The Official Position of the FTA Membership is Reflected through Resolutions
Resolution 2021-1: Federal Mobile Workforce Legislation
The fundamental principle of individual income taxation is that income is taxable where it is earned or where the services giving rise to the income are performed. In addition, the taxpayer’s state of residence may tax all income regardless of where it is earned, although if that state also taxes the income of nonresidents earned in the state, the state must offer a credit to its residents for taxes paid to other states. This is the same tax policy embraced by the U.S. government and by all other income-taxing governments.
As work patterns shift to include more interstate commuting, telecommuting and multistate travel, more workers find themselves with tax obligations to more than one jurisdiction. Likewise, employers are faced with an increased responsibility for withholding income taxes for multiple jurisdictions where they may have no other operations. Not all states have clear de minimis thresholds for the imposition of tax and withholding obligations.
Federal legislation has been introduced in Congress for the past 15 years that would limit a state’s taxation of income earned within its borders. Most recently, bills such as the Mobile Workforce State Income Tax Simplification Act and the Remote and Mobile Worker Relief Act of 2021 generally would prevent a state or locality from imposing an income tax liability on a nonresident employee unless that employee performs employment duties for more than 30 days in the state. The bills would also relieve employers of the duty to withhold in that case and would also relieve employers from any penalties for failure to withhold if they rely an employee’s estimate of where the employee expects to be in the coming year. There are certain exceptions to these rules. The 30-day limit is expanded to 90 days during the pandemic.
In response to these bills, the Multistate Tax Commission developed a state model mobile workforce statute. This model provides relief for employers and employees but does so in a way that avoids potential administrative or enforcement problems that would be created under provisions of the federal legislation. The work product reflects input from industry and employer representatives.
FTA opposes such federal legislation for the following reasons:
- The legislation represents a substantial preemption of, and intrusion into, state tax authority;
- As with all such federal preemption legislation, there is no authority that can issue binding administrative guidance, which requires that states and taxpayers resort to litigation to resolve any ambiguities or difficulties in applying the legislation;
- The 30-day threshold, which includes only working days, is longer than necessary to protect the vast majority of traveling employees;
- The federal legislation does not contain a high-wage exception, which would be simple to apply by looking to the employee’s prior-year wages;
- States are not actively enforcing tax or withholding obligations on those with de minimis in-state activity; and
- “Nowhere” wages might potentially occur, where the state in which the employee normally performs employment duties cannot tax those wages and neither can the state where employee is temporarily performing the employment duties.
The FTA supports state legislation to clearly provide a safe-harbor threshold for traveling employees that sets reasonable minimum standards, similar to the MTC model mobile workforce statute.
This resolution shall automatically terminate three years after the Annual Business Meeting at which it is adopted, unless reaffirmed or replaced in the normal policy process. Passed by unanimous voice vote by the membership on June 25, 2021, with abstentions by Alaska and New Hampshire.
Resolution 2021-2: Remote Seller Collection Authority
More than two decades ago, the U.S. Supreme Court decided Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and invited Congress to resolve what United States Supreme Court Justice Alito has called the “quagmire” concerning the role of states in fairly taxing remote sellers.
The states have worked individually and together, including members of the Streamlined Sales and Use Tax Agreement, to simplify their tax administration systems in ways that encourage voluntary compliance and reduce the complexity and burdens faced by both in-state and out-of-state sellers.
Efforts to address remote seller collection authority via federal legislation have been ongoing since the 1967 predecessor to Quill, National Bellas Hess v. Illinois. Since the mid-1980s, in particular, states have worked to persuade Congress of the need for action.
Legislation was introduced in both the House and Senate regularly, but none was acted on, even to be passed out of committee, with the singular exception of the Senate passage of the Marketplace Fairness Act in May 2013.
Between 2013 and 2018, House committee leadership was publicly adamant that it would not consider the Marketplace Fairness Act. The House instead floated vague proposals, occasionally offered draft language and only rarely introduced a bill. In every form, the proposals were unadministrable. At worst, they would have expanded preemptions of state tax authority and severely affected state tax authority over sellers who are currently collecting and remitting sales and use tax.
On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, 585 U.S. __(2018)_, with all justices agreeing that National Bellas Hess was wrongly decided. The majority held that Quill and Bellas Hess should be overruled, that the physical presence rule of Quill was unsound and incorrect, and that remote sellers could be required to collect and remit sales and use taxes as long as the states did not discriminate against or impose undue burdens on interstate commerce. The Court did not prescribe exactly how the states should implement the new economic nexus standard established by the decision.
In light of the Wayfair decision, state legislatures and revenue departments have taken steps to ensure that their remote seller collection laws are consistent with the Constitution.
Decades of good-faith effort generated no meaningful progress by Congress toward the goal of developing a workable solution for all stakeholders related to the issue of remote seller collection authority. Any federal legislation that addresses a desire forremote seller uniformity would necessarily limit state taxing authority. Following the example set by the U.S. Supreme Court in Quill, FTA supports the right of each state to enact fair and reasonable laws related to remote seller collection authority within the limits of the Wayfair decision without additional action by Congress.
This resolution shall automatically terminate three years after the Annual Business Meeting at which it is adopted, unless reaffirmed or replaced in the normal policy process. Passed by unanimous voice vote by the membership on June 25, 2021, with abstentions by Alaska and New Hampshire.
Resolution 2022-1: Opposing Federal Preemption of State Tax Authority Creating Preferred Taxpayer Status
In 1976, Congress passed the Railroad Revitalization and Regulatory Reform Act (the “4-R Act”), which grants railroads “most-favored-taxpayer” status by prohibiting state and local governments from taxing railroad property at higher rates or ratios of value than those for other commercial and industrial property, and prohibits “another tax that discriminates against a rail carrier” (referred to as the “catch-all” provision). It also provides that railroads may pursue equitable claims under the Act in federal court. Similar, but not identical, protections have been accorded the interstate airline and motor carrier industries.
The 4-R Act and its progeny have had a number of undesirable effects on state and local property tax and other tax systems. Litigation since the Act became law still has not fully defined the contours of the 4-R Act. That litigation, repeated in many states, questioned issues not addressed in the statute including: which commercial and industrial property constituted the comparison class for railroads, the jurisdiction and role of the federal courts, what taxes besides property taxes were included in the “catch-all” provision, and how to deal with exempt property.
Beyond the litigation, 4-R Act-like protections have disrupted state property tax systems. This is particularly true in states where citizens have ratified constitutional provisions allowing for different classes of property. Federal law has, in effect, established a preferred class of taxpayer and has led to requests for similar treatment by additional industries. Moreover, the scope of the 4-R Act preemption vastly exceeds the original stated Congressional intent because the catch-all provision has been construed to apply to other taxes not imposed in lieu of property taxes.
There have been a variety of state tax restrictions proposed for different types of property or activities that are similar to the 4-R Act “nondiscriminatory” prohibitions. Proposals have been made for wireless communications companies, telecommunications companies, interstate natural gas pipeline companies, hotel reservation businesses, auto rental companies, Internet sellers and sellers of digital goods and services. Extending preferred taxpayer status to other industries could cause serious and widespread revenue consequences to the states and localities and put non-preferred taxpayers at a competitive disadvantage. A particularly dramatic impact will be felt in those states where the voters have approved constitutional provisions authorizing differential treatment of certain types of taxpayers. In effect, Congress would be establishing state tax policies by substituting its judgment for the judgment of state voters and elected officials.
The Federation of Tax Administrators strongly opposes action by Congress and federal agencies that would abrogate, disrupt, or otherwise restrict states from imposing taxes that are otherwise lawful under the U.S. Constitution or from effectively administering those taxes. The FTA believes Congress should undertake an active program of consultation with states as it considers measures that would preempt state tax authority.
The FTA strongly opposes prohibitions of state taxing authority on the types or level of taxes that states can impose, especially where the purpose is to give one group of businesses or industries preferred status, including the establishment of property tax rates and classes. Decisions about property tax assessments, rates and policies, and property tax administration, as well as state and local tax policy generally, should be left to state and local elected officials and the citizens they represent.
Furthermore, the FTA opposes giving federal courts jurisdiction to hear state tax disputes. Abrogating state sovereign immunity raises serious constitutional questions and Congress should respect the states’ administrative and judicial processes for dealing with tax appeals, which are the appropriate means to protect taxpayers from unconstitutional discrimination.
Resolution 2022-2: Opposing Business Activity Tax Nexus Legislation
Business activity taxes are levied by states for the privilege of doing business in the state and are generally measured by the portion of gross or net income derived from the state. These include state corporate income taxes, gross receipts taxes, business license taxes, franchise taxes, business and occupation taxes, and insurance premiums taxes.
The U.S. Supreme Court has found that the U.S. Constitution allows a state to tax a portion of business income if there is a substantial nexus between the business and the taxing state. The Supreme Court has also acknowledged in South Dakota v. Wayfair, 585 U.S. ___ (2018) that a physical presence is not required for businesses to have substantial nexus in a state and be subject to state and local tax responsibilities.
In recent years, bills have been introduced in both the House and Senate named the Business Activity Tax Simplification Act (BATSA). On September 14, 2015, the Congressional Budget Office considered a version of BATSA in HR 2584 (114th Congress) and estimated “that the costs — in the form of forgone revenues — to state and local governments would be more than $2 billion in the first full year after enactment and at least that amount in subsequent years.”
The bill would eliminate state jurisdiction to tax business income derived from the state unless the business had a substantial amount of physical presence in the state and would provide that certain types of physical presence could not be considered for purposes of determining the jurisdiction to impose business activity taxes. The bill also would expand the limitations of P.L. 86-272 to all forms of business activity taxes (instead of just net income taxes) and to the solicitation of sales of all types of property and services instead of just tangible personal property.
BATSA would cause the following disruptions in state and local tax systems:
- As a departure from existing U.S. Supreme Court precedent, the legislation would allow some businesses and industries to easily avoid paying state taxes.
- The legislation would also provide an incentive for other companies to engage in aggressive tax planning and structuring in order to avoid substantial amounts of tax in the states in which they do business essentially changing their business form, but not the nature of the income-producing activities. In particular, larger companies would be able to transfer intangible assets to holding companies incorporated in no-tax or low-tax states.
- The legislation favors large multi-national and multi-state businesses over in-state businesses. It would allow large corporations that can conduct business online to solicit business and compete with locally-based companies and exploit the market in that state without being subjected to the same taxes that in-state businesses are required to pay.
- The expansion of P.L. 86-272 is unwarranted and runs counter to the direction that business operations are taking.
The Federation of Tax Administrators strongly opposes any legislation that would restrict a state’s constitutional authority to impose tax on the portion of a businesses’ income derived from that state. The FTA opposes any legislation that would require physical presence for the imposition of state business activity taxes.
Resolution 2022-3: Opposition to Federal Legislation Preempting Tax on Online Travel Company Mark-Ups
Online Travel Companies (OTCs) such as Expedia, Travelocity, Orbitz, Priceline, and Hotels.com have adopted similar business operating models. They contract with hotels to facilitate the sale of hotel rooms over the telephone and Internet. OTCs pay discounted rates to hotels that are not disclosed to consumers. The OTCs charge consumers a marked-up retail rate for the accommodations. They also typically charge consumers a service fee. OTCs collect hotel taxes based on the discounted rate for remittance to state and local taxing authorities.
Other intermediaries sell accommodations in homes or other lodging options, including camping sites.
Hotel taxes have been imposed for more than 30 years. They are collected from consumers and remitted to local and state governments, regardless of how the hotel room is rented, whether over the phone, in person at a hotel, by a travel agent, or online.
Any failure to collect hotel or sales taxes on the retail rate hurts tourism in many state and local jurisdictions. Many local hotel or sales taxes are dedicated to funding tourism costs such as hotel to convention center transportation, convention centers, visitor centers, and historic restoration projects. Education, fire, police, and health care budgets also could be reduced.
State and local governments have initiated collection actions against OTCs and other intermediaries to compel the remittance of hotel occupancy or sales taxes on the room rate charged to the consumer (the retail rate, not the discounted rate). Dozens of court cases are pending nationwide. The number of administrative collection efforts is not known because of confidentiality rules.
State and local governments are also updating statutes and other authorities to include intermediaries to ensure they collect and remit the proper taxes. This will create parity with hotels that sell the same rooms at the same rates so there is no disparity in the taxes due and enhanced transparency for taxpayers.
OTCs have made several attempts to secure special federal legislation preempting state and local jurisdictions’ taxing authority. This could significantly reduce the hotel occupancy or sales taxes collected when a consumer books a room through an OTC. If successful, this legislation could cause hotels to set up similar affiliated booking companies to substantially minimize their taxes.
The Federation of Tax Administrators opposes any federal legislation that would restrict the ability of state and local governments to collect hotel taxes of any kind and to determine the base on which those taxes should be paid.
Resolution 2022-4: Opposing Digital Goods and Services Tax Fairness Act
The taxation of digital goods and services (or goods and services delivered electronically) is an important issue to many state and local governments. The latest version of the Digital Goods and Services Tax Fairness Act (H.R. 1725 and S. 765) (116th Congress) mandates which state is permitted to tax a sale of a digital good or service based on sourcing rules set out in the bill, and would also prohibit states from taxing digital goods and services differently from or to a greater extent than “similar” non-digital goods and services. On December 16, 2015, the Congressional Budget Office evaluated an earlier version of the bill, H.R. 1643, and estimated that “the cost—in the form of foregone revenues—to state and local governments would total about $1 billion in at least one of the first five years after the mandate becomes effective and at least that amount in each subsequent year.”
The current bill preempts taxes on digital goods and services that might apply differently or to a greater extent than taxes on “similar” non-digital goods and services. In addition to the problems that such a rule is likely to cause administratively — since there is no clear indication of what the term “similar” is intended to include — this is also a provision that is completely unwarranted. First, the Internet Tax Freedom Act already provides protection for goods and services sold through the Internet versus those same goods and services sold through some other means. Second, states may have sound policy reasons to treat what might be considered “similar” goods and services differently, depending on various factors including who is the seller, who is the buyer, what the good or service will be used for, etc., and the bill does not allow states to consider these factors. Third, there is absolutely no evidence that digital goods and services have been taxed in a discriminatory manner — in fact, they are generally taxed less than other goods and services. Fourth, this provision would give sellers of digital goods and services “most-favored taxpayer” status that may provide them with unwarranted advantages over other businesses.
In addition, the current bill expands the scope of the items covered to include Voice over Internet Protocol (VoIP), which in some states is considered a telecommunication service. It also allows the seller and purchaser of covered items that are used in multiple locations simultaneously to determine the sourcing “at the time of sale or at a later date.” Moreover, the bill allows the seller to choose the location to which the sale is sourced when “the seller is without sufficient information. . . .” These provisions arguably allow a seller to source sales in a manner that result in uncollected taxes and revenue losses even greater than the 2015 version of the bill.
In general, FTA opposes action by Congress and federal agencies that would abrogate, disrupt, or otherwise restrict states from imposing taxes that are otherwise lawful under the U.S. Constitution or from effectively administering those taxes. Congress should undertake an active program of consultation with states whenever it considers measures that would preempt state tax authority. States should be allowed to actively pursue uniformity and simplification measures as are necessary and would be effective in addressing the administrative burden in complying with the tax laws of multiple states.
While federal preemption of state taxing authority is an extreme action, preemptive legislation can, at times, promote simplification, uniformity, and taxpayer compliance, albeit at some cost to state sovereignty. FTA will evaluate proposed federal legislation that preempts state taxing authority against several criteria:
- Has the preferred solution of uniform state action been pursued and exhausted?
- Recognizing that the benefits of federalism will impose administrative burdens on commerce, is there disinterested evidence that the administrative burden and complexity posed by current state and local practices is impeding the growth of commerce?
- Does the proposed preemption address administrative issues such as simplification, uniformity, and taxpayer compliance?
- Can meaningful simplifications and uniformity be achieved through state action?
- Would preemption disrupt state and local revenue flows and tax systems?
- Would preemption cause similarly situated taxpayers to be taxed differently — specifically, does the proposal create advantages for multistate and multinational businesses over local business?
- Does the preemption support sound tax policy?
- Does the preemption create unknown or potential unintended consequences?
- Have state tax authorities and taxpayer representatives together agreed to a beneficial change in federal law?
- Does the proposed preemption materially narrow the scope of state laws?
The FTA opposes The Digital Goods and Services Tax Fairness Act. The bill would limit state taxation of digital goods and services, and now VoIP services under the current version of the bill, and provide an unwarranted preference to digital goods and services vis-à-vis non-digital goods and services. Specific problems with the bill include:
- The preemption extends beyond sales and use taxes;
- There are few tools or protections for the states and local jurisdictions to reduce the risk of tax avoidance;
- Despite its purported purpose, the bill is not limited to rate discrimination between specified digital products (e.g. digital movies, music, books) and their tangible equivalents;
- There is no recognition of the general use tax credit mechanism and federal constitutional tax-crediting principles to avoid multiple taxation; and
- There is no ability for state administrative agencies to issue binding regulations to implement the bill’s provisions.
Any discussions of desired uniformity or model rules or definitions should take place either through existing channels such as the Multistate Tax Commission’s uniformity projects or through cooperative and inclusive meetings of representatives of both state governments and all affected taxpayers.
Resolution 2022-5: Opposition to Federal Legislation That Abrogates, Disrupts or Restricts States from Imposing Lawful Taxes
The authority of state lawmakers to set state tax policy is a core element of state sovereignty under the federalist system created by the United States Constitution. Under the U.S. Constitution both federal and state governments have the right to establish their own, separate systems of taxation. The system of federalism that is defined by the Constitution further assigns to state and local governments the responsibility for supplying the majority of the daily services due to their citizens and residents.
There are two circumstances under which Congress will, on occasion, consider passing federal laws that would significantly affect state tax administration and state and local tax revenues.
State and local income tax systems have generally been developed in coordination with the federal income tax system, and fundamental aspects of the state and local income taxes, including the definition of income, allowable deductions, third-party reporting, and compliance — among others — are heavily dependent on federal income rules.
This system of income tax conformity has effectively created a tax base and tax system that is in many ways integrated and is effectively shared between the federal, state and local governments. This both eases the burden of compliance on taxpayers and simplifies administration for all parties.
State and local governments also rely on consumption taxes as their other primary source of revenue. They impose consumption taxes most often in the form of a retail sales tax or a gross receipts tax, which have no direct federal counterpart.
The nature of the current income tax system means that changes to federal laws will often have a substantial fiscal and administrative impact at the state and local level.
In the second circumstance, an increasing number of groups will ask Congress to preempt state taxation authority in particular areas, citing a variety of reasons. Beyond the opposition to the incursion on state sovereignty, states have also generally resisted federal preemption efforts because preemption of state tax authority has the effect of establishing a preferred class of taxpayers and shifting the tax burden to other non-preferred taxpayers. Moreover, such preemptions often have unintended consequences that work significant disruptions of state and local tax systems.
While our federalist system can impose additional compliance burdens on taxpayers, those burdens can often be relieved without resorting to federal preemption legislation and its negative impacts. Many of the legitimate goals that might be pursued in preemptive legislation can be effectively achieved through cooperative state efforts, improved uniformity among the states, increased information provided by states, and technology solutions. States have an obligation to pursue such efforts.
Similarly, failure to take into account the fiscal, administrative and policy implications for states and localities of federal income tax changes leads to nonconformity and considerable new complexities and recordkeeping burdens for taxpayers and tax professionals. Failure to involve the states in proposed federal laws affecting state and local consumption taxes means that any resulting law may fail to achieve its goals or interfere with the functioning of that tax base, so important to many governmental programs. Such failure also affects the state and local tax structure as a whole, compliance programs, and levels of service to taxpayers. They can also lead to the effective preemption of state and local tax bases and the loss of opportunities to leverage improvements in the overall tax system. There are often alternative ways to achieve desired changes to federal policy that minimize or eliminate any need for states and localities to make adjustments to their own tax systems and thus keep the federal, state and local systems in harmony.
The Federation of Tax Administrators (FTA) supports Congressional efforts to formally and carefully consider the positive and negative impact of potential federal tax measures on state and local income tax systems, including generation of revenue estimates. Congress is encouraged to identify federal tax actions that can lead to nonconformity and to estimate the impact of those actions. States and local governments with income and consumption taxes and taxpayers should work in concert to educate Congress on the effects of federal changes that force states and localities to reduce conformity and to jointly seek the creation of procedures that will reduce or eliminate the need for such state and local action.
FTA also supports Congress’s commitment to consult with state and local governments on consumption tax issues since it is the state and local policymakers who have extensive experience in the administration of these consumption taxes.
FTA strongly opposes action by Congress and federal agencies that would abrogate, disrupt, or restrict states from imposing taxes that are otherwise lawful under the U.S. Constitution or from effectively administering those taxes. Congress should undertake an active program of consultation with states when considering measures that would preempt state tax authority. Congress should defer to states as they actively pursue such solutions, including uniformity and simplification measures, as are necessary and effective to address concerns of administrative burden in complying with the tax laws of multiple states.
Congress should not act to preempt state tax policy unless it is the only viable option for achieving the legitimate purpose of reducing unreasonable compliance burdens or achieving some other essential goal and then it should do so only when states agree that such action will not create significant negative consequences.
The FTA will evaluate proposed federal legislation that preempts state taxing authority against several criteria:
1. Has the preferred solution of uniform state action been pursued and exhausted?
2. Recognizing that the benefits of federalism will impose administrative burdens on commerce, is there disinterested evidence that the administrative burden and complexity posed by current state and local practices is impeding the growth of commerce?
3. Does the proposed preemption address administrative issues such as simplification, uniformity, and taxpayer compliance?
4. Can meaningful simplifications and uniformity be achieved through state action?
5. Would preemption disrupt state and local revenue flows and tax systems?
6. Would preemption cause similarly situated taxpayers to be taxed differently — specifically, does the proposal create advantages for multistate and multinational businesses over local business?
7. Does the preemption support sound tax policy?
8. Does the preemption create unknown or potential unintended consequences?
9. Have state tax authorities and taxpayer representatives together agreed to a beneficial change in federal law?
Does the proposed preemption materially narrow the scope of state laws?