NAFEM campaigns to rein in state “business activity” taxes

Bills to clarify that states can impose these “business activity” taxes – essentially a form of income tac – only on businesses that have offices, manufacturing, or employees in those states, have now been introduced in both the Senate and the House of Representatives. The Senate bill, introduced by Charles Schumer (D-NY) and Michael Crapo (R-ID) is S. 1726; the House bill, H.R. 5267, has been introduced by Congressmen Rick Boucher (D-VA) and Robert Goodlatte (R-VA).

Rolston was one of five business representatives testifying at a hearing of the House Committee on Small Business February 14 on the impact of these taxes on small business.

After describing NAFEM and its typical members – 66 percent businesses with less than $10 million a year in sales and typically with no physical presence outside their home states – Rolston laid out for the committee the impact these taxes have on NAFEM members and many other small manufacturers if a state’s ability to impose these taxes is left unchecked.

“Efficiency and predictability are essential to a small business,” Rolston said. “The growing practice of states to assess “business activity” taxes on firms that have no physical presence in the taxing jurisdiction has come as an unpleasant and shocking surprise. If left unchecked, these taxes will become a nightmare for small businesses, increasing our administrative costs, adding an unnecessary layer of inefficiency and limiting our ability to grow.”

A number of states, Rolston explained, are imposing these taxes on firms that sell through manufacturers’ representatives or use independent service firms for warranty and repair work, as do most NAFEM members. “Our manufacturers’ representatives and service agents in these states do pay state income taxes on their own business profits. We should be paying taxes in states where we have presence and receive government services. For us, that is Wisconsin. We should not be paying taxes in states where we have no physical presence.”

“As a small U.S. manufacturer, we face many threats from outside our borders,” he continued. “We continue to be successful by staying lean and smart. Adding unnecessary headcount to administer programs like activity taxes makes us less competitive with overseas companies.”

As a similar bill to clarify that states do not have the right to tax out-of-state firms failed in the last Congress, largely due to opposition from the National Governor’s Association (NGA), prospects for the legislation are not clear. NAFEM is working with a coalition of firms and other organizations, including the National Association of Manufacturers (NAM) and several large firms in financial services and direct marketing, to gain additional co-sponsors. Support from the House Judiciary Committee, which has primary jurisdiction, is critical.

Although headlines have emphasized individual tax rebates. President Bush’s recently signed Economic Stimulus Act of 2006 includes several very important incentives for businesses – including restaurants – to invest in new equipment.

While chase incentives will be most useful for small businesses, they also could stimulate immediate purchases of food equipment by restaurants and other commercial foodservice establishments.

Companies that purchase up to $100,000 in capital assets in 2008 will be able to expense (deduct directly) up to $250,000 of this investment in the year the equipment is placed in service. These expensing limits and phase-out threshold are significantly higher than the $128,00 expensing limit and $510,000 threshold that would have applied prior to passing the stimulus package.

The National Restaurant Association (NRA) has advised this increased immediate expensing limit would apply to foodservice equipment purchased by its members.

The new law includes a “bonus” first year 50 percent depreciation allowance on capital equipment placed in service in 2005 that would normally be written off on a 20-year depreciation schedule. This precision is available to all companies, restaurants included. Small businesses can take both the direct expensing outlines above and accelerated depreciation on other investments above $250,000 level but under the $800,000 threshold.

As with most tax laws, details are complex and there are prescriptions on what property qualifies. NAFEM members should consult their accountant or tax attorney and also find a useful description of these business stimulus measures, prepared be Deloitte Tax L.L.P. on the National Association of Manufacturers (NAM) website,