BROKEN SILENCE: CONGRESSIONAL INACTION, JUDICIAL REACTION, AND THE NEED FOR A FEDERALLY MANDATED PHYSICAL PRESENCE STANDARD FOR STATE BUSINESS ACTIVITY TAXES

This article concerns the need for Congress to resolve a serious and longstanding question of what jurisdictional standard should a state apply in order to impose a business activity tax on an out-of-state entity with no in-state physical presence. This is a question of enormous practical importance on which the states are squarely in conflict, and one that the U.S. Supreme Court has consistently refused to address.

There is currently a clear and irreconcilable division of authority on this important question. The result is an untenable patchwork of standards, in which some state taxing authorities are permitted to tax out-of-state entities that lack physical presence and others are not, and in which no corporation can predict whether and where its commercial activities will subject it to state taxation. The scope of the states' authority to tax beyond their borders is an issue of fundamental importance to virtually every business involved in interstate or international commerce. It is of particular significance to that critically important sector of the economy that engages in commerce over the internet. These new tax assessments violate settled expectations upon which large segments of the American economy have relied in development and long-term planning, and they directly burden and disrupt the free flow of interstate commerce that the Commerce Clause exists to protect. That disruption will necessarily intensify until Congress clarifies and enacts a physical presence rule applying to all state taxes.

Currently there are two bills pending in Congress that would create a physical presence standard for all state business activity taxes. This article argues that (1) Congress needs act on these bills and put this issue to rest; and (2) it needs to act by enacting a clear physical presence standard.