[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




                                 
