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The world is changing yet tax systems have been slow to change. This can hinder economic progress, lead to a loss in tax revenue, and frustrate taxpayers. Here, I explain some of the problems, offer ideas for reform, and an opportunity to comment on what I post. The focus will be on California taxes. Thanks for reading!
About Annette Nellen
I am a tax professor at San Jose State University. I am also a fellow with the New America Foundation California Program, where I focus on tax reforms that follow the principles of good tax policy, address existing flaws, and best reflect our 21st-century society and economy. I am an active member of the AICPA and ABA Tax Sections. At SJSU, I teach graduate tax courses, direct the Campus Reading Program, chair the First Year Experience planning team, and serve on the Athletics Board.
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Public Law 86-272 - Upcoming 50th Anniversary of Stopgap Legislation
In reaction to a US Supreme Court decision - Northwestern Cement v. Minn., 358 US 450 (1959), which many members of Congress thought would lead states to tax businesses beyond what they should under the commerce clause, Congress enacted Public Law 86-272 on September 14, 1959. Despite the lack of an expiration date in this legislation, it was described as a temporary measure while Congress further studied state taxation (a study established by PL 86-272). The report was completed in the mid-1960s (referred to as the Willis Commission report after the Congressman who chaired the subcommittee). However, PL 86-272 was not revised.
PL 86-272 explains when a state may impose income taxes on multistate businesses selling tangible personal property. Businesses selling services or intangibles, get no protection (or guidance) from the federal law. With more businesses selling services and intangibles today than in 1959, PL 86-272 is in need of updating. There have been various congressional proposals in the past few years, but no changes have been enacted and there are differences of opinion between state governments and businesses on what the reforms should be. Also, recent court decisions have held that "economic presence" is sufficient for a state to be able to impose income tax obligations on a business (businesses believe that "physical presence" should be the standard). The US Supreme Court has declined to hear any of these cases. Meanwhile, the 50th anniversary of this stopgap legislation is approaching.
For background on PL 86-272 and the case that led to its enactment, click here.
For links and related information on PL 86-272 and the current controversies in attempts to modernize this nexus rule - see this website.
Do you think temporary law PL 86-272 will be updated before its 50th anniversary on 9/14/09? If no, why not? If yes, what will the new version look like?
PL 86-272
Our company sells software in all states to cities. We are a tiny company of 4 people yet we have sold to over 900 city and county governments. As the economy grows worse more and more governments are approaching us to file registration to pay tax in every jurisdication as a new way to generate more tax revenue.
While I have no problem paying our taxes we are like other typical small businesses in that our man power is limited. There is no way we can afford to file 900+ business licenses and tax returns every year. Each city in which we have customers claimes we have a "Nexus" with their city even though we don't have any employees or office there.
Unless PL 86-272 is modernized to require a physical presence before a city can tax a business this trend to tax out of state businesses, if continued, will grind the entire economy to a halt. Already our company is considering quitting business all together or at least withdrawing from some cities to reduce our paperwork / compliance burden. If other companies have the same problem with compliance costs of having to file so many business license applications every year and have to withdraw from interstate commerce because of the compliance load then modernization is truly needed.
We must modernize 86-272 now! If we don't then damage to the economy will be great in the next few years.
PL 86-272
There are mortgage servicing operations located throughout the US that have a single physical location that "service" mortgages in several states. To service a mortgage loan means to collect monthly payments, pay property taxes and insurance on the real estate that secures the mortgage/deed of trust, enforce the terms of the mortgage/deed of trust on behalf of the investor who owns the mortgage/deed of trust and provide reports of these activities to investors.
All of the business activity is initiated and occurs in the single physical location. Several states are unclear as to whether they have taxable nexus and impose a franchise or similar non-income based tax. It is my opinion that these types of oprations are not subject to income tax apportioned or not. A franchise tax based on some apportionment factor applied to income is just an income tax in disguise.
A clear definition of what consitutes "doing business" or conducting activity that is taxable by a state or locality needs to be provided.
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