[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
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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
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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