Issue

The significant inconsistency in state business activity tax programs.

Position Statement

ABA supports legislation to enact a federal standard clarifying the physical presence standard as the nexus for imposition by states of a business activity tax (BAT) on businesses.

Explanation

State and local taxation of nonresident business is restricted by the Due Process and Commerce clauses of the United States Constitution. Businesses must have a nexus or connection with a state or locality before the state can impose a business activity tax. The concept of a nexus as a physical presence in the state has been upheld in judicial precedents.

As the focus of the economy has increasingly shifted to services and intangibles, and as states and localities have sought new source of revenues, states and localities have become more aggressive in attempts to apply an "economic" nexus standard in assessing business activity taxes on businesses with no physical presence in a state or locality. These actions have resulted in increased uncertainty and higher litigation costs for business.

In view of this situation, ABA supports federal legislation establishing a physical nexus standard that would prohibit state and local governments from imposing any business activity tax on a business unless that business has a physical presence in the state or locality that meets specified standards.

Contact for further information: Larry Seyfried (202) 663-5322, Fran Mordi (202) 663-5317.