[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
STATE TAXATION: THE ROLE OF CONGRESS IN DEVELOPING APPORTIONMENT
STANDARDS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MAY 6, 2010
__________
Serial No. 111-93
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
U.S. GOVERNMENT PRINTING OFFICE
56-272 WASHINGTON : 2010
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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
TED DEUTCH, Florida TOM ROONEY, Florida
LUIS V. GUTIERREZ, Illinois GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DANIEL MAFFEI, New York
JARED POLIS, Colorado
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
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MAY 6, 2010
Page
OPENING STATEMENT
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Chairman, Subcommittee on Commercial
and Administrative Law......................................... 1
WITNESSES
Mr. John A. Swain, Professor, University of Arizona, James E.
Rogers College of Law
Oral Testimony................................................. 3
Prepared Statement............................................. 5
Mr. James R. Eads, Jr., Executive Director, Federation of Tax
Administrators
Oral Testimony................................................. 15
Prepared Statement............................................. 17
Mr. Daniel B. De Jong, Tax Counsel, Tax Executives Institute,
Inc.
Oral Testimony................................................. 30
Prepared Statement............................................. 32
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........................... 51
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Member, Subcommittee on Commercial and Administrative Law.. 52
Response to Post-Hearing Questions from John A. Swain, Professor,
University of Arizona, James E. Rogers College of Law.......... 53
Response to Post-Hearing Questions from James R. Eads, Jr.,
Executive Director, Federation of Tax Administrators........... 57
Response to Post-Hearing Questions from Daniel B. De Jong, Tax
Counsel, Tax Executives Institute, Inc......................... 60
STATE TAXATION: THE ROLE OF CONGRESS IN DEVELOPING APPORTIONMENT
STANDARDS
----------
THURSDAY, MAY 6, 2010
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 11:07 a.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (Chairman of the Subcommittee) presiding.
Present: Representatives Cohen, Watt, Scott, and Chu.
Staff present: (Majority) Norberto Salinas, Counsel; Adam
Russell, Professional Staff Member; and Stewart Jeffries,
Minority Counsel.
Mr. Cohen. The hearing will commence here with the banging
of the gavel. [Commenced.]
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 there will be votes at
11:30, so we will have to go and be interrupted at some point.
I will recognize myself for a short statement.
In February, this Subcommittee held a hearing on the state
tax nexus, simply, when a state may impose a tax on an
individual or business entity.
Today's hearing will focus on that next step, assuming that
sufficient nexus is established, how should a state determine
the imposed tax. States currently follow formulas to apportion
the tax based on several different factors.
They include location of the taxpayer's property,
taxpayer's income, and even the taxpayer's payroll within that
state. That calculation is simple when the taxpayer only
conducts business within the state, of course, but becomes more
complicated when the business' goods and services are
collected--across state lines.
States must determine what portion of the total value of a
multi-state taxpayer's property, and each single state should
and can tax what they can get away with and what they should
get away with. These calculations could lead to double taxation
or possibly, in a very unusual case of somebody who loses their
job, undertaxation.
Considering that many states are actively competing for
business development investment, especially during the current
economic climate, states may create apportionment formulas
which favor in-state businesses over multi-state businesses or
vice versa. Such apportionment formulas may also bring in much-
needed revenue.
But do the apportionment formulas burden interstate
commerce, one of the issues we will deal with. Some contend
states need to adopt a uniform apportionment standard, however,
some of the states may not want to be limited by such
standards. Others claim that businesses have already tax
planned or have based investment on the differing state tax
structures and they don't want to interrupt that process.
It is the role of Congress and this Subcommittee in
particular to review whether state taxation affecting
interstate commerce is burdensome. Specifically, we should
determine whether the differing apportionment formulas utilized
in this expanding borderless economy are fair and appropriate.
We should question whether the differing formulas favor in-
state taxpayers over multi-state taxpayers. We should consider
whether uniform apportionment standards are a better
alternative, and would create a competitively neutral playing
field for in-state and multi-state businesses.
And we should discuss whether such a standard would lead to
a more efficient and robust--we haven't heard robust since the
health-care debate--economy.
I thank the witnesses for appearing today, and I look
forward to their testimony. And I will now recognize my
colleague, Mr. Franks, who is not here. Having done that, I
will go right along--ah.
Mr. Coble, would you like to give an opening statement?
Mr. Coble. [Off Mike.] [Laughter.]
Mr. Cohen. We are lucky to have you. We are all lucky to be
here in more ways than one.
With Mr. Coble's sage advice, comments and observations, we
will then go onto the witnesses. And the first witness today--
and I want to thank everybody for participating. Your written
statements will be placed in the record. I ask you to limit
your oral remarks to 5 minutes. We have got a lighting system.
Green means you are in the first 4. Yellow means you are in
your last 1. Red means you should conclude or be finished.
Members will be able to ask you questions. The same 5
minutes prevail.
The first witness is Mr. John Swain. I almost made you Lynn
Swann's brother. [Laughter.]
Mr. John Swain, professor of college at University of
Arizona, an rival school for Mr. Swann, the Rogers College of
Law.
Professor Swain has authored and co-authored numerous books
including ``The Streamlined Sales and Use Tax,'' and is a
regular columnist for State Tax Notes Magazine. He is a
frequent speaker at state and local tax conferences, consults
with state governments and other entities on tax law.
Before entering academia, he was with a firm in Phoenix
where he practiced in the area of state and local taxation.
Thank you, Professor Swain. And if you would begin your
testimony, and your 5-minute light is now on.
TESTIMONY OF JOHN A. SWAIN, PROFESSOR, UNIVERSITY OF ARIZONA,
JAMES E. ROGERS COLLEGE OF LAW
Mr. Swain. Okay. Thank you, Mr. Chairman, and Members of
the Committee. And I want to thank you for inviting me to
testify today.
As the Chairman noted, there is a problem in state
taxation, and that problem is how do we divide the income of a
taxpayer who does business in more than one state. And for
example, let us imagine a business that has customers all over
the United States, does manufacturing in Michigan, has
distribution facilities in Tennessee, maybe does R&D in
California. How do we determine how much income is earned in
each of those jurisdictions? It is a thorny problem. The states
have a clever and generally good solution to that problem. It
is called formula apportionment.
And what the states do is they compute an apportionment
ratio for that business, and that is computed by the average of
three ratios. The first is the sales factor, and we take the
sales in state over the sales everywhere; that is one ratio.
Then we take the payroll in state over payroll everywhere. And
we take the property in state over the property everywhere. We
get those ratios. We average them. And then we come up with an
apportionment formula. We apply that to the total income of
that business to determine what income is taxed in that state.
I think it is--whenever you are dividing a pie, I believe
it is good to have uniform rules otherwise you run into problem
of overallocating or underallocating that pie. For example, let
us assume that Iowa has an apportionment formula that relies
only to sales which, in fact, is true. And then let us say
Illinois has a formula that employs the traditional three
factor formula I just mentioned.
And then assume there is a business with all its property
and payroll in Illinois that is making sales into Iowa--all its
sales are into Iowa. What is going to happen?
Setting aside nexus questions, what is going to happen is
Iowa will tax all the income of that business because Iowa only
relies on sales, and all the sales are in Iowa. But then when
Illinois goes to compute that taxpayer's income, sure, there
are no sales in that state, so the sales factor is zero, but
all the property and all the payroll are in Illinois, and that
matters to Illinois. So Illinois is going to tax two-thirds of
that business' income. And that business will pay tax on one
and two-thirds of its income.
So that is the problem when we have inconsistent rules.
Now, the opposite can happen. Assume the same facts but the
business is located in Iowa and making all of its sales into
Illinois. Iowa won't tax that business at all even though it
has payroll and property in Iowa because Iowa doesn't care. It
only relies on a sales factor.
Illinois will only have--the sales factor will be one
because all the sales are in Illinois, but there is no property
or payroll in Illinois. So that ratio will be one-third. And in
that case, that business will only be taxed on a third of its
income. So we can undertaxation as well.
In the 1960's and 1970's, there was relative peace in the
valley. There was relative uniformity among the states, and
they used the three-factor formula I described. More recently,
the lid has been blown off of uniformity, largely, because of
economic development pressures.
States and taxpayers realizes that every time the business
adds property, makes a capital investment, adds payroll in a
state, their tax bill goes up. And so in the name of economic
development, states have begun to overweight their sales factor
which, in effect, lowers the weight of the property and sales
factors--excuse me--property and payroll factors to attract
business, to have a more favorable business environment.
But in this period where some states are changing and some
aren't, we have a lack of uniformity and the risk of
overtaxation and, actually, undertaxation.
In my view, there is a predicate for intervention that has
been met because of the compliance burdens of non-uniform
rules, because of the risk of double taxation. It is a burden
of interstate commerce. On the other hand, as I mentioned in my
example earlier, there is the opportunity for tax planning and
undertaxation which I suppose is less of a concern to Congress.
Unless the states come to Congress, you know, hat in hand and
say please save us from ourselves, I don't know that they are
going to do that. But that would be the other possibility.
Thank you very much.
[The prepared statement of Mr. Swain follows:]
Prepared Statement of John A. Swain
__________
Mr. Cohen. Thank you for your testimony.
And we now recognize Mr. Jim Eads. Mr. Eads has been with
us before, executive director of the Federation of Tax
Administrators since September where he kept capping a 30-year
career in state tax work. He leads the FTA staff in D.C., and
he represents the 50 states, the District, and New York City.
Previously, he was director of public affairs for Ryan, a
major tax consulting company, where he represents their clients
regarding state tax policy and legislative proposals. Past
president of the National Tax Association, former chairman of
Electronic Commerce Task Force on the Council on State
Taxation.
Thank you, Mr. Eads. The light begins.
TESTIMONY OF JAMES R. EADS, JR., EXECUTIVE DIRECTOR, FEDERATION
OF TAX ADMINISTRATORS
Mr. Eads. Thank you, Mr. Chairman, and Members of the
Committee. Thank you for opportunity to appear before you
today.
As the Chairman said, my name is Jim Eads. I am the
executive director at the Federation of Tax Administrators. The
Federation is an organization of the state tax agencies of all
50 states as well as the District of Columbia and New York
City.
As you know, Navjeet Bal, the commissioner of revenue for
the Commonwealth of Massachusetts was scheduled to present this
testimony at the hearing in March which was rescheduled today.
She could not be here today, and I am honored to be here
representing her and the Federation of Tax Administrators.
We gather at a difficult time for state governments. The
recession has taken its toll on our citizens and creates the
demand for state services and caused record declines in state
tax revenues. States have responded by cutting services, laying
off state workers, drawing down rainy-day funds, and, in some
cases, raising taxes.
The Federal Government has been a vital partner to the
states, providing financial assistance, which has allowed the
states to meet their balanced-budget requirements without even
deeper budget cuts. As the states prepare their budgets for the
upcoming fiscal year, it appears that state revenues are no
longer in freefall, but state budgets still face enormous
challenges as Federal assistance ends, demand for state
services remains strong, and state revenues are well below pre-
recession levels.
You asked that we discuss the general issue of
apportionment of corporate income for state tax purposes and
specifically to address the question of what role the Congress
has or should have in developing apportionment standards.
This hearing follows on a hearing in February that the
Chairman mentioned on nexus issues. You heard then from Utah
Tax Commission Chairman Bruce Johnson, and I repeat now, a
respectful request that Congress continue to refrain from
Federal legislation in areas of state taxation, including
apportionment, that are best left to the states. An honest and
healthy respect for our Federal system requires no less.
For the better part of 50 years now, the states have found
a workable solution to the issue of determining a corporation's
taxable income through the application of formulary
apportionment. It has served as a stable and widely accepted
means to approximate the extent of a business' activity within
a state and has proven sufficiently flexible to address a
changing economy.
As that economy has evolved toward a service and
information economy, states have responded by adjusting their
apportionment formula and also by adopting alternative
apportionment regulations for particular industries such as
financial institutions, telecommunications, airlines,
railroads, trucking companies, television and radio
broadcasting.
Despite business' opposition, the multi-state tax
commission is undertaking an effort to modernize and
standardize the sales factor for services and intangibles to
better reflect today's economy and to promote uniformity
amongst the states with respect to this important sector of the
economy.
We believe that the states are the best laboratories for
the evolution of apportionment structures that significantly
affect their own fiscal destiny. State tax administrative
agencies are confronted daily with issues related to state
corporation taxation. They have the knowledge, the experience
and expertise to craft what we believe are workable solutions.
Given the diversity and complexity of the American economy
and the rapid changes that it is undergoing, it is imperative
for both the business community and the states to maintain
their flexibility to adjust the apportionment formula to
address particular industries and to respond to particular
needs of that state.
Any type of Federal intervention in this effort would have
a deleterious effect on the flexibility that is in the current
apportionment structure and would, in all likelihood, have
unintended consequences. Given their expertise, their
motivation, and their on-the-ground relations with the business
community, the states are best positioned to revise formulary
apportionment as it applies to state taxation of interstate
commerce.
Thank you for your time and for your consideration of this
important issue, and I will be glad to respond to questions at
the appropriate time.
[The prepared statement of Mr. Eads follows:]
Prepared Statement of James R. Eads, Jr.
__________
Mr. Cohen. Thank you, sir.
We are approaching a record, two witnesses who have not
gone to the red light.
You are on the spot, Mr. De Jong.
Mr. De Jong is a tax counsel at Tax Executives Institute,
Inc. He focuses primarily on state and local tax issues,
drafted several Supreme Court amicus briefs, written advocacy
pieces on issues ranging from economic nexus is to state add-
back statutes and penalties.
Prior to joining TEI, he worked in the McLean, Virginia,
office of Ernst and Young. The majority of his time was spent
on state and local tax practices, assisting clients with a
broad variety of issues.
Thank you, Mr. De Jong. Don't feel any great, you know,
burden, but it is all on you. [Laughter.]
TESTIMONY OF DANIEL B. DE JONG, TAX COUNSEL,
TAX EXECUTIVES INSTITUTE, INC.
Mr. De Jong. Thanks for taking away that burden. Is this
working for you?
Mr. Cohen. Your time started.
Mr. De Jong. Okay. [Laughter.]
Good morning, and thank you for your invitation to Tax
Executives Institute to participate in this hearing and to
provide the business perspective on issues related to the
apportionment of income for state corporate tax purposes.
Founded in 1944, TEI is the preeminent worldwide
association of in-house tax professionals with more than 7,000
members representing over 3,000 of the world's largest
businesses located in the United States, in Canada, Europe, and
Asia.
My testimony today will focus on two areas. First, I will
discuss the practical effects of the current patchwork of state
apportionment rules and how they affect multi-state businesses.
Second, I will describe the challenges that exist to achieving
consensus in this area.
But before jumping into apportionment, I think it is also
important to note that complexity exists in determining the tax
base, the pie that Mr. Swain described, that must ultimately be
divided among the states. This includes determining which
entities must be included in a tax return which can be
complicated, in part, because of the general lack of uniformity
among the states.
After identifying the entities to be included in each state
tax return and the tax base of those entities, businesses must
apportion that income to the various states in which they have
nexus. For the reasons outlined by Professor Swain, many states
have moved away from a standard formula based on a
corporation's property, payroll, and sales and have used their
apportionment formulas to benefit and encourage in-state
investment.
For example, by moving the payroll and property factors out
of the apportionment calculation, the state can benefit in-
state businesses by eliminating the ratios tied to the
production of a taxpayer's goods and services. The resulting
lack of uniformity increases the compliance burden on multi-
state business.
Perhaps the most striking example of this disconnect is the
manner in which receipts from the sale of services and
intangibles are sourced for purposes of the sales factor. Under
many state statutes, taxpayers must source those receipts to
the state in which the income-producing activity is performed.
Many other states, however, have begun to source sales to the
location where the customer receives the benefit of those
services.
Inconsistent application of these rules can result in both
double taxation and taxation of less than one hundred percent
of a taxpayer's income. TEI's written statement includes an
example of a taxpayer that provides computer help desk services
and ultimately paid tax twice on half of its income as a result
of the varying sourcing rules applicable to multi-state service
providers.
The example also shows that these inconsistent rules can
work in favor of the taxpayer. By moving its headquarters from
one state to another, the taxpayer in that example would pay
state income taxes on only half of its income. While the
example may seem only an interesting hypothetical, situations
of a similar nature are not uncommon for businesses across the
country.
This brings us to the question: ``Is it possible to achieve
consensus on a uniform apportionment standard?'' Based on
experience across the country, the challenge will be
significant. Some degree of complexity is inherent in any
multi-jurisdictional tax system. Changes in one area would
likely benefit some businesses and disadvantage others.
This occurs because the facts and circumstances of each
business can vary by industry, geographic location, and other
factors. Over the years, there have been repeated efforts to
promote state and local tax consistency and uniformity. These
efforts have, for the most part, met with limited success for a
variety of reasons--state economic and budgetary pressures,
concerns about state sovereignty, geographic and demographic
considerations, and interstate or international competitive
concerns.
A one-size-fits-all approach to apportionment may not be
uniformly supported by the business community. For example, a
uniform apportionment formula that includes a payroll or
property factor would increase the state tax burden on
businesses that located production facilities in states that
offered single-sale-factor apportionment formulas in order to
attract in-state investment. That may also run contrary to
policy decisions made by states to promote in-state
investments.
In conclusion, Tax Executives Institute thanks the
Subcommittee for the opportunity to share our perspective on
the complexities of our multi-state tax system in general and
apportionment matters in particular. And with 25 seconds to
spare, I welcome the opportunity to answer any questions.
[Laughter.]
[The prepared statement of Mr. De Jong follows:]
Prepared Statement of Daniel B. De Jong
__________
Mr. Cohen. Thank you, Mr. De Jong. What a great panel. I
think we should give them applause. [Applause.]
That was very special.
I am going to yield to Mr. Watt for first questions.
Normally--Mr. Watt, you are recognized for 3 minutes.
Mr. Watt. Three minutes?
Mr. Cohen. Well, I think we have votes at 11:30. I would
like to give everybody a shot.
Mr. Watt. Okay. That is fine. I will try to stay within my
time. My green light is not on, though. So you better start the
clock.
Mr. Eads, you are with this multi-state task force that is
doing some work in this area. To what extent will they address
coming up with some uniformity on the definition of ``nexus''?
Mr. Eads. I alluded in my testimony to the multi-state tax
commission, which is working on an issue with regard to
apportionment. I represent the Federation of Tax Administrators
which includes all the states' tax agencies.
Right now, the issue of nexus is governed by two United
States Supreme Court decisions based on the Constitution.
Mr. Watt. I understand that. I am trying to figure out
whether anybody in this task force or any of the multi-state
discussions are trying to come up with some kind of uniformity
in that area.
Mr. Eads. There is an effort, yes, among the states to--
particularly at the multi-state tax commission--to address the
issue of nexus as well as issues with regard to apportionment.
As you might well imagine being a participant in the
legislative process, getting everyone in a particular group to
agree about something, sometimes, can be problematic.
Mr. Watt. Are they anywhere in the neighborhood of having
some kind of consensus about what the definition of ``nexus''
is?
Mr. Eads. Well, it depends on which state--I am sorry--
which tax we are talking about, Mr. Watt. In the area of sales
taxes, there is going to be some legislation and has been
legislation introduced in the Congress in the past which would
establish a universal definition of nexus for sales taxes.
There is also, pending before this Committee, a bill which
would also define nexus in the corporate income tax----
Mr. Watt. I think you may be missing it. You are lobbying
for the states to work this out, and then you are telling me
about legislation that has been introduced here. So what I am
trying to get a sense is whether there is any possibility of
whether the states, if we stay out of this, can resolve this
without legislation.
Mr. Eads. The states can make some progress, but when--as
we have in the sales tax area, the Supreme Court has ruled
based on the Constitution. There may not be a whole lot that
the states can do. The states can act collaboratively, and they
probably can even act collaboratively within the Constitution.
But it is very difficult to get there.
Mr. Watt. Mr. Chairman, I will yield back before my red
light comes on, too.
Mr. Cohen. Thank you, sir. I appreciate it.
Mr. Coble has left the building, like Elvis.
Mr. Scott, you are recognized.
Mr. Scott. Thank you.
Professor Swain, you mentioned a situation where people in
Iowa could, if you run a business out of Iowa which just has a
sales--if they were in Illinois selling in Illinois taxed at a
hundred percent and moved their corporate headquarters across
the street as Mr. De Jong has indicated, would they cut their
corporate taxes?
Mr. Swain. Yes. I think--I mean, my scenario was----
Mr. Scott. If you move a company that is doing business in
Iowa, selling in Iowa, property in Iowa--if you just pick up
your corporate headquarters, move--excuse me--in Illinois--and
pick up just the corporate headquarters and move it to Iowa
where all your customers all still in Illinois, you could be
taxed on one-third----
Mr. Swain. Yes. You could reduce your tax liability
substantially----
Mr. Scott. You have got population places like Bristol,
Tennessee; Bristol, Virgini; Kansas City; Illinois; Kansas
City, Missouri. Do people locate across state lines to try to
save some money? Does that actually happen?
Mr. Swain. Oh, certainly. Certainly. And you have to move
your operations, not just your headquarters because they count
your property and your payroll. But if you move your
operations, you can--you find a tax haven if you can.
Mr. Scott. Now, we are just talking--we are talking about
corporate income tax. How many people use all three? Sales,
payroll, and property? How many just use sales? How much
variation is there?
Mr. Swain. It is a moving target. It is in my written
testimony. I am thinking maybe 11 to 14 or somewhere--15'ish--
use the traditional formula. I think it is up to about 14 or so
that use sales only. And the rest are using a superweighted
sales factor. It is somewhere in there in my testimony.
Mr. Scott. Now, if you pay your corporate tax in one state,
do you necessarily get a credit in the other state?
Mr. Swain. No. The interesting thing about the state system
is it is not a credit system. It is just--each state determines
the slice of the pie it is going to tax, end of story. No
credits for taxes paid in other jurisdictions.
Mr. Scott. And how continuous a nexus do we have to have to
trigger all of this apportionment?
Mr. Swain. Well, that is an open question for income tax,
but the trend with state courts is that you just need what we
call an economic nexus. You don't need a physical presence in
order to trigger income tax liability. That hasn't been
determined by the Supreme Court, but the clear trend with state
courts is to allow what we call economic nexus for income
taxes.
Mr. Cohen. Ms. Chu from California, an expert on this as
many other topics.
Ms. Chu. Thank you, Mr. Chair.
Mr. Eads, Professor Swain argues that, without uniform
apportionment rules, there is a risk of both overtaxation and
undertaxation of multi-state businesses. How do you respond to
that?
Mr. Eads. There is a risk. Professor Swain is correct that
there is a risk. It is not a perfect system. It is a system
that, on a case-by-case basis, has been to the U.S. Supreme
Court and been found to be constitutional. There is a good body
of case law from the Supreme Court about what the states have
done and what is constitutional and what is not.
The struggle that the Congress would have would be if it
wanted to craft a piece of legislation to find something that
would please everyone. And as Mr. De Jong said in his
testimony, even among the business community, that would be
hard to do.
So is it a perfect system? No. Is it a working system that
achieves--I hesitate to use this term but--rough justice? Yes.
Ms. Chu. And how about the issue of double taxation in
services? Of course, we know that tangible goods. It is very
clear where that tangible good comes from.
But with services, there is the risk of being double taxed
because it has to do with where the service is rendered versus
where it is being received.
Mr. Eads. Representative Chu, certainly, the evolving
nature of the economy has put some stresses and strains on the
tax system. Many state tax laws were drafted in an era when we
were a mercantile system. People went to stores and bought
things. There wasn't nearly as much service in the economy when
many tax laws were adopted.
And so there are some stresses and strains that need to be
worked out to try to address that segment of the economy to
make the tax system work and to be fair to taxpayers.
Ms. Chu. Okay. Thank you. I yield back.
Mr. Cohen. Let me ask a question or two about maybe--first,
Mr. Eads.
You said that you think that we should respect the
sovereignty of the states and refrain from Federal legislation
in the area of apportionment for state taxes purposes. You
don't see any benefit at all from any kind of uniformity?
Mr. Eads. Mr. Chairman, I do. I think the devil is in the
details. That is--as Mr. De Jong alluded to in his testimony,
even amongst the business community, it would be hard to find a
consensus about what the standard should be. That would also be
true among my members.
So is there a role for Congress to try to alleviate some
burden? Yes. As I indicated in my testimony, however, what the
Congress would have to do is try is avoid those unintended
consequences that would just create a new set of problems or a
new burden that business would have to confront.
The fact of the matter is----
Mr. Cohen. And do you not think Congress can do that in its
infinite wisdom and its ability to craft, you know, meaningful
and reasonable and rational legislation devoid of political
considerations and special influences?
Mr. Eads. I am a hundred percent confident of the Congress'
ability to do that, Mr. Chairman. [Laughter.]
Mr. Cohen. This Congress too? [Laughter.]
Thank you for your endorsement.
Do either of you gentlemen feel that Congress should do
anything in this area? Or are you laissez-faire as well?
Mr. Swain. Well, I live--go ahead. I mean, I have kind of
the ivory-tower perspective. I mean, conceptually, it is a good
idea. It is what should be done. I understand the politics is
difficult. And I don't have much of an opinion on that.
But, you know, first, do no harm. I think that is what the
states are worried about; that if Congress tried to do
something, it might do some harm rather than some good even
though, conceptually or in the abstract, uniformity makes
complete sense.
Mr. Cohen. And Mr. De Jong?
Mr. De Jong. My perspective--our members would probably--to
answer a question of should there be uniform apportionment
standards with a yes, and then you asked each one of them what
that uniform standard would be, they would probably give you a
hundred different answers to what it would be.
So I think it would be difficult to build up a consensus
behind a single solution to that problem. It is very complex.
Mr. Cohen. I want to thank the Members of the Committee for
attending, and I want to thank the witnesses very much for your
testimony and time.
I wish we had more time, but we have to vote--we have the
healthy--a bill that would help provide for--cash for clunkers
is what it is. It is called Home Start, a very important bill.
And then we have to vote for motherhood, literally, voting for
Mother's Day. So we all want to get up there and do that to
precede apple pie.
So we thank the witnesses today. Without objection, Members
have 5 legislative days to submit any additional written
questions which we will forward to the witnesses and ask you to
respond as promptly as you did your testimony.
Without objection, the record will remain open for 5
legislative days for submission of any other additional
materials. I thank everyone for their time and patience. The
hearing is adjourned.
[Whereupon, at 11:38 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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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
Nearly 50 years ago, the House Judiciary Committee established a
special subcommittee on State taxation affecting interstate commerce,
known as the ``Willis Committee,'' to study these complicated issues
and to make recommendations.
Unfortunately, State taxation affecting interstate commerce has
become even more complex in the Age of the Internet.
The Subcommittee on Commercial and Administrative Law has conducted
a series of hearings--both legislative and oversight--examining these
issues, including a hearing it conducted last February that focused on
defining nexus.
Today's oversight hearing considers how States calculate tax
liabilities for multistate businesses in light of the fact that
different States utilize different formulas.
Given the potential for taxation formulas to burden interstate
commerce, it is critical for Congress to understand them.
Accordingly, I welcome today's hearing. As we hear testimony from
today's witnesses, we should consider the following three points:
First, to help our Nation lift itself out of the current economic
climate, we should work to lessen unnecessary burdens on interstate
commerce. As our businesses thrive and increase production, more jobs
are created. As more workers get back on their feet, they create a
market for more goods and services that further helps our businesses to
thrive.
But to foster our country's economic revival, businesses need
clarity and fair tax policies to operate. They need simple and clear
tax structures to know what activities will trigger tax liability in a
State.
Accordingly, we should urge the creation of State and local tax
policies that are clear and fair and that will not burden interstate
commerce.
Second, many State and local governments across the United States
are also suffering during this three-year-long economic downturn.
With reduced revenues and looming fiscal obligations, State and
local governments are having to make tough choices to spur economic
growth while balancing their budgets.
My home State of Michigan has been hit especially hard as its tax
base continues to dwindle. In response, Michigan has had to cut
spending and tweak its tax policies just to stay afloat.
It's important, however, that State and local governments create
tax policies that not only pay for providing essential services, but
also spur economic development, and in turn, job creation.
For example, State governments often formulate tax policies in
hopes of attracting investments and businesses to the State.
Within these tax policies, State governments have to determine how
to tax multistate companies.
We should not at this hearing question the effectiveness of such
tax policies. Instead, we should focus on whether these tax policies
burden interstate commerce.
Nonetheless, Congress should take seriously the plight of State and
local governments. In fact, last month, this Subcommittee held a
hearing on how pending legislation could affect State and local
government revenues, especially during the current economic downturn.
Third, we should encourage State and local governments--together
with the relevant taxpayers--to work together to establish tax policies
that eliminate over-taxation of multistate taxpayers, while ensuring
that there is no under-taxation.
And we should encourage the parties to work together to lessen the
administrative burdens for both businesses and governments.
To the extent that there are issues involving over-taxation and
under-taxation--as we know from the creation of the Uniform Division of
Income for Tax Purposes Act, and its widespread adoption--the
interested parties should work collaboratively to achieve a tax policy
that is mutually beneficial.
They can choose to follow a uniform standard, or tweak the current
differing standards, or do nothing at all.
Although Congress can provide a legislative solution if the
relevant parties cannot agree upon one, I would hope the interested
parties could try to develop their own solutions before involving
Congress.
We are interested in how, for instance, the Multi-state Tax
Commission will approach the apportionment issue.
Of course, if there exists a problem that cannot be solved through
mutual agreement, then Congress may need to intercede.
If Congress later chooses to provide a solution, the legislative
record from today's hearing should provide us with a basis for creating
meaningful legislation.
I thank Chairman Cohen for holding this very important hearing. And
I encourage him and this Subcommittee to continue its review of State
taxation issues to ensure that State tax policies do not burden
interstate commerce.
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a
Representative in Congress from the State of Georgia, and Member,
Subcommittee on Commercial and Administrative Law
Thank you, Mr. Chairman, for holding this hearing today.
Today we will examine the general issue of apportionment of
corporate income for state tax purposes. Specifically, this hearing
will give Members the opportunity to hear from witnesses about what
Congress should do, if anything, in regards to apportionment standards.
I hope the witnesses will be able to shed some light on this issue.
Apportionment is a means to attribute a business entity's income to
and among the various states in which the entity conducts business.
When an entity conducts businesses in multiple jurisdictions, it is
necessary to determine which of the entity's activities, and how much
of the income derived from those activities, should be attributed to
each jurisdiction in which it conducts business. States currently set
their own corporate tax formulas.
Given the tumultuous economy, and record unemployment, states are
hurting. States are struggling to create budgets to provide essential
services, such as public education, police, and fire personnel, for
their citizens. Therefore, this is an issue that should not be taken
lightly.
As I think about apportionment, several questions come to mind.
Should Congress step in and legislate? If so, how should Congress
proceed? How would federal legislation affect multistate businesses?
How would it impact interstate commerce?
Hopefully, the witnesses can enlighten us on these and other
questions.
I thank the Chairman for holding this hearing today, and I look
forward to hearing from the witnesses.
Response to Post-Hearing Questions from John A. Swain, Professor,
University of Arizona, James E. Rogers College of Law
Response to Post-Hearing Questions from James R. Eads, Jr.,
Executive Director, Federation of Tax Administrators
Response to Post-Hearing Questions from Daniel B. De Jong,
Tax Counsel, Tax Executives Institute, Inc.