    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

     MOBILE WORKFORCE STATE INCOME TAX FAIRNESS AND SIMPLIFICATION ACT OF
                                      2007

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       COMMERCIAL AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 3359

                                   __________

                                NOVEMBER 1, 2007

                                   __________

                               Serial No. 110-143

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
    MAXINE WATERS, California            DANIEL E. LUNGREN, California
    WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
    ROBERT WEXLER, Florida               RIC KELLER, Florida
    LINDA T. SANCHEZ, California         DARRELL ISSA, California
    STEVE COHEN, Tennessee               MIKE PENCE, Indiana
    HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
    BETTY SUTTON, Ohio                   STEVE KING, Iowa
    LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
    BRAD SHERMAN, California             TRENT FRANKS, Arizona
    TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
    ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
    ADAM B. SCHIFF, California
    ARTUR DAVIS, Alabama
    DEBBIE WASSERMAN SCHULTZ, Florida
    KEITH ELLISON, Minnesota

                Perry Apelbaum, Staff Director and Chief Counsel
                     Joseph Gibson, Minority Chief Counsel
                                     ------

               Subcommittee on Commercial and Administrative Law

                    LINDA T. SANCHEZ, California, Chairwoman

    JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
    HANK JOHNSON, Georgia                JIM JORDAN, Ohio
    ZOE LOFGREN, California              RIC KELLER, Florida
    WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
    MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
    STEVE COHEN, Tennessee

                         Michone Johnson, Chief Counsel

                        Daniel Flores, Minority Counsel

                                C O N T E N T S

                                  ----------

                                NOVEMBER 1, 2007

                                                                       Page

                                    THE BILL

    H.R. 3359, the ``Mobile Workforce State Income Tax Fairness and
      Simplification Act of 2007''...................................     3

                               OPENING STATEMENTS

    The Honorable Linda T. Sanchez, a Representative in Congress from
      the State of California, and Chairwoman, Subcommittee on
      Commercial and Administrative Law..............................     1
    The Honorable Chris Cannon, a Representative in Congress from the
      State of Utah, and Ranking Member, Subcommittee on Commercial
      and Administrative Law.........................................     8
    The Honorable Hank Johnson, a Representative in Congress from the
      State of Georgia, and Member, Subcommittee on Commercial and
      Administrative Law.............................................     9

                                   WITNESSES

    Mr. Douglas L. Lindholm, President and Executive Director,
      Council on State Taxation, Washington, DC
      Oral Testimony.................................................    12
      Prepared Statement.............................................    14
    Ms. Dee Nelson, Payroll Manager, Alutiiq, LLC and Subsidiaries,
      Anchorage, AK, on behalf of the American Payroll Association
      Oral Testimony.................................................    29
      Prepared Statement.............................................    31
    Mr. Harley T. Duncan, Executive Director, Federation of Tax
      Administrators, Washington, DC
      Oral Testimony.................................................    55
      Prepared Statement.............................................    57
    Mr. Walter Hellerstein, Francis Shackelford Distinguished
      Professor of Taxation Law, University of Georgia School of Law,
      Athens, GA
      Oral Testimony.................................................    71
      Prepared Statement.............................................    73

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable Chris Cannon, a
      Representative in Congress from the State of Utah, and Ranking
      Member, Subcommittee on Commercial and Administrative Law......     8
    Prepared Statement of the Honorable John Conyers, Jr., a
      Representative in Congress from the State of Michigan,
      Chairman, Committee on the Judiciary, and Member, Subcommittee
      on Commercial and Administrative Law...........................     9

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Answers to Post-Hearing Questions from Douglas L. Lindholm,
      President and Executive Director, Council on State Taxation,
      Washington, DC.................................................    92
    Answers to Post-Hearing Questions from Dee Nelson, Payroll
      Manager, Alutiiq, LLC and Subsidiaries, Anchorage, AK, on
      behalf of the American Payroll Association.....................    99
    Answers to Post-Hearing Questions from Harley T. Duncan,
      Executive Director, Federation of Tax Administrators,
      Washington, DC.................................................   105
    Answers to Post-Hearing Questions from Walter Hellerstein,
      Francis Shackelford Distinguished Professor of Taxation Law,
      University of Georgia School of Law, Athens, GA................   108
    Prepared Statement of the American Institute of Certified Public
      Accountants....................................................   112
    Prepared Statement of Edward A. Zelinsky, Morris and Annie
      Trachman Professor of Law, Benjamin N. Cardozo School of Law,
      Yeshiva University.............................................   113
    Prepared Statement of Nicole Belson Goluboff, Esquire............   116
    Letter from various employers in support of H.R. 3359............   127
    Letter from Kristina Rasmussen, Director of Government Affairs,
      Nation Taxpayers Union in support of H.R. 3359.................   129

     MOBILE WORKFORCE STATE INCOME TAX FAIRNESS AND SIMPLIFICATION ACT OF
                                      2007

                                  ----------

                           THURSDAY, NOVEMBER 1, 2007

                  House of Representatives,
                         Subcommittee on Commercial
                                and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to notice, at 12:12 p.m., in
    room 2237, Rayburn House Office Building, the Honorable Linda
    Sanchez (Chairwoman of the Subcommittee) presiding.
        Present: Representatives Sanchez, Johnson, Watt, Cannon and
    Jordan.
        Staff present: Michone Johnson, Majority Chief Counsel;
    Norberto Salinas, Majority Counsel; Stewart Jefferies, Minority
    Counsel; and Adam Russell, Majority Professional Staff Member.
        Ms. Sanchez. I would bang the gavel, but I don't have one
    with me this morning, or this afternoon, I should say. But I am
    going to call the hearing of the Committee on the Judiciary,
    Subcommittee on Commercial and Administrative Law to order. And
    I am going to recognize myself for a short statement.
        Our workforce has increasingly become mobile. Some
    employees travel and work in several States throughout the
    year, while others live in one State but work in another. When
    it comes time to complete their income tax returns, many
    employees must file several returns because each State has the
    authority to tax all the income earned within its borders and
    all the income of the residents wherever the income is earned.
        While employees are responsible for filing State income tax
    returns, their employers are duty bound to withhold State
    income taxes for their employees. Therefore, both employees and
    employers must know the different thresholds for each State in
    which the company operates.
        These varying thresholds have raised concerns of employee
    tax liability and employer State income tax withholding
    compliance during this period of improved corporate
    transparency. To remedy this confusing system, my colleagues,
    Congressman Johnson and Ranking Member Cannon introduced H.R.
    3359, which aims to establish a uniform national threshold of
    60 work days within a calendar year before a State may tax
    certain nonresidents.
        Today's hearing serves a dual purpose. First, this hearing
    will provide us with an opportunity to learn more about State
    taxation of nonresidents, specifically the differing thresholds
    States maintain and how they affect employees, employers and
    State and local revenues. And second, the testimony provided
    today will help us determine what role Congress has in this
    matter, and whether H.R. 3359 addresses the concerns of
    employee liability and employer withholding requirements for
    nonresidents, while protecting the interests of State and local
    governments to tax the income earned within their boundaries.
        Accordingly, I very much look forward to today's hearing
    and the testimony of our witnesses. And at this time I would
    like to recognize my colleague, Mr. Cannon, the distinguished
    Ranking Member of the Subcommittee and co-author of the bill
    that we are examining today for his opening remarks.
        [The bill, H.R. 3359, follows]:

        Mr. Cannon. Thank you, Madam Chair. And I apologize. I am
    going to have to be leaving the hearing virtually immediately.
    We have a bill on the floor that would save us from a 19th
    century piece of legislation. I worry that somebody will want
    to save us from an 18th century Constitution at some point in
    time. So I need to go over and do an amendment there.
        And I apologize in advance to our distinguished panel and
    appreciate them being here. This, of course, is legislation
    that I introduced last year. And I wanted to thank Mr. Johnson
    for introducing it on behalf of the majority this time.
        This is good legislation. It creates some bright lines and
    significantly facilitates the nature of what we are doing, what
    is actually happening in America, that some States just can't
    keep their hands off.
        And so, with that, Madam Chair, I would actually like to
    submit my statement for the record.
        Ms. Sanchez. Without objection, so ordered.
        [The prepared statement of Mr. Cannon follows:]
     Prepared Statement of the Honorable Chris Cannon, a Representative in
     Congress from the State of Utah, and Ranking Member, Subcommittee on
                       Commercial and Administrative Law
        In today's increasingly mobile workplace, employers and employees
    face numerous challenges in determining tax liability, particularly in
    instances when employers send their employees into another state to
    work for a short period of time.
        Of the 41 states that have a personal income tax, 24 have no
    minimum threshold for employer withholding requirements. That is,
    employers and employees are liable for that state's taxes the moment an
    employee sets foot in the state to do work. Six states have exemptions
    for employer filing requirements that are determined by the number of
    days that an employee works in the state. Those thresholds range from a
    minimum of 10 days in Maine to 60 days in Arizona and Hawaii.
        Another 11 states have exemptions based on the amount of income
    that an employee earns in a particular state. Those income thresholds
    range from a minimum of $300 in any calendar quarter in Ohio to $7,000
    in Virginia. According to the Council on State Taxation (COST),
    represented here by Mr. Doug Lindholm, the point at which tax liability
    attaches to an individual is usually, but not always, the same as when
    a company's withholding requirement kicks in.
        This patchwork of state laws creates significant administrative
    headaches for both companies and their employees. Under Sarbanes-Oxley,
    a company must certify that it is compliance with all state and local
    laws, including tax laws. With so many variations on the state
    withholding laws, employers argue that it is impossible to be fully in
    compliance with Sarbanes-Oxley.
        All four of the witnesses today recognize that there is a problem
    here. That is a good start. Obviously the state taxing authorities, as
    represented by Mr. Harley Duncan, have their concerns about this
    legislation, which is to be expected. But I am heartened to see that
    they are willing to talk about ways to fix the problem.
        We are all concerned about federalism on this committee and on the
    ability of states to control activities within the state's borders.
    That said, this Subcommittee, this Committee, and this Congress have
    also recognized that there are times when the country's needs outweigh
    the needs of any individual state. Such was the case with the recently
    enacted Internet Tax Freedom Act Amendments Act, which was signed by
    the President yesterday.
        In addition to Mr. Duncan and Mr. Lindholm, I want to thank our
    other witnesses here today, particularly Ms. Nelson, who flew in from
    Alaska to give us her perspective on the burdens that the current
    situation places on employers and employees. I also want to thank
    Professor Hellerstein for being here; he has testified before this
    Subcommittee in previous Congresses and his knowledge of the Commerce
    Clause as it relates to state taxation is invaluable.
        Finally, I am thankful that Representative Johnson has introduced
    H.R. 3359, the ``Mobile Workforce State Income Tax Fairness and
    Simplification Act of 2007.'' I am a co-sponsor of that legislation and
    was a sponsor of a similar bill, H.R. 6167, in the last Congress. H.R.
    3359 is beginning to garner more co-sponsors, and I am hopeful that
    this hearing will raise awareness of this issue and begin to get the
    ball rolling towards a legislative solution.
        American companies and American workers deserve no less.
        I look forward to hearing from our witnesses.

        Mr. Cannon. And in addition to that, I have a document, a
    statement by the AICPA, the American Institute of Certified
    Public Accountants. I would ask unanimous consent that we can
    submit that to the record.
        Ms. Sanchez. Without objection, so ordered.
        [The information referred to is available in the Appendix.]
        Mr. Cannon. Thank you, Madam Chair. And I yield back.
        Ms. Sanchez. I thank the gentleman for his statement. I
    also would like to enter into the record a statement from Mr.
    Conyers who could not join us today. Without objection, it will
    be entered into the record.
        [The prepared statement of Mr. Conyers follows:]
    Prepared Statement of the Honorable John Conyers, Jr., a Representative
      in Congress from the State of Michigan, Chairman, Committee on the
     Judiciary, and Member, Subcommittee on Commercial and Administrative
                                      Law
        Today we hold a legislative hearing on H.R. 3359, a bill introduced
    by two distinguished members of this Subcommittee, Congressman Hank
    Johnson and Ranking Member Chris Cannon. This legislation attempts to
    impose a uniform national standard for when employees are required to
    pay state income taxes to those states in which they work but do not
    reside. Some concerns have been raised that some employees who work in
    several states throughout the year have difficulty knowing in which
    states they must file an income tax return and that some employers also
    experience the same challenges when withholding deductions for their
    employees. These concerns apparently exist because the states have
    different standards by which they begin to tax non-resident employees.
        Although this legislation seems to address those concerns, I worry
    about Congress treading upon state sovereignty. My state of Michigan
    has already addressed some of the concerns some of you will discuss
    this afternoon by entering into reciprocity agreements with surrounding
    states. I would hope that the states can resolve these concerns first,
    and if they cannot, we can determine whether Congress should step in
    and strike a balanced piece of legislation.
        I have concerns about how H.R. 3359 may impact Michigan and other
    states. According to an attachment to Mr. Lindholm's testimony, this
    legislation will result in an estimated revenue loss for Michigan, a
    state which is experiencing severe budgetary problems. Other states,
    especially California, Illinois, and New York, will stand to lose tens
    of millions of dollars in revenues if H.R. 3359 passes without any
    changes. We should be careful not to cause more revenue losses for
    states. Remember that the power to tax is the power to govern, and if
    states cannot tax the income earned within their states, how will they
    afford to provide needed services to those within their states. I
    understand that the Federation of Tax Administrators opposes H.R. 3359
    as written, and I look forward to hearing their testimony this
    afternoon on how this bill can be improved so that we can pass a
    balanced bill.

        Ms. Sanchez. And at this time, I would like to recognize
    Mr. Johnson for his opening statement.
        Mr. Johnson. Thank you, Madam Chairwoman, for holding this
    important hearing that affects businesses large and small.
    Today if an Atlanta-based employee of a Chicago company travels
    to headquarters on business once a year, that employee would be
    subject to Illinois tax, even if his annual visit only lasts 1
    day.
        But if he travels to Maine, his trip would be subject to
    tax only if his trip lasts for 10 days. And if he traveled to a
    weekend conference in Virginia, withholding would occur if his
    wages were above his personal exemptions and standard
    deduction, unless the employee elected his filing threshold.
        These varying thresholds within the 41 States that have a
    personal income tax have their own different set of standards
    for liability and enforcement. This inconsistency between
    statute and practice has the effect of placing tremendous
    compliance burdens on businesses and employees.
        With the passage of the Sarbanes-Oxley Act employers are
    spending a tremendous amount of time and resources to fully
    comply with tax laws and withholding regulations. Under section
    404 of the act, auditors of public companies must attest under
    penalty of perjury that they have reviewed the corporation's
    systems and that the company is in full compliance with all of
    its tax obligations.
        With 41 different tax laws, however, and with various de
    minimis rules, companies are facing difficulties complying with
    these rules and are expending a significant amount of resources
    to comply. That is why I, along with my colleague, Congressman
    Chris Cannon, introduced H.R. 3359, the ``Mobile Workforce
    State Income Tax Fairness and Simplification Act of 2007.''
    This is an act that Congressman Cannon has been working on even
    prior to the 110th Congress, which is my first session of
    Congress, of course.
        So I appreciate your work and effort in this regard in the
    109th, Mr. Cannon.
        H.R. 3359 would establish uniform and administratable
    rules, including appropriate de minimis rules, which would
    ensure that the appropriate amount of income tax is paid to
    jurisdictions without placing undue burdens on employees and
    their employers. This legislation was not designed to usurp
    State rights to tax. Rather, this bill was introduced in order
    to aid companies to fully comply with applicable laws and
    regulations, including State tax laws.
        We are all aware of the problem. It is my hope that this
    bill can serve as the impetus to a solution that will minimally
    impact State revenues while assisting businesses as they comply
    with complex tax laws.
        Thank you. And I yield back my time.
        Ms. Sanchez. I thank the gentleman for his opening
    statement.
        And without objection, other Members' opening statements
    will be included in the record. Without objection, the Chair
    will be authorized to declare a recess of the hearing at any
    time.
        I am now pleased to introduce the witnesses for today's
    hearing. Our first witness is Douglas Lindholm. Mr. Lindholm is
    president and executive director of the Council on State
    Taxation, an organization dedicated to preserving and promoting
    equitable and nondiscriminatory State taxation of multi-
    jurisdictional entities.
        He also served for 3 years as legislative director for
    COST. Prior to taking the helm at COST, Mr. Lindholm served as
    counsel for State tax policy for the General Electric Company
    in Washington, D.C., where he managed and coordinated State tax
    policy initiatives before State legislators and State
    administrative agencies.
        We want to welcome you here.
        He has written numerous articles on Federal, State, and
    local tax issues in a wide variety of publications, testified
    frequently before State legislatures and Congress on State tax
    issues and is a frequent speaker at State tax and State
    government affairs conferences and seminars.
        Our second witness is Dee Nelson. Ms. Nelson has over 17
    years of experience as a payroll professional, an active member
    of the American Payroll Association since 1998. She chairs the
    automated clearinghouse committee nominations and election
    committee and the global affairs task force as well as the
    hotline referral service. She also teaches courses for APA's
    fundamental payroll certification and certified payroll
    professional designations.
        She received a meritorious service award in 2003 and the
    special recognition award in 2007. At the State level, she has
    served as president of both the northern life and, I know this
    is going to be a tough one, Matanuska-Susitna Valley--is that
    pretty close--chapters. Ms. Nelson currently works as payroll
    manager for Alutiiq LLC, a company that provides government
    contracting service.
        Welcome to you.
        Our third witness is Harley Duncan. Mr. Duncan is the
    executive director of the Federation of Tax Administrators and
    the chief executive officer of the National Association of
    State Tax Administration Agencies. FTA represents the revenue
    departments of each of the 50 States plus D.C. and New York
    City and carries out a program of research, information
    sharing, training, inter-governmental coordination, and Federal
    representation.
        Prior to joining the FTA, Mr. Duncan served as secretary of
    the Kansas Department of Revenue and was responsible for
    administration of major State taxes as well as motor vehicle
    registration, drivers licensing, alcoholic beverage control,
    and property tax oversight. He is a frequent lecturer and
    speaker at national and regional tax conferences and meetings
    and has written several tax articles. Mr. Duncan regularly
    testifies before congressional Committees on matters affecting
    State and local taxation.
        We want to welcome you this afternoon as well.
        Our final witness is Walter Hellerstein. Professor
    Hellerstein joined the University of Georgia's School of Law
    faculty in 1978 and was named Francis Shackelford distinguished
    professor of taxation law in 1999. He teaches in the area of
    State and local taxation, international taxation, and Federal
    income taxation.
        Professor Hellerstein is co-author with his late father of
    both the leading treaties on State taxation, State Taxation
    Volumes I and II, which probably gave me nightmares as a law
    student, and the leading casebook on State and local taxation,
    State and Local Taxation. In 1992 Hellerstein received the
    multi-state tax commission's 25th anniversary award for
    outstanding contributions to multi-state taxation.
        I want to thank all of you for your willingness to
    participate in today's hearing. Without objection, your written
    statements will be placed into the record. And we are going to
    ask that you limit your oral testimony to 5 minutes.
        You will note that we have a lighting system that we try to
    keep on top of, let us be honest, but don't always. When you
    begin your testimony, you will get a green light. After 4
    minutes, the light will turn yellow.
        It serves as a warning that you have one minute left to
    give your testimony. When it turns red, that means your time
    has expired, and we would appreciate it if you could just
    conclude your final thoughts so that we can move on to the next
    witness.
        After each witness has presented his or her testimony,
    Subcommittee Members will be permitted to ask questions subject
    to the 5-minute limit.
        And so, at this time, I would invite Mr. Lindholm to please
    proceed with his testimony.

       TESTIMONY OF DOUGLAS L. LINDHOLM, PRESIDENT AND EXECUTIVE
          DIRECTOR, COUNCIL ON STATE TAXATION, WASHINGTON, DC

        Mr. Lindholm. Thank you, Madam Chairwoman and Ranking
    Member Cannon and Congressman Johnson. I very much appreciate
    the opportunity to be here and the fact that you are holding
    this hearing. As indicated, my name is Doug Lindholm. I am
    president and executive director of the Council on State
    Taxation. Our membership consists of almost 600 multi-state
    businesses engaged in both interstate and international
    commerce.
        I realize that time is somewhat short today, so let me just
    make three points regarding the bill before us today, House
    bill 3359. First of all, as opening statements attest, this is
    indeed a widespread problem that we feel Congress is best
    suited to resolve. Secondly, the bill contains a simple and
    practical solution to that problem. Third, we feel that
    solution very effectively balances State sovereignty issues
    with Congress' interest in resolving burdens on interstate
    commerce.
        Now, let me elaborate briefly on some of those. First of
    all, with regard to how widespread the problem is, one of the
    greatest strengths of our economy is that we have an
    increasingly nimble and mobile workforce, national workforce.
    Those of you that have spent any time in an airport recently
    realize that thousands of employees are sent by their employers
    on an almost daily basis to nonresident States to work in those
    States. Most of those trips are temporary in nature.
        Typically they will travel out, conduct some business, and
    then fly back to their State of residence. Unfortunately, the
    41 States that impose a personal income tax have widely
    diverging rules for determining two things: one, when the
    liability for that employee attaches and two, when the
    withholding obligation for that employee's employer attaches.
        Some States attach a liability the moment you set foot in
    the State. Some States have a days threshold. Arizona and
    Hawaii, to name two, have a 60-day threshold similar to what we
    are proposing. Others have a dollar threshold, an earnings
    threshold. And still others have a combination of a days and a
    dollar threshold. And there is an attachment to my testimony
    that does a pretty good job of laying this out in a map.
        A key point I would like to make is that this is not just
    an issue for large corporations. It impacts small businesses,
    nonprofits, State and local governments, hospitals, churches,
    universities, anyone who has employees that travel regularly
    for work.
        Point two, we think this is a simple and practical
    solution. And essentially what it does is it creates a Federal
    threshold of 60 days for temporary work assignments in
    nonresident States. And another point is that for anything up
    to 60 days the employee would remain taxable in their State of
    residence.
        Now, I am sure we will get the question, why 60 days? We
    conducted a fairly extensive survey of our membership, our
    member companies. And 60 days came back as the figure that our
    employers felt resolved most of the problems.
        First of all, that time period covers the vast majority of
    employee travel. Secondly, if you start shortening that time
    period, there is a--it becomes more and more likely that
    employees will inadvertently or unwittingly back into the State
    rules.
        Secondly, if you start to shorten that time period, it
    increases the possibility that there will be arguments over
    what constitutes a day or what are the duties that they are
    performing for employment in a day. The 60 days allows that
    company to focus on that small set of employees that actually
    travel for long-term work assignments.
        The second question I would like to address is that why no
    dollar threshold. I would like to point out that we have been
    working with the State administrators on this issue for 2
    years, or discussing it with them for 2 years. And we know that
    this is a concern for States. But after considering this dollar
    threshold, we ultimately rejected it because it would actually
    make the compliance burden greater in many cases than it is
    now.
        Employers would be forced to track every employee on a
    daily basis, compare that with sensitive payroll data, and then
    make allocations to the States where they travel. And all this
    before the employee has filed a single tax return. So although
    we are sympathetic to State concerns, we feel that that really
    would create a greater compliance burden.
        A third point, we really do think that this solution
    strikes the proper balance between individual State concerns
    over sovereignty and revenue and national concerns of Congress
    over reducing burdens on interstate commerce. We have got a
    fiscal note attached, and we feel that the impact on States is
    negligible. For all 50 States, the net reduction in personal
    income tax revenues is estimated to be 100 of 1 percent, .01
    percent.
        And again, I want to point out that we had been working on
    this issue with tax administrators for several years. We very
    much appreciate their constructive engagement. But this is an
    issue that if left unresolved will only grow in scope and
    complexity. Accordingly, we very much urge your support, thank
    you for your support. And I would be happy to answer any
    questions.
        [The prepared statement of Mr. Lindholm follows:]
                   Prepared Statement of Douglas L. Lindholm

        Ms. Sanchez. Thank you. We appreciate your testimony.
        Ms. Nelson, you may begin your testimony.

      TESTIMONY OF DEE NELSON, PAYROLL MANAGER, ALUTIIQ, LLC AND
    SUBSIDIARIES, ANCHORAGE, AK, ON BEHALF OF THE AMERICAN PAYROLL
                              ASSOCIATION

        Ms. Nelson. My name is Dee Nelson. And I am speaking today
    on behalf of the American Payroll Association in favor of H.R.
    3359. The American Payroll Association is a nonprofit payroll
    association with more than 23,000 members. Most of our members
    are the payroll managers for their employers. And some of our
    members work for payroll service providers who in turn process
    the payrolls of another 1.5 million employers.
        I have been a payroll professional for 17 years, of which
    10 of the last have been with a multi-state company. I have
    been in this environment, so I know firsthand the problems that
    employers and employees face in trying to manage their way
    through multi-state tax requirements.
        Even in the case of an employee who resides in one State
    and works throughout the year in another State, State and local
    tax withholding and reporting can be very complicated. The
    employer has to verify the employee's State of residence, check
    whether the two States have a reciprocity agreement, analyze
    the tax laws of both States, and likely withhold tax for both
    States and prepare a form W-2 for both States.
        Of the 41 States with income tax withhold, most tax all
    wages earned within their borders by residents of other States.
    States have widely varying de minimis amounts, but need to be
    exceeded before withholding is required.
        Just as the United States taxes its citizens and residents
    on their worldwide income, so do the States impose a tax on
    their residents who earn income outside their borders. If the
    employer has a business connection within the employee's State
    of residence, it generally must withhold tax for the State of
    residence in addition to the State in which the services are
    performed. Besides the withholding requirement, each State also
    has its own wage reporting requirement.
        I offer this as background on how much more complicated it
    becomes when an employee has a temporary assignment to another
    State. Whenever an employer sends an employee to a worksite
    outside of the State in which the employee normally performs
    services, the requirements that are then imposed on the
    employer, such as to register for the withholding account and
    to withhold tax, creates a very burdensome process.
        As a payroll professional it is my duty to ensure that
    taxation is happening properly for the State in which the
    employee is working, as well as the State in which the employee
    claims residency. What I do for an employee who is a California
    resident who temporarily goes to work in New York is completely
    different from what I do for the same employee if he or she
    goes to work in New Jersey or Georgia.
        If I send an employee who is an Oregon resident to
    temporarily work in New York, New Jersey, or Georgia, I will be
    required to handle it entirely differently than I did for the
    California resident. The current process is not only
    burdensome, but it is costly to both employees and employers.
        As a multi-state employer for the company I work for, not
    only are we required to withhold taxes for each of the States
    in which our employees may temporarily work, but we also have
    the responsibility to register our business in each of the
    States in which we are required to pay the tax. The
    registration process for businesses can be just as burdensome
    as trying to manage the tax itself.
        This process is very time consuming and utilizes many of my
    payroll department staff resources for a small group of our
    employees. Our employees are also burdened. Each employee has
    to file a State personal income tax return for each State for
    which tax was taken from their pay. For some of our employees,
    this can mean up to eight State tax returns in addition to the
    one for their home State.
        Most of the States have thresholds of income below which no
    income tax is due. Payroll systems have no way of detecting the
    length in which an employee will be in any State, so State
    withholding is taken even for someone who spends only 1 week in
    that State out of the entire year. In such a situation, the
    employee, of course, has to file a State personal income tax
    return and will likely get a refund on all of that withholding.
        So, because there is no standard time period before
    withholding is required, employers have to withhold tax, report
    wages, employees must file income tax returns, and in cases
    like these, States have to process wage reports and income tax
    returns of individuals for whom they will refund all the taxes
    withheld. That is a lot of time, effort, and burden with no
    positive return for the employer, the employee, or the State.
        At my company, to assist our employees and to ensure we can
    keep their positions filled, we pay for preparation of their
    additional tax returns. This costs our company approximately
    $50,000 annually.
        I have told you about the processes and burdens at my
    company. However, it certainly can be said that due to the
    extreme complexity of the varying current State tax
    regulations, there are many companies that are not withholding
    properly due to ignorance or due to lack of systems, personnel,
    time, money, or other resources to uphold the complex rules.
        More employers will comply with a law that is uniform
    across all States and localities and that is federally
    supported, versus the current patchwork of laws of which an
    employer might not even be aware. The American Payroll
    Association and its 23,000 members strongly recommend that this
    legislation be considered and enacted.
        And I thank you for your time you have allowed me today.
    And I hope to see this legislation passed.
        [The prepared statement of Ms. Nelson follows:]
                        Prepared Statement of Dee Nelson

        Ms. Sanchez. Thank you, Ms. Nelson. We appreciate your
    testimony.
        At this time, I would invite Mr. Duncan to give his
    testimony.

     TESTIMONY OF HARLEY T. DUNCAN, EXECUTIVE DIRECTOR, FEDERATION
                 OF TAX ADMINISTRATORS, WASHINGTON, DC

        Mr. Duncan. Madam Chairwoman, Members of the Committee, my
    name is Harley Duncan. I am the executive director of the
    Federation of Tax Administrators. I appreciate the opportunity
    to appear before you on H.R. 3359 to present the views of State
    tax administrators.
        The federation is an association of the principal tax
    administration agencies in each of the 50 States, D.C., New
    York City, and Puerto Rico. Our policy on this matter is
    attached to my testimony. It was adopted by our membership in
    Chicago, and amplified last week by our board of trustees.
        As a preliminary matter, while I will be speaking to States
    because that is who I represent is States, the issues involved
    in this bill and I think the comments I make also apply to a
    fair number of local governments that apply and impose income
    taxes, particularly cities of St. Louis, Kansas City,
    Philadelphia, and a number in Ohio and Kentucky as well.
        The federation is opposed to H.R. 3359 as that bill has
    been introduced. We have three major policy objections to the
    issue.
        The first is that it represents a substantial intrusion
    into State tax sovereignty and authority, the authority of
    States to design a tax system that meets their needs within the
    contours of the Constitution and to impose tax on economic
    activity that occurs within its borders. If enacted as
    introduced, it would leave States exposed to a situation in
    which an individuals could make extensive use of the
    marketplace in the State without making a contribution in terms
    of income tax paid.
        Second, it represents a very substantial and radical
    departure from current State tax policy with respect to income
    taxes. Namely, States employ the source tax principle as does
    the Federal Government. And income is generally taxed where the
    services giving rise to the income are performed. This bill
    with the 60-day threshold will substantially turn that on its
    head for any number of employees and individual and convert the
    country to essentially a residency-based system.
        There are States that use the residency-based. There are
    States that have reciprocal agreements with one another. But
    they have chosen to do so voluntarily, generally, where the
    economies of those States match up and the tax systems of those
    match up. This would be a mandated reciprocal arrangement by
    the Congress.
        And finally, we believe that H.R. 3359 goes well beyond
    where the Congress has been in the area of regulating
    individual income taxation in the past. If you look across the
    various enactments, they are generally of two types. The first
    is where there is a substantial Federal interest involving
    either Federal employees, members of the military service,
    employees on Federal installations.
        The second is where the workers are regularly engaged in
    interstate commerce: the railway workers, the airline workers,
    the motor carriers where it is their job to travel from State
    to State. Those are really the only two areas where the
    Congress has enacted bills in the individual income tax area.
    To step in to the extent that this one does, we think, is a
    radical departure.
        This is not to say that we have our head in the sand or are
    unmindful of the burdens that are imposed by the current
    system. Complying with the current system where there is no de
    minimis threshold on either liability or withholding is indeed
    difficult and probably impractical. That is why a number of
    States, several States have moved to address the issue on their
    own. That is why we have worked with the Council on State
    Taxation to try to fashion legislation that could be workable.
        If you desire to move forward in this, we have raised a
    number of issues in my written remarks that we would ask that
    you address and we would be willing to work with you. Two most
    important ones are first, the 60-day rule.
        The 60-day rule, we believe, goes well beyond what is
    necessary to deal with the burden issue. If in 60 days you
    can't figure out where you are going to be, then I think we
    have some more issues than just withholding.
        You can deal with it in far less than 60. Sixty days gives
    a person a quarter of a year of operating within a State
    without owing a tax liability. And we think it goes well beyond
    what is necessary.
        The second issue that we have raised for you is that our
    policy provides that if a threshold in a bill such as this is
    enacted that it should have a dollar component as well. And we
    would suggest that the withholding can be triggered off of
    days, but there needs to be a backstop on if the employee's
    income exceeds some threshold in a State, he or she has a
    liability to that State.
        Otherwise, State revenue systems are exposed. And we
    believe that the days only threshold leaves the systems too
    exposed. We believe a days and a dollar can be done in a
    fashion that substantially alleviates the burden and doesn't
    expose State systems to the risk that they would under the bill
    that is introduced.
        Thanks very much. We look forward to working with you in
    the future.
        [The prepared statement of Mr. Duncan follows:]
                     Prepared Statement of Harley T. Duncan

        Ms. Sanchez. Thank you, Mr. Duncan. I appreciate your
    testimony.
        And finally, I would invite our final witness, Mr.
    Hellerstein, to please begin his testimony.

         TESTIMONY OF WALTER HELLERSTEIN, FRANCIS SHACKELFORD
    DISTINGUISHED PROFESSOR OF TAXATION LAW, UNIVERSITY OF GEORGIA
                       SCHOOL OF LAW, ATHENS, GA

        Mr. Hellerstein. Thank you very much, Madam Chairwoman. I
    am very grateful for the opportunity to testify before this
    Subcommittee and to have the special privilege of testifying
    before a fellow Georgian, Congressman Johnson.
        My testimony addresses three specific questions, the first
    two of which I think should not be controversial at all. First,
    does Congress have the constitutional authority to enact H.R.
    3359? Second, is there historical precedent for Congress
    enacting legislation analogous to H.R. 3359? And finally, the
    more controversial question, is this an appropriate exercise of
    congressional power?
        Question one, I think it is clear the Congress has the
    authority under the commerce clause to enact H.R. 3359. The
    case law in this area is clear that Congress has extremely
    broad powers to enact legislation that affects interstate
    commerce. Indeed, when the court has dealt with or addressed
    issues involving State taxation in particular, it has stated in
    very broad terms that Congress essentially can do what it wants
    in this area.
        Just to read you one quote, ``It is clear that the
    legislative power granted by Congress--to Congress by the
    commerce clause would amply justify the enactment of
    legislation requiring all States to adhere to uniform rules for
    the division of income.'' So presumably they can also create
    uniform rules for the withholding of income or when tax
    liability occurs. I think that really should be a
    noncontroversial issue.
        The second question is whether there is precedent for this
    kind of legislation. Congress has never enacted really broad-
    based legislation regulating State taxation. There is no
    uniform apportionment formula. There are no broad-based rules
    that limit the States in what they can do.
        But there is a lot of precedent, really, I think, quite
    analogous to H.R. 3359, for Congress enacting specific
    legislation targeted at specific problems. Indeed, Harley
    Duncan just referred to one type of legislation, taxes on
    employees engaged in interstate transportation. They are quite
    analogous, I think, although certainly a narrower target, to
    dealing with the problems of income taxation of employees
    engaged in water transportation, air transportation, motor
    carrier transportation.
        Congress has also acted to restrict the power of States to
    tax nonresidents, retirement income. And I have this whole
    litany in my testimony, and I don't want to use all my time up
    on this list. But just to go through some of the areas,
    Congress has limited States in their power to tax interstate
    businesses when they sell tangible property and do no more than
    solicit in the State. Congress has limited power, limited the
    States' power to tax--to impose discriminatory taxes on
    railroads, on motor carriers, and on air carriers.
        Congress has limited the States' power to impose taxes that
    affect a pension plan under the Employees Retirement Income
    Security Act. So it seems to me this is something for which
    there is really quite substantial precedent. Just 2 days ago by
    voice vote, Congress unanimously re-extended the Internet Tax
    Freedom Act, another example of targeted legislation.
        Finally, and this is a more--probably the only
    controversial question here is--is this an appropriate exercise
    of congressional power. And in my opinion, I think it is.
        First, I really do wish to make it clear that I believe the
    States have a legitimate interest in assuring that workers who
    earn income in the State pay their fair share of the State tax
    burdens for the benefits and protections that the State
    provides to them. But this legitimate interest has to be
    balanced against the burdens that are imposed on multi-state
    enterprises and on the conduct of interstate commerce by
    uncertain, inconsistent, and unreasonable withholding
    obligations imposed by the State.
        Yes, I think it is telling that the States themselves
    recognizing this problem have to some extent tried to alleviate
    it through their own voluntary reciprocal exemption agreements.
    As Bill Gates would say, a known problem.
        In the end, although there may well be room for additional
    fine tuning of the statutory language to assure that the right
    balance is struck between the States' legitimate interest in
    revenue raising and the Nation's interest in preserving our
    national common market, I believe that a targeted response to
    the specific problem reflected in H.R. 3359 is an appropriate
    exercise of congressional commerce power. Thank you.
        [The prepared statement of Mr. Hellerstein follows:]
                    Prepared Statement of Walter Hellerstein

        Ms. Sanchez. Thank you very much for your testimony.
        We are now going to begin our questioning. And I will begin
    by recognizing myself for 5 minutes.
        Mr. Lindholm, in your written testimony for today's hearing
    you argue that a dollar amount threshold as opposed to a days
    worked threshold like the one in H.R. 3359 would be more
    burdensome because each employee would have to be tracked on a
    daily basis. And it seems that in either a days worked or a
    dollar amount threshold the employer is going to need to be
    tracking the employee anyway. So I am interested in knowing why
    you think that one is a superior method than the other.
        Mr. Lindholm. Well, two points, Madam Chairwoman. Let me
    address first with respect to the 60 days. Most travel is
    temporary in nature. And most employees don't travel anywhere
    close to the 60 days. So they automatically would not be within
    that pool of employees that an employer would track.
        Secondly, with respect to the dollar threshold itself, it
    really does require not just a tracking of their whereabouts,
    but a tracking of very sensitive payroll data within the
    company. And it increases the exposure of that payroll data
    among employees of the company, which obviously is a very
    sensitive thing.
        And, you know, I think the FTA has proposed a combination
    dollar-day with a dollar backstop. The other issue there is
    that it would, in effect, separate the liability question,
    could make that rule distinct from the withholding obligation.
    And when you have got those two operating under separate rules,
    it increases the complexity greatly.
        Ms. Sanchez. But how would you respond to Mr. Duncan's
    concern that 60 days is quite a long time before triggering the
    liability?
        Mr. Lindholm. You know, Congress has enacted several, as
    Professor Hellerstein pointed out, several protective or
    analogous pieces of legislation. Airline employees--it is their
    resident State or the State where they earn 50 percent or more
    of their pay. For motor carrier employees, rail carrier
    employees, Members of Congress, they, in effect--Congress has,
    in effect, enacted a 365-day threshold.
        And, you know, the--from our standpoint, a number of States
    also have enacted reciprocal agreements, which are, in effect,
    a 365-day threshold. So in our sense, the 60-day pretty much
    draws a very effective line in the sand for those traveling
    employees.
        Ms. Sanchez. Mr. Duncan, I want to give you an opportunity
    to respond to some of these complexities. Now, you are
    advocating a clarification of the definition of what a day
    worked is. Can you talk about that?
        Mr. Duncan. Yes, that is right. In our testimony, we have
    suggested that the definition of day needs to be changed. As it
    is contained in the bill--and I apologize I don't have a copy
    in front of me. But it says a day is defined as a day in which
    the employee performs more than 50 percent of the work duties
    in a State.
        To me, I don't know what that means. I don't know what
    performing more than 50 percent of the work duties are. Is it
    by time? Is it by value? Is it--I don't want to be flip, but
    how hard it was? So we have suggested that it should be--a day
    should be a day or any part of a day.
        And remember we say that because that is the easiest thing
    to count. That is the least controversial thing. And we are
    only using it to determine whether the threshold is met. And
    for that reason, we think the day or any part of a day is
    workable.
        That is the way a number of States are now. That is the way
    Federal law with respect to the taxation of nonresident aliens
    that are working in the State operates as well.
        Ms. Sanchez. Thank you, Mr. Duncan.
        Ms. Nelson, I am interested, since you are the expert on
    payroll, under the 60-day threshold, if an employee hits the
    60-day threshold late in the year, the employee's paycheck
    would reflect withholding for the 60 days. For some employees
    that could be a huge dent in their paycheck.
        Although a lower threshold is a possibility and would seem
    like less of a hardship on an employee once they hit that, what
    are some of the things that a payroll department or company
    could do to perhaps lessen the hardship of a 60-day trigger?
    You know, could they spread those out, those withholdings out
    over several paychecks? Do you have any thoughts on that?
        Ms. Nelson. Well, I think just addressing some kind of
    threshold across all States would first just ease my burden as
    a payroll professional.
        Ms. Sanchez. I understand.
        Ms. Nelson. Yes, and so----
        Ms. Sanchez. Maybe you could look at it from the
    perspective it also keeps you employed.
        Ms. Nelson. Yes, there is that. But because of DOL I have
    plenty of those job securities.
        So to answer your question, yes, we could find a way to,
    you know, pass those payments off during, you know, each check
    retrospectively for however many pay periods. I mean, there
    would be ways to manage it.
        Ms. Sanchez. You mean there are ways to help minimize that?
    Okay.
        Ms. Nelson. Yes.
        Ms. Sanchez. My time has expired.
        And at this time, I would invite Mr. Johnson for his 5
    minutes of questions.
        Mr. Johnson. Madam Chair, my friend from North Carolina has
    an important engagement that he needs to attend to, so I would
    yield my position and allow him to move in front of me, if that
    is okay with the Chair.
        Ms. Sanchez. Excellent. I think that is fine.
        Mr. Watt, you are recognized for 5 minutes.
        Mr. Watt. I thank the wonderful Chairperson of this
    Subcommittee. And I thank my colleague from Georgia for
    allowing me to go in front of him.
        I think maybe before I ask a question I will confess that
    our Chairperson who Chairs this Subcommittee may be now
    understanding why I opted not to become the Chair of the
    Subcommittee. It was the combination of Internet taxation. This
    individual issue that we are having the hearing about today,
    remote sales taxation, and collection of those remote sales,
    and physical presence--those are about the four most difficult
    taxation issues that are really out there. And so, I decided
    that Chairing a Subcommittee on financial services and dealing
    with predatory lending was actually easier than dealing with
    this.
        But I am delighted that the Chair is taking on these issues
    because there needs to be more discussion about it. And she has
    done a masterful job of passing the Internet taxation
    moratorium. And I saw the Senate and everybody is now onboard
    with that. So if she can pull that rabbit out of that hat for
    Internet taxation, maybe she has got three more rabbits in the
    hat. And if anybody can do it, I have confidence that my
    Chair----
        Ms. Sanchez. But no pressure, right, Mr. Watt?
        Mr. Watt. No pressure, no pressure. But I am confident that
    she can do it.
        These are difficult issues. And as Ranking Member of the
    Subcommittee for two or three or however many--it seemed like
    forever, I got an appreciation of how difficult the issues are.
        Let me ask Mr. Duncan first. One of the things that always
    was told to me in the context of both this issue and the remote
    sales issue was that there was a series of negotiations going
    on and there might be some possibility that all the
    stakeholders would find common ground and make this easier for
    us. I think in the remote sales area, we even passed some kind
    of threshold that said if a certain number of States passed a
    model statute then the Federal Government would act.
        Talk to me, Mr. Lindholm and Mr. Duncan, about the
    impediments to you all getting together and working something
    out that is mutually satisfactory. Because the States obviously
    have a very serious interest in this issue, as do businesses
    and employees. What is the status of those discussions? And are
    you all just deluding us when you say these discussions are
    going on and we are going to work this out at some point?
        Mr. Duncan. I don't think we are trying to fool you. I
    don't know anything about financial services, but maybe I could
    learn so I could leave these issues sometime, too.
        Mr. Watt. If you want to go over and tackle the massive
    foreclosures that are going on, we will welcome you over there.
        Mr. Duncan. No, thank you. As I indicated in our testimony,
    we have been in conversations and discussions with the business
    community about this. We have had a working group of State
    people to make sure that we understand the bill and that we try
    to get some real world experience from them.
        In addition, I can guarantee you that our people understand
    the burden issues and the difficulties of compliance. We have
    not at this point had a board action from our organization that
    says we are prepared to begin negotiating or at least, you
    know, enter into something to resolve this issue with the
    Council of State Taxation. I am to report back based on this
    hearing and we will, I am certain, have further conversations
    because our people do understand the burden issue and that it
    needs to be addressed.
        Mr. Watt. I know you want to respond. But let me just say I
    applaud the Chair for taking on the issue. It seems to me that
    the ramping up of this as an issue and the movement of
    employees as much as they move kind of ramped up at the same
    time that technology was ramping up. And one would hope that
    there would be some technological answer to this that would
    allow the movement.
        I don't know that technology or the system--as you say in
    one place in your testimony, Ms. Nelson, there is no system to
    take care of this, the way it is being done now. But I don't
    see any system, any payroll system to take care of it under the
    60-day threshold, either. And that is not a knock on the 60-day
    threshold.
        I just think there are some real technical problems. And I
    hope technology will make some advances at the same time that
    movement makes advances to make this easier. I mean, it is just
    a very, very difficult issue.
        I don't envy you, Madam Chair. But I am going to yield back
    my time to you and rely on you to pull those other three
    rabbits out of the hat.
        Ms. Sanchez. Thank you, Mr. Watt. And we appreciate your
    participation in today's hearing.
        Now I think it is appropriate that we hear from one of the
    bill's authors and allow him to ask questions that he may have.
        So, Mr. Johnson, you are recognized.
        Mr. Johnson. Thank you, Madam Chair.
        Mr. Duncan, you have indicated in your testimony or you
    stated that complying with the current system is burdensome and
    impractical for businesses. Is that a fair assessment?
        Mr. Duncan. I think the way I framed it was that where
    there is no de minimis standard in a State, where there isn't a
    15-day or 20-day de minimis threshold and where liability and
    withholding presumably would trigger on day one, I think we
    would all say that is impractical.
        Mr. Johnson. And we just have a multiplicity of rules now
    among the States that make the entire effort to collect income
    taxes from nonresidents, temporary workers impractical and
    burdensome at this point, even for the tax administrators. Is
    it not?
        Mr. Duncan. There are certainly issues in terms of
    collecting tax from nonresidents. First of all, you have to
    have the information flows and reports so that you know who has
    performed services, the income earned from the State. Then
    there is the collection issues as well.
        Mr. Johnson. Pretty much voluntary information and
    collections that have to be forwarded to you by the businesses.
    And it definitely can impact the amount of money that States
    collect for income taxes due. Is that correct?
        Mr. Duncan. Yes. I mean, there is--you know, what we would
    like to have is the withholding, the voluntary remittances
    withholding following up with the information reports. I think
    it is not----
        Mr. Johnson. It is difficult for businesses to comply, say
    a small business, a number of small businesses. It is difficult
    for them to understand what the rules are and then perhaps they
    will not forward those payments in, if you will.
        Mr. Duncan. Just two quick points. I think you are right,
    that if we can make the rules clear and administerable,
    compliance can improve, particularly in the small business
    community. Second, there are a number of States with
    significant enforcement programs in the nonresident area. But I
    wouldn't argue your central point that if it is simpler and
    clearer, compliance will improve. The question, of course, is
    one of balance as to how to construct the threshold and where
    that threshold ought to be.
        Mr. Johnson. Let me ask this question. Has there been a
    collective effort by the States to come up with uniform and
    simple method for the collection for nonresidents?
        Mr. Duncan. There has not been an effort that has gathered
    the 41 States together to do it. We have areas where the States
    share borders, share economies, have similar tax systems where
    they have had reciprocity agreements. I think what----
        Mr. Johnson. It would be ideal, would it not, that there
    would be some national uniform standard that everyone could
    stand easily and comply with?
        Mr. Duncan. That would certainly make the task of
    withholding knowing when one has an obligation simpler.
        Mr. Johnson. But you have no objection to a Federal
    solution to this problem? You just have a problem with the
    substance of the solution that has been proposed. Is that a
    fair assessment?
        Mr. Duncan. The position of our group is that the bill as
    introduced goes too far and that we are in a position to have
    to oppose the bill as it has been introduced. We have tried to
    lay out the issues as clearly as we can.
        Mr. Johnson. Okay. I understand. So you really would like
    to see a dollar threshold along with a threshold as far as
    number of days?
        Mr. Duncan. We believe that that can bring all the benefits
    of the burden reduction and at the same time, minimize the risk
    and exposure of States, yes, sir.
        Mr. Johnson. Do you have any specifics on both of those
    points? How many days would be suitable to tax administrators
    and what dollar amount would be suitable?
        Mr. Duncan. I am not in a position to be able to give those
    to you today. We don't have those at this point. In part there
    is a couple of moving parts here. There is a seesaw function to
    it that if the days threshold is relatively high, then perhaps
    the dollar threshold needs to be relatively lower or vice versa
    because we are trying to achieve a balance and reduce risk and
    exposure. And so, I think--I don't have a ready-made solution
    to provide you today on that.
        Mr. Johnson. Mr. Lindholm, would you care to weigh in on
    that?
        Mr. Lindholm. Yes, thank you, Congressman Johnson. First of
    all to address the issue of our efforts to resolve some of our
    differences, I very much appreciate the--you know, we have met
    with Harley and his group several times to talk about this
    issue. And I think we have a fundamental difference in
    perspective in that I think the States' viewpoint is a
    collective viewpoint of how this issue affects each
    administrator of a specific State.
        And that is rightly so. That is the job that they are hired
    to do. That is the job that they are appointed to do in some
    cases.
        But I would submit that we should view this from the
    perspective of how many more people would be in compliance. I
    think there is a tendency to say from a State administrator's
    perspective to look at this bill and say how many people are
    paying now that would not be paying in our State because of
    this change in the law. But if you look at this from a national
    perspective, then you can point a finger to how many more
    people would be able to comply with this law.
        Secondly, if I could address Mr. Watt's question about the
    technology, can we come up with technology to do this. Yes, it
    is possible, but at great expense. And I think the question
    that this Committee ought to address is although it is possible
    whether it is sensible to force companies to do so when a
    simple and practical solution is at hand that would prevent
    that.
        Ms. Sanchez. Mr. Johnson, your time has expired. But if you
    have further questions, I don't think there would be objection
    to some additional time.
        Mr. Johnson. Thank you, Madam Chair.
        Ms. Sanchez. I will recognize you for an additional 3
    minutes of questions.
        Mr. Johnson. Mr. Lindholm, would the Council on State
    Taxation be opposed to the threshold requirement that--a
    dollars feature as well as days? Is that something that you
    oppose in principle, and why?
        Mr. Lindholm. I think we would, Congressman. And I think
    the difficulty there is that any time you have a dollar
    threshold, you are forced to track, as I said, every employee
    that conceivably could spend time there and not just for
    those--for the day period, but for the--you know, everybody's
    dollar amount if they exceed that threshold.
        The second issue is that under their proposed solution,
    there is a tendency to look at--it bifurcates the tax liability
    with the--from the withholding obligation. And anytime you do
    that, you have got employees that are potentially under-
    withheld or over-withheld. And it complicates things
    tremendously for employers trying to withhold for the proper
    allocation of proper States.
        Mr. Johnson. Isn't it a fact, by the way, that most
    employees who have been--whose wages have been withheld to do
    their work in other States--isn't it a fact that most of them
    end up getting credits from that State because the amount of
    tax and the amount of wages earned is below the amount
    necessary for taxation?
        Mr. Lindholm. That is precisely correct. And let us say I,
    for example, travel to 10 States and happen to trigger whatever
    the--either the wage threshold or the day threshold in those
    States, I am then required to file a return in each of those
    States and then file a credit against my return in the state of
    Virginia. And again, all those 10 returns where I entered that
    threshold would not be necessary, since I am getting a lot of
    credit for that anyway.
        It ends up being a wash between State-to-State, unless, of
    course, there is a differentiation between the rates. But
    effectively the 60-day threshold would allow the resident State
    to continue withholding regardless of where they traveled,
    unless it was clear that that employee was on a long-term
    assignment and expected to be on a long-term assignment within
    that State, within the nonresident State.
        Mr. Johnson. Thank you.
        Ms. Sanchez. Thank you, Mr. Johnson. And I think this has
    been a very enlightening hearing trying to figure out how we
    can balance the interests of State and local governments'
    concerns about loss of revenue while eliminating some of the
    complexities and not having a uniform national standard.
        And it is an ongoing battle. While obviously there is not a
    complete agreement among everyone, my hope is that they will be
    able to incorporate some of the information that you have
    shared with us today and try to bring about a solution that is
    acceptable.
        I want to thank all of the witnesses for their testimony
    today. Without objection, Members will have 5 legislative days
    to submit any additional written questions which we will
    forward to the witnesses and ask that you answer as promptly as
    you can so that they can be made a part of the record. And
    without objection, the record will remain open for 5
    legislative days for the submission of any additional
    materials.
        Again, I thank everybody for their time and their patience.
    And this hearing on the Subcommittee of Commercial and
    Administrative Law is adjourned.
        [Whereupon, at 1:09 p.m., the Subcommittee was adjourned.]
                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

    Answers to Post-Hearing Questions from Douglas Lindholm, President and
         Executive Director, Council on State Taxation, Washington, DC

      Answers to Post-Hearing Questions from Dee Nelson, Payroll Manager,
    Alutiiq, LLC and Subsidiaries, Anchorage, AK, on behalf of the American
                              Payroll Association

        Answers to Post-Hearing Questions from Harley Duncan, Executive
           Director, Federation of Tax Administrators, Washington, DC

      Answers to Post-Hearing Questions from Walter Hellerstein, Francis
      Shackelford Distinguished Professor of Taxation Law, University of
                       Georgia School of Law, Athens, GA

                Prepared Statement of the American Institute of
                          Certified Public Accountants
        The American Institute of Certified Public Accountants (AICPA)
    appreciates the opportunity to submit this statement for the record to
    the Committee on the Judiciary, Subcommittee on Commercial and
    Administrative Law for the hearing on H.R. 3359, the ``Mobile Workforce
    State Income Tax Fairness and Simplification Act of 2007.''
        The AICPA is the national, professional association of CPAs, with
    more than 350,000 members, including CPAs in business and industry,
    public practice, government, and education; student affiliates; and
    international associates. It sets ethical standards for the profession
    and U.S. auditing standards for audits of private companies; federal,
    state and local governments; and non-profit organizations. It also
    develops and grades the Uniform CPA Examination.
        Approximately 42% of our membership is made up of members in public
    practice. Of our members in public practice, approximately 75% are in
    firms of 10 people or less. This numbers 46,500 firms.
        The AICPA supports H.R. 3359, the Mobile Workforce State Income Tax
    Fairness Act of 2007. Businesses, including small businesses and family
    businesses that operate interstate, are subject to a significant
    regulatory burden with regard to compliance with nonresident state
    income tax withholding laws. These burdens translate into an
    administrative burden on these entities that takes resources from
    operating their business. Also, the cost must be passed on to the
    entity's customers and clients. Having a uniform national standard for
    state nonresident income tax withholding would significantly ameliorate
    these burdens. And concomitant with this is the need for a de minimis
    exemption from the multi-state assessment of state nonresident income
    tax.
        Accounting firms, including small firms, do a great deal of
    business across state lines. Many clients have facilities in nearby
    states that require an on-site inspection during the conduct of an
    audit. Additionally, consulting, tax or other non audit services that
    CPAs deliver may be provided to clients in other states, or to
    facilities of local clients that are located in other states. Many
    small business clients of CPAs also have multi-state activities. All of
    these small businesses, accounting firms and their clients are affected
    by nonresident income tax withholding laws.
        There are 41 states that impose a personal income tax on wages and
    partnership income, and there are many differing tax requirements
    regarding the withholding for income tax of nonresidents among those 41
    states. A number of states have a de minimis threshold, or exemption
    for nonresidents working in the state before taxes must be withheld and
    paid. Others have a de minimis exemption based on the amount of the
    wages earned, either in dollars or as a percent of total income, while
    in the state. The rest of the states that impose personal income taxes
    on nonresident income earned in the state require only a work
    appearance in the state. Further complicating the issue is that a
    number of these states have reciprocity agreements with other, usually
    adjoining, states that specify that they will not require state income
    tax withholding for residents of the other states that have signed the
    reciprocity pact.
        It is not difficult to understand that the recordkeeping,
    especially if business travel to multiple states occurs, can be
    voluminous. And the recordkeeping and withholding a state requires can
    be for as little as one day's work in another state. Additionally, the
    amount of research that goes into determining what each state law
    requires is expensive and time consuming, especially for a small firm
    or small business that does not have a great amount of resources. A
    small firm or business will often be required to engage outside counsel
    to research the laws of the other states. And this research needs to be
    updated yearly to make sure that the state law has not changed. Having
    a uniform national standard would eliminate the burden of having to
    research state law for each state where work is performed.
        In addition to uniformity, there needs to be a de minimis
    exemption. AICPA believes that the 60 day limit contained in H.R. 3359
    is fair and workable. The economic changes that have occurred as our
    country has gone from local economies to a national economy are huge.
    Where businesses once tended to be local, they now have a national
    reach. This has caused the operations of even small businesses to move
    to an interstate basis. Because of the interstate operations of these
    companies, many providers of services to these companies, such as CPAs,
    find that they are also operating, to some extent, on an interstate
    basis. And with the ease of communication through the internet, and the
    ease of travel, the ability to provide some services far from home is
    not an issue, as it once was. What once were local taxation issues have
    now become national in scope, and burdens must be eased in order to
    promote this interstate commerce and insure it runs efficiently.
        Many smaller firms and businesses use third party payroll services
    instead of performing that function in house. A number of third party
    payroll service providers are unable to handle multi-state reporting.
    They often limit, for example, reporting to two states, the state of
    residence and the state of employment. Additionally, third party
    payroll service providers generally report on a pay period basis (e.g.,
    twice per month, bi-weekly, etc.) as opposed to daily, which can be a
    necessity when interstate work is performed. These reporting issues
    require employers to track and manually adjust the reporting and
    withholding to comply with various state requirements. The alternative
    is to pay for a much more expensive payroll service. H.R. 3359 would
    provide significant relief from these burdens.
        The 60 day limit in the bill ensures that the interstate work for
    which an exemption from withholding is granted does not become a means
    of avoiding being taxed or shifting income tax liability to a state
    with a lower rate. Instead, it insures that the primary place(s) of
    business for an employee are where that employee pays state income
    taxes.
        There is one amendment to the bill that the AICPA would recommend.
    Once the 60 day threshold is reached, the employee should pay
    withholding and state income taxes in the host state for all wages
    earned going forward. The withholding should not be made retroactive
    for the first 60 days. To do so would be unfair to the employee. If the
    reach is retroactive, then on the 61st day of working in the other
    state, the employee would owe withholding to that state for the 60 day
    period. This could be a substantial amount, which could even cause the
    employee to immediately be in an underpayment penalty situation. It
    would be unfair to require the employee to pay this much money,
    especially where the employee is a resident of one of the other 40
    states that imposes a state income tax. In that situation, the employee
    would have double paid withholding and would not receive a refund from
    the home state until tax returns are filed and refunds paid. Even
    should a state allow for current withholding and filing in the open
    payroll period, this could cause cash flow challenges for employees
    should they find themselves in a high tax rate jurisdiction.
        The AICPA appreciates the opportunity to submit this statement in
    support of H.R. 3359.

      Prepared Statement of Edward A. Zelinsky, Morris and Annie Trachman
        Professor of Law,\1\ Benjamin N. Cardozo School of Law, Yeshiva
                                   University
    ---------------------------------------------------------------------------
        \1\ For purposes of identification only. This statement expresses
    my personal views, not the views of any institution or group with which
    I am affiliated, professionally or otherwise.
    ---------------------------------------------------------------------------
        I strongly support H.R. 3359, the Mobile Workforce State Income Tax
    Fairness and Simplification Act of 2007. H.R. 3359 is a useful, indeed
    a long overdue, effort by Congress, using its authority under the
    Commerce Clause, to begin to rationalize the states' income taxation of
    nonresidents. The core concept of H.R. 3359 is compelling: In any
    calendar year, a state may tax the income of a nonresident employee
    only if such employee is ``physically present performing duties'' in
    the taxing state ``for more than 60 days.'' \2\
    ---------------------------------------------------------------------------
        \2\ H.R. 3359, Section 2(a)(2).
    ---------------------------------------------------------------------------
        However, H.R. 3359 in its current form is not enough and may
    unintentionally prove counterproductive. To be fully effective, H.R.
    3359 must be conjoined with H.R. 1360, the Telecommuter Tax Fairness
    Act of 2007. H.R. 3359 lacks any definition of physical presence and
    fails to forbid states from adopting doctrines like New York's
    ``convenience of the employer'' rule, doctrines which pretend that
    taxpayers are present in-state when in fact they are not.
        Consequently, H.R. 3359, if enacted into law without H.R. 1360 and
    its definition of physical presence, will likely be flouted by New
    York, deploying its employer convenience doctrine to push nonresident
    taxpayers over H.R. 3359's sixty (60) day minimum by treating out-of-
    state work days as days spent in New York. Moreover, H.R. 3359, if
    adopted without the safeguards of H.R. 1360, may encourage other states
    to emulate New York's employer convenience doctrine and thereby
    eviscerate the requirement that nonresident employees be physically
    present in the taxing state.
                                   background
        In 2005, I was privileged to testify before this subcommittee on
    the subject of nonresident income taxation and New York's employer
    convenience doctrine.\3\ I am something of a poster boy on this
    subject, having been the unsuccessful litigant in Zelinsky v. Tax
    Appeals Tribunal.\4\ In that case, New York took its standard position
    that the days I worked at my home in New Haven, Connecticut were, for
    tax purposes, to be deemed days I was present in New York, even though
    I was not. At its most basic, New York's notion of employer convenience
    decimates the concept of physical presence by treating nonresident
    employees, particularly those who work at home, as being in New York
    even when they are not.
    ---------------------------------------------------------------------------
        \3\ A joint hearing of this subcommittee and the Subcomittee on the
    Constitution was held on May 24, 2005. My testimony is on page 32 of
    the printed transcript of this May 24, 2005 hearing (Serial No. 109-27)
    and at 36 STATE TAX NOTES 713 (2005), 2005 STT 101-2.
        \4\ 1 N.Y.3d 85 (2003), cert. denied 541 U.S. 1009 (2004).
    ---------------------------------------------------------------------------
        New York's practices in this respect have been widely and correctly
    condemned as unsound as a matter of policy and unconstitutional as a
    matter of law.\5\ Most recently, three dissenting judges of New York's
    highest court condemned in the strongest terms New York's use of the
    employer convenience doctrine to impose New York's nonresident income
    taxes on Mr. Thomas Huckaby for working at his home in Nashville,
    Tennessee by pretending that, on those Tennessee days, Mr. Huckaby was
    in New York.\6\
    ---------------------------------------------------------------------------
        \5\ See, e.g., Nicole Belson Goluboff, New York Makes It Official:
    Double Taxing of Telecommuters Will Continue, 40 STATE TAX NOTES 877
    (2006); Walter Hellerstein, 1 STATE TAXATION (3rd ed. 2007)at para.
    20.05[4][e][i] (the Zelinsky decision ``does not withstand analysis'');
    William V. Vetter, New York's Convenience of the Employer Rule
    Conveniently Collects Cash From Nonresidents, Part 1, 42 STATE TAX
    NOTES 173 (2006); William V. Vetter, New York's Convenience of the
    Employer Rule Conveniently Collects Cash From Nonresidents, Part 2, 42
    STATE TAX NOTES 229 (2006).
        \6\ 4 N.Y.3d 427, 440 (2005), cert. denied 126 S.Ct. 546 (2005).
    ---------------------------------------------------------------------------
        Nevertheless, the New York Department of Taxation and Finance,
    supported by a majority of New York's highest court, persists in
    pretending that, for income tax purposes, nonresidents are present in
    New York on days when they are not. New York will not let logic stand
    in the way of revenue--particularly when the payors of that revenue are
    nonvoting nonresidents.
                           defining physical presence
        Consider against this background the definition of ``day'' embodied
    in H.R. 3359. Under that definition, a nonresident employee is deemed
    to have performed a day of services in the taxing state only ``if the
    employee performs more than 50 percent of the employee's employment
    duties in such State or locality for such day.'' \7\ This is a
    reasonable definition,\8\ perfectly appropriate for a sensible world.
    ---------------------------------------------------------------------------
        \7\ H.R. 3359, Section 2(d)(1).
        \8\ Though not an ideal definition, as it leaves unclear the metric
    for measuring whether the ``more than 50 percent'' test is satisfied.
    Is this a test of time spent on the job during the day in question? Or
    of the value of the employee's services? Or the relative importance of
    the tasks the employee performs during the day? H.R. 3359 does not say.
    ---------------------------------------------------------------------------
        But, in this context, we do not live in a sensible world. If the
    past is any indication (and I think it is), New York will respond to
    H.R. 3359 and its current definition of ``day'' by flouting that
    definition, declaring that a nonresident employee, under the employer
    convenience doctrine, is deemed to perform services in New York on days
    when such employee works at his out-of-state home or at any other out-
    of-state location which New York characterizes as having been chosen
    for the employee's convenience. New York will thereby propel
    nonresidents over the sixty day in-state minimum of H.R. 3359 by
    declaring (as New York does now) that out-of-state days should be
    treated for tax purposes as days spent in New York.
        When a nonresident employee seeks to enforce H.R. 3359 against this
    illogical approach, he will be required by federal law to challenge New
    York's taxes in New York's courts.\9\ And, as we saw in my case and in
    Mr. Huckaby's case, New York's courts, despite all of the U.S. Supreme
    Court case law to the contrary, uphold the New York tax commissioner
    when he declares, under the rubric of employer convenience, that
    employees who aren't in New York should be treated for tax purposes as
    though they are. Nothing in the current language of H.R. 3359 will
    compel New York's courts or its tax commissioner to reach a different
    conclusion. It is thus likely that New York, continuing current
    practice, will annually declare nonresidents to be in New York more
    than sixty (60) days based on work these nonresidents perform at their
    out-of-state homes and other out-of-state locations.
    ---------------------------------------------------------------------------
        \9\ Tax Injunction Act, 28 U.S.C. Section 1341.
    ---------------------------------------------------------------------------
        Perhaps some hardy soul will emulate Mr. Huckaby and me and will
    fight New York's irrationality through the New York courts. Perhaps
    that intrepid taxpayer will also achieve what Mr. Huckaby and I could
    not, namely, U.S. Supreme Court review of New York's employer
    convenience fiction.
        It would, however, be better to deal with this problem now as does
    H.R. 1360. H.R. 1360 addresses this problem with such clarity that even
    New York's courts and tax department will be compelled to acknowledge
    the inconvenient truth that a physical day outside New York is a
    physical day outside New York.
        Specifically, H.R. 1360 does three important things. First, it
    forbids a state for any income tax purpose from deeming a taxpayer to
    be physically present in the state when he is not.\10\ Second, H.R.
    1360 specifically forbids ``any convenience of the employer test or any
    similar test'' which could otherwise eviscerate the physical presence
    requirement.\11\ Third, H.R. 1360 precludes a variety of interpretive
    techniques which New York and its courts have used to avoid the obvious
    reality that, when nonresident taxpayers work at their out-of-state
    homes, they are not working in New York.\12\
    ---------------------------------------------------------------------------
        \10\ H.R. 1360, Section 2(a), adding to title 4 of the United
    States Code section 127(a).
        \11\ H.R. 1360, Section 2(a), adding to title 4 of the United
    States Code section 127(b).
        \12\ H.R. 1360, Section 2(a), adding to title 4 of the United
    States Code section 127(c).
    ---------------------------------------------------------------------------
        Thus, together, H.R. 3359 and H.R. 1360 can help achieve the goal
    of rational income taxation of nonresidents.
                      potential counterproductive effects
        My concern is not just that H.R. 3359 could prove ineffective
    because it lacks a strong definition of physical presence. I also fear
    that H.R. 3359, adopted without H.R. 1360, will inadvertently prove
    counterproductive and will cause other states to emulate New York and
    its employer convenience doctrine. If New York is able to avoid the
    more than sixty (60) day rule of H.R. 3359 by pretending that
    nonresidents work in state on days when they do not, other states will
    be tempted to take the same course to continue taxing nonresidents.
        The U.S. Supreme Court's refusal to hear either my case or Mr.
    Huckaby's case, in practical terms, gives a green light to other states
    desiring to raise income tax revenue by pretending that nonvoting,
    nonresidents work in-state on days when they do not. If New York's
    courts are prepared to countenance this behavior, why should not other
    states' courts similarly condone such behavior as well?
        Among the reasons why no other state has so far followed New York's
    aggressive lead in taxing nonresidents on days when they work out-of-
    state is that the states are watching Congress to see if it will
    legislate in this area. If H.R. 3359 is enacted unaccompanied by H.R.
    1360, at least some tax commissioners will inform their respective
    governors and legislators that there is a way around H.R. 3359 and its
    more than sixty (60) day rule: adopt New York's employer convenience
    doctrine to declare that out-of-state days shall be deemed in-state
    days to get nonresidents above the sixty day minimum. Some revenue-
    starved officials will undoubtedly approve of this approach. If so,
    H.R. 3359 will have accidentally spread the irrationality of New York's
    employer convenience doctrine throughout the nation.
        This scenario is avoidable by coupling H.R. 3359 with H.R. 1360
    which forbids the adoption of the employer convenience doctrine and
    similar tests for taxing nonresidents on days they are outside the
    taxing state.
                                   conclusion
        H.R. 3359 and its more than sixty (60) day rule represent a
    commendable effort to begin to rationalize the states' income taxation
    of nonresidents. However, H.R. 3359 in its current form is not enough
    and may unintentionally prove counterproductive. To be fully effective,
    H.R. 3359 must be conjoined with H.R. 1360 which would forbid states
    from adopting doctrines like New York's ``convenience of the employer''
    rule, doctrines which pretend that taxpayers are present in-state when
    in fact they are not. Together, these two pieces of legislation would
    make more sensible our system of nonresident income taxation.
             Prepared Statement of Nicole Belson Goluboff, Esquire

             Letter from various employers in support of H.R. 3359

    Letter from Kristina Rasmussen, Director of Government Affairs, Nation
                    Taxpayers Union in support of H.R. 3359