[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2013
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
REGULATORY REFORM,
COMMERCIAL AND ANTITRUST LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
H.R. 2992
__________
FEBRUARY 26, 2014
__________
Serial No. 113-70
__________
Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://judiciary.house.gov
__________
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
HOWARD COBLE, North Carolina ROBERT C. ``BOBBY'' SCOTT,
LAMAR SMITH, Texas Virginia
STEVE CHABOT, Ohio ZOE LOFGREN, California
SPENCER BACHUS, Alabama SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa Georgia
TRENT FRANKS, Arizona PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas JUDY CHU, California
JIM JORDAN, Ohio TED DEUTCH, Florida
TED POE, Texas LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
JASON T. SMITH, Missouri
[Vacant]
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum,
------
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
SPENCER BACHUS, Alabama, Chairman
BLAKE FARENTHOLD, Texas, Vice-Chairman
DARRELL E. ISSA, California HENRY C. ``HANK'' JOHNSON, Jr.,
TOM MARINO, Pennsylvania Georgia
GEORGE HOLDING, North Carolina SUZAN DelBENE, Washington
DOUG COLLINS, Georgia JOE GARCIA, Florida
JASON T. SMITH, Missouri HAKEEM JEFFRIES, New York
DAVID N. CICILLINE, Rhode Island
Daniel Flores, Chief Counsel
James Park, Minority Counsel
C O N T E N T S
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FEBRUARY 26, 2014
Page
H.R. 2992, the ``Business Activity Tax Simplification Act of
2013''......................................................... 3
OPENING STATEMENTS
The Honorable Spencer Bachus, a Representative in Congress from
the State of Alabama, and Chairman, Subcommittee on Regulatory
Reform, Commercial and Antitrust Law........................... 1
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Tennessee, and Ranking Member,
Subcommittee on Regulatory Reform, Commercial and Antitrust Law 13
WITNESSES
Pete Vegas, Founder and President, Sage V Foods, Los Angeles, CA
Oral Testimony................................................. 62
Prepared Statement............................................. 66
Tony Simmons, President and Chief Executive Officer, McIlhenny
Company, Avery Island, LA
Oral Testimony................................................. 71
Prepared Statement............................................. 73
Joseph Henchman, Vice President of Legal & State Projects, Tax
Foundation, Washington, DC
Oral Testimony................................................. 81
Prepared Statement............................................. 83
David Quam, Deputy Director, National Governors Association,
Washington, DC
Oral Testimony................................................. 96
Prepared Statement............................................. 98
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Ranking Member, Subcommittee on Regulatory Reform,
Commercial and Antitrust Law................................... 14
Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress from the State of Virginia, and
Chairman, Committee on the Judiciary........................... 18
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 22
Material submitted by the Honorable Spencer Bachus, a
Representative in Congress from the State of Alabama, and
Chairman, Subcommittee on Regulatory Reform, Commercial and
Antitrust Law.................................................. 29
Material submitted by the Honorable Suzan DelBene, a
Representative in Congress from the State of Washington, and
Member, Subcommittee on Regulatory Reform, Commercial and
Antitrust Law.................................................. 109
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the National Marine Manufacturers
Association.................................................... 122
Prepared Statement of Grady-White-Boats.......................... 124
Prepared Statement of the American Bankers Association........... 126
Prepared Statement of the American Trucking Associations......... 130
Letter from the Council On State Taxation (COST)................. 137
Letter from the Motion Picture Association of America, Inc....... 141
Material submitted by the Center on Budget and Policy Priorities. 144
Prepared Statement of the Financial Services Roundtable (FSR).... 175
Prepared Statement of the Ad Hoc Fair Hotel Tax Collection
Coalition...................................................... 179
Prepared Statement of Mark Louchheim, President, Bobrick Washroom
Equipment, Inc., on behalf of the National Association of
Manufacturers.................................................. 180
Prepared Statement of the Softward Finance & Tax Executives
Council (SoFTEC)............................................... 185
Letter from Unions opposed to H.R. 2992, the ``Business Activity
Tax Simplification Act of 2013''............................... 189
BUSINESS ACTIVITY TAX SIMPLIFICATION ACT OF 2013
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WEDNESDAY, FEBRUARY 26, 2014
House of Representatives,
Subcommittee on Regulatory Reform,
Commercial and Antitrust Law
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 3:01 p.m., in
room 2141, Rayburn Office Building, the Honorable Spencer
Bachus (Chairman of the Subcommittee) presiding.
Present: Representatives Bachus, Goodlatte, Farenthold,
Marino, Johnson, and DelBene.
Staff present: (Majority) Anthony Grossi, Counsel; Rachel
Wolbers, Legislative Assistant for Rep. Farenthold; Philip
Schwartzfager, Legislative Director for Rep. Bachus; Ashley
Lewis, Clerk; (Minority) Perry Apelbaum, Minority Staff
Director & Chief Counsel; Norberto Salinas, Counsel; Slade
Bond, Legislative Counsel for Rep. Johnson; and Rosalind
Jackson, Professional Staff Member.
Mr. Bachus. The Subcommittee on Regulatory Reform,
Commercial and Antitrust Law hearing will come to order.
Without objection, the Chair is authorized to declare recesses
of the Committee at any time.
I do want to tell the panel that events on the House floor
have been changing this week. We were going to consider this
bill or that bill out of this Committee on the floor, and they
keep moving that around, and so, we usually do not initially
set a hearing for 4 p.m. We usually have them earlier, but we
try to do that. And now we find we are going to be on the floor
a little later on, so this hearing may be fairly compact. But
let me give an opening statement.
Today we will hear testimony regarding the Business
Activity Tax Simplification Act of 2013, or BATSA. The purpose
of this bill, which I have co-sponsored, is to establish a
clear, uniform, and predictable framework for states and
businesses with regard to the application of business activity
taxes. States have broad authority to assess taxes on
individuals, property, and businesses that originate from the
basic principles of federalism.
The Constitution has always conferred upon Congress the
responsibility to protect against undue burdens to interstate
commerce to allow our free market economy to function across
state borders. There is a thoughtful balance that must be
struck between these two competing interests. And when acting
in interstate commerce matters, Congress must be sure to
exercise its power with great care and precision.
The issue before us deals with state taxation policies that
affect out-of-state businesses. The Judiciary Committee has
collected much testimony and will receive more testimony today
that documents the frustrations of small businesses with state
taxing regimes that have been increasingly aggressive in their
efforts to collect revenue from out-of-state businesses.
Small businesses can be easy targets because they have
little or no direct representation in the state and do not have
the resources to fight. And I think two of our witnesses are
going to be fantastic examples of this. In addition, court
decisions have created confusing and ambiguous guidelines for
what actions taken by an out-of-state business will be
sufficient for a state to gain authority to impose business
taxes.
As a result of unclear judicial precedent, businesses are
often forced to spend scarce resources on lawyers and
accountants to either calculate their tax liability or defend
against improper tax bills, and often the only option is just
simply to write a check. It is not the right thing to do, but
it is certainly the economically right thing to do, and that
should not be the case.
BATSA will bring needed consistency and predictability to
what we know as nexus standard issues where an out-of-state
business is subject to business activity taxes. It will enable
small businesses in particular to more accurately determine
their tax liability without impeding the traditional ability of
states to assess taxes on enterprises that truly have an active
presence within their borders. This legislation is a balanced
approach that respects states' prerogatives and preserves the
seamless interconnected national economy that we all benefit
from.
I now recognize the Ranking Member, Mr. Hank Johnson of
Georgia, for his opening statement.
[The bill, H.R. 2992, follows:]
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Mr. Johnson. Thank you, Mr. Chairman, for holding this
hearing today. I find it fortuitous that as I assume the
Ranking Member position, the Subcommittee turns to addressing
state taxation issues. I hope this is the beginning of a series
of discussions focusing on state taxation.
Over the past several Congresses, I have worked closely
with my colleague, Representative Howard Coble, on a common
sense solution to simplify and reduce taxes for so many
Americans. This Congress we introduced H.R. 1129, the ``Mobile
Work Force State Income Tax Simplification Act of 2013.'' H.R.
1129 is identical to legislation passed by the House last
Congress. I hope that this bipartisan legislation will be
considered at the appropriate time, and I look forward to
working with the Chair on it.
I also look forward to this Committee addressing the remote
sales tax issue next week. I have long supported leveling the
playing field when it comes to sales tax collections. That is
why I support H.R. 684, the ``Marketplace Fairness Act.''
Although I would prefer a legislative hearing on that bill, I
welcome any movement toward addressing the remote sales tax
issue.
There are other issues and related legislative proposals
this Subcommittee can discuss. As the former Chair of the
Subcommittee on Courts and Competition Policy, I look forward
to future hearings on some of those issues, especially on
antitrust issues, another area right for this Subcommittee's
attention.
But today, we focus on H.R. 2992, the ``Business Activity
Tax Simplification Act of 2013.'' This legislation would
establish a physical presence standard, which must be met
before states can impose a business activity tax. Proponents of
the legislation contend that businesses need more certainty in
determining what activities are taxable, and that a uniform
standard would provide that. Opponents of the bill argue that
states should determine what activities are taxed within their
borders, and that the physical presence standard created in
this bill would invite tax evasion.
Although I have supported similar legislation in the past,
I am taking a step back this time to look more closely at the
legislation and to hear today's testimony. I hesitate because
of the impact this legislation may have on state and local
governments. Last Congress, the Congressional Budget Office
estimated that identical legislation would lead to about $2
billion in lost annual revenues with the potential for
additional losses in subsequent years.
When we consider legislation which will have that large of
an impact, we need to determine if we need to simply revise the
language. We should also study whether there are alternative
methods which accomplish the same goal of providing more
certainty for businesses while minimizing any impact on or
state and local governments.
I look forward to hearing from the witnesses, and again I
thank the Chairman for holding today's hearing. Thank you, and
I yield back.
Mr. Bachus. Thank you. Without objection, all Members'
opening statements will be made a part of the record.
[The prepared statement of Mr. Johnson follows:]
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[The prepared statement of Mr. Goodlatte follows:]
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[The prepared statement of Mr. Conyers follows:]
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Mr. Bachus. Before we introduce today's witnesses, without
objection, I would like to submit for the record letters and
written testimony in support of BATSA from the International
Franchise Association, Pro-Help Systems, Fischer and Wieser
Specialty Foods, Partnership for New York City, the missing
Computing Technology Industry Association, and the U.S. Chamber
of Commerce.
[The information referred to follows:]
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Mr. Bachus. We have a distinguished panel today, and I
would like to introduce our witnesses now. Having read the
experiences of Mr. Vegas and Mr. Simmons and your companies, I
think that the evidence will be helpful to Mr. Johnson and
others as they try to decide what to do.
Mr. Vegas is the founder and president of Sage V Foods,
which specializes in producing rice-based ingredients for use
in processed foods, and has developed the most complete line of
rice products in the industry. Prior to Sage V, Mr. Vegas
managed a startup rice milling company that was a joint venture
between Comet Rice and the government of Puerto Rico, and
ultimately became vice president of marketing for Comet Rice.
Mr. Vegas graduated from Louisiana State University with a
degree in agribusiness, and received his MBA from Harvard
Business School. We welcome you.
Mr. Tony Simmons is president, CEO, director, and interim
chairman of the board of McIlhenny Company. McIlhenny, okay.
McIlhenny Company is 146-year-old company whose most famous
product is TABASCO brand pepper sauce. I think we all know
about the island and everything. Mr. Simmons is the great,
great grandson of the creator of TABASCO, Edmund McIlhenny, and
is the seventh family member to assume McIlhenny Company
leadership, which is still family owned and operated.
Prior to accepting the position with McIlhenny Company, Mr.
Simmons was president and CEO of Manitowoc Southeastern--yes,
it is the crane people, right, the cranes--an independent crane
distributor located in the southeast. And that company is
headquartered in Wisconsin or Minnesota?
Mr. Simmons. Manitowoc is in Manitowoc, Wisconsin.
Mr. Bachus. Wisconsin, okay. Mr. Simmons also serves on the
board of America's Wetland Foundation. Mr. Simmons holds a
degree in speech from Loyola University in New Orleans. We
welcome you. And what is the name of the island?
Mr. Simmons. Avery Island.
Mr. Bachus. Avery Island, that is right. I think every
restaurant in the south either has tabasco sauce or, what is
it, Texas Pete, that which is not a tabasco sauce.
Mr. Simmons. Never heard of Texas Pete. [Laughter.]
Mr. Bachus. That is a great answer. Mr. Joseph Henchman is
vice president of legal and state projects at the Tax
Foundation, a non-profit organization dedicated to educating
taxpayers about all aspects of tax policy. He joined the Tax
Foundation in 2005. Mr. Henchman's analysis of fiscal trends,
constitutional issues, and tax law developments has been
featured in numerous print and electronic media, including the
New York Times, the Wall Street Journal, CNN, Fortune magazine,
and a number of law review journals.
Mr. Henchman received his bachelor's degree in political
science from the University of California at Berkeley and his
JD from George Washington University Law School. Welcome to
you, Mr. Henchman.
Mr. David Quam is deputy director of Federal relations at
the National Governors Association. He has an extensive track
record in development policy solutions and effectively
advocating positions before Congress and the Administration to
the Governors Collective Policy Priority. Before joining the
National Governors Association, he was an associate at Powell,
Goldstein, Frazer, and Murphy, LLP, director of international
affairs and general counsel at the International Anti-
Counterfeiting Coalition, and majority counsel on the Senate
Judiciary Committee's Constitution Subcommittee.
He received his BA from Duke University and his JD from
Vanderbilt University School of Law.
Each of the witnesses' written testimonies will be entered
into the record in its entirety, and I ask each of our
witnesses to summarize his or her testimony in 5 minutes or
less. And we are going to have a light which will turn yellow
and then red, but if you need to go over by 20 or 30 seconds,
that is fine with me, although I think the Chairman does not
really like that, but I am the Subcommittee Chairman, and I do
not mind it.
So at this point, we will still start with the witnesses.
Mr. Vegas, we will start with you first, and then we will go
down the line.
TESTIMONY OF PETE VEGAS, FOUNDER AND PRESIDENT, SAGE V FOODS,
LOS ANGELES, CA
Mr. Vegas. Okay. Okay. My name is Pete Vegas. I appreciate
the opportunity to speak with you today. I will tell you I am a
little concerned that I could be targeted by these states once
my name becomes public, so I would hope you help me out if that
happens. Otherwise, this could be a very----
Mr. Bachus. We could pass this. That would help.
Mr. Vegas. That would solve the problem. [Laughter.]
I hope you have had the chance to read my written testimony
or will read it. Those are my words. Because I defended myself
against the State of Washington, I have actually learned quite
a bit about this, probably more than any businessman should
know really.
Mr. Bachus. And let me say this, and stop the time. Both
your testimony and, Mr. Simmons, I mean, those are nightmare
situations for not only a small business. I would actually call
your business a medium-sized business. Really your experience,
you are an eyewitness to this. So, you have experienced this,
and you look at it, and how anyone can look at what you have
gone through and think that is fair or equitable, you know, it
is hard to believe that that was what we conceived when we gave
states the taxing authority.
Mr. Vegas. You know, and 5 minutes is not a lot of time, so
I'm hoping there are questions and I can spend more time, yes.
So I started my company from scratch. We basically take
rice and have learned to make new products from rice, have
taught people how to use it. Today we sell rice flour, frozen
rice, crisp rice like goes in granola bars, instant rice. We
are an approved supplier in almost every major food company in
the United States, so we are shipping products, you know,
pretty much throughout the country.
Our sales today are about $100 million. You know, I employ
over 200 people. And so from a tax standpoint--and in the last
7 years I have built 3 facilities, two in Arkansas and one in
Texas. I live in California. From a tax standpoint, you know, I
am an LLC. That means taxes flow straight through to me, so I
pay Federal taxes. I pay taxes in California. And then I pay
taxes in the states where I have facilities and properties,
like Arkansas and Texas.
In 2010, I was basically hit, you know, by the State of
Washington. Washington has no income tax, so they charge what
they call a business and occupation tax, which is essentially a
tax on sales. It is a tax on gross receipts. And to be clear,
you know, what I am talking about here are business to business
taxes. I am not selling to a consumer. I am not talking about
sales taxes to a consumer like you would discuss with Amazon or
someone like that. I mean, to make it very clear, I am selling
rice flour in bulk rail cars to a company in the State of
Washington that takes my flour, blends it with other
ingredients, sells a mix, you know, a batter mix basically, to
a french fry company that makes French fries, that turns around
sells it to a large burger chain that then sells to their
franchises. So if everyone was charging taxes like the State of
Washington, my flour would be taxed four times before the
consumer paid a sales tax on it, okay?
As a percentage of my income, the tax that I paid in
Washington is over 16 percent. That is higher than any state in
the country, okay? And if you start adding up what I pay in
Federal taxes and state's taxes, if I paid everyone what
Washington charged me, my tax bills would be over 70 percent.
And I can tell you, I cannot run a company when that much of my
money is going outside.
Because I visited the state one time in 7 years, Washington
basically sent me a tax bill for over $180,000. It was for 7
years back penalties and taxes. And then once you have
established nexus, even though you stop the activity--I do not
visit anymore--it goes another 5 years forward. So this could
have easily been or would be a $300,000 kind of bill. Quite
frankly, I have never seen anything like that. I was shocked.
You know, I called other businesses, friends, to ask, you know,
what did they know about this. It is not known by people who
have not been hit yet, but it is becoming more and more
prevalent. I had to hire an attorney to explain it to me, you
know.
And I can tell you, a company like mine cannot afford to
try to understand every oddball state in 50 different states. I
mean, I had a tax accountant last year that wanted to charge me
over $100,000 to do my taxes, okay? Imagine if I had to deal
with 50 states coming at me. It is just impossible.
Every attorney in the State of Washington literally turned
me down. They said, Pete, it is a waste of your money to fight
these people. But, you know, I am bullheaded. I was wronged. I
did it anyway. I mostly defended myself, okay? I went through
three appeal processes and eventually won, you know, but that
was a huge effort on my part. It took a lot of time away from
my business. It is not something I could do every time a state
comes after me.
And the kind of stuff that Washington tried to trip me up
on, which I think is common in other states so that you
understand, the issues are did I have brokers in the state, had
I attended trade shows in the state, you know, did I sell on a
delivered basis instead of an FOB basis, could a customer
reject my product at destination, had I sent a service
technician to, like, repair a rail car or help them use the
product, did I ship on company-owned trucks, do I have any
product warehoused in the states. Any of these things would
have established nexus.
My actual fights in court were mostly related to my visit,
you know, how many times did I visit. We determined it was one,
you know, and then I won that case. The next time I went they
focused on the fact that I had shipped on company-leased rail
cars, which meant in their mind I had leased equipment in the
state. In both cases, you know, I prevailed mostly because in
the State of Washington, they have a statute that says to
establish nexus, the business activity must be related to or
maintaining a market in the state, okay? And in both cases I
proved it did not, you know, which means had I made a sales
call, a serious sales call, in that one visit, they may have
established nexus with that.
And basically because I defended myself, I learned quite a
bit about the law itself. And what I have learned is there is
really nothing to date that prevents states from collecting all
of their revenue from outsiders. I mean, if you are a
politician and you are running a state, it is hard to cut your
budget. It is hard to reduce expenses. It is hard to raise
taxes on your voters. It is very easy to take advantage of
somebody from the outside because we have no recourse. We have
no vote. And that is exactly what you are seeing more and more
of. I mean, it is the old story of taxation without
representation. I mean, it is why our country is here today and
not part of Great Britain.
I studied the Constitution and Supreme Court rulings. You
know, the commerce clause is a pretty simple clause really. It
basically gives Congress the power to regulate commerce with
foreign nations and among the several states and with the
Indian tribes. It makes it very clear that this is Congress'
job, not the job of the Supreme Court. Everyone seems to
understand that a big part of this is to prevent the kind of
problem we have today, which is a deterrent to interstate
commerce. If this goes on, you know, it is going to be a huge
problem and it is going to prevent interstate commerce.
The last time the Supreme Court visited this, and I am sure
you will hear more from people that know more about it, was the
Quill case. And it actually required a physical presence. The
Supreme Court has never issued a ruling that allowed nexus
without a physical presence.
In my particular situation, I argued the four-pronged test
of the Auto Transit v. Brady, which is kind of the old golden
rule. It had a four-pronged test to establish nexus, and this
is what I used in the State of Washington. And I basically
learned it has pretty much been negated. The first rule--and
you have to pass all four. The first rule is substantial nexus,
and that is where most people argue. How many times does it
take to visit to establish substantial nexus?
The second one is fair relationship. And I basically showed
the budget in the State of Washington and where they spend
their money--schools, human services, this sort of stuff--and
showed that I spent no money whatsoever in the State of
Washington, okay? But that particular prong has kind of been
pushed aside by the courts. You cannot win on that anymore.
I argued fair apportionment, which meant I explained what
percentage of my taxes were going to the State of Washington
and how did that compare to the percent of my sales, the
percent of my assets, the percent of employees in those various
states. Very clear that Washington was way out of line. Once
again, that has no meaning in the law today. Everyone ignores
that issue.
The fourth one is non-discrimination, which means you
cannot discriminate against interstate commerce. That is a
complete waste of time to argue that one today.
So essentially what you have is lower courts, you know,
State revenue services, lower courts in the states, are
ignoring what little law was set by the Supreme Court. They are
establishing their own laws, and it is a snowball effect. Every
time a court puts some aggressive, you know, determination out
there, it sets a precedent that everyone uses, and then they
move it another step. And then eventually you reach the point
where we are today. When one of my suppliers learned I was
coming, they sent me this document from the State of Ohio.
There are several states today that all they require to
establish nexus is that you have sales in their state.
So what I can tell you is this is a very serious problem
for companies like mine, and I would really appreciate your
help. You need to put an end to this, and it is Congress' job.
[The prepared statement of Mr. Vegas follows:]
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__________
Mr. Bachus. Thank you. Thank you. And we will come back
with some questions hopefully.
Mr. Simmons?
TESTIMONY OF TONY SIMMONS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, McILHENNY COMPANY, AVERY ISLAND, LA
Mr. Simmons. Good afternoon, and thank you. McIlhenny
Company currently has 240 employees, most of whom are located
at Avery Island, Louisiana.
TABASCO is sold in over 166 countries and bottled in 22
languages and dialects. We make every bottle of TABASCO at
Avery Island, and you will find our product in almost, if not
every, grocery store in America. In addition, we also sell a
large percentage of our product to the food service industry
where it is used by chefs in the kitchen and as a condiment on
tables.
Although our only manufacturing plan is in Louisiana, we
currently pay state income and/or franchise tax in 13
additional states. We are subject to those taxes because we
have employees and/or tangible personal property in those
states which meets the physical presence standard in
establishing nexus. Additionally, we pay income or other forms
of business activity tax in seven additional states, thus a
total of 21 states including our home state of Louisiana.
I am here today because state and local taxing authorities
are increasingly and often retroactively expanding the reach of
their business activity taxes using an expansive definition of
``substantial nexus.'' I will give you three examples. My goal
is to demonstrate why a bright line definition of what activity
constitutes nexus is so important to companies who do business
in multiple states.
First, last year, we responded to an inquiry from a city in
Washington state for pertinent information going back to 2003.
Not having employees or inventory physically located there, we
were confident that we had no filing obligation. Following
their review, the city argued that our use of an independent
sales broker established nexus, and levied a business and
occupation tax assessment of just over $32,000 in tax, penalty,
and interest for the tax years from 2003 through 2008. This
levy was based on our company sales of TABASCO products for the
entire State of Washington.
In 2009, the city changed is rules to limit collections to
those sales that occurred within its borders only. Under these
revised rules, our sales are too small, and we owe no tax. The
new rules, however, did not prevent the city from seeking
payment for sales in the years before the change. As this case
remains open today, I am not able to expand on it further. But
suffice it to say that the costs of time, energy, and dollars
dedicated to the process far outweigh the potential tax
obligation, which is an underlying issue that surrounds this
topic.
My second example is when we encountered the single
business tax nexus standards of Michigan back in 2002. Noting
that there were no McIlhenny company employees, inventories, or
real property in the state, and that sales solicitations were
performed by an independent sales broker in Michigan, we
contested Michigan's attempt to apply its single business tax
to our sales within the state. Despite extensive correspondence
with the state and our numerous appeals on the merits of our
case, an audit by the state resulted in a back tax liability in
excess of $85,000. Again, the process of defending our position
and subsequent monitoring and compliance adds to the overall
administrative burden of complying with ever-changing tax
interpretations.
Third and finally, our tax advisors have highlighted a
developing situation where the State of Maine is declaring that
promotion of a product within a grocery store by a third party
representative located in their state creates nexus for the
manufacturer and a filing obligation based on an analysis and
interpretation the state has made of an old sales tax case.
These are just three examples. The task of monitoring,
interpreting, and complying with unclear, unwritten, and
constantly-changing state and local nexus interpretations
places an undue burden on our limited resources, and brings
uncertainty to our business planning and execution. We believe
that adopting adopting the principles set forth in BATSA will
allow businesses that do business in multiple states to have a
clearly defined understanding of what constitutes nexus. We
understand that modernization of the law brought about by BATSA
may not provide an overall lower tax obligation for our
company, but we do believe it will provide for more efficient
compliance efforts and eliminate the uncertainty and excessive
administration costs that currently exist.
[The prepared statement of Mr. Simmons follows:]
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__________
Mr. Bachus. Thank you. Thank you.
Mr. Henchman?
TESTIMONY OF JOSEPH HENCHMAN, VICE PRESIDENT OF LEGAL & STATE
PROJECTS, TAX FOUNDATION, WASHINGTON, DC
Mr. Henchman. Mr. Chairman, Mr. Ranking Member, Mr.
Chairman, thank you for the opportunity to appear before you
today on the subject of the scope of state business activity
taxation. And I am one of those people who carries around the
Constitution with him. I am a lawyer. And in there is your
power to regulate interstate commerce. The reason it is in
there is because before the Constitution, the states, left to
their own devices, just about wrecked the national economy.
Port states put taxes on goods going into interior states.
Interior states taxed the port states, and everyone tried to
exempt their own residents and put all their taxes on
interstate commerce. That crisis a big reason why they all
gathered in Philadelphia and gave you the power to limit the
ability of states to tax entities with no physical presence in
the state.
The physical presence rule for business taxation is not
only good constitutional law, it is good tax policy. Now, I am
not an economist, but I am surrounded by them at my office. And
they talk about the benefit principle, the idea that people and
businesses should pay taxes in the places where they benefit
from government services. For businesses, that is where they
have property and employees. States should pay for services by
taxing the residents who live and work in the state and benefit
from those services.
Congress has acted on this before. In 1959, Congress
enacted P.L. 86272, and was going to do more, but the states
said if Congress would just stay away, they as the states would
solve it, and the thing would get better. They have not. I wish
I could say what happened to Mr. Vegas was an isolated example,
but in many states, it is official policy. I could review lots,
but in the interest of time I brought five pulled from the
excellent Annual Survey of Tax Officials done by Bloomberg BNA.
And with the Chairman's indulgence, I would like to draw
attention to some charts that I brought.
The first chart, which is up already, is the question of
how long nexus lasts in a state if the business stops the
activity. The gray states say it is just for the taxes
measurement period, so if the tax is just for a quarter, the
nexus only lasts for a quarter. The green states apply nexus
for the full year. Washington state adds on a little bit more,
as Mr. Vegas said, beyond that year. A couple of the states,
the black ones on this chart, they declined to answer the
question, which is certainly not helpful. California and
Georgia said it depends, which is also not helpful, and in
Indiana, apparently nexus lasts forever. Next chart.
This chart is whether you have nexus because you have a
website and you pay some third party to host the website, and
that third party has a server in the state. You all have
websites. Do you know where it is hosted, where the server is?
Well, if you are a company, 14 states say that is enough for
you to have nexus in that state, and 18 states declined to
answer the question. Next chart.
This chart is a state will find nexus if you send a catalog
into the state. No people, no sales in the state, just sending
a catalog. This is pretty open and shut in the case law, and
most states are good. Those are the blue states. But seven
states, the red ones, say that is nexus, and two more say it
depends. Next chart.
This chart involves having a non-solicitation back office
employee telecommuting from the state. Now, under BATSA and
under the physical presence rule, there should be a finding of
nexus in this case, so I am not too worried about the yeses.
Those are the reds, those are the noes, those are the blues. I
am not worried about the noes because just because a state can
tax, it does not mean they have to.
What I am worried about are the eight states, the black
ones on there, that declined to answer this pretty basic
question. That is eight states where taxpayers cannot get the
answers from their officials to rely on for their business
activity. Next chart.
This chart shows the states that define nexus if you attend
a trade show in red. Now, this is attend a trade show. It is
not exhibiting or selling stuff. Every state finds nexus if you
go and have a booth at a trade show and sells stuff. This is
merely attending a trade show will find you nexus in 10 states.
Five more states say it depends, and five more decline to
answer the question.
This is all basic stuff. The last time we had this hearing,
the states talked about physical presence would harm their
revenue, even though these taxes are a tiny portion of their
budgets. And they are cutting them anyway for in-state
companies through single sales factor and tax incentive deals.
They talked about how it encouraged tax evasion, even though
this bill does not change one thing about the ability of states
to go after tax evaders. They talked about state sovereignty
even though stuff like this is precisely why Congress has the
power to regulate state taxation of interstate commerce.
I hope today we get some answers. If states are handling
this and Congress does not need to get involved, why is basic
guidance about nexus all a mess over there? The truth is states
do not want to fix this problem. Like before the Constitution,
they are happy to substitute their parochial interests for the
national economic interests. They are doing harm, and the court
cases have gone both ways, so it is time to be on time for
there to be a modest national framework answering this simple
and key question: how far does state tax authority over inter-
state business extend? If Congress does not answer that
question, no one will. Thank you.
[The prepared statement of Mr. Henchman follows:]
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__________
Mr. Bachus. Mr. Quam. Is that right? Did I get it right?
Mr. Quam. Quam, yes.
Mr. Bachus. Quam, I got it right.
Mr. Quam. Yes.
TESTIMONY OF DAVID QUAM, DEPUTY DIRECTOR,
NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC
Mr. Quam. Thank you, Mr. Chairman. Thank you, Member
Johnson. Chairman Goodlatte, good to see you, too.
Thank you for the opportunity to be here again. I actually
pulled several of the letters and testimony from previous
hearings, and I think four times I have appeared before this
Committee on this particular issue. And it is an issue that
keeps coming up, and I have sympathy for the stories that have
been told. I think anybody would. Any governor would.
At the same time, it is a privilege to be here on behalf of
the National Governors Association to say we have to oppose
this bill. We have to oppose it because it does tread on state
sovereignty. It does not solve the problem that is being
articulated. And at the end of the day, it does do harm, and it
does harm to states.
Now, this Congress has the ability under the commerce
clause--I am not going to dispute that--to work on interstate
commerce and solve those problems. It does not always mean,
though, that the Congress has to act. But when it does and when
it looks at state problems or state taxation, there are a
couple of guidelines that we use to say when is it appropriate
for Congress to get involved. And the first one is really do no
harm. Do no harm to the states because, after all, we are
talking about state tax laws. And a key premise for governors
when it comes to state tax laws is that decisions regarding
state revenue systems should be made in state capitals, not
Washington, D.C.
Unfortunately, this bill, which is identical to a bill
passed last Congress and scored by CBO, would take away about
$2 billion in the first year in state revenues. The changes in
nexus would not allow states to collect about $2 billion they
collect today. Now, for the states that is meaningful because
states, unlike the Federal Government, have to balance their
budgets. And so, $2 billion out-of-states is $2 billion that
either has to be cut or raised in taxes, both which can harm
the recession or harm states' ability to recover from the
recession that they are still dealing with.
The $2 billion in the first year is merely the starting
point. What this bill does, because it provides rules of the
road to allow for greater tax avoidance, means that states will
actually lose more money in the out years, $2 billion in the
first year, growing in years thereafter.
Now, let us say that we could actually make a bill where
you do no harm. I think everybody would agree, and even states
would agree with, be clearer. Tax laws should be clearer. It
helps with state compliance. It helps states enforce their
laws. It helps companies to comply with those laws.
Unfortunately, the bill before us and previous iterations
is not clear. It claims to say that physical presence should be
the law of the land, yet this is physical presence plus. You
can actually be in the state for 15 days and do business. You
can have multiple people in the state doing business for 15
days. You are not going to be liable under this bill. That is
not physical presence. The loopholes and exceptions to the
physical presence standard actually create more problems and
are not clear for either states or businesses at the end of the
day.
In addition, for the companies that are both here and some
of the small companies that reside in your states, you are
actually increasing the tax burden on them. Why is that?
Because some of the larger businesses can use the loopholes of
this bill to avoid state taxation. Those large companies that
have the lawyers, that have the accountants, that can do the
planning, that can shift the property ultimately can create a
situation where they do not pay tax. There is nowhere income,
according to the Congressional Research Service that looked at
a similar version of this bill 5 or 6 years ago.
When you take those tax dollars out of a state from some of
your larger taxpayers, you are increasing the burden on those
who cannot do that type of tax planning in your own state. And
that is some of the small- and medium-sized businesses that
reside and are visibly present.
Finally, there has to be a respect for state sovereignty.
The 10th Amendment did mean something, and at the end of the
day, the ability to control revenue systems is a key tenant of
federalism. What that ultimately is at the end of the day is a
Federal tax cut, Federal corporate tax cut, using state tax
dollars, changing this nexus standard, so actually taking $2
billion away from the states.
Now, I should mention that NGA actually participated
through this Committee in talks over the course of several
months with industry to try to find a clear bright line
standard. We had discussions about the problems that were
raised and how they could be addressed. States have actually
posed a very clear standard, yet one that is economic presence.
What I would argue is actually the law of the land. Businesses
at the end of the day could not get past wanting a physical
presence standard because that allows for the type of planning
that they want to do.
We have no problem with clarity. We have actually had no
problem with finding that bright line rule, but it needs to be
done within the constitutional and context in which we find
ourselves, and that is, for business income taxes, economic
presence is the law of the land. And so, from there we start
and we take a look at a bill like this and say on behalf of the
National Governors Association, we must oppose this bill. Thank
you.
[The prepared statement of Mr. Quam follows:]
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__________
Mr. Bachus. Thank you. You know, one thing I would say. The
National Governors Association, you know, you are saying it
harms the states, this $2 billion. But, you know, the two
examples that I hear at this end of the table, you have harmed
these businesses. If the State of Washington, if every state
took that approach, you would put this man out of business, I
would think. I mean, you heard the testimony about Maine. If a
retailer has an advertisement or a third party advertising his
product, I mean, that is pretty far-fetched.
I would think that, you know, 20 years ago states did not
try to use this type of collection. I mean, I cannot imagine
that they did. You know, Mr. Vegas visits a state one time,
and, I mean, he is opened up to all that.
My main concern with this, and we talk about jobs, jobs,
jobs. That is America's number one problem. You know, we talk
about home ownership is the American Dream, but if you do not
have a job, you are never going to own a home. You cannot
provide for your children.
Small businesses have historically created 70 percent of
the jobs in this country. They are not doing that anymore.
Large businesses are getting bigger and bigger, because just as
you said, they can afford the lawyers. They are either doing a
lot of business in those states, or they have the lawyers to
fight these things. A small business, I am not sure it could
even get started today. A small business of 5, 10 employees, if
seven generations ago they started shipping tabasco sauce and
they ran into this, it would cost all their profits for 1 year
in one isolated state.
I believe that is one reason this sort of thing, whether
the states feel like they have a right or whatever, this sort
of taxing regime is going to make it nearly impossible for a
small business to be able to do business across state lines. I
will let you respond to that.
Mr. Quam. Well, Mr. Chairman, as I said, the facts as they
have presented here today, I am very sympathetic. I think there
is always a different side to that story and a different side
to the case. And without the states actually being here to
defend themselves and not knowing exactly all the different
aspects of the states, I am not going to get into those
specific----
Mr. Bachus. Well, let us just take the example of Maine. He
is not in Maine. He does not have employees in Maine or
Michigan. He has an independent contractor. I mean, physical
presence ought to be physical presence. I mean, we do have a
constitutional right to not interfere with interstate commerce.
And, I mean, my gosh. This has a chilling effect on that.
Mr. Quam. The physical presence standard that is set up by
this bill is actually moving backwards when it comes to sort of
the----
Mr. Bachus. And any----
Mr. Quam. Rather than interstate commerce where the
internet has made us borderless, where a small business
actually can start out of the garage and do business in
multiple states, rather than finding some of that clarity and
find out every business who is earning customers in another
state, is also, therefore, possibly taking customers away from
those businesses----
Mr. Bachus. Well, I will tell you. One thing this taxing
policy may be doing, it may be driving companies to become
basically internet companies, I mean, because if they do
anything else, if they ship a product into a state, they run
into this.
Let me ask you this. You know, we are considering giving
the state the right to collect sales tax, out-of-state, and
that is going to be a tremendous boon to the states. To me,
that is where the emphasis ought to be for the states is
pushing that. I mean, I am just----
Mr. Quam. Marketplace fairness and passage of marketplace
fairness is our number one priority.
Mr. Bachus. Yes, and I think it should be. And I have been
on your side of that issue for some time.
Mr. Quam. Yes, sir.
Mr. Bachus. Not everybody on this Committee is.
Mr. Quam. We are working on it.
Mr. Bachus. But these are, I mean, nightmare scenarios.
Mr. Quam. Mr. Chairman, I am going to go back to what I
said before. Marketplace fairness where states are simplifying
their tax laws in order to recognize the 21st century
borderless economy and to make sales taxes fair so you do not
have winners or losers in business, the economic presence
standard in business activity tax is similar. It is borderless.
It is about you are doing business in another state and earning
customers.
Now, again, I have sympathy for the two cases that were
brought up here today. I do not know the factors and I do not
know the state side. However, to take this one back to a
physical presence standard, which is really a 1950's construct
where you have to do business with a handshake versus today,
and then support marketplace fairness, which is moving in the
other direction. I think instead what we need to be doing is
creating certainty and clarity and not picking winners and
losers.
Mr. Bachus. Well, and let me say this. You know, this is, I
think, the Chairman's bill.
Mr. Quam. Yes.
Mr. Bachus. I believe in it. I am a strong supporter. But,
you know, you are invited. I mean, you have an open door to
come to our staff and say I think this is a problem.
Mr. Quam. That is exactly why, and some Members of this
Committee know this, why we did come up and we tried to talk
about let us create certainty, but let us create certainty that
also works for the states and matches the 21st century economy.
Unfortunately, we did not get there. Certainty is not a problem
that we have. We are willing to always have those discussions.
Mr. Bachus. Thank you.
Mr. Quam. But those two have to go together. Thank you.
Mr. Bachus. Thank you. Mr. Johnson is recognized.
Mr. Johnson. Thank you, Mr. Chairman.
Mr. Bachus. The representative from Washington state showed
up. [Laughter.]
Mr. Johnson. Just in time.
Mr. Bachus. You would not believe what your state is doing.
[Laughter.]
Mr. Johnson. Well, I will tell you, all states do not have
a business activity tax, do they, Mr. Henchman?
Mr. Henchman. Three states do not.
Mr. Johnson. Three states do not. And we would not want to
force those states to adopt one, I do not think, at this time.
So we want the states to have some freedom. Clearly the
commerce clause gives the Federal Government----
Mr. Henchman. Right, and this bill, like the bill you
sponsored, the Mobile Workforce, in a similar way, they are
floors. So states can be more generous in the protections they
provide. They cannot have a tax if they choose, but so long as
it does not go below what the Federal Government prescribes.
Mr. Johnson. Those that do have a business activity tax,
though, it seems like there should be some uniformity in there
so that there will not be 47 different schemes that have to be
adhered to by today's modern business. That is just an
untenable position to be in. But you would disagree with that,
Mr. Quam?
Mr. Quam. I would say the tenets of federalism allow us to
have a system of 50 different state laws where state lawmakers
get to make the choices and in this particular area of what it
means for nexus. That being said, groups and states, including
the Multistate Tax Commission, have come up with some
uniformity under an economic presence standard that would be
very clear that every state could use.
Unfortunately a lot of businesses have pushed back against
that, have pushed back against efforts to try to find this
clarity and this middle ground, something that does not do harm
to states as far as existing revenues, but would create
clarity. And so, it is very difficult to find that middle
ground when you say, everybody is different, so one standard is
going to preempt everybody, allow us to do tax planning to
actually avoid taxation. It is going to cost states $2 billion
from what they collect today, and that is a better solution
than something that does not harm to states. The states have
imparted that solution, and create some real clarity. But it is
not going to present that opportunity for that type of tax
avoidance.
So again, I think there is a ground here that has to be
covered, but because of the 10th Amendment and federalism, have
to tread very carefully when we are talking about state tax
systems, because the ability to control those tax systems at
the end of the day is a core of what state sovereignty means.
And so, when you move into that realm, we have got to be very
careful that we do not use blunt instruments. This bill, even
for physical presence states, will preempt every nexus standard
in every state.
Mr. Johnson. What is it specifically that you would
recommend to get at this problem? And certainly it is a
problem.
Mr. Quam. I think the first place to start is you can look
at the MTC's formula for nexus?
Mr. Johnson. MTVs?
Mr. Quam. MTC.
Mr. Johnson. MTC.
Mr. Quam. Multistate Tax Commission.
Mr. Johnson. Okay.
Mr. Quam. Came up with, again, a model for states that
states could adopt.
Mr. Johnson. What is it called?
Mr. Quam. Multistate Tax Commission.
Mr. Johnson. The Multistate Tax Commission has come up with
a business activity tax model that can be----
Mr. Quam. A nexus, uh-uh. It is a place to start. It is a
place where both the states and the businesses can come
together and talk about--if the constitutional standard today
is economic presence, and that is what it is, then let us start
from that construct. Let us create the certainty we need.
States have entered those conversations before and would be
willing to do it. But until that time, for this Committee to go
to a solution that instead is going to create tax avoidance and
preempt all states with a more blunt instrument, governors
cannot support that at the end of the day. It violates that do
no harm principle and violates the sense of do not
unnecessarily preempt, do not take a step more than you have to
when it comes to state tax laws.
Mr. Johnson. Mr. Henchmen, does that sound reasonable to
you?
Mr. Henchman. I am sure what the gentleman's basis is for
saying economic presence is the law of the land. The Supreme
Court has never ruled that. Congress has certainly never
legislated that. If anything, it has been the other way.
Physical presence has been the standard since the Constitution.
So let me just explain why economic presence would be a
problem using the examples of the two people you had here. So
Mr. Vegas makes a product that goes into french fries from his
two facilities in Arkansas, and those are where all of his
employees are, where their kids are going to school, where they
see doctors, where they use police and fire services. That is
where they are paying taxes, and that is where the services are
being received.
Under economic presence, what would matter is where his
products were sold, so anywhere where french fries are, which I
imagine is all 50 states and every country in the world. So
somebody in East Timor buys a french fry, that means he has got
to fill out a corporate tax return for East Timor?
I mean, in the end what that does is it turns the corporate
income tax into a sales tax because you are now measuring it
all by sales. And, you know, states have sales taxes and they
can charge sales taxes for that kind of stuff. What we are
talking about are business activity taxes, and those should be
premised on the location of property and employees of the
business.
Mr. Johnson. Mr. Vegas, do you mean to tell me, I'm 59
years old, and I have always had confidence and been self-
assured about every french fry that I have ever eaten, that it
was potato based. And now you are telling that it is rice
based? [Laughter.]
Mr. Vegas. Almost all but one chain has some rice in it.
Mr. Johnson. My goodness.
Mr. Bachus. Rice is very good for you. [Laughter.]
Mr. Vegas. Since you opened me up, can I just mention one
thing that people seem to be confused about?
Mr. Johnson. Okay.
Mr. Vegas. Business and occupation tax----
Mr. Johnson. Well, I thought you were going to talk about
french fries. I am real confused about that, but go ahead, sir.
[Laughter.]
Mr. Vegas. Let me say this because I think it is important,
and a lot of people do not get it. Business and occupational
tax is an additional tax, okay? If you go back to the old
standards, which still apply in a lot of states. For example, I
have facilities in Arkansas. Arkansas has a 7 percent income
tax. So if half my business is in Arkansas, they get 7 percent
of half of my income. But that does not kill me because I pay
taxes in California that are actually higher, 13 percent, so
they deduct it. So when you are dealing with income taxes, the
highest tax you can pay is whatever the highest state you are
dealing with, which is about 13 percent of this country when
you get into New Jersey and California.
These business and occupational taxes are in addition.
Okay. They do not get deducted from my income tax. It is a new
tax, so they are just adding onto what we are already paying.
Mr. Bachus. Thank you, Mr. Johnson.
Mr. Johnson. Thank you.
Mr. Bachus. I would let Mr. Marino and then I will let the
gentlelady from Washington who has come in to put out a fire
here.
Mr. Johnson. Well, if I might, Mr. Chairman, just to say
that my mind is all messed up now, Mr. Vegas. [Laughter.]
Mr. Bachus. Thank you. Mr. Marino?
Mr. Marino. I am sorry for being late. I have three full
Committee hearings today and six Subcommittee hearings, and I
am trying to at least touch base with each one. I am not going
to ask any questions because I did not hear what was going on,
and I am sure it would be repetitive to a certain extent. I
just want to thank you for being here.
And with that said, this talk about french fries, I have
not eaten all day, so I do not care if it has rice in it or
not. I will eat the french fries if you get them to me. Thank
you. [Laughter.]
Mr. Bachus. Yielded back your time?
Mr. Marino. Yes.
Mr. Bachus. Ms. DelBene?
Ms. DelBene. Good job. So you are getting it now.
Mr. Bachus. Yes.
Ms. DelBene. He has been practicing pronouncing my name.
Thanks to all of you for being here today. I will be quick
because I know they called votes.
Mr. Quam, when we look at the economic environment today,
we have millions of U.S. customers who are buying things
online. I assume you have bought things on line as well.
Mr. Quam. Absolutely.
Ms. DelBene. And the Census Bureau at the Department of
Commerce announced just last week that total e-commerce sales
for 2013 were estimated to have increased almost 17 percent
from 2012 to the tune of about $263 billion in 2013. And this
obviously has had huge opportunity and created innovation, and
economic growth, and jobs. But it has also just changed the way
folks do business across our country.
And now that we have that, we know that we need to have tax
policies that are user friendly, that are workable, that
provide clarity, that everyone has talked about here, clarity
and certainty to businesses and individuals. And I definitely
support that. But I also think it is important that we look at
the way our economy works today and figure out solutions that
are up to date.
Given that there is major economic activity that is going
across state borders, and many cases, for example, on the
internet with limited physical presence, we need to take a
close look at the physical presence standard and whether this
proposal might have unintended consequences. I think you have
talked about that.
But, you know, the Supreme Court had their decision, Quill.
It is over 20 years old now. And although it has come up in the
context of this business activity tax bill, the case was
actually about sales tax originally. What have been the
consequences of that decision on states, especially given now
that we have the internet and a slightly different economy than
when that decision was made? And what steps would you like to
see Congress take on this issue, if any?
Mr. Quam. I very much appreciate the question. Yes, I have
bought things recently on the internet, as have my sons, as
have probably most everybody here. And the internet has been
such a boom to the economy. You talked about growth numbers at
17 percent. Coming out of the last 5 years, what other sector
can you possibly say that about other than the internet?
Now, interestingly enough, because of the Quill decision
and that physical presence standard, we have an uneven playing
field when it comes to sales tax and sales tax collection. And
the Marketplace Fairness Act, which is supposed to talk about
what can states do to simplify their sales taxes, to ease
compliance, but require collection, so that folks doing
business both online or on Main Street are on the same footing
with regard to those sales, is a critical question of fairness.
And right now, that playing field is unlevel.
And so, one of the top priorities for the National
Governors Association is the Marketplace Fairness Act and
addressing that question of the inequity caused by a physical
presence standard in the sales tax realm. The Marketplace
Fairness Act would create certainty. It would create fairness.
It would simplify and the states would simplify their taxes in
return for that authority to require that collection.
States today cannot collect about $23 billion in sales tax
because of the Quill decision. States came together with the
business industry--I think this is really critical--to address
that problem and say what simplifications are needed. The
Streamline Sales Tax Agreement is the collective efforts of
business and states to solving the national problem and say how
do we do this together. And at the end of the day, that is also
good for consumers. It is good for consumers because they see
competition and they have competition, but also protects the
Main Street retailer who is hiring the part-time worker. It
becomes about jobs. It also becomes about fairness in that
economy.
So the physical presence standard created that inequity.
Finding a way to, in a borderless economy, just recognize the
right of states to control their own revenue systems, recognize
our Federal system when it comes to state taxation, but also
find a way to recognize that borderless economy, the internet
economy, and create fairness so there is competition in that
marketplace. I think that should be the focus of this Committee
and its top priority. My fear is that this bill goes in the
opposite direction.
Ms. DelBene. Thank you. Since we are running out of time
here, Mr. Chair, I would like to ask for unanimous consent to
enter into the record a statement from the Federation of Tax
Administrators.
Mr. Bachus. Without objection.
[The information referred to follows:]
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Ms. DelBene. Thank you. I yield back.
Mr. Bachus. And if you need more time.
Ms. DelBene. That is fine. I know we have to----
Mr. Bachus. All right, thank you. Well, we thank everyone
for their attendance at this hearing. I was thinking about
Boeing airplanes. They land at all the airports in the country.
I may tell my counties to start taxing Boeing because their
product comes into all our cities. That is an economic
presence, I guess.
This concludes today's hearing. Thanks to all our witnesses
for attending. Without objection, all Members will have 5
legislative days to submit additional written questions for the
witnesses or additional materials for the record.
This hearing is adjourned. We thank you for your presence.
[Whereupon, at 4:05 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
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