[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                 STATE TAXATION: THE ROLE OF CONGRESS 
                           IN DEFINING NEXUS

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


                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 4, 2010

                               __________

                           Serial No. 111-68

                               __________

         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            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
STEVE COHEN, Tennessee               STEVE KING, Iowa
HENRY C. ``HANK'' JOHNSON, Jr.,      TRENT FRANKS, Arizona
  Georgia                            LOUIE GOHMERT, Texas
PEDRO PIERLUISI, Puerto Rico         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               TED POE, Texas
JUDY CHU, California                 JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]

       Perry Apelbaum, Majority Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                    STEVE COHEN, Tennessee, Chairman

WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
DANIEL MAFFEI, New York              HOWARD COBLE, North Carolina
ZOE LOFGREN, California              DARRELL E. ISSA, California
HENRY C. ``HANK'' JOHNSON, Jr.,      J. RANDY FORBES, Virginia
  Georgia                            STEVE KING, Iowa
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
JUDY CHU, California

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel


                            C O N T E N T S

                              ----------                              

                            FEBRUARY 4, 2009

                                                                   Page

                           OPENING STATEMENTS

The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee, and Chairman, Subcommittee on Commercial 
  and Administrative Law.........................................     1
The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Ranking Member, Subcommittee on 
  Commercial and Administrative Law..............................     2
The Honorable Zoe Lofgren, a Representative in Congress from the 
  State of California, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................    59
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Member, Subcommittee on 
  Commercial and Administrative Law..............................    59

                               WITNESSES

Mr. Walter Hellerstein, Francis Shackelford Distinguished 
  Professor in Taxation Law, University of Georgia School of Law
  Oral Testimony.................................................    60
  Prepared Statement.............................................    62
Mr. Joseph Crosby, Legislative Director, Council on State 
  Taxation
  Oral Testimony.................................................    73
  Prepared Statement.............................................    75
Mr. R. Bruce Johnson, Commissioner, Utah State Tax Commission
  Oral Testimony.................................................    86
  Prepared Statement.............................................    88

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Material submitted by the Honorable Trent Franks, a 
  Representative in Congress from the State of Arizona, and 
  Ranking Member, Subcommittee on Commercial and Administrative 
  Law............................................................     3

                                APPENDIX
               Material Submitted for the Hearing Record

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...........................   119
Response to Post-Hearing Questions from Walter Hellerstein, 
  Francis Shackelford Distinguished Professor in Taxation Law, 
  University of Georgia School of Law............................   121
Response to Post-Hearing Questions from Joseph Crosby, 
  Legislative Director, Council on State Taxation................   128
Response to Post-Hearing Questions from R. Bruce Johnson, 
  Commissioner, Utah State Tax Commission........................   134
Prepared Statement of 303 Products, Inc..........................   146
Prepared Statement of the American Bankers Association...........   149
Prepared Statement of the National Association for The Specialty 
  Food Trade, Inc. (NASFT).......................................   153
Prepared Statement of Kathryn Wylde, President & CEO, Partnership 
  for New York City..............................................   156
Letter from Edward A. Zelinsky, Morris and Annie Trachman 
  Professor of Law, Benjamin N. Cardozo School of Law of Yeshiva 
  University.....................................................   158
Letter from Matthew R. Shay, President and CEO, the International 
  Franchise Association (IFA)....................................   162
Letter from Joe Huddleston, Executive Director, Multistate Tax 
  Commission (MTC)...............................................   165
Prepared Statement of Mark Louchheim, President, Bobrick Washroom 
  Equipment, Inc., on behalf of the National Association of 
  Manufacturers..................................................   167
Prepared Statement of the Organization for International 
  Investment (OFII)..............................................   171
Prepared Statement of Carey J. ``Bo'' Horne, Past President, and 
  Katherine S. Horne, Past Vice President, ProHelp Systems, Inc..   176
Prepared Statement of the United States Council for International 
  Business (USCIB)...............................................   190
Prepared Statement of the American Trucking Associations.........   192
Law Reviw Article submitted by Marjorie B. Gell, Assistant 
  Professor, The Thomas M. Cooley Law School.....................   203
Letter from Nate K. Garvis, Vice President, Government Affairs & 
  Sr. Public Affair Officer Target Brand, Inc....................   253
Letter from the Direct Marketing Association (DMA)...............   257


         STATE TAXATION: THE ROLE OF CONGRESS IN DEFINING NEXUS

                              ----------                              


                       THURSDAY, FEBRUARY 4, 2010

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

    The Subcommittee met, pursuant to notice, at 11:43 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Watt, Lofgren, Johnson, 
Scott, Chu, Franks, Jordan, Coble, and King.
    Staff present: (Majority) Norberto Salinas, Counsel; Adam 
Russell, Professional Staff Member; and Stewart Jeffries, 
Minority Counsel.
    Mr. Cohen. 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 and apologizes for being a few minutes 
late.
    I will now recognize myself for a short statement.
    Currently, States levy a tax on income earned or on a 
transaction occurring within its borders. The taxpayer is 
liable only if there exists a nexus or a connection between the 
State and the activities of the taxpayer.
    Some taxpayers have expressed concerns that current State 
tax policies are difficult to navigate, leading to 
unpredictable tax bills or incurring onerous paperwork. They 
contend that States utilize an overly broad tax nexus standard 
to impose unnecessary taxes and urge Congress to step in and 
define State tax nexus.
    State government representatives disagree. They contend the 
State taxes in accordance with the taxpayers's use. States--the 
redefining of nexus would unfairly preempt States' authority to 
tax and very likely lead to a substantial loss of State tax 
revenue.
    In response to the confusion, many legislative proposals 
have been introduced to clarify the nexus requirements. These 
proposals now before the Committee seek to limit or expand the 
ability of States to impose certain taxes.
    One such proposal urges Congress to grant States the 
authority to collect and remit use taxes from those with whom 
the States currently do not have a sufficient nexus.
    Another proposal would prohibit a State from taxing the 
income of a taxpayer who has not established a physical 
presence within the State. Essentially, these and many other 
proposals attempt to establish or solidify what constitutes a 
sufficient nexus.
    Before determining what constitutes that sufficient nexus 
for State tax purposes, Congress should ensure that it 
understands how defining nexus would affect State revenues.
    Additionally, we must consider how defining nexus would 
affect business development and investments. And we must 
explore how clarifying nexus would impact individual taxpayers.
    Today's hearing should help us understand the implications 
of defining nexus. The hearing will also provide Subcommittee 
Members the opportunity to examine generally how the 
legislative proposals would impact State taxation.
    So it is your classic situation of States wanting and 
needing more revenue and desiring their province and control 
and taxing to support their services, and businesses not 
wanting to be interfered with and having that difficulty of 
having interstate commerce and having less government 
intrusion. It is your classic situation.
    With that, I thank the witnesses for appearing today, and I 
look forward to their testimony.
    I now recognize my colleague, Mr. Franks, the distinguished 
Ranking Member of the Subcommittee, for his opening remarks.
    Mr. Franks?
    Mr. Franks. Well, thank you, Mr. Chairman.
    Mr. Chairman, today's hearing is sort of an anomaly for 
this Subcommittee. You know, rather than discussing a 
particular bill and how it would impact this industry or that 
State, we are discussing the constitutional limitations on 
States' ability to tax, and it is a question that I am 
obviously interested in, having been the former Ranking Member 
of Constitution Committee.
    And so before I start, I have several statements from 
various business groups that I would, with your permission, Mr. 
Chairman, like to see inserted into the record.
    Mr. Cohen. Without objection.
    [The information referred to follows:]
    
    
    
    


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    Mr. Franks. As many of those groups know, I am a co-sponsor 
of several State tax-related measures along with some of the 
individuals on the other side of this aisle, and I encourage 
the Chairman of the Subcommittee to move on a markup of those 
bills as soon as is practicable.
    That said, you know, I am sort of a reluctant co-sponsor of 
State-tax-related measures simply for the reason that I am a 
strong believer in the 10th Amendment, which says, ``The powers 
not delegated to the United States by the Constitution nor 
prohibited by it to the States are reserved to the States 
respectively or to the people.'' That is not really that hard 
to understand, but it is hard to apply here.
    We will hear from our distinguished panel today about how 
the Commerce Clause prohibits a State from taxing an entity 
that lacks a substantial nexus with that State. For sales taxes 
on the sale of physical goods, that restriction has been 
limited to companies that have a physical presence in the 
State.
    The Commerce Clause also prohibits a State from imposing a 
tax regime that disproportionately affects out-of-state vendors 
in favor of in-state companies.
    And I hope we will also learn how the due process clause of 
the 14th Amendment requires that a State have certain ``minimum 
contacts'' with a company before that State can tax that 
company.
    And we also hope to hear how Congress has the authority to 
shape tax authority by States under the Commerce Clause.
    What I would like to hear from today's witnesses, however, 
is really more a subtle question, perhaps even more important. 
And that is when should Congress use its Commerce Clause powers 
to regulate States' taxing authority, and how should the 10th 
Amendment constrain Congress' authority on these matters.
    If it sounds like I am siding with the States on these 
questions, Mr. Chairman, to a significant degree I am. I 
believe the founders created a Federal Government with limited 
powers.
    However, as I said before, I also believe that some of 
the--these tax bills are necessary to ensure the flow of 
interstate commerce, and that is definitely one of the powers 
that was given to Congress as well under the Constitution.
    So for my friends in State government, I have a question. 
When is a good time for Congress to regulate in this area?
    Time and time again, the States and localities have come to 
Congress saying that they cannot afford for Congress to cut 
their revenue, and I understand that. I mean, but they have 
said when the coffers are full and when the coffers are empty. 
So that has been consistent.
    But given we know that we cannot tax our way to prosperity, 
I want to know when is a good time for Congress to assist 
States in making some much-needed tax reforms.
    So that is the mission from my perspective, Mr. Chairman, 
and I look forward to hearing from our witnesses on these and 
other questions, and I yield back the balance of my time.
    Mr. Cohen. Thank you, sir.
    As I understand it, no one on the Republican side is 
desiring to make an opening statement. There are a few folks on 
the Democratic side that would like to make a brief opening 
statement, and there is one person on the Democratic side that 
would like us to have no opening statements because he is so 
interested in hearing the panel.
    Because we have come here late, no--through mostly no fault 
of theirs, a little bit of mine, but mostly the Congress' for 
the votes, I am going to ask anybody that wants to make a 
statement to make a statement but to limit your remarks to 2 
minutes.
    So with that, Ms. Lofgren, you are recognized, and you are 
in the 2-minute zone.
    Ms. Lofgren. Thank you, Mr. Chairman. I will take 2 
minutes.
    This is an important hearing, and I think there are 
certainly academic issues that will be addressed. But I hope 
that the witnesses will talk about not just the impact on State 
and local governments, which we care about--I was a county 
supervisor for 14 years before I came here--but also the impact 
that State and locals can have on our business environment.
    I think that we need to be concerned that local 
governments--and I did the same when I was there--have to meet 
a bottom line. Their job is not to worry about the national 
economy. Their job is to meet their payroll.
    But the Congress has a responsibility for the entire 
economy of the country, and unduly burdening electronic 
commerce with the patchwork of taxes may have an impact on 
economic growth.
    So I just wanted to put that out there in the hopes that 
the witnesses will address it, and I am eager to hear them.
    And I will yield back, Mr. Chairman.
    Mr. Cohen. Thank you, Ms. Lofgren.
    Chairman Johnson is recognized for 2 minutes.
    Mr. Johnson of Georgia. Thank you, Mr. Chairman. Thanks for 
holding this important hearing on State taxation today.
    Today we will examine the intricacies of nexus and its 
impact on State taxation. We will also have the opportunity to 
examine the pending legislative proposals before this 
Subcommittee regarding State taxation.
    This hearing is necessary because States have widely 
varying and inconsistent requirements regarding taxation. The 
Supreme Court has acknowledged that Congress has the authority 
under the Commerce Clause to legislate in the area of nexus for 
State tax purposes.
    Therefore, Congress should take action to simplify the tax 
system and make it fair for individuals, States and businesses. 
This is why I introduced H.R. 2110, the ``Mobile Workforce 
State Income Tax Fairness and Simplification Act.''
    This legislation provides for a uniform, fair and easily 
administered law that would ensure that the correct amount of 
tax is withheld and paid to States without the undue burden 
that the current system places on employees as well as 
employers.
    Understanding nexus is extremely important because it 
directly affects our districts and their ability to collect 
revenue for essential services that benefit our constituents.
    I thank the Chairman for holding this hearing, and I look 
forward to hearing from our witnesses today. Thank you.
    Mr. Cohen. Thank you, sir.
    Mr. Scott, Chairman Scott, are you--is that who is next? He 
is gone? Ms. Chu is left.
    Welcome. I am now pleased to introduce the witnesses and 
hear the testimony for today's hearings. First, thank you all 
for participating in today's hearing. Without objection, your 
written statements will be placed into the record and we would 
ask you limit your oral remarks to 5 minutes.
    You will note that we have a lighting system. It starts 
with a green light. At 4 minutes, it turns--it doesn't turn 
yellow; at 4 minutes a yellow light comes on. The green light 
goes off. And then the red light comes on at 5 minutes, and 
that means you should have concluded by that time.
    After each witness has presented his or her testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the same 5-minute limit.
    First witness is Mr. Walter Hellerstein. Professor 
Hellerstein is the Francis Shackelford Professor of Taxation at 
the University of Georgia Law School. He is co-author of State 
Taxation Volumes I and II and other tax manuals--over 100 
journal articles he has published.
    Professor Hellerstein has practiced extensively in the 
State tax field and has been involved in numerous State tax 
cases before the U.S. Supreme Court. He did not teach Herschel 
Walker.
    Thank you for being here, Professor Hellerstein. Begin your 
testimony.

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

    Mr. Hellerstein. Thank you, Mr. Chairman. I am honored by 
your invitation to testify here today, and I hope I can be of 
assistance to the Subcommittee.
    My testimony addresses three basic questions. First, what 
is State tax nexus? Second, what can Congress do about State 
tax nexus? And third, what should Congress do about State tax 
nexus?
    First, what is State tax nexus? Essentially, State tax 
nexus is the minimum required constitutional connection that a 
State needs to tax a taxpayer or to require someone to collect 
a tax.
    For the most part, that nexus had been defined by the 
courts because Congress has only rarely enacted statutes 
relating to nexus.
    And the general rule under the due process clause for all 
taxes is that nexus is created even without physical presence 
if a taxpayer purposely directs its activity toward a State as, 
for example, by selling to in-state customers.
    The way the law now stands with regard to the Commerce 
Clause is that nexus for purposes of collecting a sales or use 
tax requires the physical presence of the seller.
    With regard to the imposition of income taxes, however, no 
physical presence has been required. Instead, courts have 
looked to what they call economic or--presence or a significant 
exploitation of the State's market. So that is where the law 
stands.
    What can Congress do about State tax nexus? The answer is 
Congress can pretty much do anything it wants in this area, 
subject only to the very loose restraint that it cannot 
authorize a violation of the due process clause.
    In fact, the courts, in talking about this very issue, 
said, ``No matter how we evaluate the burdens, no matter what 
the court says, Congress remains free to disagree with our 
conclusions.'' Accordingly, Congress is free to decide whether, 
when, and to what extent States may burden interstate mail 
order concerns with a duty to collect use taxes.
    Third, what should Congress do about State taxes? I should 
make it clear that I have not been asked to address the 
specifics of the proposed legislation.
    Instead, I am just going to share with the Subcommittee 
some of my general--some important considerations that I think 
the Subcommittee should take into account in considering what, 
if anything, to do about the various nexus proposals.
    First, in my view, there is no one-size-fits-all solution 
to the State tax nexus problem. A solution to one problem--for 
example, a 30-day physical presence rule for triggering a tax 
withholding obligation--may well be inappropriate for another 
problem--for example, whether or not a State vendor should be 
required to collect a use tax on sales to in-state consumers.
    My second point, related to my first, is that nexus issues 
raised by sales taxes are different from nexus issues raised by 
income taxes. And Congress should pay attention to that 
difference. I think I can best illustrate this by an example.
    As I think most people sitting in this room know, all 
States that impose sales taxes on things that are purchased 
locally also impose so-called use taxes on stuff that people 
buy outside the State and bring into the State.
    The reason for this is that States, quite sensibly, want to 
impose a uniform tax on all things that are consumed in the 
State without giving in-State folks an incentive to leave the 
State to shop elsewhere.
    So for example, if a resident of Washington goes to buy a 
car in Oregon, she doesn't pay a sales tax. Why not? Because 
Oregon doesn't have a sales tax. She brings the car back to 
Washington. What happens? She pays a use tax.
    The same thing in principle is true when I buy a book from 
Amazon.com. I don't pay a sales tax because title passes where 
the--Amazon is. When I receive that book in Athens, Georgia, I 
owe a use tax.
    There is, however, one significant difference. When my 
Washington resident goes back to Washington, when does she pay 
the use tax? She goes to register the car and she pays a use 
tax. Well, pretty simple.
    When I buy the book in Athens, Georgia, I just go to the 
book registry and I register the book, right? Obviously not. As 
long as we have a First Amendment, we are not going to have 
book registries.
    So the real question in the use tax area--it is clear I owe 
the tax. The only question is under what circumstances can we 
reasonably ask someone to help the State collect a tax that is 
clearly due.
    In the income tax area, it is a little bit different. Why? 
Because in the income tax area, the question as to whether or 
not a tax is due is not always clear when, for example, there 
is no presence of a taxpayer in a State.
    So there, it is a much more complicated question. I think 
in looking at these issues, Congress needs to keep in mind 
these differences.
    Third point--and I see my time is about to run out--I think 
it is very important for Congress to look at the question of 
physical presence and to ask whether physical presence makes 
sense or non-sense in the context of a tax collection 
obligation.
    I think we can all agree that requiring a remote seller to 
comply with a use tax obligation may well impose a burden on 
interstate commerce if the compliance burdens are unreasonable.
    The question, however, is whether physical presence is a 
good proxy for determining whether such burdens exist.
    Is a small business that happens to send a few salespeople 
into a State, thus establishing a physical presence and 
triggering a tax obligation, better able to comply with another 
State's tax laws than a multi-million-dollar out-of-state 
retailer that may not have physical presence in the State but 
has sophisticated software programs that not only track a 
customer's buying habits, frequently informing them of product 
offers, but also fulfills tax collection obligations of similar 
businesses that have physical presences in the State?
    If not, perhaps there is a better metric than physical 
presence for determining nexus for use tax collection purposes 
in the 21st century.
    Thank you, and I apologize for going over.
    [The prepared statement of Mr. Hellerstein follows:]
                Prepared Statement of Walter Hallerstein























                               __________
    Mr. Cohen. Thank you, Professor Hellerstein. Appreciate it.
    Second witness, Mr. Joseph Crosby. Mr. Crosby is the senior 
director of policy of the Council on State Taxation and its 
chief operating officer.
    He regularly testifies before State legislatures and other 
State and national policy-making boards, such as the Federal 
Advisory Commission on Electronic Commerce, and frequently 
quoted in State and local tax policy publications. Previously 
served this organization as legislative director.
    Prior to joining COST, Joe was national director of the 
State legislative services for Ernst & Young in Washington, 
D.C.
    Mr. Crosby, thank you very much, and we--you may begin your 
testimony.

 TESTIMONY OF JOSEPH CROSBY, LEGISLATIVE DIRECTOR, COUNCIL ON 
                         STATE TAXATION

    Mr. Crosby. Thank you, Mr. Chairman, Members of the 
Committee. I appreciate the opportunity to share with you today 
COST's views on the important issue you have before you, the 
role of Congress in defining tax nexus.
    Council on State Taxation, COST, is a trade association 
based here in Washington, D.C. We represent approximately 600 
of the Nation's largest businesses on State and local tax 
issues.
    In my written statement, I demonstrate two things. First, 
that the existing hodgepodge of State tax nexus laws burden 
interstate commerce; and second, that Congress has a 
responsibility to regulate issues associated with State tax 
nexus.
    In the interest of time, I am going to focus my comments on 
the second part of that, which is the need for Congress to act.
    Nexus laws very widely and are constantly changing. Over 
the past few years, the pace of change has accelerated, and new 
laws and regulations are directed almost exclusively at 
expanding the jurisdiction of State tax nexus.
    These expansive nexus standards have implicated many areas 
of State taxes, including personal income taxes, business 
activity taxes, sales and use taxes, and telecommunications 
transaction taxes.
    The fact that States have been very active over the past 
few years in adopting new and amended laws and regulations has 
not provided taxpayers with either clarity or certainty.
    Indeed, clarity and certainty are not the motivations for 
the enactment of these laws. The primary motivation for 
expanded State tax jurisdiction, as the Chairman indicated in 
his opening remarks, is to bring in more tax revenue to the 
States. It is quite natural for State legislators to seek to 
export their tax burdens to the greatest extent possible.
    Even if the States did have a desire to provide clear and 
certain nexus standards, though, they cannot do it. They can't 
do it because State tax jurisdiction is ultimately a 
constitutional construct.
    States acting alone or even in concert cannot usurp the 
Constitution. And so ultimately it falls on this body to 
determine the appropriate extent of State tax jurisdiction.
    With regard to nexus for business activity taxes, absent 
Federal action the controversy that exists today will continue 
unabated. It imposes significant burdens on our national 
economy.
    Since Quill was decided by the court nearly two decades 
ago, the court has had many opportunities to take State tax 
nexus cases and has chosen not to do so. Even if the court were 
to decide to take a case, it is likely that it would be decided 
on the limited facts of the case. Quill has taught us this.
    As Professor Hellerstein noted, even if the court were to 
take such a case, the Congress still ultimately has the 
authority to determine the appropriate extent of State tax 
nexus.
    Congressional legislation clarifying that physical presence 
is the appropriate nexus standard for the imposition of direct 
taxes on business is fair to both States and businesses and 
provides predictability and consistency necessary to promote 
economic growth.
    Turning to sales and use taxes, the States and the business 
community have actually come together in this area. Mr. 
Delahunt was here briefly earlier. He has long worked on this 
issue.
    The States and the business community over--for over 10 
years have worked together on the Streamlined Sales and Use Tax 
Act to address the burden issue that the court spoke to in 
Quill. Unfortunately, that process cannot come to resolution 
absent congressional action.
    The process was initially predicated on congressional 
enactment of authorization of States to collect sales taxes, 
coincident with Federal legislation that demonstrated--required 
the States to simply, that compensates sellers for any burdens 
that remain, and that make sure that there is a fair and even 
nexus standard that applies nationwide.
    Finally, turning to non-resident taxation of employees and 
telecommunications taxes, the problems in these areas are not 
necessarily the case that tax jurisdiction isn't clear. For 
non-resident employees who travel to multiple States, it is 
clear that States have nexus over these folks and can impose 
tax on them.
    The question is whether the multiplicity of jurisdictions 
that have the ability to tax the same income makes sense in our 
national economy. And as the Federation of Tax Administrators 
said in testimony before this Committee in a prior Congress, 
``Complying with the current system is indeed difficult and 
probably impractical.''
    A Federal solution to the issue of non-resident personal 
income taxes and telecommunications transaction taxes can be 
crafted without imposing financial hardships on the State and 
without unduly interfering with State tax authority.
    It is conceivable in these areas that the States acting in 
lockstep could address the problem. The reality is, however, we 
have no example in our history of the States coming together on 
a tax issue like this to create and continue uniformity over 
any period of time.
    In conclusion, I urge this Committee to favorably report 
the legislation that is before it. It is critical that the 
Congress have a thorough debate on these issues, and I applaud 
the Chairman and the Ranking Member for holding this hearing 
today.
    I welcome any questions that you or the Committee may have. 
Thank you very much.
    [The prepared statement of Mr. Crosby follows:]
                 Prepared Statement of Joseph R. Crosby






















                               __________

    Mr. Cohen. You are welcome, Mr. Crosby, and a wonderful 
close.
    Our final witness is Mr. Bruce Johnson. Commissioner 
Johnson was appointed to serve as commissioner of the Utah 
State Tax Commission by Governor Leavitt in October 1998. 
December 2009, Governor Herbert named him chair of the 
commission.
    The tax commission is comprised of four commissioners who 
have the constitutional duty to administer and supervise all 
the tax laws of the State of Utah, including property tax, 
income tax, franchise tax, sales tax and other miscellaneous 
taxes.
    Prior to his appointment, Commissioner Johnson was a 
partner in the law firm of Holme Roberts & Owen. And prior to 
joining that firm, he was a trial attorney for the tax division 
of the U.S. Department of Justice.
    Thank you, Commissioner Johnson, and we welcome your 
remarks.

         TESTIMONY OF R. BRUCE JOHNSON, COMMISSIONER, 
                   UTAH STATE TAX COMMISSION

    Mr. Johnson. Thank you, Mr. Chair and Members of the 
Committee. It is a great pleasure for me to be here today.
    It is particularly an honor to testify with Professor 
Hellerstein. I learned a lot from his father's textbook. I 
continue to consult his textbook.
    It is also a pleasure to appear with Mr. Crosby. I worked 
with COST extensively over the last 12 years, and I think we 
have had the opportunity to make some progress on some of these 
difficult State tax issues.
    I am appearing today on behalf of the Federation of Tax 
Administrators, which is a group of tax agencies across the 
country. It is all 50 States, the District of Columbia and New 
York City.
    Nexus is a fundamental concept in State taxation and it 
benefits both taxpayers and tax collectors. It is rooted in the 
fundamental laws of the country--in the Constitution, as 
interpreted by the courts, as Professor Hellerstein has noted.
    Mostly, Congress has chosen to forbear from limiting--from 
exercising its ability to limit the States, and we urge that 
forbearance to continue.
    There are times in the past when the States and businesses 
have come together and recognized that they need a 
congressional solution, and that has been forthcoming, and we 
appreciate the Congress' forbearance on these important issues.
    The basic issue before us really is is economic presence 
appropriate or is physical presence the appropriate test for 
nexus. I would agree with Professor Hellerstein that this is 
not a situation in which one size fits all. But the basic 
question is physical presence versus economic presence.
    And the fact is that the economy of the 21st century is 
electronic and borderless. Many multistate businesses can and 
do operate without any physical presence in a State. They 
exploit the State's market. They make millions or hundreds of 
millions of dollars of sales into those States and derive 
income from those States.
    Consequently, the businesses that utilize these modern 
technologies may have less of a physical presence in the State, 
but they have a much greater impact on the State and on a 
State's economy. Appropriate nexus standards need to take that 
into account.
    Let me give you a couple of real quick examples. I have a 
couple of credit cards in my wallet, one of them from a local 
bank. One of them is from a bank that is headquartered in the 
east.
    Let's assume both of those banks have $10,000--or 10,000 
customers in the State of Utah. Let's assume they both receive 
the same amount of revenue from bank charges from stores in the 
State of Utah. Let's assume they both receive exactly the same 
amount of interest income from Utah cardholders.
    Does it make sense that one bank has to pay income tax on 
all of that money and the other bank doesn't? Why should an 
out-of-state bank be able to come in, exploit the Utah market, 
and not have to pay an income tax on the income it derives from 
the Utah market? It simply doesn't make sense in this economy.
    Another example--one of my favorite bookstores--actually, 
my favorite bookstore in Salt Lake is Sam Weller's Bookstore. 
My grandmother used to buy books there before I was born. She 
brought me a book every year on my birthday.
    My other favorite bookstore is Amazon. Amazon sends me e-
mails two or three times a week that tell me what I have 
ordered, what I have browsed, what my favorite choices are, 
what books they think I would like, and I have some of those 
downloaded onto my Kindle in about 20 seconds.
    Does it make sense that Sam Weller has to collect sales tax 
on the sales of books to me and Amazon, who knows a heck of a 
lot more about me than Sam Weller does, frankly, doesn't have 
to collect a sales tax?
    The fact is that the physical presence standard was 
outmoded and recognized as outmoded by the court in Quill in 
1992 and was affirmed on the basis of stare decisis. It was 
outmoded, you know, 18 years ago and commerce has changed 
radically since then.
    This is simply a--the physical presence standard is a relic 
of a bygone era and should be rejected.
    The other point I would like to make is--two other points I 
would like to make. This is not a question of States--hungry 
States versus businesses.
    This is a question of taxpayers within the State versus 
taxpayers that are multistate businesses. How is the burden 
appropriately and fairly distributed among all of the people, 
all of the businesses doing business in the State? It is a 
fairness issue.
    The States gave up a lot of their sovereignty when the 
Constitution was adopted. And they did it for good and 
appropriate reasons. But because they did give up that 
important part of their sovereignty, it is important that this 
Congress recognize and deal very carefully in this area.
    Thank you very much.
    [The prepared statement of Mr. Johnson follows:]
                 Prepared Statement of R. Bruce Johnson

























                               __________
    Mr. Cohen. Thank you, Commissioner Johnson.
    Normally, I start the questioning, but in recognition of 
the fact that we have reasonably good attendance and that Mr. 
Watt was so good to want to hear the witnesses and not do an 
opening statement, I am going to let Mr. Watt be the first 
person to ask questions.
    Mr. Watt, you are recognized.
    Mr. Watt. Thank you, Mr. Chairman.
    I plead guilty to being the person who was rushing to hear 
the witnesses because I was hoping that the witnesses would 
shed a lot of light on this, and they have educated us 
substantially on the issues.
    This is an issue that a number of us have been working on 
for a number of years, and it just seems to be like the little 
pink bunny. It keeps going and going and going. And it never 
gets resolved.
    Mr. Johnson, there was a movement at some point to have the 
States come together and get a number of States to enter into 
some kind of streamlined agreement, compact, whatever. Can you 
tell us what the status of that is presently?
    And because I am--there is a growing pressure to do 
something in this area because of the mismatch of--hodgepodge 
of things that is going on, and the pressures to do what you 
have suggested, which is stay out of this and do nothing, I 
think, are growing adversely to that position.
    So tell us what is going on in that area and what is the 
impediment.
    Mr. Johnson. Thank you. I appreciate that. The streamlined 
sales tax project is alive and well. We added our most recent 
State, Wisconsin, just in the last year. And this is one of 
those few areas in which we would ask Congress to act.
    The business community and the States collectively have 
been working together to simplify their sales tax systems, to 
simplify their sales tax bases, to have more uniformity in the 
rates, more uniformity in the tax base among the various 
jurisdictions within a State----
    Mr. Watt. Now, how many----
    Mr. Johnson [continuing]. More uniformity----
    Mr. Watt [continuing]. How many--Wisconsin made how many 
States that have come on board?
    Mr. Johnson. I believe there are 21 States now that are 
full Members, and there----
    Mr. Watt. Wasn't there some agreement at some point that 
once you reach some critical mass Congress would act, or at 
least that was implicitly understood? What was that magic 
number? And am I mistaken that there----
    Mr. Johnson. Well, there was a magic--excuse me. There was 
a magic number before the agreement actually took effect, and 
we have reached that magic number. The magic number that is 
necessary before the Congress acts is a magic number that, 
frankly, is up to the Congress.
    Mr. Watt. So what was the magic number that Congress didn't 
implicitly agree to?
    Mr. Johnson. The magic number that was in place before the 
agreement became effective I think was 10 States with 20 
percent of the population----
    Mr. Watt. Okay, and----
    Mr. Johnson [continuing]. Of the sales tax States.
    Mr. Watt. Now, what would Congress need to do to move on 
that?
    Mr. Crosby, you know about the history of this. What do we 
need to do? Or should we be doing nothing on that issue?
    Mr. Crosby. Thank you, Congressman Watt. First, in this 
current Congress, legislation has not yet been introduced. I 
know that is something that Mr. Delahunt and others have been 
working on. So critically, of course, to get legislation 
introduced--legislation that has been introduced in prior 
congresses that----
    Mr. Watt. Which would do what?
    Mr. Crosby. Which would authorize States that have complied 
with the simplification requirements in the legislation to 
impose a collection obligation on all sellers regardless of 
nexus.
    Mr. Watt. Okay.
    Mr. Crosby. So it would allow them to require these sellers 
to collect taxes under a simple sales tax system.
    Mr. Watt. Now, would that solve the whole problem, or would 
this--is that just a particular segment of the problem?
    Mr. Crosby. It would address the problem with respect to 
sales and use taxes only. It would remain unsolved the issue of 
nexus for business activity taxes, the assignment of charges 
for telecommunications transaction taxes like voice over 
Internet protocol.
    And then, finally, with regard to mobile workers, people 
who travel for business, there would still need to be relief 
provided for those who travel for----
    Mr. Watt. And would that resolve at least that sales and 
use tax thing for all of the States or just for the 21 that 
have entered into the compact?
    Mr. Crosby. It would solve it for all of the States that 
chose to comply with it. So for the--those that have entered 
the compact, it would obviously--they would be almost all the 
way there.
    Other States then could choose--and we know in talking with 
State legislators, there are many of them who have chosen not 
to act because until Congress acts that those--the remote sales 
dollars are not available to them, and so for many States there 
is a negative financial implication for acting now, and I know 
that has been the case in a number of States, including some of 
the States represented here.
    Mr. Watt. Mr. Chairman, you rewarded me for not saying 
something, and I am--I hope you will reward me for being close 
to being--end of my time. So I will yield back.
    Mr. Cohen. Thank you, Mr. Watt. I appreciate it. I will 
hold in reserve your reward.
    Mr. Franks, you are recognized.
    Mr. Franks. I usually go after you.
    Mr. Cohen. If you would like to pass and we will 
recognize----
    Mr. Watt. I have discombobulated him.
    Mr. Franks. Yes.
    Mr. Watt. He doesn't know how to react to it.
    Mr. Franks. Mr. Watt does that to me a lot. If it is all 
right, I am going to pass over to Mr. Jordan.
    Mr. Jordan. Thank you, Mr. Chairman.
    Mr. Johnson, is there anything in the example you gave, the 
two banks--is there anything prohibiting the bank in Utah from 
marketing their services and products out of State, or is there 
anything prohibiting--I think you said Sam's Bookstore versus 
Amazon--is there anything prohibiting Sam from marketing his 
product outside your State?
    I mean, it seems to me we always have this idea to reach 
some sort of fairness, we have got to increase the tax burden 
on certain businesses who may be located out of the State 
versus there is other ways to be fair in the marketplace and 
for people to compete in the marketplace.
    Mr. Jordan. If those businesses--if Utah businesses--and 
many of them do--choose to exploit markets in other States, 
that is perfectly fine, and they should be subject to the 
taxation in those other States.
    If those other States choose not to tax it, that is--that 
is their prerogative as well. But the States should have the 
authority to do that.
    Mr. Jordan. And, Mr. Crosby, you talk about the hodgepodge 
of laws and the idea that, you know, we need to tax more--or at 
least some think that--states think that--talk to me about what 
you would perceive as the burden on economic growth, 
particularly if we start putting an additional tax on cell 
providers, satellite providers.
    It seems to me that--and particularly in this climate, 
economic climate, we find ourselves in, that would be the wrong 
approach.
    Mr. Crosby. Thank you, Congressman Jordan. The biggest 
problem, I think, is the considerable uncertainty that the 
business community faces today without an adequate answer as to 
when they are going to be subject to a State's tax 
jurisdiction.
    Governor Gregoire in the State of Washington just last 
month proposed a bill that would say--would abandon 
Washington's long-held physical presence nexus standard and say 
you now have nexus if you sell into Washington. It would also 
say that if you stop selling into Washington you still have 
nexus for the next 4 years.
    It is clear to me that in these cases the purpose of these 
bills is to export the tax burden, and that is a natural 
tendency, I think, for State legislators. And that, I think, is 
the role--and Chairman Cohen set it up very well at the 
beginning. At what point and how should Congress step in to 
make sure that the needs of the States are balanced with the 
needs of the national economy?
    Mr. Jordan. And you are representing briefly in your 
testimony--what about the impact on the individual? You know, I 
mean, to me, you know, obviously, at some point it is people 
paying these taxes, and the person who is traveling or 
whatever--talk about that.
    Mr. Crosby. Right.
    Mr. Jordan. I think that is a big concern.
    Mr. Crosby. It is a terribly large issue. Many of us--I 
mean, many of the folks here in this room today have traveled 
here. Washington, D.C., of course, doesn't have the right, as 
you well know, to impose personal income taxes on non-
residents. But every other State does.
    Mr. Jordan. Right.
    Mr. Crosby. Or every State does, I should say. And when 
individuals travel for business in many States today you are 
legally required to pay State taxes and, in some cases, local 
taxes even if you are there for 1 day.
    Mr. Jordan. Right.
    Mr. Crosby. The burden of that is, from an administrative 
perspective, on the individual and the employer--vastly exceeds 
the value to the economy. The legislation that Congressman 
Johnson has introduced addresses this in a very balanced way--
--
    Mr. Jordan. Right.
    Mr. Crosby [continuing]. And does so in a way that has 
almost negligible effect on most States financially.
    Mr. Jordan. I am a co-sponsor of that legislation.
    Professor, what do you say about Congressman Johnson's 
legislation requiring you to be in a State for a certain period 
of time----
    Mr. Hellerstein. Yeah. I have actually testified on this 
issue before and I--in principle, I think that this is a very 
appropriate exercise of congressional power. Whether it should 
be 29 days or 25 days, you know, that is not----
    Mr. Jordan. Yeah.
    Mr. Hellerstein [continuing]. It is beyond my pay grade. 
But clearly, I think this is--in part for the reasons I think 
that have been suggested to the Subcommittee, this is a quite 
appropriate area for Congress to act.
    Mr. Jordan. And are you opposed--just for the record, are 
you opposed to Congressman Boucher's legislation, Professor?
    Mr. Hellerstein. Excuse me?
    Mr. Jordan. Congressman Boucher's--the BAT, the Business 
Activity Tax Simplification Act--are you----
    Mr. Hellerstein. No, I am not--am I opposed? I mean, no. 
And I have not--again, I am not here to either favor or 
disfavor any bills other than those I have already taken a 
position on.
    If you ask me about--specifics about that bill, I would 
say--in effect, go back to my general point, which--it seems to 
me you have got to look very carefully at what it is--what is 
the context of an income tax.
    Perhaps you might want to look at what other jurisdictions, 
including foreign jurisdictions, do. Should we have the same 
rules domestically as we have internationally? That is an 
important question.
    I think you also have to ask the question whether or not, 
you know, where is the tax base. If, in fact, all the States 
are saying, often with businesses' encouragement, that the base 
should be defined entirely by sales, it might not make a lot of 
sense to have a jurisdictional rule that says you can't tax if 
all you do is sales in the State.
    So I think these are things Congress needs to think about.
    Mr. Jordan. I have got 30 seconds. You are supportive of 
Congressman Johnson's. You are unsure of Mr. Boucher's. Where 
are you at on 1019 and 1521, Video Tax Fairness Act and the 
Cell Tax Fairness Act? Where are you at on those two? We have 
got four bills kind of in front of the Committee----
    Mr. Hellerstein. Right, and I am--again, I have--you know, 
I may not have the numbers right, but I can tell you that I 
think that the bill involving the question as to whether or not 
New York should be able to employ its convenience of the 
employer rule--again, I think that would be--that would be 
appropriate for Congress to say, ``Here is the general rule for 
allocating personal income from--among States, rather than 
having overlap.''
    I think, in my judgment--and I have said this in print--I 
think New York has overreached in that instance.
    What was the other bill you mentioned?
    Mr. Jordan. Video Tax Fairness Act, Sales Tax--Cell Tax 
Fairness Act, 1521.
    Mr. Hellerstein. I don't think I am familiar with that--
with that bill.
    Mr. Jordan. Okay. All right.
    Thank you, Mr. Chairman.
    Mr. Cohen. Thank you, Mr. Jordan.
    Ms. Lofgren, the distinguished Chairman of the--and an 
expert in this subject, you are recognized.
    Ms. Lofgren. Well, I don't know if I am an expert on the 
subject, but I am the author of the Cell Tax Fairness Act.
    And as I listen to--this is a complicated subject, really. 
I mean, it--in terms of business activity, taxing of employers, 
sales and use tax--I mean, it is not just a one-issue type of 
thing.
    But the question I have, Mr. Johnson--and I am very 
sympathetic to State and local government, but I am also aware 
that we have some national priorities, which is why I 
introduced the Cell Tax Fairness Act.
    We have taken a position as a Congress, and the President 
has taken the lead, that broadband deployment is important for 
the economic development of the United States, and it is more 
than just people being--it is a generator of additional 
economic activity.
    We are behind other industrialized nations. And we are 
falling farther behind. In some cases, we are even behind 
countries that we wouldn't expect to be behind.
    And if you take a look at how is access occurring to 
broadband, increasingly it is with cell phones. And that is 
especially true for low-income Americans and especially true 
for minorities.
    If you take a look at who has access to broadband primarily 
through a cell phone, it is a younger person, it is a person 
with less income, it is an African American or Latino person, 
more than someone who has the bucks to go out and buy an 
expensive desktop.
    I am struggling with, you know, what is the proper balance 
for the Congress. We have this priority, and yet State and 
local governments have increased the taxes on--and burden to 
access on the lowest income Americans on their broadband access 
at a rate twice as fast as the taxes on any other goods.
    So do you think that that is an appropriate point of 
interest for us? And if not, why not?
    Mr. Johnson. Well, let me--and thank you for the question. 
Let me respond in a couple of ways. First, let me acknowledge 
that the Mobile Telecommunications Sourcing Act was a good 
example of a situation where the States and the businesses came 
together, said, ``We need a solution here, let's go to Congress 
with something we can all agree on,'' and we all agreed on it, 
and Congress enacted it.
    I am sure there are some businesses that didn't agree with 
it. I am sure there are some States that didn't agree with it. 
But there was a broad recognition that that was a problem that 
needed to be solved, and we did that cooperatively.
    You know, I am sympathetic to the problems of the low-
income households. And those are also the people that are 
primarily the recipients of a lot of the government aid and 
assistance. And if the infrastructure is not there, if the 
rapid transit systems aren't there, if those systems aren't 
available to the community----
    Ms. Lofgren. No, and that is why I am so----
    Mr. Johnson [continuing]. We are going to have a problem.
    Ms. Lofgren [continuing]. Sympathetic. I mean, so many 
essential services are provided by State and local government, 
oftentimes with Federal assistance.
    But certainly, the provider, on-the-ground provider, is 
often State and local government. And I mean, I spent almost as 
many years in that role in county government as I have in the 
Congress. So I am not hostile to that point of view.
    Mr. Johnson. And the streamlined sales tax agreement--let 
me point out--we did not require each locality to give up its 
own rate, but we did require them--and the agreement does 
require them to give up the ability to set their own tax rate, 
to have their own--excuse me, their own tax base.
    So those are difficult problems of balancing.
    Ms. Lofgren. If I can, I am going to go to Mr. Crosby, 
because, really, what the bill does--it doesn't repeal it; it 
just freezes it, and it also talks about differential rates, 
and I heard a muttered comment that it is always easy to tax 
somebody who is not a voter in your jurisdiction. You know, 
that is a preferred way.
    And that is also a preferred way for people who do not turn 
out to vote in large numbers, so I think that is why the low-
income users of this broadband access have been particularly 
victimized.
    Mr. Crosby, I am very sympathetic to your concerns. 
However, business also needs what State and local governments 
provide, and especially education. If we don't have a great 
educated American public, we don't have a future as a country.
    So how do we--if we do these controls, how do States and 
local governments make up for the revenue that they need to 
provide these essential services?
    Mr. Crosby. Thank you, Congresswoman Lofgren. That is a 
great question. I would say, first, turning to Professor 
Hellerstein, his encouragement to you that you look carefully 
at these issues is one that we would agree with as well.
    Certainly, COST and the business community is not 
suggesting that you should eviscerate State and local tax 
bases. In many cases, that is not at all what we are talking 
about. In fact, all we are simply asking the Congress to do is 
to set the boundaries for when State tax jurisdiction ends.
    It must end somewhere. Where is it? We don't know. The 
Constitution provides the due process clause. The Commerce 
Clause--that has not been well designed. I mean, in terms of--
there has not been answers from this body or from the court as 
to where the limits are.
    So I think that would--you know, the main response--the 
goal is not to eviscerate State and local revenues.
    I also would like to note a study that our organization 
does every year shows that businesses in this country currently 
pay more than 45 percent of all State and local taxes. These 
bills would not meaningfully change that figure. Businesses 
would still be paying substantial amounts of State and local 
taxes across the country.
    So I think it is really a question of the balance of what 
is the import of the national economy versus the needs of State 
and local government and striking that proper balance. And if 
you do that well, I think that the benefit accrues to all.
    Ms. Lofgren. Thank you.
    I yield back, Mr. Chairman.
    Mr. Cohen. Thank you, Ms. Lofgren.
    I now recognize the distinguished Ranking Member, Mr. 
Franks.
    Mr. Franks. Thank you, Mr. Chairman.
    And Ms. Lofgren doesn't confuse me nearly as much as Mr. 
Watt.
    Commissioner Johnson, you know, I suppose in an ideal world 
it would be great if the States--if we had some sort of magic 
nexus where the State that the business originated in, whether 
it was physical presence or economic presence, or whatever, had 
the tax base rights and then, of course, there would be 
competition among the States to keep their taxes low in order 
to attract those businesses. There would be sort of a natural 
regulation, as it were.
    But you state that the physical presence nexus standard 
which the Supreme Court has held is necessary for sales and use 
taxes is antiquated. And the State and localities have also 
been opposed to a physical presence standard for business 
activity or franchise taxes.
    So I guess my question is why should Congress support an 
economic nexus text over a physical presence test when the 
physical presence test gives businesses a certainty to do their 
tax planning? It is something that--you know, it is definable. 
So I know that is a fun question, but----
    Mr. Johnson. Thank you, Congressman. I practiced State and 
local tax law at a private firm for 17 years before I became a 
member of the commission. The physical presence test in the 
context of the modern business world simply makes no sense.
    There are under the current BATSA bill--there are so many 
ways to structure your operations around that bill to avoid 
taxation and still have exactly the same economic footprint in 
the State.
    It is simply a roadmap to--I won't say abuse, because it is 
legal. If it is authorized by Congress, it is legal. But the 
same kinds of things we see in tax havens overseas we would be 
seeing in spades in local taxation. It doesn't make sense in 
today's economy.
    Mr. Franks. Is there any overall principle--sometimes, you 
know, it is good to go back to some principle that even though 
it can't be applied in every circumstance--is there any kind of 
undergirding guideline that you sort of refer to in your own 
mind as a better approach?
    Mr. Johnson. Well, you know, the Multistate Tax Commission, 
for example, has proposed a uniform nexus standard for the 
States to adopt that would have reasonable force.
    If you didn't exceed in that case $500,000 worth of sales, 
or $50,000 worth of payroll, or $50,000 worth of property in a 
State, you wouldn't be subject to the income tax. I proposed 
that legislation in Utah because I thought it made a lot of 
sense.
    Small businesses particularly should have some certainty, 
and they should have some security, and there should be some 
thresholds that are recognized. And the States, frankly, need 
to do a better job. But I would encourage COST and the 
businesses to approach the States and say, ``Look, this is a 
problem for us. Let's get it solved.'' And they can knock off 
some States.
    Now, I know it is harder to knock off 50 States than it is, 
in many cases, to come to Congress. But that is our 
Constitution. You know, the States have sovereign rights. And I 
think the States will be receptive to those approaches, perhaps 
not this year. They might want to wait for a slightly better 
budget year.
    But that is basic fairness. I don't want to get income tax 
returns from somebody that sells $15 worth of stuff in my 
State. That doesn't make sense for the taxpayers. It doesn't 
make sense for the tax collectors.
    There are some minimum thresholds that the States should 
adopt, and we would be happy to work with the business 
community in trying to implement those on a State-by-State 
basis.
    Mr. Franks. Thank you, sir.
    Professor Hellerstein, you don't reference the 10th 
Amendment in your testimony, so I guess to what extent, if any, 
should the 10th Amendment constrain Congress' authority to 
legislate in this whole area we are discussing here?
    Mr. Hellerstein. Well, from a constitutional standpoint--
that is, from a legal standpoint--not at all.
    I mean, I think there is virtually no doubt that Congress 
has ample power, as the U.S. Supreme Court has said--the 10th 
Amendment, to exercise its power under the Commerce Clause to 
create uniform rules for State taxation, to create thresholds, 
even, in fact, to create bases.
    There once was a time when it was thought that the 10th 
Amendment was a constraint on Congress, and there was a case 
called National League of Cities back in 1976. That case was 
overruled. So I think the short answer is the 10th Amendment 
does not, as a legal matter, constrain what this body can do.
    It may well be that if one is a fan of the 10th Amendment 
one thinks Congress shouldn't do something. But there is no 
legal constraint on Congress that the 10th Amendment in this 
context, I think, imposes.
    Mr. Franks. Mr. Chairman, could Mr. Johnson have a shot at 
the same question?
    Mr. Cohen. You are recognized, Mr. Commissioner.
    Mr. Johnson. Thank you, Your Honor. Excuse me.
    Mr. Cohen. You are competing with Mr. Crosby now for 
witness of the day.
    Mr. Johnson. Oh, thank you, Your Honor.
    [Laughter.]
    The Congress, I think, does have plenary authority in the 
Commerce Clause area. The 10th Amendment is still very much 
alive in very many areas. And I think the intent of the 10th 
Amendment clearly has to, you know, inform what Congress 
chooses to do in exercising its Commerce Clause power.
    Mr. Cohen. Thank you.
    Before I recognize Mr. Johnson and continue this sexy 
subject that this Committee often gets into, I would like to 
pause for one question for Commissioner Johnson and Mr. Johnson 
only.
    What do you think of the BCS?
    Mr. Johnson. We are not fans of it in my part of the 
country.
    Mr. Cohen. I didn't think so.
    Mr. Johnson, you are recognized.
    Mr. Johnson of Georgia. Thank you, Mr. Chairman, for 
holding this hearing.
    And before I get started, I did want to announce my own 
personal choice for witness of the day, and that honor should 
go to my good friend from Georgia, Professor Hellerstein.
    Mr. Hellerstein. Thank you, Congressman.
    Mr. Johnson of Georgia. Yes, sir.
    Mr. Cohen. You realize he has no jurisdiction to put any 
honor on you, sir.
    Mr. Hellerstein. He has jurisdiction over my children.
    [Laughter.]
    Mr. Johnson of Georgia. There you go.
    I do want to talk a little bit about H.R. 2110, the mobile 
workforce bill that would clarify and make uniform the laws 
with respect to employee withholding taxes and a duty on 
employers to withhold those taxes.
    And what kind of problems do we get when we have so many 
different tax rules coming out of 50 States? How does that 
affect our ability to compete? How does that affect 
efficiencies with respect to both sides of the issue, States 
and employers and employees?
    And I also would like to take the opportunity, before I 
expect an answer, Mr. Crosby, to say that this is a issue that 
has been percolating long before Hank Johnson arrived in 
Congress.
    And a previous congressperson from Utah was a big proponent 
of this, as you well know, Mr. Johnson.
    So, Mr. Crosby, if you would take a stab at that.
    Mr. Crosby. Thank you, Congressman Johnson. We appreciate 
your leadership on this issue and Congressman Franks and 
Congressman Jordan also for their leadership on this issue.
    The problem of traveling employees and their taxation is a 
very interesting one. It is one of those classic examples where 
the greater someone tries to comply, the greater the burden 
becomes.
    If you travel for business around the country and are 
unaware of the laws, or choose to ignore the laws, your burden 
is likely relatively light.
    But if you actually try to comply with the laws of this 
country, you could have a substantial burden to pay income 
taxes and to file tax returns in the States where your presence 
is fleeting at best.
    And from a financial perspective, for your taxes, in most 
cases you will not end up worse off, because in your home State 
you are going to get a credit against those taxes, but 
administratively the financial burden of filing all those forms 
can be quite considerable.
    I myself have looked into this. I travel fairly widely 
around the country. I live in the State of Maine that has an 
8.5 percent personal income tax rate. And so for almost every 
place I travel, were I to file in all those places, I would 
receive a credit on my Maine state return.
    But in 2008 I would have had to file returns in nearly 20 
other States. That would have been an enormous burden. And I am 
willing to admit that I did not do that, because I could not do 
that.
    For the employer, the burden is equally great. The employer 
has to track their employees' whereabouts, and for most 
traveling employees there is nothing that ties back into the 
payroll system that says where the employee is.
    Their boss may know, but the fact is most traveling 
employees don't fill out time sheets, don't keep track of their 
time on a daily basis. They do their jobs as they are 
instructed to do them.
    And so for the payroll systems to have to try to split pay 
periods, and withhold part to one State and part to another 
State, and keep track of all these things is enormously complex 
and expensive.
    And so again, here, the companies that try to comply with 
these withholding requirements are the ones that bear the 
greatest burdens.
    And in the current environment, the changes that now has--
that have come from Congress and other places over the past 
decade, companies are increasingly concerned about complying 
with all laws and regulations regardless of whether a tax 
authority is auditing them.
    So this is an increasingly important issue for businesses 
and employees. And as more companies put in place systems to 
comply, more employees are forced to deal with these laws.
    Mr. Johnson of Georgia. Thank you, Mr. Crosby. I would like 
to have a response from Mr. Johnson to this question. The 
mobile workforce bill, H.R. 2110, would set a 30-day uniform 
threshold across the Nation. Why is this 30-day threshold 
preferable to a shorter period as many have--or as some have 
suggested?
    Mr. Johnson. Thank you, Congressman Johnson. Why is it 
preferable to a shorter period? I think States--as far as I 
know the FTA is comfortable with a 30-day period.
    A shorter period would be even more burdensome on the 
businesses because then if they had, you know, a 2-day 
threshold they would have to file in lots of places. So I think 
the 30-day period is reasonable.
    The FTA, as you know--I hope you know--has been working 
closely on many provisions of this bill. We certainly recognize 
there is a problem. There is also a uniform law project under 
way at the Multistate Tax Commission to address this problem.
    It is a problem. We recognize it. And we want to work with 
the business community in solving it.
    Mr. Johnson of Georgia. Thank you.
    And if I could, Mr. Chairman, just one--if I could get a 
comment on that same issue from Professor Hellerstein.
    Mr. Hellerstein. Yes. Thank you, Congressman. Well, again, 
as I testified a couple of years ago, I believe this is a 
perfect type of intervention by Congress. We need a uniform 
rule. We have heard about the burdens that this creates.
    You know, precisely what the line is--again, that is not my 
area of expertise. But I would say this is exactly, I think, 
what Congress should be looking at, looking at administrative 
burdens, I would say, in other areas, too, and making sure that 
in this context, where, as Mr. Crosby has pointed out, there is 
really not a huge amount of revenue at stake, and it is really 
a question of which State gets the income, and if--it is not 
going to make a large bit of difference.
    This is, I think, a place where Congress can do a lot of 
good without doing a lot of harm in terms of intrusion into 
State sovereignty, because the States are not going to 
voluntarily get together and choose the right or a particular 
rule. That I think we have learned. States are not very good at 
doing that.
    Mr. Johnson of Georgia. Thank you, Mr. Chairman--witnesses.
    Mr. Johnson. Mr. Chair, I apologize. I need to amend my 
testimony. As I am looking at my notes, if I may, the 30-day 
period--I think the problem that we have with 30 days is that, 
you know, 30 working days is closer to 6 weeks, and I think we 
are--we do have a problem with that.
    Mr. Cohen. In the Senate, it is about 3 years.
    [Laughter.]
    Mr. Johnson. We would like a shorter period than that. Like 
I say, working days--that is 6 weeks. If you are going to be in 
a State, you know, for a month, you are working 20 days. 
Certainly, that, I think, is not an unreasonable burden to put 
on an employer.
    The other concern we have, of course, is the limitation on 
the taxation. We recognize that there are good reasons--
problems with withholding, but at the end of the year, you know 
where you have been. There is no uncertainty. And you can 
figure out what the taxes are and get appropriate credits.
    So I apologize for my misstatement on that.
    Mr. Cohen. Thank you. You are now second place, a half a 
remark behind Professor Hellerstein and Mr. Crosby.
    Mr. Coble, you are recognized.
    Mr. Coble. Thank you, Mr. Cohen--thank you, Mr. Chairman.
    It is good to have you all with us today. Gentlemen, it is 
essential for our economic well-being and only fair to 
businesses or taxpayers that they have certainty in knowing 
where they may or must pay their taxes.
    In reading the prepared remarks submitted for the record, 
particularly of the American Truckers Association, U.S. Bancorp 
and the Consumer Electronics Association, it appears clear to 
me that we have an unpredictable, chaotic and sometimes unfair 
system of State tax collection. And I will be glad if you all 
concur or disavow that subsequently.
    But H.R. 1521 prohibits local governments from imposing new 
discriminatory taxes on mobile services for 5 years. Now, I 
understand that many taxing regimes for mobile services are 
unpredictable.
    But, gentlemen--and I will start with you, Mr. Johnson--why 
has this occurred to the mobile industry as opposed to other 
local industries?
    Mr. Johnson. I am sorry, Mr. Coble, could you repeat that 
question?
    Mr. Coble. H.R. 1521 prohibits local governments from 
imposing new discriminatory taxes on mobile services for 5 
years. Why is this applied only to the mobile services, as 
opposed to other local industries? I think you may have touched 
on that earlier.
    Mr. Johnson. Well, we are certainly not--we are not 
supporters of this bill. We do think it singles out a 
particular industry for special treatment.
    We would also note that this is a dynamically changing 
industry. Any kind of a preemption, particularly for 5 years, 
seems to us to be unreasonable. Discriminatory is also in the 
eye of the beholder. If this discriminates against interstate 
commerce in a constitutional way, the State law wouldn't be 
upheld.
    So what we are talking about here is preventing a locality 
from distributing its tax base the way it thinks appropriate. 
And all taxes in one sense are discriminatory. Some things are 
in the tax base. Some things are not.
    You know, some income earners get a different rate than 
other income earners on income taxes. That is discrimination, I 
think, within the sense of this bill, but it may be very, very 
good tax policy. So we would oppose that bill.
    Mr. Coble. Thank you, sir.
    Mr. Crosby, do you want to weigh in on that?
    Mr. Crosby. Thank you, Congressman Coble. I will preface my 
statement by noting that as an organization that broadly 
represents business, we tend not to become involved with taxes 
on individual business segments.
    That said, however, COST has long studied the impact of 
taxes on telecommunications around the country, sort of adding 
them up and determining what burden is imposed on 
telecommunications.
    And Mr. Johnson indicated that the legislation singles out 
one industry. I would note that I think that the reason that 
the bill is before the Congress is because that industry has 
been singled out for extra attention when it comes to tax 
matters as well.
    And so, you know, certainly, it is the case that over our 
history State and local governments have imposed greater tax 
burdens on regulated utilities and they have, as the cellular 
telecommunications industry has grown, begun to export those 
tax burdens to wireless telecommunications as well.
    Mr. Coble. Thank you, sir.
    Professor, do you want to insert your oars into these 
waters?
    Mr. Hellerstein. All I would say is, you know, you have to 
be very, very careful, I think, in legislating for specific 
industries, at least without very strong evidence that that 
particular industry needs the protection.
    There is the ``me, too'' problem, as you have probably 
seen. Once one industry says, ``Gee, we are having this 
problem,'' then there are always the economists that can bring 
you the data that show that they are being discriminated 
against.
    So I think it is certainly an area where I think intrusion 
into State prerogatives as choosing their tax base is quite 
sensitive.
    Now, there may well be instances in which the proof is 
overwhelming that a particular industry has been singled out, 
looking at all taxes, and if the evidence is overwhelming it 
may be appropriate for Congress to act.
    But I think Congress has to look very, very carefully at 
the facts before, in effect, saying that States may not tax 
this or that or the other, because there is a tendency, I 
think, once one industry gets a particular benefit--``Why not 
me? I want that same benefit.''
    Mr. Coble. Thank you, gentlemen.
    I yield back, Mr. Chairman.
    Mr. Cohen. Thank you, Mr. Coble.
    Mr. Scott, the Chairman of the Criminal Law Subcommittee 
and gentleman from Virginia, you are recognized.
    Mr. Scott. Thank you. Thank you, Mr. Chairman.
    Mr. Chairman, I got involved in this issue when a local 
food processor brought it to my attention that one of their 
trucks traveling through the State of New Jersey had 
essentially been hijacked and held hostage until they had wired 
the State of New Jersey some money to release the truck.
    They had no sales force, nobody in New Jersey, just driving 
through, and essentially got hijacked. And that obviously isn't 
fair, but as the gentlelady from California mentioned, it is 
great taxation policy where you can whack people that are out 
of State and can't vote for you.
    Just from a practical point of view, Mr. Crosby, can you 
talk about the problems in trying to figure out what sales tax 
you might owe as you go through cities, States, counties, in 
terms of whether something is food or not food, or exempt for 
food, or whether it is a Labor Day holiday or whatever?
    Can you talk about the problems in calculating what tax you 
might owe if it is a sales tax?
    Mr. Crosby. Thank you, Congressman Johnson--or, excuse me, 
Congressman Scott. With regard to sales and use taxes, the 
difficulty for retailers who sell into a national marketplace 
and who may not be physically located in a jurisdiction is the 
fact that there are more than 6,000 sales and use tax 
jurisdictions around this country--different bases, different 
tax rates, different definitions of items that may be identical 
across the country but defined differently across the country.
    And I think that is why, as Mr. Johnson talked about in his 
testimony and I briefly touched on in mine, the Council on 
State Taxation, the Federation of Tax Administrators and many 
other business and State groups have come together to try to 
address these issues through the streamlined sales tax project.
    So when it comes to sales taxes, we have been working on it 
10 years. We have made progress. We are not at the end of the 
game. But it is certainly something that Congress needs to----
    Mr. Scott. What about business tax--business taxes? Do they 
differ from jurisdiction to jurisdiction----
    Mr. Crosby. Yes.
    Mr. Scott [continuing]. And cause the----
    Mr. Crosby. Yes, sir.
    Mr. Scott [continuing]. And cause the same kind of 
complication?
    Mr. Crosby. Business activity taxes are--it is a little 
different of an issue. Because of the sales tax arena, the tax 
is actually owed by the person who lives there.
    With regard to business activity taxes, it is unclear to 
businesses exactly what activities are going to trigger a tax 
liability in a jurisdiction, whether it be the State or local 
governments.
    And your example about the Virginia food processor who was 
just transiting goods through the State of New Jersey and had 
their truck stopped and had to wire money before they were able 
to get the truck released is not a singular example.
    These sorts of things have happened in many other 
businesses, small businesses and large businesses alike. One of 
the major problems is that the businesses are filing their 
returns under their understanding of what the law is today. 
That is unclear.
    Years later, tax administrators may come back and say, 
``You failed to collect or you failed to remit taxes we think 
you ought to have had to remit and you are required to file 
returns and contest them in court or capitulate and pay taxes 
you don't think you owe to avoid the costs of litigation.''
    Mr. Scott. Well, you mention years later. You have 
confessed to possible transgressions. Is there----
    Mr. Crosby. Yes.
    Mr. Scott. Is there any statute of limitations?
    Mr. Crosby. I am comfortable in that area because my home 
State of Maine taxes at a relatively high rate that I could 
file amended returns and receive the credits and----
    Mr. Scott. Well, there is a--there is certainly a limit on 
how far back you can go. Is there any statute of limitations on 
what they--when they can go back and charge you?
    Mr. Crosby. Not if you haven't filed a return, no. And that 
is one of the problems----
    Mr. Scott. So you can go back decades.
    Mr. Crosby. They can go back--yes, decades, indeed.
    Mr. Scott. Okay.
    Mr. Hellerstein, you mentioned a situation where if you go 
to Oregon and buy a car without paying a sales tax because they 
have no sales tax and bring it back into a State with a sales 
tax you pay the sales tax or use tax there.
    What if you buy it from a State that has a sales tax, you 
pay the sales tax there, do you still have to pay the use tax 
when you get back home?
    Mr. Hellerstein. No, you get a credit against the sales tax 
that you paid where you purchased it in the State where you 
bring it back.
    So if instead of going to Oregon you had gone to California 
and paid a sales tax and you brought it back to Washington and 
went to register it, assuming the sales taxes were the same, 
you would pay no use tax.
    Mr. Scott. Well, are all States--do all States give credit 
for taxes paid to other States?
    Mr. Hellerstein. Yes. As a matter of constitutional law, 
they have to.
    Mr. Scott. In terms of income tax on telecommuting, you 
could have a situation where someone lives in northern 
Virginia, works at a place located in Maryland, and never set 
foot in Maryland because you telecommute, or you telecommute 
once a week, or you take home--take work home with you at 
night.
    How would you ever calculate who--what income tax you owe 
to which State?
    Mr. Hellerstein. Well, again, it would depend on the State 
rules. If a State had a rule that said--that determined how 
much a non-resident--we are talking about a non-resident, 
because State residents--will tax you on all your income.
    If it is on a physical presence, daily count, it is pretty 
easy. If it isn't, if it is a rule such as the rule that New 
York has, which says, ``Well, we are not going to count days 
that you are not in New York if it was not for the convenience 
of the employer,'' if the employer didn't say, ``You must be in 
a particular location,'' it becomes more difficult.
    Mr. Scott. If you do show up--I think for sports players, 
when they go to play a game, they show up for 1 day. The State 
where they are playing wants to tax them. Do they count the 
practice and all that that went into it, or they count the 
number of games divided up? How do they calculate it?
    Mr. Hellerstein. That is a very good question. In fact, 
there are--the question as to how athletes and professional 
sports teams should calculate their income in various States--
should it be on a games-played basis? Should it be on a 
physical presence during the--during the off season?
    And in fact, the Federation of Tax Administrators has a 
uniform statute that they have urge States to adopt to deal 
with sports, because that is a very special problem, and there 
are various approaches to this. I think there is a good uniform 
approach that the Federation of Tax Administrators has 
recommended.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Cohen. Thank you, Mr. Scott.
    The bells indicate we have votes in 15 minutes, so we are 
kind of in overtime, and I am going to ask Mr. King and Ms. 
Chu, who have been good enough to be here, to limit their 
answers and questions to 4 minutes and ask the respondents to 
answer quickly.
    Mr. King. Reserving my right to object, Mr. Chairman, I 
would point out that nearly everyone on this panel ran over the 
5 minutes, and so I had some important things that I want to 
raise, and I will try to respect the time, but--and I will just 
make this point, because I sit here and listen to this go back 
and forth and back and forth, and there will never be an end to 
the discussion and the argument, because where you sit is where 
you stand.
    So you will always try to draw a little advantage for--
whether it is for Maine, or Utah, or whatever it might be, 
because you see it through that lens.
    And there is a certain characteristic of human nature that 
I have noticed in my times of business and public life, and 
that is that if you appoint a committee, that is the first 
thing that sets the conclusion that the committee will draw.
    The second thing is you assign a charge to that committee, 
a mission, and they will start down that path, limited within 
the definition of that mission.
    Then you appoint or elect a chair, and that chair will then 
have an agenda. And if it is a powerful chair, and usually it 
is, the members on the committee will line up behind the agenda 
of the chair, and then they will just seek to perfect that path 
or that track that has been laid out by the committee, the 
appointment to the committee, the mission for the committee, 
and by the chair of the committee.
    And so as I listen to this, it occurs to me that we have 
been dealing with something here, the--well, the Federal income 
tax and the State income tax--that next year we will celebrate 
the 150th year of the first income tax in America. That was by 
the Confederate States of America in 1861--lasted 10 years.
    Then in 1894 we had a Federal income tax that lasted for a 
year. It was determined to be unconstitutional. And then the 
Congress just last--100 years ago last year passed the 
constitutional amendment, the 16th Amendment, and it took a few 
more years, 4 years, to ratify that.
    So soon we will have a century of the income tax. And I am 
hearing that what we have is archaic, physical presence is 
archaic because the world has moved on, yet we are cobbling 
together how it is we are going to bolt new parts onto a more-
than-centuries-old income tax system that was Federal and most 
of the States have adopted on, and each one has a different set 
of rules.
    So I am going to submit that this Committee has gotten more 
and more tunnel vision over the years. And we have not stepped 
back and looked at this from 10,000 feet.
    And we haven't decided how we are going to adapt a tax 
policy for the United States of America that is right for the 
21st century and maybe lays the groundwork for adaptation into 
the 22nd century.
    And I am going to say for the 21st century the IRS itself 
has to go. It is a cobbled mess that no one understands. And it 
creates the convolution of the States' income taxes as well.
    And setting aside the Federal problems that we have, even 
if we do the things that have been advocated here by each of 
you in certain ways, and Mr. Johnson most recently, we are 
still going to end up with 50 different models, as clean as it 
might be, to go see what the State's policy is.
    I am going to suggest why don't we do one model for the 
United States of America? Why don't we allow the States within 
the 10th Amendment to conform in a fashion that will allow us 
to have an opportunity for a single model that would be 
conducive to business in all the States and completely simplify 
this?
    The streamlined sales tax, which I have done some work on 
as a State legislator--and I am not quite to the point of 
despair, but it is very difficult to get to the point to get 
enough States to agree.
    I believe if we go to a national sales tax the States will 
follow, probably all of them eventually. And the streamlined 
sales tax can be a tax--a low tax on all sales and service, 
regardless--we don't have to have the discussion about what is 
taxed and what is not--everything, last stop retail, sales and 
service.
    If we do that, we eliminate everybody's problem here. We 
can solve the Federal problem with this convoluted mess.
    Another point that I would make--and it would be in 
disagreement with Mr. Crosby's statement that businesses would 
still be paying taxes--I have never believed that businesses 
pay taxes. They pass them along to their customers. Taxes are 
really assessed at the retail level, sales and service.
    And so this simplification that I am proposing solves every 
problem here, and it creates a dynamic economy, States and in 
the Federal Government, and it moves us into the 21st century 
in a way that we have got a model to work on rather than this 
model that has had parts bolted on it and been upgraded and 
convoluted for 150 years.
    And if there is anybody on the panel that would like to 
tell me how much you have thought about that, that I have just 
described here today, and speak to that, I would be very 
interested in hearing it.
    Mr. Johnson?
    Mr. Johnson. I think at the FTA we believe that the State 
sovereignty is core. The ability to raise your revenues and 
determine how those tax revenues are shared by the people of 
the State is an important part of the legislative process. And 
we think that is what the Constitution envisioned. It is not 
pretty.
    Mr. King. Mr. Johnson, I agree with you in the 10th 
Amendment principles. I am going to suggest the States would 
opt in if the Federal Government would go to a national sales 
tax, because they would see how it is streamlined in that 
fashion.
    At this point, I think I would just conclude. And I 
appreciate the witnesses' testimony.
    And I would yield back the balance of my time.
    Mr. Cohen. Thank you, sir.
    Ms. Chu? Thank you. You are recognized.
    Ms. Chu. Well, I know we are under time pressure, so I 
would be happy with a very succinct answer. But I am really 
happy to see Congress step in and to--for us to be pursuing 
this line of reasoning because of my previous position.
    Prior to this, I was elected to the California State Board 
of Equalization which collected the sales tax for the State. 
And overall, we collected $53 billion worth for the State of 
California.
    And we watched as there was a decline in sales tax revenue 
as there were more sales online and the bricks and mortar 
companies were suffering, which forced California to rely more 
on income tax for its State revenue rather than sales tax, 
which resulted in a much more volatile revenue stream for the 
State of California.
    And so we have this--these hodgepodge of laws, and the 
latest example is Expedia, which negotiated rates with hotels, 
of course charging a--ultimately charging a lower wholesale 
room rate than what an individual could get on their own, and--
but then only paying local taxes on the wholesale rate rather 
than the rate that they charged customers.
    And the city of Columbus, Georgia, sued Expedia for this 
practice, saying that the city had a right to the--that which 
was charged the customer. Well, Expedia argued that they didn't 
have to because they didn't have a physical presence.
    But it went to the Georgia Supreme Court and the supreme 
court decided that Expedia did have to pay the--have to pay the 
higher rate, the rate that they were charging the customers.
    And recently, there was a case in California where a 
California city is suing Expedia for--also for the hotel tax 
that they charge every hotel in the city.
    So my question is why should there be a standard definition 
across the States? What is the fairest way to create these 
standards? And on the nexus issue, should there be separate 
legislation for each situation, sales tax versus income tax?
    Mr. Hellerstein. Is that----
    Ms. Chu. For anybody, yeah.
    Mr. Hellerstein. Well, I mean, there are a lot of questions 
there. I think, first of all, it is my view, as I stated in my 
testimony, that I think that certainly with regard to sales 
tax, which is probably the biggest issue than the one you 
address, I believe very strongly that Congress needs to take a 
very hard look at whether the physical presence standard really 
makes any sense.
    I mean, is that a good proxy for an ability to comply with 
the sales tax? And if it doesn't, there may well be another 
standard, and another standard that is really much simpler.
    Anybody that says the physical presence is clear has not 
read hundreds of pages of my treatise, hundreds of pages of 
case after case after case which has a different definition of 
what constitutes a sufficient physical presence to create 
nexus.
    A simple rule that said 10,000, 100,000, a million--you 
pick the figure--I think would be certainly simpler. And that 
is a--that is a question Congress needs to ask.
    I think the Expedia question is another very important 
question but, unfortunately, for the moment, one very much 
mired in local accommodations taxes. I would agree with you 
that it would be nice to have a uniform rule that taxed on a 
uniform basis if the States decide to tax.
    Right now, the problem really is that these are not system-
wide taxes. They are local accommodations taxes. And the real 
question is whether under one of those taxes the--is Expedia an 
innkeeper, and so it is a technical problem. Congress might 
well want to intervene in that area.
    But again, it would clean up a lot of the sub-national and 
sub--even below the State level--clean up a lot of the 
uncertainty. But again, there is the question of how far does 
the Congress want to intrude into what has historically been 
clearly a matter for local determination.
    Ms. Chu. Thank you.
    Mr. Cohen. Thank you, Ms. Chu. I appreciate it.
    And I thank all the witnesses for their testimony today. It 
is a tie for witness of the day. We had three great witnesses.
    Without objection, the Members will have 5 legislative days 
to submit any additional questions which we would forward to 
the witnesses and ask you answer as promptly as you can. They 
will be part of the record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any other additional 
materials from Members of the Committee or from witnesses, I 
guess.
    Again, I thank everyone for their time and patience. This 
hearing of the Subcommittee is adjourned.
    [Whereupon, at 1:05 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

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
    Each Congress, this Committee considers several legislative 
proposals which seek to restrict or expand the ability of States to tax 
income or transactions.
    One such proposal includes Congress' granting authority to States 
to require remote sellers to collect and remit sales taxes.
    Another proposal seeks to establish a set standard for taxing 
certain business activities.
    Yet another proposal, one which I introduced, focuses on the 
discriminatory tax treatment by States between cable and satellite 
television providers. Several of these legislative proposals touch upon 
the complicated issue of ``nexus.'' Because of its complexity, and it 
being the basis for when a State can rightfully impose a tax, a 
discussion on ``nexus'' merits its own hearing.
    I welcome today's hearing, and find it timely in light of the 
current economic situation.
    As we hear testimony from today's witnesses, we should consider the 
following three points:
    First, to lift this country out of the current economic doldrums, 
we should provide certainty to encourage the free flow of commerce.
    We need more businesses to produce goods and provide services to 
help create much-needed jobs. These jobs help workers get back on their 
feet, and create a market for more goods and services. To encourage 
this economic revival, businesses, and taxpayers in general, need 
certainty to operate. They need simple and clear tax structures to know 
what activities will trigger tax liability in a State.
    The certainty of knowing when tax liability is triggered will help 
businesses to plan for investments, and to know when to withhold an 
employee's income tax, or collect and remit a sales tax.
    We should urge the creation of State and local tax policies which 
are clear, fair, and certain. Such policies would not hinder the free 
flow of commerce, but would encourage technological development, 
efficiencies, and job creation.
    Second, our State and local governments are currently hemorrhaging 
during this continuing economic downturn. Although the fourth quarter 
GDP points to an economic turnaround on the horizon, State and local 
revenues are still declining for the foreseeable future. My home State 
of Michigan has been especially hit hard, as its tax base dwindles 
after employers lay off workers, home prices fall, and consumer 
spending drops.
    For that reason, we should examine carefully any legislative 
proposal that could further depress State and local revenues and those 
governments' abilities to provide their residents essential services.
    Congress should tread lightly when considering legislation that may 
force State and local governments to decide whether to cut spending on 
law enforcement, or much-needed repairs to infrastructure or education.
    Whenever States are forced to lay off teachers, eliminate after-
school programs, or raise tuition at State universities, the future of 
the next generation, and in turn, our country, is negatively impacted.
    Congress should take seriously the plight of State and local 
governments. In fact, this Subcommittee should hold a hearing on what 
Congress can do to help State and local governments weather the current 
downturn.
    Third, when we review legislation concerning State taxation, I have 
encouraged State and local governments and the relevant taxpayers to 
work reasonably together to create tax policies that are clear and 
competitively neutral, and that do not unnecessarily limit State and 
local revenues and authority. Although Congress can legislate solutions 
to nexus issues, the interested parties may be able to find better 
solutions amongst themselves. If Congress later chooses to provide 
solutions, the testimony from today's hearing will be invaluable to 
help us develop fair and straightforward legislation.
    I thank Chairman Cohen for holding this very important hearing, and 
I look forward to hearing today from our three distinguished witnesses.






                                

  Response to Post-Hearing Questions from Walter Hellerstein, Francis 
  Shackelford Distinguished Professor in Taxation Law, University of 
                         Georgia School of Law
















                                

        Response to Post-Hearing Questions from Joseph Crosby, 
            Legislative Director, Council on State Taxation














                                

Response to Post-Hearing Questions from R. Bruce Johnson, Commissioner, 
                       Utah State Tax Commission








                               ATTACHMENT


















                                

                Prepared Statement of 303 Products, Inc.








                                

         Prepared Statement of the American Bankers Association










                                

          Prepared Statement of the National Association for 
                 The Specialty Food Trade, Inc. (NASFT)







                                

         Prepared Statement of Kathryn Wylde, President & CEO, 
                     Partnership for New York City






                                

Letter from Edward A. Zelinsky, Morris and Annie Trachman Professor of 
      Law, Benjamin N. Cardozo School of Law of Yeshiva University










                                

            Letter from Matthew R. Shay, President and CEO, 
             the International Franchise Association (IFA)








                                

            Letter from Joe Huddleston, Executive Director, 
                    Multistate Tax Commission (MTC)







                                

   Prepared Statement of Mark Louchheim, President, Bobrick Washroom 
Equipment, Inc., on behalf of the National Association of Manufacturers










                                

              Prepared Statement of the Organization for 
                    International Investment (OFII)












                                

   Prepared Statement of Carey J. ``Bo'' Horne, Past President, and 
     Katherine S. Horne, Past Vice President, ProHelp Systems, Inc.





























                                

          Prepared Statement of the United States Council for 
                     International Business (USCIB)





                                

        Prepared Statement of the American Trucking Associations












                              ATTACHMENT 1




                              ATTACHMENT 2








                                

 Law Reviw Article submitted by Marjorie B. Gell, Assistant Professor, 
                    The Thomas M. Cooley Law School






































































































                                

   Letter from Nate K. Garvis, Vice President, Government Affairs & 
              Sr. Public Affair Officer Target Brand, Inc.









                                

           Letter from the Direct Marketing Association (DMA)



                                 
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