Because of the innovative nature of tech companies and the wonderful products that our members create, it is easy to forget that these are also businesses that require a level playing field to across the country and around the globe to succeed. A key to that level playing field is fair and innovation-friendly tax policy.
Our global companies are constrained by an outdated and clunky federal tax code that is desperately in need of an overhaul to reflect the dynamic evolution of America businesses over the last 27 years. Online companies are finding new ways to deliver products and services but face thousands of different tax laws around the country.
Taxation is an issue that cuts across state, federal and international lines.
The overwhelming issue on the federal stage is comprehensive tax reform. Our system of corporate taxation puts U.S. companies at a competitive disadvantage with their global competitors and is in urgent need of an overhaul. The last major tax reform occurred in 1986.
The current U.S. tax system discourages investment in the United States and may also slow the pace of technological innovation. The current system of business taxation in the United States is making the country uncompetitive globally and needs to be overhauled. A new tax system aimed at improving the global competitiveness of U.S. companies could raise GDP by 2% to 2.5%.
Businesses now operate more freely across borders and business location and investment decisions are more sensitive to tax considerations than ever before. As new market access has increased, nations tax systems have become a greater factor in the success of global companies. Over the last decade, most of the United States’ major trading partners have reduced their corporate tax rates.
For years now, Congress has kicked the subject of tax reform down the road but has now become increasingly more focused on the topic of corporate tax reform. To date, most tax reform conversations have focused on the reduction of corporate tax rates, in exchange for the elimination of various tax credits, deductions and preferences. There have been some significant discussions on proposals for corporate tax reform among leaders of the Congressional tax-writing Committees, House Ways and Means and Senate Finance. There is some bi-partisan agreement on the need for a simpler tax system that rewards returning overseas profits to the United States and a move to a territorial tax system to make the U.S. more competitive in the global marketplace.
House Ways and Means Committee Chairman Dave Camp (R-MI) released a draft legislative proposal in October that significantly advances the international tax reform debate in the US. The revenue-neutral proposal would move the US to a territorial tax system and reduce the maximum corporate tax rate to 25%. The committee chair cast the proposal as an initial step in a comprehensive tax reform effort that would also broaden the tax base and lower the individual income tax to 25%. Chairman Camp’s proposal provides a likely framework for future international tax reform discussions.
The Treasury Department released the President’s Framework for Business Tax Reform on February 22, 2012. The Framework contains a large number of general business-oriented proposals which, according to the Administration, will make the Tax Code less complicated for businesses and increase the nation’s competitiveness in the global economy. A reduction in the corporate tax rate would be fully paid for by repeal of business tax preferences. The Framework also calls for a new minimum tax on overseas profits and encourages companies to return work to the U.S. by offering a new relocation tax incentive.
We must ensure that any corporate tax reform proposals treat the technology industry equitably. Corporate tax reform should embrace the principles of an “innovation economy.” Any tax reform proposals should incorporate principles which recognize the valuable contribution of innovation incentives such as those for research and development, tax law stability, and the recognition that in a global economy, expanding operations overseas enhances U.S. GDP productivity. Lowering the top corporate tax rate and enacting a competitive territorial system would spur job creation in the United States and allow U.S. companies to better compete abroad.
Specifically, TechAmerica recommends the following issues be considered as part of comprehensive corporate tax reform:
U.S. companies have had to compete with a corporate tax rate that is the highest rate among OECD countries. While nearly every other country has lowered corporate tax rates at least once since 1997, and most countries have done so several times, the U.S. has not made one adjustment. At least 75 countries, including some of our largest trading partners, have cut their corporate tax rates in just the past four years. The result is that the U.S. rate is now second-highest rate to Japan in the Organization for Economic Co-operation and Development (OECD). Right now, with a top marginal rate of 35 percent, the corporate tax rate vies for the developed world’s highest, placing our companies—indeed, our entire country—at a competitive disadvantage. It is vital that we move quickly to reduce the corporate tax rate and put American companies on a level playing field. Other countries have recognized the direct correlation between a lowered corporate tax rate and an increased competitive advantage.
Not only does a lower rate help U.S. companies compete, but it also encourages foreign companies to invest in the United States, resulting in increased employment and higher wages for American workers.
Some small and mid-sized companies generate as much as 97% of their revenues overseas, with many large companies earning more than three-quarters of their income outside the United States. Overseas investment leads to greater success selling goods and services globally, which under the right tax structure, would significantly fuel domestic capital investment, domestic job creation and increased domestic investment in research and development activities. As global competition has grown, other countries have recognized this and adopted taxation systems that bolster the ability of their companies to compete in foreign markets and increase investments at home. Currently the U.S. is one of a small handful of developed countries that taxes corporate earnings on a global basis, which means that a U.S. company’s foreign earnings are subject to U.S. tax, despite the fact that those earnings have already been taxed overseas. This double taxation, combined with a high corporate rate, dissuades many companies from investing foreign earnings in the U.S. to create jobs and boost our economy. A territorial international tax system, combined with a lower rare, would remove the legal barriers that prevent foreign earnings from being used for domestic investment without penalty.
A move to make all online retailers levy sales tax continues to be debated by Congress. Online retailers could soon be required to collect it — just like their traditional bricks-and-mortar peers — instead of trusting customers to pay it on their own. The push is gaining momentum from traditional retail stores that want to level the playing field and state governments that are desperate for new revenues.
TechAmerica has repeatedly urged Congress to pass the Digital Goods and Services Tax Fairness Act, which would establish a national framework for state and local taxation of goods and services. This bill will ensure fair, consistent taxation, and prohibit multiple, discriminatory taxation.
In contrast, a bill that would significantly harm online retailers has kept popping up in Congress. TechAmerica maintains our opposition to the “Main Street Fairness Act,” which authorizes the states to require out-of-state retailers to collect and remit sales tax, even with no physical presence in the state.
Research and Development tax credits are an issue for technology companies at the state and federal level. Our industry faces extreme competition and rapid technological advancements that result in compressed research cycles and product lives, skyrocketing R&D costs and increasing capital requirements. In today’s fiscal climate, high-tech firms must compare their operational costs to other locations globally. These credits for manufacturing and R&D equipment provide significant investment incentives for technology companies and help them compete globally.
TechAmerica strives to secure these exemptions, which in turn will help grow and retain high paying tech and production jobs.
The R&D tax credit has been temporary for a number of years and was just recently retroactively reinstated for 2012. TechAmerica has repeatedly called for Congress to make the credit permanent and has participated as part of the White House stakeholder discussions on the FY 2013 federal R&D budget.
TechAmerica is advocating for science and technology policies that promote healthy investment in federal R&D by sustained and increased funding at federal agencies during FY 2013 budget appropriations process.
Past state tax policies have had a major positive impact on high-tech’s success. TechAmerica encourages legislatures to balance their budgets by critically reviewing all necessary state expenditures, and wisely considering the impact on business of any proposed tax increases. A strengthened high tech industry will help strengthen economies. To that end, TechAmerica supports the continuation of those tax policies and fiscal reforms that have served to improve and strengthen state business climates.
As states are facing tough economic times, legislators need to be mindful of not sacrificing long-term prosperity for near-term “savings.” States should not limit or eliminate R&D incentives and sales and use exemptions on manufacturing R&D equipment as those incentives will help foster investment and job creation in the states.
TechAmerica opposes tax policies that impose a use tax collection duty on out-of-state retailers by virtue of their business relationships with in-state companies. Not only are these types of policies fraught with legal challenges, they specifically attack the business models of many U.S.-based tech companies and undermine their ability to remain viable.
Instead of imposing new tax collection requirements on out-of-state retailers, some legislative proposals would instead impose new notice and reporting requirements in an effort to circumvent the U.S. Supreme Court’s ruling, Quill v. North Dakota (504 U.S. 298 (1992)), which held that states may not compel out-of-state companies to collect sales tax unless those companies have a physical presence in the state. This standard was established to “ensure that state taxation does not unduly burden interstate commerce.” Like bills that would require out-of-state retailers to collect and remit sales tax, the notice and reporting requirements create a significant new regimes that not only burden interstate commerce but also discriminate against out-of-state businesses. If the issue in Quill is the “burden” of sales tax collection, these reporting requirements raise dormant commerce clause issues.
With regards to affiliate nexus or similar proposals that impose burdensome reporting requirements, TechAmerica opposes tax policies that impose a use tax collection duty on out-of-state retailers by virtue of their business relationships with in-state companies. Not only are these types of policies fraught with legal challenges, they specifically attack the business models of many U.S.-based high tech companies and undermine their ability to remain viable.
The digital economy is changing rapidly. Companies now sell a broad array of digital products and services, such as movies, music, books, and ringtones, to consumers who either download the content or access it over the Internet. Businesses are moving much of their enterprise systems to remote-access servers – i.e. cloud-based services. The complexity of these business models, and the fading differentiation between digital “products” and digital “services,” creates a minefield of compliance problems for companies operating in these industries. In some cases, digital services may be taxed at higher rates than equivalent traditional services. Some industries face multiple taxation on the sale of digital products.
Companies selling goods and services in the digital products arena often require significant and ever-growing data processing capabilities. Data centers housing huge server capacities that provide data processing capacity to digital commerce are not subject to transportation logistics and therefore can be located in any state. Naturally, companies will choose to locate those data centers where the economics are most favorable.
Digital products are extremely price-sensitive, and the location of a business in a particular state may hinge on whether the sales of digital products are subject to tax. This is especially true when a viable, tax-free alternative for consumers is a mouse-click (or screen tap) away. Because of constitutional nexus constraints, out-of-state companies will not be required to collect the same tax that in-state businesses must collect. With instant downloads and access to servers, the location of a business is invisible and unimportant to most customers—except to the extent that the location results in sales tax being added to the invoice total.
States should reject new taxes on electronically transferred digital products and electronically delivered services such as data processing, hosting, and related services. Such a broad expansion of the sales tax base to include electronically transferred goods and services is bad public policy and will result in multiple and discriminatory taxation.