As Logistics Today went to press, H.R. 1956, the Business Activity Tax Simplification Act of 2005 had moved to the floor of the U.S. House of Representatives for debate but then was pulled from the floor on July 25th.
Representative Bob Goodlatte (R-Va.) ended discussion of the bill in the House Judiciary Committee and moved that the bill be brought to the House floor, with no amendments, for debate. The bill was scheduled for one hour of debate on the floor, but before the process could begin, it was pulled from the schedule.
Rep. Pete Sessions (R-Tx.) had approached Rep. Goodlatte, the bill's sponsor, with an amendment to exclude inventory stored in interstate commerce in accordance with the Uniform Commercial Code from the definition of tangible property that would establish a physical presence in a state for tax purposes. Though Sessions knew Goodlatte would not consider the amendment, the goal was to gain an agreement to discuss the issue and get that into the record.
Mounting pressure from state governors and tax authorities caused the bill to be pulled prior to the Congressional recess. States took the position that the exclusions allowed under the proposed law would cost billions of dollars in tax revenues at the state level, forcing states to make up the loss by raising other taxes or reducing services. An Ernst & Young LLP study estimated annual revenue losses to the states of $434 million at fiscal 2005 levels of tax collections. U.S. governors estimated the exclusions in the bill would cost $6 billion per year in lost tax revenues.
A Congressional Budget Office estimate suggests the bill would cost localities $1 billion in the first year after it is enacted and as much as $3 billion annually by 2011. At the same time, the loss of the state tax deduction would increase corporate income and subject companies to an estimated $1.2 billion in additional federal taxes between 2007 and 2011.
None of the studies appeared to quantify the potential cost to businesses if inventory in transit caused them to be included in additional state taxes. Currently, 45 states and the District of Columbia impose corporate income taxes.
H.R. 1956 is supported by banking and other businesses with affiliate, franchise or contractor relationships outside their home state. Examples of companies that would benefit from exclusions in the bill were offered by the Center on Budget and Policy Priorities (CBPP). They include a television network which may distribute programming to an affiliate station, the parent of franchise restaurants or a bank which may hire independent contractors to process mortgage loan applications in other states.
The same report by the CBPP notes a company with $1 million in inventory stored in a state could be taxed by that state while a company with $1 million of unfinished goods being processed into finished goods could not. It is just this point that led the International Warehouse Logistics Association (IWLA) to bring nearly 50 members to Washington, D.C. in June to discuss an amendment to H.R. 1956 to clarify the "tangible property" provision and exclude goods in interstate commerce or in-transit inventory.
In an unexpected twist, an issue has been raised that excluding inventory as IWLA has asked would give public warehouses a competitive advantage over private warehouses. IWLA legal counsel Pat O'Connor said he was looking into the issue.