in a 2012 opinion piece in The Hill.
The Supreme Court has invited Congress to clean up this mess, and a handful of bills are circulating in Washington that offer clearer standards on what constitutes "tax nexus" — the authority to tax a firm or an individual located elsewhere — in a virtual world.
Yet for years, Congress has put off passing any remedy.
So, as one corporate-finance officer put it to CFO recently: "The states are in a pure money grab mode."
Original Source: http://news.investors.com/ibd-editorials-viewpoint/020514-688964-states-find-ways-to-tax-businesses-in-other-states.htm?p=full