Business Activity Tax Simplification Act of 2011

On April 8, 2011, House of Representatives Bill 1439, the Business Activity Tax Simplification Act of 2011 (The Bill) was introduced to Congress. This proposed legislation seeks to modify the following three areas of state taxation: (1) the application of Public Law 86-272; (2) the physical presence nexus standard; and (3) the calculation of tax liability in group returns.

If passed, The Bill would be effective as of January 1, 2012, and could have a significant impact on many taxpayers’ multistate filing obligations.

Revision of P.L. 86-272

Currently, Public Law 86-272 (hereinafter referred to as P.L. 86-272) generally prohibits the imposition of state net income tax if a taxpayer’s activities within a state are limited to the solicitation of orders of tangible personal property, which are sent outside the state for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the state.

The proposed “modernization” would expand the applicability of P.L. 86-272 to other business taxes, which The Bill defines as net income taxes or “taxes measured by the amount of, or economic results of, business or related activity conducted in the State.” This does not include sales and use tax or transaction taxes.

P.L. 86-272 currently applies only to the solicitation of orders of tangible personal property. However, The Bill would expand the protection of P.L. 86-272 to include solicitation of orders of “other forms of property, services, and other transactions” and to the solicitation of customers “for sales or transactions.”

In addition, the proposed house bill aims to encompass business activities beyond the mere solicitation of orders within the scope of P.L. 86-272 protection. Specifically, the bill expands protection to:

1. the furnishing of information to customers or affiliates and the coverage of events or other gathering of information, if the information is used or disseminated from a point outside the state; and
2. those business activities directly related to the potential or actual purchase of goods or services if the final decision to purchase is made outside the state.

The expansion of P.L 86-272 to other business taxes and sales of other forms of property, service and other transactions could provide benefit to a large population of taxpayers.  Because the protection of P.L. 86-272 is currently limited to taxes based on net income and the solicitation of sales of tangible personal property, those taxpayers which stand to benefit the most would be those taxpayers that are in industries which involve solicitation of sales of intangibles and/or services doing business in states which impose business taxes.

Physical Presence Standard

The Bill would create a physical presence requirement in order for states to have the power to impose, assess, or collect a net income tax or other business activity tax. “Physical presence” exists if:

1. an individual is physically in the state, or there is at least one or more employees assigned to the state;
2. services of an agent (excluding an employee) are utilized to establish or maintain the market in a state, if such agent does not perform business services in the state for any other person during such taxable year; or
3. a business leases or owns tangible or real property in a state (tangible personal property does not include the leasing or licensing of computer software).

A de minimis presence exception is also provided in The Bill. Excluded from the definition of “physical presence” is presence in a state for less than 15 days in the taxable year and presence in a state to conduct limited or transient business activity. It is important to note that both “limited” and “transient business activity” are not defined in the proposed house bill.

Group Returns

The last section of The Bill addresses group returns and applies to states which consider the net income or economic results of affiliated persons in the calculation of tax liability. This section provides specific rules for the calculation of combined net income, consolidated net income or other economic results where an apportionment formula is utilized. An apportionment formula generally measures a taxpayer’s state presence in the form of a percentage, by weighting the taxpayer’s state property, payroll and sales. Generally for group returns, the apportionment factors include the numerator and denominator of each member included in the group return, regardless of whether each member has nexus in the state or not. The Bill provides that the apportionment formula denominators shall still include the aggregate factors of those group members whose net income or other economic results are included in such combined or consolidated net income or other economic results; however, the numerator shall include the factors attributable to the state of only those persons that are themselves subject to taxation by the state. Although some states currently adopt this type of rule, known as the "Joyce" standard, others do not; and this rule would provide uniformity among states which require group returns.

WTAS Commentary

Clearly, the impetus behind the proposed house bill truly is simplification. Not only does the bill establish a bright-line physical presence standard, but it is also taxpayer friendly with its revisions to P.L. 86-272 and the group return rules. The bright-line physical presence standard provides benefit to taxpayers that have a presence of less than 15 days in a state or conduct limited or transient business activity in a state. As mentioned above, there is a broad spectrum of taxpayers that could benefit from the bill’s revisions to P.L. 86-272 – specifically taxpayers that solicit orders for services and intangible property, as well as taxpayers that solicit sales in states that impose gross income or gross receipt taxes. Moreover, the adoption of the “Joyce” standard in group returns provides benefit to those taxpayers with affiliated members that lack nexus in unitary combined and consolidated filing states.

Given the taxpayer friendly nature of The Bill, it likely faces stiff opposition in Congress. In prior years, similar legislation made it to a House of Representative floor vote, but did not advance beyond that point. A hearing for the proposed bill occurred on April 13, 2011. Subsequent to the hearing, stakeholders and advocacy groups issued opinion statements on the bill. As expected, these groups fell out on both sides of the issue creating uncertainty for the bill’s future. The Federation of Tax Administrators issued a statement opposing the bill, while members of the Tax Foundation and International Franchise Association were in favor. These varied responses to The Act likely reflect opinions of those in Congress that will ultimately determine the bill’s fate.