It should be more and more clear that blue states are not taking the exodus of taxpayers and businesses to red states lying down.
That does not mean these Democrat-controlled states are cutting back on spending and changing their high-tax ways. To the contrary, they are spending more money than ever. What they are doing is fighting to tax people who do not live in their states.
Their current targets are any businesses that happen to have customers in their states, even if the business has no physical presence.
This is possible thanks to the misguided Supreme Court decision in Wayfair v. South Dakota.
The ruling destroyed the standard that required a physical presence in a state before a business was required to collect and remit tax, sales tax in this case. Before this, a customer was required to remit use tax on out-of-state purchases, but companies did not have to do the legwork.
As many taxpayer advocates, including Americans for Tax Reform, warned at the time, eroding the barrier for sales tax collection was just step one for state tax authorities to reach outside their borders.
This is now coming true as states have adopted new rules that they claim give them the right to collect business taxes from companies that are based in other states and have no physical presence in their states.
The state with the highest corporate income tax in the nation, New Jersey, is leading the charge. The withering Garden State has been applying that high corporate tax to any company with over $100,000 in New Jersey-sourced receipts or 200 or more separate transactions.
New York and California, surprise, are also at the vanguard.
The general line of defense for sane states and businesses has been Public Law 86-272, “The Interstate Income Tax Act of 1959,” which limits a state’s power to impose a net income tax on out-of-state businesses.
After the Wayfair decision, a Multistate Tax Commission ruling in 2021 said many common internet activities are not “solicitation” but are actually “business activity” within the customer’s state.
So things that courts may consider “post-sale assistance,” “placing property,” or “recruiting” can make a company subject to taxation under the new loose standards.
Examples of activities that fall under these categories include interactive websites and live chat functions. Internet cookies can be viewed as “placing property,” and accepting online job applications for non-sales roles can be seen as “recruiting.”
Given the current digital landscape, these are very basic business activities. Yet any business that engages in them could be taxed on its income by states where it is not based and has no operations.
Court cases are ongoing. A New York appellate court just upheld the state tax department’s rule. Ultimately, the U.S. Supreme Court may have to rule on this issue. Until then, it is difficult to see how companies can avoid being taxed under these new rules.
