What’s Gov. Bill Ritter’s Revenue Department up to these days? Oh, not much – just doing its bit to undermine the Commerce Clause of the U.S. Constitution, that’s all.
The Commerce Clause, of course, gives Congress the power to regulate interstate commerce — and for the very good reason that states can’t be trusted with the task. Without a constitutional check enforced by the Supreme Court, states would erect trade barriers to favor their own industries and export their taxes to companies beyond their borders (not as difficult as it sounds).
They’d suffocate economic growth, in other words.
Comes now Colorado with a proposal to levy income tax on companies without a physical presence in the state — that is, no property or payroll — but that record sales here of $500,000. A hearing on the regulation is scheduled this morning at the Revenue Department.
Actually, this is the proposal’s second time at bat. The measure was withdrawn last year after business groups — including the Colorado Association of Commerce & Industry (CACI) and Denver Metro Chamber of Commerce — protested. They’re protesting again this year, too.
“We . . . question the fundamental fairness of imposing income taxes on businesses that do not have a physical presence in Colorado,” CACI’s tax council wrote the Revenue Department last week. Besides, the group added, the “U.S. Supreme Court has yet to rule on a case determining whether anything less than physical presence is sufficient” to impose such a tax.
At the very least, CACI reasons, the legislature “should determine the extent of Colorado’s tax jurisdiction by statute” rather than let bureaucrats make the call.
All true. Perhaps you’re wondering, however, what is the big deal. Why shouldn’t states impose taxes on businesses that make money within their borders even if they don’t own property or make payroll there? Joseph Henchman, legal counsel for the Tax Foundation in Washington, tells me the short answer is that it’s “destructive of business investment.” The more complex answer is that with more than 8,000 sales-tax jurisdictions in the country, he says, the burden of complying with their ever-shifting rates would be enormous. Imposing income taxes on outsiders creates a different set of compliance burdens.
As recently as 1992, in Quill Corp. vs. North Dakota, the Supreme Court reaffirmed that companies must have a physical presence in a state to be subject to sales and use taxes. And although the court has never spoken specifically on the corporate income tax, Henchman believes “the answer would be the same.” He says that’s the consensus of most experts, too.
Unfortunately, two years ago the court declined to review a ruling by the West Virginia Supreme Court of Appeals upholding an income tax on a bank that had customers in that state but no property, offices or employees. Henchman figures the court would prefer that Congress settle this issue.
Maybe so, but in the meantime some states are taking silence as a green light to boldly go where tax policy has not ventured before.
Naturally, it’s all about the money, although Revenue doesn’t see it that way. Department spokesman Mark Couch told me its staff didn’t do a fiscal analysis of the regulation, but believes it would be “a wash in terms of revenue.”
Not so, retorts Loren Rachel Furman, CACI’s vice president of governmental affairs. She says its members “firmly believe that this regulation will result in a tax increase to businesses” because “companies that have not been subject to [Colorado] taxation in the past will become subject to taxation.”
“How can that logically not result in a tax increase?” she wonders.
Once upon a time — from 1992 through 2006, to be precise — we followed a quaint policy in this state in which voters were asked if taxes should be raised. But maybe the Taxpayer’s Bill of Rights is another constitutional clause that it’s now safe to ignore.
E-mail Vincent Carroll at vcarroll@denverpost.com.
