Taxation without representation?

Whatever happened to the founding principles?

Smokey was shocked to see the following...

Charlotte Observer, The (NC) (KRT) via NewsEdge Corporation :

Oct. 5--Bo Horne of Seneca, S.C., sold a $695 software program to a New Jersey casino eight years ago.

Now, the N.J. Treasury Department says Horne must pay $600 in corporate income tax and fees each year for as long as the casino uses the program -- even though Horne says he's never collected additional revenue from the one-time sale.

As states across the country cope with budget shortfalls, an increasing number are turning to out-of-state companies to boost corporate tax revenues, according to a study released Friday by the Tax Foundation, a Washington, D.C., think tank that advocates lower taxes.

Companies that have fleeting contact with certain states may find tax bills in their mailboxes years later, says Chris Atkins, the study's author.

The trend is occurring in part because state officials are finding it easy to hunt for revenue from out-of-state firms because "there's no political price to pay," Atkins says.

Horne's case centers on New Jersey's interpretation of his connection with the state, or nexus, as it's called in tax law. Most states require companies have a physical presence, such as a building or employees, to establish nexus -- and the right to levy taxes.

An increasing number of others, including New Jersey, North Carolina and South Carolina, now say providing a service in their state could be enough to trigger income tax liability.

A N.J. treasury spokeswoman said Horne must pay corporate income tax because his software is an "intangible asset" and gives him a significant enough presence in the state to pay the minimum annual corporate income tax of $500 a year, plus fees.

"It's a sleeper issue for small businesses," says Horne, owner of ProHelp Systems, Inc., which he runs out of his basement with wife Katherine. "States can make your life miserable, if they choose."

He worries such aggressive tax collecting will chill commerce, particularly for small businesses. He's stopped doing business with N.J.-based customers.

It's easier these days for states to track multi-state sales because more government agencies use electronic databases. Such activity could go undetected years ago.

Last week, Horne testified before a House subcommittee in support of a bill that would prevent states from applying income tax to businesses that provide a service but don't have physical assets located there.

The bill, the Business Activity Tax Simplification Act of 2005, has 30 co-sponsors, including three S.C. representatives. No N.C. lawmakers have signed on.

The Carolinas helped birth this trend of applying corporate income tax to out-of-state service providers.

In a 1994 landmark ruling, the S.C. Supreme Court ruled that the taxpayer's physical presence isn't required for the state to levy income tax.

This fall, the U.S. Supreme Court is expected to decide whether to consider an appeal from a similar N.C. ruling. Both cases are often cited as precedents when similar lawsuits are brought up around the country, those familiar with the issue say.

Today, South Carolina levies corporate income tax on a case-by-case basis, said spokesman Danny Brazell. For example, if an out-of-state mortgage lender had one S.C. client, they probably wouldn't be required to file income taxes, he said.

But if that same company had 50 clients and ran radio advertisements, they probably would, he said.

Brazell said the state levies the tax to even the playing field between out-of-state corporations that make money off S.C. sales, and in-state companies that pay property tax and contribute to the community.

"Certainly, there's an issue of what is fair," he said. The state collects an average $8 million annually from out-of-state companies, roughly 5 percent of total corporate income tax revenues.

In a decision that bodes badly for Horne, a N.J. appellate court ruled last month that out-of-state companies with no physical presence in the state can be taxed on sales of their licensed goods.

For Horne, who enjoys fishing on Lake Keowee and visiting historical sites, that decision, if it ultimately stands, could cripple the country's economy.

"If you sell someone in New Jersey a box of paper clips you'll be hit with a $600 tax," he says. "This just destroys small business."