Congress may trim state tax revenue

WASHINGTON — Washington's congressional delegation is united against a U.S. House bill that could cost the state and its local governments $689 million in tax revenue a year.

The House could vote on the Business Activity Tax Simplification Act as early as Tuesday.

The measure, approved by the House Judiciary Committee last month, would reduce the number of companies subject to Washington's business-and-occupation tax.

Currently, Washington can collect state taxes from companies not physically located in the state, as long as they have representatives that do business in Washington. The bill would change the residency standard for collecting those taxes.

A National Governors Association survey says Washington would lose the most of any state under the bill because it relies so heavily on the business-and-occupation tax.

Supporters of the bill say it would clarify tax laws and ensure that only businesses that receive the benefits and protections of state and local governments pay taxes in those states.

Under the bill, some businesses could get off the hook for certain taxes if they had a limited sales or marketing presence in a given state. Specifically, companies whose representatives spend less than 22 days each year in a state would no longer have to pay business-and-occupation taxes on their sales and services.

"The National Governors Association is strongly opposed to this," said David Quam, the association's director of federal relations. "Governors see this as a direct interference in state sovereignty, and at the end of the day it's a federal corporate-tax cut using state tax dollars."

U.S. Sen. Maria Cantwell, D-Wash., said she opposes a similar bill in the Senate because "it does not take into account Washington state's unique tax system."

Washington is one of five states that do not have corporate income taxes.

Last week, Cindi Holmstrom, director of the Washington Department of Revenue, flew to Washington, D.C., to brief the congressional delegation on the matter.

"We wanted to really highlight how important this is for our state," Holmstrom said. "This measure purports to set a bright line or standard, but in reality, it allows outside businesses to come into Washington state, conduct business here and compete against Washington companies while avoiding paying taxes in our state."

The business-and-occupation tax provides about 18 percent of the state's general-fund revenue, according to the state Office of Financial Management.

According to data submitted by Washington state officials, the bill could cost the state and local governments at least $138.4 million in tax money next year, and eventually as much as $689 million annually. The range results from varying estimates by state officials of how many companies would alter their operations to take advantage of the tax relief in the legislation.

"Many companies wouldn't have to do much to restructure and exploit this if it passes," Holmstrom said.

The Council on State Taxation, a lobbying group that represents 575 multistate corporations, challenged the findings of the governors association survey. The council's members include Microsoft, General Motors and Waste Management.

Last October, the accounting firm of Ernst & Young produced a report for the council dismissing the governors' claims that the tax bill would drastically reduce state revenues. The report said the methodology used by the governors association was incomplete and produced inaccurate estimates.

The American Legislative Exchange Council, a pro-business, nonprofit group, also supports the bill.

"You hear anecdotal horror stories about companies spending one to two days in a state and being subject to taxes," said Michael Keegan, director of tax and fiscal policy for the Legislative Exchange Council.

Keegan declined to identify any companies that have endorsed the bill. But the group's board includes representatives from ExxonMobil, BellSouth, Verizon, Intuit, R.J. Reynolds Tobacco, Pfizer and others.

"Any company with any sort of sales outside of state borders would support this since they could find themselves subject to taxation from a state, without protection from that state," Keegan said.

The bill has been difficult for Washington lawmakers to get a handle on.

George Behan, press secretary for U.S. Rep. Norm Dicks, D-Bremerton, said the bill's movement out of committee was unexpected.

"The bill had been languishing in the Judiciary Committee for a while," he said.

Had it gone through Ways and Means, the usual taxation committee, it likely would have caught the attention of staff experts and members, including U.S. Rep. Jim McDermott, D-Seattle, a member of the panel.

U.S. Rep. Bob Goodlatte, R-Va., sponsor of the bill, said the measure is a priority for the high-tech community.

"It will ensure that businesses are not subject to double taxation at the state level, which will ultimately facilitate the continued growth of e-commerce, job creation and the overall strength of the American economy," Goodlatte said in a statement.

The governors association said Virginia is one of the few states that would not be affected by the bill.

Seattle Times reporter Alicia Mundy contributed to this report.