H.R. 2584 would 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, and media activities unless businesses providing those services have a “physical presence”—as defined in the bill—in the taxing jurisdiction.
CBO estimates that enacting H.R. 2584 would have no direct effect on the federal budget. Because enacting the bill would not affect direct spending or revenues, pay-as-you-go procedures do not apply.
H.R. 2584 would impose an intergovernmental mandate as defined in the Unfunded Mandates Reform Act (UMRA) by prohibiting state and local governments from taxing certain business activities. CBO estimates 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 cost would exceed the threshold established in UMRA for intergovernmental mandates ($77 million in 2015, adjusted annually for inflation).
Current law (notably, Public Law 86-272 and related Supreme Court decisions) prohibits states from levying a tax on the net corporate income of a company whose only activity in the state is pursuing and making sales that would be filled from outside the state (for example, mail order sales). H.R. 2584 would expand that prohibition to other types of business activity taxes (BATs), including additional corporate income taxes, franchise taxes, single business taxes, capital taxes, gross receipt taxes, and business and occupation taxes. Corporations currently pay those 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 and is based on some measure of physical presence or economic activity in a state.) H.R. 2584 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.
Specifically, 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 15 or more days to establish nexus;
Allow specific industries or activities (such as media) to exceed the standard without establishing nexus with a state;
Expand the prohibitions on taxation in Public Law 86-272 to include taxes not based solely on the income of a company (gross receipts taxes, franchise taxes, and business and occupation taxes);
Expand the applicability of Public Law 86-272 to services and intangibles (for example, the trademark for a retail store or the patent for a formula for soda); and
Prohibit states that require businesses to file group returns from imposing BATs on individual members of the group if they do not meet the standard for physical nexus.
This bill contains no private-sector mandates as defined in UMRA.