[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2011
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, COMMERCIAL
AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
ON
H.R. 1439
__________
APRIL 13, 2011
__________
Serial No. 112-41
__________
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
65-745 WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, gpo@custhelp.com.
COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
[Vacant]
Sean McLaughlin, Majority Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Courts, Commercial and Administrative Law
HOWARD COBLE, North Carolina, Chairman
TREY GOWDY, South Carolina, Vice-Chairman
ELTON GALLEGLY, California STEVE COHEN, Tennessee
TRENT FRANKS, Arizona HENRY C. ``HANK'' JOHNSON, Jr.,
DENNIS ROSS, Florida Georgia
[Vacant] MELVIN L. WATT, North Carolina
MIKE QUIGLEY, Illinois
Daniel Flores, Chief Counsel
James Park, Minority Counsel
C O N T E N T S
----------
APRIL 13, 2011
Page
THE BILL
H.R. 1439, the ``Business Activity Tax Simplification Act of
2011''......................................................... 13
OPENING STATEMENTS
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Chairman, Subcommittee on Courts,
Commercial and Administrative Law.............................. 11
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Ranking Member, Subcommittee on Courts,
Commercial and Administrative Law.............................. 23
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Ranking Member, Committee on
the Judiciary.................................................. 24
WITNESSES
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia
Oral Testimony................................................. 1
Prepared Statement............................................. 4
The Honorable Robert C. ``Bobby'' Scott, a Representative in
Congress from the State of Virginia
Oral Testimony................................................. 6
Prepared Statement............................................. 7
Corey Schroeder, Vice President and CFO, Outdoor Living Brands,
Inc. (Richmond, VA), on behalf of the International Franchise
Association
Oral Testimony................................................. 26
Prepared Statement............................................. 28
R. Bruce Johnson, Chairman, Utah State Tax Commission (Salt Lake
City, UT), on behalf of the Federation of Tax Administrators
Oral Testimony................................................. 37
Prepared Statement............................................. 39
Joseph Henchman, Tax Counsel and Director of State Projects, The
Tax Foundation (Washington, DC)
Oral Testimony................................................. 50
Prepared Statement............................................. 52
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the American Bankers Association........... 68
Letter from Bill Himpler, Executive Vice President, American
Financial Services Association (AFSA).......................... 72
Prepared Statement of the American Homeowners Grassroots Alliance 73
Letter from Senator Jim Buck, Indiana, Public Sector Chairman,
Tax and Fiscal Policy Task Force, and Jonathan Williams,
Director, Tax and Fiscal Policy Task Force, American
Legislative Exchange Council................................... 76
Prepared Statement of the American Trucking Association.......... 77
Prepared Statement of Mark Louchheim, President, Bobrick Washroom
Equipment, Inc., North Hollywood, CA, on behalf of the National
Association of Manufacturers................................... 83
Letter from Arthur R. Rosen, McDermott Will & Emergy LLP,
Counsel, the Coalition for Rational and Fair Taxation.......... 88
Prepared Statement of the Computing Technology Industry
Association (CompTIA).......................................... 105
Prepared Statement of Michael Petricone, Senior Vice President,
Government Affairs, Consumer Electronics Association........... 113
Letter from Joseph R. Crosby, COO & Senior Director, Policy,
Council On State Taxation (COST)............................... 115
Letter of Support from Mark B. Wieser, Founder and Chairman,
Fischer & Wieser Specialty Foods, Inc.......................... 119
Prepared Statement of David Rolston, President and CEO, Hatco
Corporation, on behalf of the North American Association of
Food Equipment Manufacturers (NAFEM)........................... 127
Prepared Statement of Ivan Petric, Vice-President, Hope Trucking,
Inc............................................................ 130
Prepared Statement of the National Association for the Specialty
Food Trade, Inc. (NASFT)....................................... 134
Prepared Statement of the National Foreign Trade Council, Inc.
(NFTC)......................................................... 137
Letter from Rebecca Boenigk, CEO & Chairman, Neutral Posture..... 139
Prepared Statement of the New York Bankers Association (NYBA).... 141
Prepared Statement of the Organization for International
Investment (OFII).............................................. 143
Prepared Statement of Kathryn Wylde, President & CEO, Partnership
for New York City.............................................. 148
Letter and Article from Marjorie B. Gell, Associate Professor,
The Thomas Cooley Law School................................... 150
Prepared Statement of Carey J. (Bo) Horne, Past President, and
Katherine S. Horne, Past Vice President, ProHelp Systems, Inc.. 154
Letter from Joan Maxwell, President, Regular Marine, Inc......... 168
Prepared Statement of the Securities Industry and Financial
Markets Association (SIFMA).................................... 170
Prepared Statement of Vernon T. Turner, Vice President, Corporate
Tax, Smithfield Foods, Inc..................................... 171
Prepared Statement of the Software Finance & Tax Executives
Council (SoFTEC)............................................... 174
Material from Carley A. Roberts, Chair, Taxation Section, The
State Bar of California........................................ 178
Letter from Scott George, Chief Executive Officer, Tennessee
Commercial Warehouse (TCW)..................................... 198
Letter from Rebecca J. Paulsen, Vice President, State Tax, U.S.
Bancorp........................................................ 199
Prepared Statement of the United States Council for International
Business (USCIB)............................................... 203
BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2011
----------
WEDNESDAY, APRIL 13, 2011
House of Representatives,
Subcommittee on Courts,
Commercial and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:34 p.m., in
room 2141, Rayburn Office Building, the Honorable Howard Coble
(Chairman of the Subcommittee) presiding.
Present: Representatives Coble, Gowdy, Gallegly, Franks,
Cohen, Watt, Quigley and Conyers.
Staff present: (Majority) Travis Norton, Counsel; John
Hilton, Counsel; John Mautz, Counsel; Allison Rose,
Professional Staff Member; Ashley Lewis, Clerk; (Minority)
James Park, Subcommittee Chief Counsel; Norberto Salinas,
Counsel; and Ann Woods Hawks, Professional Staff Member.
Mr. Coble. The Subcommittee will come to order.
We have two panels today. The first includes two long time
friends from the--from my neighbor to the north, Virginia,
Representative Bob Goodlatte who represents the Roanoke area,
and the Valley, I presume, Bob. And Representative Bobby Scott
who represents the Tidewater area, primarily. Good to have both
of you here.
I know Mr. Goodlatte--good to see you, Mr. Cohen.
Mr. Cohen. Good to be seen.
Mr. Coble. Mr. Goodlatte I know has embraced this along
with Representative Boucher when he was here, and now Mr. Scott
has taken up the case so we have two formidable allies before
us. We will be glad to recognize each one of you for 5 minutes,
if possible.
Mr. Goodlatte, we'll start with you.
TESTIMONY OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF VIRGINIA
Mr. Goodlatte. Mr. Chairman, thank you very much and
Ranking Member Cohen and Members of the Subcommittee. I
appreciate being invited to testify today about the ``Business
Activity Tax Simplification Act'' which I introduced with my
friend and Virginia colleague, Representative Scott.
This legislation will provide a ``bright line'' test to
clarify state and local authority to collect business activity
taxes from out of state entities. Many states and some local
governments levy corporate income, franchise and other taxes on
out-of-state companies that conduct business activities within
their jurisdictions. While providing revenue for states, these
taxes also serve to pay for the privilege of doing business in
a state.
However, with the growth of the Internet, companies are
increasingly able to conduct transactions without the
constraint of geopolitical boundaries. The growth of the
technology industry, and interstate business-to-business and
business-to-consumer transactions raise questions over where
multistate companies should be required to pay corporate income
and other business activity taxes.
Over the past several years a growing number of
jurisdictions have sought to collect business activity taxes
from businesses located in other states, even though those
businesses received no appreciable benefits from the taxing
jurisdiction. This has led to unfairness and uncertainty,
generated contentious, widespread litigation and hindered
business expansion as businesses shy away from expanding their
presence in other states for fear of exposure to unfair tax
burdens.
We need a basic, fair, bright line rule in this area.
Previous actions by the Supreme Court and Congress have laid
the groundwork for such a bright line rule. In the landmark
case of Quill Corporation versus North Dakota, the Supreme
Court declared that a state cannot impose a tax on an out-of-
state business unless that business has a ``substantial nexus''
with the taxing state. However, the Court did not define what
constituted a ``substantial nexus'' for purposes of imposing
business activity taxes.
In addition, over 50 years ago Congress passed Public Law
86272 which set clear, uniform standards for when states could
and could not impose certain taxes on out-of-state businesses
when the businesses activities in the state were nominal and
only involved the solicitation of orders for sales of tangible
property. However, the scope of Public Law 86272 only extended
to activities related to tangible personal property. Our
Nation's economy has changed dramatically over the last 50
years and this outdated statute needs to be modernized.
The Business Activity Tax Simplification Act updates the
protections of Public Law 86272 to reflect the changing nature
of our economy by expanding the scope of those protections from
just tangible property to include intangible property and
services.
In addition, our legislation establishes a clear, uniform
physical presence test such that an out-of-state company must
have a physical presence in a state before the state can impose
corporate net income taxes and other types of business activity
taxes on that company.
In our current challenging economic times, it is especially
important to eliminate artificial government-imposed barriers
to small businesses. Small businesses are crucial to our
economy and account for a significant majority of new product
ideas and innovation. Small businesses are also central to the
American dream of self-improvement and individual achievement
which is why it is so vital that Congress enact legislation
that reduces the excessive and often duplicative tax burdens
that hinder small businesses and ultimately overall economic
growth and job creation.
Unfortunately small businesses are often the hardest hit
when aggressive states and localities impose excessive tax
burdens on out-of-state companies. These businesses do not have
the resources to hire the teams of lawyers that many large
corporations devote to tax compliance and they are more likely
to halt expansion to avoid uncertain tax obligations and
litigation expenses.
The clarity that the Business Activity Tax Simplification
Act will bring will ensure fairness, immunize litigation and
create the kind of--minimize litigation and create the kind of
legally certain and stable business climate that frees up funds
for businesses of all sizes to make investments, expand
interstate commerce, grow the economy and create new jobs.
At the same time, and it's important to emphasize, this
legislation will protect the ability of states to ensure that
they are fairly compensated when they provide services to
businesses that do have physical presences in the state. In
addition, the legislation expressly protects the ability of
states to use all tools at their disposal to aggressively
combat illegal activities, sham transactions and other abuses.
Thank you again for the opportunity to speak to the
Committee today.
[The prepared statement of Mr. Goodlatte follows:]
__________
Mr. Coble. Thank you, Mr. Goodlatte.
And Mr. Scott, if you will suspend just a moment. The Chair
wants to recognize the presence of Dan Freeman who served a
long time as parliamentarian for the House Judiciary Committee.
Good to have you with us, Dan.
And now I'm pleased to recognize the distinguished--the
other distinguished gentleman from Virginia, Mr. Bobby Scott.
TESTIMONY OF THE HONORABLE ROBERT C. ``BOBBY'' SCOTT, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. Scott. Thank you, Chairman Coble, Ranking Member Cohen,
Chairman--former Chairman Conyers and other Members of the
Committee.
I appreciate your holding today's hearing on the Business
Activity Tax Simplification Act introduced by my colleague from
Virginia, Bob Goodlatte and for providing me the opportunity to
testify in support of the legislation.
Business Activity Simplification Act or BATSA has attracted
strong bipartisan support over the last several Congresses and
I expect this version to attract the same amount of support.
BATSA seeks to update a 50-year-old Federal statute that
determines when states can impose state income taxes on the
sale of tangible personal good in the state--over the years
states have adopted a series of business activity taxes that
are proxies for state income tax, including gross receipts
taxes, licensing arrangements and other changes--and other
charges that states frequently seek to impose on out-of-state
companies.
Some states have enacted overly aggressive and often unfair
business activity taxes. Businesses in my state have been
acutely affected by these aggressive business activity taxes.
Smithfield Foods, located in Congressman Forbes' district, has
had its trucks threatened with confiscation by New Jersey tax
revenue agents simply for driving down the New Jersey Turnpike.
Virginia based Capital One has joined other financial
institutions in becoming easy prey for other states and
localities seeking to increase their tax revenues by targeting
out-of-state businesses. Other sectors of the Virginia economy,
such as manufacturing, information technology, franchising,
media industries all have been targeted with overly aggressive
business activity taxes in other states.
There is an urgent need to modernize this decades-old law.
BATSA would clarify the standard governing state assessment of
corporate income taxes and comparable taxes on businesses.
Specifically, the bill will articulate a ``bright line''
physical presence nexus standard that includes either owning or
leasing real or tangible property in the state or assigning one
or more employees to perform certain activities in the state
for more than 15 days in a taxable year.
No one is arguing that the business should not be
responsible for paying taxes where they do business. However,
BATSA would ensure fairness, minimize costly litigation for
both state governments and taxpayers, reduce the likelihood of
a business being double taxed on the same income, and create
the kind of legal certainty and stability for business
environment that encourages businesses to make investments,
expand interstate commerce and create new jobs.
More importantly, the bill would unsure that businesses
continue to pay business activity taxes to states that provide
them with direct benefits and protections.
I appreciate the Subcommittee's focus on this timely matter
and look forward to working with you as we pass this important
legislation, hopefully during this session of Congress.
[The prepared statement of Mr. Scott follows:]
__________
Mr. Coble. I thank each of you for being with us. We
normally don't examine Members, so I assume does anyone have
questions for the Members? We usually--gentleman from Illinois?
Mr. Quigley. Just for a point of clarification, how would
you two gentlemen distinguish most of the taxes you're talking
about that, as you say, could be very burdensome just for
driving down the New Jersey Turnpike, for example, and the much
more controversial aspect of the transaction tax dealing with
the Internet and how some states and local governments are
reacting to the fact that their retailers are closing down
because so much more of those sales are taking place on the
Internet and the shortfall that it is creating?
Mr. Goodlatte. Well, if the gentleman would allow? This
legislation is neutral as between bricks and mortar entities
and online entities. You'll find pretty much widespread
business support from both groups.
As you know, with relation to sales taxes online, there's a
great division there between those who do business within an
individual state and required by state law, because they do
have that nexus with the state, and entities that operate from
a greater distance.
This does not address that issue in any way, shape or form.
It would not limit the ability of the Congress to change the--
as you know, right now the Congress has never provided the
necessary finding of nexus to allow a state to require a
company in another state to collect sales taxes. They're left
with having to try to collect that from the individual who owes
the tax and that of course is a too burdensome way to collect
it.
Some of us have suggested that the states should work
together to come up with a single definition of what is taxable
and perhaps even a single interstate sales tax so that if
you're a small business doing business online, you're not
talking about having to know the tax in not just 50 states but
thousands of sub-jurisdictions that have add on sales taxes. So
that is a separate, complicated issue and is not addressed
here.
Mr. Quigley. Thank you. I yield back.
Mr. Coble. Any other questions for the Members?
Mr. Cohen?
Mr. Cohen. Since we have two fine gentlemen from the
Commonwealth, I'd like to ask you what you think Mr. Jefferson
would think of this bill and why.
Mr. Scott. He would think--I think he would like the bill.
It's a fine piece---- [Laughter.]
Mr. Cohen. Great answer.
Mr. Coble. Mr. Cohen, you asked for that one.
Gentlemen, good to have both of you with us.
Trey, did you have any questions?
Mr. Gowdy. No, sir, Mr. Chairman.
Mr. Coble. You're excused, gentlemen. Good to be--good to
have you with us.
I'll give my opening statement and then I'll recognize Mr.
Cohen and Mr. Conyers after that and then we'll proceed with
our other panel.
Benjamin Franklin once remarked that nothing is certain in
this world except death and taxes. But while taxes are
necessary to fund the essential government operations, they
should not be imposed arbitrarily or unfairly, especially on
America's small businesses which create the majority of jobs in
this country.
The Dormant Commerce Clause prohibits states from imposing
taxes on entities that lack a substantial nexus to the taxing
state. In the 1922--strike that. In the 1992 Quill decision,
the Supreme Court held that a state could not impose a sales or
use tax on a business that was not physically present in the
taxing state. Since then some courts have held that the
physical presence standard does not apply to the imposition of
net income or other business activity taxes.
As a result, each state's standard for what constitutes
substantial nexus for net income taxes varies. Some states like
Texas and Tennessee hold that the physical presence standard
applies, but the majority of states allow taxation of net
income if there is merely an economic nexus between the state
and the taxpayer.
Some businesses are thus faced with a lose/lose situation.
They may hire expensive accountants and tax attorneys to
decipher the tax laws of the states in which they transact
business to determine whether they have tax liability, but most
small businesses lack the resources to do this. Those that do
find such resources pass the cost on to the consumers in the
form of higher priced goods and services. Our small businesses
can reasonably conclude that they are not liable to pay taxes
in a state because they transact only very limited business
there, but under this approach, if a state later concludes that
taxes should have been paid, the business will owe--likely will
owe penalties in addition to back taxes.
In my opinion, there's a substantial need for a clear rule
for what a state may impose in net income or other business
activity tax. H.R. 1439, the Business Activity Tax
Simplification Act of 2011, does just that. It clarifies that a
state may not impose such a tax on a business that lacks
physical presence in the state.
BATSA also updates a law Congress passed in 1959 which
prohibits states from taxing businesses merely because they
employ salesmen who travel to the states selling tangible
goods. That was 52 years ago. In the modern American economy
services and intangible goods play a significant and larger
role than they did in 1959. There's no good reason, it seems to
me, to discriminate between tangible and intangible goods in
this regard, so we ought to update that law.
It is important to note that BATSA does not require states
or localities to reduce their taxes, rather it gives small
businesses some certainty about their tax liability so they can
adequately budget their resources, and to the extent possible,
create more jobs.
This is not the first time this Committee has considered
BATSA, but state taxation is an important issue and I am
pleased to take it up once again.
Again, we thank Mr. Goodlatte and Mr. Scott for having been
with us. And I am now pleased to recognize the distinguished
gentleman from Tennessee, Mr. Steve Cohen, the Ranking Member.
[The bill, H.R. 1439, follows:]
__________
Mr. Cohen. Thank you, Mr. Chairman. Three years ago the
subcommittee on Commercial and Administrative law held a
hearing on legislation substantially similar to this bill, H.R.
1439, the ``Business Activity Tax Simplification Act of 2011.''
At that time I noted the issues that BATSA was trying to
address were complex ones. What should be the proper scope of a
state's authority to impose a corporate income tax or other
similar tax on a particular company based on the company's
business activity in that state? What role should Congress play
in defining that scope? And those were the primary issues.
The constitution requires a sufficient nexus to exist
between a state and a business' in-state activity in order for
that state to be able to tax that business. The Supreme Court,
however, has been ambiguous as to what that nexus is in the
business activity tax context.
In 2008 I heard what I thought were some valid concerns
expressed about the adoption of a physical presence standard as
the only determinative of whether a given business had
sufficient nexus with a state for business activity tax
purposes. I also called upon interested stakeholders to use the
bill's introduction as an opportunity to reach a consensus on a
clear and uniform national standard for state taxation of
business activity. Unfortunately that does not seem to be what
has occurred in the intervening time. So here we are.
I agree with proponents of H.R. 1439 that a uniform
national standard that determines when a state can tax business
activity will provide useful clarity and reduce the cost of
doing business. But by expanding the limitations on taxable
business activity under Federal law, and by once again adopting
physical presence in a state as the sole basis for what a state
tax business activity, I am concerned that H.R. 1439, if
enacted would cost states to potentially lose billions of
dollars in tax revenue that they should be entitled to. This
revenue loss in turn threatens to undermine critical state and
local government services and adversely impact employees.
The physical presence standard concerns me, because it
appears to be too restrictive, does not fully capture business
activity that a state legitimately, constantly should be able
to tax. Adoption of the physical presence standard threatens to
prohibit taxation of activities that currently states can tax.
The standard limits the scope of a state's authority to
impose a corporate income tax or other business activity in one
of three situations. Where business is physically present in
the state or is assigned one or more employees in the state.
Secondly, where the business uses the service of an agent to
establish or maintain the market in a state. Or, the business
leases or owns tangible personal or real property in the state
during the relevant tax year.
I fear that this narrowly crafted standard allows
businesses simply to game the system, by for example, making
all employees independent contractors or allowing banks to
conduct online businesses in all states while avoiding taxes on
such activity, because they lack tangible property in most
states.
I feel like a TV show with background action. It's very
difficult.
Worse yet, according to a Congressional Budget Office cost
estimate prepared in 2006 for an earlier, but substantially
similar version of BATSA, the act would concentrate 70 percent
of revenue losses in just ten states. One of those states would
be Michigan, home of the Wolverines. Another would be Texas.
Whatever. And the other is Tennessee, that matters.
I noted that at least one alternative to physical presence
as a uniform standard has been proposed by the Multistate Tax
Commission. I do not take a view on the merits of that
alternative proposal. I simply note that--and reiterate my
point from 3 years ago, which is that while uniform standard of
business activity taxes and the clarity and certainty it
provides are valuable, that uniform standard must be one that
is fair to all who would be impacted. H.R. 1439 does not appear
to meet that goal.
With that, I yield back the remainder of my time.
Mr. Coble. And I apologize to you, Mr. Cohen, for having
talked behind your back. We had to get some preliminaries out
of the way.
Mr. Cohen. It was the physical dance I had to do which was
more difficult---- [Laughter.]
But there was the challenge, and I appreciate rising to
their----
Mr. Gowdy. Physical presence.
Mr. Cohen [continuing]. Right, it was physical presence.
Mr. Coble. The distinguished gentleman from South Carolina
has no opening statement.
Mr. Conyers, the distinguished gentleman from Michigan is
recognized for 5 minutes.
Mr. Conyers. Thank you, Chairman Coble.
Ladies and gentleman, imposing a physical presence standard
would drastically alter the taxing landscape as we know it.
With respect to past legislation similar to this, surveys have
estimated that lost state tax revenues might be as high as $8
billion in the first year following enactment, and that was an
estimate from several years ago. The impact might be even more
damaging now.
If this legislation has a similar negative impact on the
states I wonder how any of us can support it. The states are
already getting Federal budget cuts all over the place and now
we want to make sure that we increase the stress and the dire
circumstances that they find themselves in. This is legislation
that might possibly eviscerate some state revenues. We would,
in effect, be turning our back once again on state governments.
We would be forcing state governments to eliminate valuable
governmental programs and services and furlough dedicated
government workers, some are already doing it. We should
shudder at the impact of a potential loss of $8 billion on top
of the lost tax revenue base the states have suffered in the
last few years.
I don't know if there is support enough to pass a
legislative measure which would undercut states' abilities to
tax activity within its borders. In this case, Congress should
not step in and impose a damaging physical presence standard
for activities which a state may have the constitutional right
already to tax.
An $8 billion loss to the states which have already
suffered extensively during this economic downturn, would
further hamper economic--the economic rebound that people keep
looking and hoping and praying will occur. And when you
consider the Federal cuts to state and local assistance, which
the Ryan budget will obviously lead to, our state and local
governments would be suffering, in my view unnecessarily, for
years to come.
So while Congress must ensure that the states do not burden
interstate commerce through their taxing authority, the
authority of states to tax activity within their borders must
be respected. Why not? And unfortunately the proposal that we
are examining does not seem to balance these competing
interests.
And with that, Chairman Coble, I return any unused time.
Mr. Coble. I thank the gentleman.
I am told that there will be an imminent vote on the floor
in a matter of minutes, but we will go ahead and start.
I will invite the witnesses, if they will assume their
seated position at the table and I will introduce the
witnesses.
We have a very favorable group of three panelists who will
be us today.
Mr. Corey L. Schroeder is vice president and chief
financial officer of Outdoor Living Brands, a multi-brand
franchise company dedicated to products and services within the
outdoor living market. As VP and CFO of Outdoor Living Brands,
Mr. Schroeder is responsible for the financial reporting and
management of the business overseeing franchise compliance
matters and working to support the strategic direction of the
company.
Prior to the formation of Outdoor Living Brands, Mr.
Schroeder served as vice president and CFO of U.S. Structures,
Inc., also a franchise company.
Mr. Schroeder holds a bachelors degree in business
administration with a concentration in finance from the
University of Richmond and a masters degree in accounting from
the College of William and Mary. He also holds a designation of
chartered financial analyst.
Our second witness is Mr. Bruce Johnson who is the Utah
governor--in 2009 Utah Governor Gary Herbert appointed Bruce
Johnson to serve as chairman of the Utah State Tax Commission.
He has been a commissioner since 1998. The Tax Commission has
the constitutional duties to administer all--and supervise all
the tax laws of the state, including property tax, income tax,
franchise tax, sales tax and all miscellaneous taxes.
Prior to his appointment, Mr. Johnson litigated numerous
tax disputes as a private attorney and as a trial attorney for
the Tax Division of the United States Department of Justice.
He's a CPA and holds a degree in accounting from the
University of Utah. Mr. Johnson also served on numerous boards
and testified before legislative bodies. He was, as well, the
founding national co-chair of the Streamlined Sales Tax
Project.
Our final witness today, Mr. Joseph Henchman. Mr. Henchman
is a tax counsel and director of state projects at the Tax
Foundation a nonprofit organization dedicated to educating
taxpayers about all aspects of tax policy. He joined the Tax
Foundation in 2005.
Mr. Henchman's analysis of fiscal trends, constitutional
issues and tax law developments has been featured in numerous
print and electronic media, including The New York Times, The
Wall Street Journal, CNN and Fortune magazine.
Of particular relevance to this hearing, in 2007 Mr.
Henchman published an article in a popular state sales
periodical entitled, ``Why the Quill Physical Presence Standard
Should Not Go Away--Should Not Go the Way of Personal
Jurisdiction.''
Mr. Henchman was graduated from the University of
California at Berkley with a degree in political science and a
law degree from the George Washington University.
Gentlemen, good to have you with us. We operate on a 5-
minute rule, gentlemen. The panel before you, the green light
will expire at the conclusion of 4 minutes. And you will see an
amber light then which is your notice to--if you can start
wrapping up at that time we would be appreciative. And we try
to apply that 5 minute rule to us as well on this side of the
podium.
Mr. Schroeder, why don't you start us off?
TESTIMONY OF COREY SCHROEDER, VICE PRESIDENT AND CFO, OUTDOOR
LIVING BRANDS, INC. (RICHMOND, VA), ON BEHALF OF THE
INTERNATIONAL FRANCHISE ASSOCIATION
Mr. Coble. Mr. Schroeder, I know either your mic is not on
or is not close to you.
Mr. Schroeder. How is that?
Mr. Coble. That's better.
Mr. Schroeder. Thank you. Thank you again for providing me
the opportunity to voice my support for the Business Activity
Tax Simplification Act of 2011. And thank you also to
Congressmen Scott and Goodlatte, from my home state of
Virginia, for introducing the bill.
I'm speaking today on behalf of Outdoor Living Brands
located in Richmond, Virginia. We currently operate three
franchise brands with 181 locations in 34 states and have 28
employees.
I'm also here today on behalf of the International
Franchise Association, the largest and oldest franchising trade
group representing more than 90 industries, more than 13,000
members nationwide. And according to a study done for the IFA
by Price Waterhouse Coopers, there are over 825,000 franchise
businesses across 300 different business lines providing nearly
18 million American jobs and generating over $2.1 trillion for
the American economy.
The Business Activity Simplification Act of 2011 addresses
a significant issue within the franchise community relating to
state income tax reporting. Franchise businesses face a very
confusing and ever changing set of rules regarding the
obligation to file state corporate income taxes. The primary
issue is the different and changing definitions of nexus to
establish--established with various states for our business
activities.
Once nexus is established we must begin filing state
corporate income tax returns for that portion of our revenue
that we generate from that state. Like Outdoor Living Brands,
most franchisors do not own any real property in the states
which our--in which our franchisees operate. We only have, in
my case, a physical presence in the State of Virginia.
However, central to the concept of our business in
franchising is the relationship with our franchisees and
primarily our shared trade identity of our brand. We license
that trade identity and that intellectual property and business
plan to local entrepreneurs, as well as support them in growing
and building their business and providing jobs in their local
markets and their various states.
Many states, however, now are concluding that the very
existence of our brand and our intellectual property or even
the physical existence of our training manuals in their states
is establishing nexus. And I understand the desire for states,
in this fiscal environment, to need to generate and want to
generate revenue from out-of-state businesses, however, the
local outcome of this view on nexus, for a company like Outdoor
Living Brands, is that we would file 34 different state tax
returns and less than 10 percent of our revenue would be taxed
in the state of Virginia where we operate.
Franchising is already a very heavily regulated business
model and my small firm spends close to $100,000 a year in
legal, accounting and tax advisory fees. It does not--that does
not include the time of myself or the folks on my team, and
these are precious resources that we would like to be using to
help grow our franchisees and our businesses.
Currently my firm files income taxes in six states. With
various nexus and standard enforcement practices changing I
expect the costs and administrative burden of this particular
issue to continue to grow. My most recent experiences with it
was with the State of South Carolina and Minnesota who both
sent me business activity questionnaires. These lengthy
questionnaires, to which I answered no to almost every activity
described, were in the end determined that it was simply the
existence of my franchise agreement and the royalty revenue
derived in that state that required nexus and I had to file
several years of past returns.
One state in particular, South Carolina, a South Carolina
revenue agent described for me how he found our business by
creating a mass mailing list of franchise companies like mine,
using a marketing website service that the franchising industry
it commonly uses to sell franchises.
As a franchisor I have very little visibility on what the
nexus rules are in each state and when they change and why they
change. And South Carolina's activity was based on a court case
that happened in that state.
Iowa just recently announced a similar change due to a
court case. And I expect I will be getting a questionnaire from
them and I will deal with them in--as the questionnaire comes
up.
And this raises the issue of managing this issue. For a
small business like mine, managing this issue is rife with
uncertainty created by this environment. I could proactively
engage another tax advisor and have them go seek out all the 34
states where I have franchisees and determine which ones would
have nexus with me. I am sure that the states would gladly
agree that I have nexus. And then I could pay that tax advisor
even more to continue to fill out more and more tax returns in
the various states.
I could be passive, which is what I think most franchisors
in my situation do, where we wait for the next franchise
activity questionnaire to come in and we respond to it
accordingly.
To sum up, earlier in my career I worked in investment
banking and I advised a number of private businesses in a lot
of different industries with far broader business activities in
different states than what we experience in franchising. And
franchising is the only business I have come across where we
face this level of complexity and this burden of state tax
compliance.
So, I hope this testimony has been helpful in illustrating
the difficulty that franchise businesses face across the
country related to this. And I hope we can work together to
pass the Business Activity Simplification Act.
Thank you.
[The prepared statement of Mr. Schroeder follows:]
__________
Mr. Coble. Thank you, Mr. Schroeder.
Mr. Johnson?
TESTIMONY OF R. BRUCE JOHNSON, CHAIRMAN, UTAH STATE TAX
COMMISSION (SALT LAKE CITY, UT), ON BEHALF OF THE FEDERATION OF
TAX ADMINISTRATORS
Mr. Johnson. Chairman Coble, Vice Chairman Gowdy, Ranking
Member Cohen and Members of the Committee, thank you for the
opportunity to address this issue today. I am Bruce Johnson,
chair of the Utah State Tax Commission. Today I am testifying
on behalf of the Federation of Tax Administrators which is an
association of tax administration agencies in each of the 50
states, the District of Columbia and New York City.
This is not a greedy states versus poor taxpayer bill. This
is a bill about large multistate businesses versus small local
businesses and how a state can allocate its tax base and its
tax burden among the entities doing business in the state. That
is what it is about. It is also a bill about Federal preemption
of state sovereignty and when it is appropriate for the Federal
Government to limit a state's sovereign power to raise its
revenue as it sees fit through its local elected officials.
We have already heard some discussion about the estimated
revenue impact of this bill. The Congressional Budget Office
said it would result in a $3 billion annual revenue loss,
that's the 2005 predecessor of this bill. The NGA has
substantially larger estimates. But that is not revenue that is
going to go away, that is revenue that is going to be shifted
if we can't tax the fair share of interstate businesses that do
business in our state. That tax is going to be shifted to our
local businesses and our local taxpayers. It is going to have a
devastating impact on small business.
The U.S. Supreme Court has held that a company meets the
jurisdictional standard of substantial--or sufficient contacts
if it is doing business in the state or otherwise engaged in
establishing and maintaining a market in the state. This bill
purports to establish a physical presence standard which has
never been the law for income taxes or business activity taxes.
But I suggest it is not even a physical presence standard. If
you look at Public Law 86-272, which the proponents of the bill
seek to expand, 86-272 allows a business to have permanent
employees in a state, driving company cars on state roads, and
as long as they are not engaged in activities other than the
solicitation of sales, that physical presence has to be ignored
and the state can't tax that business even though it clearly
has physical presence there.
This bill would seek to extend that preemption not only to
the solicitation of sales of tangible personal property, but to
the solicitation of services, to the solicitation of sales of
intangible property, to the gathering of information in a
state, to the furnishing of information to customers in the
state. It would say that 15 days in the state is not physical
presence. That may be a reasonable de minimis test for many
taxpayers, but it also says if the activity of the business,
the physical presence is for a limited or transient business
purpose, it can be longer than 15 days.
Now I don't know what a limited or transient business
purpose is. And I don't see how that provides clarity to our
taxpayers. In a multi-level company that manufacturers,
distributes and retails, is a warehouse in the state just a
limited purpose? It may well be under this law.
Moreover, activities of subsidiaries can easily be ignored
with a little bit of structuring. I had the privilege of
representing taxpayers for over 17 years and I can tell you
that under the provisions of this bill I could substantially
reduce the tax obligations of many taxpayers in Utah that have
a physical presence through the--merely by setting up a
subsidiary, a toy company could--that has a 5-percent profit
margin in the state could set up an intangible holding company
in Delaware, charge a 2-percent royalty and cut its taxes in
Utah by 40 percent even though it continued to have a store in
Utah. It could set up a 3-percent royalty and cut its taxes by
60 percent, even though it continued to have physical presence
in Utah.
I acknowledge the need for more clarity. This bill
unfortunately is fatally flawed in many ways and I urge you to
oppose the bill. Thank you.
[The prepared statement of Mr. Johnson follows:]
__________
Mr. Coble. Thank you, Mr. Johnson.
Mr. Coble. Mr. Henchman?
TESTIMONY OF JOSEPH HENCHMAN, TAX COUNSEL AND DIRECTOR OF STATE
PROJECTS, THE TAX FOUNDATION (WASHINGTON, DC)
Mr. Henchman. Thank you. Mr. Chairman, Ranking Member
Cohen, Ranking Member Conyers and Members of the Subcommittee.
I appreciate the opportunity to testify today on legislation
pending before you on state tax actions that impact interstate
commerce.
Let's say you have a retired congressman, he hires a
research assistant, he decides to write his memoirs. So he
rents a little office in a business park in Virginia. He hires
a research assistant, a Virginian. He buys some computers and
some printers from a Virginia company. And every day for a year
he sits in that Virginia office writing his memoirs. And at the
end of the year he sells the finished manuscript to a New York
publisher.
Where did he earn that income? An economist will tell you
that the congressman earned the income where he invested his
capital and his labor, which is, in this case, Virginia. This
is what is known as the ``benefit principle,'' the idea that
the taxes people pay are linked to the government services they
receive. In other words, individuals and businesses should pay
taxes where they work and live and jurisdictions should not tax
those who don't work and live there.
While a physical presence rule for taxation is the norm in
the international context and is the historical norm
for state taxation here in the United States, we at the Tax
Foundation have been monitoring increasingly aggressive state
efforts to reject this rule so as to shift tax burdens away
from residents toward non-residents.
This is not entirely new. States have always had this
incentive, to the detriment of the national economy. In fact in
the time of the founding the use of tolls and taxes by states
in this regard were a primary reason why we had the
Constitutional Convention in the first place. And out of that
convention it was decided that the free flow of goods and
services is so important and it matters more than letting
states tax certain types of transactions, that you, the
Congress, have been empowered to preempt some state actions in
that regard, for restraining the states from enacting laws that
disrupt the national economy by discriminating against
interstate commerce.
It is not a power to use lightly, but it rests with you
because states have no incentive to get together and resolve
this on it own. On the contrary, each state thinks it can get a
bigger share of the national tax pie by adopting an aggressive
nexus standard. But these--this leaves us all poorer because
all businesses, large and small, must deal with complex tax
regulations, uncertainty about what activities create tax
obligations in different states, lack of uniformity between
different states in tax rules and formulas and generally
wasting significant amounts of time, wealth and brain power
navigating tax compliance rather than doing more productive
things.
These state actions deter new investment by domestic and
foreign businesses who want no part of this quagmire and take
their dollars and their jobs overseas. State spending
overwhelming, if not exclusively, exists to benefit the people
who live and work in the state. Education, health care, roads,
police protection, the reasons states do these things is to
benefit the residents. Residents should be willing to pay for
these services that they demand. Instead, what we see are many
states offering tax credits and waivers to select residents,
businesses and individuals, while insisting on going off out-
of-state corporations that engage in sales in the state. This
is backwards and it is a violation of good tax policy. A
physical presence standard for business activity taxes would
correct this and be in line with the benefit principle which is
a fundamental view of taxation.
As a country we have gone from the artisan to Amazon.com.
But this sophistication of technological progress does not
change the fact that state services are still based on physical
geographic borders, so the tax system should be too.
And state fiscal pain does not justify overruling timeless
constitutional principles, such as the idea that states
shouldn't be allowed to burden interstate commerce and impose
uncertainty in the national economy.
Sometimes small businesses call up my office, as I am sure
they call up the other members of the panel, asking if I engage
in activities in a state, what would create nexus. And the only
reason answer I have for them is to send them this. This is
BNA's annual survey of state tax actions. It is the
questionnaire that Mr. Schroeder talked about where they ask I
think it is over 100 questions of, would this activity create
nexus, would this activity create nexus. This is--this should
not be how we do our system. There has to be a better way.
Thank you.
[The prepared statement of Mr. Henchman follows:]
__________
Mr. Coble. Thank you, gentlemen for your testimony. We
appreciate you being with us. We will now examine the
witnesses.
Mr. Schroeder, how has the uncertainty and lack of
predictability concerning different states' nexus requirements
affected your small business?
Mr. Schroeder. Yeah. In my case it is simply a matter of
management time and attention and as well as the cost and
expense of trying to comply. We spend, as I mentioned, you
know, over--almost a $100,000 a year in our already highly
regulated business, and that is dollars and time and attention
that is not spent on growing our business, launching new
franchisees or developing new business concepts. And it is
simply a matter of I don't know what the rules are, I probably
could benefit from that and it would take even more of my time
to figure out which of the 34 states I operate in I should be
filing state tax returns in.
Mr. Coble. Thank you, sir.
Mr. Johnson, is it your position that states should be
entitled to discriminate against a company based on whether it
sells tangible goods or intangible goods and services?
Mr. Johnson. That is certainly not my position, Mr. Chair.
In fact that is imposed on us by Public Law 86-272. And again--
--
Mr. Coble. Now we--Mr. Johnson, would you oppose
modernizing Public Law 86-272?
Mr. Johnson. Well, if a physical presence is what is
sought, and I don't believe a physical presence test is
appropriate, I don't believe we should go back to the way the
last--business was conducted in the last century to impose
taxes in the new century, but if you want a physical presence
standard, you have to repeal 86-272, because 86-272 allows a
physical presence and protects it from taxation, as long as the
activities are limited to the solicitation of sales of tangible
personal property.
So if a physical presence is sought, then repeal of 86-272
is required.
Mr. Coble. Well I thank you, sir.
Now Mr. Henchman, speaking of physical presence, why do you
believe that a physical presence standard for net income and
other business activity taxes is consistent with the holding of
Quill? If you do believe that.
Mr. Henchman. I do believe that. The Quill decision, of
course, by its own terms was restricted to sales taxes. And as
Congressman Goodlatte's answer to Representative Quigley
earlier indicated, this bill does not address sales taxes one
way or the other, because I know different people have
different views on that. It just deals with business activity
taxes and the view that the physical presence--and for me it
just comes down to the basic economics as I said in my
testimony. The residents of a state benefit from the services
provided by a state. And to the extent a state is providing
benefits to nonresidents, maybe they ought to be voted out of
office because the reason you get elected to office is to
provide benefits to your residents that vote for you. And those
are the people that should be paying taxes to support those
services.
Mr. Coble. I thank you, gentlemen.
The Chair recognizes the distinguished gentleman from
Michigan. I yield back my time, by the way. Mr. Conyers is
recognized for 5 minutes.
Mr. Conyers. Thank you, Chairman Coble.
Mr. Johnson, is--are there any tax avoidance opportunities
that we ought to frankly talk about here? It has been said that
we might create tax planning opportunities to eliminate tax--
state taxation revenues that are earned in a state. Can you
amplify?
Mr. Johnson. Yes. Thank you, Congressman.
As I indicated, I practiced for 17 years representing
businesses, many of them large businesses. And if this bill
were passed in its current form it would be malpractice for me
not to recommend a number of structuring techniques.
One of the simplest would be to take the issue of a toy
store, Toys R Us, for example. And I use that example because
it is the subject of some well known litigation. For any
retailer----
Mr. Conyers. Does some of that litigation----
Mr. Johnson [continuing]. Doing business in the state----
Mr. Conyers. Does some of that litigation involve tax
avoidance?
Mr. Johnson. Yes, it does. By creating an intangible
holding company and charging a royalty, then a company can
essentially eliminate its profits in a state or reduce them
dramatically by paying a royalty to a holding company in
Delaware or offshore and deducting the royalty which can
completely eliminate its profit margin in the state. That would
be a simple example.
Another example would be creating a--if I had a business
that was selling software for payroll and software for accounts
receivable, for example, and part of my business model was to
be able to repair and install that software and say I got a
third of my revenue from each of those things, I would simply
create three different subsidiaries. The repair subsidiary
would then become subject to Utah tax. I could structure the
sales of the payroll subsidiary and the sales of the accounting
subsidiary to be exempt from Utah tax. I could cut my Utah tax
in--by two-thirds by the simple expedient of creating three
separate subsidiaries.
Mr. Conyers. Any Federal tax opportunities involved?
Mr. Johnson. Well, the Federal tax--this same kind of
planning goes on at the Federal level.
Mr. Conyers. It could be local or Federal taxes?
Mr. Johnson. Yes.
Mr. Conyers. Okay.
Mr. Johnson. But this would provide a blueprint for
legitimized--and tax planning is something we recognize is
legitimate.
Mr. Conyers. Well----
Mr. Johnson. A company has no moral obligation----
Mr. Conyers [continuing]. Look, we just left the Wall
Street debacle and there were some tax organizations that
didn't do very well in those investigations.
Mr. Johnson. There is definitely a line that can be
crossed. But this would authorize many of these techniques.
Mr. Conyers. Well, you have sufficiently disturbed me with
this information.
Thanks, Chairman.
Mr. Coble. Thank you, Mr. Conyers.
I say to my Members, we are going to have a vote here soon.
I think we can probably wrap this up.
I am now recognizing the distinguished gentleman from South
Carolina.
Mr. Gowdy. Thank you, Mr. Chairman.
Mr. Coble. I almost demoted you, Trey.
Mr. Gowdy. And California would never allow me to set foot
in that state, Mr. Chairman, I don't think. I am sure I have
warrants pending.
Mr. Henchman, the substantial nexus test, how--what are the
elements of it, how is it applied today?
Mr. Henchman. It is laid out in the--for--in this case it
is laid out in the bill and essentially--it is essentially
property and payroll. And I do want to indicate that it is a
substantial nexus test, not the sufficient context test used
for personal jurisdiction, as Mr. Johnson indicated, that is a
completely less--that is a lower standard that the Supreme
Court has never held to be the case for tax purposes.
Mr. Gowdy. Are there limits to Congress' ability to
regulate state tax structures?
Mr. Henchman. This bill does not address that, so----
Mr. Gowdy. In your judgment, are there limits to what we
can do with respect to state tax structures?
Mr. Henchman. Well, the Constitution permits the Congress
to regulate commerce as it sees fit.
Mr. Gowdy. Yeah, but that is a very amorphous, increasing
elastic----
Mr. Henchman. It is.
Mr. Gowdy [continuing]. Term.
Mr. Henchman. It is. And in terms of preempting certain
state activities, I think even a limited reading of the
Commerce Clause finds that power existing with Congress. There
are----
Mr. Gowdy. Mr. Johnson, you----
Mr. Henchman [continuing]. Probably a lot of things you
could----
Mr. Gowdy. Let me ask, Mr. Johnson. What are the limits as
you see them? Because I didn't write the note down and at my
age my memory slips, but you questioned, perhaps or maybe I
misunderstood you, whether Congress would have the authority to
do certain things with respect to state tax structures or
perhaps--I don't want to put words in your mouth. What do you
think about it?
Mr. Johnson. I think there are certainly--I think there are
certainly steps that Congress could take that would be so
extreme that they could be struck down as unconstitutional.
P.L. 86272 has not been challenged, to my knowledge, so I
don't--our position is not that this bill would be
unconstitutional, our position is that just because the Federal
Government may have the authority to impose this bill doesn't
mean it is a good idea.
Mr. Gowdy. What remedy would you propose?
Mr. Johnson. I would echo the comments of Congressman
Cohen. I would like to see the businesses get together with the
states and have a brighter line standard. I think it should
include sales, but I think there should be some clear de
minimis standards.
I tried to propose something in Utah and I didn't get much
support from anyone, either on the business side or from my
legislators on it. But I--as someone who, again, has
represented taxpayers, I do think more certainty in the area
would be appropriate. And I would encourage states to adopt
brighter line standards. But I think the states should be able
to do so based on their own elected legislators. And I would
encourage the business community to work with the states in
accomplishing that.
Mr. Gowdy. Mr. Henchman, what would be your perspective on
that remedy?
Mr. Henchman. Well, I would say there is no incentive the
states will ever do that. And on the contrary, the incentive is
to move away from apportionment--away from uniformity. And we
have seen that in apportionment, where back in the '50's
Congress and through the Willis Commission threatened, look,
this is a mess in apportionment, and so you guys just need to
adopt a standard otherwise we are going to do it for you. And
it took until a bill nearly being passed by Congress for the
states to get together and adopt a uniform standard.
And since Congress has moved to other matters, the states
have now wandered off and now we have all these different
apportionment standards. That is the way states go on these
things. It is going to take Congress or the courts to impose
uniformity, the states are not going to do it on its own.
Mr. Gowdy. Mr. Schroeder, I am from South Carolina and if I
can help you navigate that form, I will be happy to try and
help, but thank you for doing business in South Carolina.
And with that I would yield back the remainder of my time,
Mr. Chair.
Mr. Coble. I thank the gentleman from South Carolina.
The gentleman from Tennessee, Mr. Cohen is recognized.
Mr. Cohen. Thank you, sir.
Are all of you all familiar with the Section 4 of this H.R.
1439? Mr. Johnson, you are?
Mr. Johnson. Pardon me?
Mr. Cohen. Section 4, the new section in H.R. 1439?
Mr. Henchman. The Joyce Finnigan Provision I think?
Mr. Johnson. Yes.
Mr. Cohen. You're familiar with it then. What do you think
about it, sir? It was not in the prior Business Activities
Simplification Act.
Mr. Johnson. Well----
Mr. Cohen. How does that impact state governments?
Mr. Johnson. To--a simple example would be the--under the
prior versions of the bill the technique I talked about where
you would set up an intangible holding company for trademarks,
that would not have worked in Utah, because we are a combined
state. We would have taken the position that both the trademark
holding company and the retailer are a single business entity
as long as one of them has nexus in the state, the other one
wouldn't. So that technique would not have worked under prior
bills.
Under this bill it will work because we are required to
consider each individual member of the combined group,
individually, for purposes of determining whether or not it has
nexus under this provision. So this is a dramatic expansion of
the preemption.
Mr. Cohen. So you are against it?
Mr. Johnson. I am very much against it.
Mr. Cohen. Yeah, I would think so.
Mr. Henchman, where are you on this?
Mr. Henchman. The--what is at issue here is basically two
different interpretations of how you calculate nexus for
different states, it is known as the Joyce standard and the
Finnigan standard. The Joyce standard brings in--does not bring
in entities for which the state doesn't have nexus, the
Finnigan standard does.
We view the Finnigan standard as the more aggressive one
and the Joyce one as not. And this statute would enshrine the
Joyce standard which limits state taxation to those entities
that are actually have nexus with the state.
Mr. Cohen. Mr. Schroeder, are you familiar with this?
Mr. Schroeder. I am sorry, I didn't hear.
Mr. Cohen. Are you familiar with this section of the law?
Mr. Schroeder. I am not in detail, but judging from what I
am hearing is, you know, what we are looking for as a small
business is simply a bright line test that helps us establish
where do we have nexus and understanding why, because we want
to make sure we spend as much of our resources as possible
helping our franchisees grow and to grow their business and we
need some clarity and reduction of uncertainty to be able to do
that.
Mr. Cohen. Now you are a franchisor.
Mr. Schroeder. Right.
Mr. Cohen. And you are here because you are a member of the
franchise association, but you don't necessarily representative
the franchise association. Is that correct?
Mr. Schroeder. Correct.
Mr. Cohen. All right. So you do not know the--but the
franchise association is 100 percent consistent with your
position?
Mr. Schroeder. Yes.
Mr. Cohen. Okay. I got you.
I yield back the remainder of my time. Thank you.
Mr. Coble. Thank you.
Trent, if you can keep it fairly brief I think we can get
out of here, if you will do that.
Mr. Franks. I will move it, Mr. Chairman.
Mr. Coble. The distinguished gentleman from Arizona, Mr.
Franks.
Mr. Franks. All right. Mr. Johnson, what is your response
to the stories from companies such as Outdoor Brands that small
businesses facing this kind of Hobson's Choice of either hiring
expensive accountants to decipher the various state laws or the
state nexus rules or roll the dice and just make the best
conclusion they can and sometimes end up having a major tax
liability. I mean isn't that sort of a textbook example of kind
of taxation without--that is unduly burdens to interstate
commerce?
Mr. Johnson. Well, as I stated, Congressman Franks, I have
some sympathy for that position and I think the states have
been somewhat derelict in not providing clearer standards. And
I think a clear standard, for example, might include a de
minimis amount of sales. If you don't have more than $250,000
worth of sales into the state, for example, that might be a
good bright line.
But with regard to franchises, franchise--the whole idea of
a franchise is that when I am driving through Colorado or
Wyoming or South Carolina and I see a franchise that I am
familiar with from Utah, I am more likely to go to that
business. I am more likely to participate there, patronize that
business because it has built up good will in the state. So to
say that a franchisor doesn't benefit from the market created
in Utah, I think frankly is not correct.
Mr. Franks. Well, Mr. Henchman let me just ask you one
question here sort of a combination question.
I know that some states are already using the physical
presence standard for net income and business activity taxes,
even though I don't think the Supreme Court has ever required
it. So touch on that.
And then also the recent Iowa Supreme Court decision held
that Kentucky--a Kentucky franchiser had a physical presence in
Iowa because the franchisee was using the franchisor's
intellectual property to, you know, pursuant to a franchisor
contract arrangement. And that is--boy, that is something that
is very hard for a business to--you know, I came from a small
business background----
Mr. Henchman. Right.
Mr. Franks [continuing]. And sometimes businesses don't
know whether to jump or go blind. And tell me, what do you
think about that and what is the answer to it.
Mr. Henchman. Sure. I mean Mr. Johnson and I think some of
the members have talked about tax planning. There is also
issues of this is just how they have designed the business. I
mean if somebody is structuring their business with the intent
of avoiding taxes they owe, then Mr. Johnson and his fellow tax
commissioners have the legal power to go after them. I mean you
can do (inaudible) reporting, you can do unitary, you do a
whole bunch of other--and you can prosecute them.
If it is just made up to avoid taxes you can go after them
and nothing in this bill stops that. But with people who
legitimately structured their business in that way, they face a
lot of problems the way the system is set up now.
Mr. Franks. Yeah. Well Mr. Chairman, I will just make a
comment and I am through. It seems to me, you know, the IRS and
tax agencies are always saying that businesses and individuals
have every right to pay as little taxes as they can, within the
clear confines of the law. But when the confines of the law are
just completely murky it is not fair to businesses or
individuals and it is the responsible of Government to make
those lines clear. And of course, in my judgment, also to
somehow find ourselves somewhere in the vicinity of the
Constitution at the same time.
So with that I yield back.
Mr. Coble. I thank the gentleman.
Good news for the witnesses, we won't keep you here all the
rest of the afternoon waiting for us to return. I thank you all
for your testimony. Your written statements will be made part
of the record.
We appreciate those in the audience for your presence today
as well.
Without objection all Members will have 5 legislative days
to submit to the Chair additional written questions for the
witnesses which we will forward and ask the witnesses to
respond as promptly as they can do so with their answers that
may also be made a part of the record. Without objection all
Members will have 5 legislative days to submit any additional
materials for inclusion in the record.
And this hearing stands adjourned.
[Whereupon, at 2:35 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record