A tax nightmare began for Pete Vegas when a truck carrying his L.A. company’s food made a routine stop at a weigh station in Washington state.

It’s cost him hundreds of thousands of dollars. And he’s now taking part in an intensifying battle over states’ rights to tax companies where they don’t have facilities or employees.

Business groups contend states should not have the authority to impose such taxes. State tax collectors say they have a right to collect billions of dollars in corporate income because that’s where the sales take place.

Vegas owns Sage V Foods, a West L.A. food company specializing in rice products. Two years ago, Washington state hit the company with a $180,000 tax bill. Vegas appealed in a hearing in Tacoma last week. A ruling is pending within the next few weeks.

“It’s outrageous,” Vegas said last week after the appeals hearing. “If every state did what Washington did, we’d be broke. It’s just so wrong.”

A few weeks after the truck stopped at the weigh station in 2010, Sage V received a questionnaire from the Washington Department of Revenue. One of the questions was: “How many visits per year have you made to Washington state?” A company executive responded, checking the box “1.”

Washington state authorities launched an audit of Sage V’s books and sent Vegas a tax bill for $180,267 for seven years of back taxes, penalties and interest. As Sage V has no facilities or employees in Washington, the tax was based on the state’s estimate of the income the company generated in the state.

Vegas wouldn’t disclose his sales in Washington. But he agreed the bill wasn’t going to put him out of business, although it might prevent him from investing in future growth.

He paid the bill to avoid racking up penalties and interest, but then he fought back. He appealed the bill and joined a national coalition calling for legislation designed to end similar tax collection practices by states nationwide. The Coalition for Interstate Tax Fairness and Job Growth lists membership of more than 100 companies, large and small; the most notable local company is Burbank-based Walt Disney Co. Executives there declined to comment for this article.

Grasping for revenue

Vegas and other coalition members say that as states in recent years have become more desperate for money, some have become more aggressive in taxing out-of-state companies. The taxes are levied on gross receipts or corporate income of companies and are based on nonretail sales or other business activity.

Until recently, companies have only paid corporate income tax if they had facilities or employees in the state. Now, however, states are seeking the taxes for any business activity.

At issue is the tie, or “nexus,” that an out-of-state company has to a state. Court rulings and legislation over the years have generally held that a company can be taxed on its income in a state if it has employees or facilities there. But what’s less clear is whether states have the authority to tax companies for any business activity they conduct in the state, such as selling wholesale or even attending trade shows.

The issue of the nexus got headlines last year when California attempted to impose state sales on Amazon.com, claiming the Seattle-based company’s affiliate program created the nexus. Amazon launched an effort to repeal the state’s Internet sales tax law, but then agreed to start collecting California’s 7.25 percent sales tax, plus local sales taxes.

The Amazon case centered on retail sales taxes; the Vegas case is different because it’s a dispute over corporate tax. The issue of the nexus, though, is the same.

Business groups have long pushed for federal legislation preventing the imposition of corporate taxes on companies that don’t have facilities or employees in the taxing state, but those attempts have been defeated. The latest attempt is HR 1439, which is likely to become part of proposed tax legislation that won’t be debated until after the November election.

The Multistate Tax Commission, representing state tax collectors, has led the battle against any such legislation. The commission says that in today’s Internet economy, the nexus should be broad rather than narrow.

“The concept of only taxing a company’s physical presence in a state is ridiculous in today’s world,” said Joe Huddleston, executive director of the commission.

Huddleston said that if states were limited to collecting taxes based solely on a company’s physical presence, they would lose tens of billions of dollars, further crunching already strained state budgets.

But the coalition backing the bill says that states have become too aggressive in taxing companies’ income, often using the flimsiest of ties to make their case. He cited cases of out-of-state tax bills that resulted from companies sending employees to trade shows.

“States have attempted to advance the idea of an economic nexus,” said coalition attorney and spokesman Jack O’Rourke. “If you’re a large company, you can fight these practices. But if you’re a small company, you usually have no choice but to settle and move on. And that’s what state tax collectors are counting on.”

Huge drain

Bobrick Washroom Equipment Inc. in North Hollywood received a tax bill exceeding $100,000 from Texas. The state claimed Bobrick had employees in the state distributing its products and was therefore subject to income taxes. But Mark Louchheim, Bobrick president, said each of his distributors also sells products for other companies so they’re independent contractors.

He said Bobrick has 200 employees total, about half in North Hollywood and the rest at six plants, none of which is in Texas.

Louchheim appealed the Texas tax bill, but lost several rounds. After spending $185,000 on his challenge, he gave up and agreed to a settlement of about $130,000.

“We had exhausted all our remedies short of the federal courts and it was just becoming too expensive for us to continue,” Louchheim said. He estimated that continuing to fight the case could have cost his company upwards of $1 million.

But the problem didn’t end there. Now he has to file quarterly tax returns with Texas.

“There’s no way to come up with all the paperwork that Texas is demanding,” he said. “It’s been a huge amount of work for us and immensely frustrating.”

He successfully fought back attempts by Illinois and Louisiana to levy business activity taxes. But he believes more attempts by other states will follow unless HR 1439 passes.

“All the states are constantly sending us questionnaires trying to determine whether we have a nexus in their state,” Louchheim said. “It’s a huge drain on our time and each answer has to be very carefully thought out or else they can come after us and then it becomes a huge uphill battle to fight them.”