[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



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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

                              ----------                              

                              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

                              ----------                              


               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.




















                                 
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