49–006 

109TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 109–575 

BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2006 

JULY 17, 2006.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. SENSENBRENNER, from the Committee on the Judiciary, 

submitted the following 

R E P O R T 

together with 

DISSENTING VIEWS 

[To accompany H.R. 1956] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on the Judiciary, to whom was referred the bill 

(H.R. 1956) to regulate certain State taxation of interstate commerce; and for other purposes, having considered the same, report 

favorably thereon with an amendment and recommend that the bill 

as amended do pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Business Activity Tax Simplification Act of 2006’’. 

SEC. 2. REMOVAL OF CERTAIN LIMITATIONS ON THE APPLICATION OF PUBLIC LAW 86–272. 

(a) SOLICITATIONS WITH RESPECT TO SALES AND TRANSACTIONS OF OTHER THAN

TANGIBLE PERSONAL PROPERTY.—Section 101 of the Act entitled ‘‘An Act relating to 

the power of the States to impose net income taxes on income derived from interstate commerce, and authorizing studies by congressional committees of matters 

pertaining thereto’’, approved September 14, 1959 (15 U.S.C. 381 et seq.) is amended— 

(1) in subsection (a)(1) by striking ‘‘of tangible’’ and all that follows through 

‘‘State; and’’ and inserting the following: 

‘‘or transactions, which orders are sent outside the State for approval or rejection and, if approved, are— 

‘‘(A) in the case of tangible personal property, filled by shipment or delivery from a point outside the State; and 

‘‘(B) in the case of all other forms of property, services, and other transactions, fulfilled from a point outside the State; 

and’’; 


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(2) in subsection (c)— 

(A) by inserting ‘‘or fulfilling transactions’’ after ‘‘making sales’’; 

(B) by inserting ‘‘or transactions’’ after ‘‘sales’’ the other places it appears; 

(C) by striking ‘‘of tangible personal property’’ the first place it appears; 

and 

(D) by striking ‘‘, of tangible personal property’’; and 

(3) in subsection (d)(1) by striking ‘‘the sale of, tangible personal property’’ 

and inserting ‘‘a sale or transaction,’’. 

(b) APPLICATION OF PROHIBITIONS TO OTHER BUSINESS ACTIVITY TAXES.—Title I 

of the Act entitled ‘‘An Act relating to the power of the States to impose net income 

taxes on income derived from interstate commerce, and authorizing studies by congressional committees of matters pertaining thereto’’, approved September 14, 1959 

(15 U.S.C. 381 et seq.) is amended by adding at the end the following: 

‘‘SEC. 105. Beginning with taxable periods beginning on or after the first day of 

the first calendar year that begins after the date of the enactment of the Business 

Activity Tax Simplification Act of 2006, the prohibitions of section 101 that apply 

with respect to net income taxes shall also apply with respect to each other business 

activity tax, as defined in section 4 of the Business Activity Tax Simplification Act 

of 2006. A State or political subdivision thereof may not assess or collect any tax 

which by reason of this section the State or political subdivision may not impose.’’. 

(c) EFFECTIVE DATE OF SUBSECTION (a) AMENDMENTS.—The amendments made by 

subsection (a) shall apply with respect to the imposition, assessment, and collection 

of taxes for taxable periods beginning on or after the first day of the first calendar 

year that begins after the date of the enactment of the Business Activity Tax Simplification Act of 2006. 

SEC. 3. JURISDICTIONAL STANDARD FOR STATE AND LOCAL NET INCOME TAXES AND OTHER 

BUSINESS ACTIVITY TAXES. 

(a) IN GENERAL.—No taxing authority of a State shall have power to impose, assess, or collect a net income tax or other business activity tax on any person relating 

to such person’s activities in interstate commerce unless such person has a physical 

presence in the State during the taxable period with respect to which the tax is imposed. 

(b) REQUIREMENTS FOR PHYSICAL PRESENCE.—For the purposes of subsection (a), 

a person has a physical presence in a State only if such person’s business activities 

in the State include any of the following, collectively and on more than 21 days in 

the aggregate, during such person’s taxable year: 

(1) Being an individual physically in the State, or assigning one or more employees to be in the State, except that the following shall be excluded in determining whether such 21-day limit has been exceeded: 

(A) Activities in connection with a possible or an actual purchase of goods 

or services, for consumption by the person’s business. 

(B) Gathering news for print, broadcast, or other distribution through the 

news media. 

(C) Meeting government officials for purposes other than selling goods or 

services, for consumption by such government. 

(D) Merely attending educational or training conferences, seminars or 

other similar functions. 

(E) Nonprofit participation in charitable activities. 

(2) Using the services of an agent (excluding an employee) to establish or 

maintain the market in the State, if such agent does not perform business services in the State for any other person during such taxable year. 

(3) The leasing or owning of tangible personal property or of real property in 

the State, except that the following shall be excluded in determining whether 

such 21-day limit has been exceeded: 

(A) Tangible personal property located in the State for purposes of being 

assembled, manufactured, processed, or tested by another person for the 

benefit of the owner or lessee, or used to furnish a service to the owner or 

lessee by another person. 

(B) Marketing or promotional materials distributed in the State. 

(C) Any property to the extent used ancillary to an activity excluded from 

the computation of the 21-day period based on paragraph (1) or (2). 

(c) TAXABLE PERIODS NOT CONSISTING OF A YEAR.—If the taxable period for which 

the tax is imposed is not a year, then any requirements expressed in days for establishing physical presence under this Act shall be adjusted pro rata accordingly. 

(d) EXCEPTIONS.— 

(1) DOMESTIC BUSINESS ENTITIES AND INDIVIDUALS DOMICILED IN, OR RESIDENTS OF, THE STATE.—Subsection (a) does not apply with respect to— 


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(A) a person (other than an individual) that is incorporated or formed 

under the laws of the State (or domiciled in the State) in which the tax is 

imposed; or 

(B) an individual who is domiciled in, or a resident of, the State in which 

the tax is imposed. 

(2) TAXATION OF PARTNERS AND SIMILAR PERSONS.—This section shall not be 

construed to modify or affect any State business activity tax liability of an 

owner or beneficiary of an entity that is a partnership, an S corporation (as defined in section 1361 of the Internal Revenue Code of 1986 (26 U.S.C. 1361)), 

a limited liability company, a trust, an estate, or any other similar entity, if the 

entity has a physical presence in the State in which the tax is imposed. 

(3) PRESERVATION OF AUTHORITY.—This section shall not be construed to modify, affect, or supersede the authority of a State to bring an enforcement action 

against a person or entity that may be engaged in an illegal activity, a sham 

transaction, or any perceived or actual abuse in its business activities if such 

enforcement action does not modify, affect, or supersede the operation of any 

provision of this Act or of any other Federal law. 

(4) CERTAIN ACTIVITIES.—With respect to the following, subsection (b) shall be 

read by substituting ‘‘at least one day’’ for ‘‘more than 21 days in the aggregate’’: 

(A) The sale within a State of tangible personal property, if delivery of 

the property originates and is completed within the State. 

(B) The performance of services that physically affect real property within 

a State. 

(5) EXCEPTION RELATING TO CERTAIN PERFORMANCES AND SPORTING EVENTS.— With respect to the taxation of the following, subsection (b) shall be read by 

substituting ‘‘at least one day’’ for ‘‘more than 21 days in the aggregate’’: 

(A) A live performance in a State, before a live audience of more than 100 

individuals. 

(B) A live sporting event in a State before more than 100 spectators 

present at the event. 

(e) RULE OF CONSTRUCTION.—This section shall not be construed to modify, affect, 

or supersede the operation of title I of the Act entitled ‘‘An Act relating to the power 

of the States to impose net income taxes on income derived from interstate commerce, and authorizing studies by congressional committees of matters pertaining 

thereto’’, approved September 14, 1959 (15 U.S.C. 381 et seq.). 

SEC. 4. DEFINITIONS. 

The following definitions apply in this Act: 

(1) NET INCOME TAX.—The term ‘‘net income tax’’ has the meaning given that 

term for the purposes of the Act entitled ‘‘An Act relating to the power of the 

States to impose net income taxes on income derived from interstate commerce, 

and authorizing studies by congressional committees of matters pertaining 

thereto’’, approved September 14, 1959 (15 U.S.C. 381 et seq.). 

(2) OTHER BUSINESS ACTIVITY TAX.— 

(A) The term ‘‘other business activity tax’’ means— 

(i) a tax imposed on or measured by gross receipts, gross income, or 

gross profits; 

(ii) a business license tax; 

(iii) a business and occupation tax; 

(iv) a franchise tax; 

(v) a single business tax or a capital stock tax; or 

(vi) any other tax imposed by a State on a business for the right to 

do business in the State or measured by the amount of, or economic 

results of, business or related activity conducted in the State. 

(B) The term ‘‘other business activity tax’’ does not include a sales tax, 

a use tax, or a similar tax, imposed as the result of the sale or acquisition 

of goods or services, whether or not denominated a tax imposed on the 

privilege of doing business. 

(3) STATE.—The term ‘‘State’’ means any of the several States, the District of 

Columbia, or any territory or possession of the United States, or any political 

subdivision of any of the foregoing. 

(4) TANGIBLE PERSONAL PROPERTY.—The term ‘‘tangible personal property’’ 

does not include computer software that is owned and licensed by the owner to 

another person. 

SEC. 5. EFFECTIVE DATE. 

Except as provided otherwise in this Act, this Act applies with respect to taxable 

periods beginning on and after the first day of the first year that begins after the 

date of enactment of this Act. 


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1 H.R. 1956 was introduced by Representative Bob Goodlatte (R–VA) on April 28, 2005. 

2Pub. L. No. 86–272, 73 Stat. 555 (1959) (codified, as amended, at 15 U.S.C. § 381 et seq. 

(2004)). 3 Internet Tax Fairness Act of 2001, H.R. 2526, 107th Cong. (2001) (introduced by Representative Bob Goodlatte (R–VA) on July 17, 2001). In addition to the physical presence nexus requirements, this bill originally included a permanent ban on Internet access taxes, as well as a ban 

on multiple or discriminatory taxes levied on goods sold online. 4 Business Activity Tax Simplification Act of 2003, H.R. 3220, 108th Cong. (2003) (introduced 

by Representative Bob Goodlatte (R–VA) on October 1, 2003). 5 Internet Tax Fairness Act of 2001: Hearing on H.R. 2526 Before Subcomm. on Commercial 

& Admin. Law of the H. Comm. on the Judiciary, 107th Cong. 4–6 (2001) (Statement of Rep. 

Bob Barr, Chairman, Subcomm. on Commercial & Admin. Law of the H. Comm. on the Judiciary). 6The substitute amendment struck the title and Internet tax language in the bill and renamed the measure the ‘‘Business Activity Tax Modernization Act of 2002.’’ There was no further action on H.R. 2526 in the 107th Congress. 

PURPOSE AND SUMMARY

H.R. 1956, the ‘‘Business Activity Tax Simplification Act of 

2006,’’ 1 provides a bright-line physical presence nexus requirement 

in order for States to collect net income taxes or other business activity taxes on multistate enterprises. H.R. 1956 would amend Public Law 86–272,2 enacted in 1959, which prohibits States from imposing taxes on the net income of interstate sellers of tangible personal property if the only business activity within the State consists of the solicitation of certain sales orders. H.R. 1956 lists the 

conditions that a business must meet in order to establish a physical presence for the purposes of a State imposing business activity 

taxes. It also cites those conditions that should be disregarded in 

determining whether a business has established physical presence 

within a State. H.R. 1956 promotes interstate commerce by creating certainty for both States and businesses to know when a 

business has a taxable nexus within a State. 

BACKGROUND AND NEED FOR THE LEGISLATION

Legislation similar to H.R. 1956 was introduced in the 107th 3

and the 108th 4 Congresses. On September 11, 2001, the Subcommittee on Commercial and Administrative Law held a hearing 

on H.R. 2526. While the hearing was adjourned prematurely due 

to the terrorist attacks in New York and Washington, D.C., testimony was received from the following witnesses: Stanely Sokul, 

Member of the Advisory Commission on Electronic Commerce and 

Principal of Davidson & Company; Fred Montgomery, Director of 

State and Local Tax of Sara Lee Corporation; Arthur Rosen, Chairman of the Coalition for Rational and Fair Taxation and partner 

at the law firm of McDermott, Will & Emery; and June Summer 

Haas, Commissioner of Revenue of the Michigan Department of 

Treasury.5 The Subcommittee, by voice vote, favorably reported the 

bill, as amended, to the full committee.6

In the 108th Congress, the Subcommittee on Commercial and 

Administrative Law once again held hearings on business activity 

tax legislation, H.R. 3220. Testimony was received from: Rick 

Clyburgh, the Tax Commissioner for the State of North Dakota; 

Jamie Van Fossen, State Representative for the 81st House District of the State of Iowa; Arthur Rosen, Chairman of the Coalition 

for Rational and Fair Taxation and partner at the law firm of 


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7 Business Activity Tax Simplification Act of 2003, Hearing on H.R. 3220 Before the Subcomm. 

on Commercial & Admin. Law of the H. Comm. On the Judiciary, 108th Cong. 6–7 (2004) (Statement of Rep. Chris Cannon, Chairman, Subcomm. on Commercial & Admin. Law of the H. 

Comm. on the Judiciary). 8Federation of Tax Administrators, Range of State Corporate Income Tax Rates (2005), http:// 

www.taxadmin.org/fta/rate/corplinc.html. 9 U.S. Census Bureau, State Government Tax Collections: 2004 (2005), http://www.census.gov/ 

govs/statetax/0400usstax.html. 10 U.S. Const. art. I, sec. 8, cl. 2. 11 Ronald Rotunda, Modern Constitutional Law 135 (5th ed. 1998). 12 504 U.S. 298 (1992). While traditional ‘‘brick and mortar’’ sales outlets are required to collect State and local sales taxes, remote electronic sellers may escape State taxation if they lack 

a ‘‘substantial nexus’’ with the buyer’s State. 

McDermott, Will & Emery; and Vernon Turner, Corporate Tax Director of SmithField Foods, Inc.7

Most States and some local governments levy a range of business 

activity taxes on companies that either operate or conduct business 

activities within their jurisdictions. With the exception of Nevada, 

South Dakota, Washington, and Wyoming, all States and the District of Columbia levy general corporate income taxes. The rates for 

income taxes range from 1 percent in Alaska to 9.99 percent in 

Pennsylvania.8 In 2004, corporate income taxes imposed by the 

States accounted for only 5.19 percent of all of the taxes collected 

by the States.9 Most States also require nonresident corporations 

to remit taxes if they reach out or otherwise ‘‘purposefully avail’’ 

themselves of the privilege of doing business in the taxing State. 

The conceptual and legal bases for this taxing authority are often 

somewhat tenuous, resting upon imprecise formulations and shifting jurisdictional theories. The determination of the outer limits of 

State taxing power over nonresident businesses has given rise to 

substantial litigation between State taxing authorities and 

multistate business enterprises. While State and local governments 

may tax transactions occurring within their jurisdictions, this authority is not unlimited. More specifically, the Constitution imposes 

constraints on a State is power to compel nonresident business entities to collect and remit taxes. 

1. CONSTITUTIONAL LIMITATIONS ON STATE TAXING AUTHORITY

Dormant commerce clause 

The Commerce Clause of the Constitution authorizes Congress to 

‘‘regulate Commerce with foreign Nations, and among the several 

States.’’ 10 While the Commerce Clause establishes a predicate for 

Congressional regulation, the Supreme Court has also interpreted 

the Commerce Clause to create a negative limitation on State 

power to regulate in areas that might adversely affect interstate 

commerce. This limitation on State power is referred to as the Dormant Commerce Clause. Since State taxation of commerce may 

burden interstate commerce, the Court has placed constitutional 

constraints on State taxing authority.11

The fullest legal explanation of Dormant Commerce Clause limitations on State taxing authority is contained in Quill Corp. v. 

North Dakota.12 Quill concerned North Dakota’s attempt to require 

an out-of-state mail order catalog retailer to collect and pay a use 

tax on goods purchased for use within the State. Quill Corporation, 

a Delaware corporation, grossed more than $1 million a year in 

mail order catalog sales to North Dakota residents, but lacked a 

physical presence in the State. When North Dakota moved to comVerDate Aug 31 2005 23:41 Jul 20, 2006 Jkt 049006 PO 00000 Frm 00005 Fmt 6659 Sfmt 6602 E:\HR\OC\HR575.XXX HR575

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13The Quill Court reiterated the four part test enunciated in Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977), holding that State taxation survives Dormant Commerce Clause 

challenge if the tax: 

(1) is applied to an activity with a substantial nexus with the taxing state; (2) is fairly apportioned; 

(3) does not discriminate against interstate commerce and; 

(4) is fairly related to services provided by the State. 

Quill, 504 U.S. at 311. 

14 National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753 (1967). 15Quill, 504 U.S. at 306 (quoting Miller Bros. Co. v. Maryland, 311 U.S. 457, 463 (1940)). 16 Id. at 307. See also International Shoe v. Washington, 326 U.S. 310 (1945). 17 15 U.S.C §381 et seq. (2004). 

pel Quill Corporation to collect and remit use taxes, the corporation 

resisted on the grounds that such action by the State was unconstitutional. The Supreme Court concluded North Dakota’s efforts to 

compel a remote seller to collect and remit use taxes to that State 

without a physical presence or other ‘‘substantial nexus’’ violated 

the Commerce Clause.13 By requiring a remote seller to have a 

physical presence in the taxing State, the Court maintained a previously enunciated use tax safe harbor for remote vendors ‘‘whose 

only connection with customers in the taxing State is by common 

carrier or United States mail.’’ 14

Due process clause 

The Fourteenth Amendment of the Constitution has been interpreted to limit the power of a State government to assert taxing 

jurisdiction over parties who do not reside in the forum State. A 

State statute imposing taxes on nonresident businesses will withstand Due Process challenge if the taxing State demonstrates 

‘‘some definite link, some minimum connection, between a State 

and the person, property or transaction it seeks to tax.’’ 15 As long 

as the business entity (be it a remote seller or a nonresident corporation) ‘‘purposefully avails itself of the benefits of an economic 

market in the forum State, it may be subject to the State’s jurisdiction even if it has no physical presence in the State.’’ 16

To curb perceived prospective tax revenue losses, some States 

have begun to consider novel theories for expanding their taxing 

authority over remote sellers. For example, some tax officials have 

speculated that an Internet service provider (ISP), which connects 

consumers to the Internet, acts as an agent of online sellers and 

therefore creates a ‘‘nexus’’ for electronic merchants ‘‘doing business’’ in the taxing State. But, the existence of a plethora of conflicting jurisdictional taxing criteria for out-of-state businesses burdens interstate commerce. 

2. PUBLIC LAW 86–272

To provide a measure of jurisdictional clarity over State efforts 

to tax out-of-state businesses on sales of tangible goods, Congress 

passed Public Law 86–272 in 1959 17. This law prohibits States 

from imposing taxes on the net income of interstate sellers of tangible personal property if the only business activities within the 

State consist of: 

(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and if approved, are filled by shipment or delivery from a point outside the 

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18 J.C. Penney National Bank v. Johnson, No. MI998–00497–COA–R3–CV (Tenn. Ct. App. 

Dec. 17, 1999), appeal denied, (Tenn. May 8, 2000). 19See Bureau of Economic Analysis, U.S. Department of Commerce, Services and Goods Sectors Strong in 2005: Advance Estimates of Gross Domestic Product (GDP) by Industry (April 

27, 2006), http://www.bea.gov/bea/newsrelarchive/2006/gdpind05.pdf 20 Business Activity Tax Simplification Act of 2003: Hearing on H.R. 3220 Before the 

Subcomm. on Commercial and Administrative Law of the H. Comm. on the Judiciary, 108th 

Cong. 8 (2004) (statement of Arthur Rosen, Chairman of the Coalition for Rational and Fair 

Taxation and partner at the law firm of McDermott, Will & Emery). 21 Business Activity Tax Simplification Act of 2005: Hearing on H.R. 1956 Before the 

Subcomm. on Commercial and Administrative Law of the H. Comm. on the Judiciary, 109th 

Cong. 28 (2005) (statement of Lyndon Williams, Tax Counsel for Citigroup Corp). 

resentative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to 

such person to enable such customer to fill orders resulting from 

such solicitation. 

This law provides that a State lacks authority to tax a nonresident 

business if its only activities in the taxing State consist of the solicitation or delivery of orders for tangible personal property. 

3. CONTINUED LEGAL UNCERTAINTY FOR NONRESIDENT MULTISTATE

BUSINESSES

Enactment of Public Law 86–272 helped c1arify the necessary jurisdictional predicates for taxing nonresident corporations on the 

sale of tangible goods. However, this law did not resolve all questions in this area because it did not define the term ‘‘solicitation,’’ 

and state decisions have conflicted on this point. More critically, today’s economy is drastically different from that of 1959 and is 

based much more upon services and commerce in intangible property. The rise of the digital, service-based economy has made nonresident sellers of intangible goods and services vulnerable to taxation by distant state and local taxing officials. For example, states 

have imposed business activity taxes on an out-of-state bank simply because these banks issued credit cards to state residents.18

The importance of the service sector to the United State’s economy cannot be overlooked. The percentage of the economic output 

that is serviced based continues to increase every year. In 2005, the 

service sector of the country’s GDP grew by 4.1 percent, as opposed 

to the goods sector that grew at only 2.6 percent. The group of industries including finance, insurance, real estate, rental, and leasing contributed 24 percent to the real GDP growth in 2005. Over 

the last 4 years, the service industries sector of the GDP has grown 

at a greater rate than that of the goods sector. It is important to 

encourage policies that nurture the growth of this vital sector of 

the Untied State’s economy.19

The current situation of uncertainty concerning the tax liabilities 

of business and how aggressive the State revenue departments may 

become has ‘‘placed a real drag on American business, hurting 

American job growth and harming the entire U.S. Economy.’’ 20

During the hearings held by the Subcommittee on Commercial and 

Administrative Law, Lyndon William testified that the current taxation standards have ‘‘lead to a great uncertainty and unpredictability in the manner in which multi-state businesses are taxed 

* * * ’’ 21 A physical presence standard for the creation of a business activity taxing nexus would remove this taxing uncertainty by 

prohibiting states from taxing corporations if they lack tangible 

property or employees in the taxing jurisdiction for a set period of 


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time within a taxing period. It would provide certainty regarding 

when a state can tax a business, providing the stability and predictability needed by business, especially small businesses. 

HEARINGS

The Committee’s Subcommittee on Commercial and Administrative Law held one day of hearings on H.R. 1956 on September 27, 

2005. Testimony was received from the following witnesses: Carey 

J. ‘‘Bo’’ Horne, President of ProHelp Systems, Inc. a home-based 

software business in South Carolina; Earl Ehrhart, State Representative for the 36th House District of the State of Georgia and 

National Chairman of the American Legislative Exchange Council; 

Joan Wagnon, Secretary of Revenue for the State of Kansas and 

Chair of the Multistate Tax Commission; and Lyndon D. Williams, 

Tax Counsel for Citigroup Corp. Additional material was submitted 

by other individuals and organizations. 

COMMITTEE CONSIDERATION

On December 13, 2005, the Subcommittee on Commercial and 

Administrative Law met in open session and ordered favorably reported the bill H.R. 1956, as amended, by a voice vote, a quorum 

being present. On June 28, 2006, the Committee met in open session and ordered favorably reported the bill H.R. 1956 with an 

amendment by voice vote, a quorum being present. 

VOTE OF THE COMMITTEE

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the Committee notes that there were no 

recorded votes during the committee consideration of H.R. 1956. 

COMMITTEE OVERSIGHT FINDINGS

In compliance with clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives, the Committee reports that the findings 

and recommendations of the Committee, based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report. 

NEW BUDGET AUTHORITY AND TAX EXPENDITURES

Clause 3(c)(2) of rule XIII of the Rules of the House of Representatives is inapplicable because this legislation does not provide new 

budgetary authority or increased tax expenditures. 

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, the Committee sets forth, with respect to 

the bill, H.R. 1956, the following estimate and comparison prepared 

by the Director of the Congressional Budget Office under section 

402 of the Congressional Budget Act of 1974: 


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JULY 11, 2006. 

Hon. F. JAMES SENSENBRENNER, Jr., 

Chairman, Committee on Judiciary, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 1956, the Business Activity Tax Simplification Act of 2005. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Sarah Puro (for the state 

and local impact) and Barbara Edwards (for federal revenues). 

Sincerely, 

DONALD B. MARRON, Acting Director. 

Enclosure. 

H.R. 1956—Business Activity Tax Simplification Act of 2005 

Summary: H.R. 1956 would amend current law to prohibit state 

and local governments from taxing certain business activities that 

are currently taxable. Specifically, it would prohibit those governments from taxing certain services, intangible goods, media activities, and some financial activities unless businesses have a ‘‘substantial physical presence’’—as defined in the bill—in a jurisdiction. 

CBO estimates that enacting H.R. 1956 would increase federal 

revenues by $106 million in 2007, by $1.2 billion over the 2007– 

2011 period, and by $3.1 billion over the 2007–2016 period. The bill 

would have no other impacts on the federal budget. 

By prohibiting state and local governments from taxing certain 

business activities, H.R. 1956 would impose an intergovernmental 

mandate as defined in the Unfunded Mandates Reform Act 

(UMRA). CBO estimates that the costs—in the form of forgone revenues—to state and local governments would exceed $1 billion in 

the first full year after enactment and would likely grow to about 

$3 billion, annually, by 2011. These costs would exceed the threshold established in UMRA for intergovernmental mandates ($64 million in 2006, adjusted annually for inflation). 

This bill contains no new private-sector mandates as defined in 

UMRA. 

Estimated effect on the Federal Government: The estimated 

budgetary impact of H.R. 1956 is shown in the following table. 

By fiscal year, in millions of dollars— 

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 

CHANGES IN REVENUES 

Estimated Revenues ...................... 106 225 280 301 319 340 355 367 379 390 

CBO expects that enacting H.R. 1956 would reduce payments of 

certain state and local taxes by corporations. These lower payments 

would, in turn, reduce deductions made by corporations for federal 

taxes and raise taxable income for federal purposes. State and local 

governments are expected to adjust their finances as a result of 

these lost revenues. They would likely achieve this through some 

mix of reduced spending and higher taxes and fees—both deductible and non-deductible. This response by state and local governVerDate Aug 31 2005 23:41 Jul 20, 2006 Jkt 049006 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\HR575.XXX HR575

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ments would mute, but not eliminate, the revenue gain to the federal government. CBO estimates that, on balance, H.R. 1956 would 

increase federal revenues by $106 million in 2007, by $1.2 billion 

over the 2007–2011 period, and by $3.1 billion over the 2007–2016 

period. 

Intergovernmental mandates contained in the bill: H.R. 1956 

would amend current law to prohibit state and local governments 

from taxing certain business activities that are taxable under current law. Specifically, it would prohibit those governments from 

taxing certain services, intangible goods, media activities, and some 

financial activities unless businesses have a ‘‘substantial physical 

presence’’—as defined in the bill—in a jurisdiction. 

Current law (Public Law 86–272) and certain Supreme Court decisions prohibit states from levying a tax on the corporate (net) income tax of a company whose only activity in the state is pursuing 

and making sales that would be filled from outside the state (e.g., 

mail order sales). H.R. 1956 would expand the prohibition under 

Public Law 86–272 to certain other types of business activity taxes 

(BATs), including additional corporate income taxes, franchise 

taxes, single business taxes, capital state taxes, gross receipt taxes, 

and business and occupation taxes. Corporations currently pay 

these taxes to a state only if the state can establish ‘‘nexus’’ with 

the firm. (‘‘Nexus’’ is the connection between a firm and a state 

that allows the state to legally impose taxes on the firm.) H.R. 

1956 would redefine ‘‘nexus’’ and preempt state laws that are different from that definition. Such a preemption would constitute a 

mandate as defined in UMRA and would result in forgone revenues 

to state and local governments because of the new definition. 

Specifically, provisions in the bill would: • Define physical presence for firms not based in a state; • Establish a uniform nexus standard nationwide—an entity 

would need to be physically present in a state for 21 or more 

days to establish nexus; • Create ‘‘carve outs’’ from the 21-day standard that would 

allow certain industries or activities (including banking and 

media) to exceed the standard without establishing nexus with 

a state; 

• Expand the prohibitions in Public Law 86–272 to include 

certain taxes not based solely on the income of a company (i.e., 

gross receipts taxes, franchises taxes and business and occupation taxes); and 

• Expand the applicability of Public Law 86–272 to services 

and intangibles (e.g., the trademark for a retail store or the 

patent for a formula for soda). 

Estimated direct costs of mandates to state and local governments: CBO estimates that enacting H.R. 1956 would result in revenue losses for states and some local governments and that such 

losses likely would total more than $1 billion in the first full year 

after enactment. We estimate that forgone revenues would grow to 

about $3 billion annually by 2011. These forgone revenues are 

about 2 percent of the total BATs collected by states in 2006 and 

about 4.5 percent of the amount expected to be collected in 2011, 

and would far exceed the threshold established in UMRA ($64 million in 2006, adjusted annually for inflation.) In 2005, states collected almost $650 billion in total taxes. In the year following enVerDate Aug 31 2005 23:41 Jul 20, 2006 Jkt 049006 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 E:\HR\OC\HR575.XXX HR575

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1 Although the bill’s provisions also would affect collection of taxes by some local governments, 

CBO has not separately estimated the potential loss for such governments. Relatively few local 

governments (in fewer than 10 states) impose significant business taxes. 

actment, the revenue losses resulting from H.R. 1956 would total 

significantly less than one percent of total state tax collections and 

about 3 percent of collections from corporate income taxes. 

UMRA includes in its definition of the direct costs of a mandate 

the amounts that state and local governments would be prohibited 

from raising in revenues as a result of the mandate. The direct 

mandate costs of H.R. 1956 would be the tax revenues that state 

and local governments are currently collecting but would be precluded from collecting under the bill. Further, UMRA’s definition 

of the net costs of a mandate excludes additional revenues that 

state and local governments might raise in reaction to enactment 

of that mandate. 

CBO expects that all states and some local governments would 

see an immediate revenue loss because they are currently collecting 

taxes from firms that would be exempt from taxation under the 

bill. This initial effect would likely exceed $1 billion, annually, nationwide. Subsequently, it is likely that corporations would rearrange their business activities to take advantage of beneficial tax 

treatments that would result from the interaction of the new federal law and certain state taxing regimes. CBO expects that these 

reorganizations would occur during the first five years after enactment of the legislation and estimates that forgone revenues to state 

and local governments would likely total about $3 billion, annually, 

by 2011. 

While virtually all states would lose revenues, about 70 percent 

of the estimated losses would come from ten states: California, 

Florida, Illinois, Michigan, New Jersey, New York, Pennsylvania, 

Tennessee, Texas, and Washington. These states would experience 

the largest losses because of the size and organization of their 

economies, or the current structure of their state tax systems. 

Basis of estimate for intergovernmental mandates costs: CBO 

used information from a variety of sources to estimate the state 

revenue losses that likely would result from enactment of this legislation.1 Using data from the states, industry, and the Census Bureau, CBO estimated potential losses based on current receipts, 

projected receipts (when available), the industrial and commercial 

profile of state economies, and the structure of state taxing systems—including information from precedents issued by state tax 

departments. 

States use a variety of rules to determine whether a company is 

subject to taxation—if it has nexus—and if so, how the activities 

in which that company engages are taxed. The differences in state 

taxing systems affect how much revenue each state or local government would likely forgo under the provisions of the bill. CBO examined both characteristics of the corporate tax structure of each 

state and data about the economic makeup of each state in order 

to estimate potential revenue losses. 

To estimate the costs of enacting H.R. 1956 to state and local 

governments, CBO first estimated the total amount of BATs paid 

by corporations in each state. Such taxes totaled about $60 billion 

in 2005. Since certain industries are significantly less likely to be 

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tion about the industrial and commercial makeup of states to calculate BATs that could be at risk if H.R. 1956 is enacted. Overall, 

we estimate that about 75 percent of total income from BATs could 

be at risk under the bill. The portion at risk, however, would vary 

significantly from state to state. 

As noted above, CBO expects that states would lose only a small 

percent of BATs—about 2 percent in the first year after enactment 

and about 4.5 percent in 2011, nationwide. Further, those loses 

would be a very small percentage of total state tax collections. To 

calculate losses for 2006 and 2011, CBO estimated the likely percentage that states would lose based on their current tax systems 

and applied that to the BATs potentially at risk. 

Losses also would depend on the current characteristics of each 

state tax system. For example, a large state with a heavily information-based economy that does not currently require a company 

to have a physical presence to establish nexus and only assesses 

corporate income tax based on the amount of sales in the state 

would see a significant loss of revenue. In contrast, a small state 

that requires physical presence to establish nexus and that has a 

predominately agrarian or manufacturing economy would see a 

much smaller loss. 

In the absence of this legislation, it is possible that some state 

and local governments would enact new taxes or change the way 

they tax businesses. Since such changes are difficult to predict, for 

the purposes of estimating the direct costs of the mandate, CBO 

considered only the revenues from taxes that are currently in place 

and actually being collected or estimates for changes that are already in statute and will be implemented over the next five years. 

Impact on the private sector: The bill contains no new privatesector mandates as defined in UMRA. 

Estimate prepared by: Impact on State, Local, and Tribal Governments: Sarah Puro. Federal Revenues: Barbara Edwards. Impact on the Private Sector: Paige Piper/Bach. 

Estimate approved by: Peter H. Fontaine, Deputy Assistant Director for Budget Analysis. G. Thomas Woodward, Assistant Director for Tax Analysis. 

PERFORMANCE GOALS AND OBJECTIVES

The Committee states that pursuant to clause 3(c)(4) of rule XIII 

of the Rules of the House of Representatives, H.R. 1956, provides 

a physical presence nexus standard that business would have to 

meet before a State could determine that the business is within the 

State’s taxing jurisdiction for business activity taxes. 

CONSTITUTIONAL AUTHORITY STATEMENT

Pursuant to clause 3(d)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee finds the authority for this legislation in article I, section 8 of the Constitution. 

SECTION-BY-SECTION ANALYSIS AND DISCUSSION

The following discussion describes the bill as reported by the 

Committee. 


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Section 1. Short title 

This section sets forth the title of the bill as the ‘‘Business Activity Tax Simplification Act of 2006’’. 

Section 2. Removal of certain limitations on the application of Public Law 86–272 

This section amends Public Law 86–272 by striking references to 

‘‘tangible personal property,’’ thereby extending the prohibition on 

the imposition by States of net income taxes where the only business activity of a company is the solicitation of orders for a sale in 

that State. This section also extends the prohibition to ‘‘other business activity taxes’’ as defined in Section 4. 

Section 3. Jurisdictional standard for State and local net income 

taxes and other business activity taxes 

Subsection (a) presents the jurisdictional standard of ‘‘physical 

presence’’ for State and local income taxes and other business activity taxes. Specifically, it provides that no State may impose a net 

income or other business activity tax on any business engaged in 

interstate commerce unless that business has a physical presence 

within the taxing jurisdiction during the taxable period. 

Subsection (b) provides that ‘‘physical presence’’ is established 

only if the business activities within the State include any of the 

following: 

(A) Being an individual physically within the State, or assigning 

one or more employees to be in the State, on more than 21 days. 

The following activities are disregarded in determining whether the 

21-day limit has been exceeded: • Activities in connection with possible purchase of goods or 

services, for consumption by the person’s business. • Gathering news for print, broadcast, or other distribution 

through the news media. • Meeting government officials for purposes other than selling 

goods or services, for consumption by such government. • Merely attending educational or training conferences, seminars 

or other similar functions. • Nonprofit participation in charitable activities. 

(B) Using the services of an agent (excluding an employee) to establish or maintain the market in the State, if such agent does not 

perform business services in the State for any other person during 

such taxable year. 

(C) The leasing or owning of tangible personal property or of real 

property in the State, except that the following shall be excluded 

in determining whether the 21-day limit has been exceeded: 

• Tangible property located in the State for purposes of being assembled, manufactured, processed, or tested by another person for 

the benefit of the owner or lessee, or used to furnish a service to 

the owner or lessee by another person. 

• Marketing or promotional materials distributed in the State. 

• Any property to the extent used ancillary to an activity excluded from the computation of the 21-day period under paragraph 

(1) or (2). 

Subsection (c) clarifies that any requirements for establishing 

physical presence for taxable periods not consisting of a year shall 

be adjusted pro rata. 


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Subsection (d) delineates the exceptions to the bill’s general requirements. It specifies that States are not prohibited from taxing 

the following: (a) entities incorporated or formed under the laws of 

the State or commercially domiciled in the State in question; (b) individuals domiciled in the State; (c) or the owner or beneficiary of 

an entity that is a partnership, an S corporation, a limited liability 

company, a trust, an estate or any other similar entity that has a 

physical presence in the State. Subsection (d)(3) stipulates that 

nothing in the bill is to be construed to supercede a State’s authority to bring enforcement actions against entities or persons acting 

illegally. For example, a State will still be allowed to enforce its 

laws regarding tax shelters or ‘‘sham transactions.’’ 

Further, the 21-day rule is reduced to one day for live performances and sporting events in a State when the audience is more 

than 100 individuals, when sales of tangible personal property are 

made within a State if the delivery is completed within the State, 

and for the performance of service that physically affects real property within the State. 

Section 4. Definitions 

Section 4 sets forth the operative definitions for the Act. ‘‘Other 

business activity tax’’ is specifically defined as: 

• a tax imposed on or measured by gross receipts, gross income, or gross profits 

• a business license tax 

• a business and occupation tax 

• a franchise tax 

• a single business tax or capital stock tax, or 

• any other tax imposed by a State on a business for the 

right to do business in the State or measured by the amount 

of, or economic results of, business or related activity conducted in the State. 

The term excludes any sales, use or similar taxes imposed as the 

result of a sale or acquisition of a good. Further, subsection (4) excludes computer software owned and licensed by the owner to another person from the definition of tangible personal property. 

Section 5. Effective date 

This section provides that the effective date for the Act begins on 

the taxable period beginning on or after the first day of the first 

year after the enactment of this Act. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 


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ACT OF SEPTEMBER 14, 1956 

AN ACT Relating to the power of the States to impose net income taxes on income 

derived from interstate commerce, and authorizing studies by congressional committees of matters pertaining thereto. 

Be it enacted by the Senute and House of Representatives of the 

United States of America in Congress assembled, 

TITLE I—IMPOSITION OF MINIMUM STANDARD 

SEC. 101. (a) No State, or political subdivision thereof, shall have 

power to impose, for any taxable year ending after the date of the 

enactment of this Act, a net income tax on the income derived 

within such State by any person from interstate commerce if the 

only business activities within such State by or on behalf of such 

person during such taxable year are either, or both, of the following: 

(1) the solicitation of orders by such person, or his representative, in such State for sales øof tangible personal property, 

which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from 

a point outside the State; and¿ or transactions, which orders 

are sent outside the State for approval or rejection and, if approved, are— 

(A) in the case of tangible personal property, filled by 

shipment or delivery from a point outside the State; and 

(B) in the case of all other forms of property, services, 

and other transactions, fulfilled from a point outside the 

State; 

and 

* * * * * * * 

(c) For purposes of subsection (a), a person shall not be considered to have engaged in business activities within a State during 

any taxable year merely by reason of sales or transactions in such 

State, or the solicitation of orders for sales or transactions in such 

State, øof tangible personal property¿ on behalf of such person by 

one or more independent contractors, or by reason of the maintenance of an office in such State by one or more independent contractors whose activities on behalf of such person in such State consist solely of making sales or fulfilling transactions, or soliciting orders for sales or transactions ø, of tangible personal property¿. 

(d) For purposes of this section— 

(1) the term ‘‘independent contractor’’ means a commission 

agent, broker, or other independent contractor who is engaged 

in selling, or soliciting orders for øthe sale of, tangible personal 

property¿ a sale or transaction, for more than one principal 

and who holds himself out as such in the regular course of his 

business activities; and 

* * * * * * * 

SEC. 105. Beginning with taxable periods beginning on or after 

the first day of the first calendar year that begins after the date of 

the enactment of the Business Activity Tax Simplification Act of 

2006, the prohibitions of section 101 that apply with respect to net 

income taxes shall also apply with respect to each other business activity tax, as defined in section 4 of the Business Activity Tax SimVerDate Aug 31 2005 23:41 Jul 20, 2006 Jkt 049006 PO 00000 Frm 00015 Fmt 6659 Sfmt 6603 E:\HR\OC\HR575.XXX HR575

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plification Act of 2006. A State or political subdivision thereof may 

not assess or collect any tax which by reason of this section the State 

or political subdivision may not impose. 

MARKUP TRANSCRIPT

BUSINESS MEETING 

WEDNESDAY, JUNE 28, 2006 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:07 a.m., in Room 

2141, Rayburn House Office Building, the Honorable F. James Sensenbrenner, Jr. (Chairman of the Committee) presiding. 

[Intervening business.] 

Chairman SENSENBRENNER. The next item on the agenda is H.R. 

1956, the ‘‘Business Activity Tax Simplification Act.’’ 

[The bill, H.R. 1956, follows:] 


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Chairman SENSENBRENNER. In the absence of the gentleman 

from Utah, Mr. Cannon, who is the Chairman of the Subcommittee 

on Commercial and Administrative Law, the chair recognizes the 

gentleman from North Carolina, Mr. Coble, for a motion. 

Mr. COBLE. I thank the Chairman. 

Mr. Chairman, the Subcommittee on Commercial and Administrative law reports favorably the bill, H.R. 1956, with an amendment, and moves its favorable recommendation to the full House. 

Chairman SENSENBRENNER. Without objection, the bill will be 

considered as read and open for amendment at any point. 

And the Subcommittee amendment in the nature of a substitute, 

which the Members have before them, will be considered as read, 

considered as the original text for purposes of amendment, and 

open for amendment at any point. 

The chair recognizes the gentleman from North Carolina, Mr. 

Coble, to strike the last word. 

Mr. COBLE. I thank the Chairman. 

Mr. Chairman and colleagues, H.R. 1956, the ‘‘Business Activity 

Tax Simplification Act of 2005,’’ is designed to create a clear and 

concise standard to determine when a business entity has a taxable 

nexus in a State. 

The Subcommittee on Commercial and Administrative law, 

under Chairman Cannon’s leadership, held a hearing last September to learn more about the need for this bill and the likely effects it will have on the States, businesses, both large and small, 

and our constituents. 

This is not a new issue for the Subcommittee. We conducted 

hearings on this topic, you will recall, on both the 107th and 108th 

Congresses, reporting legislation in the 107th Congress. 

I want to commend the diligent efforts of my colleague from Virginia, Mr. Goodlatte, the bill’s sponsor, who has labored on this legislation for three Congresses. 

Prior to yielding my time to him, Mr. Chairman, I ask unanimous consent that Members may submit their written statements 

to be included in the record and to the extent I have time remaining, I yield to my colleague from Virginia. 

Chairman SENSENBRENNER. Without objection, the gentleman’s 

request is so ordered. And without objection, all Members may 

place opening statements in the record. 

The gentleman yields to the gentleman from Virginia. 

Mr. GOODLATTE. Thank you, Mr. Chairman. 

I thank the gentleman from North Carolina for yielding to me. 

My full written statement will be made a part of the record. 

I also want to thank the Chairman for scheduling this markup 

on the Business Activity Simplification Act. I introduced this legislation with my good friend and colleague, Congressman Boucher of 

Virginia, to provide a bright line rule to clarify the issue of when 

State and local authorities may impose business activity taxes on 

out-of-State entities. 

Many States and local governments levy corporate income franchise and other taxes on out-of-State companies that conduct business activities within their jurisdictions. While providing revenue 

for States, these taxes also serve to pay for the privilege of doing 

business in a State. 


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However, with the growth of the Internet, companies are increasingly able to conduct transactions without the constraints of geopolitical boundaries. The growth of the high tech industry and 

interstate business-to-business and business-to-consumer transactions raises questions over where multi-State companies should 

be required to pay corporate income and other business activity 

taxes. 

Over the past several years, a growing number of jurisdictions 

have sought to collect business activity taxes from businesses located in other States, even though those businesses receive no appreciable benefit from the taxing jurisdiction and even though the 

Supreme Court has ruled that the Constitution prohibits a State 

from imposing taxes on businesses that lack substantial connections to the State. 

This has led to unfairness and uncertainty, generated contentious, widespread litigation, and hindered business expansion as 

businesses shy away from expanding their presence in other States 

for fear of exposure to unfair tax burdens. 

In order for businesses to continue to become more efficient and 

expand the scope of their goods and services, it is imperative that 

clear and easily navigable rules be set forth regarding when an 

out-of-State business is obliged to pay business activity taxes to a 

State. 

Otherwise, the confusion surrounding these taxes will have a 

chilling effect on e-commerce, interstate commerce generally, and 

the entire economy as the tax burdens, compliance costs, litigation 

and uncertainty escalate. 

Previous actions by the Supreme Court and Congress have laid 

the groundwork for a clear, concise and modern bright line rule in 

this area. In the landmark case of Quill v. North Dakota, the Supreme Court declared that a State cannot impose a tax on an outof-State business unless that business has a substantial nexus with 

the taxing State. 

However, the court did not define what constituted a substantial 

nexus for the purposes of imposing business activity taxes. 

In addition, over 40 years ago, Congress passed legislation to 

prohibit jurisdictions from taxing the income of out-of-State corporations whose in-State presence was nominal. 

Public Law 86–272 set forth clear, uniform standards for when 

States could and could not impose such taxes on out-of-State businesses, when the businesses’ activities involved the solicitation of 

orders for sales. 

However, like the economy of its time, the scope of P.L. 86–272 

is limited to tangible personal property. Our nation’s economy has 

changed dramatically over the past 40 years and this outdated 

statute needs to be modernized. 

The Business Activity Tax Simplification Act both modernizes 

and provides clarity in an outdated an ambiguous tax environment. 

First, the legislation updates the protections of P.L. 86–272. In addition, our legislation sets forth clear, specific standards to govern 

when businesses should be obliged to pay business activity taxes to 

a State. 

The clarity that the Business Activity Tax Simplification Act will 

bring will ensure fairness, minimize litigation and create the kind 

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nesses to make investments, expand interstate commerce, grow the 

economy and create new jobs. 

At this time, I thank the Chairman for holding—— 

Chairman SENSENBRENNER. The time of the gentleman from 

North Carolina has expired. 

The gentleman from Michigan? 

Mr. CONYERS. Mr. Chairman, I rise to oppose the legislation and 

speak in behalf of our Ranking Member, Mr. Watt, who is conducting a CBC meeting. 

If only the National Governors Association would support this 

bill, we would realize that it might have some real significance for 

the several States. But as drafted, what we are doing here is virtually creating tax shelters for non-resident businesses doing a 

great deal of business in a State, while burdening the State’s traditional brick and mortar companies. 

We are creating tax shelters in this bright line legislation, as it 

was referred. The exemption of non-resident businesses from State 

and local taxation allows out-of-State companies, who often conduct 

major economic activities within the State, to take full advantage 

of State resources while shifting all the State corporate income tax 

burden on the in-State businesses. 

Thus, resident businesses that contribute to the community by 

creating jobs, paying other taxes, are now further burdened, or 

would be, while those companies headquartered elsewhere, but 

doing substantial business in a State would essentially get a free 

ride. 

This isn’t fair. The National Governors Association describes this 

bill as a huge unfunded mandate that will result in the loss of billions of State dollars and that is across the country. 

But in my State of Michigan, the State treasurer did a revenue 

analysis, calculating a potential loss of more than $417.5 million 

annually if this legislation was enacted. 

In an era where our States are in desperate need for revenue for 

the protection of citizens, should we enact legislation that would reduce their funds? I think not. This is patently unfair legislation 

which would have a clear detrimental effect on State revenue. 

Please consider this with great care and I think the Committee 

will reject House Resolution 1956. 

I return my unused time. 

Chairman SENSENBRENNER. Are there any amendments to the 

amendment in the nature of a substitute? 

Mr. FORBES. Mr. Chairman? 

Chairman SENSENBRENNER. The gentleman from Virginia, Mr. 

Forbes, for what purpose do you seek recognition? 

Mr. FORBES. I have an amendment at the desk. 

Chairman SENSENBRENNER. The clerk will report the amendment. 

The CLERK. ‘‘Amendment offered by Mr. Forbes to the Amendment in the Nature of a Substitute to H.R. 1956. Page 5, line 23, 

insert ‘warehoused in accordance with Article 7 of the Uniform 

Commercial Code, as in effect in the State,’ after’’—— 

[The amendment by Mr. Forbes follows:] 


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Chairman SENSENBRENNER. The gentleman is recognized for 5 

minutes. 

Mr. FORBES. Thank you, Mr. Chairman. 

Mr. Chairman, I want to first compliment Congressman Goodlatte for his hard work on this bill, which I think is an important 

bill, but there is one concern that I have with it and that is as it 

deals with public warehouses. 

Currently, public warehouses are not currently taxed on goods 

and products that are held for a third party. And under Article 7 

of the UCC, they are classified as baileys for hire, but there is a 

real concern that this bright line that we are putting down with 

this bill could be misinterpreted as a green line and a green light 

for States to tax warehouses after the 21-day period of time. 

This amendment would make it clear that when they are holding 

goods under Article 7 for distribution in interstate commerce, they 

would not be taxed under the provisions of the bill. 

However, I have had discussions with Congressman Goodlatte. It 

is my understanding that he is going to continue to work on trying 

to close this gap. 

And so, Mr. Chairman, I would request unanimous consent to 

withdraw the amendment and to yield the balance of my time to 

Congressman—— 

Chairman SENSENBRENNER. The amendment is withdrawn. 

Are there further amendments to the amendment in the nature—— 

Mr. SCOTT. Mr. Chairman? 

Chairman SENSENBRENNER. The gentleman from Virginia, Mr. 

Scott? 

Mr. SCOTT. Move to strike the last word. 

Chairman SENSENBRENNER. The gentleman is recognized for 5 

minutes. 

Mr. SCOTT. Mr. Chairman, I just wanted to say this bill may not 

be perfect, but it certainly solves many problems that are worse 

than no bill at all. 

I would ask unanimous consent to introduce a letter from Smithfield Foods, near our district. 

Chairman SENSENBRENNER. Without objection. 

[The letter follows:] 


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Mr. SCOTT. That outlines part of the problems. And I will just 

recite a couple of paragraphs from the letter. 

One of the problems they encountered was in New Jersey. ‘‘The 

Department of Taxation in New Jersey stopped one of our trucks 

and demanded, in return, the release of the truck and its driver. 

The demand was made despite the fact that Smithfield has no 

physical presence in the State and that, in the end, New Jersey’s 

Department of Taxation agreed that Smithfield owed no such 

taxes.’’ 

A full account and our response to questions was made available 

in the hearing record of the Subcommittee. 

Unfortunately, the story did not end there. Rather than being 

just an isolated incident, it happened again not long after the testimony. 

In December 2004, a truck belong to one of our subsidiaries was 

seized at a Costco distribution facility in New Jersey. To resolve 

the situation, they spoke to a person who was part of the special 

task force within the New Jersey Department of Revenue. 

That agent demanded $80,000 for the release of the truck. After 

hours of discussion, $13,400 was mutually agreed upon. And then, 

Mr. Chairman, they filed a refund and got most of their $13,400 

back. 

I think, Mr. Chairman, this bill outlines a formula whereby everybody will know what the taxes are and it is a rational way of 

dealing with the situation and I would hope that we would pass the 

bill. 

And I would yield to my colleague from Virginia, if he wanted 

time. 

Mr. GOODLATTE. I thank the gentleman for yielding. 

I just want to briefly respond to the gentleman from Virginia, 

Mr. Forbes. First of all, his interest in the issue regarding public 

warehouses is well taken. 

We have focused on this very closely, because it is our intention 

and our belief that the bill does not in any way jeopardize public 

warehouses and we certainly do not want that to happen. 

So we will continue to work with the gentleman and anybody 

else who is interested in having input on that to make sure that 

that is the case. 

We also have to be very careful that we do not change the treatment that private warehouses receive or others receive under the 

legislation. So we have to be very careful that we are not doing a 

carve-out for anybody. 

The purpose of this legislation is to create a clear bright line, not 

to create major exceptions under the rule. 

So with that understanding that we do want public warehouses 

to be treated the same under this law as they have been treated 

and remain competitive in the warehousing industry, I would look 

forward to working with the gentleman. 

Mr. SCOTT. Reclaiming my time. 

Mr. Chairman, again, I would say it is not perfect, but I think 

of all the problems that can occur without the bill, I think this is 

a rational way of dealing with a complex situation and my colleagues from Virginia, Mr. Goodlatte and Mr. Boucher, have done 

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I think they have the best possible way to deal with the taxation 

situation and I would urge the Committee to adopt the bill. 

And yield back the balance of my time. 

Chairman SENSENBRENNER. Are there amendments to the 

amendment in the nature of a substitute? 

Mr. GOODLATTE. Mr. Chairman, I have an amendment. 

Chairman SENSENBRENNER. The clerk will report the amendment. 

The CLERK. ‘‘Amendment offered by Mr. Goodlatte of Virginia 

and Mr. Boucher of Virginia to the Amendment in the Nature of 

a Substitute to H.R. 1956. Page 5, strike line 9 through 16’’—— 

[The amendment by Mr. Goodlatte and Mr. Boucher follows:] 


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Chairman SENSENBRENNER. Without objection, the amendment is 

considered as read and the gentleman is recognized for 5 minutes. 

Mr. GOODLATTE. Mr. Chairman, very briefly. This is a technical 

amendment that clarifies the language in the bill regarding when 

the nexus of a person or business inside of a State can be attributed to an out-of-State business that would not otherwise have a 

nexus in the State. 

The original intent of the attribution provision in the bill was 

that attribution would only occur when an in-State person acted as 

an agent of an out-of-State business and was not performing business for anyone else. 

This amendment clarifies the language to ensure that it complies 

with the intentions behind that provision. 

And I yield back. 

Chairman SENSENBRENNER. The question is on agreeing to the 

amendment offered by the gentleman from Virginia, Mr. Goodlatte. 

Those in favor will say, ‘‘Aye.’’ 

Opposed, ‘‘No.’’ 

The ayes appear to have it. The ayes have it. The amendment 

is agreed to. 

Are there further amendments? If not, without objection, the 

Subcommittee amendment in the nature of a substitute, laid down 

as the base text, is adopted, as amended. 

A reporting quorum is present. The question occurs on the motion to report the bill H.R. 1956 favorably, as amended. 

All in favor say, ‘‘Aye.’’ 

Opposed, ‘‘No.’’ 

The ayes appear to have it. The ayes have it and the motion to 

report the bill favorably, as amended, is agreed to. 

Without objection, the bill will be reported favorably to the 

House in the form of a single amendment, in the nature of a substitute, incorporating the amendments adopted here today. 

Without objection, the staff is directed to make any technical and 

conforming changes and all Members will be given 2 days, as provided by the House rules, in which to submit additional dissenting, 

supplemental, or minority views. 

[Intervening business.] 

[Whereupon, at 1:40 p.m., the Committee was adjourned.] 


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1Letter from Governor Mike Huckabee, Chairman of the National Governors Association and 

Governor Janet Napolitano, Vice Chair of the National Governors Association to Representative 

Sensenbrenner, Chairman of the House Judiciary Committee and Representative Conyers, 

Ranking Member of the House Judiciary Committee (March 19, 2006)(on file with the House 

of Representative Committee on the Judiciary, Democratic Staff). Letter from Larry Naake, Executive Direction of the National Association of Counties to Representative Sensenbrenner, 

Chairman of the House Judiciary Committee and Representative Conyers, Ranking Member of 

the House Judiciary Committee (March 28, 2006) (on file with the House of Representative Committee on the Judiciary, Democratic Staff). Letter from Michael A. Resnick, Associate Executive 

Director, National School Boards Association to Representative Sensenbrenner, Chairman of the 

House Judiciary Committee (June 27,2006) (on file with the House of Representative Committee 

on the Judiciary, Democratic Staff). Electronic letter from Martha Coven, Senior Legislative Associate, Center on Budge and Policy Priorities (June 20, 2006) (on file with the House of Representative Committee on the Judiciary, Democratic Staff). 

DISSENTING VIEWS 

We strongly oppose H.R. 1956, the ‘‘Business Activity Tax Simplification Act of 2005,’’ which would impose a federal physical 

presence standard for determining when a state can impose a business activity tax. While proponents of H.R. 1956 maintain that federal legislation is needed to clarify the nexus standard for state 

business activity taxes to minimize litigation, this legislation is 

more likely to have the opposite effect. In fact, if H.R. 1956 were 

enacted, it would legalize certain tax sheltering practices and income shifting methods. This legislation is strongly opposed by the 

National Governors Association, the National Association of Counties, and the National School Boards Association and the Center on 

Budget and Policy Priorities.1

H.R. 1956 is problematic for several reasons. First, the proposed 

legislation would severely limit the ability of state and local governments to levy their corporate income and similar taxes on multi 

state corporations which are earning income within the state but 

lack a permanent or physical presence there. Second, while proponents claims that H.R. 1956 will minimize litigation, in fact, the 

legislation would create reorganization opportunities that could 

provide new ground for litigation. Third, the legislation that is likely to result from the ‘‘physical presence’’ standard established by 

H.R. 1956, would have a significant impact on the state revenue 

creating an issue of federalism and result in an unfunded mandate. 

DESCRIPTION OF THE LEGISLATION

H.R. 1956, introduced by Rep. Goodlatte in April 2005, would establish ‘‘physical presence’’ as the nexus standard for levying state 

and local business activity taxes on interstate commerce. Specifically, this legislation would preempt state law to provide that an 

out-of-state company must have a physical presence in a state before the state can impose franchise taxes, business license taxes, 

and other business activity taxes. The physical presence threshold 

is the minimum amount of activity a business must conduct in a 

particular state to become subject to taxation in that state. 


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2 U.S. Const. Amend. XIV § 1. 

3 U.S. Const. Art. I § I 8, cl. 3. 

4Generally, the Due Process Clause relates to the fairness of the tax burden and whether a 

business has sufficient contacts with the taxing jurisdiction to justify the tax. The Commerce 

Clause is concerned with the effect of the tax on interstate commerce. See Walter Hellerstein, 

Supreme Court Says No Use Tax Imposed on Mail-order Sellers . . . for Now, 77 J. Tax’n 120, 

120 (Aug., 1992) 5 504 U.S. 298 (1992). 

6 Business interests argue that the Quill standard should apply to all taxes, while states have 

employed an apportionment standard that is based on what is referred to as ‘‘economic nexus.’’ 

The Supreme Court has refused to clarify whether ‘‘economic nexus’’ is sufficient under the Constitution. In Geoffrey, Inc. v. South Carolina Tax Commission, 313 S. C. 15, 437 S.E.2d 13, cert. 

denied, 510 U.S. 992 1993, for example, the Supreme Court denied certiorari in a case in which 

the South Carolina Supreme Court found sufficient connection between a Delaware corporation 

and the state of South Carolina to justify a business activity tax. The Delaware corporation’s 

contact with the state consisted of intangible property. 

H.R. 1956 would also amend P.L. 86–272, which limits the power 

of states to impose net income taxes on interstate commerce. Under 

this legislation, P.L. 86–272 would apply to services and intangible 

property of all in state businesses. In addition, H.R. 1956 would 

generally require use of employees of services for more than 21 

days per calendar year in a state to establish nexus. These regulations would exacerbate underlying inefficiencies because the nexus 

threshold for businesses—the 21 day rule, which is higher than 

currently exists in most states—would increase the opportunities 

for businesses to manipulate their activities to avoid paying state 

taxes. Finally, H.R. 1956 would enumerate exempt activities, allowing certain tax shelters or income shifting methods that a number 

of states consider questionable. 

BACKGROUND

Generally, both in-state and out-of-state businesses that are 

‘‘doing business’’ in a state, pay corporate income taxes (business 

activity taxes or BAT) on the money earned in that state. These 

taxes may only be imposed on those businesses that have a ‘‘substantial nexus’’ with the state. A state may, therefore, tax a transaction if there is an appropriate level of connection of the transaction to the state. BAT taxes differ from the obligation to collect 

sales or use taxes imposed on non-resident businesses. Both, however, are governed by the Constitution. 

The Due Process 2 Commerce Clause 3 of the U.S. Constitution 

limit a State from imposing tax liability or collection responsibilities on a business unless there is a substantial nexus with the 

state. 4 Thus the issue of when a state has the authority to impose 

a tax upon an non-resident corporation depends upon whether that 

corporation has sufficient connection with the state to warrant the 

tax obligation. In Quill Corp. v. North Dakota,5 the Supreme Court 

set out a bright-line test of ‘‘physical presence’’ to satisfy the necessary connection with a state under the dormant commerce clause 

but explicitly limited that test to the duty of mail order houses to 

collect use taxes from customers. The Quill Court did not, however, 

clearly address the question whether ‘‘physical presence’’ is required to impose other types of taxes on non-resident businesses, 

including BAT, or under what standard.6


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7See Congressional Research Service Report for Congress, RL32297, State Corporate Income 

Taxes: A Description and Analysis (March 23, 2004). (A copy is on file with the House of Representative Committee on the Judiciary, Democratic Staff). 

I. H.R. 1956 limits the ability of state and local governments to levy 

their corporate taxes on out-of-state companies 

Under current law, both in-state and non-resident businesses 

that are doing business in a state may be subject to business activity taxes on income earned in that state. Each state independently 

implements rules for economic activities—which are not covered by 

P.L. 86–272—that establish nexus. State rules are very similar for 

most services and activities. 

The ‘‘physical presence’’ standard adopted by the bill favors businesses with limited physical presence but often with major economic activity within the state, while shifting the state corporate 

income tax burden to small businesses, manufacturing, and natural 

resource and service industries—businesses that create jobs, pay 

local property taxes, and sponsor little league teams. Furthermore, 

out-of-state businesses often benefit substantially from public services provided by the states such as roads and police protection. In 

addition, these companies benefit from states in which they have 

no physical presence but do have customers and can reasonably be 

expected to pay some amount of business activity tax. For example, 

when an out-of-state bank makes mortgage loans in a state, the 

value of the houses that serve as collateral depends on the quality 

of local schools and the safety of the community. Furthermore, that 

same out of state bank would use the local court system is used 

if legal action necessary for non payment of loans. Each of these 

services is provided by the state, notwithstanding a company’s 

physical presence in that state. 

The adoption of a physical presence standard will also permit the 

creation of tax shelters for non-resident businesses and discriminate against traditional ‘‘brick and mortar’’ companies within the 

state. A Congressional Research Service analysis of H.R. 1956 concludes: 

The new regulations as proposed in H.R. 1956 would 

have exacerbated underlying inefficiencies because the 

threshold for business—the 21-day rule, higher than currently exists in most states—would increase opportunities 

for tax planning leading to more ‘‘nowhere income.’’ In addition, expanding the number of transactions that are covered by P.L. 86–272 also expands the opportunities for tax 

planning and thus tax avoidance and possibly evasion.7

Finally, in an increasingly borderless economy, taxing authorities 

argue that a bright line standard is outdated, inappropriate, and 

would impede, rather than promote economic growth by encouraging business entities to evade their tax responsibilities. 

II. Although proponents claim that H.R. 1956 could mitigate litigation, it is more likely to provide new ground for litigation 

The proponents state that the legislation is needed to correct the 

trend of federal and state court decisions which strongly imply that 

‘‘physical presence’’ is the nexus needed to levy business activity 

tax under the Constitution. Specifically, they claim that H.R. 1956 


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8 H.R. 1996, Section 3(b)(2). 

9 H.R. 1956, Section 3. 

10 According to the CBO, ‘‘While virtually all states would lose revenues, about 70 percent of 

the estimated losses would come from ten states: California, Florida, Illinois, Michigan, New 

Jersey, New York, Pennsylvania, Tennessee, Texas, and Washington.’’ 

would establish a clear physical-presence nexus standard that 

would reduce the amount of litigation that is occurring. Instead, 

the legislation contains numerous undefined terms and confusing 

provisions that would no doubt spark litigation in the quest to ascertain what Congress meant. In H.R. 1956, physical presence is 

described as, ‘‘Using the services of an agent (excluding an employee) to establish or maintain the market in the State, if such 

agent does not perform business in the State for any other person 

during such taxable year,’’ with no explanation or interpretation of 

its meaning.8 among other things, the bill fails to elaborate on the 

meaning of such critical terms as ‘‘services,’’ ‘‘establish or maintain,’’ ‘‘market,’’ or ‘‘perform business.’’ 

Additionally, the legislation is likely to spawn costly litigation by 

allowing new opportunities for businesses to reorganize in order to 

avoid taxes. The bill is drafted to limit physical presence to ‘‘collectively and on more than 21 days in the aggregate, during such person’s taxable year,’’ and to excluded those who are conducting, ‘‘activities in connection with a possible or an actual purchase of goods 

or services for consumption by the person’s business.’’ 9 This construction will likely spur corporations to shelter their profits from 

taxation by changing their business practices so that they fall within the guidelines of the legislation. In reaction, the states will be 

forced to use alternative means to enforce the state taxation laws. 

Further, many states have discretionary authority to treat in-state 

and out-of-state subsidiaries for tax purposes as if they are one corporation. To protect their revenues, the states are more likely to 

use this authority, creating addition litigation. 

III. H.R. 1956 reduces states tax revenue affecting the states ability 

to provide traditional state and local government services and 

is an unfunded mandate 

As a policy matter we would note that State and local governments work with the federal government, both providing essential 

government services like education and transportation. However, 

states are restricted from providing these services if their power of 

taxation is truncated or interfered with. Furthermore, it will be 

state officials and not Congress who will be held accountable if 

public services are reduced or personal income or property taxes 

are increased to compensate for the reduction in tax revenue resulting from the enaction of this legislation. 

H.R. 1956 would also create an enormous unfunded mandated resulting in a several billion dollar loss for state revenues.10 According to a survey conducted by the National Governors Association, 

the business activity tax proposal would cost states more than several billion annually. As state governments, unlike the federal government, are required to balance their budget, the lost of such a 

significant amount of revenue must be replaced by either increasing taxes or cutting programs. The Congressional Budget Office 

Cost estimates that the cost of this bill to state and local governVerDate Aug 31 2005 23:41 Jul 20, 2006 Jkt 049006 PO 00000 Frm 00042 Fmt 6604 Sfmt 6602 E:\HR\OC\HR575.XXX HR575

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ment would exceed $1 billion the first full year after enactment and 

would likely grow to approximately $3 billion annually in 2011. 

Thus, these costs would exceed the threshold under UMRA for 

intergovernmental mandates by $64 million in 2006. 

CONCLUSION

H.R. 1956 is ill-considered legislation that would provide unnecessary tax exemptions resulting in a huge revenue loss to states. 

In an era when our states are in desperate need of revenue for the 

protection of our citizens, it seems irresponsible that should we 

enact legislation that would reduce their funds. 

JOHN CONYERS, Jr. 

WILLIAM D. DELAHUNT. 

HOWARD L. BERMAN. 

JERROLD NADLER. 

SHEILA JACKSON-LEE. 


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ADDITIONAL DISSENTING VIEWS 

I oppose the BATSA bill in its current form. Although I believe 

that valid concerns have been raised by all stakeholders in this debate, I do not believe H.R. 1956 adequately addresses those concerns or proposes a workable solution. Therefore, I respectfully dissent. 

MELVIN L. WATT. 

Æ 


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