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Out-of-state tax bills could sink businesses

It's tough enough for U.S. manufacturers to make ends meet in this economy. After paying the bills and covering payroll and expenses, many businesses are simply hoping to stay afloat, let alone turn a profit.

So imagine being blindsided with a $376,000 tax bill from a state in which your company has no property, no sales offices, no bank accounts, no agents and not a single employee. In fact, the company's sales in the state for the year in question were $100,000 less than the surprise tax assessment.

That's exactly what happened recently to the well-known company I work for, Monterey Boats, a 27-year-old boat manufacturer based in Central Florida. The state of Michigan issued Monterey a 2010 gross receipts tax notice for that amount and the result could be crushing for our 250 employees.

Monterey Boats' sales in Michigan run roughly about 2 percent of its overall sales. That may not sound like a lot, but the potential loss is enormous since Michigan, with its beautiful lakes, has a large boating community. If we were to stop doing business in Michigan due to the unreasonable and inconsistent tax rules, we would be in serious trouble. We would have to cut staff and trim payroll even more than we have already, and we couldn't even think about expanding. It would be a serious blow.

Like any company in a competitive business, we have to watch our bottom line. So it's outrageous and shocking when a state that we don't have a brick or an employee in tries to impose a corporate tax. Worse yet, this was not the first time that happened and, I'm afraid, it probably won't be the last time.

What's particularly challenging — if not chaotic — is that states are imposing these business activity taxes inconsistently. Some states reach across their borders and some don't. Some businesses are targeted, others are not.

Congress needs to step in to stop this practice so that the rules are clear, fair and uniform. The bipartisan Business Activity Tax Simplification Act (BATSA), sponsored by Reps. Bob Goodlatte, R-Va., and Bobby Scott, D-Va., would set a single standard for all states so that businesses like Monterey Boats would no longer have to wonder about their tax liability and would no longer have to worry about being hit unexpectedly with an unjustified and inconsistently applied assessment.

BATSA would not affect sales taxes — this is a completely separate issue from an Internet sales tax — and it would not undermine a state's ability to impose taxes. It would merely clarify what the Supreme Court decided nearly two decades ago: that a state can only tax out-of-state companies if they have a substantial, physical connection to that state.

Companies like ours have few alternatives when a tax bill like Michigan's arrives: pay what we believe to be an unfair and unjustified bill, fight it in court (we've already written to Michigan to dispute the levy) or stop doing business there. None of these options is reasonable or acceptable, and all would amount to a significant financial loss for us.

Monterey Boats has no connection to Michigan and therefore has no sales to report for corporate activity tax purposes. Don't get me wrong. Monterey is more than willing to pay its share. We're not trying to avoid taxes. In fact, Monterey already pays Michigan for the proper permitting, as well as freight and fuel taxes, whenever we deliver a boat. But why should a company be levied a gross receipts tax when it has no physical presence in a state?

These types of corporate income taxes are imposed to cover the cost of the state's many beneficial services. Paying such a tax makes sense for a company with bricks and mortar and employees in that state.

Monterey gladly pays these taxes in Florida — where it is based. But it makes no sense for us to shell out tens of thousands of dollars for state services that we neither receive nor need.

BATSA would fix this so that U.S.-based employers like Monterey Boats would know the rules and would be taxed in a fair and reasonable way. This would go a long way toward helping our economy — and companies like ours — continue to grow.

Mark Ducharme is vice president and chief financial officer of Monterey Boats of Williston.

Out-of-state tax bills could sink businesses 03/28/12 [Last modified: Wednesday, March 28, 2012 4:38pm]
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