BUSINESS ACTIVITY TAX SIMPLIFICATION ACT

OF 2011

HEARING
BEFORE THE

SUBCOMMITTEE ON COURTS, COMMERCIAL

AND ADMINISTRATIVE LAW
OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
ON

H.R. 1439
APRIL 13, 2011

Serial No. 11241

Printed for the use of the Committee on the Judiciary

(
Available via the World Wide Web: http://judiciary.house.gov
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65745 PDF

2011

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COMMITTEE ON THE JUDICIARY

LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, JR.,
JOHN CONYERS, JR., Michigan
HOWARD L. BERMAN, California
Wisconsin
JERROLD NADLER, New York
HOWARD COBLE, North Carolina
ROBERT C. BOBBY SCOTT, Virginia
ELTON GALLEGLY, California
MELVIN L. WATT, North Carolina
BOB GOODLATTE, Virginia
ZOE LOFGREN, California
DANIEL E. LUNGREN, California
SHEILA JACKSON LEE, Texas
STEVE CHABOT, Ohio
MAXINE WATERS, California
DARRELL E. ISSA, California
STEVE COHEN, Tennessee
MIKE PENCE, Indiana
HENRY C. HANK JOHNSON, JR.,
J. RANDY FORBES, Virginia
Georgia
STEVE KING, Iowa
PEDRO R. PIERLUISI, Puerto Rico
TRENT FRANKS, Arizona
MIKE QUIGLEY, Illinois
LOUIE GOHMERT, Texas
JUDY CHU, California
JIM JORDAN, Ohio
TED DEUTCH, Florida
TED POE, Texas
NCHEZ, California
LINDA T. SA
JASON CHAFFETZ, Utah
DEBBIE WASSERMAN SCHULTZ, Florida
TIM GRIFFIN, Arkansas
TOM MARINO, Pennsylvania
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
[Vacant]
SEAN MCLAUGHLIN, Majority Chief of Staff and General Counsel
PERRY APELBAUM, Minority Staff Director and Chief Counsel

SUBCOMMITTEE

ON

COURTS, COMMERCIAL

AND

ADMINISTRATIVE LAW

HOWARD COBLE, North Carolina, Chairman

TREY GOWDY, South Carolina, Vice-Chairman
ELTON GALLEGLY, California
STEVE COHEN, Tennessee
TRENT FRANKS, Arizona
HENRY C. HANK JOHNSON, JR.,
Georgia
DENNIS ROSS, Florida
MELVIN L. WATT, North Carolina
[Vacant]
MIKE QUIGLEY, Illinois
DANIEL FLORES, Chief Counsel
JAMES PARK, Minority Counsel

(II)

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CONTENTS
APRIL 13, 2011
Page

THE BILL
H.R. 1439, the Business Activity Tax Simplification Act of 2011 .....................

13

OPENING STATEMENTS
The Honorable Howard Coble, a Representative in Congress from the State
of North Carolina, and Chairman, Subcommittee on Courts, Commercial
and Administrative Law ......................................................................................
The Honorable Steve Cohen, a Representative in Congress from the State
of Tennessee, and Ranking Member, Subcommittee on Courts, Commercial
and Administrative Law ......................................................................................
The Honorable John Conyers, Jr., a Representative in Congress from the
State of Michigan, and Ranking Member, Committee on the Judiciary .........

11
23
24

WITNESSES
The Honorable Bob Goodlatte, a Representative in Congress from the State
of Virginia
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
The Honorable Robert C. Bobby Scott, a Representative in Congress from
the State of Virginia
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
Corey Schroeder, Vice President and CFO, Outdoor Living Brands, Inc. (Richmond, VA), on behalf of the International Franchise Association
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
R. Bruce Johnson, Chairman, Utah State Tax Commission (Salt Lake City,
UT), on behalf of the Federation of Tax Administrators
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................
Joseph Henchman, Tax Counsel and Director of State Projects, The Tax
Foundation (Washington, DC)
Oral Testimony .....................................................................................................
Prepared Statement .............................................................................................

1
4
6
7
26
28
37
39
50
52

APPENDIX
MATERIAL SUBMITTED

FOR THE

HEARING RECORD

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

Letter from Bill Himpler, Executive Vice President, American Financial Services Association (AFSA) .......................................................................................
Prepared Statement of the American Homeowners Grassroots Alliance ............
Letter from Senator Jim Buck, Indiana, Public Sector Chairman, Tax and
Fiscal Policy Task Force, and Jonathan Williams, Director, Tax and Fiscal
Policy Task Force, American Legislative Exchange Council ............................
Prepared Statement of the American Trucking Association ................................

68
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77

(III)

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IV
Page

Prepared Statement of Mark Louchheim, President, Bobrick Washroom

Equipment, Inc., North Hollywood, CA, on behalf of the National Association of Manufacturers ..........................................................................................
Letter from Arthur R. Rosen, McDermott Will & Emergy LLP, Counsel,
the Coalition for Rational and Fair Taxation ....................................................
Prepared Statement of the Computing Technology Industry Association
(CompTIA) ............................................................................................................
Prepared Statement of Michael Petricone, Senior Vice President, Government
Affairs, Consumer Electronics Association ........................................................
Letter from Joseph R. Crosby, COO & Senior Director, Policy, Council On
State Taxation (COST) ........................................................................................
Letter of Support from Mark B. Wieser, Founder and Chairman, Fischer
& Wieser Specialty Foods, Inc. ...........................................................................
Prepared Statement of David Rolston, President and CEO, Hatco Corporation,
on behalf of the North American Association of Food Equipment Manufacturers (NAFEM) ...................................................................................................
Prepared Statement of Ivan Petric, Vice-President, Hope Trucking, Inc. ..........
Prepared Statement of the National Association for the Specialty Food Trade,
Inc. (NASFT) ........................................................................................................
Prepared Statement of the National Foreign Trade Council, Inc. (NFTC) .........
Letter from Rebecca Boenigk, CEO & Chairman, Neutral Posture ....................
Prepared Statement of the New York Bankers Association (NYBA) ..................
Prepared Statement of the Organization for International Investment (OFII) .
Prepared Statement of Kathryn Wylde, President & CEO, Partnership for
New York City ......................................................................................................
Letter and Article from Marjorie B. Gell, Associate Professor, The Thomas
Cooley Law School ...............................................................................................
Prepared Statement of Carey J. (Bo) Horne, Past President, and Katherine
S. Horne, Past Vice President, ProHelp Systems, Inc. .....................................
Letter from Joan Maxwell, President, Regular Marine, Inc. ...............................
Prepared Statement of the Securities Industry and Financial Markets Association (SIFMA) ....................................................................................................
Prepared Statement of Vernon T. Turner, Vice President, Corporate Tax,
Smithfield Foods, Inc. ..........................................................................................
Prepared Statement of the Software Finance & Tax Executives Council
(SoFTEC) ..............................................................................................................
Material from Carley A. Roberts, Chair, Taxation Section, The State Bar
of California ..........................................................................................................
Letter from Scott George, Chief Executive Officer, Tennessee Commercial
Warehouse (TCW) ................................................................................................
Letter from Rebecca J. Paulsen, Vice President, State Tax, U.S. Bancorp ........
Prepared Statement of the United States Council for International Business
(USCIB) .................................................................................................................

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BUSINESS ACTIVITY TAX SIMPLIFICATION

ACT OF 2011
WEDNESDAY, APRIL 13, 2011

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON COURTS,
COMMERCIAL AND ADMINISTRATIVE LAW,
COMMITTEE ON THE JUDICIARY,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:34 p.m., in room
2141, Rayburn Office Building, the Honorable Howard Coble
(Chairman of the Subcommittee) presiding.
Present: Representatives Coble, Gowdy, Gallegly, Franks, Cohen,
Watt, Quigley and Conyers.
Staff present: (Majority) Travis Norton, Counsel; John Hilton,
Counsel; John Mautz, Counsel; Allison Rose, Professional Staff
Member; Ashley Lewis, Clerk; (Minority) James Park, Subcommittee Chief Counsel; Norberto Salinas, Counsel; and Ann
Woods Hawks, Professional Staff Member.
Mr. COBLE. The Subcommittee will come to order.
We have two panels today. The first includes two long time
friends from thefrom my neighbor to the north, Virginia, Representative Bob Goodlatte who represents the Roanoke area, and
the Valley, I presume, Bob. And Representative Bobby Scott who
represents the Tidewater area, primarily. Good to have both of you
here.
I know Mr. Goodlattegood to see you, Mr. Cohen.
Mr. COHEN. Good to be seen.
Mr. COBLE. Mr. Goodlatte I know has embraced this along with
Representative Boucher when he was here, and now Mr. Scott has
taken up the case so we have two formidable allies before us. We
will be glad to recognize each one of you for 5 minutes, if possible.
Mr. Goodlatte, well start with you.
TESTIMONY OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

Mr. GOODLATTE. Mr. Chairman, thank you very much and Ranking Member Cohen and Members of the Subcommittee. I appreciate
being invited to testify today about the Business Activity Tax Simplification Act which I introduced with my friend and Virginia colleague, Representative Scott.
This legislation will provide a bright line test to clarify state
and local authority to collect business activity taxes from out of
state entities. Many states and some local governments levy cor(1)

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2
porate income, franchise and other taxes on out-of-state companies
that conduct business activities within their jurisdictions. While
providing revenue for states, these taxes also serve to pay for the
privilege of doing business in a state.
However, with the growth of the Internet, companies are increasingly able to conduct transactions without the constraint of geopolitical boundaries. The growth of the technology industry, and
interstate business-to-business and business-to-consumer transactions raise questions over where multistate companies should be
required to pay corporate income and other business activity taxes.
Over the past several years a growing number of jurisdictions
have sought to collect business activity taxes from businesses located in other states, even though those businesses received no appreciable benefits from the taxing jurisdiction. This has led to unfairness and uncertainty, generated contentious, widespread litigation and hindered business expansion as businesses shy away from
expanding their presence in other states for fear of exposure to unfair tax burdens.
We need a basic, fair, bright line rule in this area. Previous actions by the Supreme Court and Congress have laid the groundwork for such a bright line rule. In the landmark case of Quill Corporation versus North Dakota, the Supreme Court declared that a
state cannot impose a tax on an out-of-state business unless that
business has a substantial nexus with the taxing state. However,
the Court did not define what constituted a substantial nexus for
purposes of imposing business activity taxes.
In addition, over 50 years ago Congress passed Public Law 86272
which set clear, uniform standards for when states could and could
not impose certain taxes on out-of-state businesses when the businesses activities in the state were nominal and only involved the
solicitation of orders for sales of tangible property. However, the
scope of Public Law 86272 only extended to activities related to
tangible personal property. Our Nations economy has changed dramatically over the last 50 years and this outdated statute needs to
be modernized.
The Business Activity Tax Simplification Act updates the protections of Public Law 86272 to reflect the changing nature of our
economy by expanding the scope of those protections from just tangible property to include intangible property and services.
In addition, our legislation establishes a clear, uniform physical
presence test such that an out-of-state company must have a physical presence in a state before the state can impose corporate net
income taxes and other types of business activity taxes on that
company.
In our current challenging economic times, it is especially important to eliminate artificial government-imposed barriers to small
businesses. Small businesses are crucial to our economy and account for a significant majority of new product ideas and innovation. Small businesses are also central to the American dream of
self-improvement and individual achievement which is why it is so
vital that Congress enact legislation that reduces the excessive and
often duplicative tax burdens that hinder small businesses and ultimately overall economic growth and job creation.

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3
Unfortunately small businesses are often the hardest hit when
aggressive states and localities impose excessive tax burdens on
out-of-state companies. These businesses do not have the resources
to hire the teams of lawyers that many large corporations devote
to tax compliance and they are more likely to halt expansion to
avoid uncertain tax obligations and litigation expenses.
The clarity that the Business Activity Tax Simplification Act will
bring will ensure fairness, immunize litigation and create the kind
ofminimize litigation and create the kind of legally certain and
stable business climate that frees up funds for businesses of all
sizes to make investments, expand interstate commerce, grow the
economy and create new jobs.
At the same time, and its important to emphasize, this legislation will protect the ability of states to ensure that they are fairly
compensated when they provide services to businesses that do have
physical presences in the state. In addition, the legislation expressly protects the ability of states to use all tools at their disposal to aggressively combat illegal activities, sham transactions
and other abuses.
Thank you again for the opportunity to speak to the Committee
today.
[The prepared statement of Mr. Goodlatte follows:]

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BG-2.eps

Mr. COBLE. Thank you, Mr. Goodlatte.

And Mr. Scott, if you will suspend just a moment. The Chair
wants to recognize the presence of Dan Freeman who served a long
time as parliamentarian for the House Judiciary Committee. Good
to have you with us, Dan.
And now Im pleased to recognize the distinguishedthe other
distinguished gentleman from Virginia, Mr. Bobby Scott.

6
TESTIMONY OF THE HONORABLE ROBERT C. BOBBY SCOTT,
A REPRESENTATIVE IN CONGRESS FROM THE STATE OF
VIRGINIA

Mr. SCOTT. Thank you, Chairman Coble, Ranking Member

Cohen, Chairmanformer Chairman Conyers and other Members
of the Committee.
I appreciate your holding todays hearing on the Business Activity Tax Simplification Act introduced by my colleague from Virginia, Bob Goodlatte and for providing me the opportunity to testify
in support of the legislation.
Business Activity Simplification Act or BATSA has attracted
strong bipartisan support over the last several Congresses and I
expect this version to attract the same amount of support.
BATSA seeks to update a 50-year-old Federal statute that determines when states can impose state income taxes on the sale of
tangible personal good in the stateover the years states have
adopted a series of business activity taxes that are proxies for state
income tax, including gross receipts taxes, licensing arrangements
and other changesand other charges that states frequently seek
to impose on out-of-state companies.
Some states have enacted overly aggressive and often unfair
business activity taxes. Businesses in my state have been acutely
affected by these aggressive business activity taxes. Smithfield
Foods, located in Congressman Forbes district, has had its trucks
threatened with confiscation by New Jersey tax revenue agents
simply for driving down the New Jersey Turnpike. Virginia based
Capital One has joined other financial institutions in becoming
easy prey for other states and localities seeking to increase their
tax revenues by targeting out-of-state businesses. Other sectors of
the Virginia economy, such as manufacturing, information technology, franchising, media industries all have been targeted with
overly aggressive business activity taxes in other states.
There is an urgent need to modernize this decades-old law.
BATSA would clarify the standard governing state assessment of
corporate income taxes and comparable taxes on businesses. Specifically, the bill will articulate a bright line physical presence
nexus standard that includes either owning or leasing real or tangible property in the state or assigning one or more employees to
perform certain activities in the state for more than 15 days in a
taxable year.
No one is arguing that the business should not be responsible for
paying taxes where they do business. However, BATSA would ensure fairness, minimize costly litigation for both state governments
and taxpayers, reduce the likelihood of a business being double
taxed on the same income, and create the kind of legal certainty
and stability for business environment that encourages businesses
to make investments, expand interstate commerce and create new
jobs.
More importantly, the bill would unsure that businesses continue
to pay business activity taxes to states that provide them with direct benefits and protections.
I appreciate the Subcommittees focus on this timely matter and
look forward to working with you as we pass this important legislation, hopefully during this session of Congress.

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Scott-1.eps

[The prepared statement of Mr. Scott follows:]

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Scott-4.eps

Mr. COBLE. I thank each of you for being with us. We normally
dont examine Members, so I assume does anyone have questions
for the Members? We usuallygentleman from Illinois?
Mr. QUIGLEY. Just for a point of clarification, how would you two
gentlemen distinguish most of the taxes youre talking about that,
as you say, could be very burdensome just for driving down the
New Jersey Turnpike, for example, and the much more controver-

11
sial aspect of the transaction tax dealing with the Internet and how
some states and local governments are reacting to the fact that
their retailers are closing down because so much more of those
sales are taking place on the Internet and the shortfall that it is
creating?
Mr. GOODLATTE. Well, if the gentleman would allow? This legislation is neutral as between bricks and mortar entities and online
entities. Youll find pretty much widespread business support from
both groups.
As you know, with relation to sales taxes online, theres a great
division there between those who do business within an individual
state and required by state law, because they do have that nexus
with the state, and entities that operate from a greater distance.
This does not address that issue in any way, shape or form. It
would not limit the ability of the Congress to change theas you
know, right now the Congress has never provided the necessary
finding of nexus to allow a state to require a company in another
state to collect sales taxes. Theyre left with having to try to collect
that from the individual who owes the tax and that of course is a
too burdensome way to collect it.
Some of us have suggested that the states should work together
to come up with a single definition of what is taxable and perhaps
even a single interstate sales tax so that if youre a small business
doing business online, youre not talking about having to know the
tax in not just 50 states but thousands of sub-jurisdictions that
have add on sales taxes. So that is a separate, complicated issue
and is not addressed here.
Mr. QUIGLEY. Thank you. I yield back.
Mr. COBLE. Any other questions for the Members?
Mr. Cohen?
Mr. COHEN. Since we have two fine gentlemen from the Commonwealth, Id like to ask you what you think Mr. Jefferson would
think of this bill and why.
Mr. SCOTT. He would thinkI think he would like the bill. Its
a fine piece [Laughter.]
Mr. COHEN. Great answer.
Mr. COBLE. Mr. Cohen, you asked for that one.
Gentlemen, good to have both of you with us.
Trey, did you have any questions?
Mr. GOWDY. No, sir, Mr. Chairman.
Mr. COBLE. Youre excused, gentlemen. Good to begood to have
you with us.
Ill give my opening statement and then Ill recognize Mr. Cohen
and Mr. Conyers after that and then well proceed with our other
panel.
Benjamin Franklin once remarked that nothing is certain in this
world except death and taxes. But while taxes are necessary to
fund the essential government operations, they should not be imposed arbitrarily or unfairly, especially on Americas small businesses which create the majority of jobs in this country.
The Dormant Commerce Clause prohibits states from imposing
taxes on entities that lack a substantial nexus to the taxing state.
In the 1922strike that. In the 1992 Quill decision, the Supreme
Court held that a state could not impose a sales or use tax on a

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12
business that was not physically present in the taxing state. Since
then some courts have held that the physical presence standard
does not apply to the imposition of net income or other business activity taxes.
As a result, each states standard for what constitutes substantial nexus for net income taxes varies. Some states like Texas and
Tennessee hold that the physical presence standard applies, but
the majority of states allow taxation of net income if there is merely an economic nexus between the state and the taxpayer.
Some businesses are thus faced with a lose/lose situation. They
may hire expensive accountants and tax attorneys to decipher the
tax laws of the states in which they transact business to determine
whether they have tax liability, but most small businesses lack the
resources to do this. Those that do find such resources pass the cost
on to the consumers in the form of higher priced goods and services. Our small businesses can reasonably conclude that they are
not liable to pay taxes in a state because they transact only very
limited business there, but under this approach, if a state later
concludes that taxes should have been paid, the business will
owelikely will owe penalties in addition to back taxes.
In my opinion, theres a substantial need for a clear rule for what
a state may impose in net income or other business activity tax.
H.R. 1439, the Business Activity Tax Simplification Act of 2011,
does just that. It clarifies that a state may not impose such a tax
on a business that lacks physical presence in the state.
BATSA also updates a law Congress passed in 1959 which prohibits states from taxing businesses merely because they employ
salesmen who travel to the states selling tangible goods. That was
52 years ago. In the modern American economy services and intangible goods play a significant and larger role than they did in 1959.
Theres no good reason, it seems to me, to discriminate between
tangible and intangible goods in this regard, so we ought to update
that law.
It is important to note that BATSA does not require states or localities to reduce their taxes, rather it gives small businesses some
certainty about their tax liability so they can adequately budget
their resources, and to the extent possible, create more jobs.
This is not the first time this Committee has considered BATSA,
but state taxation is an important issue and I am pleased to take
it up once again.
Again, we thank Mr. Goodlatte and Mr. Scott for having been
with us. And I am now pleased to recognize the distinguished gentleman from Tennessee, Mr. Steve Cohen, the Ranking Member.
[The bill, H.R. 1439, follows:]

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Mr. COHEN. Thank you, Mr. Chairman. Three years ago the subcommittee on Commercial and Administrative law held a hearing
on legislation substantially similar to this bill, H.R. 1439, the
Business Activity Tax Simplification Act of 2011. At that time I
noted the issues that BATSA was trying to address were complex
ones. What should be the proper scope of a states authority to impose a corporate income tax or other similar tax on a particular
company based on the companys business activity in that state?
What role should Congress play in defining that scope? And those
were the primary issues.
The constitution requires a sufficient nexus to exist between a
state and a business in-state activity in order for that state to be
able to tax that business. The Supreme Court, however, has been
ambiguous as to what that nexus is in the business activity tax
context.
In 2008 I heard what I thought were some valid concerns expressed about the adoption of a physical presence standard as the
only determinative of whether a given business had sufficient
nexus with a state for business activity tax purposes. I also called
upon interested stakeholders to use the bills introduction as an opportunity to reach a consensus on a clear and uniform national
standard for state taxation of business activity. Unfortunately that
does not seem to be what has occurred in the intervening time. So
here we are.
I agree with proponents of H.R. 1439 that a uniform national
standard that determines when a state can tax business activity
will provide useful clarity and reduce the cost of doing business.
But by expanding the limitations on taxable business activity
under Federal law, and by once again adopting physical presence
in a state as the sole basis for what a state tax business activity,
I am concerned that H.R. 1439, if enacted would cost states to potentially lose billions of dollars in tax revenue that they should be
entitled to. This revenue loss in turn threatens to undermine critical state and local government services and adversely impact employees.
The physical presence standard concerns me, because it appears
to be too restrictive, does not fully capture business activity that
a state legitimately, constantly should be able to tax. Adoption of
the physical presence standard threatens to prohibit taxation of activities that currently states can tax.
The standard limits the scope of a states authority to impose a
corporate income tax or other business activity in one of three situations. Where business is physically present in the state or is assigned one or more employees in the state. Secondly, where the
business uses the service of an agent to establish or maintain the
market in a state. Or, the business leases or owns tangible personal or real property in the state during the relevant tax year.
I fear that this narrowly crafted standard allows businesses simply to game the system, by for example, making all employees independent contractors or allowing banks to conduct online businesses
in all states while avoiding taxes on such activity, because they
lack tangible property in most states.
I feel like a TV show with background action. Its very difficult.

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Worse yet, according to a Congressional Budget Office cost estimate prepared in 2006 for an earlier, but substantially similar
version of BATSA, the act would concentrate 70 percent of revenue
losses in just ten states. One of those states would be Michigan,
home of the Wolverines. Another would be Texas. Whatever. And
the other is Tennessee, that matters.
I noted that at least one alternative to physical presence as a
uniform standard has been proposed by the Multistate Tax Commission. I do not take a view on the merits of that alternative proposal. I simply note thatand reiterate my point from 3 years ago,
which is that while uniform standard of business activity taxes and
the clarity and certainty it provides are valuable, that uniform
standard must be one that is fair to all who would be impacted.
H.R. 1439 does not appear to meet that goal.
With that, I yield back the remainder of my time.
Mr. COBLE. And I apologize to you, Mr. Cohen, for having talked
behind your back. We had to get some preliminaries out of the way.
Mr. COHEN. It was the physical dance I had to do which was
more difficult [Laughter.]
But there was the challenge, and I appreciate rising to their
Mr. GOWDY. Physical presence.
Mr. COHEN [continuing]. Right, it was physical presence.
Mr. COBLE. The distinguished gentleman from South Carolina
has no opening statement.
Mr. Conyers, the distinguished gentleman from Michigan is recognized for 5 minutes.
Mr. CONYERS. Thank you, Chairman Coble.
Ladies and gentleman, imposing a physical presence standard
would drastically alter the taxing landscape as we know it. With
respect to past legislation similar to this, surveys have estimated
that lost state tax revenues might be as high as $8 billion in the
first year following enactment, and that was an estimate from several years ago. The impact might be even more damaging now.
If this legislation has a similar negative impact on the states I
wonder how any of us can support it. The states are already getting Federal budget cuts all over the place and now we want to
make sure that we increase the stress and the dire circumstances
that they find themselves in. This is legislation that might possibly
eviscerate some state revenues. We would, in effect, be turning our
back once again on state governments. We would be forcing state
governments to eliminate valuable governmental programs and
services and furlough dedicated government workers, some are already doing it. We should shudder at the impact of a potential loss
of $8 billion on top of the lost tax revenue base the states have suffered in the last few years.
I dont know if there is support enough to pass a legislative
measure which would undercut states abilities to tax activity within its borders. In this case, Congress should not step in and impose
a damaging physical presence standard for activities which a state
may have the constitutional right already to tax.
An $8 billion loss to the states which have already suffered extensively during this economic downturn, would further hamper
economicthe economic rebound that people keep looking and hoping and praying will occur. And when you consider the Federal cuts

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to state and local assistance, which the Ryan budget will obviously
lead to, our state and local governments would be suffering, in my
view unnecessarily, for years to come.
So while Congress must ensure that the states do not burden
interstate commerce through their taxing authority, the authority
of states to tax activity within their borders must be respected.
Why not? And unfortunately the proposal that we are examining
does not seem to balance these competing interests.
And with that, Chairman Coble, I return any unused time.
Mr. COBLE. I thank the gentleman.
I am told that there will be an imminent vote on the floor in a
matter of minutes, but we will go ahead and start.
I will invite the witnesses, if they will assume their seated position at the table and I will introduce the witnesses.
We have a very favorable group of three panelists who will be us
today.
Mr. Corey L. Schroeder is vice president and chief financial officer of Outdoor Living Brands, a multi-brand franchise company
dedicated to products and services within the outdoor living market. As VP and CFO of Outdoor Living Brands, Mr. Schroeder is
responsible for the financial reporting and management of the business overseeing franchise compliance matters and working to support the strategic direction of the company.
Prior to the formation of Outdoor Living Brands, Mr. Schroeder
served as vice president and CFO of U.S. Structures, Inc., also a
franchise company.
Mr. Schroeder holds a bachelors degree in business administration with a concentration in finance from the University of Richmond and a masters degree in accounting from the College of William and Mary. He also holds a designation of chartered financial
analyst.
Our second witness is Mr. Bruce Johnson who is the Utah governorin 2009 Utah Governor Gary Herbert appointed Bruce
Johnson to serve as chairman of the Utah State Tax Commission.
He has been a commissioner since 1998. The Tax Commission has
the constitutional duties to administer alland supervise all the
tax laws of the state, including property tax, income tax, franchise
tax, sales tax and all miscellaneous taxes.
Prior to his appointment, Mr. Johnson litigated numerous tax
disputes as a private attorney and as a trial attorney for the Tax
Division of the United States Department of Justice.
Hes a CPA and holds a degree in accounting from the University
of Utah. Mr. Johnson also served on numerous boards and testified
before legislative bodies. He was, as well, the founding national cochair of the Streamlined Sales Tax Project.
Our final witness today, Mr. Joseph Henchman. Mr. Henchman
is a tax counsel and director of state projects at the Tax Foundation a nonprofit organization dedicated to educating taxpayers
about all aspects of tax policy. He joined the Tax Foundation in
2005.
Mr. Henchmans analysis of fiscal trends, constitutional issues
and tax law developments has been featured in numerous print
and electronic media, including The New York Times, The Wall
Street Journal, CNN and Fortune magazine.

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Of particular relevance to this hearing, in 2007 Mr. Henchman
published an article in a popular state sales periodical entitled,
Why the Quill Physical Presence Standard Should Not Go Away
Should Not Go the Way of Personal Jurisdiction.
Mr. Henchman was graduated from the University of California
at Berkley with a degree in political science and a law degree from
the George Washington University.
Gentlemen, good to have you with us. We operate on a 5-minute
rule, gentlemen. The panel before you, the green light will expire
at the conclusion of 4 minutes. And you will see an amber light
then which is your notice toif you can start wrapping up at that
time we would be appreciative. And we try to apply that 5 minute
rule to us as well on this side of the podium.
Mr. Schroeder, why dont you start us off?
TESTIMONY OF COREY SCHROEDER, VICE PRESIDENT AND
CFO, OUTDOOR LIVING BRANDS, INC. (RICHMOND, VA), ON
BEHALF OF THE INTERNATIONAL FRANCHISE ASSOCIATION

Mr. COBLE. Mr. Schroeder, I know either your mic is not on or

is not close to you.
Mr. SCHROEDER. How is that?
Mr. COBLE. Thats better.
Mr. SCHROEDER. Thank you. Thank you again for providing me
the opportunity to voice my support for the Business Activity Tax
Simplification Act of 2011. And thank you also to Congressmen
Scott and Goodlatte, from my home state of Virginia, for introducing the bill.
Im speaking today on behalf of Outdoor Living Brands located
in Richmond, Virginia. We currently operate three franchise brands
with 181 locations in 34 states and have 28 employees.
Im also here today on behalf of the International Franchise Association, the largest and oldest franchising trade group representing more than 90 industries, more than 13,000 members nationwide. And according to a study done for the IFA by Price
Waterhouse Coopers, there are over 825,000 franchise businesses
across 300 different business lines providing nearly 18 million
American jobs and generating over $2.1 trillion for the American
economy.
The Business Activity Simplification Act of 2011 addresses a significant issue within the franchise community relating to state income tax reporting. Franchise businesses face a very confusing and
ever changing set of rules regarding the obligation to file state corporate income taxes. The primary issue is the different and changing definitions of nexus to establishestablished with various
states for our business activities.
Once nexus is established we must begin filing state corporate
income tax returns for that portion of our revenue that we generate
from that state. Like Outdoor Living Brands, most franchisors do
not own any real property in the states which ourin which our
franchisees operate. We only have, in my case, a physical presence
in the State of Virginia.
However, central to the concept of our business in franchising is
the relationship with our franchisees and primarily our shared
trade identity of our brand. We license that trade identity and that

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intellectual property and business plan to local entrepreneurs, as
well as support them in growing and building their business and
providing jobs in their local markets and their various states.
Many states, however, now are concluding that the very existence of our brand and our intellectual property or even the physical
existence of our training manuals in their states is establishing
nexus. And I understand the desire for states, in this fiscal environment, to need to generate and want to generate revenue from
out-of-state businesses, however, the local outcome of this view on
nexus, for a company like Outdoor Living Brands, is that we would
file 34 different state tax returns and less than 10 percent of our
revenue would be taxed in the state of Virginia where we operate.
Franchising is already a very heavily regulated business model
and my small firm spends close to $100,000 a year in legal, accounting and tax advisory fees. It does notthat does not include
the time of myself or the folks on my team, and these are precious
resources that we would like to be using to help grow our
franchisees and our businesses.
Currently my firm files income taxes in six states. With various
nexus and standard enforcement practices changing I expect the
costs and administrative burden of this particular issue to continue
to grow. My most recent experiences with it was with the State of
South Carolina and Minnesota who both sent me business activity
questionnaires. These lengthy questionnaires, to which I answered
no to almost every activity described, were in the end determined
that it was simply the existence of my franchise agreement and the
royalty revenue derived in that state that required nexus and I had
to file several years of past returns.
One state in particular, South Carolina, a South Carolina revenue agent described for me how he found our business by creating
a mass mailing list of franchise companies like mine, using a marketing website service that the franchising industry it commonly
uses to sell franchises.
As a franchisor I have very little visibility on what the nexus
rules are in each state and when they change and why they
change. And South Carolinas activity was based on a court case
that happened in that state.
Iowa just recently announced a similar change due to a court
case. And I expect I will be getting a questionnaire from them and
I will deal with them inas the questionnaire comes up.
And this raises the issue of managing this issue. For a small
business like mine, managing this issue is rife with uncertainty
created by this environment. I could proactively engage another tax
advisor and have them go seek out all the 34 states where I have
franchisees and determine which ones would have nexus with me.
I am sure that the states would gladly agree that I have nexus.
And then I could pay that tax advisor even more to continue to fill
out more and more tax returns in the various states.
I could be passive, which is what I think most franchisors in my
situation do, where we wait for the next franchise activity questionnaire to come in and we respond to it accordingly.
To sum up, earlier in my career I worked in investment banking
and I advised a number of private businesses in a lot of different
industries with far broader business activities in different states

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than what we experience in franchising. And franchising is the

only business I have come across where we face this level of complexity and this burden of state tax compliance.
So, I hope this testimony has been helpful in illustrating the difficulty that franchise businesses face across the country related to
this. And I hope we can work together to pass the Business Activity Simplification Act.
Thank you.
[The prepared statement of Mr. Schroeder follows:]

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Mr. COBLE. Thank you, Mr. Schroeder.

Mr. Johnson?

37
TESTIMONY OF R. BRUCE JOHNSON, CHAIRMAN, UTAH STATE
TAX COMMISSION (SALT LAKE CITY, UT), ON BEHALF OF THE
FEDERATION OF TAX ADMINISTRATORS

Mr. JOHNSON. Chairman Coble, Vice Chairman Gowdy, Ranking

Member Cohen and Members of the Committee, thank you for the
opportunity to address this issue today. I am Bruce Johnson, chair
of the Utah State Tax Commission. Today I am testifying on behalf
of the Federation of Tax Administrators which is an association of
tax administration agencies in each of the 50 states, the District
of Columbia and New York City.
This is not a greedy states versus poor taxpayer bill. This is a
bill about large multistate businesses versus small local businesses
and how a state can allocate its tax base and its tax burden among
the entities doing business in the state. That is what it is about.
It is also a bill about Federal preemption of state sovereignty and
when it is appropriate for the Federal Government to limit a states
sovereign power to raise its revenue as it sees fit through its local
elected officials.
We have already heard some discussion about the estimated revenue impact of this bill. The Congressional Budget Office said it
would result in a $3 billion annual revenue loss, thats the 2005
predecessor of this bill. The NGA has substantially larger estimates. But that is not revenue that is going to go away, that is revenue that is going to be shifted if we cant tax the fair share of
interstate businesses that do business in our state. That tax is
going to be shifted to our local businesses and our local taxpayers.
It is going to have a devastating impact on small business.
The U.S. Supreme Court has held that a company meets the jurisdictional standard of substantialor sufficient contacts if it is
doing business in the state or otherwise engaged in establishing
and maintaining a market in the state. This bill purports to establish a physical presence standard which has never been the law for
income taxes or business activity taxes. But I suggest it is not even
a physical presence standard. If you look at Public Law 86272,
which the proponents of the bill seek to expand, 86272 allows a
business to have permanent employees in a state, driving company
cars on state roads, and as long as they are not engaged in activities other than the solicitation of sales, that physical presence has
to be ignored and the state cant tax that business even though it
clearly has physical presence there.
This bill would seek to extend that preemption not only to the
solicitation of sales of tangible personal property, but to the solicitation of services, to the solicitation of sales of intangible property,
to the gathering of information in a state, to the furnishing of information to customers in the state. It would say that 15 days in
the state is not physical presence. That may be a reasonable de
minimis test for many taxpayers, but it also says if the activity of
the business, the physical presence is for a limited or transient
business purpose, it can be longer than 15 days.
Now I dont know what a limited or transient business purpose
is. And I dont see how that provides clarity to our taxpayers. In
a multi-level company that manufacturers, distributes and retails,
is a warehouse in the state just a limited purpose? It may well be
under this law.

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Moreover, activities of subsidiaries can easily be ignored with a
little bit of structuring. I had the privilege of representing taxpayers for over 17 years and I can tell you that under the provisions of this bill I could substantially reduce the tax obligations of
many taxpayers in Utah that have a physical presence through
themerely by setting up a subsidiary, a toy company couldthat
has a 5-percent profit margin in the state could set up an intangible holding company in Delaware, charge a 2-percent royalty and
cut its taxes in Utah by 40 percent even though it continued to
have a store in Utah. It could set up a 3-percent royalty and cut
its taxes by 60 percent, even though it continued to have physical
presence in Utah.
I acknowledge the need for more clarity. This bill unfortunately
is fatally flawed in many ways and I urge you to oppose the bill.
Thank you.
[The prepared statement of Mr. Johnson follows:]

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49

50
Mr. COBLE. Thank you, Mr. Johnson.
Mr. COBLE. Mr. Henchman?
TESTIMONY OF JOSEPH HENCHMAN, TAX COUNSEL AND DIRECTOR OF STATE PROJECTS, THE TAX FOUNDATION
(WASHINGTON, DC)

Mr. HENCHMAN. Thank you. Mr. Chairman, Ranking Member

Cohen, Ranking Member Conyers and Members of the Subcommittee. I appreciate the opportunity to testify today on legislation pending before you on state tax actions that impact interstate
commerce.
Lets say you have a retired congressman, he hires a research assistant, he decides to write his memoirs. So he rents a little office
in a business park in Virginia. He hires a research assistant, a Virginian. He buys some computers and some printers from a Virginia
company. And every day for a year he sits in that Virginia office
writing his memoirs. And at the end of the year he sells the finished manuscript to a New York publisher.
Where did he earn that income? An economist will tell you that
the congressman earned the income where he invested his capital
and his labor, which is, in this case, Virginia. This is what is
known as the benefit principle, the idea that the taxes people pay
are linked to the government services they receive. In other words,
individuals and businesses should pay taxes where they work and
live and jurisdictions should not tax those who dont work and live
there.
While a physical presence rule for taxation is the norm in the
international context and is the historical norm
for state taxation here in the United States, we at the Tax Foundation have been monitoring increasingly aggressive state efforts to
reject this rule so as to shift tax burdens away from residents toward non-residents.
This is not entirely new. States have always had this incentive,
to the detriment of the national economy. In fact in the time of the
founding the use of tolls and taxes by states in this regard were
a primary reason why we had the Constitutional Convention in the
first place. And out of that convention it was decided that the free
flow of goods and services is so important and it matters more than
letting states tax certain types of transactions, that you, the Congress, have been empowered to preempt some state actions in that
regard, for restraining the states from enacting laws that disrupt
the national economy by discriminating against interstate commerce.
It is not a power to use lightly, but it rests with you because
states have no incentive to get together and resolve this on it own.
On the contrary, each state thinks it can get a bigger share of the
national tax pie by adopting an aggressive nexus standard. But
thesethis leaves us all poorer because all businesses, large and
small, must deal with complex tax regulations, uncertainty about
what activities create tax obligations in different states, lack of uniformity between different states in tax rules and formulas and generally wasting significant amounts of time, wealth and brain power
navigating tax compliance rather than doing more productive
things.

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These state actions deter new investment by domestic and foreign businesses who want no part of this quagmire and take their
dollars and their jobs overseas. State spending overwhelming, if not
exclusively, exists to benefit the people who live and work in the
state. Education, health care, roads, police protection, the reasons
states do these things is to benefit the residents. Residents should
be willing to pay for these services that they demand. Instead,
what we see are many states offering tax credits and waivers to select residents, businesses and individuals, while insisting on going
off out-of-state corporations that engage in sales in the state. This
is backwards and it is a violation of good tax policy. A physical
presence standard for business activity taxes would correct this
and be in line with the benefit principle which is a fundamental
view of taxation.
As a country we have gone from the artisan to Amazon.com. But
this sophistication of technological progress does not change the
fact that state services are still based on physical geographic borders, so the tax system should be too.
And state fiscal pain does not justify overruling timeless constitutional principles, such as the idea that states shouldnt be allowed to burden interstate commerce and impose uncertainty in the
national economy.
Sometimes small businesses call up my office, as I am sure they
call up the other members of the panel, asking if I engage in activities in a state, what would create nexus. And the only reason answer I have for them is to send them this. This is BNAs annual
survey of state tax actions. It is the questionnaire that Mr. Schroeder talked about where they ask I think it is over 100 questions
of, would this activity create nexus, would this activity create
nexus. This isthis should not be how we do our system. There
has to be a better way.
Thank you.
[The prepared statement of Mr. Henchman follows:]

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Mr. COBLE. Thank you, gentlemen for your testimony. We appreciate you being with us. We will now examine the witnesses.
Mr. Schroeder, how has the uncertainty and lack of predictability
concerning different states nexus requirements affected your small
business?
Mr. SCHROEDER. Yeah. In my case it is simply a matter of management time and attention and as well as the cost and expense
of trying to comply. We spend, as I mentioned, you know, over
almost a $100,000 a year in our already highly regulated business,
and that is dollars and time and attention that is not spent on
growing our business, launching new franchisees or developing new

61
business concepts. And it is simply a matter of I dont know what
the rules are, I probably could benefit from that and it would take
even more of my time to figure out which of the 34 states I operate
in I should be filing state tax returns in.
Mr. COBLE. Thank you, sir.
Mr. Johnson, is it your position that states should be entitled to
discriminate against a company based on whether it sells tangible
goods or intangible goods and services?
Mr. JOHNSON. That is certainly not my position, Mr. Chair. In
fact that is imposed on us by Public Law 86272. And again
Mr. COBLE. Now weMr. Johnson, would you oppose modernizing Public Law 86272?
Mr. JOHNSON. Well, if a physical presence is what is sought, and
I dont believe a physical presence test is appropriate, I dont believe we should go back to the way the lastbusiness was conducted in the last century to impose taxes in the new century, but
if you want a physical presence standard, you have to repeal 86
272, because 86272 allows a physical presence and protects it
from taxation, as long as the activities are limited to the solicitation of sales of tangible personal property.
So if a physical presence is sought, then repeal of 86272 is required.
Mr. COBLE. Well I thank you, sir.
Now Mr. Henchman, speaking of physical presence, why do you
believe that a physical presence standard for net income and other
business activity taxes is consistent with the holding of Quill? If
you do believe that.
Mr. HENCHMAN. I do believe that. The Quill decision, of course,
by its own terms was restricted to sales taxes. And as Congressman Goodlattes answer to Representative Quigley earlier indicated, this bill does not address sales taxes one way or the other,
because I know different people have different views on that. It just
deals with business activity taxes and the view that the physical
presenceand for me it just comes down to the basic economics as
I said in my testimony. The residents of a state benefit from the
services provided by a state. And to the extent a state is providing
benefits to nonresidents, maybe they ought to be voted out of office
because the reason you get elected to office is to provide benefits
to your residents that vote for you. And those are the people that
should be paying taxes to support those services.
Mr. COBLE. I thank you, gentlemen.
The Chair recognizes the distinguished gentleman from Michigan. I yield back my time, by the way. Mr. Conyers is recognized
for 5 minutes.
Mr. CONYERS. Thank you, Chairman Coble.
Mr. Johnson, isare there any tax avoidance opportunities that
we ought to frankly talk about here? It has been said that we
might create tax planning opportunities to eliminate taxstate
taxation revenues that are earned in a state. Can you amplify?
Mr. JOHNSON. Yes. Thank you, Congressman.
As I indicated, I practiced for 17 years representing businesses,
many of them large businesses. And if this bill were passed in its
current form it would be malpractice for me not to recommend a
number of structuring techniques.

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One of the simplest would be to take the issue of a toy store,
Toys R Us, for example. And I use that example because it is the
subject of some well known litigation. For any retailer
Mr. CONYERS. Does some of that litigation
Mr. JOHNSON [continuing]. Doing business in the state
Mr. CONYERS. Does some of that litigation involve tax avoidance?
Mr. JOHNSON. Yes, it does. By creating an intangible holding
company and charging a royalty, then a company can essentially
eliminate its profits in a state or reduce them dramatically by paying a royalty to a holding company in Delaware or offshore and deducting the royalty which can completely eliminate its profit margin in the state. That would be a simple example.
Another example would be creating aif I had a business that
was selling software for payroll and software for accounts receivable, for example, and part of my business model was to be able
to repair and install that software and say I got a third of my revenue from each of those things, I would simply create three different subsidiaries. The repair subsidiary would then become subject to Utah tax. I could structure the sales of the payroll subsidiary and the sales of the accounting subsidiary to be exempt
from Utah tax. I could cut my Utah tax inby two-thirds by the
simple expedient of creating three separate subsidiaries.
Mr. CONYERS. Any Federal tax opportunities involved?
Mr. JOHNSON. Well, the Federal taxthis same kind of planning
goes on at the Federal level.
Mr. CONYERS. It could be local or Federal taxes?
Mr. JOHNSON. Yes.
Mr. CONYERS. Okay.
Mr. JOHNSON. But this would provide a blueprint for legitimizedand tax planning is something we recognize is legitimate.
Mr. CONYERS. Well
Mr. JOHNSON. A company has no moral obligation
Mr. CONYERS [continuing]. Look, we just left the Wall Street debacle and there were some tax organizations that didnt do very
well in those investigations.
Mr. JOHNSON. There is definitely a line that can be crossed. But
this would authorize many of these techniques.
Mr. CONYERS. Well, you have sufficiently disturbed me with this
information.
Thanks, Chairman.
Mr. COBLE. Thank you, Mr. Conyers.
I say to my Members, we are going to have a vote here soon. I
think we can probably wrap this up.
I am now recognizing the distinguished gentleman from South
Carolina.
Mr. GOWDY. Thank you, Mr. Chairman.
Mr. COBLE. I almost demoted you, Trey.
Mr. GOWDY. And California would never allow me to set foot in
that state, Mr. Chairman, I dont think. I am sure I have warrants
pending.
Mr. Henchman, the substantial nexus test, howwhat are the
elements of it, how is it applied today?
Mr. HENCHMAN. It is laid out in theforin this case it is laid
out in the bill and essentiallyit is essentially property and pay-

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roll. And I do want to indicate that it is a substantial nexus test,
not the sufficient context test used for personal jurisdiction, as Mr.
Johnson indicated, that is a completely lessthat is a lower standard that the Supreme Court has never held to be the case for tax
purposes.
Mr. GOWDY. Are there limits to Congress ability to regulate state
tax structures?
Mr. HENCHMAN. This bill does not address that, so
Mr. GOWDY. In your judgment, are there limits to what we can
do with respect to state tax structures?
Mr. HENCHMAN. Well, the Constitution permits the Congress to
regulate commerce as it sees fit.
Mr. GOWDY. Yeah, but that is a very amorphous, increasing elastic
Mr. HENCHMAN. It is.
Mr. GOWDY [continuing]. Term.
Mr. HENCHMAN. It is. And in terms of preempting certain state
activities, I think even a limited reading of the Commerce Clause
finds that power existing with Congress. There are
Mr. GOWDY. Mr. Johnson, you
Mr. HENCHMAN [continuing]. Probably a lot of things you
could
Mr. GOWDY. Let me ask, Mr. Johnson. What are the limits as you
see them? Because I didnt write the note down and at my age my
memory slips, but you questioned, perhaps or maybe I misunderstood you, whether Congress would have the authority to do certain
things with respect to state tax structures or perhapsI dont want
to put words in your mouth. What do you think about it?
Mr. JOHNSON. I think there are certainlyI think there are certainly steps that Congress could take that would be so extreme
that they could be struck down as unconstitutional. P.L. 86272 has
not been challenged, to my knowledge, so I dontour position is
not that this bill would be unconstitutional, our position is that just
because the Federal Government may have the authority to impose
this bill doesnt mean it is a good idea.
Mr. GOWDY. What remedy would you propose?
Mr. JOHNSON. I would echo the comments of Congressman
Cohen. I would like to see the businesses get together with the
states and have a brighter line standard. I think it should include
sales, but I think there should be some clear de minimis standards.
I tried to propose something in Utah and I didnt get much support from anyone, either on the business side or from my legislators on it. But Ias someone who, again, has represented taxpayers, I do think more certainty in the area would be appropriate.
And I would encourage states to adopt brighter line standards. But
I think the states should be able to do so based on their own elected legislators. And I would encourage the business community to
work with the states in accomplishing that.
Mr. GOWDY. Mr. Henchman, what would be your perspective on
that remedy?
Mr. HENCHMAN. Well, I would say there is no incentive the
states will ever do that. And on the contrary, the incentive is to
move away from apportionmentaway from uniformity. And we
have seen that in apportionment, where back in the 50s Congress

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and through the Willis Commission threatened, look, this is a mess
in apportionment, and so you guys just need to adopt a standard
otherwise we are going to do it for you. And it took until a bill
nearly being passed by Congress for the states to get together and
adopt a uniform standard.
And since Congress has moved to other matters, the states have
now wandered off and now we have all these different apportionment standards. That is the way states go on these things. It is
going to take Congress or the courts to impose uniformity, the
states are not going to do it on its own.
Mr. GOWDY. Mr. Schroeder, I am from South Carolina and if I
can help you navigate that form, I will be happy to try and help,
but thank you for doing business in South Carolina.
And with that I would yield back the remainder of my time, Mr.
Chair.
Mr. COBLE. I thank the gentleman from South Carolina.
The gentleman from Tennessee, Mr. Cohen is recognized.
Mr. COHEN. Thank you, sir.
Are all of you all familiar with the Section 4 of this H.R. 1439?
Mr. Johnson, you are?
Mr. JOHNSON. Pardon me?
Mr. COHEN. Section 4, the new section in H.R. 1439?
Mr. HENCHMAN. The Joyce Finnigan Provision I think?
Mr. JOHNSON. Yes.
Mr. COHEN. Youre familiar with it then. What do you think
about it, sir? It was not in the prior Business Activities Simplification Act.
Mr. JOHNSON. Well
Mr. COHEN. How does that impact state governments?
Mr. JOHNSON. Toa simple example would be theunder the
prior versions of the bill the technique I talked about where you
would set up an intangible holding company for trademarks, that
would not have worked in Utah, because we are a combined state.
We would have taken the position that both the trademark holding
company and the retailer are a single business entity as long as
one of them has nexus in the state, the other one wouldnt. So that
technique would not have worked under prior bills.
Under this bill it will work because we are required to consider
each individual member of the combined group, individually, for
purposes of determining whether or not it has nexus under this
provision. So this is a dramatic expansion of the preemption.
Mr. COHEN. So you are against it?
Mr. JOHNSON. I am very much against it.
Mr. COHEN. Yeah, I would think so.
Mr. Henchman, where are you on this?
Mr. HENCHMAN. Thewhat is at issue here is basically two different interpretations of how you calculate nexus for different
states, it is known as the Joyce standard and the Finnigan standard. The Joyce standard brings indoes not bring in entities for
which the state doesnt have nexus, the Finnigan standard does.
We view the Finnigan standard as the more aggressive one and
the Joyce one as not. And this statute would enshrine the Joyce
standard which limits state taxation to those entities that are actually have nexus with the state.

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Mr. COHEN. Mr. Schroeder, are you familiar with this?
Mr. SCHROEDER. I am sorry, I didnt hear.
Mr. COHEN. Are you familiar with this section of the law?
Mr. SCHROEDER. I am not in detail, but judging from what I am
hearing is, you know, what we are looking for as a small business
is simply a bright line test that helps us establish where do we
have nexus and understanding why, because we want to make sure
we spend as much of our resources as possible helping our
franchisees grow and to grow their business and we need some
clarity and reduction of uncertainty to be able to do that.
Mr. COHEN. Now you are a franchisor.
Mr. SCHROEDER. Right.
Mr. COHEN. And you are here because you are a member of the
franchise association, but you dont necessarily representative the
franchise association. Is that correct?
Mr. SCHROEDER. Correct.
Mr. COHEN. All right. So you do not know thebut the franchise
association is 100 percent consistent with your position?
Mr. SCHROEDER. Yes.
Mr. COHEN. Okay. I got you.
I yield back the remainder of my time. Thank you.
Mr. COBLE. Thank you.
Trent, if you can keep it fairly brief I think we can get out of
here, if you will do that.
Mr. FRANKS. I will move it, Mr. Chairman.
Mr. COBLE. The distinguished gentleman from Arizona, Mr.
Franks.
Mr. FRANKS. All right. Mr. Johnson, what is your response to the
stories from companies such as Outdoor Brands that small businesses facing this kind of Hobsons Choice of either hiring expensive accountants to decipher the various state laws or the state
nexus rules or roll the dice and just make the best conclusion they
can and sometimes end up having a major tax liability. I mean
isnt that sort of a textbook example of kind of taxation without
that is unduly burdens to interstate commerce?
Mr. JOHNSON. Well, as I stated, Congressman Franks, I have
some sympathy for that position and I think the states have been
somewhat derelict in not providing clearer standards. And I think
a clear standard, for example, might include a de minimis amount
of sales. If you dont have more than $250,000 worth of sales into
the state, for example, that might be a good bright line.
But with regard to franchises, franchisethe whole idea of a
franchise is that when I am driving through Colorado or Wyoming
or South Carolina and I see a franchise that I am familiar with
from Utah, I am more likely to go to that business. I am more likely to participate there, patronize that business because it has built
up good will in the state. So to say that a franchisor doesnt benefit
from the market created in Utah, I think frankly is not correct.
Mr. FRANKS. Well, Mr. Henchman let me just ask you one question here sort of a combination question.
I know that some states are already using the physical presence
standard for net income and business activity taxes, even though
I dont think the Supreme Court has ever required it. So touch on
that.

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And then also the recent Iowa Supreme Court decision held that
Kentuckya Kentucky franchiser had a physical presence in Iowa
because the franchisee was using the franchisors intellectual property to, you know, pursuant to a franchisor contract arrangement.
And that isboy, that is something that is very hard for a business
toyou know, I came from a small business background
Mr. HENCHMAN. Right.
Mr. FRANKS [continuing]. And sometimes businesses dont know
whether to jump or go blind. And tell me, what do you think about
that and what is the answer to it.
Mr. HENCHMAN. Sure. I mean Mr. Johnson and I think some of
the members have talked about tax planning. There is also issues
of this is just how they have designed the business. I mean if somebody is structuring their business with the intent of avoiding taxes
they owe, then Mr. Johnson and his fellow tax commissioners have
the legal power to go after them. I mean you can do (inaudible) reporting, you can do unitary, you do a whole bunch of otherand
you can prosecute them.
If it is just made up to avoid taxes you can go after them and
nothing in this bill stops that. But with people who legitimately
structured their business in that way, they face a lot of problems
the way the system is set up now.
Mr. FRANKS. Yeah. Well Mr. Chairman, I will just make a comment and I am through. It seems to me, you know, the IRS and
tax agencies are always saying that businesses and individuals
have every right to pay as little taxes as they can, within the clear
confines of the law. But when the confines of the law are just completely murky it is not fair to businesses or individuals and it is
the responsible of Government to make those lines clear. And of
course, in my judgment, also to somehow find ourselves somewhere
in the vicinity of the Constitution at the same time.
So with that I yield back.
Mr. COBLE. I thank the gentleman.
Good news for the witnesses, we wont keep you here all the rest
of the afternoon waiting for us to return. I thank you all for your
testimony. Your written statements will be made part of the record.
We appreciate those in the audience for your presence today as
well.
Without objection all Members will have 5 legislative days to
submit to the Chair additional written questions for the witnesses
which we will forward and ask the witnesses to respond as promptly as they can do so with their answers that may also be made a
part of the record. Without objection all Members will have 5 legislative days to submit any additional materials for inclusion in the
record.
And this hearing stands adjourned.
[Whereupon, at 2:35 p.m., the Subcommittee was adjourned.]

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MATERIAL SUBMITTED

FOR THE

HEARING RECORD

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