STATEMENT
Of the Honorable Nydia M. Velazquez, Chairwoman
United States House of Representatives, Committee on Small Business
Full Committee Hearing: “The Business Activities Taxes and its Impact on Small Businesses.”
Thursday, February 14, 2008

In recent years, the American economy has changed dramatically; shifting away from the manufacture of goods to the delivery of services and intangibles. As a result, many states have sought to strengthen their eroding tax base by levying taxes on businesses that are not located within their jurisdiction.

Today’s hearing will focus on the potential problems many small businesses face when engaging in interstate commerce and the impact Business Activity Taxes have on their firms.

As the name implies, Business Activity Taxes, are just that -- taxes imposed by a state for merely conducting business – rather than being physically located within a state’s borders.  While there are clearly circumstances when this is reasonable, the question becomes whether states are going too far. 

This is not the first time this issue has come before Congress.  In 1959, Congress enacted the Federal Interstate Income Tax Law to address the matter of a state’s ability to affect interstate commerce through taxation. Still in effect today, this law prohibits states from taxing the income of businesses whose only activities are the solicitation of orders for the sale of tangible personal property within that state.   

There is concern that this law needs to be clarified to prevent small firms from being unfairly burdened.  

Typically, Business Activity Taxes are levied on corporate income generated within the taxing jurisdiction. However, some states have imposed a business and occupation tax based on gross sales, and others have imposed taxes in the form of ‘fees’ or ‘licenses’ for products sold within their borders.

This means that a small business software developer may be subject to licensing and use fees in states just for making sales via mail order. If each state charged a $400 licensing fee to that small business owner, it is not hard to imagine the chilling affect this would have on a small company.  Having to pay unpredictable taxes inhibits the growth potential for small businesses and our economy at large.

Congress is currently considering whether to provide clarity in this area by setting standards about when a state may invoke its taxing power. And for many small businesses, tax certainty is a primary concern.

Today’s hearing will help provide perspective on the scope of the problem.  The issue of the BAT is something that has gone under the radar, but has an enormous effect on our economy.  The hearing will also provide insight on how any changes to federal law would affect states’ ability to tax legitimate economic activity.   Limiting the ability of states is something that must be considered carefully.  Many of these revenues are used to provide vital services, such as police, fire, and education to their citizens.

The witnesses here today will discuss how the BAT affects their industries.   As with most taxes, it impacts small and mid-sized companies to a greater extent than larger entities. Many small firms are completely unaware that they are even subject to these taxes until they receive a bill from a state taxing authority.

Smaller businesses also often lack the resources or capability to comply with the multitude of state and local tax laws that are triggered by Business Activity Taxes.   Further, the prospect of challenging an incorrect assessment is costly and time consuming.    The issue becomes: how do we ensure clarity for these businesses, while also ensuring that states are not going too far?

While the issue is a complex one, it is important for thousands of businesses across this country.  I look forward to today’s discussion and appreciate the witnesses coming here to discuss this important matter.