Efforts by logistics groups to have H.R. 1956 amended to exclude goods in interstate commerce or goods in transit from the definition of “tangible assets” that would establish a physical presence for tax purposes had not moved forward before the bill was pulled from the floor of the House of Representatives without debate.
H.R. 1956, the Business Activity Tax Simplification Act of 2005, moved from Representative Bob Goodlatte’s (R-Va.) Judiciary Committee to the House floor July 24th, but was pulled before the one hour of scheduled debate. 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.
Mounting pressure from state governors and tax authorities caused the bill to be pulled prior to the Congressional recess. The bill, and a Senate version (S. 2721) are still subject to a long legislative process which includes review of any House- and Senate-passed bills by Rep. Sessions’ House Rules Committee.
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 limiting the ability of state and local governments to collect taxes from out-of-state businesses would cost $6 billion per year in lost 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.
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 offered by the Center on Budget and Policy Priorities (CBPP) 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.