State Taxation of Interstate Commerce - H.R. 2887
Any business that has had the unfortunate experience of challenging a determination made by either Washington’s Dept. of Revenue or Oregon’s Dept. of Revenue on the question of nexus, in particular, economic nexus, will be interested in a bill that has been introduced in the US House of Representative. H.R. 2887 that would dramatically stabilize a State’s ability to tax interstate business activities.
The bill, if signed into law, would limit a State’s ability to tax or regulate business activity in interstate commerce to circumstances where the business is physically present in the State during the period in which the tax or regulation is imposed.
Under the bill, the term “physical presence” is defined to include the following business activities:
1. Maintaining its commercial or legal domicile in the State;
2. Owning, holding a leasehold interest in, or maintaining real property such as an office, retail store, warehouse, distribution center, manufacturing operation, or assembly facility in the State;
3. Leasing or owning tangible personal property (other than computer software) of more than de minimis value in the State;
4. Having one or more employees, agents, or independent contractors present in the State who provide on-site design, installation, or repair services on behalf of the remote seller;
5. Having one or more employees, exclusive agents or exclusive independent contractors present in the State who engage in activities that substantially assist the person to establish or maintain a market in the State; or
6. Regularly employing in the State three or more employees for any purpose.
The bill provides further guidance stating that the term “physical presence” does not include any of the following:
1. Entering into an agreement under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the State, whether by an Internet-based link or platform, Internet Web site or otherwise;
2. Any presence in a State for less than 15 days in a taxable year (or a greater number of days if provided by State law);
3. Product placement, setup, or other services offered in connection with delivery of products by an interstate or in-State carrier or other service provider;
4. Internet advertising services provided by in-State residents which are not exclusively directed towards, or do not solicit exclusively, in-State customers;
5. Ownership by a person outside the State of an interest in a limited liability company or similar entity organized or with a physical presence in the State;
6. The furnishing of information to customers or affiliates in such State, or the coverage of events or other gathering of information in such State by such person, or his representative, which information is used or disseminated from a point outside the State; or
7. Business activities directly relating to such person’s potential or actual purchase of goods or services within the State if the final decision to purchase is made outside the State.
Finally, the bill would limit a State’s ability to impose a tax or regulation on any person unless the person is wither the purchaser or the seller having a physical presence in the State.
There is much for business to like in this bill in its current form. We are advising our business clients to contact their respective representatives in Congress and urge support for the bill.
As a final observation, the bill confers original jurisdiction with the US District Courts if there is a dispute involving this law. This is a welcome departure in state tax litigation where generally, state courts have jurisdiction over all state tax matters, including the interpretation and construction of federal statutes.