Business Activity Tax
The simplest business activity tax asks a business to report its value added by activities in a state and pay a small percentage of that (e.g., 0.25%) as state tax. A different approach asks for this payment only if it is larger than what is owed under the corporate income tax. This approach doesn’t change the tax liability of most profitable corporations but provides a minimum tax for corporations experiencing losses and non-corporate business forms such as partnerships.
New Hampshire has such a tax. Nevada has seriously considered one and may have enacted it. The concept had considerable support in Texas in 1997 and probably would have been enacted except for a problem that exists in Texas but doesn’t exist in Tennessee. The Texas Constitution bars any tax based on income, so the Tennessee tax on dividends and interest would be unconstitutional in Texas. As applied to a company selling professional services, the value-added tax base is almost identical to what an income tax base would be. For sure, any Texas business activity tax would have been tied up in court and might have been declared contrary to the state’s constitution.
For more detail on business activity taxes and proposals that some form of this tax be adopted in Tennessee, see the Tennessee Department of Revenue paper, Business Taxes: Current Structure And Options For Change.
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