If turning bitcoin into USD is a taxable event in the US, how are they planning on handling this? According to the story, users (corporations) pay bitcoin to Bitpay, who then converts it to dollars and pays the state...at a cost of only 1% per transaction. Seems Bitpay will be upside down come time for them to pay their taxes.
Not really, their basically selling BTC for USD immediately upon receiving it. The fluctuation of price in that time frame should be fairly low, and the 1% fee should cover any taxes and then some when averaged out.
User pays tax on the USD value they paid to Bitpay. So if user bought at X and "sold to bitpay" for X+Y, they still have to pay taxes on Y.