Bloomberg BNA Quotes Peter Barnes: US States' Approach to Nexus and Apportionment – Oddity or New Trend?
Bloomberg BNA quoted Peter A. Barnes regarding the recent Forum on State Considerations for International Tax Reform. Panelists discussed issues such as, nexus standards and apportionment of income within US states and the international community. For the complete article, please click on the link above to view a PDF.
Excerpt taken from the article.
As Peter Barnes of Caplin & Drysdale and Diann Smith of McDermott, Will & Emery, LLP noted, two landmark cases in the early 1990s, ITEL v. Huddleston, 507 U.S. 60 (1993) and Barclays Bank v. The Franchise Tax Board, 512 U.S. 298 (1994), are responsible for this dichotomy. In ITELand Barclays the court ruled that income tax treaties are expressly applicable only to federal income taxes and do not apply to state taxes. As a result, a foreign corporation may store goods in the U.S. without triggering federal tax. However, the foreign corporation may still be responsible for state taxes.
As more multinational corporations accept that in an increasingly global marketplace, the issue is no longer whether nexus with a particular jurisdiction exists. Rather, as Barnes stated, the question becomes what portion of income is attributable to a particular jurisdiction. The various methods employed by the states to determine the amount of in- come tax owed by an out-of-state corporation gives rise to several issues.
The panelists noted that due to various political factors, it is difficult for the states to come to a consensus on a uniform formula, since each state has different considerations. As Barnes mentioned one possible solution may be the Business Activity Tax Simplification Act of 2013 or ‘‘BATSA.'' BATSA would establish a bright-line standard for when a state can impose a net income tax or other business activity tax on interstate activities. It would define physical presence in a state to exclude a presence of less than 15 days within a jurisdiction's borders or transient business activities. This standard would at the very least help both domes- tic and foreign corporations determine when they may be subject to tax on a state level.
U.S. states may also be able to learn a valuable lesson on uniformity from the international community. The Value Added System adopted by many countries may serve to provide a uniform tax base and rate at a subnational level, thereby creating uniformity amongst the states, Barnes said. But unlike many countries with a VAT, each local and state jurisdiction often establishes its own tax base. ‘‘The U.S. is a bottom up country. To simply overlay our current system with a VAT would create issues,'' said Huddleston. Barnes countered with the ex- ample of Canada as another bottom-up country that was able to solve many of its complex tax issues by implementing a VAT. He did however warn that the VAT comes with its own set of issues and was by no means a panacea to the compliance issues that are created by the various applications of formulary apportionment that exist today.
- Of Counsel