Congress Urged to Pass Internet Taxation Bill

Rhett Pardon
WASHINGTON — A federal bill that has reached a House subcommittee would establish a clear definition of when states can levy income taxes, franchise taxes and business activity taxes on companies that have no physical presence in state, according to a new study.

H.R. 1956's general physical presence rule, being debated today at a House Judiciary Commerce and Administrative Law Subcommittee hearing, is another attempt to impose taxation for companies that sell goods and services over the Internet, including online adult products.

The study by the Tax Foundation, “Paying for 'Civilized Society' in the Global Marketplace,” supports H.R. 1956, which has heavy opposition.

"A physical presence standard for business activity taxes is simple, fair, and will reduce the burden of tax compliance for U.S. companies that sell all over the United States and the world," said Foundation staff attorney Chris Atkins, author of the study.

The alternative to physical presence is economic presence, according to which corporations must pay tax anywhere they make a sale or derive income, Atkins said. This opens firms up to the complexity of complying with dozens of state tax systems, impairing interstate commerce and economic growth.

Both the Multistate Tax Commission and the Federation of Tax Administrators have come out against H.R. 1956.

The MTC called the legislation "an unwarranted preemption of the states' authority to levy taxes on the business activities of multistate enterprises," while the FTA said, "Defining nexus in federal law would upset the tenets of federalism and the system of shared authority and responsibilities long practiced by the federal and state governments."

Meanwhile, the Kansas Department of Revenue recently decided that online retail businesses must charge customers state and local sales tax in accordance with the state's destination-based sourcing rules.

The Revenue Department’s opinion letter said that destination-based sourcing rules require Kansas retailers to collect state and local sales tax based on the buyer's Kansas ship-to address, unless the buyer takes delivery at the seller's address.

The agency, in its opinion, explained that Kansas provides taxpayers with a database that coordinates different local rates for determining sales tax. The department provided directions on how to incorporate this database into a taxpayer's billing program.