[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]






            BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2013

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                           REGULATORY REFORM,
                      COMMERCIAL AND ANTITRUST LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

                               H.R. 2992

                               __________

                           FEBRUARY 26, 2014

                               __________

                           Serial No. 113-70

                               __________

         Printed for the use of the Committee on the Judiciary


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      Available via the World Wide Web: http://judiciary.house.gov

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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
HOWARD COBLE, North Carolina         ROBERT C. ``BOBBY'' SCOTT, 
LAMAR SMITH, Texas                       Virginia
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
SPENCER BACHUS, Alabama              SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California          STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia            HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa                       Georgia
TRENT FRANKS, Arizona                PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas                 JUDY CHU, California
JIM JORDAN, Ohio                     TED DEUTCH, Florida
TED POE, Texas                       LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah                 KAREN BASS, California
TOM MARINO, Pennsylvania             CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina           SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho                 JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas              HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina       DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
JASON T. SMITH, Missouri
[Vacant]

           Shelley Husband, Chief of Staff & General Counsel
                            Perry Apelbaum, 
                                 ------                                

    Subcommittee on Regulatory Reform, Commercial and Antitrust Law

                   SPENCER BACHUS, Alabama, Chairman

                 BLAKE FARENTHOLD, Texas, Vice-Chairman

DARRELL E. ISSA, California          HENRY C. ``HANK'' JOHNSON, Jr.,
TOM MARINO, Pennsylvania               Georgia
GEORGE HOLDING, North Carolina       SUZAN DelBENE, Washington
DOUG COLLINS, Georgia                JOE GARCIA, Florida
JASON T. SMITH, Missouri             HAKEEM JEFFRIES, New York
                                     DAVID N. CICILLINE, Rhode Island

                      Daniel Flores, Chief Counsel
                      James Park, Minority Counsel


















                            C O N T E N T S

                              ----------                              

                           FEBRUARY 26, 2014

                                                                   Page
H.R. 2992, the ``Business Activity Tax Simplification Act of 
  2013''.........................................................     3

                           OPENING STATEMENTS

The Honorable Spencer Bachus, a Representative in Congress from 
  the State of Alabama, and Chairman, Subcommittee on Regulatory 
  Reform, Commercial and Antitrust Law...........................     1

The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Tennessee, and Ranking Member, 
  Subcommittee on Regulatory Reform, Commercial and Antitrust Law    13

                               WITNESSES

Pete Vegas, Founder and President, Sage V Foods, Los Angeles, CA
  Oral Testimony.................................................    62
  Prepared Statement.............................................    66

Tony Simmons, President and Chief Executive Officer, McIlhenny 
  Company, Avery Island, LA
  Oral Testimony.................................................    71
  Prepared Statement.............................................    73

Joseph Henchman, Vice President of Legal & State Projects, Tax 
  Foundation, Washington, DC
  Oral Testimony.................................................    81
  Prepared Statement.............................................    83

David Quam, Deputy Director, National Governors Association, 
  Washington, DC
  Oral Testimony.................................................    96
  Prepared Statement.............................................    98

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, 
  Jr., a Representative in Congress from the State of Georgia, 
  and Ranking Member, Subcommittee on Regulatory Reform, 
  Commercial and Antitrust Law...................................    14

Prepared Statement of the Honorable Bob Goodlatte, a 
  Representative in Congress from the State of Virginia, and 
  Chairman, Committee on the Judiciary...........................    18

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Ranking Member, Committee on the Judiciary.....................    22

Material submitted by the Honorable Spencer Bachus, a 
  Representative in Congress from the State of Alabama, and 
  Chairman, Subcommittee on Regulatory Reform, Commercial and 
  Antitrust Law..................................................    29

Material submitted by the Honorable Suzan DelBene, a 
  Representative in Congress from the State of Washington, and 
  Member, Subcommittee on Regulatory Reform, Commercial and 
  Antitrust Law..................................................   109

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the National Marine Manufacturers 
  Association....................................................   122

Prepared Statement of Grady-White-Boats..........................   124

Prepared Statement of the American Bankers Association...........   126

Prepared Statement of the American Trucking Associations.........   130

Letter from the Council On State Taxation (COST).................   137

Letter from the Motion Picture Association of America, Inc.......   141

Material submitted by the Center on Budget and Policy Priorities.   144

Prepared Statement of the Financial Services Roundtable (FSR)....   175

Prepared Statement of the Ad Hoc Fair Hotel Tax Collection 
  Coalition......................................................   179

Prepared Statement of Mark Louchheim, President, Bobrick Washroom 
  Equipment, Inc., on behalf of the National Association of 
  Manufacturers..................................................   180

Prepared Statement of the Softward Finance & Tax Executives 
  Council (SoFTEC)...............................................   185

Letter from Unions opposed to H.R. 2992, the ``Business Activity 
  Tax Simplification Act of 2013''...............................   189

 
            BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2013

                              ----------                              


                      WEDNESDAY, FEBRUARY 26, 2014

                       House of Representatives,

                  Subcommittee on Regulatory Reform, 
                      Commercial and Antitrust Law

                      Committee on the Judiciary,

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 3:01 p.m., in 
room 2141, Rayburn Office Building, the Honorable Spencer 
Bachus (Chairman of the Subcommittee) presiding.
    Present: Representatives Bachus, Goodlatte, Farenthold, 
Marino, Johnson, and DelBene.
    Staff present: (Majority) Anthony Grossi, Counsel; Rachel 
Wolbers, Legislative Assistant for Rep. Farenthold; Philip 
Schwartzfager, Legislative Director for Rep. Bachus; Ashley 
Lewis, Clerk; (Minority) Perry Apelbaum, Minority Staff 
Director & Chief Counsel; Norberto Salinas, Counsel; Slade 
Bond, Legislative Counsel for Rep. Johnson; and Rosalind 
Jackson, Professional Staff Member.
    Mr. Bachus. The Subcommittee on Regulatory Reform, 
Commercial and Antitrust Law hearing will come to order. 
Without objection, the Chair is authorized to declare recesses 
of the Committee at any time.
    I do want to tell the panel that events on the House floor 
have been changing this week. We were going to consider this 
bill or that bill out of this Committee on the floor, and they 
keep moving that around, and so, we usually do not initially 
set a hearing for 4 p.m. We usually have them earlier, but we 
try to do that. And now we find we are going to be on the floor 
a little later on, so this hearing may be fairly compact. But 
let me give an opening statement.
    Today we will hear testimony regarding the Business 
Activity Tax Simplification Act of 2013, or BATSA. The purpose 
of this bill, which I have co-sponsored, is to establish a 
clear, uniform, and predictable framework for states and 
businesses with regard to the application of business activity 
taxes. States have broad authority to assess taxes on 
individuals, property, and businesses that originate from the 
basic principles of federalism.
    The Constitution has always conferred upon Congress the 
responsibility to protect against undue burdens to interstate 
commerce to allow our free market economy to function across 
state borders. There is a thoughtful balance that must be 
struck between these two competing interests. And when acting 
in interstate commerce matters, Congress must be sure to 
exercise its power with great care and precision.
    The issue before us deals with state taxation policies that 
affect out-of-state businesses. The Judiciary Committee has 
collected much testimony and will receive more testimony today 
that documents the frustrations of small businesses with state 
taxing regimes that have been increasingly aggressive in their 
efforts to collect revenue from out-of-state businesses.
    Small businesses can be easy targets because they have 
little or no direct representation in the state and do not have 
the resources to fight. And I think two of our witnesses are 
going to be fantastic examples of this. In addition, court 
decisions have created confusing and ambiguous guidelines for 
what actions taken by an out-of-state business will be 
sufficient for a state to gain authority to impose business 
taxes.
    As a result of unclear judicial precedent, businesses are 
often forced to spend scarce resources on lawyers and 
accountants to either calculate their tax liability or defend 
against improper tax bills, and often the only option is just 
simply to write a check. It is not the right thing to do, but 
it is certainly the economically right thing to do, and that 
should not be the case.
    BATSA will bring needed consistency and predictability to 
what we know as nexus standard issues where an out-of-state 
business is subject to business activity taxes. It will enable 
small businesses in particular to more accurately determine 
their tax liability without impeding the traditional ability of 
states to assess taxes on enterprises that truly have an active 
presence within their borders. This legislation is a balanced 
approach that respects states' prerogatives and preserves the 
seamless interconnected national economy that we all benefit 
from.
    I now recognize the Ranking Member, Mr. Hank Johnson of 
Georgia, for his opening statement.
    [The bill, H.R. 2992, follows:]


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                               __________

    Mr. Johnson. Thank you, Mr. Chairman, for holding this 
hearing today. I find it fortuitous that as I assume the 
Ranking Member position, the Subcommittee turns to addressing 
state taxation issues. I hope this is the beginning of a series 
of discussions focusing on state taxation.
    Over the past several Congresses, I have worked closely 
with my colleague, Representative Howard Coble, on a common 
sense solution to simplify and reduce taxes for so many 
Americans. This Congress we introduced H.R. 1129, the ``Mobile 
Work Force State Income Tax Simplification Act of 2013.'' H.R. 
1129 is identical to legislation passed by the House last 
Congress. I hope that this bipartisan legislation will be 
considered at the appropriate time, and I look forward to 
working with the Chair on it.
    I also look forward to this Committee addressing the remote 
sales tax issue next week. I have long supported leveling the 
playing field when it comes to sales tax collections. That is 
why I support H.R. 684, the ``Marketplace Fairness Act.'' 
Although I would prefer a legislative hearing on that bill, I 
welcome any movement toward addressing the remote sales tax 
issue.
    There are other issues and related legislative proposals 
this Subcommittee can discuss. As the former Chair of the 
Subcommittee on Courts and Competition Policy, I look forward 
to future hearings on some of those issues, especially on 
antitrust issues, another area right for this Subcommittee's 
attention.
    But today, we focus on H.R. 2992, the ``Business Activity 
Tax Simplification Act of 2013.'' This legislation would 
establish a physical presence standard, which must be met 
before states can impose a business activity tax. Proponents of 
the legislation contend that businesses need more certainty in 
determining what activities are taxable, and that a uniform 
standard would provide that. Opponents of the bill argue that 
states should determine what activities are taxed within their 
borders, and that the physical presence standard created in 
this bill would invite tax evasion.
    Although I have supported similar legislation in the past, 
I am taking a step back this time to look more closely at the 
legislation and to hear today's testimony. I hesitate because 
of the impact this legislation may have on state and local 
governments. Last Congress, the Congressional Budget Office 
estimated that identical legislation would lead to about $2 
billion in lost annual revenues with the potential for 
additional losses in subsequent years.
    When we consider legislation which will have that large of 
an impact, we need to determine if we need to simply revise the 
language. We should also study whether there are alternative 
methods which accomplish the same goal of providing more 
certainty for businesses while minimizing any impact on or 
state and local governments.
    I look forward to hearing from the witnesses, and again I 
thank the Chairman for holding today's hearing. Thank you, and 
I yield back.
    Mr. Bachus. Thank you. Without objection, all Members' 
opening statements will be made a part of the record.
    [The prepared statement of Mr. Johnson follows:]



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    [The prepared statement of Mr. Goodlatte follows:]


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    [The prepared statement of Mr. Conyers follows:]


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    Mr. Bachus. Before we introduce today's witnesses, without 
objection, I would like to submit for the record letters and 
written testimony in support of BATSA from the International 
Franchise Association, Pro-Help Systems, Fischer and Wieser 
Specialty Foods, Partnership for New York City, the missing 
Computing Technology Industry Association, and the U.S. Chamber 
of Commerce.
    [The information referred to follows:]


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                               __________

    Mr. Bachus. We have a distinguished panel today, and I 
would like to introduce our witnesses now. Having read the 
experiences of Mr. Vegas and Mr. Simmons and your companies, I 
think that the evidence will be helpful to Mr. Johnson and 
others as they try to decide what to do.
    Mr. Vegas is the founder and president of Sage V Foods, 
which specializes in producing rice-based ingredients for use 
in processed foods, and has developed the most complete line of 
rice products in the industry. Prior to Sage V, Mr. Vegas 
managed a startup rice milling company that was a joint venture 
between Comet Rice and the government of Puerto Rico, and 
ultimately became vice president of marketing for Comet Rice.
    Mr. Vegas graduated from Louisiana State University with a 
degree in agribusiness, and received his MBA from Harvard 
Business School. We welcome you.
    Mr. Tony Simmons is president, CEO, director, and interim 
chairman of the board of McIlhenny Company. McIlhenny, okay. 
McIlhenny Company is 146-year-old company whose most famous 
product is TABASCO brand pepper sauce. I think we all know 
about the island and everything. Mr. Simmons is the great, 
great grandson of the creator of TABASCO, Edmund McIlhenny, and 
is the seventh family member to assume McIlhenny Company 
leadership, which is still family owned and operated.
    Prior to accepting the position with McIlhenny Company, Mr. 
Simmons was president and CEO of Manitowoc Southeastern--yes, 
it is the crane people, right, the cranes--an independent crane 
distributor located in the southeast. And that company is 
headquartered in Wisconsin or Minnesota?
    Mr. Simmons. Manitowoc is in Manitowoc, Wisconsin.
    Mr. Bachus. Wisconsin, okay. Mr. Simmons also serves on the 
board of America's Wetland Foundation. Mr. Simmons holds a 
degree in speech from Loyola University in New Orleans. We 
welcome you. And what is the name of the island?
    Mr. Simmons. Avery Island.
    Mr. Bachus. Avery Island, that is right. I think every 
restaurant in the south either has tabasco sauce or, what is 
it, Texas Pete, that which is not a tabasco sauce.
    Mr. Simmons. Never heard of Texas Pete. [Laughter.]
    Mr. Bachus. That is a great answer. Mr. Joseph Henchman is 
vice president of legal and state projects at the Tax 
Foundation, a non-profit 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, Fortune magazine, 
and a number of law review journals.
    Mr. Henchman received his bachelor's degree in political 
science from the University of California at Berkeley and his 
JD from George Washington University Law School. Welcome to 
you, Mr. Henchman.
    Mr. David Quam is deputy director of Federal relations at 
the National Governors Association. He has an extensive track 
record in development policy solutions and effectively 
advocating positions before Congress and the Administration to 
the Governors Collective Policy Priority. Before joining the 
National Governors Association, he was an associate at Powell, 
Goldstein, Frazer, and Murphy, LLP, director of international 
affairs and general counsel at the International Anti-
Counterfeiting Coalition, and majority counsel on the Senate 
Judiciary Committee's Constitution Subcommittee.
    He received his BA from Duke University and his JD from 
Vanderbilt University School of Law.
    Each of the witnesses' written testimonies will be entered 
into the record in its entirety, and I ask each of our 
witnesses to summarize his or her testimony in 5 minutes or 
less. And we are going to have a light which will turn yellow 
and then red, but if you need to go over by 20 or 30 seconds, 
that is fine with me, although I think the Chairman does not 
really like that, but I am the Subcommittee Chairman, and I do 
not mind it.
    So at this point, we will still start with the witnesses. 
Mr. Vegas, we will start with you first, and then we will go 
down the line.

 TESTIMONY OF PETE VEGAS, FOUNDER AND PRESIDENT, SAGE V FOODS, 
                        LOS ANGELES, CA

    Mr. Vegas. Okay. Okay. My name is Pete Vegas. I appreciate 
the opportunity to speak with you today. I will tell you I am a 
little concerned that I could be targeted by these states once 
my name becomes public, so I would hope you help me out if that 
happens. Otherwise, this could be a very----
    Mr. Bachus. We could pass this. That would help.
    Mr. Vegas. That would solve the problem. [Laughter.]
    I hope you have had the chance to read my written testimony 
or will read it. Those are my words. Because I defended myself 
against the State of Washington, I have actually learned quite 
a bit about this, probably more than any businessman should 
know really.
    Mr. Bachus. And let me say this, and stop the time. Both 
your testimony and, Mr. Simmons, I mean, those are nightmare 
situations for not only a small business. I would actually call 
your business a medium-sized business. Really your experience, 
you are an eyewitness to this. So, you have experienced this, 
and you look at it, and how anyone can look at what you have 
gone through and think that is fair or equitable, you know, it 
is hard to believe that that was what we conceived when we gave 
states the taxing authority.
    Mr. Vegas. You know, and 5 minutes is not a lot of time, so 
I'm hoping there are questions and I can spend more time, yes.
    So I started my company from scratch. We basically take 
rice and have learned to make new products from rice, have 
taught people how to use it. Today we sell rice flour, frozen 
rice, crisp rice like goes in granola bars, instant rice. We 
are an approved supplier in almost every major food company in 
the United States, so we are shipping products, you know, 
pretty much throughout the country.
    Our sales today are about $100 million. You know, I employ 
over 200 people. And so from a tax standpoint--and in the last 
7 years I have built 3 facilities, two in Arkansas and one in 
Texas. I live in California. From a tax standpoint, you know, I 
am an LLC. That means taxes flow straight through to me, so I 
pay Federal taxes. I pay taxes in California. And then I pay 
taxes in the states where I have facilities and properties, 
like Arkansas and Texas.
    In 2010, I was basically hit, you know, by the State of 
Washington. Washington has no income tax, so they charge what 
they call a business and occupation tax, which is essentially a 
tax on sales. It is a tax on gross receipts. And to be clear, 
you know, what I am talking about here are business to business 
taxes. I am not selling to a consumer. I am not talking about 
sales taxes to a consumer like you would discuss with Amazon or 
someone like that. I mean, to make it very clear, I am selling 
rice flour in bulk rail cars to a company in the State of 
Washington that takes my flour, blends it with other 
ingredients, sells a mix, you know, a batter mix basically, to 
a french fry company that makes French fries, that turns around 
sells it to a large burger chain that then sells to their 
franchises. So if everyone was charging taxes like the State of 
Washington, my flour would be taxed four times before the 
consumer paid a sales tax on it, okay?
    As a percentage of my income, the tax that I paid in 
Washington is over 16 percent. That is higher than any state in 
the country, okay? And if you start adding up what I pay in 
Federal taxes and state's taxes, if I paid everyone what 
Washington charged me, my tax bills would be over 70 percent. 
And I can tell you, I cannot run a company when that much of my 
money is going outside.
    Because I visited the state one time in 7 years, Washington 
basically sent me a tax bill for over $180,000. It was for 7 
years back penalties and taxes. And then once you have 
established nexus, even though you stop the activity--I do not 
visit anymore--it goes another 5 years forward. So this could 
have easily been or would be a $300,000 kind of bill. Quite 
frankly, I have never seen anything like that. I was shocked. 
You know, I called other businesses, friends, to ask, you know, 
what did they know about this. It is not known by people who 
have not been hit yet, but it is becoming more and more 
prevalent. I had to hire an attorney to explain it to me, you 
know.
    And I can tell you, a company like mine cannot afford to 
try to understand every oddball state in 50 different states. I 
mean, I had a tax accountant last year that wanted to charge me 
over $100,000 to do my taxes, okay? Imagine if I had to deal 
with 50 states coming at me. It is just impossible.
    Every attorney in the State of Washington literally turned 
me down. They said, Pete, it is a waste of your money to fight 
these people. But, you know, I am bullheaded. I was wronged. I 
did it anyway. I mostly defended myself, okay? I went through 
three appeal processes and eventually won, you know, but that 
was a huge effort on my part. It took a lot of time away from 
my business. It is not something I could do every time a state 
comes after me.
    And the kind of stuff that Washington tried to trip me up 
on, which I think is common in other states so that you 
understand, the issues are did I have brokers in the state, had 
I attended trade shows in the state, you know, did I sell on a 
delivered basis instead of an FOB basis, could a customer 
reject my product at destination, had I sent a service 
technician to, like, repair a rail car or help them use the 
product, did I ship on company-owned trucks, do I have any 
product warehoused in the states. Any of these things would 
have established nexus.
    My actual fights in court were mostly related to my visit, 
you know, how many times did I visit. We determined it was one, 
you know, and then I won that case. The next time I went they 
focused on the fact that I had shipped on company-leased rail 
cars, which meant in their mind I had leased equipment in the 
state. In both cases, you know, I prevailed mostly because in 
the State of Washington, they have a statute that says to 
establish nexus, the business activity must be related to or 
maintaining a market in the state, okay? And in both cases I 
proved it did not, you know, which means had I made a sales 
call, a serious sales call, in that one visit, they may have 
established nexus with that.
    And basically because I defended myself, I learned quite a 
bit about the law itself. And what I have learned is there is 
really nothing to date that prevents states from collecting all 
of their revenue from outsiders. I mean, if you are a 
politician and you are running a state, it is hard to cut your 
budget. It is hard to reduce expenses. It is hard to raise 
taxes on your voters. It is very easy to take advantage of 
somebody from the outside because we have no recourse. We have 
no vote. And that is exactly what you are seeing more and more 
of. I mean, it is the old story of taxation without 
representation. I mean, it is why our country is here today and 
not part of Great Britain.
    I studied the Constitution and Supreme Court rulings. You 
know, the commerce clause is a pretty simple clause really. It 
basically gives Congress the power to regulate commerce with 
foreign nations and among the several states and with the 
Indian tribes. It makes it very clear that this is Congress' 
job, not the job of the Supreme Court. Everyone seems to 
understand that a big part of this is to prevent the kind of 
problem we have today, which is a deterrent to interstate 
commerce. If this goes on, you know, it is going to be a huge 
problem and it is going to prevent interstate commerce.
    The last time the Supreme Court visited this, and I am sure 
you will hear more from people that know more about it, was the 
Quill case. And it actually required a physical presence. The 
Supreme Court has never issued a ruling that allowed nexus 
without a physical presence.
    In my particular situation, I argued the four-pronged test 
of the Auto Transit v. Brady, which is kind of the old golden 
rule. It had a four-pronged test to establish nexus, and this 
is what I used in the State of Washington. And I basically 
learned it has pretty much been negated. The first rule--and 
you have to pass all four. The first rule is substantial nexus, 
and that is where most people argue. How many times does it 
take to visit to establish substantial nexus?
    The second one is fair relationship. And I basically showed 
the budget in the State of Washington and where they spend 
their money--schools, human services, this sort of stuff--and 
showed that I spent no money whatsoever in the State of 
Washington, okay? But that particular prong has kind of been 
pushed aside by the courts. You cannot win on that anymore.
    I argued fair apportionment, which meant I explained what 
percentage of my taxes were going to the State of Washington 
and how did that compare to the percent of my sales, the 
percent of my assets, the percent of employees in those various 
states. Very clear that Washington was way out of line. Once 
again, that has no meaning in the law today. Everyone ignores 
that issue.
    The fourth one is non-discrimination, which means you 
cannot discriminate against interstate commerce. That is a 
complete waste of time to argue that one today.
    So essentially what you have is lower courts, you know, 
State revenue services, lower courts in the states, are 
ignoring what little law was set by the Supreme Court. They are 
establishing their own laws, and it is a snowball effect. Every 
time a court puts some aggressive, you know, determination out 
there, it sets a precedent that everyone uses, and then they 
move it another step. And then eventually you reach the point 
where we are today. When one of my suppliers learned I was 
coming, they sent me this document from the State of Ohio. 
There are several states today that all they require to 
establish nexus is that you have sales in their state.
    So what I can tell you is this is a very serious problem 
for companies like mine, and I would really appreciate your 
help. You need to put an end to this, and it is Congress' job.
    [The prepared statement of Mr. Vegas follows:]


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                               __________

    Mr. Bachus. Thank you. Thank you. And we will come back 
with some questions hopefully.
    Mr. Simmons?

   TESTIMONY OF TONY SIMMONS, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, McILHENNY COMPANY, AVERY ISLAND, LA

    Mr. Simmons. Good afternoon, and thank you. McIlhenny 
Company currently has 240 employees, most of whom are located 
at Avery Island, Louisiana.
    TABASCO is sold in over 166 countries and bottled in 22 
languages and dialects. We make every bottle of TABASCO at 
Avery Island, and you will find our product in almost, if not 
every, grocery store in America. In addition, we also sell a 
large percentage of our product to the food service industry 
where it is used by chefs in the kitchen and as a condiment on 
tables.
    Although our only manufacturing plan is in Louisiana, we 
currently pay state income and/or franchise tax in 13 
additional states. We are subject to those taxes because we 
have employees and/or tangible personal property in those 
states which meets the physical presence standard in 
establishing nexus. Additionally, we pay income or other forms 
of business activity tax in seven additional states, thus a 
total of 21 states including our home state of Louisiana.
    I am here today because state and local taxing authorities 
are increasingly and often retroactively expanding the reach of 
their business activity taxes using an expansive definition of 
``substantial nexus.'' I will give you three examples. My goal 
is to demonstrate why a bright line definition of what activity 
constitutes nexus is so important to companies who do business 
in multiple states.
    First, last year, we responded to an inquiry from a city in 
Washington state for pertinent information going back to 2003. 
Not having employees or inventory physically located there, we 
were confident that we had no filing obligation. Following 
their review, the city argued that our use of an independent 
sales broker established nexus, and levied a business and 
occupation tax assessment of just over $32,000 in tax, penalty, 
and interest for the tax years from 2003 through 2008. This 
levy was based on our company sales of TABASCO products for the 
entire State of Washington.
    In 2009, the city changed is rules to limit collections to 
those sales that occurred within its borders only. Under these 
revised rules, our sales are too small, and we owe no tax. The 
new rules, however, did not prevent the city from seeking 
payment for sales in the years before the change. As this case 
remains open today, I am not able to expand on it further. But 
suffice it to say that the costs of time, energy, and dollars 
dedicated to the process far outweigh the potential tax 
obligation, which is an underlying issue that surrounds this 
topic.
    My second example is when we encountered the single 
business tax nexus standards of Michigan back in 2002. Noting 
that there were no McIlhenny company employees, inventories, or 
real property in the state, and that sales solicitations were 
performed by an independent sales broker in Michigan, we 
contested Michigan's attempt to apply its single business tax 
to our sales within the state. Despite extensive correspondence 
with the state and our numerous appeals on the merits of our 
case, an audit by the state resulted in a back tax liability in 
excess of $85,000. Again, the process of defending our position 
and subsequent monitoring and compliance adds to the overall 
administrative burden of complying with ever-changing tax 
interpretations.
    Third and finally, our tax advisors have highlighted a 
developing situation where the State of Maine is declaring that 
promotion of a product within a grocery store by a third party 
representative located in their state creates nexus for the 
manufacturer and a filing obligation based on an analysis and 
interpretation the state has made of an old sales tax case.
    These are just three examples. The task of monitoring, 
interpreting, and complying with unclear, unwritten, and 
constantly-changing state and local nexus interpretations 
places an undue burden on our limited resources, and brings 
uncertainty to our business planning and execution. We believe 
that adopting adopting the principles set forth in BATSA will 
allow businesses that do business in multiple states to have a 
clearly defined understanding of what constitutes nexus. We 
understand that modernization of the law brought about by BATSA 
may not provide an overall lower tax obligation for our 
company, but we do believe it will provide for more efficient 
compliance efforts and eliminate the uncertainty and excessive 
administration costs that currently exist.
    [The prepared statement of Mr. Simmons follows:]


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                               __________

    Mr. Bachus. Thank you. Thank you.
    Mr. Henchman?

 TESTIMONY OF JOSEPH HENCHMAN, VICE PRESIDENT OF LEGAL & STATE 
            PROJECTS, TAX FOUNDATION, WASHINGTON, DC

    Mr. Henchman. Mr. Chairman, Mr. Ranking Member, Mr. 
Chairman, thank you for the opportunity to appear before you 
today on the subject of the scope of state business activity 
taxation. And I am one of those people who carries around the 
Constitution with him. I am a lawyer. And in there is your 
power to regulate interstate commerce. The reason it is in 
there is because before the Constitution, the states, left to 
their own devices, just about wrecked the national economy. 
Port states put taxes on goods going into interior states. 
Interior states taxed the port states, and everyone tried to 
exempt their own residents and put all their taxes on 
interstate commerce. That crisis a big reason why they all 
gathered in Philadelphia and gave you the power to limit the 
ability of states to tax entities with no physical presence in 
the state.
    The physical presence rule for business taxation is not 
only good constitutional law, it is good tax policy. Now, I am 
not an economist, but I am surrounded by them at my office. And 
they talk about the benefit principle, the idea that people and 
businesses should pay taxes in the places where they benefit 
from government services. For businesses, that is where they 
have property and employees. States should pay for services by 
taxing the residents who live and work in the state and benefit 
from those services.
    Congress has acted on this before. In 1959, Congress 
enacted P.L. 86272, and was going to do more, but the states 
said if Congress would just stay away, they as the states would 
solve it, and the thing would get better. They have not. I wish 
I could say what happened to Mr. Vegas was an isolated example, 
but in many states, it is official policy. I could review lots, 
but in the interest of time I brought five pulled from the 
excellent Annual Survey of Tax Officials done by Bloomberg BNA. 
And with the Chairman's indulgence, I would like to draw 
attention to some charts that I brought.
    The first chart, which is up already, is the question of 
how long nexus lasts in a state if the business stops the 
activity. The gray states say it is just for the taxes 
measurement period, so if the tax is just for a quarter, the 
nexus only lasts for a quarter. The green states apply nexus 
for the full year. Washington state adds on a little bit more, 
as Mr. Vegas said, beyond that year. A couple of the states, 
the black ones on this chart, they declined to answer the 
question, which is certainly not helpful. California and 
Georgia said it depends, which is also not helpful, and in 
Indiana, apparently nexus lasts forever. Next chart.
    This chart is whether you have nexus because you have a 
website and you pay some third party to host the website, and 
that third party has a server in the state. You all have 
websites. Do you know where it is hosted, where the server is? 
Well, if you are a company, 14 states say that is enough for 
you to have nexus in that state, and 18 states declined to 
answer the question. Next chart.
    This chart is a state will find nexus if you send a catalog 
into the state. No people, no sales in the state, just sending 
a catalog. This is pretty open and shut in the case law, and 
most states are good. Those are the blue states. But seven 
states, the red ones, say that is nexus, and two more say it 
depends. Next chart.
    This chart involves having a non-solicitation back office 
employee telecommuting from the state. Now, under BATSA and 
under the physical presence rule, there should be a finding of 
nexus in this case, so I am not too worried about the yeses. 
Those are the reds, those are the noes, those are the blues. I 
am not worried about the noes because just because a state can 
tax, it does not mean they have to.
    What I am worried about are the eight states, the black 
ones on there, that declined to answer this pretty basic 
question. That is eight states where taxpayers cannot get the 
answers from their officials to rely on for their business 
activity. Next chart.
    This chart shows the states that define nexus if you attend 
a trade show in red. Now, this is attend a trade show. It is 
not exhibiting or selling stuff. Every state finds nexus if you 
go and have a booth at a trade show and sells stuff. This is 
merely attending a trade show will find you nexus in 10 states. 
Five more states say it depends, and five more decline to 
answer the question.
    This is all basic stuff. The last time we had this hearing, 
the states talked about physical presence would harm their 
revenue, even though these taxes are a tiny portion of their 
budgets. And they are cutting them anyway for in-state 
companies through single sales factor and tax incentive deals. 
They talked about how it encouraged tax evasion, even though 
this bill does not change one thing about the ability of states 
to go after tax evaders. They talked about state sovereignty 
even though stuff like this is precisely why Congress has the 
power to regulate state taxation of interstate commerce.
    I hope today we get some answers. If states are handling 
this and Congress does not need to get involved, why is basic 
guidance about nexus all a mess over there? The truth is states 
do not want to fix this problem. Like before the Constitution, 
they are happy to substitute their parochial interests for the 
national economic interests. They are doing harm, and the court 
cases have gone both ways, so it is time to be on time for 
there to be a modest national framework answering this simple 
and key question: how far does state tax authority over inter-
state business extend? If Congress does not answer that 
question, no one will. Thank you.
    [The prepared statement of Mr. Henchman follows:]


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                               __________

    Mr. Bachus. Mr. Quam. Is that right? Did I get it right?
    Mr. Quam. Quam, yes.
    Mr. Bachus. Quam, I got it right.
    Mr. Quam. Yes.

           TESTIMONY OF DAVID QUAM, DEPUTY DIRECTOR, 
         NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC

    Mr. Quam. Thank you, Mr. Chairman. Thank you, Member 
Johnson. Chairman Goodlatte, good to see you, too.
    Thank you for the opportunity to be here again. I actually 
pulled several of the letters and testimony from previous 
hearings, and I think four times I have appeared before this 
Committee on this particular issue. And it is an issue that 
keeps coming up, and I have sympathy for the stories that have 
been told. I think anybody would. Any governor would.
    At the same time, it is a privilege to be here on behalf of 
the National Governors Association to say we have to oppose 
this bill. We have to oppose it because it does tread on state 
sovereignty. It does not solve the problem that is being 
articulated. And at the end of the day, it does do harm, and it 
does harm to states.
    Now, this Congress has the ability under the commerce 
clause--I am not going to dispute that--to work on interstate 
commerce and solve those problems. It does not always mean, 
though, that the Congress has to act. But when it does and when 
it looks at state problems or state taxation, there are a 
couple of guidelines that we use to say when is it appropriate 
for Congress to get involved. And the first one is really do no 
harm. Do no harm to the states because, after all, we are 
talking about state tax laws. And a key premise for governors 
when it comes to state tax laws is that decisions regarding 
state revenue systems should be made in state capitals, not 
Washington, D.C.
    Unfortunately, this bill, which is identical to a bill 
passed last Congress and scored by CBO, would take away about 
$2 billion in the first year in state revenues. The changes in 
nexus would not allow states to collect about $2 billion they 
collect today. Now, for the states that is meaningful because 
states, unlike the Federal Government, have to balance their 
budgets. And so, $2 billion out-of-states is $2 billion that 
either has to be cut or raised in taxes, both which can harm 
the recession or harm states' ability to recover from the 
recession that they are still dealing with.
    The $2 billion in the first year is merely the starting 
point. What this bill does, because it provides rules of the 
road to allow for greater tax avoidance, means that states will 
actually lose more money in the out years, $2 billion in the 
first year, growing in years thereafter.
    Now, let us say that we could actually make a bill where 
you do no harm. I think everybody would agree, and even states 
would agree with, be clearer. Tax laws should be clearer. It 
helps with state compliance. It helps states enforce their 
laws. It helps companies to comply with those laws.
    Unfortunately, the bill before us and previous iterations 
is not clear. It claims to say that physical presence should be 
the law of the land, yet this is physical presence plus. You 
can actually be in the state for 15 days and do business. You 
can have multiple people in the state doing business for 15 
days. You are not going to be liable under this bill. That is 
not physical presence. The loopholes and exceptions to the 
physical presence standard actually create more problems and 
are not clear for either states or businesses at the end of the 
day.
    In addition, for the companies that are both here and some 
of the small companies that reside in your states, you are 
actually increasing the tax burden on them. Why is that? 
Because some of the larger businesses can use the loopholes of 
this bill to avoid state taxation. Those large companies that 
have the lawyers, that have the accountants, that can do the 
planning, that can shift the property ultimately can create a 
situation where they do not pay tax. There is nowhere income, 
according to the Congressional Research Service that looked at 
a similar version of this bill 5 or 6 years ago.
    When you take those tax dollars out of a state from some of 
your larger taxpayers, you are increasing the burden on those 
who cannot do that type of tax planning in your own state. And 
that is some of the small- and medium-sized businesses that 
reside and are visibly present.
    Finally, there has to be a respect for state sovereignty. 
The 10th Amendment did mean something, and at the end of the 
day, the ability to control revenue systems is a key tenant of 
federalism. What that ultimately is at the end of the day is a 
Federal tax cut, Federal corporate tax cut, using state tax 
dollars, changing this nexus standard, so actually taking $2 
billion away from the states.
    Now, I should mention that NGA actually participated 
through this Committee in talks over the course of several 
months with industry to try to find a clear bright line 
standard. We had discussions about the problems that were 
raised and how they could be addressed. States have actually 
posed a very clear standard, yet one that is economic presence. 
What I would argue is actually the law of the land. Businesses 
at the end of the day could not get past wanting a physical 
presence standard because that allows for the type of planning 
that they want to do.
    We have no problem with clarity. We have actually had no 
problem with finding that bright line rule, but it needs to be 
done within the constitutional and context in which we find 
ourselves, and that is, for business income taxes, economic 
presence is the law of the land. And so, from there we start 
and we take a look at a bill like this and say on behalf of the 
National Governors Association, we must oppose this bill. Thank 
you.
    [The prepared statement of Mr. Quam follows:]


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                               __________

    Mr. Bachus. Thank you. You know, one thing I would say. The 
National Governors Association, you know, you are saying it 
harms the states, this $2 billion. But, you know, the two 
examples that I hear at this end of the table, you have harmed 
these businesses. If the State of Washington, if every state 
took that approach, you would put this man out of business, I 
would think. I mean, you heard the testimony about Maine. If a 
retailer has an advertisement or a third party advertising his 
product, I mean, that is pretty far-fetched.
    I would think that, you know, 20 years ago states did not 
try to use this type of collection. I mean, I cannot imagine 
that they did. You know, Mr. Vegas visits a state one time, 
and, I mean, he is opened up to all that.
    My main concern with this, and we talk about jobs, jobs, 
jobs. That is America's number one problem. You know, we talk 
about home ownership is the American Dream, but if you do not 
have a job, you are never going to own a home. You cannot 
provide for your children.
    Small businesses have historically created 70 percent of 
the jobs in this country. They are not doing that anymore. 
Large businesses are getting bigger and bigger, because just as 
you said, they can afford the lawyers. They are either doing a 
lot of business in those states, or they have the lawyers to 
fight these things. A small business, I am not sure it could 
even get started today. A small business of 5, 10 employees, if 
seven generations ago they started shipping tabasco sauce and 
they ran into this, it would cost all their profits for 1 year 
in one isolated state.
    I believe that is one reason this sort of thing, whether 
the states feel like they have a right or whatever, this sort 
of taxing regime is going to make it nearly impossible for a 
small business to be able to do business across state lines. I 
will let you respond to that.
    Mr. Quam. Well, Mr. Chairman, as I said, the facts as they 
have presented here today, I am very sympathetic. I think there 
is always a different side to that story and a different side 
to the case. And without the states actually being here to 
defend themselves and not knowing exactly all the different 
aspects of the states, I am not going to get into those 
specific----
    Mr. Bachus. Well, let us just take the example of Maine. He 
is not in Maine. He does not have employees in Maine or 
Michigan. He has an independent contractor. I mean, physical 
presence ought to be physical presence. I mean, we do have a 
constitutional right to not interfere with interstate commerce. 
And, I mean, my gosh. This has a chilling effect on that.
    Mr. Quam. The physical presence standard that is set up by 
this bill is actually moving backwards when it comes to sort of 
the----
    Mr. Bachus. And any----
    Mr. Quam. Rather than interstate commerce where the 
internet has made us borderless, where a small business 
actually can start out of the garage and do business in 
multiple states, rather than finding some of that clarity and 
find out every business who is earning customers in another 
state, is also, therefore, possibly taking customers away from 
those businesses----
    Mr. Bachus. Well, I will tell you. One thing this taxing 
policy may be doing, it may be driving companies to become 
basically internet companies, I mean, because if they do 
anything else, if they ship a product into a state, they run 
into this.
    Let me ask you this. You know, we are considering giving 
the state the right to collect sales tax, out-of-state, and 
that is going to be a tremendous boon to the states. To me, 
that is where the emphasis ought to be for the states is 
pushing that. I mean, I am just----
    Mr. Quam. Marketplace fairness and passage of marketplace 
fairness is our number one priority.
    Mr. Bachus. Yes, and I think it should be. And I have been 
on your side of that issue for some time.
    Mr. Quam. Yes, sir.
    Mr. Bachus. Not everybody on this Committee is.
    Mr. Quam. We are working on it.
    Mr. Bachus. But these are, I mean, nightmare scenarios.
    Mr. Quam. Mr. Chairman, I am going to go back to what I 
said before. Marketplace fairness where states are simplifying 
their tax laws in order to recognize the 21st century 
borderless economy and to make sales taxes fair so you do not 
have winners or losers in business, the economic presence 
standard in business activity tax is similar. It is borderless. 
It is about you are doing business in another state and earning 
customers.
    Now, again, I have sympathy for the two cases that were 
brought up here today. I do not know the factors and I do not 
know the state side. However, to take this one back to a 
physical presence standard, which is really a 1950's construct 
where you have to do business with a handshake versus today, 
and then support marketplace fairness, which is moving in the 
other direction. I think instead what we need to be doing is 
creating certainty and clarity and not picking winners and 
losers.
    Mr. Bachus. Well, and let me say this. You know, this is, I 
think, the Chairman's bill.
    Mr. Quam. Yes.
    Mr. Bachus. I believe in it. I am a strong supporter. But, 
you know, you are invited. I mean, you have an open door to 
come to our staff and say I think this is a problem.
    Mr. Quam. That is exactly why, and some Members of this 
Committee know this, why we did come up and we tried to talk 
about let us create certainty, but let us create certainty that 
also works for the states and matches the 21st century economy. 
Unfortunately, we did not get there. Certainty is not a problem 
that we have. We are willing to always have those discussions.
    Mr. Bachus. Thank you.
    Mr. Quam. But those two have to go together. Thank you.
    Mr. Bachus. Thank you. Mr. Johnson is recognized.
    Mr. Johnson. Thank you, Mr. Chairman.
    Mr. Bachus. The representative from Washington state showed 
up. [Laughter.]
    Mr. Johnson. Just in time.
    Mr. Bachus. You would not believe what your state is doing. 
[Laughter.]
    Mr. Johnson. Well, I will tell you, all states do not have 
a business activity tax, do they, Mr. Henchman?
    Mr. Henchman. Three states do not.
    Mr. Johnson. Three states do not. And we would not want to 
force those states to adopt one, I do not think, at this time. 
So we want the states to have some freedom. Clearly the 
commerce clause gives the Federal Government----
    Mr. Henchman. Right, and this bill, like the bill you 
sponsored, the Mobile Workforce, in a similar way, they are 
floors. So states can be more generous in the protections they 
provide. They cannot have a tax if they choose, but so long as 
it does not go below what the Federal Government prescribes.
    Mr. Johnson. Those that do have a business activity tax, 
though, it seems like there should be some uniformity in there 
so that there will not be 47 different schemes that have to be 
adhered to by today's modern business. That is just an 
untenable position to be in. But you would disagree with that, 
Mr. Quam?
    Mr. Quam. I would say the tenets of federalism allow us to 
have a system of 50 different state laws where state lawmakers 
get to make the choices and in this particular area of what it 
means for nexus. That being said, groups and states, including 
the Multistate Tax Commission, have come up with some 
uniformity under an economic presence standard that would be 
very clear that every state could use.
    Unfortunately a lot of businesses have pushed back against 
that, have pushed back against efforts to try to find this 
clarity and this middle ground, something that does not do harm 
to states as far as existing revenues, but would create 
clarity. And so, it is very difficult to find that middle 
ground when you say, everybody is different, so one standard is 
going to preempt everybody, allow us to do tax planning to 
actually avoid taxation. It is going to cost states $2 billion 
from what they collect today, and that is a better solution 
than something that does not harm to states. The states have 
imparted that solution, and create some real clarity. But it is 
not going to present that opportunity for that type of tax 
avoidance.
    So again, I think there is a ground here that has to be 
covered, but because of the 10th Amendment and federalism, have 
to tread very carefully when we are talking about state tax 
systems, because the ability to control those tax systems at 
the end of the day is a core of what state sovereignty means. 
And so, when you move into that realm, we have got to be very 
careful that we do not use blunt instruments. This bill, even 
for physical presence states, will preempt every nexus standard 
in every state.
    Mr. Johnson. What is it specifically that you would 
recommend to get at this problem? And certainly it is a 
problem.
    Mr. Quam. I think the first place to start is you can look 
at the MTC's formula for nexus?
    Mr. Johnson. MTVs?
    Mr. Quam. MTC.
    Mr. Johnson. MTC.
    Mr. Quam. Multistate Tax Commission.
    Mr. Johnson. Okay.
    Mr. Quam. Came up with, again, a model for states that 
states could adopt.
    Mr. Johnson. What is it called?
    Mr. Quam. Multistate Tax Commission.
    Mr. Johnson. The Multistate Tax Commission has come up with 
a business activity tax model that can be----
    Mr. Quam. A nexus, uh-uh. It is a place to start. It is a 
place where both the states and the businesses can come 
together and talk about--if the constitutional standard today 
is economic presence, and that is what it is, then let us start 
from that construct. Let us create the certainty we need. 
States have entered those conversations before and would be 
willing to do it. But until that time, for this Committee to go 
to a solution that instead is going to create tax avoidance and 
preempt all states with a more blunt instrument, governors 
cannot support that at the end of the day. It violates that do 
no harm principle and violates the sense of do not 
unnecessarily preempt, do not take a step more than you have to 
when it comes to state tax laws.
    Mr. Johnson. Mr. Henchmen, does that sound reasonable to 
you?
    Mr. Henchman. I am sure what the gentleman's basis is for 
saying economic presence is the law of the land. The Supreme 
Court has never ruled that. Congress has certainly never 
legislated that. If anything, it has been the other way. 
Physical presence has been the standard since the Constitution.
    So let me just explain why economic presence would be a 
problem using the examples of the two people you had here. So 
Mr. Vegas makes a product that goes into french fries from his 
two facilities in Arkansas, and those are where all of his 
employees are, where their kids are going to school, where they 
see doctors, where they use police and fire services. That is 
where they are paying taxes, and that is where the services are 
being received.
    Under economic presence, what would matter is where his 
products were sold, so anywhere where french fries are, which I 
imagine is all 50 states and every country in the world. So 
somebody in East Timor buys a french fry, that means he has got 
to fill out a corporate tax return for East Timor?
    I mean, in the end what that does is it turns the corporate 
income tax into a sales tax because you are now measuring it 
all by sales. And, you know, states have sales taxes and they 
can charge sales taxes for that kind of stuff. What we are 
talking about are business activity taxes, and those should be 
premised on the location of property and employees of the 
business.
    Mr. Johnson. Mr. Vegas, do you mean to tell me, I'm 59 
years old, and I have always had confidence and been self-
assured about every french fry that I have ever eaten, that it 
was potato based. And now you are telling that it is rice 
based? [Laughter.]
    Mr. Vegas. Almost all but one chain has some rice in it.
    Mr. Johnson. My goodness.
    Mr. Bachus. Rice is very good for you. [Laughter.]
    Mr. Vegas. Since you opened me up, can I just mention one 
thing that people seem to be confused about?
    Mr. Johnson. Okay.
    Mr. Vegas. Business and occupation tax----
    Mr. Johnson. Well, I thought you were going to talk about 
french fries. I am real confused about that, but go ahead, sir. 
[Laughter.]
    Mr. Vegas. Let me say this because I think it is important, 
and a lot of people do not get it. Business and occupational 
tax is an additional tax, okay? If you go back to the old 
standards, which still apply in a lot of states. For example, I 
have facilities in Arkansas. Arkansas has a 7 percent income 
tax. So if half my business is in Arkansas, they get 7 percent 
of half of my income. But that does not kill me because I pay 
taxes in California that are actually higher, 13 percent, so 
they deduct it. So when you are dealing with income taxes, the 
highest tax you can pay is whatever the highest state you are 
dealing with, which is about 13 percent of this country when 
you get into New Jersey and California.
    These business and occupational taxes are in addition. 
Okay. They do not get deducted from my income tax. It is a new 
tax, so they are just adding onto what we are already paying.
    Mr. Bachus. Thank you, Mr. Johnson.
    Mr. Johnson. Thank you.
    Mr. Bachus. I would let Mr. Marino and then I will let the 
gentlelady from Washington who has come in to put out a fire 
here.
    Mr. Johnson. Well, if I might, Mr. Chairman, just to say 
that my mind is all messed up now, Mr. Vegas. [Laughter.]
    Mr. Bachus. Thank you. Mr. Marino?
    Mr. Marino. I am sorry for being late. I have three full 
Committee hearings today and six Subcommittee hearings, and I 
am trying to at least touch base with each one. I am not going 
to ask any questions because I did not hear what was going on, 
and I am sure it would be repetitive to a certain extent. I 
just want to thank you for being here.
    And with that said, this talk about french fries, I have 
not eaten all day, so I do not care if it has rice in it or 
not. I will eat the french fries if you get them to me. Thank 
you. [Laughter.]
    Mr. Bachus. Yielded back your time?
    Mr. Marino. Yes.
    Mr. Bachus. Ms. DelBene?
    Ms. DelBene. Good job. So you are getting it now.
    Mr. Bachus. Yes.
    Ms. DelBene. He has been practicing pronouncing my name. 
Thanks to all of you for being here today. I will be quick 
because I know they called votes.
    Mr. Quam, when we look at the economic environment today, 
we have millions of U.S. customers who are buying things 
online. I assume you have bought things on line as well.
    Mr. Quam. Absolutely.
    Ms. DelBene. And the Census Bureau at the Department of 
Commerce announced just last week that total e-commerce sales 
for 2013 were estimated to have increased almost 17 percent 
from 2012 to the tune of about $263 billion in 2013. And this 
obviously has had huge opportunity and created innovation, and 
economic growth, and jobs. But it has also just changed the way 
folks do business across our country.
    And now that we have that, we know that we need to have tax 
policies that are user friendly, that are workable, that 
provide clarity, that everyone has talked about here, clarity 
and certainty to businesses and individuals. And I definitely 
support that. But I also think it is important that we look at 
the way our economy works today and figure out solutions that 
are up to date.
    Given that there is major economic activity that is going 
across state borders, and many cases, for example, on the 
internet with limited physical presence, we need to take a 
close look at the physical presence standard and whether this 
proposal might have unintended consequences. I think you have 
talked about that.
    But, you know, the Supreme Court had their decision, Quill. 
It is over 20 years old now. And although it has come up in the 
context of this business activity tax bill, the case was 
actually about sales tax originally. What have been the 
consequences of that decision on states, especially given now 
that we have the internet and a slightly different economy than 
when that decision was made? And what steps would you like to 
see Congress take on this issue, if any?
    Mr. Quam. I very much appreciate the question. Yes, I have 
bought things recently on the internet, as have my sons, as 
have probably most everybody here. And the internet has been 
such a boom to the economy. You talked about growth numbers at 
17 percent. Coming out of the last 5 years, what other sector 
can you possibly say that about other than the internet?
    Now, interestingly enough, because of the Quill decision 
and that physical presence standard, we have an uneven playing 
field when it comes to sales tax and sales tax collection. And 
the Marketplace Fairness Act, which is supposed to talk about 
what can states do to simplify their sales taxes, to ease 
compliance, but require collection, so that folks doing 
business both online or on Main Street are on the same footing 
with regard to those sales, is a critical question of fairness. 
And right now, that playing field is unlevel.
    And so, one of the top priorities for the National 
Governors Association is the Marketplace Fairness Act and 
addressing that question of the inequity caused by a physical 
presence standard in the sales tax realm. The Marketplace 
Fairness Act would create certainty. It would create fairness. 
It would simplify and the states would simplify their taxes in 
return for that authority to require that collection.
    States today cannot collect about $23 billion in sales tax 
because of the Quill decision. States came together with the 
business industry--I think this is really critical--to address 
that problem and say what simplifications are needed. The 
Streamline Sales Tax Agreement is the collective efforts of 
business and states to solving the national problem and say how 
do we do this together. And at the end of the day, that is also 
good for consumers. It is good for consumers because they see 
competition and they have competition, but also protects the 
Main Street retailer who is hiring the part-time worker. It 
becomes about jobs. It also becomes about fairness in that 
economy.
    So the physical presence standard created that inequity. 
Finding a way to, in a borderless economy, just recognize the 
right of states to control their own revenue systems, recognize 
our Federal system when it comes to state taxation, but also 
find a way to recognize that borderless economy, the internet 
economy, and create fairness so there is competition in that 
marketplace. I think that should be the focus of this Committee 
and its top priority. My fear is that this bill goes in the 
opposite direction.
    Ms. DelBene. Thank you. Since we are running out of time 
here, Mr. Chair, I would like to ask for unanimous consent to 
enter into the record a statement from the Federation of Tax 
Administrators.
    Mr. Bachus. Without objection.
    [The information referred to follows:]


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    Ms. DelBene. Thank you. I yield back.
    Mr. Bachus. And if you need more time.
    Ms. DelBene. That is fine. I know we have to----
    Mr. Bachus. All right, thank you. Well, we thank everyone 
for their attendance at this hearing. I was thinking about 
Boeing airplanes. They land at all the airports in the country. 
I may tell my counties to start taxing Boeing because their 
product comes into all our cities. That is an economic 
presence, I guess.
    This concludes today's hearing. Thanks to all our witnesses 
for attending. Without objection, all Members will have 5 
legislative days to submit additional written questions for the 
witnesses or additional materials for the record.
    This hearing is adjourned. We thank you for your presence.
    [Whereupon, at 4:05 p.m., the Subcommittee was adjourned.]









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