    [Senate Hearing 114-360]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-360

                   TARGETED TAX REFORM: SOLUTIONS TO RELIEVE
                           THE TAX COMPLIANCE BURDENS
                         FOR AMERICA'S SMALL BUSINESSES

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

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                              AND ENTREPRENEURSHIP
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 22, 2015

                                   __________

        Printed for the Committee on Small Business and Entrepreneurship

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             Available via the World Wide Web: http://www.fdsys.gov

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                COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                        ONE HUNDRED FOURTEENTH CONGRESS

                                  ----------
                       DAVID VITTER, Louisiana, Chairman
                  BENJAMIN L. CARDIN, Maryland, Ranking Member
    JAMES E. RISCH, Idaho                MARIA CANTWELL, Washington
    MARCO RUBIO, Florida                 JEANNE SHAHEEN, New Hampshire
    RAND PAUL, Kentucky                  HEIDI HEITKAMP, North Dakota
    TIM SCOTT, South Carolina            EDWARD J. MARKEY, Massachusetts
    DEB FISCHER, Nebraska                CORY A. BOOKER, New Jersey
    CORY GARDNER, Colorado               CHRISTOPHER A. COONS, Delaware
    JONI ERNST, Iowa                     MAZIE K. HIRONO, Hawaii
    KELLY AYOTTE, New Hampshire          GARY C. PETERS, Michigan
    MICHAEL B. ENZI, Wyoming
                      Zak Baig, Republican Staff Director
                     Ann Jacobs, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                               Opening Statements

                                                                       Page

    Vitter, Hon. David, Chairman, and a U.S. Senator from Louisiana..     1
    Shaheen, Hon. Jeanne, a U.S. Senator from New Hampshire..........     3

                                   Witnesses
                                    Panel 1:

    Beebe, Diana, CFO, ProSys, Inc., Baton Rouge, LA.................     5
    Begneaud, Don, Founder/Owner, Begneaud Manufacturing, Scott, LA..     9
    O'Steen, Cori, Owner, UPakNShip, Aiken, SC.......................    12

                                    Panel 2:

    Karellas, Nick, Tax Counsel, National Federation of Independent
      Business, Washington, DC.......................................    25
    Mathison, Tom, Principal, MATHISON | MATHISON architects, Board
      of Trustees, National Small Business Association, Grand Rapids,
      MI.............................................................    33
    Porter, Jeffrey A., Owner, Porter & Associates, CPA's, Chair,
      AICPA Tax Reform Tax Force, Huntington, WV.....................    46
    Bruckner, Caroline, Professor, Kogod Tax Policy Center, American
      University, Washington, DC.....................................    64
    Zerbe, Dean, National Managing Director, alliantgroup,
      Washington, DC.................................................    71

              Alphabetical Listing and Appendix Material Submitted

    Beebe, Diana
        Testimony....................................................     5
        Prepared statement...........................................     7
    Begneaud, Don
        Testimony....................................................     9
        Prepared statement...........................................    11
    Bruckner, Caroline
        Testimony....................................................    64
        Prepared statement...........................................    66
        Responses to questions submitted by Senator Enzi.............   129
    Karellas, Nick
        Testimony....................................................    25
        Prepared statement...........................................    27
    Mathison, Tom
        Testimony....................................................    33
        Prepared statement...........................................    35
    O'Steen, Cori
        Testimony....................................................    12
        Prepared statement...........................................    14
    Porter, Jeffrey A.
        Testimony....................................................    46
        Prepared statement...........................................    48
    Shaheen, Hon. Jeanne
        Opening statement............................................     3
    South Carolina Small Business Chamber of Commerce
        Letter dated July 16, 2015...................................   127
    Vitter, Hon. David
        Opening statement............................................     1
        Letters of Support for the Small Business Tax Compliance
          Relief Act:
            Angel Capital Association
                Letter dated July 9, 2015............................   100
            Louisiana Association of Business and Industry
                Letter dated July 14, 2015...........................   101
            National Federation of Independent Business
                Letter dated June 17, 2015...........................   103
            National Small Business Association
                Letter dated July 14, 2015...........................   104
            National Small Business Network
                Letter dated July 22, 2015...........................   106
            Small Business Advocacy Council
                Letter dated July 10, 2015...........................   121
            Small Business and Entrepreneurial Council
                Letter dated July 14, 2015...........................   122
            Small Business Investor Alliance
                Letter dated July 21, 2015...........................   124
            Society of Louisiana Certified Public Accountants
                Letter dated July 20, 2015...........................   126
    Zerbe, Dean
        Testimony....................................................    71
        Prepared statement...........................................    74

                         TARGETED TAX REFORM: SOLUTIONS
      TO RELIEVE THE TAX COMPLIANCE BURDENS FOR AMERICA'S SMALL BUSINESSES

                                  ----------

                            WEDNESDAY, JULY 22, 2015

                          United States Senate,
                            Committee on Small Business
                                          and Entrepreneurship,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:07 a.m., in
    Room 428A, Russell Senate Office Building, Hon. David Vitter,
    Chairman of the Committee, presiding.
        Present: Senators Vitter, Fischer, Gardner, Ernst, Ayotte,
    Enzi, Shaheen, Cantwell, Heitkamp, and Coons.

     OPENING STATEMENT OF HON. DAVID VITTER, CHAIRMAN, AND A U.S.
                         SENATOR FROM LOUISIANA

        Chairman Vitter. Good morning, everyone, and welcome. The
    hearing of the Senate Small Business Committee will come to
    order. Thanks for joining us today to examine targeted
    solutions to relieve the tax compliance burden for America's
    small businesses.
        We will be hearing today from two panels of witnesses. The
    first is a panel of small business owners who will offer their
    own experiences on tax compliance, and then the second panel
    includes representatives from small business advocacy groups,
    two of which are also small business owners. I want to thank
    all of our witnesses today for being here and testifying.
        As Chair of this Senate Committee on Small Business and
    Entrepreneurship, I have really had the pleasure of partnering
    with business owners and their advocates to address many
    issues. In my discussions with that community, there is one
    that is raised really more than any other, and that is the
    burdensome federal tax code and the burden of compliance
    because of its complicated nature.
        The administrative burden of tax compliance is now a
    greater strain on small businesses than even their tax
    liability, according to an NSBA small business survey. I do not
    need to tell the business owners here today about that burden
    because you all live it every day. But, I do want to describe
    it for the others in attendance so they can better grasp what
    we are talking about.
        The federal tax code now is about 74,000 pages long. That
    is about four million words. And, it is continuing to grow,
    really, with no end in sight. Under this Administration, it has
    already grown approximately 7,000 pages. And just for some
    historical perspective, the code was only 400 pages long when
    it was first created.
        While it is convenient to think that only a company's CPA
    needs to be able to navigate such a behemoth, the reality is
    that the business owner must be up to date on scores of yearly
    changes in order to stay in compliance him or herself. So, I
    think it is safe to say that every single business owner would
    much rather focus his or her time and energy on growing the
    company.
        Next, according to the National Federation of Independent
    Businesses, small businesses annually spent 1.7 billion hours
    on tax compliance--that is billion with a ``b''--and $15 to $16
    billion on compliance costs. To put it another way, that is
    over 194,000 years' worth of time spent cumulatively to comply
    with all the rules and regulations.
        To bring it down to hours we can actually wrap our heads
    around, nearly 40 percent of small businesses spend 80 hours or
    more a year on tax compliance, and a quarter of all small
    businesses spend more than 120 hours. And that does not even
    take into account state and local income, sales, property
    taxes, etc. That is just the federal compliance burden. Imagine
    if those billions of hours spent complying with the IRS could
    actually be spent on focusing on the business and job growth.
        Finally, the cost of compliance to small businesses is 70
    percent higher than bigger firms, and the reason is simple.
    Small businesses simply do not have the army of accountants and
    tax attorneys that much bigger entities have. So, clearly, it
    is a disproportionate burden and hindrance to small businesses.
        So, just to recap and offer some perspective on what a
    typical small business owner may face to remain in compliance,
    it is equivalent to navigating over five King James Bibles,
    takes up roughly two 40-hour work weeks, and it is the cost of
    taking your family to Disney World, all of that just to comply
    with the tax code. And, of course, I am not even talking about
    the actual liability, the actual burden of paying the bill.
        While broad tax reform is certainly needed, small
    businesses should not have to wait for super-broad wholesale
    tax reform to have these compliance issues addressed in a
    common sense way. Congress can and should act on them right
    now.
        And, so, today, I am filing a Small Business Tax Compliance
    Relief Act. We are going to talk about various parts of it
    here. That is the purpose of this hearing, to touch on those
    subjects, and I am certainly inviting all of the committee's
    input as we go to a markup in the near future. This provides
    relief from those provisions most often cited by small business
    as overly restrictive, confusing, or just really nonsensical to
    the small business. These are issues that have been raised at
    previous committee hearings and small business roundtables, and
    the legislation provides real solutions to those very real
    problems.
        And even though wholesale reforms and tax rates are not
    touched, small businesses have indicated that addressing these
    specific issues would be a significant win to reduce their
    compliance burden in a substantial way. Or, in terms we can all
    understand, it helps a small business' bottom line even without
    touching the tax liability itself.
        In addition, many of these provisions enjoy broad support,
    as evidenced by the many groups that have signed on to
    supporting this, and I have a stack of those letters of
    support. Let me just list the groups very briefly: the NFIB,
    National Federation of Independent Business, the National Small
    Business Association, LABI, the Louisiana Association of
    Business and Industry, the Angel Capital Association, the
    Louisiana Society of Certified Public Accountants, the Small
    Business and Entrepreneurship Council, the Small Business
    Investor Alliance, the Small Business Advocacy Council.
        And, outside of those who have given their letter of
    support, we also have five groups endorsing the bill publicly,
    the American Institute of CPAs, the National Association for
    the Self-Employed, the Chamber of Commerce of Hawaii, the
    Colorado Association of Commerce and Industry, and the Greater
    North Dakota Chamber of Commerce. And, I would ask unanimous
    consent to make all of this part of the record. Without
    objection, so ordered.
        [The letters appear in the Appendix.]
        Many of these compliance solutions even have bipartisan
    support, and that is very significant, and we are continuing to
    build bipartisan support and take suggestions for this bill as
    we go to a markup.
        In conclusion, small businesses are the job creators around
    America, but when you consider the burden of tax compliance
    that is placed on their shoulders, you may have to wonder how
    they stay open at all. It is an unfortunate truth, but Congress
    and the IRS simply do not often lean toward the options of
    small businesses when crafting laws and regulations, and it is
    certainly the mission of this committee to try to correct that
    and try to balance that out.
        I am confident that our witnesses today can shed light on
    these and other issues. So, again, thanks to all of our
    witnesses. Thanks to all of the groups that have weighed in on
    this important issue.
        And now, I will turn to our Ranking Member, Senator
    Shaheen, for her opening comments.

      OPENING STATEMENT OF HON. JEANNE SHAHEEN, RANKING MEMBER, A
                    U.S. SENATOR FROM NEW HAMPSHIRE

        Senator Shaheen. Thank you, Mr. Chairman.
        Welcome to all of our witnesses today and to our second
    panel. Thank you all very much for taking the time to be here
    today to testify.
        I want to just explain to all of you that I am going to,
    unfortunately, have to leave before the end of the hearing to
    go to another briefing on the Iran negotiations, so I apologize
    for missing what I know will be very important discussion.
        As Chairman Vitter explained, and as all of you know too
    well, our tax code is in desperate need of reform. It is too
    long, too complex, and it creates a burden on middle-class
    families and small businesses across this country.
        When I hear from small businesses who are concerned about
    red tape, they are often talking about our antiquated tax code.
    As the Chairman said, of all the paperwork small businesses do
    to meet federal requirements, 80 percent relates to tax
    compliance. There is bipartisan agreement that we need
    comprehensive tax reform that simplifies the code and that
    creates a more level playing field for small businesses to
    compete with big business.
        As the Finance Committee considers tax reform, it is
    important to explore every opportunity for supporting our
    nation's job creators. That is our small businesses, where two-
    thirds of the jobs that are created come from small businesses.
    In the past, this committee has advanced a range of measures to
    reduce the tax burden on small business. For example, the
    committee, working with the Finance Committee, helped craft the
    Small Business Jobs Act of 2010, which provided $12 billion in
    small business tax relief.
        I know the Chairman has introduced legislation this week,
    and I look forward to reviewing it and to working with him on
    it so that we can pass a bipartisan bill out of this committee.
        I also look forward to hearing more from you all today
    about ways that we can help you as you are navigating the tax
    code.
        I want to take a moment before I close to recognize a
    witness on our first panel, Ms. Cori O'Steen, the owner of
    UPakNShip in Akin, South Carolina. Ms. O'Steen has a great
    story of entrepreneurship. She started selling clothing on eBay
    to make ends meet, but found herself transitioning her business
    model to shipping supplies. Her company now has 15 employees
    and continues to grow.
        I look forward to her testimony, because one of the things
    she is going to refer to this morning is the Marketplace
    Fairness Act, or as we call it in New Hampshire, the Unfairness
    Act. As we discuss ways to reform the tax code to make it work
    for small businesses, we need to make sure that we do no harm.
    The Marketplace Fairness Act would enable states to collect
    taxes from remote retailers with no physical presence in that
    state. This would impose huge new tax compliance burdens on
    entrepreneurs trying to grow their businesses through the
    Internet.
        E-commerce has been a real boon to small businesses all
    across the country. It has helped companies find new markets
    for their products and new revenues. And I believe, and I
    appreciate that I think the Chairman agrees, that imposing a
    new Internet sales tax would be bad for small businesses and
    bad for the economy.
        So, again, thank you all very much for being here. I look
    forward to hearing your testimony.
        Chairman Vitter. Thank you, Senator Shaheen, and welcome to
    Ms. O'Steen.
        Let me now introduce the two other witnesses on our first
    panel. Diana Beebe is CFO of ProSys, Inc. ProSys is an
    engineering and technology company headquartered in Baton
    Rouge, Louisiana. It specializes in providing alarm management,
    operator interface, and advanced control solutions to process
    industries around the world, and its recent growth has allowed
    it to expand with new locations in Houston and Cologne,
    Germany.
        And next, I want to introduce Don Begneaud of Begneaud
    Manufacturing. Don founded Begneaud Manufacturing in 1978 in
    Lafayette, Louisiana. The business has grown from welding jobs
    out of the back of his truck to a precision sheet metal shop
    employing 50 people. Begneaud has used their ``first mover''
    status to stay on the cutting edge of CO2 and fiber laser
    cutting, welding, perforating, bending, and other high
    technologies. And, Don also serves as a member of the Small
    Business Advisory Council at the state level and a member of
    the U.S. Chamber Small Business Council nationally.
        Thanks to all of you for being here. Thanks in advance for
    your testimony, and we will start with Ms. Beebe.

      STATEMENT OF DIANA BEEBE, CHIEF FINANCIAL OFFICER, PROSYS,
                     INCORPORATED, BATON ROUGE, LA

        Ms. Beebe. Good morning, Chairman Vitter and distinguished
    members of the committee. My name is Diana Beebe, and I, along
    with my husband, Dustin, own an engineering and technology
    company that is headquartered in Baton Rouge, Louisiana. ProSys
    specializes in providing alarm management, operator interface,
    and advanced control solutions to the process industry. As a
    small company, we are very proud to employ teams of engineers,
    developers, and supporting staff who partner with our customers
    to provide a safe work environment in refineries and chemical
    plants around the world. Now, in addition to our office in
    Baton Rouge, we have recently opened offices in Houston and
    Cologne, Germany.
        As a growing company, we must keep our eye on maintaining
    our competitive edge, and this means not allowing our time to
    be consumed by tasks that do not provide value. In many small
    businesses, including our own, the business owner wears many
    hats. The more time the business owner spends on taxes, the
    less time spent on hiring quality employees, innovating new
    products, and providing high quality service to our customer.
    The smaller the business, the more onerous each tax hour is.
    Many small businesses make bad decisions trying to minimize
    their tax burden, and for many small businesses, accounting is
    just simply reduced to tax accounting.
        Good business behavior of understanding your true costs of
    delivering your goods and services to the marketplace is
    replaced by business decisions for tax purposes. We spend way
    too many accounting hours just on tax credits and compliance
    and too few accounting hours on producing financial and budget
    statements, analyzing the income and costs, and helping the
    business making wise financial decisions that will continue to
    build a strong, stable company.
        Mr. Chairman, your recently introduced Small Business Tax
    Compliance Relief Act offers numerous common sense compliance
    solutions that businesses have been requesting for years and
    are steps in the right direction. Increasing the cash flow
    accounting threshold from $5 million to $10 million will move
    out a looming deadline and allow us to have a staff in place to
    handle the burdens of transitioning to accrual accounting. It
    is tough for a small business owner to understand having to pay
    taxes on money that they did not earn.
        Another provision in the bill addresses limits on the
    amounts that can be deducted for certain types of expenditures.
    Now, certain of these amounts are so small that it renders them
    ineffective and basically reverses the original intent. It
    makes sense to adjust these amounts and index them to inflation
    to be in line with the original intent.
        A complex tax code with frequent changes is a threat for
    small businesses that are trying to produce value for
    customers, employees, and business owners. Large complex
    legislation provides uncertainty and benefits large
    corporations that have the resources to analyze the impact this
    legislation has to their market sectors and businesses. This is
    why many small businesses see big government and big business
    going hand in hand.
        I am encouraged that there are provisions in the Small
    Business Tax Compliance Relief Act that will remedy the
    ``gotcha'' mentality that, correctly or incorrectly, many small
    businesses believe to be pervasive within the IRS. Including
    the IRS under the purview of the Office of Advocacy to better
    enforce the Regulatory Flexibility Act and the Small Business
    Regulatory Enhancement Flexibility Act, and requiring IRS to
    convene SBREFA panels that include small business
    representations are good steps in making sure that rules and
    regulations issued are sensible and reflective of the small
    business reality. Now, small businesses also welcome further
    efforts from IRS to lay out tax provisions in layman terms to
    minimize the burden and the cost of compliance.
        We would not have made it today without great employees. We
    have quite a few employees that have been loyal for a number of
    years, through good times and bad times. One of the ways we
    stand by them is providing a great benefit package. We have
    always offered a full benefit plan including health care,
    401(k), short-term and long-term disability, group term life,
    and dental. Like many small businesses, we have been locked
    into our grandfathered plan for some time and we are fearful
    that we could experience a cost increase due to ACA that will
    put us at a disadvantage to large self-insured corporations.
    The financial resources that we anticipate we will set aside to
    further grow our business will have to be held back to be sure
    we can continue to offer excellent benefits to employees. And,
    further, self-employed business owners, unlike other
    businesses, cannot fully deduct the costs of own health
    insurance as ordinary business expense and, therefore, increase
    payroll tax burden.
        In conclusion, as a small business owner, I am encouraged
    that members of Congress listen to the people and are working
    to a simple, fair tax code.
        And, I appreciate the opportunity to speak with you today
    and I will be glad to answer any questions that you have. Thank
    you.
        [The prepared statement of Ms. Beebe follows:]

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Vitter. Thank you very, very much.
        And next, we will hear from Don Begneaud. Don.

          STATEMENT OF DON BEGNEAUD, FOUNDER/OWNER, BEGNEAUD
                      MANUFACTURING, LAFAYETTE, LA

        Mr. Begneaud. Okay. Thank you, Chairman Vitter. First of
    all, I was about to say, because of my reading disability, I
    was going to not read this and I was just going to talk, but
    the more I think about it, let me still take a stab at just
    reading----
        Chairman Vitter. Sure. However you would like.
        Mr. Begneaud [continuing]. And please bear with me.
        So, in my 37 years of business, I have been no stranger to
    the burdens that small businesses face, particularly those that
    tax can bring. The expected financial burden taxes place on
    businesses is expanded to include an administrative burden when
    the business is small. Operating on limited monetary resource
    and staff, the majority of small businesses make a sincere
    effort to remain in compliance with the regulations, but
    frequently find themselves faced with administrative burdens
    that tie up their limited resources.
        I come before you to offer my support for the targeted tax
    reform that Senator Vitter is proposing. Having affected change
    in taxes at the local and state level through influence and
    inspiration, I feel it is necessary to be here in support of
    the outlined initiatives that are sure to have an impact on my
    business, Begneaud Manufacturing, and in particular, in support
    of the overall spirit of cooperation and collaboration. This
    bill makes specific efforts to ensure that government and
    businesses are working together instead of opposing, and in
    doing so, making strides towards a common goal.
        A couple of key provisions in the bill stand out for me as
    being in service of collaborative working partnerships.
    Requiring that the IRS include Small Business Review Panels for
    their input on potential impact shows a willingness to listen
    and learn from those who live the realities of small business
    ownership daily. Without lobbyists to represent their cause,
    small businesses rely on outreach from governmental agencies to
    help ensure their voices are heard. Instituting panels as a
    means to be certain that small business concerns are voiced
    solidifies the IRS's commitment to understanding the unfamiliar
    challenges faced by so many across the country.
        This bill also grants authority to the IRS Commissioner to
    waive penalties and deadlines for businesses, as appropriate,
    if it is found that businesses have been acting in good faith.
    As I mentioned previously, the majority of the small businesses
    operate from the intent to stay in compliance. Confusing
    regulations with limited resources can lead businesses
    inadvertently falling out of compliance. It is refreshing to
    see that this bill seeks to put emphasis on correcting the
    actions of small businesses and going forward as opposed to
    punishing their attempts.
        A common term in political rhetoric today is ``fight.''
    Fighting for and against does not leave us with much energy to
    do anything else.
        In Louisiana, many of my colleagues fought against a state
    use tax for years without much headway. Only through our
    influence of Governor Blanco were we able to achieve what so
    many had fought for, achieving good change for the state. In
    her statement about the bill, attached, she mentioned how
    powerful and simple active influence was. Government and
    businesses so often fight each other, working in opposition,
    with each claiming that one must suffer at the expense of the
    other. I firmly hope, though, that if both look to serve the
    other, it would benefit the whole.
        My personal declaration that I have committed to, I am a
    commitment to inspiring others to collaborate, creating new
    value for all to enjoy. I believe that what Senator Vitter is
    proposing in this bill falls directly in line with my values.
    The proposed bill includes excellent steps towards our
    government making a good faith effort to work with small
    business and meet them where they are. I offer you my full
    support and collaboration effort.
        [The prepared statement of Mr. Begneaud follows:]
      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

       Chairman Vitter. Thank you very much, Don. Thanks for your
    testimony.
        And now, we will turn to Ms. O'Steen. Welcome.

    STATEMENT OF CORI O'STEEN, OWNER, UPAKNSHIP, RANCHO CUCAMONGA,
                                   CA

        Ms. O'Steen. Thank you. Chairman Vitter, Ranking Member
    Shaheen, and members of the committee, thank you for holding
    this important hearing and for inviting me here to participate.
    My name is Cori O'Steen and I own and operate UPak,
    Incorporated, an online company that sells shipping supplies
    and custom packaging.
        I stumbled upon eBay in 2003 while looking for discount
    brand-name clothing for my children. I immediately started
    selling my children's outgrown clothing in an effort to make
    ends meet. I could not find the shipping supplies I needed
    then, but my father was in the packaging business. I bought two
    cases of poly mailers, our flagship product, and I planned to
    sell what I did not need. While I did not realize it at the
    time, our business was born.
        Like most small businesses, my expectations in the early
    days were modest. But, I am one of the fortunate small business
    success stories. What started as a single mother packing orders
    in her family room as a way to earn money while being at home
    with her kids has grown into a business which today employs 15
    people and has warehouses in California and South Carolina.
        It is hard for me to believe that my business is now 12-
    and-a-half years old. Its existence at times has been a
    turbulent one. We have lived through some economic highs and
    certainly some economic lows, but we are surviving, and I
    attribute a lot of that to the relative ease with which I am
    able to reach new customers and new markets through the
    Internet. Today, I operate web stores on Amazon and eBay and I
    have created my own Web site, UPakNShip.com.
        I applaud the committee for holding this hearing today. As
    a small business owner, tax compliance is certainly a major
    concern of mine and I welcome the opportunity to discuss how we
    can relieve any unnecessary burdens. If one purpose of this
    hearing is to identify policies that would create significant
    tax compliance burdens for small businesses, then I encourage
    you to look no further than the Marketplace Fairness Act and
    its counterpart in the House, the Remote Transactions Parity
    Act.
        These proposals, written without apparent regard for small
    businesses that use the Internet, fundamentally fail to
    appreciate the incredible burden associated with complying with
    thousands of dynamic, remote sales tax rates and rules across
    the country. These bills also expose businesses like mine to
    new audit and litigation liabilities.
        While I understand that states want to collect revenue,
    requiring businesses to do this work on their behalf is a bad
    solution for small businesses. This is especially true for
    small businesses that have chosen to reside in states like New
    Hampshire, that have fewer regulatory burdens and do not
    require sales tax collection.
        I do not believe that states should be able to export their
    laws to another jurisdiction. I believe the constitutional
    nexus limitations exist for a very sound reason. Simply, it
    protects my business from abusive cross-border enforcement from
    remote jurisdictions.
        The Marketplace Fairness Act and the Remote Transactions
    Parity Act represent a complete departure from that principle.
    Instead, these bills would subject my business to the
    legislative, executive, and judicial whims of a remote taxing
    jurisdiction, but foreclose my access to any public benefit or
    recourse at the ballot box.
        Although I understand that this specific issue is not in
    your jurisdiction, as members of this committee, you will have
    an important responsibility to protect small businesses. As you
    consider ways to improve tax compliance for small businesses, I
    urge you to be cautious of bills like these that would create
    new regulatory burdens for businesses like mine and others
    across the country.
        Thank you again for allowing me to testify this morning. It
    is important that Congress hears the small online business
    voice in this discussion, and I look forward to answering your
    questions.
        [The prepared statement of Ms. O'Steen follows:]

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        Chairman Vitter. Thank you very much, Ms. O'Steen.
        As we said before, because Senator Shaheen has to go to an
    Iran briefing soon, we will start with her.
        Senator Shaheen. Thank you very much, Mr. Chairman, and
    again, thank you to all of our witnesses for your testimony
    this morning.
        Ms. O'Steen, I am going to begin with you because you
    mentioned the Internet sales tax legislation and talked about
    the compliance burden that that would put on small businesses.
    Now, one of the things that has been proposed as part of the
    legislation is to offer software to small businesses to help
    them with that compliance. But, can you talk about whether you
    think that would address the concerns you have about
    compliance.
        Ms. O'Steen. No, it does not, because currently, such
    software do not exist, and I, for one, sell across many
    channels. I have five different channels. I sell on eBay,
    Amazon, my own Web site, I sell through POs and invoicing
    customers directly, then also a retail type of establishment
    for walk-in customers. And, I do not believe that the software
    could be made that could possibly comply with all the different
    channels people sell on. I just do not think it is possible.
    People, they build their own Web sites from scratch. I do not
    know how a software developer can predict how something is
    going to work on somebody else's homemade Web site. So, while
    they could figure out on large platforms how to make it
    compliant, on small ones, it just--I do not see how it could
    ever be.
        Senator Shaheen. Thank you. I share that skepticism.
        Mr. Begneaud, you talked about the importance of
    cooperating between business and government to address the
    concerns that you have. It is an issue that I share, and I
    applaud the changes you were able to make in Louisiana state
    tax law to address some of your concerns. Certainly, advocacy
    is one of the ways to address these issues.
        Can you talk about what particular in the tax code you
    think would be important to change to make it fairer for small
    businesses. Are there any specifics that you have seen that you
    would like to see?
        Mr. Begneaud. Well, right off the bat, the problem has been
    the continuous change, and the CPAs of the world, they have to
    continually go back to school to just learn how to, you know,
    properly file to keep us in compliance. I can give you an
    example right now.
        Senator Shaheen. Sure. That would be great.
        Mr. Begneaud. Okay. Just this--from last year's tax return,
    there has been a change that we no longer can expense our
    repairs, and believe me, we have high tech, multi-million-
    dollar machines on our floor that takes a lot of upkeep and
    repair and we are having to capitalize that vs. expense it,
    okay. And, so, now my CPA has had to hire a consultant to help
    him on filing our return because it is so cumbersome. So, now,
    that is going to come at more cost for us. Our tax return has
    been delayed. And then to top it off, we have just been hit
    with identity theft within the IRS, and so it is further
    putting more burden on us right now. But, it is just so complex
    that it comes at a cost to us. And when we need to be spending
    our time being more efficient serving our customers, it is
    quite challenging.
        Senator Shaheen. And, the identity theft that you
    mentioned, was that part of the Office of OPM at the federal
    level that has been publicized?
        Mr. Begneaud. I really cannot answer that. I do not know,
    other than we had received information from the IRS about, you
    know, this tax return that we had already filed, and it was not
    from us.
        Senator Shaheen. Thank you.
        Ms. Beebe, what are--again, talking about the compliance
    challenges that you face, are there resources that could be
    available to you through the Small Business Administration or
    through other efforts that might help you with some of the
    compliance challenges that you are facing?
        Ms. Beebe. Well, currently, I have actually just recently
    had to hire a bookkeeper to keep track of all the tax
    compliance that I have, and that is an additional cost that we
    have incurred as we are growing. For our business, as we are
    growing, we are entering a very critical stage. We are growing
    internationally and also in Houston. In order to have that
    additional expense just to hire someone to do the tax
    compliance, you know, is a burden on us, so----
        Senator Shaheen. Mr. Chairman, I am about out of time, but
    if I could just follow up, you talked about the potential for
    international business, which is one of the things that I have
    been very concerned about as we help small businesses get into
    international markets. How did you happen to open an office in
    Cologne, and what resources would be helpful to you as you are
    looking at the ability to export?
        Ms. Beebe. Yes. We opened our--we want to open an office
    anywhere in the world as long as we can service the customer.
    That is the number one thing for our business. Well, we have a
    gentleman who actually owns an engineering company there that
    has some contracts with some refinery over there, and we have--
    my husband and I have the opportunity to purchase that company
    from him. So, that kind of started our adventure in having an
    international business.
        Some of the resources that would be helpful for small
    business is actually territorial tax system. Some of the, you
    know, money that we earn overseas that has already been taxed
    overseas, if at any point in time we are to bring it back to
    the United States, we have to be taxed again, and that just
    really did not leave a lot of money left for us to grow our
    business. We want to grow internationally. We want to employ
    and send United States people who have specialized in certain
    skills overseas, you know. So, that would be a big help, some
    form of territorial tax system.
        Senator Shaheen. Thank you very much. Thank you, Mr.
    Chairman.
        Chairman Vitter. Thank you.
        And next, we will go to Senator Enzi.
        Senator Enzi. Thank you, Mr. Chairman, and thank you for
    holding this timely hearing on tax compliance relief for small
    business.
        I was in small business. I had a shoe store. Actually, I
    had three shoe stores. But, even though I understood those
    stores, one of the things that I do as a Senator is go into
    different businesses as I travel back to Wyoming pretty much
    every weekend because I found that any business that I have not
    been involved in, the decisions look pretty easy. But once you
    get to see what the decisions are and how far in advance they
    have to make them and how complicated they are, and that is
    even before the government gets involved, it is pretty
    impressive that people are willing to do that, able to do that,
    and extremely successful doing that. It does take some
    fortitude.
        I am on the Finance Committee and the Finance Committee
    makes the ultimate decisions on the taxes. I appreciate Senator
    Vitter having his bill, which we will emphasize in the Finance
    Committee and try and get those through.
        Ms. Beebe, I appreciate your comments on the territorial
    tax. I wrote an international tax piece that I think would
    greatly reduce the taxes for businesses and make it more
    possible for them to bring their revenue home once they earn
    it, which, of course, brings me to pass-through profits that
    small businesses have.
        We are talking about doing some corporate tax reform. But,
    a lot of the businesses--most of the businesses in the United
    States, when they earn a profit, they have to pay the taxes on
    it that year, even though they cannot take it out of their
    business at that point in time because they have to keep
    reinvesting it to grow their business, as you all know. So, we
    want to make sure that whatever advantages go to the big
    corporations, they certainly also go to the pass-through
    corporations.
        We just did some regulation hearings in the Oversight
    Committee for Government and found out a lot more about how
    many costs there are to doing those things. I appreciate all of
    your suggestions.
        I have been working on marketplace fairness for a long
    time, though, so I do have to make a couple of comments and
    maybe ask a couple of questions in regard to that, because,
    again, when I was in small business, and it is even more
    prevalent now with the phones and the barcodes and things, in a
    retail store, people come in and they get the full explanation
    of exactly how something works and exactly what they need, and
    then they look it up on their phone and they find out they can
    get it cheaper online. And, often, that cheapness is just the
    difference in sales tax. And, so they order it right in front
    of the store owner and he knows that it is just that sales tax
    thing that is keeping him from getting the business, and that
    is where the Marketplace Fairness Act came from.
        Now, Ms. O'Steen, you mentioned that you sell stuff on eBay
    and on Amazon. I know that Amazon already collects the sales
    tax for people and it does all the distributions. eBay has a
    subscription that they can do that takes care of the software
    problem, because they--for a small subscription, they will
    collect the tax and make the distributions for the tax. But,
    the most important thing that we had in Marketplace Fairness
    was a small business exemption, and that was at a million
    dollars in sales annually. Until a company gets to a million
    dollars in sales annually, they do not have to comply with it
    at all, and that number is up for negotiation, because on the
    House side, they have a remote transaction thing at $5 million.
    So, you might be more in favor of the House bill than the
    Senate bill, although they are very, very similar and get to
    the same point, again, just to make it fair for the brick-and-
    mortar folks.
        I will submit some questions, since I have used up the time
    that you could answer those questions. But, the SBA Office of
    Advocacy estimated that 99.9 percent of online businesses would
    be exempt under the million-dollar provision.
        So, with that, I will yield back my time.
        Chairman Vitter. Okay. Thank you very much, Senator Enzi.
        Next, we will go to Senator Heitkamp.
        Senator Heitkamp. Thank you, Mr. Chairman.
        I want to just kind of follow on with Senator Enzi's line
    of reasoning, but before I do this, I want to talk or ask Ms.
    Beebe, as you work internationally, especially in Europe, are
    you subject to a Value Added Tax in any of those jurisdictions?
        Ms. Beebe. We have--the way it is set up--the way we have
    set up our business is a whole separate entity over in Germany
    and they have a whole different tax system over there.
        Senator Heitkamp. Right. That would be the point, though.
    As you are saying, corporate income tax is comparable with a
    territorial tax, we need to look at the overall tax burden.
    Obviously, the United States has elected not to do a Value
    Added Tax, although typically in Europe, a Value Added Tax is
    the major revenue producer for most of the countries. And, so,
    we just want to make sure that when we are talking about
    comparing apples to apples, that we actually have the same kind
    of set of facts.
        And, so, I just want to kind of lay that down that it is
    important that the United States has elected to have a system
    where we allow for a foreign tax credit. That is something that
    is an anomaly in international taxation, something that we need
    to look at. I am not saying I am opposed to the territorial
    tax, but let us not just take two pieces of a tax structure and
    compare them and say these are equivalents.
        I want to talk to Ms. O'Steen for just a little bit. You
    know, let me give you an example. I have a lot of people in
    North Dakota who do exactly what you do, and when a North
    Dakota customer comes to their store, they are subject to the
    state sales tax along with any kind of local tax that they are
    subject to.
        Do you not think one of the primary elements of taxation is
    that people who do exactly the same thing ought to share the
    exact same burdens?
        Ms. O'Steen. Yes, I do agree with that, but the Marketplace
    Fairness Act was not leveling the playing field. What the
    Marketplace Fairness Act is doing is asking me to remit sales
    tax based on a customer location. When I go shop at a retail
    store, I am charged based on the retail store location.
        Senator Heitkamp. That is not exactly true. If you were a
    business who basically was audited, you would be subject to
    sale and use tax. That has been a compliance burden for years
    and years. There is not any state that has a sales tax that
    does not impose a corresponding use tax. And, so, I just want
    to give you the perspective of people who work in Main Street
    businesses who get asked to contribute to the local school
    fundraiser or do the Girl Scout thing.
        And, there is a woman that we met a couple years ago who
    runs a pet store, and she specializes. She trained all of her
    employees to basically understand pet ailments and to recommend
    different kinds of pet products, pet nutrition products.
    Unfortunately, the jurisdiction she is in has a 10 percent
    sales tax. She was losing business every day. She also has a
    small Internet business that she runs. She is losing business
    every day because that 10 percent, she cannot compete against.
    But, yet, she is providing the customer with the service.
        And, so, it is a very challenging issue, and I understand
    and appreciate what you are saying, but the more international
    and the more national our businesses become, the more important
    it is to really level the playing field, and I think
    Marketplace Fairness is an issue that cuts across small
    business. In fact, the people in my state who support
    Marketplace Fairness tend to be the small businesses who see
    the loss in sales every day because they cannot compete against
    a five, seven, 10 percent disadvantage.
        And, so, what we have been trying to do, and just to catch
    everyone up, Justice Kennedy in a recent Supreme Court case
    revealed that if this case went to the Supreme Court again, he
    would vote the other way. He would vote to basically reverse
    the Commerce Clause limitations on Quill, which means that
    there is probably a five-vote majority, which means that if, in
    fact, the courts resolve this and not the United States
    Congress, what is likely to happen is there will not be a small
    seller exemption. There will not be a requirement for software
    and that people cooperate. There will not be restrictions on
    the number of audits. It will be wide open, and then you will
    be subject to jurisdiction from literally thousands of
    jurisdictions, as opposed to the streamlined process that has
    been set forth in Marketplace Fairness.
        And, so, I think it is important that we not have the false
    choice of this or that, because right now, I think there are
    many Internet, or many Main Street businesses that are gearing
    up for a new Supreme Court case, in which case the table might
    be reversed and we might have small business Internet sellers
    in the Small Business Committee saying, please, please, please
    give us the protections that are being offered by the
    Marketplace Fairness bill.
        And, so, this is an incredibly complicated issue. It is an
    issue of fairness, and I appreciate that this is challenging
    for small business, but it is really challenging for Main
    Street businesses that are competing unfairly and lose sales
    because of this problem. And, so, I, like Senator Enzi, would
    like to submit some additional questions, but thought it was
    important to make those two points as we move forward.
        And, if I can just, Mr. Chairman, tolerate one more minute,
    on another committee that I am on, we are looking at
    streamlining kind of regulation. We are taking a look at what
    it means for small businesses as we look at other kinds of
    compliance burdens, including tax compliance burdens. We have a
    Web site called Cut the Red Tape. I hope that you all take
    advantage of that and send stories about other kinds of
    compliance burdens and tax compliance burdens, because we think
    we can do a much better job for small business in America.
        Thank you, Mr. Chairman, for the extra time.
        Chairman Vitter. Thank you, Senator.
        And now, we will go to Senator Ernst.
        Senator Ernst. Thank you, Mr. Chairman, and thanks to our
    witnesses today for appearing before us.
        This has been very beneficial. Small business is something
    that we rely on across the United States, of course, for many
    of our employees. You generate so many more jobs, I think, than
    people realize. So, thank you for doing that.
        I would like to get your opinion today on the various tax
    credits that exist out there. Lots of great small business tax
    credits, and I will get to your perspective in just a second.
    There is a small business in Cedar Rapids, Iowa, and it is
    actually three unique coffee shops in Cedar Rapids, and one of
    the things that they had mentioned to me was a burdensome
    process of applying for these various tax credits. And
    oftentimes when these businesses need an employee, again, small
    business, they needed those employees yesterday. I mean, they
    need them right away. They need someone that can get started
    immediately.
        So, the process for applying for tax credits requires the
    employer to ask some really personal questions in an interview-
    type setting. Then they have to fill out lengthy forms--this is
    what they have communicated to me--and get them qualified. And
    then they can offer the job. And, that takes a lot of time, a
    lot of process.
        And, one of the things these business owners mentioned to
    me is that it would make so much more sense, or be much more
    efficient, to have the employee start working and then apply
    for the credit after that employee has proven to be a
    successful hire.
        And, I would just like to hear from you. I loved hearing
    from them about the challenges that they have with some of
    these different tax credits, but I would like to hear from all
    of you, if you have experienced applying for tax credits, what
    that process was like, if it could be done more efficiently,
    just in your own words some of those experiences. Ms. Beebe, if
    we could start with you, please.
        Ms. Beebe. Okay. Actually, my company had benefited from
    tax credit. About five years ago, when we are really seriously
    considering developing alarm management software, we have to
    heavily invest in R&D and hiring developers who specialize in
    that and program that software, and we were not aware--small
    business, we were not aware that there is R&D credit for it,
    and the only way we realized that there is an option to try to
    apply for is about three, four years later, and even then, it
    was a friend of a CPA who said that, hey, you have a
    technology, you are moving in that direction. This might be
    something that will help you grow. We are thankful for the
    credit, because it helped us to hire more developers and IT
    people in our company, but it comes three or four years later.
        I think the biggest thing is, even though tax credits are
    good, there needs to be more tax reform to make things easier
    to understand. You know, we are in business to make a profit
    and not to get credits from government.
        Senator Ernst. Great perspective. Thank you.
        Yes, Mr. Begneaud.
        Mr. Begneaud. I had good experience with state tax credits.
    It was the Enterprise Zone. But, it did promote me hiring more
    people, and for the most part, everything went well with that
    until we reached 2008, when the economy started going down. We
    dropped from 78 employees down to 40 when we basically no
    longer could, you know, there was no more credit available for
    us because we were not still--we were not employing as many
    people. And, then, since that time, it has just been much more
    troublesome for us to even be able to have available the tax
    credits for us because we had dropped so far down. It has just
    been challenging in business general, all across the board.
        Senator Ernst. Right.
        Mr. Begneaud. And, then, as far as the R&D tax credits, we
    did apply for one with the state, and we thought that we had
    everything all filed properly, and the state denied us on that.
    And, so, we had spent a bunch of money with a specialized CPA
    firm just to do the filing for us, just to find out that we got
    denied.
        Senator Ernst. And, I think that is part of the challenge,
    is that even applying for a tax credit, you need someone else
    that you are hiring and bringing in----
        Mr. Begneaud. And not just your standard CPA. You are
    talking about the CPA firm that specializes, that understands
    the law itself.
        Senator Ernst. Certainly. Certainly. Thank you.
        And, very quickly, Ms. O'Steen.
        Ms. O'Steen. Honestly, we are too small. I know that there
    are tax credits available in the State of South Carolina for
    jobs credits, and we have done most of our hiring in the State
    of South Carolina, as we have only been there for, I believe,
    three years now--no, we are going on our fourth year--but we
    have missed out on them because our accountant is located in
    California and she is not familiar with those. So, I actually
    need to go find an accountant in the State of South Carolina
    that can handle the state taxes there----
        Senator Ernst. The state ones.
        Ms. O'Steen [continuing]. Which is something I have not
    actually gotten around to. I have had my hands very full. And,
    so, I know we are missing out, but I do not know enough about
    the tax system. It is just so complicated, that I know we are
    paying more money than we should be and we are losing out on
    opportunity.
        Senator Ernst. Right. Well, my time is up. I do appreciate
    your testimony today. Thank you very much.
        Thank you, Mr. Chair.
        Chairman Vitter. Thank you very much, Senator Ernst.
        Now, we will go to Senator Ayotte.
        Senator Ayotte. Thank you, Chairman.
        Ms. O'Steen, you talked about your business as a mother
    starting it on eBay as a way to sell clothing that your
    children outgrew. If there was an online sales tax collection
    requirement that would have required you to collect for over
    9,000 tax jurisdictions and also, by the way, under the MFA you
    could be subject to audit in those 9,000 tax jurisdictions, do
    you think you would have pursued this business if you were
    worried about that?
        Ms. O'Steen. Definitely not. I would have maybe continued
    to do what I was doing, selling stuff around the house on eBay
    to try to just make a little extra money for my family just to
    get by, because, literally, we were in such a tight situation
    then that that is basically what it was, so that I could buy
    them new clothes.
        But, if I had to pay those kind of--had that kind of tax
    compliance, I would not have started my own Web site. It would
    have been too overwhelming a thought. It is, like, a whole new
    taxation agency. So, it is like a secondary IRS, is what it is
    seeming like to me, which is, to me, just threatening that I
    would not want to open myself up to.
        Senator Ayotte. Yes. So, Senator Heitkamp asked you about
    the pet shop in North Dakota that is worried they have to
    collect 10 percent sales tax, and maybe these jurisdictions
    should think about dropping their taxes. I mean, that might be
    a way to solve this, rather than making businesses collect
    taxes for over 9,000 jurisdictions in the country. What do you
    think about that?
        Ms. O'Steen. Oh, yeah. I completely agree with you. The
    issue is the competition. I mean, we online are also charging--
    and I am not saying that this is a reason not to charge sales
    tax, but we are also charging shipping. So, we are dealing with
    lower margins. I mean, if government could help work with
    businesses and that would help them to at least----
        Senator Ayotte. Right.
        Ms. O'Steen [continuing]. Deal with what they have, or
    maybe they need to find a way to become more competitive, as
    well. And, we have to--we are always trying to find ways to
    become more competitive, working with very little. And, we also
    are in the same retail location, and it is very difficult for
    us, because we have--we ship to multiple jurisdictions in the
    State of California, so we are still paying jurisdiction tax
    all over the State of California.
        Senator Ayotte. I actually come from a state, the State of
    New Hampshire, that does not have a sales tax, and if we want
    to talk about fairness, the way that New Hampshire has decided
    to compete is by not having a sales tax. So, as we look at this
    so-called Marketplace Fairness, it is really a money grab from
    Washington to allow other states to require states like mine,
    who have made a choice to be competitive by not having a sales
    tax, to require our businesses to become the tax collectors for
    the nation.
        Senator Heitkamp talked about how you could be subject to
    the use tax, too. Well, there is a big difference between the
    use tax and what they are talking about with this online sales
    tax, because the use tax--the collector for the use tax is the
    state or municipality, not requiring the private business--yes,
    you could be subject to asking for information for that use
    tax, but they are not asking you to collect the use tax. This
    is done by the actual state or the municipality. So, the
    government is collecting it.
        You know, what is so unbelievable about this proposal is
    that they are asking businesses like you--here you are, a small
    business owner--to be the tax collectors and to take on that
    role for over 9,000 jurisdictions. What a mess.
        I would say to these other states, decrease your sales tax.
    Be be competitive. Be like New Hampshire. Do not just impose
    this big Washington mandate to make these businesses become the
    tax collectors for the nation.
        I know that Senator Enzi, whom I have a great respect for,
    talked about the small business exemption under both the Senate
    MFA proposal and the House proposal. Well, the House proposal
    actually phases out the small business exemption after three
    years, so, yes, you can be small for three years, but then
    become a tax collector for the country. And then, also, if you
    have an eBay business, that does not have an exemption
    whatsoever.
        And, so, as you look at this small business exemption, one
    of the things to be aware of, it sounds good on paper, but the
    people here who want to collect an online sales and the states
    who want the money, eventually, they are going to want that
    money from small businesses too.
        I just appreciate your hard work in starting your own
    business and I am going to do everything I can to fight this
    money grab and the requirement that would make businesses like
    yours, or larger businesses, or businesses across this country
    become the tax collectors for over 9,000 jurisdictions in this
    country. By the way, I got that wrong. It is not electronics.
    It is electronic marketplace that is exempt. So, eBay. So, that
    is a big issue. So, the House version actually, I think, puts
    you people, a lot of people who start their business and use
    eBay would be subject, apparently, to this.
        But, in any event, I just do not think this is a role for
    the federal government, and I have great respect for my
    colleagues like Senator Heitkamp and Senator Enzi, but this is
    one I do not think that we should be imposing on businesses
    across the country.
        Chairman Vitter. Okay. Thank you, Senator Ayotte.
        Thanks to all of our witnesses. I have several questions. I
    am going to submit those to the record, because we are a little
    squeezed for time and we have a very significant second panel
    and I do not want to be disrespectful to them. But, thank you
    all very, very much for your testimony, for being here.
        And now, I will invite our second panel to come up and get
    seated. As they do, if you all could try to do it as quietly as
    possible, I am going to go ahead and begin to introduce them,
    in the interest of time.
        Nick Karellas is Tax Counsel for the National Federation of
    Independent Business. Prior to joining NFIB in October of 2014,
    Nick worked as Tax Counsel to Representative Lynn Jenkins and
    for Senator Kit Bond. NFIB represents over 350,000 small
    business owners across the country in every region and every
    industry.
        Next is Tom Mathison. He is principal and co-founder, along
    with his son, of Mathison | Mathison Architects, a full-service
    architectural and planning firm in Grand Rapids, Michigan. They
    have projects throughout several states in housing, K through
    12 and higher education, commercial and institutional
    facilities. And, Tom is here toady representing the National
    Small Business Association and sits on its Board of Trustees.
    He is also Past Chair of the Small Business Association of
    Michigan and Past Vice Chair of the American Institute of
    Architects.
        Jeffrey Porter is a tax practitioner at Porter and
    Associates, based in Huntington, West Virginia, and he is the
    Immediate Past Chair of the Tax Executive Committee of the
    American Institute of Certified Public Accountants and Chair of
    the AICPA Tax Reform Task Force. He is testifying today on
    behalf of the AICPA, the world's largest member association
    representing the accounting profession.
        Caroline Bruckner is a Tax Professor at American
    University's Kogod School of Business. She is also the Managing
    Director of the Kogod Tax Policy Center, which conducts
    nonpartisan research on tax and compliance issues specific to
    small business and entrepreneurs. Prior to her appointment, Ms.
    Bruckner served on the staff of this committee as Chief
    Counsel, focusing on tax and budget issues.
        And, finally, Dean Zerbe is the National Managing Director
    for alliantgroup. He is alliantgroup's National Managing
    Director based in the Washington, D.C., office, and prior to
    joining alliantgroup, he was Senior Counsel and Tax Counsel to
    the U.S. Senate Committee on Finance. Senator Coons invited him
    to speak to the importance of the R&D tax credit, specifically.
        Thanks to all of you for being here, and we are looking
    forward to your testimony.
        We will start with Mr. Karellas.

         STATEMENT OF NICHOLAS KARELLAS, TAX COUNSEL, NATIONAL
                   FEDERATION OF INDEPENDENT BUSINESS

        Mr. Karellas. Good morning, Chairman Vitter and members of
    the Senate Committee on Small Business. I am pleased to be here
    on behalf of the National Federation of Independent Business as
    the committee explores ways to reduce the tax compliance burden
    on American small businesses.
        NFIB is the nation's leading small business advocacy
    organization and we represent over 350 small businesses, and
    those businesses are in every region, in every industry, across
    the country.
        The small business economy is slowly emerging from one of
    the worst recessions in U.S. history. NFIB's monthly surveys
    show that from 2008 to 2012, businesses reported poor sales
    were the number one problem, as consumer spending had sharply
    declined. But, now we see that taxes is now often the top
    concern reported in our surveys, a problem that is, no doubt,
    slowing our economic recovery. In fact, tax-related issues
    comprise five of the top 10 most severe problems for small
    business owners.
        Following a promising string of improvements during the
    first months of this year, our small business optimism index
    showed signs of weakness among small business owners. Our June
    2015 report showed that the optimism index plunged four points,
    to 94.1 points, the lowest point of this year and the most
    significant decline since November 2012, and this is well below
    our pre-recession average of 99.5. Small business owners
    reported that they plan to spend less and had weaker
    expectations for sales growth and business conditions over the
    next six months.
        Regardless of their industry, our members consistently rank
    tax-related complexity and compliance burdens as their most
    difficult problems facing their business. Generally, these tax
    problems fall into three categories: costs, complexity, and the
    frequency of changes.
        The cost of tax obligations for our members include the
    amount they pay in federal, state, and local taxes, the costs
    they have to pay to hire a CPA or tax advisor, and the owners'
    time that is required to put together the paperwork or file
    their taxes themselves. In fact, 88 percent of our small
    employer members have gone to hiring a tax preparer to deal
    with the complexity and to ensure their compliance with the
    code.
        As mentioned by the Chairman earlier, compliance costs are
    especially problematic for our members. They are nearly 70
    percent higher than for their larger counterparts. It costs
    them $18 to $19 billion a year, or about $74 per hour.
        Taking prudent steps to reduce the complexity and
    uncertainty in the tax code will promote smart business
    planning, increased compliance, while also reducing the burdens
    on these small business owners. In the end, it can be a win for
    the owners, their employees, the economy, and even the IRS.
        A couple areas where simplification would ease the
    compliance burden are expensing and cash accounting. The tax
    code and the Treasury regulations that determine whether an
    expense is currently deductible or must be capitalized are one
    of the most difficult areas of the tax law. Navigating the over
    200 pages of regulation requires performing a multiple-step
    facts and circumstances analysis for many of the most common
    purchases, regardless of their amount. Increasing the ability
    to expense even small dollar amounts would reduce the
    unnecessary compliance burdens that owners face in trying to
    comply with these complex capitalization rules.
        Likewise, expanding the availability of the cash method of
    accounting is another example where Congress could act to
    provide compliance relief. The cash method is easier to use,
    easier to administer, and most closely matches the way that a
    small business owner will keep his books.
        To sum up, the current tax code places an excessive burden
    on small business owners. Alleviating the significant costs
    associated with compliance is an essential component in
    creating a strong, healthy environment for owners to operate
    and grow their business.
        I appreciate that the committee is taking a serious look at
    easing the tax code challenges facing American small businesses
    and look forward to answering any questions. Thank you.
        [The prepared statement of Mr. Karellas follows:]

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        Chairman Vitter. Absolutely. Thank you.
        And, next, Mr. Mathison. Welcome.

       STATEMENT OF TOM MATHISON, PRINCIPAL, MATHISON | MATHISON
     ARCHITECTS, GRAND RAPIDS, MI, ON BEHALF OF THE NATIONAL SMALL
                          BUSINESS ASSOCIATION

        Mr. Mathison. Thank you. Good morning, Chairman Vitter and
    Ranking Member Shaheen and members of the committee for
    inviting me to speak here today. My name is Tom Mathison. I am
    a principal co-owner of Mathison | Mathison Architects. We are
    a full-service architectural and planning firm in Grand Rapids,
    Michigan.
        I am a small business owner. Our firm is less than two
    years old and we have already grown from two to seven staff
    members, and we recently moved to larger quarters to
    accommodate our growth.
        I am proud to be here representing not only my company, but
    also the National Small Business Association, where I currently
    serve on the Board of Directors and the Tax Committee Chair.
    NSBA has been a consistent proponent of comprehensive tax
    reform and we welcome Congress' efforts to replace the current
    broken tax code. However, we also recognize the challenges you
    face to achieve comprehensive reform in the near future.
    Therefore, in the interim, we believe this measure, the Small
    Business Tax Compliance Relief Act, will reduce the complexity
    and costs of compliance to promote economic growth.
        NSBA's members consistently rank the tax and tax compliance
    burden among the top issues to be addressed. One in three small
    business owners reported spending more than 80 hours, two full
    work weeks, per year dealing with just federal taxes and
    compliance. More than half of NSBA members have fewer than five
    employees, without in-house accounting, legal, and human
    resources staff. This means that business owners, like me, have
    no other choice but to hire outside help to keep track of all
    the reporting and filing requirements and changes. In fact,
    according to our member survey, only 15 percent of small
    business owners handle their taxes internally.
        When we asked our members to rate the most significant
    challenge posed by the federal tax code, the clear majority, 59
    percent, picked administrative burdens, and this is up from 53
    percent just a year ago. In addition to time, the out-of-pocket
    cost for legal and accounting services adds thousands more.
        I personally know this to be true in my firm. I spend
    significant time each week in the administration and filing of
    monthly and quarterly income and payroll reports, as well as
    trying to stay informed of changes to the tax code, changes to
    regulations, and the status of expired tax extenders and so on.
        The U.S. Small Business Administration Office of Advocacy
    reports that the proportionate cost of compliance in terms of
    per cost per employee is three times higher for small business
    than that of larger firms.
        And when surveyed, 70 percent of our members expressed
    strong support for broad reform of the tax system that reduces
    both corporate and individual tax rates. Most small businesses
    are sole proprietorships, Subchapter S Corporations, or Limited
    Liability Companies, like my company. Eighty-three percent of
    these businesses pay taxes on their business at the personal
    income level, the so-called pass-through entities, subject to
    individual tax rates. For my firm, these pass-through
    implications are a major driver in our own tax strategy,
    succession planning, and governance.
        And, so, we believe--NSBA believes that addressing only
    corporate tax reform will only lead to even greater complexity
    and a massive tipping of the scales in favor of the nation's
    largest companies at the expense of businesses, and this, in
    turn, will stymie growth from what is widely recognized as the
    primary creator of jobs, and that is small business.
        So, we support the legislation that Chairman Vitter has
    announced today and we believe that it will, by increasing the
    threshold for cash accounting to $10 million, will provide the
    flexibility and simplicity that small businesses need. I use a
    cash accounting system. Forty-six percent of small businesses
    use cash accounting.
        The health insurance deductibility for those who are self-
    employed will allow those businesses to capture the payroll tax
    on health insurance premiums that they alone pay. Small firms
    and NSBA members rated the full deductibility of health
    insurance costs as the number one most important deduction or
    credit when it comes to stimulating small business growth.
        And, then, requiring the IRS to convene Small Business
    Review Panels when making rule changes that would impact small
    businesses and directing the IRS to produce a report that
    details definitions that can be standardized and made layman-
    proof will add clarity.
        Finally, NSBA believes that without change, the current tax
    code will continue to serve as a disadvantage to small
    businesses. The ever-growing patchwork of credits, deductions,
    and sunset dates is a roller coaster ride for small business,
    without the slightest indication of what is around the corner.
    However, short of comprehensive reform, we must fix the tax
    problems with the current tax code by developing simplification
    measures. The work of this committee will lead to a better
    outcome in that respect.
        Again, I commend you for working on this legislation and
    bringing it to the Senate. I would like again to thank you,
    Chairman Vitter and the members of this committee, for the
    opportunity to speak with you today.
        [The prepared statement of Mr. Mathison follows:]

       [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Vitter. Thank you very much for your perspective,
    and thank you for that support.
        Next, we will hear from Mr. Porter. Welcome.

    STATEMENT OF JEFFREY A. PORTER, OWNER, PORTER AND ASSOCIATIONS,
        HUNTINGTON, WV, ON BEHALF OF THE AMERICAN INSTITUTE OF
                      CERTIFIED PUBLIC ACCOUNTANTS

        Mr. Porter. Thank you. Thank you, Chairman Vitter, Ranking
    Member Shaheen, and members of the committee. My name is
    Jeffrey Porter and I am a tax practitioner at Porter and
    Associations in Huntington, West Virginia. And on behalf of the
    American Institute of CPAs, I appreciate the opportunity to
    testify.
        Tax compliance is particularly burdensome on small
    businesses. While our tax code has always had a tendency to
    change, in recent years, the rate of change has accelerated.
    New rules and regulations providing guidance on tax laws comes
    out daily. Extender bills pass annually and then expire within
    a month, leaving businesses once again unsure what the rules
    are.
        When a small business asks me a simple question, such as
    what is my tax rate, you have to explain that it is really not
    that simple, because you have the regular rate, the AMT, the
    net investment income tax, and a variety of phase-ins and
    phase-outs. America's small businesses need a tax code that is
    certain, simple, and transparent.
        In preparation for this hearing, I reached out to several
    of my small business clients and asked them about the impact
    regulations have on their businesses. To say their response was
    passionate was an understatement. And before I could explain
    that I mostly was interested in tax compliance issues, they
    began to talk about the IRS, the state taxing authorities,
    OSHA, EPA, the ACA, and a host of other acronyms for government
    agencies. While we are here today to specifically discuss tax
    compliance, we need to remember that the cascading burden of
    government compliance, tax and otherwise, takes the focus of an
    entrepreneur from expanding their business and hiring more
    employees to complying with laws and regulations.
        Today, I would like to discuss a number of targeted tax
    reform and administrative solutions, many of which are included
    in Chairman Vitter's bill, the Small Business Compliance Relief
    Act of 2015. Although technical, these changes are important
    and allow entrepreneurs to spend more of their time focusing on
    operating and expanding their business.
        So, first, it is imperative that small businesses and their
    tax return preparers be able to communicate with the IRS when
    preparing their taxes and addressing compliance issues. Our
    members have expressed deep concerns regarding their ability to
    effectively represent small businesses in an environment where
    the IRS service levels are so degraded that during the last
    filing season, the IRS answered only 37 percent of their phone
    calls, and the IRS's processing of taxpayer correspondence in a
    timely manner declined by over 16 percent last year, leaving a
    backlog of almost 79,000 cases.
        Having to contact the IRS repeatedly to resolve a tax
    matter is frustrating and a waste of resources of both the
    business owner and their advisors. We believe taxpayer service
    must remain a high priority for the IRS and agree with
    requiring the agency to produce a report with specific ideas on
    how to improve its customer service.
        Another challenging tax compliance burden that small
    businesses had to deal with recently was the tangible property
    regulations, which address how businesses should report the
    purchase and improvement of tangible property. We appreciate
    the Chairman's bill, which includes a provision to increase the
    de minimis safe harbor threshold for most small businesses from
    $500 to $2,500 and provides an opportunity for more small
    businesses to use the higher $5,000 threshold.
        Currently, to deduct amounts higher than $500, small
    businesses must prove that expensing such amounts in the
    purchase year clearly reflects income. However, the clear
    reflection of income test can be challenging for any small
    business, especially for small businesses, forcing them to
    depreciate the cost of items such as computers or printers over
    a number of years for tax purposes.
        We also support the provisions in Chairman Vitter's bill
    that address some of the unfair or untargeted penalty
    provisions. Penalties should deter bad conduct without
    deterring good conduct or punishing small businesses which are
    acting in good faith. Targeted penalties that are administered
    in a reasonable manner encourage voluntary compliance with the
    laws. Good tax policy also suggests that we avoid strict
    liability provisions and instead allow the IRS to consider the
    facts and circumstances particular to a business' situation.
    Businesses that act in good faith should not be subject to the
    same rules as businesses trying to scam the system.
        The AICPA appreciates the committee's efforts and
    particularly wants to thank Chairman Vitter for his
    introduction of the Small Business Tax Compliance Relief Act of
    2015, which we believe could ease compliance costs, improve the
    overall tax system for small businesses across the country.
    These businesses and their tax practitioners are interested in
    and need this type of targeted reform.
        Again, Mr. Chairman, thank you for the opportunity to
    testify and I would be happy to answer your questions.
        [The prepared statement of Mr. Porter follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Vitter. Thank you very, very much for your
    testimony.
        And next will be Ms. Bruckner.

       STATEMENT OF CAROLINE BRUCKNER, PROFESSOR, ACCOUNTING AND
    TAXATION, AND MANAGING DIRECTOR, KOGOD TAX POLICY CENTER, KOGOD
                SCHOOL OF BUSINESS, AMERICAN UNIVERSITY

        Ms. Bruckner. Members of the committee and staff, thank you
    for the opportunity to testify today. My name is Caroline
    Bruckner and I am a Tax Professor at American University's
    Kogod School of Business. As part of my responsibilities at
    American University, I am also the Managing Director of the
    Kogod Tax Policy Center, which conducts nonpartisan research on
    tax and compliance issues specific to small businesses and
    entrepreneurs.
        Prior to my appointment at Kogod, I served on the staff of
    this committee from 2009 until 2014, ultimately as Chief
    Counsel under the leadership of its former Chair, Senator Mary
    Landrieu. During my tenure with the committee, I handled tax,
    labor, and budget issues and worked with small business
    stakeholders across the country and political spectrum to
    develop small business legislation, including provisions of the
    Small Business Jobs Act of 2010, which provided more than $12
    billion of tax relief for small businesses.
        In addition, at the direction of Chair Landrieu, I
    organized multiple hearings and roundtables to discuss tax and
    compliance issues specific to small businesses and
    entrepreneurs and advised the Chair on small business tax
    policy recommendations in response to Senate Finance Committee
    requests for tax reform proposals.
        In my current role at Kogod, I direct our team of small
    business tax policy experts, economists, and researchers, and
    we are currently focused on developing research on the tax and
    compliance issues impacting emerging entrepreneurs, who are
    America's latest iteration of small business owners.
        Emerging entrepreneurs are the new self-employed
    entrepreneurs who are powering the evolving on-demand digital
    economy. These emerging entrepreneurs are renting rooms,
    providing ride sharing services, running errands, and selling
    goods for consumers in business transactions coordinated online
    and through app-based platforms developed by companies such as
    Airbnb, Flipkey, Onefinestay, Uber, Lyft, Taskrabbit,
    Instacart, and others.
        As you know and have heard today, overwhelming complexity
    and inefficiency are the hallmarks of the current tax code.
    This reality is particularly acute for many emerging
    entrepreneurs who are first-time small business owners and have
    little experience with the requirements of quarterly estimated
    payments or self-employment taxes. As a result, many emerging
    entrepreneurs are finding out for the very first time this
    filing season that they are liable for tax underpayment
    penalties.
        In the coming months, we will be publishing research and
    corresponding policy recommendations for your committee and
    colleagues to review. In the meantime, we applaud the
    committee's initiative in discussing targeted tax solutions for
    America's small businesses.
        As many of you know, a one-size-fits-all approach for small
    business tax compliance burdens is inefficient and fails to
    recognize the specific attributes and various criteria policy
    makers, academics, government agencies, and legal authorities
    rely on to characterize small businesses as opposed to other
    firms.
        The definition of ``small business'' has very significant
    implications for policy consideration purposes, as the numbers
    can vary widely. For example, the U.S. Department of Treasury
    has developed a methodology based on taxpayer filing
    information to identify more than 23 million small businesses.
    However, SBA's Office of Advocacy, relying on U.S. Census
    Bureau data, has identified more than 28 million small
    businesses for purposes of its programs. Consequently, a
    discussion of targeted tax solutions for small businesses
    should include some facts about small business as generally
    used for tax administration purposes.
        According to GAO's most recent research released this week,
    small businesses are primarily individuals who report some
    business income, either as a sole proprietor or a landlord, on
    a separate schedule together with their Form 1040s. This group
    of approximately 16 million small business taxpayers, which is
    about 69 percent of all small businesses, on average earns
    $100,000 or less per year and generates $1.4 trillion of the
    total small business income reported to the IRS every year. In
    contrast, the remaining 7.3 million small businesses, which is
    about 31 percent of reporting small businesses' income, are
    partnerships, S Corporations, or C Corporations that earn, on
    average, about $450,000 or more per year and generate
    approximately $4.5 trillion of total small business income.
        Given the foregoing facts regarding small business
    taxpayers, it is no great surprise that millions of small
    business owners, mostly individuals running businesses and
    earning less than $100,000 each year, are unnecessarily
    burdened by an antiquated tax code and an IRS that cannot
    address their questions. Targeted tax proposals can alleviate
    some of the burdensome recordkeeping requirements or
    inequitable treatment small business owners sometimes encounter
    in complying with the code.
        This committee has a long history dating back to its days
    as a Select Senate Committee of working on behalf of America's
    small businesses on tax issues. Beginning in 1953, this
    committee prepared a comprehensive survey of the impact of
    federal taxes on small businesses, culminating in an annual
    report to the Senate with key recommendations. Since then, this
    committee has held more than 38, now 39, hearings over the
    years on tax-related concerns of small businesses. The work
    continues.
        Again, I thank you for the opportunity to testify today and
    for the work you do on behalf of America's small businesses and
    I welcome any questions from the committee or its staff.
        [The prepared statement of Ms. Bruckner follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Vitter. Thank you very much, Ms. Bruckner.
        Now, we will hear from Mr. Zerbe. Welcome.

         STATEMENT OF DEAN ZERBE, NATIONAL MANAGING DIRECTOR,
                       ALLIANTGROUP, HOUSTON, TX

        Mr. Zerbe. Thank you, Mr. Chairman. I appreciate it. Thank
    you very much for having this important hearing about tax
    reform and how tax reform can help deal with the burdens for
    small businesses in terms of tax compliance. Just as a brief
    note, alliantgroup works with small and medium businesses
    across the country, working with them to help them benefit from
    the tax code, the tax provisions that you all have placed into
    the code, and also working with CPA firms very closely to
    assist in their working with their clients. We also work with
    small businesses, representing them before the IRS. So, I have
    a good sense of knowledge of the issues before you.
        Mr. Chairman, when I think of what you are trying to deal
    with in this in terms of the tax code and small business, I
    step back and think of kind of three points. One, you want to
    talk about policy and say, okay, what can we do to make sure
    the policy and the tax laws, the tax regulations, are working
    for small businesses and understanding the problems there. I
    give you a lot of detail on the R&D credit in my testimony, but
    that is just a one-off.
        We have provision after provision after provision in the
    tax code that is very difficult and hard for small businesses
    to qualify for. It can be the law. It can be the guidance. You
    heard the testimony earlier from the question from Senator
    Ernst. Sometimes it can be they learn about it later or it is
    very cumbersome, like the work credits. So, I think
    understanding more in detail why is it that a small business
    cannot take this credit is critical.
        I think that then leads you to the next step of, okay, now
    that we understand the problems, now let us talk about what
    could be the solutions. What can we do to make this code
    provision, this incentive work better for small businesses, and
    I think that could be safe harbors, it can be things that you
    proposed, different rules for small businesses. All those are
    ways that you can get there to get small businesses able to
    take advantage of the credits and incentives that are in there
    for the code.
        I would say, as a general rule, simpler is going to be a
    better place for you to do, but I do think thinking about ways
    that you can have a credit or provision that works for small
    business is also a start point. So, I think it is getting the
    policy right.
        Then it is education. I could not have asked for a better--
    again, the statement from Senator Ernst to the question,
    education is huge. So many small business owners do not have a
    clue in the world what is out there for the credits and
    incentives that the Congress has put forward. That is what I
    spend all my days, out there talking to them about what is out
    there that you have put forward. We could do so much more.
        To be honest, the IRS is not really pulling oars on this. I
    know they have got a lot on their plate, but they could do more
    to help other tax service providers that are trying to educate
    folks on what is going on. SBA may be a way to do this, as
    well, too. But, I cannot tell you enough how much small
    business owners do not have any idea what is out there for them
    to take advantage of. So, I think education is a key part.
        The third part, then, is compliance, and there are two
    parts to compliance. One is service. You heard earlier, it is
    exactly right. IRS not answering phones, IRS not answering
    letters, people who do not have good training at the IRS. That
    is not a happy day for a small business owner and their CPA.
    They want people who will respond to their phone calls, will
    answer their letters, and know what they are talking about.
        So, I think the committee has got to look long and hard
    about the level of professionalism and service that we want to
    see out of the IRS, the resources we want to see for the IRS to
    accomplish that, and also management of the IRS's resources
    that they currently have. But, we have got to look at that.
        So, if you can get the law better, if you can get education
    in a place where people know they can qualify and how they can
    qualify, you get service better, better guidance--what you are
    talking about, I think, is exactly spot on, Chairman--all that,
    I think, will then get you to the bottom line on the
    enforcement. It will help the burden on compliance, but it will
    get you to enforcement, as well, too, and I think you will be
    in a better place in enforcement.
        Obviously, the IRS needs to have an enforcement presence,
    but I would tell you quite frankly, and I put it into detail in
    my testimony, we are a little bit afraid the IRS does not have
    its feet on the ground on some cases in some enforcement.
    Overall, yes, it can be fine, but the trend line is not good
    regarding small business. They tend to have a tendency to treat
    small businesses like big businesses in terms of requirements
    for what they want to accomplish in terms of recordkeeping,
    production of data, all that.
        So, I have laid out some details for the committee in my
    testimony. A lot could be done, I think, to get the IRS back on
    the rails in terms of where they are on that. So, I think all
    that can accomplish a great deal in terms of what you are
    looking at and trying to achieve.
        I just want to take one last moment on the Startup Act,
    just because--let me say this. I think as you are looking at
    reform, I gave you three areas that I think this committee, in
    particular, should think about in reform: entrepreneurs,
    greater employee ownership, and also capital for startups. But,
    the tax code right now does a pretty lousy job of helping
    startups because they do not have income and we are basically
    based around that. But, the problem is, for a business owner,
    they are paying tax. They are paying a lot of tax. They are
    paying--for them, it looks, walks, talks like a tax. We put it
    with different labels, with the payroll tax, there is this kind
    of tax. For the business owner, it is a tax.
        And, I think for Senator Coons, his proposal that says,
    hey, we are going to make the R&D credit available for
    startups, starts being the driver for both innovation and for
    new jobs in this country, is a godsend. I think it is going to
    be a game changer in really helping so many of our new
    innovative companies across the board finally take advantage of
    the R&D credit.
        I know Senators make lots of wonderful speeches about,
    geez, R&D credit, we are going to help those two fellows in a
    garage who are starting their new business. In simple reality,
    it does not help them a bit. It helps IBM. It helps 3M. It
    helps a lot of the companies that we work with, you know, kind
    of the 200-person tool and die shop, but it does not work for
    them. So, I think with Senator Coons' provision that just got
    passed the other day--congratulations, Senator--we are on a
    good start there. But, that is just one example of a host of
    things that are out there.
        With that, I will stop, and thank you very much, Chairman,
    for having today's hearing.
        [The prepared statement of Mr. Zerbe follows:]

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        Chairman Vitter. Great. Thanks to all of you for your
    testimony, very much.
        Now, we will go to Senator Enzi if you would care to stay,
    but if you cannot, we understand.
        Senator Enzi. I am late----
        Chairman Vitter. Okay.
        Senator Enzi [continuing]. But I wanted to hear the
    testimony.
        Chairman Vitter. Yes. Thank you.
        In that case, we will go to Senator Fischer.
        Senator Fischer. Thank you, Mr. Chairman.
        This would be a question for the entire panel, if you would
    like to weigh in on it. The Senate Finance Committee marked up
    tax extender legislation that would reenact all the provisions
    that expired in December of 2014. So, if these provisions are
    good enough for the past decade, and in many cases almost 30
    years, such as the R&D credit, then should not they be made
    permanent?
        I hear about the 179 deduction all the time. More than
    21,000 Nebraskans work in equipment manufacturing, and that is
    about one in five Nebraska manufacturing employees. Sales of
    goods produced by equipment manufacturing and related
    industries are almost $3.4 billion.
        So, my constituents would like to see a longer extension of
    this deduction allowing up to $500,000 to be expensed in a
    given year. So, do any of you have objections to making it
    permanent, and if so, what would you propose instead?
        Mr. Zerbe. I guess I will start, Senator----
        Senator Fischer. We will let the gentleman from Omaha go
    first.
        Mr. Zerbe. Thank you, Senator, very much----
        Senator Fischer. It is nice to see you.
        Mr. Zerbe. Thank you very much. Glad to see my Omaha ties
    have finally come in handy.
        [Laughter.]
        I think it would be terrific. I think, for everyone, 179,
    little ``d'' in particular, if I had to pick one out, that
    would probably be it, along with the R&D credit, because they
    are based on behaviors that you are trying to affect. I think
    you are absolutely right, though. It is really the devil that
    you have this stop and start in terms of the tax provisions,
    and to get those put into permanency would be a godsend.
        Ms. Bruckner. I think it was really encouraging to see that
    the two-year extension for the 100 percent exclusion from cap
    gains on 1202 stock, which is investments into certain
    qualified small business stock. Chair Vitter, your bill builds
    on that specific provision in a number of ways. We know that
    that provision operates to get equity into the hands of
    entrepreneurs and it would be--it would likely be a very
    successful provision in the code if it were made permanent at
    the 100 percent exclusion level.
        Mr. Porter. I, likewise, agree completely, that what we
    need more than anything is permanency in the code. The in and
    the out, you know, constantly, it is maddening for clients and
    it is maddening for us. I mean, I have clients that have me on
    their speed dial in December and they call me every other day.
    ``Has the bill passed? Has the bill passed?'' So, I think it is
    a huge issue, and then passing them late in the year, as we
    have been doing, ends up to the point where clients do not have
    the ability to go out and invest like they need to invest and
    they keep waiting and waiting for that. So, I agree. Many of
    the provisions need to be made permanent.
        Mr. Mathison. I would echo the same thing. NSBA is very
    clearly in support of making them permanent. This is the roller
    coaster I referred to in my testimony. This is the knowing, not
    knowing, pass, expire, try to get it redone. This is a mess and
    needs to be fixed.
        Mr. Karellas. Yes, I join the chorus. This 179, in
    particular, is one of the items we hear about repeatedly from
    our members, especially in December, wanting to know what the
    chances are that Congress is going to pass this, at least for
    the year that just happened. And, so, we, of course, are for
    permanency. Our members always want the opportunity to be able
    to plan ahead. If we cannot get permanency, we hope to at least
    get something that looks as far ahead of time as we can.
        Senator Fischer. Good to hear. It is such a problem when
    there is no certainty for businesses. And, as you said, you
    receive hundreds of calls, thousands of calls, as the deadline
    is approaching and people do not know how they are going to
    make decisions that are going to improve their business.
        Mr. Porter, earlier this year, I introduced legislation
    which was the Taxpayer Accountability Act, which would require
    the IRS to provide a substantive written response, not just an
    acknowledgement letter, to any written correspondence from a
    taxpayer not later than 30 days after receiving such
    correspondence, and if the IRS discloses any taxpayer
    information to any federal, state, or local government, to
    provide that to the taxpayer in a written notification within
    30 days. Do you think that would help to resolve some of the
    issues that you highlighted in your testimony?
        Mr. Porter. Yes, ma'am, I think it would, and let me give
    you a scenario of how it typically works in my practice. A
    client comes in with a notice from the IRS and so you have to
    provide some supporting information. The notice may be right,
    may be wrong. So, you send in a letter, and 45 days later, you
    get a letter that says, we have not had time to look at your
    letter yet. You know, so then you say, okay. Forty-five days
    later, you may get another letter. So, now you are out to 90
    days. But in the meantime, the computers are generating notices
    every 30 days, adding additional penalties and interest,
    threatening liens and levies, and so what that means is you
    have to call the IRS then every time and say, hey, would you
    put a hold until we get some kind of response to our letter.
        It would be hugely helpful if they were to acknowledge that
    they received your notice and let you know that they have it
    and that they are going to cease any collections activities
    until they resolve your issue.
        Senator Fischer. If they do not acknowledge that they
    received your notice, then the fees continue, right, the fines?
        Mr. Porter. The penalties and interest?
        Senator Fischer. Right, yes.
        Mr. Porter. Oh, absolutely, until it is resolved. Of
    course, if it is resolved in the favor of the taxpayer, those
    go away. But, again, it is the client comes running in the door
    with that letter again and, you know, you will call the IRS,
    after you sit on hold for who knows how long and they will say,
    yes, we have that, I can see it here in the computer system.
        Senator Fischer. Okay. Thank you very much. Thank you all.
        Chairman Vitter. Great. Thank you.
        Senator Coons.
        Senator Coons. Well, thank you, Chairman Vitter and Ranking
    Member Shaheen, both, for holding this hearing.
        It is great to be in a room where we can agree on a lot of
    different things--one in particular, I suspect. We have heard
    from a lot of different folks on both sides of the aisle is
    that when it comes to tax reform, the stakes could not be
    higher for small business. And, I suspect that every Senator
    who has been here and questioned and every witness who has
    testified has suggested that America's tax code today is too
    long, too complex, frankly, too unfair for small business, and
    that the $100 billion a year, roughly, spent in tax compliance
    is a cost that we should find a way to reduce, that the
    complexity of the tax code and the difficulty and expense of
    tax compliance puts small business, innovators, startups, and
    families really at a significant and unfair disadvantage.
        So, Senator Fischer has left, but I was going to agree with
    her that Section 179 permanency is something I would also
    support and advocate for. I grew up in a small business-owning
    family and I hear week in and week out from Delawareans who are
    trying to run small businesses exactly the points that our
    panel testified to, which is that they have great difficulty
    understanding, accessing, affording, taking advantage of the
    incentives that are provided in the tax code for small
    business, and that particularly the ones that expire year in
    and year out are of modest helpfulness, particularly when they
    seem to always be retroactively enacted.
        So, let me speak for a few minutes, if I could, to the
    Innovators Job Creation Act. I am really grateful for the
    opportunity to speak to that, and I really appreciate Senator
    Enzi working with me initially and Senator Roberts being the
    cosponsor of the provision that, as Mr. Zerbe mentioned, was
    included in extenders yesterday.
        One of the key areas, I think, for tax reform and for us to
    look at in tax policy is innovation. The R&D tax credit has
    made a huge difference, particularly for very large and very
    profitable companies, over a long period of time. And as
    someone who was in-house counsel to a company that relied on
    that to help finance its investments in cutting-edge research,
    I think it is a positive thing. My very first bill as a Senator
    was permanency for the R&D tax credit.
        But, finding ways to make it accessible to early stage and
    startup businesses is a challenge that eluded me for a number
    of years, and that is why I first worked with Senator Enzi, and
    then with Senator Roberts. The Innovators Job Creation Act
    allows the R&D credit to be claimed against the AMT, the
    alternative minimum tax. So, even if a company is entitled to
    the R&D credit, many pass-through entities cannot claim it
    because the R&D credit cannot be used in its current form
    against the AMT. Eight out of 10 businesses that could
    otherwise benefit from taking the R&D credit get little or no
    benefit because of the AMT. And, this was previously in the
    Small Business Jobs Act of 2010, but expired after a year.
        So, working together, we came up with an innovative
    solution to solve a major problem. If a startup company cannot
    access the R&D credit because they do not have an income tax
    liability, which most early stage startups do not, then they
    can claim the R&D credit against the taxes they pay on employee
    wages.
        So, I am very pleased to say that Senators Roberts and
    Schumer introduced this provision in Senate Finance Committee
    markup, which was adopted unanimously as part of the extenders
    package, and it is my real hope that it will ultimately become
    a permanent feature of the R&D credit and that we will
    ultimately get to a permanent R&D credit.
        So, if I might, in the time we have got left, Mr. Zerbe, I
    would welcome your thoughts on this particular provision. You
    have been a strong advocate of boosting access to the R&D
    credit for all businesses. What types of businesses do you
    think will benefit from this? Given previous testimony about
    how difficult it is sometimes for small businesses to be
    informed of and aware of and to access, what recommendations
    would you have, given that this looks to be on track to be in
    the extenders for accessing it?
        And before I conclude my question, let me simply say I am
    eternally grateful to J.J. Singh of my staff, who really helped
    lead all the very hard and disciplined work on this. He has
    been a tremendous contributor on many different areas, but this
    one in particular, he should take all the credit for. I am just
    the person who gets to say publicly--I get to have my name on
    the bill, but it is really his work that has helped make this
    possible.
        Mr. Zerbe. Yes, J.J. has been fantastic, and I am very
    sorry that he--I understand he is leaving your staff. I do not
    know if you did not know that, but----
        [Laughter.]
        Senator Coons. No, no, I am well aware. It is my loss, but
    Delaware's gain.
        Mr. Zerbe. That is right.
        Senator Coons. He is going to move to Delaware, which I am
    very excited about.
        Mr. Zerbe. But, you are right to point out the AMT turnoff,
    which I was so keen on getting into the refundable piece, but
    that, Mr. Chairman, goes right to the point I made. The reason
    small businesses cannot take the R&D credit, the key reason is
    the AMT. I mean, there is a legal bar to doing it, and that is
    kind of just a good example. It is not just for the R&D credit.
    Thirty-two other credits, they cannot take, because that AMT
    bar for pass-throughs, that is just the devil if they cannot
    take it.
        So, yes, I mean, that will be a massive change. We had it
    in 2010 for one year. It was just a sea change for folks being
    able to take it across the board and across the country.
        I think for the startup--well, I think the refundable piece
    of it that will be for new businesses and startups, I think
    that the industries that will be particularly benefiting from
    that, Senator, would be biochemistry. We saw that with the
    Qualifying Therapeutic Discovery Project that we had, which is
    almost a version of this. That was in the Affordable Care Act.
    I think biochemical, pharmaceutical, I think anything in the
    medical field will all be very good targets for this, folks
    that are trying to find a new new.
        But, I think the great thing about, in a sense, working
    this with the R&D credit is that the R&D credit is as wide as
    the ocean. In other words, it is not Congress picking winners
    and losers and saying, this is who should get funding. This is
    who should not get funding. So, I think you are going to
    actually encourage more folks to say, hey, I want to do that. I
    want to make that try. I want to make that leap to that new
    company to try this, because I know that this provision you
    have put in place is out there.
        So, I think it will be very broad geographically. That is
    one thing we learned from the QTDP, is that this kind of
    provision is not going to be limited to just one valley in
    California, or one part of Route 128. It will be across the
    board. That is what we found working with companies on the
    Qualifying Therapeutic. It will help all sorts of businesses
    throughout the country, and, I think, all types of businesses.
    But, I think those are the specific ones.
        I think you are right. Education is going to be critical,
    because if the small businesses have difficulty, the startups
    are going to have a greater difficulty in doing it. And, I
    think you have done a wonderful job, though, of making it
    pretty clean and clear how it is going to work and operate, and
    I think that helps a lot. The rules are pretty clean and
    simple. It is when you get into, well, hop on one foot, wear a
    pink dress, have a bow in your hair type of provision, that is
    when small businesses and CPAs say, you know, maybe not worth
    the candle.
        So, I think you have got, thanks to J.J. and your good
    work, you have got a nice clean bill. I think it is going to be
    a challenge to educate. We are certainly going to be doing that
    and working with other folks who are very much champions of
    what you have done. But, you are right. That is going to be the
    big second piece of the challenge to that.
        And then it goes to the point we were talking about, Mr.
    Chairman, is making sure for the IRS that they implement this
    properly, with service, that they are doing it properly, that
    they are not there, because if folks think there is a root
    canal at the end of the day when they are going to take this,
    they are not going to take it. So, we need to make sure that
    the IRS is working with them on that. And, I think we can
    accomplish all that and have a real success here.
        Senator Coons. Well, thank you. Thank you very much for
    your input, for your enthusiasm. I hope all the committee
    members will take up the opportunity to reach out into our home
    states and communities, and I really am optimistic that this
    great work product that Senator Roberts and Senator Schumer
    played such a central role in getting into extenders will
    actually be of meaningful benefit to a very wide range of
    sectors and companies, and I look forward to making sure that
    that implementation goes as well as possible.
        Thank you very much, Mr. Chairman.
        Chairman Vitter. Thank you, Senator.
        I certainly want to agree with several comments that have
    been made, including the need for greater access to the R&D
    credit, including the need for greater permanency, in general.
    We do not get nearly the bang out of the buck we should from
    these provisions when we let them limp along by extending them
    for short periods of time, either at the last minute or
    actually retroactively. We just get a pittance of the economic
    bang for the buck that we could if we made them permanent. And,
    certainly, including Section 179 expensing, making that
    permanent, and I am introducing legislation to make it
    permanent.
        Again, to reiterate, this discussion was meant as a
    prelude, in part, to a markup we will be having fairly soon on
    my Small Business Tax Compliance Relief Act. That is a
    collection of significant small business tax issues. I look
    forward to it getting wide bipartisan support in this
    committee, and we are completely open for suggestions from all
    committee members as we work toward that markup. I am
    introducing the bill today, but that is certainly not the end
    of the discussion. It is the beginning of the discussion. And,
    so, we are actively reaching out to every committee member to
    work toward a markup and come together around a really strong
    bipartisan committee product focused specifically on key small
    business provisions.
        It will not be overall tax reform. It will not be
    everything I would like to see. It will be very significant
    provisions that mean a lot for small business specifically that
    we can move forward on, hopefully sooner rather than later, and
    not wait on the whole world and the whole tax code being solved
    to pass these common sense reforms. So, that is the idea behind
    it.
        Again, thanks to all of you for your testimony. Thanks
    again to our first panel for their testimony.
        And with that, our hearing is adjourned.
        [Whereupon, at 11:49 a.m., the committee was adjourned.]

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