There are limits on how much states can regulate interstate commerce, but the U.S. Supreme Court says the U.S. Congress can allow states to tax interstate commerce. A new bill, The Business Activity Tax Simplification Act (H.R. 1956), could subject shippers to more state taxes.
Typically, companies with no physical operations in a state are not subject to state taxes related to their business activities there. In its present form, says the International Warehouse Logistics Association (ILWA), H.R. 1956 says that a physical presence is established by leasing or owning tangible personal property in the state for more than 21 days. That could mean a company using a public warehouse or third party logistics service (3PL) could be deemed to have a physical presence by virtue of the inventory the third party holds and/or distributes on the company’s behalf.
IWLA is pushing an exemption from the rule for “tangible personal property held in a public warehouse for distribution in interstate commerce.”
The bill is intended to deal with state tax authorities’ issues with the on-line economy, says Pat O’Connor, Washington Counsel for the IWLA. For financial services companies and similar service-based companies doing business over the Internet, the 21-day physical presence standard is no problem. But for companies engaged in physical movement of goods in interstate commerce, the 21-day test easily establishes a presence.
Discussions with Congressional staffers yielded an interpretation that the goods themselves were not the test but a relationship with a public warehouse that lasted over 21 days would establish a presence in a state.
Excluding the goods as the measure might have been easier. An old Interstate Commerce Commission case involving Armstrong World Industries and the Texas Railroad Commission established goods stored in transit were still in interstate commerce. That decision has been upheld in various U.S. courts. IWLA is not neglecting that argument, even though, according to O’Connor, the Congressional staffers’ interpretation was to view the rule as applying if you have a relationship with a public warehouse for longer than 21 days.
If the rule was to be applied to inventory stored over 21 days, that equates to 17 inventory turns a year, and a quick survey of members of IWLA indicated an average of four or five turns a year. Inventory or relationship, the rule would catch nearly everyone who uses a third party, O’Connor observes.
What should shippers do? O’Connor says contact congressional sponsors of the bill and members of the U.S. House of Representatives Judiciary Committee to express concern. The bill passed in a sub-committee in December and will be brought before the full Judiciary Committee says O’Connor. The full committee will likely consider the bill in April or May.
The IWLA is working to have an amendment added to the bill to address logistics concerns. At least one other shipper organization was looking into the issue.
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The sponsor of H.R. 1956, the Business Activity Tax Simplification Act, is Rep. Bob Goodlatte (R-VA).
H.R. 1956 has 40 co-sponsors. Click here for bill summary and status and to access the list of co-sponsors.
The bill itself can be viewed here.