WASHINGTON — Three New York lawmakers on Capitol Hill are siding against Governor Paterson in an intensifying battle between the federal government and the states regarding the taxation of interstate commerce.
Senator Schumer and Reps. Anthony Weiner and Gregory Meeks are co-sponsoring federal legislation that could undercut taxes New York State imposed this year on banks and online retailers, such as Amazon.com, that have customers in New York but no offices here. All three lawmakers are Democrats, as is Mr. Paterson.
The federal bill, known as the Business Activity Tax Simplification Act, prohibits states from taxing the income of companies that don't have a "physical presence" in the state. It has been championed by businesses looking to lighten their tax burden but has drawn stiff resistance from many states eyeing greater revenues and expanding Internet retail sales.
Facing budget deficits and a slowing economy, the Paterson administration enacted two provisions this year aimed at boosting state tax revenues by tens of millions of dollars. One that became known as the "Amazon tax" requires the Internet giant and other online retailers to collect city and state sales tax on all goods shipped to New York State. The other measure assesses a corporate tax on out-of-state banks that have issued credit cards to more than 1,000 state residents or earn more than $1 million from credit card customers in New York.
"States are increasingly reaching out across their borders to tax out-of-state revenue," the tax counsel for the Washington-based Tax Foundation, Joseph Henchman, said. "BATSA would restrain many of these, while the Amazon tax is an example of one of these efforts."
Tax policy experts on both sides of the fight about the federal legislation say it is not aimed directly at the state's Amazon tax; the bill in Congress deals with income taxes and specifically excludes sales taxes, which are the target of the New York measure.
But Mr. Henchman said the two bills could come into conflict, depending on how lawyers for the state defend the Amazon measure in a lawsuit the company filed this spring. Amazon has challenged the provision on constitutional grounds, arguing that it violates the Commerce Clause and citing a 1992 Supreme Court ruling in Quill Corp. v. North Dakota that reaffirmed that a business must have a "physical presence" in a state in which it is assessed sales taxes.
Rather than press the case under the standards applied to sales tax collection, New York could try to apply the broader standards used for income taxes, Mr. Henchman said. "I think that would be the best argument you could make," he said.
But then the state would risk a clash with the federal law, should it pass Congress. "If New York is talking about sales taxes, then it violates Quill. If it's talking about taxing income, then it violates BATSA," Mr. Henchman said.
The state has yet to submit a response to the Amazon complaint.
The federal legislation has been introduced in Congress several times without success, but a House subcommittee held a hearing on the bill last month, which advocates saw as a sign that the measure is gaining steam. A bipartisan group of 30 lawmakers, including some influential Republicans such as Reps. Michael Pence and Eric Cantor and Democrats such as Reps. Robert Wexler and Deborah Wasserman Schultz have signed on to the bill in the House, though it had just two co-sponsors in the Senate: Mr. Schumer and Senator Crapo, a Democrat of Idaho.
A spokesman for the Paterson administration, Thomas Bergin, said its lawyers were reviewing the bill but that "there doesn't seem to be a connection" to the new online sales tax requirement.
While the effect of the federal bill on the Amazon tax is a subject of debate, the impact on New York's move to tax out-of-state banks with credit card business in the state is more clear-cut.
"It's black and white. That's exactly what BATSA is trying to stop the states from doing," a New York attorney representing a coalition of businesses in support of the bill, Arthur Rosen, said.
The federal legislation originated in part out of complaints from companies large and small that they were being hounded by tax collectors from states where they had neither an office nor employees. In one of the more extreme examples, the chief financial officer of a Florida-based boat manufacturer told lawmakers in testimony last month that in 2004, tax collectors from New Jersey seized one of its trucks carrying boats slated for delivery in the state and demanded a payment of $27,500 in taxes before the boats would be released
State associations opposed to the legislation say such stories are exaggerated and argue for a broader standard for assessing business taxes. The BATSA legislation, they say, would cost state governments more than $3 billion in revenue, according to an estimate by the Congressional Budget Office in 2005.
In New York alone, the price tag could reach into the hundreds of millions of dollars, the executive director of the Multistate Tax Commission, Joe Huddleston, said. "Some of these lawmakers have been urged by industry to get on board, and they may not fully understand the impact to their state," he said, referring to Messrs. Schumer, Weiner, and Meeks.
Mr. Weiner, a candidate for mayor in New York City next year, defended the bill in a statement. "New York's business community, particularly our vital financial services sector, has been hammered with business activity taxes in states and localities where they do not operate," he said. "It's bad for our economy and kills jobs. Period."
Messrs. Schumer and Meeks did not return calls for comment.