State Taxation: The Role of Congress in Defining Nexus

Testimony before the Subcommittee on Commercial and Administrative Law Regulatory Reform and Oversight to help us understand the implications of defining nexus. Currently, States levy a tax on income earned or on a transaction occurring within its borders. The taxpayer is liable only if there exists a nexus or a connection between the State and the activities of the taxpayer. Some taxpayers have expressed concerns that current State tax policies are difficult to navigate, leading to unpredictable tax bills or incurring onerous paperwork. They contend that States utilize an overly broad tax nexus standard to impose unnecessary taxes and urge Congress to step in and define State tax nexus. State government representatives disagree. They contend the State taxes in accordance with the taxpayers’s use. The redefining of nexus would unfairly preempt States’ authority to tax and very likely lead to a substantial loss of State tax revenue. In response to the confusion, many legislative proposals have been introduced to clarify the nexus requirements. These proposals now before the Committee seek to limit or expand the ability of States to impose certain taxes. Before determining what constitutes that sufficient nexus for State tax purposes, Congress should ensure that it understands how defining nexus would affect State revenues. Additionally, we must consider how defining nexus would affect business development and investments. And we must explore how clarifying nexus would impact individual taxpayers