The outcomes of the 2012 U.S. Presidential and Senate elections have virtually guaranteed that the Business Activity Tax Simplification Act (BATSA) will not become law, at least not in the foreseeable future. BATSA is a proposed Federal law designed to impose uniform standards on the ability of state and local taxing authorities to levy taxes on out-of-state businesses. The proposed legislations is an attempt to curtail the zeal of individual state revenue departments who are energetically expanding their efforts to tax out-of-state businesses. Businesses of all types have been looking forward to passage of BATSA because many have already received what they believe to be unjustified tax bills.
Historically, taxing authorities imposed taxes upon businesses that established a nexus with the taxing jurisdiction. That nexus was typically a physical presence within the state imposing the tax. However, in recent years, states have been expanding the definition of nexus to capture additional tax dollars. Franchisors who collect royalties and/or license trademarks to franchisees in other states are often targets of the tax collector in the state where the franchisee is located.
For example, Iowa imposed tax upon KFC, Corp., an out-of-state franchisor who had no physical presence in Iowa, based upon its receipt of royalties from franchisees located within the state of Iowa. South Carolina imposed taxes upon an out-of-state licensor based upon its licensing of intangible property to an affiliate operating in the state. In separate challenges brought by the tax payers, both practices were upheld by the respective Supreme Courts of Iowa and South Carolina.
Without federal legislation like BATSA, the continued efforts of states to expand their ability to tax out-of-state businesses will continue, and likely, intensify. So how can you protect your business? Get proactive and plan.
To protect your business, there are 5 steps you can take right now:
1) conduct a thorough review of your operations and assess which states
may claim sufficient nexus to tax your business;
2) once you determine the jurisdictions where you may have exposure to tax, ascertain the amount of tax that you may be required to pay;
3) retain a legal professional to work with your business, one who has specific experience in this area, including the knowledge to identify and mitigate exposure;
4) compose a strategy to avoid unintentionally establishing nexus in a foreign state and to manage tax obligations in jurisdictions that claim nexus; and
5) get engaged in the effort to stop taxing authorities from abusing their power and damaging our climate for business.
BATSA was an effort to restore basic principles of taxation and to provide certainty and uniformity for tax paying businesses. Without such legislation or a decision by the United States Supreme Court weighing in on this issue, business owners, including franchisors, will curtail or eliminate plans to expand into new territories. Unless BATSA receives bipartisan support, which has been absent in Washington in recent memory, there appears to be no hope for much needed tax reform on this issue.