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


 
                         BUSINESS ACTIVITY TAX 
                       SIMPLIFICATION ACT OF 2008

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

                               H.R. 5267

                               __________

                             JUNE 24, 2008

                               __________

                           Serial No. 110-187

                               __________

         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
      Sean McLaughlin, Minority Chief of Staff and General 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

                              ----------                              

                             JUNE 24, 2008

                                                                   Page

                                THE BILL

H.R. 5257, the ``Business Activity Tax Simplification Act of 
  2008''.........................................................     2

                           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 Jim Jordan, a Representative in Congress from the 
  State of Ohio, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................    12
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.    14

                               WITNESSES

The Honorable Rick Boucher, a Representative in Congress from the 
  State of Virginia
  Oral Testimony.................................................    17
  Prepared Statement.............................................    19
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia
  Oral Testimony.................................................    20
  Prepared Statement.............................................    21
Mr. Mark Ducharme, Vice President and CFO, Monterey Boats, 
  Williston, FL
  Oral Testimony.................................................    24
  Prepared Statement.............................................    27
Mr. R. Bruce Johnson, Commissioner, Utah State Tax Commission, 
  Salt Lake City, UT
  Oral Testimony.................................................    31
  Prepared Statement.............................................    33
Mr. Michael Petricone, Vice President, Technology Policy, 
  Consumer Electronics Association, Arlington, VA
  Oral Testimony.................................................    43
  Prepared Statement.............................................    45
Mr. David C. Quam, Director, Office of Federal Relations, 
  National Governors Association, Washington, DC
  Oral Testimony.................................................    50
  Prepared Statement.............................................    51

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

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...........................    14
Prepared Statement of the Honorable Steve Cohen, a Representative 
  in Congress from the State of Tennessee, and Member, 
  Subcommittee on Commercial and Administrative Law..............    15
Prepared Statement of the Honorable Trent Franks, a 
  Representative in Congress from the State of Arizona, and 
  Member, Subcommittee on Commercial and Administrative Law......    16

                                APPENDIX
               Material Submitted for the Hearing Record

Answers to Post-Hearing Questions from Mark Ducharme, Vice 
  President and CFO, Monterey Boats, Williston, FL...............    68
Answers to Post-Hearing Questions from R. Bruce Johnson, 
  Commissioner, Utah State Tax Commission, Salt Lake City, UT....    71
Answers to Post-Hearing Questions from Michael Petricone, Vice 
  President, Technology Policy, Consumer Electronics Association, 
  Arlington, VA..................................................    77
Post-Hearing Questions submitted to David C. Quam, Director, 
  Office of Federal Relations, National Governors Association, 
  Washington, DC.................................................    80
Statements Submitted for the Record..............................    82


                         BUSINESS ACTIVITY TAX 
                       SIMPLIFICATION ACT OF 2008

                              ----------                              


                         TUESDAY, JUNE 24, 2008

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

    The Subcommittee met, pursuant to notice, at 1:10 p.m., in 
room 2237, Rayburn House Office Building, the Honoorable Linda 
Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Conyers, Sanchez, Johnson, 
Lofgren, Delahunt, Smith, Jordan, and Feeney.
    Staff present: Norberto Salinas, Majority Counsel; Stewart 
Jeffries, Minority Counsel; and Adam Russell, Majority 
Professional Staff Member.
    Ms. Sanchez. This hearing of the Committee on the 
Judiciary, Subcommittee on Commercial and Administrative Law 
will now come to order.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing at any point.
    I am now going to recognize myself for a short statement.
    The growth of marketing and sales of goods and services 
over the Internet is just one example of our country's movement 
toward an economic system not limited by State borders.
    But this borderless economy has led to confusion for some 
businesses regarding their tax obligations. Although a State 
levies taxes on companies conducting business within the State, 
some companies have expressed concerns that they are unaware 
when their activities trigger State tax obligations.
    These companies favor a physical presence standard for 
taxation. In essence, the standard would require businesses to 
pay taxes to States in which they own or lease property or 
effectively station employees.
    On the opposing side are the State governments. They oppose 
such an approach contending that, in the future, because more 
transactions and services will occur online, the physical 
presence standard would eviscerate State revenues and prompt 
tax avoidance schemes.
    The question then becomes how do you clarify the taxation 
standard while protecting State revenues and taxing 
authorities.
    The legislation we are examining today is H.R. 5267, the 
``Business Activity Tax Simplification Act of 2008.''
    [The bill, H.R. 5267, follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ms. Sanchez. This bill would prohibit State taxation of 
interstate commerce of out-of-state transactions involving all 
forms of property.
    The legislation would also establish the physical presence 
standard advocated by business interests.
    This afternoon's hearing serves a dual purpose. First, this 
hearing provides us with the opportunity to learn more about 
business activity taxes and under what circumstances they are 
levied.
    Second, the testimony provided today will help us determine 
what role Congress has in this matter and whether H.R. 5267 
addresses the concerns of businesses that are expected to pay 
these types of taxes while also protecting the interests of 
State governments to tax business activity within their 
borders.
    To help us explore these issues, we have six witnesses 
divided into two panels for this hearing.
    For our first panel, we have Representatives Rick Boucher 
from the 9th District of Virginia and Bob Goodlatte from the 
6th District of Virginia, the authors of the legislation. And 
they will discuss H.R. 5267.
    For our second panel, I am pleased to have Mark Ducharme, 
vice president and CFO of Monterey Boats; R. Bruce Johnson, 
commissioner of the Utah State Tax Commission; Michael 
Petricone, vice president of technology policy at the Consumer 
Electronics Association; and David Quam, director of Federal 
relations at the National Governors' Association.
    As we hear today's testimony, let us remember that we must 
balance the interests of State governments to collect revenue 
with efforts to encourage business development.
    Accordingly, I look forward to this afternoon's hearing and 
see it as the beginning of a dialogue on this issue.
    I now would like to recognize my colleague, Mr. Jordan, our 
acting Ranking Member of the Subcommittee for any opening 
remarks he may have.
    Mr. Jordan. Thank you, Madam Chair.
    Ranking Member Cannon is unable to make the hearing today 
because of the Utah primary. He extends his regrets.
    Today we consider H.R. 5267, the ``Business Activity Tax 
Simplification Act of 2008,'' a measure intended to provide 
greater clarity to businesses in navigating the tax landscape.
    This bill was introduced by Representative Rick Boucher on 
February 26, 2008, and has 26 co-sponsors.
    Representative Bob Goodlatte, who sponsored similar 
measures in previous Congresses, is the primary Republican co-
sponsor of the legislation.
    H.R. 5267 is designed to address a fundamental problem 
relating to interstate commerce. Specifically, when is a State 
justified in taxing a business with little or no physical 
connection with the State?
    Congress has examined this issue from time to time over the 
years. Now, with the emergence of the Internet economy and the 
explosion of the service industries, the need for clear, 
concise taxation standards has become even more urgent.
    In 1995, Congress enacting Public Law 86-272, still 
enforced today, prohibiting States from imposing a business 
activity tax on companies whose only contact with the State is 
the solicitation of orders for tangible goods.
    In addition, since 1959, many States appear to have engaged 
in practices that are at odds with the meaning and the intent 
of Public Law 86-272.
    For example, States have begun to impose a tax on companies 
business activities on gross receipts rather than on net 
income.
    These developments have wreaked havoc on businesses. These 
businesses have incurred great expense in attempting to 
decipher and, in many cases, litigate the appropriate nexus 
standard for business activity taxes.
    H.R. 5267 would provide some certainty to this issue. It 
would amend Public Law 86-272 to be able to apply to 
solicitation activities in connection with all sales not just 
sales of tangible personal property.
    It would also cover all business activity taxes, not just 
net income taxes.
    It establishes a bright line 15-day physical presence 
requirement for the imposition of business activity taxes and 
would codify the current physical presence standard observed 
for years and elaborated by the Supreme Court in 1992 in Quill 
v. North Dakota.
    In Quill, the Court required that in order to impose a 
requirement, that remote vendors collect and remit sales taxes 
for sales made to customers in the State the business must have 
a physical presence within the State.
    During the 107th, 108th, and 109th Congresses, Subcommittee 
considered similar measures sponsored by Mr. Goodlatte.
    The bill in the 107th Congress was reported out favorably 
by this Subcommittee though the full Judiciary Committee did 
not have an opportunity to consider it prior to conclusion of 
that Congress.
    In the 108th Congress, the Subcommittee did not have an 
opportunity to consider the bill further after a legislative 
hearing.
    And in the 109th Congress, the bill was favorably reported 
out of the Committee by voice vote but was not considered by 
the full House.
    I would note that supporters of this legislation have made 
a number of changes from previous versions in order to make the 
bill more palatable to the States.
    One such change was reducing the period of time that 
triggered tax liability from 21 days to 15. This bill also 
eliminates the number of exceptions to the physical presence 
test that were contained in earlier versions.
    As always, this bill enjoys wide support in the business 
community, including the Business Roundtable, the National 
Association of Manufacturers, the Motion Picture Association of 
America, and the Software and Information Industry Association, 
to name only a few.
    I recognize that the States continue to have a number of 
concerns about the legislation, both in terms of how it will 
impact their bottom line and its encroaching into traditional 
State taxation authorities.
    I hope that this hearing can begin a dialogue where both 
sides can try to reach an accommodation on this important issue 
for American businesses.
    I look forward to hearing from all our witnesses today.
    Thank you, Madam Chair.
    Ms. Sanchez. Thank you. I thank the gentleman for his 
statement, and I would like to recognize Mr. Smith, the 
distinguished Ranking Member of the Committee on the Judiciary 
for an opening statement if he wishes.
    Mr. Smith. Thank you, Madam Chair.
    First of all, I want to thank our colleagues from the 
Judiciary Committee, Congressman Boucher and Congressman 
Goodlatte, for introducing this piece of legislation.
    It is nice to see two Members of the Committee and two 
Virginians linking arms to pass such a good piece of 
legislation.
    H.R. 5267, the Business Activity Tax Simplification Act of 
2008, creates a physical presence requirement before State 
governments can collect income taxes or other business activity 
taxes on companies that conduct businesses in their States.
    Without such a physical presence requirement, companies 
must contend with dozens of different rules for determining 
when they owe State business activity taxes.
    The Business Activity Tax Simplification Act brings the law 
regarding business activity tax into line with the physical 
presence standard that Congress adopted for State sales taxes 
in 1959.
    This bill would list those conditions that a business must 
meet to establish a physical presence for the purposes of the 
imposition of a business activity tax by States.
    I supported similar legislation in the past because I think 
that businesses deserve some clarity as to when they will owe 
corporate income taxes.
    This bill also will make it easier for small businesses to 
determine their tax liability, and it will also limit the 
imposition of taxes for the simple act, for example, of driving 
goods across a State's highways.
    This legislation has tremendous support in the business 
community.
    We have received over 20 statements for the record in 
support of this legislation from business associations both 
large and small.
    At the same time, I recognize that some States have 
concerns about this legislation because of its impact on 
potential revenue.
    I know this Subcommittee has a history of asking the States 
and business stakeholders to sit down and talk about their 
differences when it comes to taxation, so I hope similar such 
talks can occur in the future about this legislation.
    And with that, Madam Chair, I will yield back.
    Thank you for yielding.
    Ms. Sanchez. I thank the gentleman for his statement.
    Without objection, other Members' opening statements will 
be included in 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

    While Congress must ensure that the States do not burden interstate 
commerce through their taxing authority, the authority of States to tax 
activity within their borders must be respected. Clearly, we must 
carefully balance these competing interests.
    Today, we will consider H.R. 5267, the ``Business Activity Tax 
Simplification Act of 2008,'' which attempts to clarify when a State 
may tax a business with little or no physical connection with the 
State.
    The bill establishes a physical presence standard for business 
activity taxes, and amends Public Law 86-272 to protect from State net 
income tax obligations the solicitation of orders of all forms of 
property and services, not just tangible property.
    Establishing a uniform standard would potentially create certainty 
for businesses and State governments. The business community could 
presumably better plan its development by knowing when and where it is 
obligated to pay taxes.
    Imposing a physical presence standard, however, could drastically 
alter the taxing landscape. States now generally apply an economic 
presence standard, whereby a company is taxed based on whether it 
conducts business within the State.
    In this precarious economic environment, where State revenues are 
already in decline, we should be very careful in considering 
legislation that could further impact State revenues or present tax 
avoidance possibilities.
    At least with respect to legislation that was similar to H.R. 5267, 
it was estimated that lost State tax revenues could be as high as $8 
billion in the first year following enactment.
    I think we need to look carefully at this bill to see if it might 
have a similar negative impact on the States.
    I look forward to today's hearing, and hope it will achieve three 
critical objectives.
    First, it should serve as a robust venue where the current standard 
of economic presence, the extent of confusion presented by the current 
standard, and the bona fides of a new standard that would permit a 
State to tax only companies with a physical presence there can be 
thoroughly examined.
    Second, this hearing should allow us to focus on H.R. 5267, which 
responds to concerns put forward by the business community regarding 
confusing State tax obligations.
    Third, this hearing should serve to begin a dialogue on State 
business activity taxes that results in a standard that is predictable, 
respects State taxing authority, and provides for a balanced and fair 
tax system.
    I thank Chairwoman Sanchez for holding this important hearing, and 
I very much look forward to hearing today from the witnesses.

    [The prepared statement of Mr. Cohen follows:]

 Prepared Statement of the Honorable Steve Cohen, a Representative in 
   Congress from the State of Tennessee, and Member, Subcommittee on 
                   Commercial and Administrative Law

    The issue that H.R. 5267, the ``Business Activity Tax 
Simplification Act,'' seeks to address is a complex one. What is the 
proper scope of a state's authority to tax the business activity of an 
interstate business? Unfortunately, the Supreme Court has provided 
ambiguous guidance with respect to the constitutionally required nexus 
between a state and an interstate business that is needed for the state 
to be able to impose a business activity tax.
    H.R. 5267 is supposed to answer this question in favor of a 
``physical presence'' nexus requirement and a limited definition of 
taxable business activity. Proponents of this bill contend that they 
seek uniformity and clarity with respect to the state tax obligations 
of businesses, and that the current patchwork of state and local tax 
laws concerning business activity places an unsustainable and 
impermissible burden on interstate commerce. Opponents, meanwhile, 
maintain that this bill, if enacted as written, would cost financially 
strapped states like Tennessee billions of dollars in lost tax revenue, 
and that will have a negative impact on state government services and 
employees. I do not see H.R. 5267 as the final answer to the issue of 
states' authority to impose business activity taxes. Rather, I hope 
that all the stakeholders will use this opportunity to engage in an 
honest and open discussion amongst them so as to reach consensus on 
establishing a clear and uniform standard with respect to business 
activity taxes.

    [The prepared statement of Mr. Franks follows:]

 Prepared Statement of the Honorable Trent Franks, a Representative in 
    Congress from the State of Arizona, and Member, Subcommittee on 
                   Commercial and Administrative Law

    Thank you, Madam Chair, for holding this critically important 
hearing on the ``Business Activity Tax Simplification Act of 2008.'' I 
would also like to express my appreciation to the witnesses for joining 
us here today to discuss this legislation.
    It is rare in this 110th Congress that a proposed law has drawn 
such diverse support across party lines. A brief glance at this 
legislation's cosponsors reveals some of the most ardent conservatives 
lining up with the most passionate liberals in support of this bill. It 
is equally rare in this Congress that a law has been considered which 
makes government less intrusive, business easier, and regulations 
clearer. Metaphorically, this bill is the white whale of this session. 
With bipartisan cooperation and sound policy, it unquestionably 
deserves the full backing of this subcommittee.
    First, I would like to address the concerns of the states, the most 
visible opponents of this legislation. They claim that the ``Business 
Activity Tax Simplification Act of 2008'' passes an unfunded mandate 
onto state governments. This mandate, according to the states, comes at 
an especially difficult financial time for their budgets. Yet financial 
irresponsibility on the part of the states does not provide an excuse 
for their laws to interfere with the flow of interstate commerce. Many 
studies, such as from the CATO Institute, document the reckless 
spending binge indulged in by state governments. I do not mean to take 
the financial problems now faced by the states lightly, but they have 
no business passing on their burden to the detriment of the national 
economy. Finally, it appears that the states tend to exaggerate the 
severity of this legislation's impact on tax revenues. The Tax 
Foundation notes that the estimated revenue loss for the states under 
similar legislation authored in the 109th Congress is roughly 0.1 
percent, so small that it falls within typical revenue estimate margins 
of error.
    This issue of overreaching state laws is not new. Before the 
Constitution, the United States was governed under the Articles of 
Confederation. Under these Articles, the federal government was 
powerless to ensure that interstate commerce flowed without burdensome 
impediments. States often engaged in trade wars with each other, 
grinding national commerce to a halt. As a remedy, the new Constitution 
drafted by the Founding Fathers gave Congress explicit authority in 
Article I to regulate commerce ``among the several states.'' This 
legislation clearly falls under the purview of the Commerce Clause and 
within Congress' enumerated powers.
    With this constitutional authority in mind, the ``Business Activity 
Tax Simplification Act of 2008'' modernizes a 49-year-old law to 
reflect the dramatic changes in the nature of our economy, which is 
increasingly reliant upon networks that cross state lines. In a time of 
slowing economic growth, confusing and irrational policies are the last 
thing that American workers and employers need. Business activity taxes 
are just that. Haphazardly applied and enforced, they unnecessarily 
impede the vibrant interstate commerce that fuels our powerful economic 
engine. As such, Congress has a legitimate and vital responsibility to 
act.
    In establishing guidelines based upon a ``physical presence'' 
standard, this legislation gives much-needed legal clarity to small 
businesses hoping to expand their operations to other states. Some 
argue that states can work collectively to make their business activity 
taxes more succinct; yet it is for this very purpose, to address 
commerce issues that cross state lines, that the federal government 
exists! I urge all of my colleagues to support this common-sense, 
bipartisan legislation that protects the interstate economy so vital to 
the fabric of this nation. Madam Chair, I yield the balance of my time.

    I am now pleased to introduce the witnesses on our first 
panel for today's hearing.
    Our first witness is Congressman Rick Boucher.
    Mr. Boucher is serving in his thirteenth term in the U.S. 
House of Representatives and represents Virginia's 9th 
Congressional District.
    Prior to his election to Congress, he served for 7 years as 
a member of the Virginia State Senate.
    He is a native of Abingdon, Virginia.
    Congressman Boucher sits on the House Judiciary Committee, 
serving on the Courts, the Internet, and Intellectual Property 
Subcommittee.
    He also is a Member of the House Energy and Commerce 
Committee, serving on three Subcommittees: Energy and Air 
Quality, of which he is the Chairman; as well as 
Telecommunications and the Internet; and Commerce Trade and 
Consumer Protection.
    As Chairman of the Energy and Air Quality Subcommittee, he 
is uniquely positioned to influence Federal legislation 
relating to a broad range of energy-related issues including 
electricity generation and markets, cool use, pipeline safety, 
refineries, and the Clean Air Act.
    Mr. Boucher is the sponsor of H.R. 5267.
    Our second witness is Congressman Goodlatte. Mr. Goodlatte 
is in his eighth term and represents the 6th Congressional 
District of Virginia.
    Prior to serving in Congress, he was a partner in the law 
firm of Bird, Kinder, and Huffman.
    Congressman Goodlatte also served as district director for 
former Congressman Caldwell Butler.
    Congressman Goodlatte serves on the House Judiciary 
Subcommittee on Immigration, Citizenship, Refugees, Border 
Security, and International Law and on the Courts, the 
Internet, and Intellectual Property Subcommittee.
    In addition to serving on the House Judiciary Committee, he 
serves as the Ranking Republican on the House Agriculture 
Committee.
    Congressman Goodlatte has taken a strong interest in issues 
such as welfare reform and forestry policy.
    Mr. Goodlatte is an original co-sponsor of H.R. 5267.
    I want to thank you both for your willingness to 
participate in today's hearing.
    And without objection, your written statements will be 
placed into the record in their entirety.
    And we are going ask that you limit your oral remarks to 5 
minutes.
    You are, I am sure, more than intimate with the lighting 
system.
    Sometimes, we forget to start it, but you are forewarned.
    And, of course, if you are caught mid-sentence or mid-
thought when your time expires, we will allow you to complete 
your thought before moving on.
    So with that, I am going to invite Mr. Boucher to please 
proceed with your testimony.

 TESTIMONY OF THE HONORABLE RICK BOUCHER, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF VIRGINIA

    Mr. Boucher. Chairwoman Sanchez, thank you very much for 
holding this hearing on what Bob and I both believe is a timely 
subject and, according to both of us, an opportunity to comment 
on the legislation that together we have introduced.
    We have been partnered in this exercise for many years, and 
continue to believe that this measure deserves passage and 
would commend it to the Subcommittee's consideration.
    I would note this afternoon that the measure is co-
sponsored by 26 Members of the House.
    And I will just take a moment to list of Members of the 
House Judiciary Committee who, on a bipartisan basis, are 
supporting the legislation.
    Representatives Hank Johnson, Bobby Scott, Zoe Lofgren, 
Arthur Davis, Sheila Jackson Lee, Bob Wexler, Anthony Weiner, 
Elton Gallegly, Steve Chabot, Mike Pence, and Tom Feeney.
    So we do have, essentially, equal numbers of Democrats and 
Republicans on the full Committee co-sponsoring this measure.
    It is an urgently-needed modernization of a 49-year-old 
statute that determines when States can impose State income 
taxes on the sales of tangible personal property within that 
State.
    Reflecting the economy of its time, that five-decade-old 
statute only applies to State income taxes, and it only applies 
to the sales of tangible personal property.
    Over the years, States have adopted a series of business 
activity taxes that, in some respects, are proxies for the 
State income tax including, among others, gross receipts taxes 
and a range of license arrangements.
    And the States frequently seek to impose those taxes on 
out-of-state companies that have no physical presence within 
the State.
    And over the years, greater volumes of our national 
commerce have been in intangible products and services such as 
financial services and software.
    Our measure modernizes the old law by expanding it to 
address not just State income taxes but also that range of 
business activity taxes that serve as proxies in some cases for 
the State income taxes.
    And we also create situations where there is a more 
explicit bright-line standard for the circumstances in which 
those taxes can be imposed.
    For 49 years, the test has been whether or not an out-of-
state company has a physical presence within the taxing State.
    We keep that standard, but we provide a much clearer 
definition of what constitutes a physical presence.
    The bill provides certainty for the States and for out-of-
state companies alike by specifying that physical presence 
means having property or employees within the taxing State for 
at least days within a year.
    If that test is met, State business activity taxes can be 
imposed on the sales that take place within that State.
    In the absence of these needed changes, the current legal 
uncertainty is producing clearly undesirable result.
    And I will just mention several examples.
    In Louisiana, the threat of business activity taxes has 
been raised against companies that have no physical presence 
within the State but broadcast advertisements from out-of-state 
into the State of Louisiana.
    Several States have attempted to impose business activity 
taxes on credit card companies located outside the State based 
solely on the fact that in-state residents are subscribers to 
those credit card services.
    New Jersey has held trucks belonging to companies with no 
physical presence in New Jersey that were passing through the 
State in order to make deliveries in another State until 
business activity taxes sometimes ranging in the tens of 
thousands of dollars have been paid.
    Many other equally troubling examples could be cited, and I 
think some witnesses, perhaps, will mention some of them.
    Our legislation is a needed modification of an old law 
which is appropriate to the realities of today's national 
commerce.
    If offers a certainty that should be welcome to companies 
doing business across State lines and to the taxing authorities 
at the State level alike.
    I very much appreciate the Chairwoman's focus on this 
timely matter, her very balanced statement, and her indication 
of welcoming our views and a continued discussion on this 
subject.
    We very much look forward to working with you and the other 
Members of the Committee as your considerations continue.
    At the end of that process, it is very much our hope that 
we will be able to pass a law which provides a much-needed 
modernization of the term under which State business activity 
taxes can be imposed on out-of-state companies of them.
    Thank you very much, Madam Chairwoman.
    [The prepared statement of Mr. Boucher follows:]

 Prepared Statement of the Honorable Rick Boucher, a Representative in 
                  Congress from the State of Virginia

    Chairwoman Sanchez, I appreciate your conducting today's hearing on 
the Business Activity Tax Simplification Act, which I introduced with 
my Virginia colleague Bob Goodlatte.
    The measure is cosponsored by 26 House Members, including our 
Committee colleagues Hank Johnson, Bobby Scott, Zoe Lofgren, Artur 
Davis, Sheila Jackson Lee, Bob Wexler, Anthony Weiner, Elton Gallegly, 
Steve Chabot, Mike Pence, and Tom Feeney.
    It is an urgently needed modernization of the 49-year-old federal 
statute that determines when states can impose state income taxes on 
the sale of tangible personal goods in the state.
    Reflecting the economy of its time, that five decade old law only 
applies to state income taxes and only to the sale within the state of 
tangible personal property.
    Over the years, states have adopted a series of business activity 
taxes that are proxies for the state income tax, including gross 
receipts taxes, licensing arrangements, and other charges which states 
frequently seek to impose on out of state companies.
    And over the years, greater volumes of our national commerce have 
been in intangible products and services, such as financial services 
and software.
    Our measure modernized the old law by expanding it to address not 
just state income taxes but business activity taxes as well.
    We also make the circumstances under which these taxes can be 
imposed on out of state companies explicit with a bright line standard.
    For 49 years the test has been whether the out of state company has 
a physical presence in the taxing state.
    We keep that standard, but we provide a clearer definition of what 
constitutes physical presence. The bill provides certainty for the 
states and out of state companies alike by specifying that physical 
presence means having property or employees in the state for at least 
15 days annually. If that test is met, state business activity taxes 
can be imposed on the sales that take place in the state.
    In the absence of these needed changes, the current legal 
uncertainty is producing undesirable results.
    In Louisiana, the threat of business activity taxes has been raised 
against companies that have no physical presence in the state but 
broadcast advertisements into the state from out of state.
    Several states have attempted to impose business activity taxes on 
credit card companies located outside the state, based solely on the 
fact that in state residents subscribe to the credit cards.
    New Jersey has held trucks belonging to companies with no physical 
presence in New Jersey that were passing through the state to make 
deliveries in another state until business activity taxes of tens of 
thousand of dollars were paid.
    Many other equally troubling examples can be cited.
    Our legislation is a needed modification of an old law which is 
appropriate to the realities of today's national commerce. It offers a 
certainty that should be welcome to both companies doing business 
across state lines and state taxing authorities alike.
    I appreciate the Committee's focus on this timely matter and look 
forward to working with you as we take further steps.

    Ms. Sanchez. Thank you, Mr. Boucher. We appreciate your 
testimony.
    At this time, I would invite Mr. Goodlatte to proceed with 
his testimony.

 TESTIMONY OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF VIRGINIA

    Mr. Goodlatte. Well, thank you, Madam Chairman. I 
appreciate the opportunity to testify. I appreciate your 
holding this hearing and your and the other Members of the 
Committee's interest in this important legislation.
    Many States and some local governments levy corporate 
income, franchise, and other taxes on out-of-state companies 
that conduct business activities within their jurisdiction.
    While providing revenue for States, these taxes also serve 
to pay for the privilege of doing business in a State.
    Over the past several years, a growing number of 
jurisdictions have sought to collect business activity taxes 
from businesses located in other States even though those 
businesses receive no appreciable benefits from the taxing 
jurisdiction and even though the Supreme Court has ruled that 
the Constitution prohibits a State from imposing taxes on basis 
that lack substantial connections to the State.
    This has led to unfairness and uncertainty, generated 
contentious, widespread litigation, and hindered business 
expansion as businesses shy away from expanding their presence 
in other States for fear of exposure to unfair tax burdens.
    I understand that some of our witnesses on the next panel 
will detail the specific examples of abuses that are occurring 
under the current ambiguous legal environment.
    Previous actions by the Supreme Court and Congress have 
laid the ground work for a clear, concise, and modern bright-
line rule in this area.
    In the landmark case of Quill Corporation v. North Dakota, 
the Supreme Court declared that a State cannot impose a tax on 
an out-of-state business unless that business has a substantial 
nexus with the taxing State.
    However, the Court did not define what constituted a 
substantial nexus for purposes of imposing business activity 
taxes.
    In addition, over 40 years ago, Congress passed legislation 
to prohibit jurisdictions from taxing the income of out-of-
state corporations whose in-state presence was nominal.
    Public Law 86-272 set clear, uniformed standards for when 
States could and could not impose such taxes on out-of-state 
businesses when the business activities involved the 
solicitation of orders for sales.
    However, like the economy of its time, the scope of Public 
Law 86-272 was limited to tangible personal property.
    Our nation's economy has changed dramatically over the past 
40 years, and this outdated statute needs to be modernized.
    The Business Activity Tax Simplification Act of 2008 both 
modernizes and provides clarity to an outdated and ambiguous 
tax environment.
    First, the legislation updates the protections of P. L. 86-
272.
    This legislation reflects the changing nature of our 
economy by expanding the scope of protections of that law from 
just tangible personal property to include intangible property 
and services.
    In addition, our legislation sets forth clear, specific 
standards to govern when businesses should be obligated to pay 
business activity taxes to a State.
    Specifically, the legislation establishes a physical 
presence test such that an out-of-state company must have a 
physical presence in a State before the State can impose 
corporate net income taxes and other types of business activity 
taxes.
    The clarity that the Business Activity Tax Simplification 
Act will bring with insure fairness, minimize litigation, and 
create the kind of legally certain and stable business climate 
that encourages businesses to make investments, expand 
interstate commerce, grow the economy, and create new jobs.
    At the same time, this legislation will protect the ability 
of the States to ensure that they are fairly compensated when 
they provide services to businesses that do have a physical 
presence in the State.
    H.R. 5267 has been amended from what the Judiciary 
Committee reported out by voice vote last Congress.
    Specifically, the legislation has been amended to address 
some of the concerns expressed by the States.
    For example, the time period during this an individual or 
business could be present in a State without constituting a 
substantial physical presence has been reduced from 21 days to 
14 days.
    I will end my testimony by mentioning that this legislation 
has strong bipartisan support as noted by my colleague and 
friend, Congressman Boucher, from numerous Members of the House 
Judiciary Committee.
    And I would strongly urge the Chairman of the Subcommittee 
and Chairman Conyers to move forward with the markup of this 
legislation in the near future.
    And I thank you again for allowing me to participate today.
    [The prepared statement of Mr. Goodlatte follows:]

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress from the State of Virginia

    Madam Chairman and Ranking Member Cannon, thank you for inviting me 
to testify this afternoon about the Business Activity Tax 
Simplification Act.
    Many states and some local governments levy corporate income, 
franchise and other taxes on out-of-state companies that conduct 
business activities within their jurisdictions. While providing revenue 
for states, these taxes also serve to pay for the privilege of doing 
business in a state.
    However, with the growth of the Internet, companies are 
increasingly able to conduct transactions without the constraint of 
geopolitical boundaries. The growth of the high tech industry and 
interstate business-to-business and business-to-consumer transactions 
raise questions over where multi-state companies should be required to 
pay corporate income and other business activity taxes.
    Over the past several years, a growing number of jurisdictions have 
sought to collect business activity taxes from businesses located in 
other states, even though those businesses receive no appreciable 
benefits from the taxing jurisdiction and even though the Supreme Court 
has ruled that the Constitution prohibits a state from imposing taxes 
on businesses that lack substantial connections to the state. This has 
led to unfairness and uncertainty, generated contentious, widespread 
litigation, and hindered business expansion, as businesses shy away 
from expanding their presence in other states for fear of exposure to 
unfair tax burdens. I understand that some of our witnesses on the next 
panel will detail the specific examples of abuses that are occurring 
under the current ambiguous legal environment.
    Previous actions by the Supreme Court and Congress have laid the 
groundwork for a clear, concise and modern ``bright line'' rule in this 
area. In the landmark case of Quill Corp. v. North Dakota, the Supreme 
Court declared that a state cannot impose a tax on an out-of-state 
business unless that business has a Asubstantial nexus@ with the taxing 
state. However, the Court did not define what constituted a 
``substantial nexus'' for purposes of imposing business activity taxes.
    In addition, over forty years ago, Congress passed legislation to 
prohibit jurisdictions from taxing the income of out-of-state 
corporations whose in-state presence was nominal. Public Law 86-272 set 
clear, uniform standards for when states could and could not impose 
such taxes on out-of-state businesses when the businesses' activities 
involved the solicitation of orders for sales. However, like the 
economy of its time, the scope of Public Law 86-272 was limited to 
tangible personal property. Our nation's economy has changed 
dramatically over the past forty years, and this outdated statute needs 
to be modernized.
    The Business Activity Tax Simplification Act of 2008 both 
modernizes and provides clarity to an outdated and ambiguous tax 
environment. First, the legislation updates the protections in P.L. 86-
272. This legislation reflects the changing nature of our economy by 
expanding the scope of the protections in P.L. 86-272 from just 
tangible personal property to include intangible property and services.
    In addition, our legislation sets forth clear, specific standards 
to govern when businesses should be obliged to pay business activity 
taxes to a state. Specifically, the legislation establishes a 
``physical presence'' test such that an out-of-state company must have 
a physical presence in a state before the state can impose corporate 
net income taxes and other types of business activity taxes.
    The clarity that the Business Activity Tax Simplification Act will 
bring will ensure fairness, minimize litigation, and create the kind of 
legally certain and stable business climate that encourages businesses 
to make investments, expand interstate commerce, grow the economy and 
create new jobs. At the same time, this legislation will protect the 
ability of states to ensure that they are fairly compensated when they 
provide services to businesses that do have a physical presence in the 
state.
    H.R. 5267 has been amended from what the Judiciary Committee 
reported out by voice vote last Congress. Specifically, the legislation 
has been amended to address some of the concerns expressed by the 
States. For example, the time period during which an individual or 
business could be present in a State without constituting a substantial 
physical presence has been reduced from 21 days to 14 days.
    I will end my testimony by mentioning that this legislation has 
strong bipartisan support from numerous Members of the House Judiciary 
Committee. I would strongly urge the Chairman of the Subcommittee and 
Chairman Conyers to move forward with a markup of this legislation in 
the near future.

    Ms. Sanchez. We thank you for your testimony, Mr. 
Goodlatte.
    At this time, it is traditional to begin a round of 
questioning. I don't have any questions for the first panel.
    I am going to encourage my colleagues not to ask too many 
questions of the first panel knowing that your schedules, 
probably, are just as busy as ours.
    But if anybody is interested in asking brief questions? No? 
Nobody? Nope.
    The gentlewoman from California, Ms. Zoe Lofgren, is 
recognized.
    Ms. Lofgren. Not a question, but just kudos to our 
colleagues on the Committee for the leadership they have shown 
on this, not just this year, but in past years.
    I really appreciate and am proud to be a co-sponsor.
    Thank you.
    Ms. Sanchez. Anybody else?
    Okay. Gentlemen, that is it. We thank you for your 
testimony, and you are excused to run off to the many other 
demands on your time I am sure that you have.
    Mr. Boucher. Thank you, Madam Chairwoman.
    Ms. Sanchez. At this time, I would invite the second panel 
of witnesses to please approach the table.
    It is now my pleasure to introduce our second panel of 
witnesses for today's hearing.
    Our first witness is Mark Ducharme. And I apologize; I 
mispronounced your name initially.
    Mr. Ducharme is the vice president and chief financial 
officer of Monterey Boats, a Gainesville, Florida company 
founded in 1985.
    Prior to his employment at Monterey Boats, he served at 
James Moore and Company from 1995 to 1999, and at Arthur 
Anderson, LLP from 1989 to 1995.
    Mr. Ducharme is a member of the American Institute of 
Certified Public Accountants, the Florida Institute of 
Certified Public Accountants, and the board of directors of Big 
Brothers-Big Sisters of Mid-Florida.
    We want to welcome you to today's panel.
    Our second witness is Bruce Johnson, commissioner for the 
Utah State Tax Commission.
    Commissioner Johnson was appointed by Utah Governor Leavitt 
in 1998.
    Prior to his appointment, he was a partner at the law firm 
of Holme, Roberts, and Owen, LLP, where he litigated State and 
local tax disputes and advised clients on State and local tax 
issues, tax exemption issues, and issues relating to tax-exempt 
municipal financing.
    Commissioner Johnson also was a trial attorney for the tax 
division of the U.S. Department of Justice.
    Commissioner Johnson serves on the executive committee of 
the Streamlined Sales Tax Governing Board and is a member of 
the Utah Tax Review Commission, and a board member of the 
National Tax Association.
    He is a recent past chair of the American Bar Association 
Tax Section Committee on State and Local Taxes.
    We want to welcome you to our panel, Mr. Johnson.
    Our third witness is Michael Petricone.
    Mr. Petricone is the senior vice president of governmental 
affairs for the Consumer Electronics Association. He is 
responsible for representing the consumer electronics 
industry's position before Congress and the FCC on critical 
issues such as digital television, broadband, privacy, and home 
recording rights.
    Mr. Petricone is a frequent speaker on policy issues 
impacting the consumer electronics industry.
    And in 2003, he was featured by ``Dealer Scope'' magazine 
as one of the technology industry's top 40 under 40.
    Welcome to you, Mr. Petricone.
    Our final witness is David Quam, who we recognize. He has 
been before this Subcommittee many times.
    He is the director of the Office of Federal Relations for 
the National Governor's Association.
    Mr. Quam manages the NGA's legal and advocacy efforts, 
working closely with governors, Washington, DC representatives, 
and NGA's standing committees to advance the associations 
legislative priorities.
    Prior to working at NGA, Mr. Quam served as director of 
international affairs and general counsel of the International 
Anti-Counterfeiting Coalition, Incorporated.
    He was also an associate of the law firm of Powell, 
Goldstein, Frazer, and Murphy, LLP.
    Additionally, Mr. Quam was counsel on the U.S. Senate 
Subcommittee on the Constitution, Federalism, and Property 
Rights for the Committee on the Judiciary.
    It is good to have you back again with us, Mr. Quam.
    The lighting system, I would explain for this panel because 
I didn't for the first.
    When you begin your oral testimony, you will see a green 
light. That green light tells you you have 5 minutes to speak.
    When you have 1 minute remaining, the light will turn from 
green to yellow. That warns you that you have 1 minute left.
    And, of course, when your time expires, you will see a red 
light.
    If you are caught mid-sentence or mid-thought when the 
light turns red and your time expires, we will allow you to 
finish that thought or sentence before we move on.
    So with that, I also will tell the witnesses that once you 
have given us your oral testimony, Members will be allowed to 
ask question subject to the 5-minute limit.
    So with that, I am going to ask Mr. Ducharme to please 
proceed with his testimony.

 TESTIMONY OF MARK DUCHARME, VICE PRESIDENT AND CFO, MONTEREY 
                      BOATS, WILLISTON, FL

    Mr. Ducharme. Thank you for the opportunity to address the 
Subcommittee concerning the Business Activity Tax 
Simplification Act.
    Monterey Boats is a small fiberglass boat manufacturer 
located in Williston, Florida.
    We build boats 18 to 40 feet. We have approximately 550 
employees, and produce approximately 2500 units every year.
    In understanding and discussing our position on State 
taxing authority, our obligation to pay appropriately mandated 
taxes are not in question.
    However, our ability to compete in our industry requires us 
to pass along these costs in the pricing of our product.
    When the taxing arm of each State does not consistently 
apply the law or provide clear guidance on activities requiring 
registration as an out-of-state corporation and potential tax 
obligation, we are at a distinct disadvantage not only with the 
domestic manufacturers but foreign manufacturers as well.
    Our first experience with State nexus in Michigan. The 
State sent us a detailed questionnaire inquiring about our 
activities within the State.
    Being unfamiliar with the nexus standards and naivete 
regarding the State's agenda, we inquired to other boat 
manufacturers their experience with States assessing income and 
sales tax on out-of-state corporations.
    Some manufacturers had not received any contact from 
States. Others had similar experiences that we were having. And 
still others received inquiries from States we had no contact 
with.
    Since we do not have property or payroll and sales occur 
outside the State, we deemed our exposure to Michigan assessing 
tax nonexistent.
    However, in further discussions with Michigan state agents, 
very few follow-up questions were asked regarding our responses 
to the questionnaire as if the question on whether or not we 
owed Michigan's single business tax was a foregone conclusion 
and the questionnaire with a formal process having little 
significance in determining whether or not we owed any tax.
    We subsequently determined agents from the State were 
contacting dealers domiciled in the State posing as interested 
customers to inquire regarding how we delivered the product.
    Did we have sales representatives in the State?
    How often did they visit the dealer?
    Do we assist in unloading the product?
    And how was the warranty process handled?
    Based on the dealer's responses, it was deemed by the State 
we had an obligation to register, pay tax, and the burden was 
on us to disprove comments made by Monterey Boats' dealers 
regardless of whether or not the dealer could have made 
incorrect responses, didn't understand the basis of the 
questions, or confused us with one of the their other product 
lines.
    Our next experience occurred with the State of New Jersey 
and is nothing short of extortion.
    We received a phone call on October 6, 2004 from someone 
purporting to be an agent with the New Jersey Division of 
Taxation. The agent indicated he was in possession of our truck 
with a load of boats destined for delivery in the State.
    The agent subsequently indicated the truck was to be 
impounded along with the boats unless we immediately remitted 
$27,500.
    The investigative agent claimed nexus arose because we 
deliver product into the State on trucks owned by Monterey.
    We also determined the $27,500 figure was determined based 
on a fuel formula having no basis or relation to property, 
payroll, or sales.
    After refusing to remit any funds for tax based on a fuel 
formula, we retained an attorney to intervene on our behalf, 
and our attorney negotiated the release of the truck and the 
boats.
    However, on October 7, we received a warrant of execution 
jeopardy assessment demanding payment for $176,000, again, 
based on some explainable fuel formula.
    In addition, the State placed a lien by levy on fund due to 
us from New Jersey dealers finance company.
    And on December 21, 2004, we filed a petition on protest 
and request for refund with the conference and appeals branch 
with the State.
    We received a notification letter and a list of questions 
the State wanted us to provide prior to the hearing.
    None of the questions related to use of or delivery of the 
boats on Monterey owned or leased trucks appearing as if of 
reason for New Jersey having authority to impose tax for 
delivery on product on Monterey trucks no longer applied.
    In October 2006, we met with the conference and appeals 
branch to resolve the issue and clarify our responsibility with 
the State. Subsequent to that hearing, we submitted a proposed 
resolution, and to date, no response has been received.
    Our sales are down approximately 13 percent year-to-date. 
Our full-time employee count is down approximately 15 percent.
    We are experiencing an unprecedented amount of pricing 
pressure in the boating industry requiring us to offer higher 
and more incentives.
    In the short term, we consider rebates and incentives in 
investment in establishing or increasing our market share.
    However, in the long term, the continued pressure on 
profitability has consequences: profound layoffs, decreased 
competition, and eventually going out of business.
    Monterey is the largest employer in the surrounding 
geographic area and the loss of jobs has a profound and 
rippling affect through the local economy.
    In order to establish consistent application of doing 
business, we need clear guidance provided by the Business 
Activity Tax Simplification Act of 2008.
    Thank you.
    [The prepared statement of Mr. Ducharme follows:]

                  Prepared Statement of Mark Ducharme









    Ms. Sanchez. Thank you, Mr. Ducharme. I appreciate your 
testimony.
    At this time, I will invite Mr. Johnson to give his oral 
testimony.

         TESTIMONY OF R. BRUCE JOHNSON, COMMISSIONER, 
         UTAH STATE TAX COMMISSION, SALT LAKE CITY, UT

    Mr. Johnson. Thank you, Madam Chairwoman and Members of the 
Subcommittee.
    I appreciate this opportunity to testify today.
    I am Bruce Johnson, one of the commissioners of the Utah 
State Tax Commission.
    I am here today testifying on behalf of the Federation of 
Tax Administrators and the Multi-State Tax Commission.
    The FTA is an association of tax administrative agencies in 
all of the 50 States, the District of Columbia, Puerto Rico, 
and New York City.
    The Multi-State Tax Commission is an organization of State 
governments that works with taxpayers to administer, equitably 
and efficiently, tax laws that apply to multi-state and multi-
national enterprises.
    FTA and MTC both strongly oppose this legislation because 
the bill would result in significant revenue losses for the 
States. It would reverse years of judicial precidents under the 
basis for State taxation. And it would create tax planning 
opportunities for multi-state, large multi-state enterprises 
that would not be available to locally-owned small businesses.
    In addition, we believe that there has been a failure to 
show an adequate need for this legislation.
    The Congressional Budget Office estimated in 2005 that 
predecessors of the current bill would result in a $3 billion 
annual revenue loss, the largest unfunded mandate CBO had ever 
measured.
    The National Governors' Association estimated an annual 
range of lost State revenues from $4.7 billion to $8 billion 
with a single best estimate of $6.6 billion.
    We are currently in the process of updating those 
estimates, but it appears that the losses under this bill will 
be the same order of magnitude as they were under the prior 
bill.
    The bill, as proposed, has two major components. First, it 
expands Public Law 86-272.
    Public Law 86-272 already allows a corporation to have a 
full-time sales force in a State, full-time, driving company 
cars on State roads. As long as the activities of that sales 
force will limited to the solicitation of sales of tangible 
personal property and ancillary activities that company is 
exempt from corporate income tax.
    That is unfortunate enough. That is simply bad policy.
    But this bill--at least 86-272--is limited to corporate 
income taxes and sales of tangible personal property.
    This bill would allow the same full-time sales force to be 
in a State soliciting sales of services and sales of intangible 
property. It would also allow those representatives to be in 
the State full time if they were purchasing agents purchasing 
sales or services on behalf of a corporation.
    So not only do you have sales people, you have got 
purchasing agents now who can be in a State full time and be 
exempt from taxation.
    Second, the bill would prohibit States from taxing a myriad 
of other activities if the corporation did not have a bricks 
and mortar facility in the State or employees in the State for 
more than 15 days.
    But there is also an exception if they were there for 
transient or limited purposes where you can be in the State for 
more than 15 days if you are there for a limited purpose.
    What is a Federal court going to do with a limited purpose? 
If I am an architect from out of State and I am in a State for 
a year supervising the construction of a shopping center, am I 
there for a limited purpose? Arguably, I am.
    If that is my only presence in the State, is it transient? 
Arguably, it is.
    This bill will not provide the kind of certainty that its 
proponents hope for.
    It also provides all sorts of tax planning. Let me give you 
two examples.
    A Utah bank has 10,000 Visa card holders. It pays income 
tax on the fees it receives from merchants and on the interest.
    An out-of-state bank blankets Utah with solicitation for 
card holders, signs up the same 10,000 people to conduct the 
same transactions with Utah retailers, pays the same interest, 
that bank is exempt from Utah income tax. They are competing 
head to head. That doesn't make any sense in today's economy.
    Second, two toy stores, both in South Carolina, next to 
each other. They both have the same sales. They both have the 
same profit margin. One has an intangible holding company and 
pays 3 percent of its gross sales as a royalty to a Delaware 
holding company, obliterating its sales tax or its income tax 
obligation.
    This is simply bad tax policy. It creates an unlevel 
playing field between interstate and local businesses, and we 
urge you to oppose this legislation.
    Thank you.
    [The prepared statement of Mr. Johnson follows:]

                 Prepared Statement of R. Bruce Johnson





















    Ms. Sanchez. Thank you for your testimony, Mr. Johnson.
    At this time, I would invite Mr. Petricone to provide his 
oral testimony.

  TESTIMONY OF MICHAEL PETRICONE, VICE PRESIDENT, TECHNOLOGY 
    POLICY, CONSUMER ELECTRONICS ASSOCIATION, ARLINGTON, VA

    Mr. Petricone. Good afternoon, Madam Chairwoman and Members 
of the Subcommittee.
    The Consumer Electronics Association [Inaudible] to create 
jobs, drive the economy, and--I don't have to tell you in these 
tough economic times that [Inaudible].
    There is one issue, however, that this Subcommittee can 
immediately address: The growing number of States using 
economic nexus theories to unfairly tax companies that have no 
physical presence within the State.
    No taxation without representation is America's first 
governing principle.
    Having established our nation under that basis, our 
founders went further. They created a single national economy 
and imposed constitutional safeguards to ensure that States 
cannot act to impede interstate commerce.
    Unfortunately, the system our founders put in place is now 
eroding.
    The number of States with a statute or regulation 
establishing economic nexus without a physical presence has now 
grown to more than a dozen.
    The problems caused by this growing patchwork of taxation 
are obvious and they fall disproportionately on our small 
business members.
    As you know, small businesses run close to the bone. To 
[Inaudible] beneath reasonable taxation in a settled, 
predictable business climate, but increasingly, they face 
significant costs [Inaudible] their State tax liabilities.
    They must meet multiple filing requirements, keep multiple 
records, and deal with multiple sets of regulators.
    It is becoming difficult for them to make any reasonable 
estimate of their projected tax burden. You can imagine the 
challenges of long-term business planning in such an 
environment.
    Of course, small firms also have fewer resources to 
challenge questionable assessments in far away States. As a 
practical matter, when faced with these levies, they have 
little choice but to bite the bullet and write the check.
    As a technology association, we are especially concerned 
with the burdens the situation places on electronic commerce.
    At the very moment, the Internet grants every business 
access to a national marketplace, a crazy quilt of local tax 
obligations, throws a roadblock across the electronic highway.
    Businesses will avoid sales in the various States, and 
consumers, especially those in the remote areas, will be unable 
to go online and get the goods they need.
    This situation will not resolve itself. In fact, left 
alone, it will get worse.
    Out-of-state businesses present at the timing targets to 
legislators seeking to raise revenue. Naturally, States have 
every political incentive to exploit their tax burdens as 
aggressively as possible.
    Meanwhile, States are making conflicting decisions and the 
Supreme Court has declined to address this issue. Specifically, 
the Supreme Court recently refused to hear two cases 
challenging the constitutionality of the economic nexus 
approach. Naturally, States see this as a green light to press 
forward with more economic nexus legislation.
    Pursuant to your authority under the commerce clause, it is 
time for you to act. There is ample precedent here.
    A few examples: You have moved to prevent multiple States 
taxes on electronic commerce. You have ensured that States 
cannot impose apply-over taxes on airlines.
    And you have restricted taxation of mobile communication 
services to the State where the service is primarily used.
    Specifically, we now urge you to support H.R. 5267, the 
Business Activity Tax Simplification Act of 2008. The bill 
provides that, pursuant to the commerce clause, a State may not 
impose business activity taxes on businesses that have no 
physical presence in the State.
    And the physical presence rule clearly clarifies the State 
taxation landscape. It is easy to understand. It is easy to 
enforce. Its bright-line standard ensures that small businesses 
know with certainty when and where they will be taxed.
    For a business owner, this means fewer resources spent on 
tax compliance and litigation and more resources invested in 
building their business.
    Such an approach would also ensure compliance with our 
international treaty obligations. In every tax treaty to which 
the U.S. is a party, the universal climate for imposing income 
taxes on non-residents is physical presence in the taxing 
jurisdiction.
    This is a fair and reasonable solution. Contrary to 
opponents' claims, it will not limit a State's ability to tax 
shelters or allow businesses to restructure their activities to 
avoid paying legitimate taxes. That is not the intention here. 
Our members are good corporate citizens.
    We do not object to paying our fair share of taxes. We 
simply believe that States that provide meaningful benefits to 
the business, like water, roads, fire, police protection, 
should properly receive the tax revenue rather than a distant 
State that provides no benefits.
    Members of the Committee, the constitution is clear. The 
right to regulate beyond individual States' borders lies, not 
with the States but with Congress. A bright-line physical 
presence rule eliminates ambiguity, stimulates investment, and 
promotes interstate commerce. It is good for large and small 
businesses, and it is good for the economy.
    We urge Congress to support H.R. 5267, the Business 
Activity Tax Simplification Act of 2008.
    I commend you for holding this hearing, and I look forward 
to answering your questions.
    [The prepared statement of Mr. Petricone follows:]

                Prepared Statement of Michael Petricone











    Ms. Sanchez. Thank you, Mr. Petricone.
    At this time, I would like invite Mr. Quam to give his 
testimony.

    TESTIMONY OF DAVID C. QUAM, DIRECTOR, OFFICE OF FEDERAL 
   RELATIONS, NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC

    Mr. Quam. Chairwoman Sanchez, Mr. Jordan, Members of the 
Subcommittee, it is a privilege to go back here before you 
again on behalf of the National Governors' Association, this 
time, expressing governors' strong opposition to H.R. 5267, the 
``Business Activity Tax Simplification Act of 2008.''
    It is not often that governors can come together on a 
consensus basis behind a policy and then State that policy 
clearly. It just so happens that in this particular area, we 
have a very precise process statement from the governors.
    ``The nation's governors oppose any further legislative 
restriction on the ability of States to determine their own 
policy on business activity or corporate profits taxes. This is 
an issue of State sovereignty. The U.S. Constitution adequately 
protects the interests of both States and business.''
    ``H.R. 5267, like its predecessors that we have discussed 
before, represents an unwarranted Federal intrusion into State 
affairs that would allow companies to avoid and evade State 
business activity taxes, increase the tax burden on small 
businesses and individuals, alter established constitutional 
standards for State taxation, and at the end of the day, cost 
States billions of dollars.''
    Rather than going through my written testimony, I wanted to 
focus on something because I think the witnesses covered it. 
There is a distinct question of philosophy here. Everyone talks 
about--and Congressman Goodlatte and Boucher, who I respect a 
lot--talked about modernizing a 49-year-old law.
    The question is should we be modernizing the 49-year-old 
law. That is a difference economy and a different time.
    It was a law put in place when business could only be done 
by a handshake, by traveling into a State. We are in an 
Internet-based economy, and we have experienced several debates 
with this Committee regarding what an Internet-based and 
communications-based economy means.
    In today's economy, you can do business in another State 
without ever setting foot there. From a State's perspective, 
that means that out-of-state companies can come in, compete 
with your mom-and-pop stores and compete with your State 
businesses but not share the tax burden of the roads, the 
education, which I would argue that every company who is doing 
business in the State benefits from the services that are 
provided by that State.
    I think, philosophically, States have come together with 
regard to simplification of big sales taxes. The Streamlined 
Sales Tax and Use Agreement is an example where States have 
come together to address the complex issue and try to solve a 
national problem in working with business.
    At the end of the day, we are trying to mostly form a 
physical presence standard for sales taxes, which is what Quill 
said, into more of an economic presence standard where remote 
vendors can collect and be asked to collect those sales taxes.
    To comment on the business activity side, say, we are going 
to reverse where we current stand and move backwards 49 years, 
does not make a lot of sense from a tax policy standpoint.
    And certainly, when you are talking about congressional 
interference with State tax systems, Congress has to be very, 
very careful about when it crosses that line.
    I would also like to say that this is a bottom-line issue. 
If I was representing a company right now, I also would be on 
this bill. I would support it because it is a $6 billion tax 
break for business. It is $6 billion that will go to almost any 
business who is not physically present.
    However, it is also a $6 billion tax break that can go to 
companies who are physically present.
    Under this bill, you can do the type of tax planning where 
you can have two toy stores next to each other; one who has the 
means to hire the tax counselors to actually exploit the 
loopholes in this bill. And all of a sudden, you have the same 
stores physically present in the State, one paying business 
activity tax and one not. That does not seem to be a good 
standard for Congress to be setting for a modern economy.
    Lastly, there is a lot of talk about States entering into 
discussions.
    I would agree that clarifying the laws, making it clear, 
moving forward, are discussions worth having, but they must be 
balanced with State interest of sovereignty and the revenue 
interest of States.
    NGA is repeatedly on this issue over the past years, and I 
think Mr. Delahunt made this point at the last hearing. Please 
get together and have a discussion of how we can move forward.
    Unfortunately, in that time, my phone rang once. And that 
call was to tell me that this bill was being dropped.
    The governors would welcome a discussion, but I think we 
have to talk about what is the question that has to be--what is 
the question and what is the problem, and then what can we do 
in a balanced fashion that makes sense, respecting State 
sovereignty and the revenue concerns.
    Thank you, Chairwoman.
    [The prepared statement of Mr. Quam follows:]

                  Prepared Statement of David C. Quam

    Chairwoman Sanchez, Ranking Member Cannon and members of the 
Subcommittee, I am pleased to be here on behalf of the National 
Governors Association (NGA) to communicate governors' strong opposition 
to H.R. 5267, the ``Business Activity Tax Simplification Act of 2008.''

Governors oppose H.R. 5267:

    Governors' long-standing policy regarding federal interference with 
state business activity taxes is clear and unambiguous. NGA Policy 
reads:

        ``The nation's governors oppose any further legislative 
        restriction on the ability of states to determine their own 
        policy on business activity or corporate profits taxes. This is 
        an issue of state sovereignty. The U.S. Constitution adequately 
        protects the interests of both states and business.'' (NGA 
        Policy Position, EC-9)

    H.R. 5267, the ``Business Activity Tax Simplification Act of 
2008,'' like its predecessors in other Congresses, represents an 
unwarranted federal intrusion into state affairs that would allow 
companies to avoid and evade state business activity taxes (BAT); 
increase the tax burden on small businesses and individuals; alter 
established constitutional standards for state taxation; and cost 
states billions in existing revenue. While governors welcome the 
opportunity to discuss issues related to business activity taxes, they 
urge Congress to oppose measures such as H.R. 5267 that would assist 
large corporations to the detriment of other taxpayers and states.

1H.R. 5267 violates core principles of federalism:

    Governors oppose H.R. 5267 because it represents an unnecessary 
intrusion into the states' authority to govern. U.S. courts have long 
recognized the authority of a state to structure its own tax system as 
a core element of state sovereignty. H.R. 5267 would interfere with 
this basic principle by altering the constitutional standard that 
governs when states may tax companies conducting business within their 
borders. Specifically, the bill would mandate the use of a physical 
presence standard for determining whether an entity can be taxed. This 
differs from economic presence, such as the ``doing business'' or 
``earning income'' standards used by most states. As discussed below, 
this change would shrink state tax bases by relieving out-of-state 
businesses of BAT liability while allowing larger in-state companies to 
circumvent tax laws by legalizing questionable tax avoidance schemes. 
These outcomes would effectively constitute a federal corporate tax cut 
using state tax dollars--a decision that, fundamentally, should be left 
to state elected officials.

1H.R. 5267 would encourage tax evasion and avoidance:

    H.R. 5267 promotes avoidance of state taxation. At a time when the 
federal government is closing loopholes in the federal tax code, H.R. 
5267 would subvert state tax systems by creating opportunities for 
companies to structure corporate affiliates and transactions to avoid 
paying state taxes.
    The bill's physical presence standard would significantly raise the 
threshold for business income taxation in most states and, according to 
a January 20, 2006 report by the Congressional Research Service (CRS) 
on similar legislation, lead to more ``nowhere income.'' In fact, CRS 
noted that legislative exceptions to the supposed physical presence 
standard, including its massive expansion of P.L. 86-272 to services, 
``would . . . expand the opportunities for tax planning and thus tax 
avoidance and possible evasion.''
    If H.R. 5267 provides the opportunity for planning, corporations 
will use it to avoid taxation. For example, a recent Wall Street 
Journal article demonstrated the extent to which corporations already 
work to avoid state business taxation. (``Inside Wal-Mart's Bid to 
Slash State Taxes,'' Wall Street Journal, Oct. 23, 2007.) The article 
details the extensive tax avoidance strategies of Wal-Mart as it sought 
to reduce its state tax liability through a series of sophisticated 
strategies, some of which states later identified as abusive and 
illegal tax shelters. A common thread among the strategies was the 
formation of entities in jurisdictions that do not tax certain 
activity, followed by a shift of income to the entity to avoid 
taxation. If enacted, the physical presence nexus standard of H.R. 5267 
would federally codify such tax practices and grant corporations with 
the means to restructure their businesses with a federal permission 
slip to aggressively avoid state taxation.

H.R. 5267 would harm locally-owned and small businesses:

    H.R. 5267 would favor large, multi-state corporations to the 
detriment of small businesses and individual taxpayers. By raising the 
jurisdictional standard for taxation, H.R. 5267 would effectively limit 
a state's business activity tax base to in-state companies. Out-of-
state vendors could therefore compete for customers against in-state 
businesses with the advantage of inequitable tax responsibilities.
    At the same time, larger in-state companies with the size and means 
to hire professionals specializing in tax avoidance could minimize or 
eliminate their state business tax liability even though they are 
present in the state. This ability to be physically present yet avoid 
state taxation places a disproportionate tax burden on smaller, in-
state businesses and individual taxpayers. Companies willing to compete 
for customers and earn revenue in a state should share the 
responsibility of paying for state services that benefit all 
businesses.

H.R. 5267 would alter established constitutional standards:

    H.R. 5267 would alter the existing constitutional standard for 
taxation of business activity. The U.S. Supreme Court has never 
required a physical presence standard for imposing business activity 
taxes. In fact, since the time of this Subcommittee's last hearing on 
this topic in 2005, state courts, and through its denial of certiorari, 
the U.S. Supreme Court, have clearly established economic presence, not 
physical presence, as the appropriate standard for determining if a 
company has sufficient contacts to impose a business activity tax. (A&F 
Trademark, Inc., et al. v. Tolson, 605 S.E. 2d 187 (N.C. Ct. App. 
2004), review denied (N.C., 2005), cert denied, 126 S. Ct. 353 (2005); 
Kmart Properties, Inc. v. Taxation and Revenue Dept., No. 21,140 (N.M. 
Ct. App. 2001), certx quashed (N.M. 12/29/05); Lanco, Inc. v. Director, 
Division of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied, 127 S.Ct. 
2974 (U.S., 6/18/07); Geoffrey, Inc. v. Oklahoma Tax Commission, 132 
P.3d 632 (Okla. Ct. Civ. App., 12/23/05), review denied (Okla., 3/20/
06); Commissioner v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.V. 
2006), cert. denied, FIA Card Services, N.A. v. Tax Commissioner of 
West Virginia, 127 S.Ct. 2997 (U.S., 6/18/07)). H.R. 5267 would disrupt 
this well-established constitutional standard and call into question 
state business activity tax systems in every state.

H.R. 5267 would undermine state revenues:

    H.R. 5267 represents a huge unfunded mandate that will result in 
the loss of billions of state dollars. A survey released by the 
National Governors Association found that a substantially similar House 
bill, H.R. 1956, would cost states more than $6.6 billion annually. 
(``Impact of H.R. 1956, Business Activity Tax Simplification Act of 
2005, On States,'' National Governors Association, September 26, 2005.) 
Preliminary cost estimates for H.R. 5267 yield similar results, with 
first-year loss estimates ranging from $20 million in a state like 
Idaho to over $366 million for New Jersey. State losses also will grow 
as companies restructure to take advantage of H.R. 5267's loopholes. 
California estimates that if enacted, H.R. 5267 would cost the state 
$135 million in 2011 then grow to more than $614 million just two years 
later.
    This shift in revenue, while beneficial to business, is 
particularly harmful to states because unlike the federal government, 
states are required to balance their budgets. Consequently, when 
federal action causes states to lose revenues, states must act to 
replace lost funds by either increasing taxes or cutting programs. The 
economic effects of such actions are pro-cyclical in that they make 
economic downturns worse. NGA already predicts that 21 states are 
likely to face $34 billion in budget shortfalls for fiscal year 2009. 
Federal legislation that would reduce corporate state taxes by $6 
billion annually would only further exacerbate the pro-cyclical 
pressures on states and thereby prolong the economic downturn and delay 
recovery.

Conclusion:

    States have demonstrated that they are willing to address state tax 
issues on a national basis. Through projects like the Streamlined Sales 
and Use Tax Agreement, states have come together with the business 
community to fashion workable solutions that address both private and 
public sector interests.
    Unfortunately, in the context of business activity taxes, 
proponents of bills like H.R. 5267 have shown little willingness to 
work with states to either properly define the problem or discuss 
solutions that balance the goals of certainty and consistency with 
state authority and revenue requirements. As a result, NGA will 
continue to oppose legislation like H.R. 5267 and call upon Congress to 
reject legislation that interferes with state business activity tax 
systems.

    Ms. Sanchez. Thank you, Mr. Quam.
    We will now begin our round of questioning, and I will 
begin by recognizing myself first for 5 minutes of questions.
    Mr. Johnson, businesses contend that it is understandable 
for them to pay taxes when they receive government benefits in 
return, such as police and fire protection.
    How do you respond to supporters of a physical presence 
standard who contend that businesses receive no benefit from 
government under the economic presence standard?
    Mr. Johnson. Well, I would respond in two ways, Madam 
Chair.
    First, I would say that--take the example of the bank, the 
out-of-state bank.
    It is using the same financial infrastructure that a State 
bank is using. It is using the courts to enforce its 
contractual obligations.
    It is benefitting from the working force and exploiting the 
market in the State the same way that a local bank is.
    It doesn't have to pay property taxes because it doesn't 
have property there, but it is certainly exploiting the market 
and the civilized society that is created there.
    So I think that bank does benefit from the courts, the 
infrastructure provided by the State.
    Secondly, look at the toy store example. You can have, 
under this bill, you can have an intangible holding company 
that essentially sucks the profit out of a bricks and mortar 
company and it won't have to pay any tax.
    Under 86-262, you can have those salesmen driving on State 
roads, being protected by the State police force, having 
company cars protected by the State police force and the fire 
department. They simply receive those benefits. They should pay 
a fair share.
    Ms. Sanchez. Thank you.
    Mr. Quam, I know you have been before this Subcommittee 
many times, but with respect to this particular issue, do you 
agree that there is a problem here? That there is a lack of a 
clear and uniform standard that has made it difficult for 
businesses to meet their filing obligations and to sort of plan 
prospectively?
    Mr. Quam. There are certainly different standards. But as 
we have talked many times, federalism is difficult.
    The sovereignty of States to establish their own revenue 
systems is a core of that sovereignty. And so that will 
engender certain complexities.
    Ms. Sanchez. But you don't think that, perhaps, we might be 
able to benefit from a little uniformity or a little more 
clarity?
    Mr. Quam. There can be benefits to uniformity. I think they 
really have to be measured against State sovereignty interests.
    Again, I think States may be willing to discuss, you know, 
what the particular problem is and see if there is a way to 
clarify. However, States still need the flexibility to control 
and manage their own State systems.
    Differences will always remain. There are some things that 
can be done. Unfortunately, under this bill, what you are 
really doing is gutting the entire system to solve what I think 
may be a much more pointed problem.
    Also, one thing that this bill does not do is establish a 
clear line. Physical presence sounds clear, but not when you 
incorporate all the exceptions that still remain in this bill.
    They might not be line for line like they were in previous 
measures, but they are still contained in here with some of the 
exceptions.
    So, unfortunately, we don't have a bright-line before us.
    Ms. Sanchez. That is a point well-taken.
    You indicate in your written statement that H.R. 5267 would 
increase the tax burden on small businesses and individuals, 
and I am interested in knowing why you believe that.
    Mr. Quam. The reason for that is, going back to my example 
of the two toy stores, the fact of the matter is, under 
physical presence standards, particularly the one in this bill, 
you can have a company that is physically presently that does 
not pay tax.
    Your small business who does not have the fleet of 
accountants and does not have the tax attorneys to do some of 
the planning necessary to take advantage of the loopholes in 
this bill is going to pay full freight.
    They are going to pay the State business activity tax, the 
property tax. They are going to pay their taxes as good 
corporate citizens.
    The company next to them that may be a large conglomerate 
or corporation that has the ability to do that can do the tax 
planning to avoid that State taxation, and now you have two 
stores running the same business. One has a lower tax burden 
than the other, yet both are physically present.
    That increases the burden on those who are there that can't 
do that tax planning because the tax burden still remains 
within that State.
    Ms. Sanchez. Mr. Petricone, I know that you stated that 
your members are good corporate citizens and that the purpose 
of this bill is not to evade taxes and I want to believe you.
    But I do also know that there are, occasionally, a few bad 
apples that will try to exploit certain advantages.
    I wanted to ask you specifically, earlier this year the New 
York State Bar Association recommended that Congress establish 
a clear nexus standard for a States' imposition of a business 
activity tax.
    And it suggested that the standard take into account 
economic presence rather than a pure physical presence test and 
include a reasonable de minimis threshold before imposing a tax 
on a business.
    Do you like anything at all about the Bar Association's 
recommendation? Or are you totally opposed and wholeheartedly 
just a supporter of the physical presence standard?
    Mr. Petricone. Well, Madam Chairwoman, there is many ways 
to get there. One thing that small businesses need that is very 
important to them is certainty.
    They want to know how they are being taxed, where they are 
being taxed, and who they are being taxed by.
    Again, you know, when you have minimal resources, the 
notion of complying with multiple taxing entities operating 
under multiple rules is--I mean, it may sound look a minimal 
thing, but it is extraordinarily burdensome to you and 
expensive.
    Ms. Sanchez. Wouldn't a small business that was subject to 
de minimis standards have some certainty?
    Mr. Petricone. Right? Well, the attraction of the physical 
presence rule for us is that that is far and away the simplest 
to understand and the simplest to administer.
    While I realize that there are other ways to get there, and 
that is good and that should be discussed, for us, it is the 
simplicity of the physical presence standard that is very 
attractive.
    Ms. Sanchez. You are a physical presence standard only guy?
    Mr. Petricone. That is what we believe to be the best 
solution, yes.
    Ms. Sanchez. Okay. Thank you.
    My time has expired. At this time, I would recognize our 
acting Ranking Member, Mr. Jordan, for 5 minutes of 
questioning.
    Mr. Jordan. Thank you, Madam Chair.
    Mr. Johnson, a couple of times, you have mentioned 86-272 
is clear that a company can have a sales force in a State 
driving on roads--to use your language--and not be subject to 
tangible personal property tax in that jurisdiction.
    You also said in your opening comments that you think 
businesses have failed to show that there is adequate need to 
update this 1959 law.
    How do you square what you just said with the example that 
Mr. Ducharme gave with his experience in the State of New 
Jersey and them seizing his property and stopping the boats 
from being delivered?
    How do you square those two?
    Mr. Johnson. Well, I guess I would respond to Mr. Jordan 
first.
    I would agree that there is a need for some clarity in this 
area.
    The Multi-State Tax Commission has promulgated a factor 
presence formula that would provide that most businesses don't 
have to pay any income tax in a State unless they have either 
more than $500,000 worth of sales, more than $50,000 worth of 
property, or more than $50,000 worth of payroll in the State.
    I think something like that should be adopted by the States 
uniformly. I think an important part of tax policy is 
certainty, and small businesses do need certainty.
    So to the extent that that problem exists, and it does 
exist, I think the States should work collectively to solve it. 
We would rather have the businesses come to us as States and 
solve that rather than have it imposed at the congressional 
level.
    Second, I would just say that New Jersey is not here. They 
provided a letter that describes their jeopardy assessment 
policy.
    Jeopardy assessments are common in the States. They are 
also used by the Federal Government.
    There is always, at the very least, a post-deprivation due 
process hearing that is required in case those powers are being 
exercised inappropriately.
    You know, without----
    Mr. Jordan. Okay.
    Mr. Ducharme, in your experience, you related the New 
Jersey story, are you seeing this more widespread? Are you 
seeing other States being aggressive?
    I mean, give me some of your experiences.
    Mr. Ducharme. Our personal experience in New Jersey has 
definitely been the most aggressive.
    The process that we have encountered with the other States 
that have contacted us has been a phone call questionnaire. 
Mind you, that really doesn't have any merit to whether or not 
they are going to assess tax on you, but it has been more of a 
formal phone call questionnaire return separation process as 
opposed to what we encountered in the State of New Jersey.
    Mr. Jordan. Sure.
    Any time any department of taxation is calling you, you 
certainly take notice, I would think.
    Mr. Ducharme. Yes.
    Mr. Jordan. I understand how that is.
    Maybe you and Mr. Petricone, give me your general thoughts 
on where you think it is headed. I mean, if we don't get some 
clarification, what--give me your thoughts of what you see in 
the not too distant future and how that impacts you.
    And I know you have talked about that some. I will come 
back to you, Mr. Petricone.
    Mr. Petricone. Right. Congressman Jordan, what worries me 
about this issue is, left to its own devices, there is an 
upward--effect.
    Mr. Jordan. Right.
    Mr. Petricone. You know, I mean, if somebody doing this to 
my company, than I am certainly going to do this to your 
company.
    You know, and you have 50 States, and you have got 
municipalities and--you know, so there are potentially dozens 
and dozens of jurisdictions where these may be enacted.
    Mr. Jordan. Right.
    Mr. Petricone. So we are afraid--right now, you can say it 
is only a dozen States, what is the big deal. But we are 
convinced that, left to its own devices, it is going to worse. 
I mean, the condition is there for it to get worse.
    I can also add----
    Mr. Jordan. You know, that is the nature of government.
    Mr. Petricone [continuing]. Right. And, of course, there is 
every political incentive to export your tax burden, sir.
    Even at the present time, there are a few issues; 
Congressman--gets many calls from our small business members 
saying, you know, this just happened to me, this is terrible, 
what can I do.
    And at present, there is not a lot I can tell them.
    Mr. Jordan. Go ahead. I have got one more question for Mr. 
Petricone, but go ahead.
    Mr. Ducharme. I think the discussions that we have had 
internally at Monterey have centered around, you know, what is 
the rationale for this process; how did it begin?
    And it all stems from, and it is our opinion that it is the 
constraints that State budgets are having that they are looking 
for additional revenue.
    This seems to be a short-term solution to a long-term 
issue.
    Monterey Boats, all activity occurs in the State of 
Florida.
    We have independent sales reps that are not employees of 
Monterey, so we don't benefit from any of the resources of the 
States that we deliver boats into.
    We pay income, sales, property, real property taxes in the 
State of Florida. We pay for permits and fuel taxes in the 
various States that we deliver to.
    At the end of the day, our activities within all these 
States that are imposing tax on us, we don't actually benefit 
from. The ultimate buyer, yes, they do; but we, as a 
corporation, do not.
    Ms. Sanchez. The time of gentleman has expired
    I just wanted to make sure the witnesses have your mics on 
when you are answering questions. For recording purposes, we 
need the mics on even though we can hear you.
    At this time, I would like to recognize the Chairman of the 
full Judiciary Committee who has joined us, Mr. Conyers, for 5 
minutes of questions.
    Chairman Conyers. Thank you very much, Chairwoman Sanchez.
    What a great afternoon here to have standing-room-only.
    Why is it that Subcommittee number five always seems to 
attract more attention than all the other great Subcommittees 
that exist on the Judiciary Committee?
    Ms. Sanchez. It is because of the Chairwoman, I think. That 
is the short answer, Mr. Conyers.
    Chairman Conyers. Well, the Chairwoman is correct herself.
    Look, when we started here in the 110th Congress, nobody 
wanted to go on Subcommittee number five. Now, I am still 
getting requests for people that ask me to enlarge number five, 
can they get on it for next year, and it goes on and on and on.
    More subpoenas and authorizations for subpoenas come out of 
this Subcommittee than any other--than all the other 
Subcommittees on the Judiciary Committee.
    Look, and here we are this afternoon, standing-room-only, 
offices on K Street, Pennsylvania Avenue, L Street, Georgetown, 
are left lane barren. And everybody is here.
    I look across the room, the only ones that aren't here are 
Members of Congress that have offices in those places that I 
just named.
    And so we know that something important and significant and 
serious is afoot here.
    Now, what to do?
    Well, let us have some fairness for the business community. 
Okay. But let us remember that the States are catching hell. 
Most of them are insolvent. And so what should we do?
    Well, it devolves upon this powerful Subcommittee under the 
distinguished leadership of the gentlewoman from California to 
urge that there be further negotiations after this splendid 
hearing this afternoon.
    We have got to start talking with some people. Here, we 
have wonderful divisions here. We heard our first two 
colleagues on the Committee. They are joined by Messrs Pence 
and Gallegly.
    And, of course, the distinguished gentlelady from 
California, Ms. Lofgren and former magistrate Hank Johnson.
    I mean, the only few people hanging out here uncommitted 
are the gentleman from Massachusetts and the acting, Ranking 
minority Member here and myself.
    And so we would like the results of this hearing to be the 
predicate for some other discussion in which we try to resolve 
what is the central dilemma.
    Sure, let us protect business. But tell me what I tell 
Governor Granholm when I go back to Detroit just what we did. 
We just relieved you of millions of dollars of taxes that would 
have been coming into Michigan because of the benevolence of 
the Subcommittee number 5 and this work it sent to the full 
Committee.
    That may present a difficult situation.
    So what advice do you witnesses have here for a person in 
my predicament?
    Ms. Sanchez. And I would note that the witnesses have 5 
seconds to answer Mr. Conyers' question. [Laughter.]
    Chairman Conyers. Well, I yield back the balance of my 
time. [Laughter.]
    Ms. Sanchez. If anybody would like to take a crack at that 
briefly?
    Mr. Quam?
    Mr. Quam. Congressman, I think you make a very good point. 
Taking money away from the States right now is a very bad idea.
    States, of course, have to balance their budgets, so taking 
$6 billion out of State economies would actually hinder States' 
ability to recover even from the economic downturn we are in.
    A State such as yours, I think the estimate is almost $500 
million under this bill that would be to be filled by the 
State, a State that is having difficulty.
    And I know that the governor has communicated that to you. 
Governors are always willing to talk. I think discussions can 
be warranted. They have to be balanced.
    Clarity and uniformity has to be balanced against State 
sovereignty and revenue needs. If those discussions can take 
place with balance, there is probably some place to go.
    However, unfortunately, up until now, we haven't had a bill 
with us that suggests that balance.
    I think discussions within that framework are possible. 
They are going to take some work. But I thank you for your 
comments regarding this bill and the condition of States.
    Ms. Sanchez. Mr. Johnson?
    Mr. Johnson. I would just like to make one brief point.
    In my view, this is not so much a business versus States 
bill; this is a multi-state, sophisticated, large business 
versus local business.
    In Utah, every dime we get from the income tax, the 
corporate income tax and the individual income tax, go to 
educate our children.
    We are going to have to get that money from somebody. If we 
can't get it from multi-state businesses, we are going to have 
to get it from our individual taxpayers or our local 
businesses.
    That is, to me, where the rubber hits the road on this one.
    Ms. Sanchez. Thank you.
    Mr. Petricone?
    Mr. Petricone. Mr. Chairman, I appreciate you being here, 
and I appreciate the very articulate way you put forward the 
very legitimate concerns of the States.
    Many of the business we represent are small businesses. 
They are trying to create jobs, and they are trying very hard 
to keep their heads above water in a very, very tough economy.
    And they are being hit by these taxes in States, sometimes, 
they hardly knew they were doing business in.
    And, you know, I am getting calls on a regular basis by 
members who want to know what to do.
    Small businesses operate close to the bone. They are now in 
a position to comply with multiple taxing entities and multiple 
tax jurisdictions.
    So I would simply ask that you and this Committee, you 
know, do everything you can to come up with an environmental 
solution that is fair to the States who have legitimate revenue 
needs but also to businesses and small businesses that are 
trying to create jobs and keep on moving forward.
    Ms. Sanchez. Thank you.
    At this time, I would like to--Mr. Ducharme, did you want 
to add anything?
    At this time, I would like to recognize the gentlewoman 
from California, Ms. Lofgren for 5 minutes of questioning.
    Ms. Lofgren. Thank you, Madam Chairwoman, and thank you for 
holding this hearing.
    I do think the hearing is an important one. There are 
important issues presented by all the witnesses here today.
    I actually think--I co-sponsored the bill. I do think that 
there is lack of clarity in the law on what constitutes 
sufficient nexus for taxation.
    It is pretty clear the Supreme Court is not going to 
provide clarity, so that means that if there is going to be 
some clarity, probably, we need to play a role.
    As Mr. Conyers has just said, and I think you are noting, 
there is room for the States and the business community to come 
together on this issue and reach an agreement.
    And I think, you know, it is possible, but we have a role 
to play in helping that to happen. If so, I am willing to do 
whatever part is necessary. Whether or not agreement is 
reached, I think further exploration would be of enormous 
value.
    You know, my State of California has a $19 billion budget 
deficit and getting larger. I know that if we had the same 
income tax rates that we had when Ronald Reagan was governor, 
basically, we wouldn't have a deficit.
    So there are many things that States can do, and I am 
mindful that it is, oftentimes, easier to tax the guy who isn't 
in your State than the guy who is in your State and who has a 
presence.
    So that is not necessarily the right and responsible way to 
deal with a budget crisis.
    I was in local government--I am only going to be able to 
say this for 6 more months--longer than I have been in the 
House of Representatives, so I am not hostile to the need to 
get revenue into public services. It is very important.
    But we also need to foster a decent business environment.
    I was wanting to see the letter sent by New Jersey. 
Apparently, we don't have a copy of it. Hopefully, we can get 
that later.
    But, Mr. Ducharme, can you explain what the representation 
was made by New Jersey in that letter?
    Mr. Ducharme. Can you clarify for me the initial jeopardy 
assessment letter that we received or the notification?
    Ms. Lofgren. Mr. Johnson said that the State of New Jersey 
had sent a letter for this hearing. Apparently, it cannot be 
found anywhere. Well, you haven't seen it either.
    Mr. Ducharme. We received an acknowledgement letter from 
the State of New Jersey notifying us that we had been scheduled 
a date for the Conference and Appeals Branch.
    Ms. Lofgren. All right.
    Mr. Ducharme. Is that the letter that you are referring to?
    Ms. Lofgren. I don't think that is what Mr. Johnson was 
referring to. Maybe I can ask Mr. Johnson.
    What was in that letter?
    Mr. Johnson. Yes. If I may, I have a copy of a letter that 
is addressed to the Honorable Linda Sanchez from the State of 
New Jersey dated June 18, 2008.
    Ms. Lofgren. I think you are the only one who has that 
letter, so I would love to see it if I could.
    Mr. Johnson. We will certainly be pleased to provide copies 
to the Committee.
    Ms. Lofgren. Maybe the clerk can get it now so I can take a 
gander at it.
    I am wondering, Mr. Petricone, when you talk about 
intangible and the kind of crazy quilt that we have now, why do 
you think that the bill that we are pursuing now actually 
provides the relief that is necessary in terms of uniformity, 
and how will that not disadvantage States?
    Mr. Petricone. Because, Congresswoman, at the very least 
with this bill, everybody is playing under the same rules. 
There is a definition of physical presence; everybody 
understands what it means.
    Small businesses and businesses in general know what their 
liabilities are and who they can be expected to be taxed by.
    The element of certainty is very important to us.
    Ms. Lofgren. It just strikes me that the--our country was 
set up in a way to not constrain commerce between the various 
States because we are the United States of America. We are not 
a pre-E.U. Europe.
    Although this was never intended, perhaps, to disassemble 
that unity. In fact, if you start taxing entities for driving 
through a State, you are burdening, really, the economic entity 
that is the United States.
    So I think this measure is, you know, maybe it is not the 
perfect bill. I am happy to be a co-sponsor, but I think the 
principle--is enormously important, and I think that if the 
parties can come together and come to some agreement, that 
would probably be the best possible outcome because everybody 
has got an incentive.
    I mean, if we move forward, States are just afraid they 
will lose, and I think that is a likely outcome unless we can 
come up with some resolution.
    So I think everybody should be motivated.
    I thank the gentlelady for recognizing me.
    Ms. Sanchez. The time of the gentlelady has expired.
    At this time, I would like to recognize Mr. Feeney for his 
5 minutes of questions.
    Mr. Feeney. Well, I thank the Chairman, and I will be 
brief.
    I was only able to attend the last few minutes of the 
hearing, so I don't want to be duplicitous of anything that has 
been asked.
    I should say that I have been a long-time supporter and co-
sponsor of the act that is being considered today.
    And I have had a chance to review some of the testimony.
    You know, there is an old rhyme--I spent 12 years in the 
State legislature--that when it comes to raising revenue, the 
best way to do is, according to the rhyme, don't tax you, don't 
tax me, tax the guy behind the tree.
    And unfortunately, the guy behind the tree, all too often, 
is the person who is not there physically to defend himself, 
whether it is in the halls of the lobbyists on the last night 
of a legislative session or whether it is because they 
literally do not have a physical locus in the State.
    And, you know, I would suggest there are a couple 
constitutional protections of the so-called dormant clause to 
the commerce clause which has been resurrected in the Quill 
Case and, of course, I think also the 14th amendment has some 
protections for people that are hit from one State with a tax 
that impacts them.
    Having said that, we have got some States that are 
understandably, including my State of Florida, had to cut 
about, oh, 10 percent of expenditures this year from about a 
$70 billion total State budget to $63 billion.
    So understandably, States are under pressure to raise 
revenues. But I think in order to have a balanced playing field 
to promote interstate commerce and to promote fair play, this 
bill strikes an important balance so that States have plenty of 
revenue options available to them, but basically taxing people 
that do not have a physical presence or, you know, I think has 
some fundamental problems.
    I do note that we have a Florida businessman here, and so 
you have had some experience with New Jersey and, perhaps--have 
you had any other States that have aggressively tried to pursue 
collection of taxes from you?
    Mr. Ducharme. The State of Washington, the State of 
Michigan, the State of New Jersey, and inquiries from South 
Carolina and Maine.
    Mr. Feeney. And given your experience, I guess I would just 
ask you to sort of speculate other types of businesses, maybe 
not boat manufacturers or your specific business, the 
uncertainty in the law with 49 States that you may ship to or 
have ancillary business with but are not physically located in, 
what type of uncertainty--what type of problems does that 
create for a business regardless of where they are actually 
physically located?
    What types of potential problems does that create as you 
are trying to create a business plan, trying to create, plans, 
a manufacturing facility, borrowing money to expand your 
business and, hopefully, create jobs.
    What type of planning dilemmas does that create for a small 
business person trying to grow into a mid-sized business or a 
large business?
    Mr. Ducharme. That is a good question.
    The biggest and most pronounced issue is going to be the 
burden of the accumulated costs that we would incur from hiring 
staff to wrap their arms around and get an understanding the 
various States tax issues.
    Hiring and retaining accountants and tax attorneys and 
attorneys within each State would become a burden that, under 
the current economic situation, would be very difficult to pass 
along in the pricing of our, in our case, our boats.
    Mr. Feeney. Well, I think that is a great point, you know, 
to have 50 different sub-accounting departments and tax-
planning departments just to make sure you weren't violating 
somebody's laws somewhere would create a horrendous choice for 
small businesses trying to grow and make their products 
available.
    So with that, Madam Chairman, I think this bill, you know, 
strikes a good balance and I thank all of our witnesses and 
would be happy to yield back the balance of my time.
    Ms. Sanchez. The gentleman yields back the balance of his 
time.
    At this time, I would like to recognize the ever-patient 
gentleman from Massachusetts, Mr. Delahunt for 5 minutes.
    Mr. Delahunt. Well, thank you so much for that kind and 
generous introduction.
    I have been attending these hearings--I should direct this 
to the Chair--long before you came to Congress. As Yogi said, 
``It is deja vu all over again.''
    I am disappointed to hear, Mr. Quam, that your phone rang 
only once since my last admonition.
    Other witnesses have testified, and I concur, that we are 
dealing with a different economy. This is a modern economy. The 
Internet is playing a more and more significant role, and we 
have to adjust.
    But there is also a political reality here, and I think 
you, Mr. Ducharme and Mr. Petricone, have recognized it. That 
is, that nothing is going to happen with this bill until there 
is some accommodations.
    You know, I just hear the arguments so eloquently put 
forward by my friend from Florida about the complexity of it 
all and the burdens that, particularly, small business have to 
endure.
    And the reality is that I think there is sentiment that 
supports dealing with that.
    And I would use the example of the SST--and Mr. Johnson, 
you are very familiar with that, and you are, Mr. Quam--where 
there has been substantial progress made to resolve that in 
favor of the business community to make it more simple.
    But what I see is a lack of political will on the part of 
the stakeholders to come to the table and to achieve a, I 
think, a potential consensus that you can all work with.
    I find it interesting that those that speak out in support 
of the business activity tax reform, let us call it, are 
reluctant to express their support for the streamlined sales 
tax when, really, they are all part of the same concerns.
    There ought to be, I think--and I have said it before--a 
grand solution, if you will.
    Was it you, Mr. Quam or Mr. Johnson, that indicated it is 
about $6-1/2 billion that would be lost revenue?
    Mr. Quam. Yes, sir.
    Mr. Delahunt. What is the amount--what is the projected 
lost revenue to the States as a result of the Quill decision as 
it relates to the collection of the sales or use tax?
    Mr. Quam. Last estimates were around $30 billion.
    Mr. Delahunt. $30 billion. So we would have a factor of 
five there.
    You know, I am sure there are ways to achieve 
reconciliation on all of these issues.
    I don't see this particular proposal--maybe it gets out of 
Committee--but getting it through the Senate and on a 
President's desk, I think you better go back and give it 
another shot and sit down and bring those other stakeholders 
that are not represented here with you to the tab and sit down 
with the governors and begin those conversations that could 
very well lead to a resolution.
    And I think there are people on this Subcommittee and the 
gentlelady from California, Ms. Lofgren, offered her good 
offices. I am sure the Chair of the Subcommittee and the 
Ranking Member would also be willing to participate in, 
somehow, mediating--or navigating is probably a more 
appropriate term--through this difficult, thorny issue.
    Otherwise, you are going to have somebody sitting in this 
very chair 5 years from now, and there will be just be a 
different set of witnesses discussing the same issue.
    So I think Congress is clearly inclined to be supportive, 
however, I don't see it as a major priority for this particular 
Congress.
    The will and the intent has to be generated by those 
impacted.
    With that, I will yield back.
    Ms. Sanchez. The gentleman yields back the balance of his 
time.
    I would now like to recognize my good colleague from the 
State of Georgia, Mr. Johnson for 5 minutes of questions.
    Mr. Johnson of Texas. Thank you, Madam Chair.
    You know, there are various types of cutting instruments. 
You know, you have a meat cleaver that is, perhaps, a very fine 
cutting instrument to a butcher. Then you have a scalpel, which 
is a very fine cutting instrument to a surgeon.
    When one wields a cutting instrument, one must be careful 
with the tool selection.
    And I am not sure that the Supreme Court, on an issue such 
as this, is the kind of cutting instrument that is needed or is 
the type of butcher, if you will, or cutter. They are not the 
exact kind of cutter that is needed.
    Certainly, you don't need a butcher on something like this, 
which means you don't need a meat cleaver.
    And I am not sure that the legislative branch, with, you 
know, 435 House members and 100 Senate members can wield a 
scalpel with the precision that that cutting instrument 
requires.
    But nevertheless, that is what we have. Some would say we 
don't have a scalpel; we have got a meat cleaver and it is just 
435 people with meat cleavers trying to chop something up and 
make something better.
    So I am saying that to say that, you know, the legislative 
branch, we certainly have the power to wield the meat cleaver. 
The judicial branch certainly has the wherewithal to wield a 
meat cleaver as well.
    But it seems to me that with 50 State revenue 
representatives or representatives of States, and with the 
number of organizations that represent large and small 
businesses, it would seem that those entities would get 
together so that they would not fall victim to either the 
congressional or judicial wielding of a cutting instrument.
    You just can't--you don't want to risk that. So this is the 
kind of situation, I think, that cries out for the parties to 
get together, using the offices of the Congress, to facilitate 
something that makes sense because times have changed since our 
constitution was ratified.
    It is a living document, so that means it is going to be 
subject to interpretation depending on the times.
    And certainly, times have changed. The commerce clause has 
held us in good standing and will continue to do so. But it is 
a matter of interpreting the time now and how we can have that 
constitution apply in a way that is efficient for business to 
operate and for America to have businesses, particularly, small 
businesses, that can compete in this global economy.
    Small business is responsible for most of the job creation 
in this country, and I am torn because I support small 
businesses, but yet I am also sensitive to the needs of States 
and local governments to have sufficient revenues to do what we 
have to do to make life better for the people.
    So I am really conflicted. I am a co-sponsor on this bill 
because I do know we have got to have good business for this 
country to remain strong.
    And I will--I think most of the questions have already been 
asked and answered, and I won't ask you to answer them any 
more. But I will offer my humble offices and expertise should 
it be necessary for the parties to be able to sit down and talk 
together.
    I will be happy to do whatever I can to help facilitate 
dialogue and discussion. I will yield back the few moments of 
time that remain.
    Ms. Sanchez. The gentleman yields back.
    We have concluded the hearing for today.
    I want to thank all of the witnesses for their testimony.
    Without objection, Members will have 5 legislative days to 
submit any additional written questions, when we will then 
forward to the witnesses and ask that you respond as quickly as 
you can so that they can also be made a part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any additional 
materials.
    Again, I want to thank everybody for their time and their 
patience.
    And this hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 2:38 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 Mark Ducharme, 
         Vice President and CFO, Monterey Boats, Williston, FL







                                

Answers to Post-Hearing Questions from R. Bruce Johnson, Commissioner, 
             Utah State Tax Commission, Salt Lake City, UT













                                

    Answers to Post-Hearing Questions from Michael Petricone, Vice 
    President, Technology Policy, Consumer Electronics Association, 
                             Arlington, VA







                                

Post-Hearing Questions submitted to David C. Quam, Director, Office of 
   Federal Relations, National Governors Association, Washington, DC




--------
Note: The Subcommittee had not received a response to these questions 
prior to the printing of this hearing.



                                

                  Statements Submitted for the Record


















































































































































































































































































































                                 
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