[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



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]







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

                                   ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

20-338 PDF                     WASHINGTON : 2016 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Publishing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
            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:]
    
    
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]   
   
    
    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:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
   
    
    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:]
    
  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]  
    
    
   
    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.]

                      APPENDIX MATERIAL SUBMITTED
                      
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                      
                      
                      
                                   [all]