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99–833 2016

KEEP IT SIMPLE: SMALL BUSINESS TAX 

SIMPLIFICATION AND REFORM, MAIN STREET 

SPEAKS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND 

CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

APRIL 13, 2016 

Small Business Committee Document Number 114–054 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

CRESENT HARDY, Nevada 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

YVETTE CLARK, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRENDA LAWRENCE, Michigan 

ALMA ADAMS, North Carolina 

SETH MOULTON, Massachusetts 

MARK TAKAI, Hawaii 

KEVIN FITZPATRICK, Staff Director 

EMILY MURPHY, Deputy Staff Director for Policy 

JAN OLIVER, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Tim Huelskamp .............................................................................................. 1 

Hon. Judy Chu ......................................................................................................... 1 

WITNESSES 

Mr. Troy K. Lewis, Managing Member, Lewis & Associates, CPAs, LLC, 

Draper, UT, testifying on behalf of the American Institute of CPAs and 

the Mobile Workforce Coalition .......................................................................... 3 

Mr. Mel Schwarz, Partner and Director of Tax Legislative Affairs, Grant 

Thornton LLP, Washington, DC ......................................................................... 5 

Mr. Robert M. Russell, Attorney—International Tax Controversy, Planning 

and Policy, Alliantgroup, Washington, DC ........................................................ 6 

Ms. Julie Verratti, Director of Business Development/Founder, Denizens 

Brewing, Silver Spring, MD ................................................................................ 8 

APPENDIX 

Prepared Statements: 

Mr. Troy K. Lewis, Managing Member, Lewis & Associates, CPAs, LLC, 

Draper, UT, testifying on behalf of the American Institute of CPAs 

and the Mobile Workforce Coalition ............................................................ 17 

Mr. Mel Schwarz, Partner and Director of Tax Legislative Affairs, Grant 

Thornton LLP, Washington, DC .................................................................. 26 

Mr. Robert M. Russell, Attorney—International Tax Controversy, Planning and Policy, Alliantgroup, Washington, DC ........................................ 31 

Ms. Julie Verratti, Director of Business Development/Founder, Denizens 

Brewing, Silver Spring, MD ......................................................................... 37 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

Statement of Henry C. ‘‘Hank’’ Johnson, Jr. .................................................. 42 

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SBREP-219A with DISTILLER

(1) 

KEEP IT SIMPLE: SMALL BUSINESS TAX 

SIMPLIFICATION AND REFORM, MAIN 

STREET SPEAKS 

WEDNESDAY, APRIL 13, 2016 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND

CAPITAL ACCESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 11:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Tim Huelskamp [chairman of the Subcommittee] presiding. 

Present: Representatives Huelskamp, Brat, Kelly, Chu, and 

Bishop. 

Chairman HUELSKAMP. Good morning. I am pleased to be 

joined today, or at least later by our colleague, Representative 

Bishop. And he will join us later. But good morning. Thank you all 

for being with us today, and I call this meeting to order. 

On Monday, April 18th, Americans will once again observe Tax 

Day. Small business owners across the country will be filing their 

tax returns, and for many small business owners, tax costs drive 

business decisions. The tax compliance costs currently imposed on 

small businesses are unacceptable. Employers with more than 50 

employees face a tax compliance burden of somewhere between 

$182 and $191, while the smallest employers with one to five employees, spend between $4,308 and $4,736 per employee. Some of 

this difference results from economies of scale, but the difference 

is still astronomical. We should be encouraging our small businesses and helping them to succeed, not erecting barriers to block 

the way. 

Every dollar that a small employer spends on tax compliance is 

a dollar that could have been used to invest back in the business 

or to hire another employee. Every hour that a small employer 

spends on tax compliance is an hour wasted that could have been 

spent on their actual business. 

Today’s hearing will focus on some of the most common and egregious areas of tax complexity that hinder small businesses in 

America. I expect we will also hear some recommended solutions— 

I hope so—and we will seriously consider them. 

I would like to thank our witnesses for coming today. I look forward to your testimony. I now yield to Ranking Member Chu for 

her opening remarks. 

Ms. CHU. Thank you, Mr. Chair. 

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2 

With filing day upon us, many small business owners are sending in their tax returns or submitting requests for an extension, 

but in truth, the process never really ends for them. Constant 

changes to the tax code makes compliance a year-round challenge 

for small employers. For small businesses, outdated and increasingly complex rules create an obstacle to success, rather than a 

means of encouraging growth and job creation. Simplification and 

certainty are the driving forces in an endless effort to reform the 

tax code and ease the compliance burdens on small employers. 

Through the years I have served on the Committee, we have 

heard many challenges created by the Internal Revenue Code and 

the major complications compliance has on business planning. We 

often hear that an intense focus on the bottom line is necessary to 

succeed. Small business owners know that every dollar counts, and 

they accordingly devote significant resources toward that goal. 

And one area every small business owner must focus on is complying with our tax laws. Tax compliance disproportionately affects 

small businesses compared to their larger counterparts, which 

often have in-house tax services. The National Small Business Administration’s Small Business Tax Survey found that over 30 percent of small firms spent more than 80 hours each year on tax compliance. It also concluded that nearly 60 percent of these businesses found administrative burdens to be the greatest complication and also the highest cost. 

The tax compliance burden on small businesses takes many 

forms. Most notably is the complexity of the code itself. With many 

forms to fill out every year, the majority of firms either spend excessive resources and time filing their own taxes or hiring tax professionals. One way to address this problem is by simplifying the 

tax code. By reducing its complexity, small businesses would see 

decreases in these fixed costs, as the need for expert preparation 

and the time commitment to prepare are both reduced. 

Congress did include the extension of important tax provisions in 

the PATH Act last year. By permanently addressing provisions like 

section 179 expensing, the R&D tax credit, and depreciation rules, 

small firms will now benefit from much needed certainty. It also 

serves as a spark to the economy as money saved now is injected 

back into the marketplace and long-term business plans can be created. But more can be done to simplify the tax code, preferably 

comprehensive tax reform. But until that day comes and we can 

agree on a solution, we must address some specific issues, like reducing paperwork requirements, updating filing deadlines, and 

other administrative caveats. 

This hearing will give the Committee the opportunity to examine 

several general compliance burdens, as well as some specific areas 

that could be addressed now to make things just a little easier for 

small businesses in the near term. 

I look forward to today’s testimony and thank the witnesses for 

their participation. I yield back. 

Chairman HUELSKAMP. Thank you, Ms. Chu. 

If Committee members have an opening statement prepared, I 

ask that they be submitted for the record. 

I would like to take a moment to explain the timing lights for 

each of you. You each have 5 minutes to deliver your testimony. 

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3 

The light will start out as green. When you have 1 minute remaining, the light will turn yellow. Finally, at the end of your 5 minutes, it will turn red. I ask that you try to adhere to that time 

limit. 

Our first witness is Mr. Troy Lewis. Mr. Lewis is a CPA, a managing member of Lewis and Associates in Draper, Utah, and chairman of the AICPA Tax Executive Committee. He is also an adjunct 

professor at Brigham Young University, where he received both a 

bachelor’s and a master’s degree in accounting. He is testifying 

today on behalf of AICPA and the Mobile Workforce Coalition. I appreciate you being with us today, Mr. Lewis, and you may begin. 

STATEMENTS OF TROY K. LEWIS, MANAGING MEMBER, LEWIS 

AND ASSOCIATES, CPAS, LLC; MEL SCHWARZ, PARTNER AND 

DIRECTOR OF TAX LEGISLATIVE AFFAIRS, GRANT THORNTON, LLP; ROBERT M. RUSSELL, INTERNATIONAL TAX CONTROVERSY, PLANNING AND POLICY, ALLIANTGROUP; JULIE 

VERRATTI, DIRECTOR OF BUSINESS DEVELOPMENT/FOUNDER DENIZENS BREWING 

STATEMENTS OF TROY K. LEWIS 

Mr. LEWIS. Chairman Huelskamp, Ranking Member Chu, and 

members of the Subcommittee, thank you for the opportunity to 

testify today in support of H.R. 2315, the Mobile Workforce State 

Income Tax Simplification Act of 2015. 

My name is Troy Lewis. I am a sole tax practitioner from Draper, Utah; an adjunct faculty member at BYU; and chair of the Tax 

Executive Committee of the American Institute of CPAs. I am 

pleased to testify on behalf of the AICPA. 

H.R. 2315 is an important step towards State tax simplification 

for small businesses. This bill provides relief which is long overdue 

from the current web of inconsistent State income tax and withholding rules on nonresident employees. The rules are burdensome 

and often bewildering to small businesses and their employees. 

There are States that tax wages even if the employee only works 

for one day in that State. 

Although some States provide a de minimis number of days or 

de minimis earnings amount before employers must withhold on 

these employees, these thresholds are not administered in any sort 

of uniform manner. For example, individuals are subject to State 

tax withholding after working 59 days in Arizona, 15 days in New 

Mexico, or just 14 days in Connecticut; yet, other States have a de 

minimis exemption based on the amount of wages earned. In Wisconsin, out-of-state employers are required to withhold State tax 

once an employee earns wages of $1,500. The cutoff is $1,000 in 

Idaho, $800 in South Carolina, and $300 a quarter in Oklahoma. 

Some States exempt and some do not income earned from certain 

activities, such as training and attending meetings. However, it is 

just not that simple. Exemptions sometimes only cover the employer’s withholding requirement. They do not even start to address the 

employee’s filing requirement or their tax liability. 

Now, to be fair, it is true that approximately one-third of the 

States have entered into agreements under which one border State 

agrees not to tax another State’s residents’ wages and vice versa. 

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4 

However, not all States have reciprocity agreements, and the 

agreements that do exist are primarily geared towards employees 

who ordinarily commute a few miles a day to particular adjoining 

States. For example, while Virginia has reciprocal withholding 

agreements with several States, California, Kansas, Mississippi, 

and New York, do not have any reciprocity agreements at all. 

As CPAs, we see firsthand small businesses on Main Street, and 

their employees, getting caught up in this web of inconsistent State 

income tax and withholding rules. Consider a real estate developer 

whose employees visit 20 prospective States and 20 different sites 

and spend less than a day each year in those States. Or a store 

manager who attends a half-day regional meeting in another State, 

with some of these meetings only occurring maybe twice a year. 

Unfortunately, small businesses are forced to comply with all of the 

variations from State to State, and some States have extremely 

complicated rules. 

Let’s consider Georgia for a second. Georgia requires withholding 

when a nonresident employee works more than 23 days in a calendar quarter, or 5 percent of their total earned income is attributable to Georgia, or if the compensation for services there is more 

than $5,000 a year. So the employer has to determine and calculate 

each of those three separate thresholds to determine when to withhold on each employee who may occasionally work in that State. 

The financial impact in most of these States is minimal. After 

taking into consideration their costs for processing nonresident tax 

returns, we believe those States receive only a minimal benefit, if 

any, from forcing out-of-state employees to file a return for just a 

few days’ worth of work. 

Small businesses currently face unnecessary administrative burdens to understand and comply with the variations from State to 

State. The issue of employer tracking and complying with all the 

different State and local tax laws is quite complicated. It takes a 

lot of time, not to mention the lost economic productivity for these 

small businesses. 

Let’s keep it simple. Let’s provide small businesses relief from 

this egregious area of administrative complexity. Congressmen 

Bishop and Johnson have reached a very reasonable balance between the States’ rights to tax income from work performed within 

their borders and the needs of individuals and businesses to operate efficiently in this economic climate. Their bill provides a reasonable and simple 30-day de minimis threshold which should 

apply uniformly across this country. We urge you to support H.R. 

2315. This legislation should be passed as soon as possible. 

Thank you for the opportunity to testify, and I would be happy 

to answer any questions you may have. 

Chairman HUELSKAMP. Thank you, Mr. Lewis. I appreciate 

your testimony and your advocacy for that bill. 

And I am now pleased to welcome Mel Schwarz, a partner and 

director of Tax Legislative Affairs in Grant Thornton’s National 

Tax Office. He is both a lawyer and a CPA, so two strikes—I am 

just kidding—with more than 29 years of Federal income tax experience. He is an alumnus of the Joint Committee on Taxation, 

where he worked for 6 years. He holds a B.A. from SMU, a master’s of accounting from the University of Texas, and a law degree 

SBREP-219A with DISTILLER

5 

from the University of Michigan. Thank you for joining us today, 

Mr. Schwarz, and you may begin. 

STATEMENT OF MEL SCHWARZ 

Mr. SCHWARZ. Thank you, Chairman Huelskamp, Ranking 

Member Chu, members of the Subcommittee. I am grateful for the 

opportunity to speak to you today. As the title of the hearing says, 

‘‘Small business needs tax reform.’’ And simplifying compliance and 

administration for small business needs to be a part of that tax reform. It is an unfortunate fact that the complexity and cost of calculating many tax incentives makes it difficult for small businesses 

to properly take advantage of them. It is my experience that because of this, many small businesses are forced to ignore these incentives. This not only prevents the provisions from accomplishing 

their intended purpose, but also results in small businesses being 

placed at a disadvantage compared to their larger competitors, who 

are better positioned to reap the benefits by incurring the cost of 

calculation. 

Now, one might say that the solution to this is to do away with 

tax incentives and to simply, really simplify, the code. When that 

happens that will be a wonderful thing, but until that happens, 

there really is an unfairness and a disadvantage for the small business community that is created by the complexity and not providing them an avenue to accomplish and to share in those incentives that for whatever reason Congress has chosen to include. It 

is my experience this leads many small businesses to believe that 

they have been left out, that the incentives in the code are intended for big business only, and that the system is simply not fair. 

Now, we urge Congress to pursue tax reform that would lower 

the tax rates applicable to all business regardless of the form in 

which they conduct that business. Small businesses are among the 

most likely to organize as pass-throughs, and it is essential that 

pass-throughs, such as partnerships, S corporations, sole proprietorships, be included in any reduction in tax rates. But we also 

recognize the immense difficulty faced in enacting fundamental tax 

reform. And if for whatever reason such tax reform is not possible 

or is only possible in the future, simplification for small business 

should be addressed now by better focusing on methods that simplify computation and allow the use of safe harbors that are specific to the needs of small business. 

Now, I am going to spend the rest of the time talking about two 

important Federal tax incentives: the Section 41 Research Credit 

and the Section 199 Domestic Production Credit. The credit for increasing research is one of the most effective incentives in the code. 

Studies have shown additional research contributes a multiple of 

its cost in increased economic activity. Now, under current law 

there are two methods that can be used to calculate the credit: a 

traditional method, which allows for a 20 percent credit but requires the use of data from as far back as 1984, or what they call 

an alternative simplified method. We tried a simplified method. We 

now need an alternative method. The credit is only 14 percent but 

we only have to use data from the prior 3 years. 

Now, I talked with people who specialize in the research credit 

in my firm, and they said, in their experience, there are virtually 

SBREP-219A with DISTILLER

6 

no small- or medium-sized businesses that use the traditional 

method, despite the fact that it provides a higher credit rate. Now, 

in recent years, there have been numerous legislative proposals to 

essentially abandon the traditional method, use whatever revenue 

could be raised by abandoning that method to increase the percentage allowed for the alternative simplified method. Enactment of 

that kind of legislation would provide a significant benefit to smaller taxpayers. 

The research credit is also an example of an area where safe harbors designed for businesses in general could be better tailored to 

the needs of a small business. Example: Wages count as qualified 

research costs eligible for the credit to the extent the employee is 

engaged in research. Employees devoting 80 percent of their time 

to qualified research activities are considered to have devoted all 

of their time to such activities. Now, large businesses with significant research staffs can generally judge whether employees are 

spending substantially all of their time performing research, and 

then they can use this 80 percent rule more as a cushion, which 

allows them to say I feel comfortable and I feel safe with regard 

to that employee. I am going to include that employee’s wage. In 

the case of a small business, typically each employee has a much 

wider range of responsibilities. Our experience is that this often 

prevents those small businesses from treating the 80 percent rule 

as a cushion the way their large business competitors are able to. 

Small businesses end up having to examine the credit and examine 

the documents to determine whether they qualify for the credit. If 

you were to reduce the safe harbor to 50 percent for small businesses, this would allow them to use the cushion in the same way 

their big business competitors use it, and this, I think, is an excellent example of the kind of change—by no means the only one. 

My written testimony includes an example with regard to the domestic production activity deduction. I would be happy to address 

that separately, but once again, it is a complex calculation which 

does have safe harbors, but has safe harbors that fit the general 

business and are not specifically designed to facilitate the needs for 

small business. 

Thank you, and I am happy to respond to any questions. 

Chairman HUELSKAMP. Thank you, Mr. Schwarz. 

Up next, I am pleased to welcome Robert Russell. Mr. Russell is 

an attorney with alliantgroup, specializing in international tax controversy, planning, and policy. He has a broad breadth of experience, having worked at the IRS, Treasury, and the Joint Tax Committee. He holds a bachelor’s in accounting from Middle Tennessee 

University, a law degree from Chicago-Kent College of Law, and a 

master of laws in taxation from Georgetown. I appreciate you being 

with us today, Mr. Russell, and you may begin. 

STATEMENT OF ROBERT M. RUSSELL 

Mr. RUSSELL. Thank you. Thank you, Chairman Huelskamp, 

Ranking Member Chu, for having me here today to address the important issue of tax reform and simplification as it applies to small 

business. Specifically, today, I will address the challenges these 

businesses face when expanding and operating overseas and the 

burden imposed by the tax code. 

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As background, the firm I am with, alliantgroup, is a leading tax 

consulting firm helping American businesses grow through the tax 

code. Among our clients are thousands of small- and mid-sized 

businesses, including businesses from Kansas and California, and 

we work with CPAs throughout our work. If there is one message 

from my testimony today, it is that small businesses are, in fact, 

operating overseas, and they look to do more. However, the current 

tax code as written for international provisions is made for large 

companies. 

Today, I would like to address three issues. First, the barriers for 

simple business functions that are imposed by the tax code, including those of information reporting. Second, the complexities in compliance costs that are in the code for these companies. And third, 

the need for international tax reform, both in the U.S. and globally. 

To my first point, many of our businesses are shocked when they 

go overseas by simple business functions that are difficult because 

of our tax law. For instance, many of our clients are even unable 

to do simple things like open foreign bank accounts because foreign 

financial institutions do not want to deal with U.S. clients because 

of our Foreign Account Tax Compliance Act. For those taxpayers 

that do have foreign accounts, they have to run through the gauntlet of our U.S. tax reporting requirements. These requirements, you 

have to report to multiple U.S. agencies with different definitions 

of what to report, and they come with steep penalties. The hearing 

memo from the Committee included some of this information, but 

the penalties which were initially in place to ferret out those with 

secret accounts in Switzerland or Panama are now playing a game 

of ‘‘Gotcha’’ for those legitimate businesses operating overseas. 

These rules should be reexamined for appropriateness and simplicity. Furthermore, our clients tell us of international business 

opportunities being turned away when foreign partners actually 

tell them they take lesser quality goods from competitors so that 

they do not have to deal with the U.S. tax administrative burdens. 

That brings me to my second point, that far too often in tax reform discussions and policy debates, the cost to taxpayers to comply is overlooked, especially when businesses expand overseas, the 

compliance costs skyrocket. I would like to give you one example 

from our client base. A specialty equipment manufacturer sees a 

market for his good overseas. He sets up an affiliate in this country 

for sales and distributions. This simple set up comes with a whole 

host of compliance costs. Under our transfer pricing rules, for this 

one enterprise, each transaction between the two entities must be 

evaluated for the price that would be charged on the open marketplace. Large companies are able to employ accountants, attorneys, 

economists, to provide extensive studies and analysis to meet the 

reporting requirements. There are no simplified reporting requirements for small businesses with resource constraints. In the past, 

alliantgroup has met with IRS and Treasury to try to discuss how 

to develop a way for smaller companies to meet their required reporting burden without being buried in compliance costs. 

And to my final point, international reform and simplification. 

Everyone is in agreement that the current U.S. international tax 

code is in need of reform. I would just like to note that small business needs a place at this table during this discussion. With the 

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high rate of U.S. tax, small businesses that operate internationally, 

in fact, face some of the highest effective tax rates in the world. 

Large companies, we know, are able to engage in sophisticated tax 

planning, and it is well known they lower their effective tax rates, 

and they need to in order to compete globally. However, many 

small businesses are not able to do the same. 

Lastly, within the reform discussion, I would like to mention the 

work globally recently by the OECD and their BEPS project. While 

many of the recommendations affect larger companies, I would just 

like to mention to keep an eye on the impact of some of these recommendations on smaller businesses. I provided a couple of examples in my written testimony, and I would be happy to get into 

some of those later. Thank you for allowing me to testify today on 

this important topic. 

Chairman HUELSKAMP. Thank you, Mr. Russell. I appreciate 

the testimony. I look forward to questions on that. 

I am now pleased to yield to the ranking member, Ms. Chu, so 

that she may introduce her final witness, Ms. Verratti. 

Ms. CHU. Thank you, Mr. Chair. Let me also say that I have a 

Judiciary Markup occurring at this exact same time, so I may have 

to step out for a moment to vote, but I will be back. 

But now, it is my pleasure to introduce Ms. Julie Verratti, director of business development and founder of Denizens Brewing in 

Silver Spring, Maryland. Denizens is the only women and minorityowned and operated brewery in Maryland. Prior to starting her 

business, Ms. Verratti was a presidential management fellow at 

the Small Business Administration and staffer with the Senate 

Small Business and Entrepreneurship Committee. She received her 

undergraduate degree from Brandeis University, and her law degree from the George Washington University Law School. Ms. 

Verratti is testifying on behalf of the Brewers Association, an organization of brewers for brewers and by brewers. Welcome, Ms. 

Verratti. 

Chairman HUELSKAMP. I thank the ranking member for that 

introduction. Ms. Verratti, you may begin. 

STATEMENT OF JULIE VERRATTI 

Ms. VERRATTI. Thank you. Chairman Huelskamp, Ranking 

Member Chu, and members of the Subcommittee, thank you for the 

opportunity to testify at today’s hearing. 

My name is Julie Verratti. I am the director of business development and cofounder of Denizens Brewing Company in Silver 

Spring, Maryland. I am here today speaking on behalf of my small 

business and the Brewers Association, which represents more than 

3,000 craft brewers. My cofounders, Emily Bruno, Jeff Ramirez, 

and I, started Denizens in 2014, and we are the only women and 

minority-owned and operated brewery in Maryland. We are both a 

restaurant and a production brewery, which means that we 

produce beer to be sold both in our restaurant and to other retail 

locations. In the short time that we have been open, our brewery 

has experienced solid growth. In 2015, we produced 1,140 barrels 

of beer and are on track to produce about 1,500 barrels in this coming year. For anyone who is curious, that equals about 82,500 sixpacks. 

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Running a craft brewery, like Denizens, is similar to running any 

other small business. All the day-to-day activities and stresses, like 

scheduling, marketing, health care, and payroll, they are all amplified by a tight brewing schedule and working to distinguish ourselves in a growing industry. 

Denizens has close to 40 full-time employees, who range from tip 

service positions, kitchen staff, brewing staff, and salaried professional positions. All of our full-time employees are offered medical, 

dental, and vision insurance through the company, which is something we are very proud of. 

Denizens produces beer in Maryland, and we sell our beer both 

in Maryland and D.C. Our tax and compliance burdens are significant. We collect and submit sales tax in our tap room. We pay employment taxes, business income taxes, and on top of that, excise 

taxes to both the State and Federal Governments using their separate and individual filing systems. I spend up to 11 hours a month 

working on taxes, which may not seem like a lot of time, but it is 

significant when you are working to grow your business. And in the 

next month, my brewery will start distributing in Virginia, which 

will increase the number of tax regulations that we must comply 

with. We are happy to comply, but these tax burdens could be a 

deterrent for a smaller brewery than Denizens. 

Currently, breweries are required to comply with a patchwork of 

Federal, State, and sometimes even county taxes and alcohol regulations. Oftentimes, there are different requirements about when 

and what to file. For example, Denizens files taxes biweekly, 

monthly, quarterly, and annually, although we have received some 

relief from the Federal Government that I want to discuss further. 

In many cases, we have found that even if there is a way to file 

online, it is actually easier to file the forms in hard copy. It would 

be significantly more convenient if the Federal and State Governments worked together to come up with a more streamlined process 

for reporting. In fact, a large portion of my time spent on taxes is 

actually duplicating information from one report to another. 

The Federal Government has taken the steps to correct some of 

the burdensome biweekly excise tax filing requirements. Last year, 

language was included in the year-end tax extenders package that 

made it so any alcohol producer that pays less than $50,000 in annual Federal excise taxes, will no longer be required to get a bond 

and will only need to file quarterly. Another step that the government took that was beneficial to both my brewery and others like 

mine, was to permanently extend the small business expensing 

limitation and phase-out amounts in section 179 when they passed 

the PATH Act. Because of this change, we were actually able to 

save on a combination of equipment purchased in 2015 and a carryover from 2014. 

As I mentioned previously, breweries like mine pay excise taxes 

on both the State and Federal level. These are additional taxes 

over and above our business and payroll taxes, and one of the 

major expenses that I, as a brewery owner, face. 

When the Federal beer excise tax was first put into place to finance the Civil War, excise taxes were a major source of revenue, 

and most other modern Federal taxes did not exist. For almost a 

decade, the Brewers Association has been working with Congress 

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to try and pass legislation that recalibrates the Federal Excise Tax 

to reflect the makeup of the craft brewing industry and to spur additional growth. The Craft Beverage Modernization and Tax Reform Act introduced this Congress would lower the Federal excise 

tax for the brewing industry, as well as the wine and distilled spirits industries, and make the alcohol beverage excise tax system 

more progressive for smaller producers like Denizens. It is legislation like this that would have a major impact on my business, as 

well as other craft brewers. Denizens is a growing brewery, and if 

we continue at our current trajectory, we will be at capacity within 

the next 2 years. If we are able to get our Federal tax lability reduced, we will be able to produce more equipment and kegs and 

hire at least two additional new full-time employees. 

Knowing that we would have access to additional capital is an 

incentive to continue growing and hiring, which will produce more 

Federal revenue over time. A reduced Federal excise tax liability 

would be extremely helpful to the craft brewing industry and the 

national economy. It is no surprise that this bill has widespread bipartisan support from not just the alcohol industry but also agricultural and manufacturing associations. 

In conclusion, taxes and tax compliant costs are the largest expenses that craft brewers, like Denizens, deal with on a day-to-day 

basis. We are more than happy to pay our fair share, but recalibration of the Federal excise tax would have an extremely positive impact on small brewing businesses like mine and also the ones that 

are in your home States. 

Thank you again. I appreciate the Subcommittee inviting me to 

testify today, both on behalf of Denizens Brewing Company, the 

Brewers Association, and the many craft brewers across this country. 

Chairman HUELSKAMP. Thank you, Ms. Verratti. I appreciate 

your testimony, each of the witnesses here today, and of course, our 

topic here is tax simplification for Main Street. And with that, I 

will start with a question for Mr. Lewis, if I might. 

If you were able to wave a magic wand—we do not do that very 

often around here but we talk about it—what would be you think 

the single most important change we could make on tax simplification that would help Main Street businesses? 

Mr. LEWIS. The single most. Well, that is, as you said, the wand 

business is far from here. I would say you heard a recurring theme 

up here, which is to cut out the administrative burden. I think that 

is the key. I think Ms. Verratti echoed what me and my clients say 

is the same thing. They are happy to pay what they owe. They just 

would like to do it with a lot less effort. There is unproductive time 

that is spent in complying, and I think that goes to the issue of tax 

simplification. Some of the other ones are more burrowed up into 

it, but in the end, what they are really saying, what we are hearing 

on Main Street is just lower the burden. Lower the burden on administrative compliance and you will be doing a great deal for 

them. 

Chairman HUELSKAMP. Mr. Lewis, when the IRS issues regulations and rules, do they make estimates of tax compliance costs 

or is that from the private sector? 

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Mr. LEWIS. There is a process by where they do try to estimate 

the time to comply, but it is just like everything else with the bureaucracy with which we live. The door only swings one direction 

usually with that stuff. We just add to the process; we do not take 

away. And so I am not here to advocate to say that any one particular regulation or a new particular thought is wrong but you just 

have to understand that it adds to the existing burden that is already there. And when you put that burden on those companies, 

what you are really doing is you are having them reallocate resources from growing their business and hiring new people and 

doing the things that you want them to do from this Committee 

and the things that you espouse from this Committee’s level, and 

instead, they just put it in nonproductive ways, like complying. 

Chairman HUELSKAMP. Mr. Schwarz, you raised the issue of 

safe harbors and I will say your explanation of safe harbors, which 

are alternative to simplification, seem quite complex. Is there any 

way we could structure, actually do that to make safe harbors a 

means for simplification? I know we are trying to target the small 

businesses here, but can you describe that a little more in-depth? 

If you were able to change that, how would you apply those and 

simplify those? 

Mr. SCHWARZ. What you are looking for any time a safe harbor 

is created for the Federal tax system, is to allow taxpayers to essentially shortcut what would otherwise be a very complex calculation. And that is where I think you want to see an expansion of 

that type of activity. Ask the question each time that a rule is put 

in place: is there a simple way to address this issue so that instead 

of going through a detailed calculation, instead, something that is 

simple, maybe something that can be drawn directly from the financial records that are being kept. One of the problems that small 

businesses face is that unless they keep their books entirely on a 

tax basis, which the banks are not always happy with, then they 

are keeping two sets of books. And the more they could be allowed 

to use their financial book, so long as that is a reasonable method, 

then I think the simpler it would be. 

Ms. Verratti has, I think, a classic example with regard to we did 

not get into the domestic production activity deduction, but because 

she runs—both brews beer and sells it at a restaurant, if she just 

brewed beer, all of her revenue would qualify. We would just take 

9 percent off the top. But because she has two functions, one of 

which qualifies, one of which does not qualify because they did not 

want McDonald’s to qualify, she is faced with having to do a separation. He could we make that separation easy? How could we put 

in a rule that she would be comfortable using that would say, okay, 

I have got this one statistic; I apply that statistic and I know the 

IRS will accept it? 

Chairman HUELSKAMP. Do you think the IRS has the capacity 

to figure that out? 

Mr. SCHWARZ. Yes. I think that they do. 

Chairman HUELSKAMP. Okay. 

Mr. SCHWARZ. The question, of course, is will they? 

Chairman HUELSKAMP. Yeah. Very good. 

Mr. Russell, you made a pretty stunning, but I think accurate, 

statement that in terms of our rules and regulations, particularly 

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for overseas business, they have been built for large corporations. 

Is that by statute, or rule and regulation, or simply simplification 

for the IRS? 

Mr. RUSSELL. Well, the statute is actually very broad in this 

area, and so it is left to Treasury and IRS to implement. And they 

look for the information that they need; however, they have not 

scaled it back to meet small business needs. And there are some 

examples of other countries that have systems in place to reduce 

documentation requirements for these size businesses, which could 

be done. Resources are available to have this conversation and to 

facilitate business. 

Chairman HUELSKAMP. Thank you. I will next yield to Representative Trent Kelly for 5 minutes of questions. 

Mr. KELLY. I am a southerner. We do terrible with any names 

that have more than two syllables, but Ms. Verratti, thank you, 

first of all, for being a woman-owned and minority industry. I think 

that is so important, and thank you for your conversations. You 

mentioned during your testimony that you spend 11 to 12 hours a 

week—a month, which is a significant amount. That being said, 

you obviously have some basis—when I was in law school and I 

took Tax, what I learned was I can recognize and identify a tax 

problem three out of four times and I can solve none of them, but 

you obviously have some expertise. Most people do not so they are 

not able to give, even if they had 11 hours to give, they cannot. Do 

you have any expertise that allows you to do the tax? 

Ms. VERRATTI. I would say the expertise that allows me to do 

the taxes. The way I do it is that I used to work for the government, so I understand what government people are looking for 

when filling out forms. So that is helpful to me. Obviously, my educational background as well is helpful. I think there are a lot of 

small business owners out there who do not necessarily have—I 

mean, I was lucky enough to be able to go to law school, so yes, 

I think that the number one thing that is frustrating with the tax 

forms that we fill out—and I say ‘‘we’’ meaning all the craft brewers across the country—is that a lot of the language in the forms 

and the directions, so to speak, that are supposed to be explaining 

to you what they are actually asking, does not make any sense. 

There is not enough plain language, so I think that that would actually be a great way to explain the system, is having all the directions in plain language. I mean, I am someone with a law degree 

and I sometimes read these forms and I am like, I have no idea 

what they are asking me to do. So I think that that would be a 

really helpful thing to improve the system. 

Mr. KELLY. And Mr. Schwarz, going to the same kind of question here, most small business owners do not have the expertise or 

the education level in that specific area of taxes and those things. 

And if they are spending, someone who is a professional and understands can spend 11 or 12 hours a month, the expenses to a regular—and those are not paid for any other way. I mean, that just 

comes down as cost to customers; is that correct? And what would 

you do to improve that? 

Mr. SCHWARZ. That is certainly correct, Congressman. 

Mr. KELLY. What, if anything, would you do, or how do we better simplify? You know, there are simple solutions to complex probSBREP-219A with DISTILLER

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lems. I think sometimes agencies and even congressmen forget 

that, but there are simple solutions. So what are some simple solutions that you think will help this? 

Mr. SCHWARZ. Again, I will come back to the idea that to the 

extent possible you want to have one set, one—you calculate things 

once. And calculating however you calculate it, whether it be 

using—how can we allow the tax rules to follow something that the 

business is already having to do? That, I think, would be significant. The other is to look at each section, and not only ones that 

are in the law but as things come into the law and say, okay, is 

there someway here that we could allow a shortcut, that we could 

allow small business to have that certainly for revenue estimation 

reasons you might not be able to extend to the entire world, but 

for small business to preserve their ability to deal with that particular provision. And I would hope that this is an area where this 

Subcommittee could make a real role in standing up for the needs 

of small business in that kind of a context. 

Mr. KELLY. Mr. Chairman, I first thank all the witnesses for 

being here and for your testimony, and Mr. Chairman, I yield back. 

Chairman HUELSKAMP. Thank you, Representative Kelly. 

Next, I yield to Representative Chu, returned from her markup, 

and you have 5 minutes for questions. 

Ms. CHU. Well, I would like to ask the entire panel about resources for the IRS and how it could better serve you. The budget 

proposal for the IRS for Fiscal Year 2017 is $11.8 billion; however, 

the IRS requested $12.3 billion in order to dedicate an adequate 

amount to resources and staff to improving customer service and 

technology. Now, I understand better taxpayer service and education leads to higher compliance rates, and what I would like to 

ask about is what kind of customer service have you experienced 

from the IRS, and what are your thoughts about where improvements could be made, especially with regards to small business. 

Mr. LEWIS. Thank you, Ranking Member Chu. It is still a little 

bit early for us to have feedback at the AICPA. We do a fairly sophisticated informal survey of our members right after busy season 

ends. As you can imagine, emails are not getting returned very 

quickly today by our members. They will be next week; I guarantee 

that. But I would say based on my personal experiences, they have 

improved year over year. Last year was abysmal, and that is in the 

commissioner’s words, not mine. This year, instead of waiting 2 

hours on the phone, the last time I called it was like 12 or 13 minutes. So I have seen an increase. And again, we have just talked 

a lot about the small business inefficiencies. Do not forget that I 

represent CPAs that have their own small businesses just like 

mine. The inefficiencies that we heard from Ms. Verratti plague us, 

too. No one wants to sit on the phone listening to the same repetitive three-song track over and over again for 2 hours, although as 

a side benefit, I have become a classical musical fan. But it is not 

productive time. It is not what my clients expect me to do, and it 

is not what I want to be doing. 

So to answer your question, the IRS has got to be more efficient 

in what they do. They have to be more effective. They have to find 

the ways to help the taxpayers, but also those that serve them, the 

tax professionals. I have seen it improve in my own experience over 

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this last year, and it is a complicated question. It is hard to tell 

exactly what the benefits all are, but I would say that it is better. 

Mr. SCHWARZ. I would agree with Mr. Lewis, but I would say 

that there is still work that could be done, and there is improvement that could be made. And, unfortunately, that always involves 

additional money. And I think it would benefit, in particular small 

business, who may be more likely to need to rely on direct contact 

with the sort of IRS phone system, that it would be helpful if there 

were additional funds available. 

Having said that, I think there is also, it is noteworthy and I 

know that the commissioner is coming to speak to you later this 

afternoon, but there are initiatives to modernize and make more efficient the taxpayer-IRS interface, particularly through a growing 

use of computer-aided and Internet-focused activities. It is always 

important to remember that for particularly the smallest of the 

businesses, that may not be an efficiency that is always available 

to them, and the ability for any taxpayer to access the IRS needs 

to always be there, whether or not they have access to a computer. 

Mr. RUSSELL. And everyone recognizes that the IRS is 

stretched thin, but speaking to our CPAs and clients, I mean, they 

are looking for more help from the IRS—more guidance, more educational outreach, and additional people trained to talk to on the 

other end of the phone. I will say in my practice, I represent clients 

with international tax issues, and yes, there is a little frustration, 

even for myself, who has been on the IRS side examining returns. 

I know who I need to talk to. I cannot get on the phone to talk to 

the right person. So there is a little frustration in that point. 

One point I will add is the help of the National Taxpayer Advocate in this system. So whenever you are talking about helping the 

IRS, more funds, that is one angle that is very helpful in this, too. 

Ms. VERRATTI. I will say that I am somewhat neutral in terms 

of I have never really had to deal with the IRS in terms, so I cannot really judge their customer service. I will say another part of 

the government that is somewhat related is the Alcohol and Tobacco Tax and Trade Bureau, otherwise known as the TTB. I would 

absolutely advocate for and encourage you guys to fully fund them, 

help them get more staff, especially as the craft brewing industry 

is growing in this country. It is an industry that is booming and 

there are more and more people needing more and more guidance 

from that agency. And more and more labels that need to be improved. And I guess I will stop there. 

Ms. CHU. Okay, thank you. I yield back. 

Chairman HUELSKAMP. Thank you, Representative Chu. Next, 

I recognize Representative Mike Bishop from Michigan. Welcome to 

the Committee. Thank you for joining us, and you have 5 minutes. 

Mr. BISHOP. Thank you, Mr. Chairman. Thank you very much 

for inviting me to be a part of this Committee even though I am 

not an actual member. I am grateful for your invitation, and thank 

you Ranking Member Chu for your hospitality today. I also want 

to thank you for accommodating my schedule. In Judiciary we had 

a markup, so thank you very much for letting me wear my track 

shoes today and run in this very easily navigated Rayburn building 

as we all know. 

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I have been a business owner, a small business owner and an attorney for more than 2 decades, and part of those 2 decades as general counsel for a small business, so I am very familiar with these 

issues. I have seen firsthand how complicated and confusing and 

burdensome the State income tax system is for businesses, especially those with employees working for temporary periods in multiple States. This compliance burden is even higher for small businesses because they do not have large legal or payroll departments 

to help them keep track of the 40 different State income tax rules. 

Small businesses and their workers should not be punished with 

the complex tax reporting standards simply because our modern 

economy means more work travel across State lines. Such policies 

are detrimental to businesses themselves, but also to the economy. 

Instead of adding jobs or reinvesting, small business owners are 

forced to spend time and their resources on complying with convoluted State income tax laws. I can tell you firsthand as a general 

counsel, we spent most of our time on compliance, looking over our 

shoulder to see what regulator was going to come at us next and 

for what reason. And if you had three regulators call in one day, 

they would all disagree with each other or give their different opinions on any particular rule. 

One particular story from an employer that we had in Judiciary 

really stands out in my mind. Last year, a gentleman came to the 

Subcommittee in Judiciary. He was an employer. He had filed 

10,500 W-2s on behalf of their employees, primarily because they 

had crossed State lines during the course of business. He explained 

a case where one worker had to file 50 W-2s. Just imagine a small 

business having to file 50 W-2s. We should not be placing that burden on our small businesses. It really is absurd. 

The bill that Mr. Johnson and I introduced, H.R. 2315, the Mobile Workforce State Income Tax Simplification Act of 2015, quite 

a mouthful, is carefully crafted legislation that creates a simple 

and easy to administer system for the imposition of a nonresident 

State income tax law by creating a uniform 30-day rule to determine nonresident income tax liability. The bill ensures employees 

will have a clear understanding of when they are liable for nonresident State income tax and small business employers will be 

able to better withhold these taxes. It will save time and resources, 

allowing businesses to put their hard-earned resources towards 

things that drive our economy forward, such as jobs and investment. That really is the underlying goal of the bill. 

I want to thank everybody in this room because I know you all 

stand for small business and you are doing everything you can to 

make this a better environment. I think this is a good bill. I would 

just throw out there, if I could, Mr. Lewis, for your thoughts about 

how this will impact small business. Bigger businesses have an opportunity to absorb this, may have a better, easier way of dealing 

with it. Small business does not. Can you quantify that for us and 

tell us the impact it is having? 

Mr. LEWIS. Sure. Thank you, Representative Bishop, and thank 

you for your leadership on this important piece of legislation and 

your cosponsorship. Also, the chairman as well for cosponsoring. 

I think to understand this legislation, you have to understand 

two parts. The first is there is a part that the employer has to deal 

SBREP-219A with DISTILLER

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with and then there is the employee. Let’s deal with the employer 

first. The employer has to be educated about all the various State 

laws, and as I said in my opening testimony, there are varying 

rules and the rules change. So that constant educational process is 

taking these business owners and these administrative people 

away from the function of running their business. How hard is it? 

It is just as you said; the smaller the business, the more they have 

to spread—they have the least amount of ability to spread those 

costs. It is incredibly burdensome. 

And to the chairman’s question, what is the most important 

thing you do? Just cut the administrative burden. I think that is 

key. But let’s do not forget that there is an employee aspect as 

well. Even after this employer has filed 50 W-2s on behalf of one 

employee, that employee then has to turn around and file, potentially, in all of those various jurisdictions. Keep that in mind. So 

it is not just burdening the small business but it is the employees 

as well. So it is incredibly burdensome, and I think it has come 

time to where let’s just, as Mr. Schwarz said, let’s look for a costbenefit. Let’s look at these types of things with a cost-benefit lens. 

Is the benefit really that great that we should burden these individual employees and these small businesses? I would suggest not, 

and that is why I think this legislation is a good piece. 

Mr. BISHOP. Thank you. 

Mr. Chairman, I know we are over. May I make a request in asking unanimous consent to submit into the record before we leave 

today Representative Johnson, who cannot be here today, his testimony? Thank you. 

Chairman HUELSKAMP. I would like to thank all of our witnesses for participating today. You have raised a number of issues 

and potential solutions. I do like hearing that. That requires serious consideration. Clearly, these are not the only areas of undue 

tax complexity for small business, but putting a spotlight on these 

issues is a good start. I am pleased to be a cosponsor of our colleague, Mr. Bishop’s Mobile Workforce Bill, which I hope will help 

us make some headway, and I urge my colleagues to join as well. 

This Subcommittee remains dedicated to small businesses and 

their hard-working employees. It is incumbent upon us to ensure 

that small businesses have the tools they need to succeed and are 

not mired in compliance complexities. It is a clear example where 

we need to get government out of the way. If our tax code is not 

helpful to our small businesses, it should at least be clear. 

I ask unanimous consent that members have 5 legislative days 

to submit statements and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 11:50 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

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INTRODUCTION 

The American Institute of CPAs (AICPA) commends Chairman 

Huelskamp, Ranking Member Chu, and Members of the Subcommittee for examining the need for, and potential benefits of, 

small business tax simplification and reform, including a bill that 

would assist small businesses, H.R. 2315, the Mobile Workforce 

State Income Tax Simplification Act of 2015. We applaud the leadership taken by the Committee to consider this important legislation. 

The AICPA is the world’s largest member association representing the accounting profession, with more than 412,000 members in 144 countries and a history of serving the public interest 

since 1877. Our members advise clients on federal, state and international tax matters, and prepare income and other tax returns for 

millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America’s largest businesses. 

The AICPA is also an active leader in the national Mobile Workforce Coalition, comprised of 295 businesses and organizations that 

support this legislation. 

H.R. 2315 

The AICPA commends the Subcommittee for their consideration 

of H.R. 2315, which limits the authority of states to tax certain income of employees for duties performed in other states. More specifically, the bill prohibits states from taxing most nonresident employees (there are exceptions for certain professions) unless the employee is present and performing employment duties for more than 

30 days during the calendar year. Furthermore, employees would 

not be subject to state income tax withholding and reporting requirements unless their income is subject to taxation. 

AICPA’S POSITION 

The AICPA strongly supports H.R. 2315. We believe the bill provides relief, which is long-overdue, from the current web of inconsistent state income tax and withholding rules that impact employers and employees. 

After taking into consideration the costs for processing nonresident tax returns with only a small amount of tax liability, we 

believe states receive only a minimal benefit (if any) from the tax 

revenue that results from an employee filing a return for just a few 

days of earnings in that state. If nonresident tax returns with 

minimal income reported were eliminated through a standard, reasonable threshold, such as in H.R. 2315, we think that most states 

would have an increase in resident income taxes to substantially 

offset any decrease in nonresident income tax revenue (assuming 

workers both travel to and out of the state for work). In other 

words, the current system as a whole unnecessarily creates complexity and costs for both employers and employees, without yielding a substantive benefit to most states. Sixteen states, such as 

Kansas, would either have no or minimal revenue loss, and 18 

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1See Statement of Statement of Douglas L. Lindholm, President & Executive Director, Council On State Taxation (COST), Before the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial and Antitrust Law, Hearing on H.R. 

2315, The Mobile Workforce State Income Tax Simplification Act of 2015, June 2, 2015, Exhibit 

C, pp. 1-2. 2These seven states have no personal income tax: Alaska, Florida, Nevada, South Dakota, 

Texas, Washington and Wyoming. New Hampshire and Tennessee are the two states that do 

not tax wages and only subject to tax interest and dividends earned by individuals. 3See Payroll Issues for Multi-State Employers, 2015 ed., American Payroll Association, pp. 4- 

1 et seq. 

states would, in fact, have a positive revenue gain from this legislation. Most importantly, according to estimates of the impact of the 

bill, the net change as a percentage of total state taxes for all 

states is only -0.01, a $42 million net change for all states.1

We believe Congressmen Bishop and Johnson have reached a 

reasonable balance between the states’ rights to tax income from 

work performed within their borders, and the needs of individuals 

and businesses, and especially small businesses, to operate efficiently in this economic climate. Having a uniform national standard for nonresident income taxation, withholding and filing requirements will enhance compliance and reduce unnecessary administrative burdens on businesses and their employees. In addition to uniformity, H.R. 2315 provides a reasonable 30-day de minimis exemption before an employee is obligated to pay taxes to a 

state in which they do not reside. 

H.R. 2315 is an important step towards tax simplification for 

state income tax purposes for small businesses. Therefore, the 

AICPA urges Congress to establish (1) a uniform standard for nonresident income tax withholding and (2) a de minimis exception 

from the assessment of state income tax as provided in H.R. 2315. 

This legislation should be passed as soon as possible. 

BACKGROUND 

The state personal income tax treatment of nonresidents is inconsistent and often bewildering to small businesses and their employees. Currently, 41 states plus the District of Columbia impose 

a personal income tax on wages, and there are many different requirements for withholding income tax for nonresidents among 

those states. There are seven states that currently do not assess a 

personal income tax, and two states that do not tax wages and only 

tax interest and dividends of individuals.2 Employees traveling into 

all the other states are subject to the confusing myriad of withholding and tax rules for nonresident taxpayers. These rules on a 

state to state basis vary so much that it is impossible to predict or 

to even guess what one state may hold as its own rules. 

Some of the states have a de minimis number of days or de minimis earnings amount before employers must withhold tax on nonresidents, or nonresidents are subject to tax. These de minimis 

rules are not administered in a uniform manner. For example, for 

2015, a nonresident is subject to income tax withholding in certain 

states based upon an entirely different threshold, such as, after 

working 59 days in Arizona, 15 days in New Mexico, or 14 days in 

Connecticut.3

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4 Ibid. 

5 Ibid. 

Other states have a de minimis exemption based on the amount 

of the wages earned, either in dollars or as a percent of total income, while in the state. For example, for 2015, employers generally are required to withhold in a nonresident state once an employee earns, or is expected to earn, taxable wages of $1,500 in 

Wisconsin, $1,000 in Idaho, $800 in South Carolina, and $300 a 

quarter in Oklahoma.4 Other states that have thresholds before 

nonresident withholding is required are Georgia, Hawaii, Maine, 

New Jersey, New York, North Dakota, Oregon, Utah, Virginia, and 

West Virginia.5 Some of these states’ thresholds are set at the 

state’s personal exemption, standard deduction, or filing threshold, 

which often change each year. The remainder of the state tax income earned within their borders by nonresidents, even if the employee only works in that state for one day. 

Some states exempt, and some do not exempt, from the withholding requirement, the income earned from certain activities, 

such as training, professional development, or attending meetings. 

Note that some of the states only cover exemptions from state withholding, and as a result, they do not address the nonresident taxpayer’s potential filing requirement and tax liability in a state or 

local jurisdiction. Furthermore, only a minority of states use day or 

income thresholds—and without any uniform standard. 

It is also important to note that approximately one-third of the 

states (mostly bordering each other in the Midwest or East) have 

entered into reciprocity agreements under which one border state 

agrees not to tax another border state’s residents’ wages, and vice 

versa. Accordingly, the in-state resident does not need to file a nonresident border state return, and the employer does not have to 

withhold non-resident income taxes with respect to the in-state 

resident, even if the in-state resident primarily works in the nonresident state. Some type of an ‘‘exemption form’’ is often required 

to be filed in each nonresident border state. 

However, not all border states have reciprocity agreements. For 

example, no reciprocity agreement exists between Maryland and 

Delaware. Therefore, both Maryland and Delaware require withholding, the payment of taxes and the submission or a tax return 

for a car salesman who lives and primarily works in Ocean City, 

Maryland but occasionally has to drive to another dealer in Rehoboth Beach, Delaware. 

Unfortunately, the existing reciprocity collaboration between 

some border states provides only patchwork relief with two-thirds 

of the country not covered by such agreements. Furthermore, the 

current agreements are primarily geared toward nonresident employees who ordinarily commute a few miles a day to particular adjoining states in which their employer is located. For example, 

while Virginia provides reciprocal withholding agreements with the 

District of Columbia, Kentucky, Maryland, Pennsylvania, and West 

Virginia, other states, such as California, Kansas, Mississippi, and 

New York do not provide any reciprocity agreements with neighSBREP-219A with DISTILLER

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boring states. The reciprocity rules generally do not apply to individuals who regularly travel greater distances. 

However, in today’s economic environment, it has become quite 

common for employees to travel for short periods of time to other 

states. 

TYPES OF INDUSTRIES AND TAXPAYERS IMPACTED 

These complicated rules impact everyone who travels for work. 

All types and sizes of businesses are impacted. Large, medium, and 

small businesses all have to understand each of the states’ treatment of nonresident employee withholding and assessment of taxes 

and the unique de minimis rules and definitions. This issue also affects all industries—retail, manufacturing, real estate, technology, 

food, services, etc. 

Some everyday examples include a real estate developer’s employee who travels to 20 states to visit prospective sites and spends 

less than a day in each state, or a store manager who attends a 

half-day regional meeting in an adjoining state, with some of these 

meetings occurring only twice a year. Since there are states in 

which there currently is no minimum threshold, an employee’s 

presence in that state for just one day could subject the employee 

to state tax withholding. 

In addition, accounting firms, including small firms, conduct 

business across state lines. Many clients have facilities in nearby 

states that require on-site inspections during an audit. Additionally, consulting, tax or other non-audit services that CPAs deliver 

are frequently provided to clients in other states, or to facilities of 

local clients that are located in other states. In essence, all of these 

entities (small businesses, accounting firms and their clients) are 

affected by nonresident income tax withholding laws. 

HYPOTHETICAL EXAMPLE 

For example, assume an employee earns $75,000 a year, resides 

in Maryland, and travels to work in Indiana, Kansas, Massachusetts, and Ohio for 5 days each in a given tax year. Assume further 

that the taxpayer earns a pro rata amount of salary in each of the 

states of $1,500 ($75,000 * 5 days / 250 total workdays = $1,500). 

Without the Mobile Workforce legislation, the employer currently 

must withhold on all of the employee’s income in Maryland (the 

resident state) and the source income from different jurisdictions 

(which for all practical purposes, will only occur if the employer has 

a sophisticated time reporting system in place and the employee 

correctly reports the number of days worked in each state.) 

Despite the relatively small amount of income in each of the nonresident states, some amount of tax is likely due in each of the 

states. The employer must withhold in all five states, and the employee then must file in addition to the federal tax return, income 

tax returns in Maryland (as a resident), and as a nonresident in 

Indiana, Kansas, Massachusetts, and Ohio, all of which require 

nonresident withholding on the first day of work in that state. DeSBREP-219A with DISTILLER

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pending on the tax withheld, the nonresident state income tax returns may yield a small refund or a small additional tax payment. 

While the Maryland return yields a refund, it becomes particularly complex because the employee is required to file forms showing the credit for taxes paid to each nonresident state, and Maryland does not always provide the employee with a dollar-for-dollar 

credit when factoring in the Maryland county-level tax required to 

be paid. The federal tax return also becomes more difficult because 

of the numerous state tax payments and refunds that impact deductions and adjustments for the state tax deduction (for alternative minimum tax purposes, for example). 

The administrative burden of filing in five nonresident states, 

along with the complexity of the withholding rules for each state, 

would probably require utilization of a third-party service provider 

that assists with processing payroll for businesses (resulting in additional costs to the employee). The Mobile Workforce legislation 

makes it significantly easier for the employer and the employee 

from a compliance perspective. The taxpayer files one state income 

tax return in Maryland, and it is a more straightforward return 

(without calculations and credits for nonresident state taxes paid). 

CHALLENGES FOR EMPLOYERS 

Employers currently face unnecessary administrative burdens to 

understand and comply with the variations from state to state. For 

example, employers are responsible for determining whether to 

subject an employee to withholding in a state if the employee attends out-of-state training for a couple of days, or how to account 

for an employee responding to business calls and e-mails on a layover in an airport. Employers also need to consider whether to 

withhold taxes in a state for when a employee is working on a train 

that travels into multiple states and jurisdictions in the Northeast 

Corridor, or what happens when an employee working at a business located close to a state border must cross the state line for a 

quick mundane task. 

The issue of employer tracking and complying with all the differing state and local laws is quite complicated. The employer and 

employee need to be aware of the individual income tax and withholding rules of each state to which that the employee travels, including whether the state has, and if the employee has exceeded, 

a de minimis threshold of days or earnings, and if there is a state 

reciprocity agreement that applies. Some states have extremely 

complicated rules for determining when to withhold for a nonresident. For example, Georgia requires withholding when a nonresident employee works more than 23 days in a calendar quarter 

in Georgia, or if five percent of total earned income is attributable 

to Georgia, or if the remuneration for services in Georgia is more 

than $5,000. The employer must determine and calculate each of 

the three thresholds to determine when to withhold for each employee working occasionally in that state. 

The recordkeeping, especially if business travel to multiple states 

occurs, is voluminous. The recordkeeping and withholding a state 

requires can trigger for as little as a few moments of work in anSBREP-219A with DISTILLER

24 

other state. The research to determine any given state’s individual 

requirement is expensive and time-consuming, especially for a 

small firm or small business that does not have a significant 

amount of resources. Taxpayers need to update the research, at 

least annually, to make sure the state law has not changed. Of 

course, a small firm or business may choose to engage outside assistance to research the laws of the other states; however, the business will incur an additional cost. 

Many small firms and businesses use third-party payroll services 

rather than performing the function in-house. However, we understand that many third-party payroll service providers cannot handle multi-state reporting. For example, third-party payroll service 

providers generally report on a pay period basis (e.g., twice per 

month, bi-weekly) as opposed to a daily basis, which is necessary 

to properly report the performance of interstate work. Due to the 

software limitations, employers must track and manually adjust 

various employees’ state income and withholding amounts to comply with different state requirements. The alternative is to pay for 

a more expensive payroll service. 

CHALLENGES FOR EMPLOYEES 

Employees face many challenges with complying with the multitude of state tax laws and requirements. When an employee travels for work to many states, even for short periods of time, each 

nonresident state tax return that is required is usually for a minimal amount of income and tax liability. Often, the employee is 

below the filing threshold, but since withholding is required, a nonresident state tax return is required, even if only to claim a refund 

of the taxes withheld. 

UNIFORMITY AND DE MINIMIS EXCEPTION NEEDED 

In addition to uniformity, there needs to be a de minimis exemption. AICPA has supported the 60-day limit contained in previous 

versions of similar legislation, but believes that the 30-day limit 

contained in H.R. 2315 is fair and workable. The 30-day limit in 

the bill ensures that the interstate work for which an exemption 

from withholding is granted does not become a means of avoiding 

tax or shifting income to a state with a lower tax rate. Instead, it 

ensures that the primary place(s) of business for an employee are 

where that employee pays state income taxes. For example, employees of many small businesses often travel to other states as 

part of their training, research, or operations. A prime example is 

a business located in South Carolina, which is on the border of 

North Carolina and Georgia, where no reciprocity agreements exist. 

It is easy for an employee to travel into three states within a few 

hours timeframe. For example: a small bike shop that has to occasionally cross state borders to buy a part, a catering company that 

delivers, and a roofing company that drives to the nearest homeimprovement store (which is located across the state line). 

CONCLUDING REMARKS 

SBREP-219A with DISTILLER

25 

The current situation of having to withhold and file many state 

nonresident tax returns for just a few days of work in various 

states is too complicated for both employers and employees. The 

small business employers’ costs to comply with the current system 

have become too burdensome and are not worth the lost economic 

productivity for those small businesses to justify the states in assessing and then trying to collect the tax. Employees are overwhelmed with the many states to which they may have a nonresident filing and tax obligation and the different filing criteria for 

each state. The AICPA urges Congress to pass H.R. 2315 to ease 

our country’s nonresident state income tax withholding and compliance burdens. The bill provides national uniformity and a reasonable 30 day de minimis threshold. Therefore, the AICPA strongly 

supports H.R. 2315 and respectfully commends the co-sponsors of 

this legislation for the development of this reasonable and much 

needed bi-partisan bill. 

The AICPA appreciates the opportunity to submit this written 

statement in support of H.R. 2315. 

SBREP-219A with DISTILLER

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SBREP-219A with DISTILLER


Insert offset folio 25 here 99833.003
27 

1 Unless otherwise indicated, all ‘‘section’’ references are to the Internal Revenue Code of 1986, 

as amended (the ‘‘Code’’ or ‘‘IRC’’), and all ‘‘Treas. Reg. § ’’ references are to the Treasury Regulations promulgated under the Code. 

Chairman Huelskamp, Ranking Member Chu, and Members of 

the Subcommittee, 

I am grateful for the opportunity to speak to you today. Small 

business needs tax reform, and simplifying compliance and administration for small businesses should be part of that tax reform. 

This subcommittee’s concern and interest in exploring the subject 

is to be applauded. 

The complexity and costs of calculating many tax incentives 

makes it difficult for small businesses to properly take advantage 

of them. It is my firm’s experience that because of this, many small 

businesses simply ignore them. This not only prevents these incentive provisions from accomplishing their intended purpose, but also 

results in small businesses being placed at a disadvantage compared to their larger competitors who are better positioned to incur 

the costs of calculation. 

More importantly, it leads many small businesses to believe that 

they have been left out, that the incentives in the Code are intended to only be available to larger business, and that the system 

is simply not fair. 

Grant Thornton urges Congress to pursue tax reform that would 

lower the tax rates applicable to all businesses, regardless of the 

form in which they conduct business. Small businesses are among 

the businesses most likely to organize as pass-throughs and it is 

essential that pass-throughs such as partnerships and S corporations be included in any reduction in tax rates. 

We recognize the immense difficulty, however, in enacting fundamental tax reform. If for whatever reason such tax reform is not 

possible, or is only possible in the future, we believe that the ability of small businesses to share in the incentives provided by the 

Internal Revenue Code 1 could be increased by better focusing on 

those methods that are easier to compute and the use of safe harbors specific to small businesses that would simplify calculations. 

I will focus the remainder of my testimony on the challenges 

faced by the small business community in taking advantage of two 

important Federal tax incentives, the research credit and the domestic production activities deduction. 

Research Credits 

The credit for increasing research is one of the most effective incentives in the Code. Studies have shown that additional research 

contributes a multiple of its cost in increased economic activity. 

Under current law, there are two methods are available for calculating the research credit: The traditional method and the alternative simplified method. 

The traditional method provides a credit equal to 20 percent of 

the amount that current qualified research expenditures exceed a 

base amount that is determined by multiplying the business’ averSBREP-219A with DISTILLER

28 

2 IRC § 41(a) 

3 IRC § 41(c)(5). 

4Treas. Reg. § 1.41-2(d)(1). 

5Treas. Reg. § 1.41-2(d)(2). 

age annual gross receipts for the prior four years by a historical 

ratio of research expenses to average gross receipts that may be determined by years as early as 1984.2 An alternative simplified 

method is available that provides a credit equal to 14 percent of 

the amount that qualified research expenditures for the current 

year exceed 50 percent of the qualified research expenditures for 

the preceding three years.3

It is my firm’s experience that virtually no small- or mediumsized businesses uses the traditional method. In recent years, there 

have been numerous proposals to abandon the traditional calculation method and increase the credit percentage allowed for the alternative simplified method. Congress could provide a significant 

benefit to smaller taxpayers and enhance the use of the research 

credit by raising the alternative simplified rate. Regardless of the 

method chosen, the taxpayer is required to determine which of its 

expenditures satisfy detailed rules and regulations to be treated as 

qualified research expenses. Where the research is performed by 

the taxpayer, such expenses include wages paid to employees (or 

self-employment income of an owner) for engaging in qualified research or the direct supervision of qualified research, supplies (not 

including land, improvements to land, or property of a character 

subject to the allowance for depreciation), and amounts paid for the 

use of computers in the conduct of qualified research. 

Small businesses would significantly benefit from the implementation of safe harbors that would simplify the process of determining which expenses qualify and the modification of existing safe 

harbors to facilitate their use by small businesses. 

An example of an existing safe harbor that may serve larger taxpayers but does not fully satisfy the need of small businesses relates to the treatment of wages paid to employees with multiple responsibilities, only some of which are research related. The general 

rule applicable to such employees is that, in the absence of another 

method that the taxpayer can demonstrate to be more appropriate, 

the wages must be separated into qualified and nonqualified portions based on the number of hours worked on qualified and nonqualified activities.4 Treasury regulations provide that an employee 

devoting 80 percent of his or her time to qualified research activities may be considered to have devoted all of his or her time to 

such activities.5

For large businesses with significant research staffs, it is generally possible to judge whether an employee spends substantially 

all of his or her time performing or directly supervising qualified 

research. In such cases, the 80 percent rule provides a cushion and 

may allow for the full inclusion of the employee’s wages as qualified research expenses without further examination. 

Small business employees, however, typically have a wider range 

of responsibilities than employees of larger organizations. Employees that are primarily employed for the purpose of doing research 

SBREP-219A with DISTILLER

29 

6 IRC Section 199 

7Treas. Regs. § 1.199-1(d)(3). 

may also have a range of administrative and other duties that do 

not qualify as research under the Code and regulations. The likelihood that these other duties might exceed 20 percent requires 

smaller businesses to go through the process of examining time 

sheets or other records. Reducing the safe harbor percentage to 50 

percent for small businesses would allow such businesses the type 

of cushion that would simplify their determination of which costs 

are qualified. 

Domestic Production Activities Deduction 

Subject to certain limitations, the domestic production activities 

deduction of section 199 provides a deduction equal to 9 percent (6 

percent in the case of production of oil and gas) of the net profits 

from producing property (including software), providing certain 

utility services, or providing services i the areas of construction, architecture and engineering provided such property is produced or 

services provided in the United States.6 Other types of service income, income from the resale of items not produced by the taxpayer, and most types of investment income, do not qualify. For 

corporations paying tax at a 35% marginal rate, the deduction is 

the equivalent of a 3 point reduction in the corporate tax rate. 

Although relatively simple in concept, the domestic production 

activities deduction can be very difficult to determine in practice. 

In some instances, only a portion of the net income earned in an 

activity or even a single transaction may qualify for the deduction. 

Given the difficulty in determining the amount of eligible income, 

and the limited benefit to be derived from identifying that income, 

many small businesses have decided that the deduction is not 

worth the effort required to calculate it. 

The Treasury has provided several safe harbors to assist taxpayers in the calculation of the domestic production activities deduction. One of these is the rule that allows all of a taxpayer’s 

gross receipts to be treated as qualified if 95 percent of its gross 

receipts are qualified.7 This allows taxpayers with only minimal 

amounts of nonqualified income to simply treat nine percent of 

their taxable income as their domestic production activities deduction. 

However, taxpayers who are not comfortably within the 95 percent test must still go through the process of segregating their income into qualified and nonqualified portions, if only to determine 

whether or not they satisfy the 95 percent test. For those taxpayers, the 95 percent safe harbor may produce a small tax savings, but it does nothing to simply the calculation and make the 

benefit worth the effort required to obtain it. 

The existing 95 percent safe harbor could be modified in several 

ways to make it more practical for small businesses, making it feasible for them to benefit from the provision in the same manner as 

their larger competitors. The percentage could be lowered, making 

it more likely that a small business could satisfy the safe harbor 

SBREP-219A with DISTILLER

30 

and claim the benefit of the domestic production activities deduction without having to carefully segregate its income into qualified 

and nonqualified portions. Alternatively, the safe harbor could be 

modified to allow it to be applied solely to the active portion of a 

small businesses’ income by first excluding identifiable investment 

income as nonqualified, and then applying the safe harbor to the 

remaining taxable income. While this might result in a reduced 

benefit in certain cases, it could significantly simplify the process 

of calculating the domestic production activities deduction, bringing 

its benefits within the reach of small as well as larger businesses. 

About Grant Thornton 

‘‘Grant Thornton’’ refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL), and/or refers 

to the brand under which the GTIL member firms provide audit, 

tax and advisory services to their clients, as the context requires. 

GTIL and each of its member firms are separate legal entities and 

are not a worldwide partnership. GTIL does not provide services to 

clients. Services are delivered by the member firms in their respective countries. GTIL and its member firms are not agents of, and 

do not obligate, one another and are not liable for one another’s 

acts or omissions. In the United States, visit grantthornton.com for 

details. 

Grant Thornton is one of the world’s leading organizations of 

independent audit, tax and advisory firms. These firms help dynamic organizations unlock their potential for growth by providing 

meaningful, forward-looking advice. Proactive teams, led by approachable partners in these firms, use insights, experience and instinct to understand complex issues faced by privately owned, publicly listed and public sector clients and help them to find solutions. 

Over 35,000 Grant Thornton people in more than 100 countries are 

focused on making a difference to clients, colleagues and the communities in which we live and work. 

The views expressed in this document are the views of the individuals named and are not necessarily those of their employers or 

of Grant Thornton LLP. The information provided may not and 

should not be construed to imply endorsement or support by Grant 

Thornton LLP or other entities named. 

SBREP-219A with DISTILLER

31 

April 13, 2016 

Statement of Robert Russell 

Attorney - International Tax Controversy, Planning and Policy at 

alliantgroup 

United States House Committee on Small Business, Subcommittee on Economic, Growth, Tax and Capital Access Hearing on ‘‘Keep it Simple: 

Small Business Tax Simplification and Reform, Main Street Speaks’’ 

Mr. Chairman Huelskamp and Ranking Member Chu: 

Thank you for inviting me to testify before the Subcommittee on 

Economic, Growth, Tax and Capital Access on this important topic 

of tax reform and simplification and making sure that small business does not get left behind in this discussion. I believe it is vitally important to remember that America’s small businesses have 

needs, interests and resources that differ significantly from those 

of larger businesses and so it is essential that hearings such as this 

take place. 

As background, the firm I am a part of, alliantgroup, is a leading 

tax service consultant for small and medium businesses across the 

country. alliantgroup has approximately 650 professionals located 

nationwide, focused on assisting small and medium sized businesses avail themselves of proper and available tax incentives, including tax credits, designed to create jobs, promote research and 

investment, and otherwise help the United States remain the leader in the global economy. We also assist these businesses in tax 

planning, and we represent them before the IRS and state tax regulators. In providing these services, we work with the CPA firms 

of these businesses. 

We are uniquely positioned to speak to the issues you wish to 

discuss today because of our work with over three thousand CPA 

firms and tens of thousands of businesses from all over the country 

in a remarkably diverse set of industries. Daily interactions with 

our CPA partners and clients reveal that cross-border business is 

a reality for many of our nation’s small and medium size businesses. I would specifically like to note a few of our CPA partners, 

James Guthrie, Jr. of Gallina, Dave Springsteen of Withum, and 

James Cordova of Windes for their valuable insights on these 

issues. 

Specifically, in my time today, I will speak to the challenges facing small companies when they want to expand their businesses 

across borders and of the challenges their CPAs face in trying to 

assist them. Discussion both here and abroad occurs daily on reSBREP-219A with DISTILLER

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1 95% of the World’s Consumers Live Outside the United States, U.S. Chamber of Commerce. 

(May 15, 2012) available at https://www.uschamber.com/ad/95-worlds-consumers-live-outsideunited-states 

form of international tax systems, but much of that attention is focused on larger businesses rather than on the difficult challenges 

facing small businesses. 

Mr. Chairman, if there is one takeaway from my message today, 

it is that although businesses of all sizes are now players in the 

global economy, our rules and regulations both in the U.S. and in 

foreign jurisdictions, have been built for big corporations. Our recommendation based on our experience is that a ‘‘one size fits all’’ 

approach cannot work and should be modified to provide needed 

adaptability and flexibility for smaller companies with resource 

constraints. 

It is often cited that 95% of the world’s consumers are outside 

of the US.1 Therefore, it is too simple a view of the world to think 

that small businesses are not currently engaged in cross-border activities and are uninterested in growing further. Simply put, when 

considering international tax law modifications, small business 

needs and resources must be considered. 

It is helpful to step back from time to time and focus on the larger economic picture. As colleagues that practice in the area of trade 

law like to quip ‘‘Tax is nothing but a speed bump on the superhighway of trade,’’ or as you learn one day one of Tax Law 100 in 

law school, ‘‘the tax tail should not wag the business dog’’. Obviously, we are not advocating the elimination of taxes. However, far 

too often we see taxpayers shy away from expansion because of 

complexity and burden created by the tax code. 

Today, I would like to focus on three areas that create barriers 

to business expansion, especially for small businesses: (1) Barriers 

created by information sharing concerns, (2) Barriers due to compliance costs that are needlessly and excessively burdensome, and 

(3) The need for real international tax reform both domestic and 

globally. 

#1 Barriers Created by Information Sharing Concerns that 

Impact Simple Business Functions and Operations 

It is surprising to many small businesses that expand overseas 

that there are incredible difficulties in establishing routine business operations. Many Americans would be shocked at activities we 

take for granted in this country that come with significant consequences when crossing borders. For example, something as basic 

as trying to open a bank account or create a banking relationship 

in another country as a US citizen. We have heard many stories 

of banks refusing to open accounts for US citizens due to the operation of the Foreign Account Tax Compliance Act (FACTA). 

If you are able to jump through these hoops to establish financial 

accounts abroad, then a small business must navigate the overlycomplex rules on how to properly report these accounts and assets 

to the US Government. This information must be reported on multiple forms to multiple agencies with varying amounts of informaSBREP-219A with DISTILLER

33 

2See Dharmapala, Dhammika and Slemrod, Joel B. and Wilson, John D., Tax Policy and the 

Missing Middle: Optimal Tax Remittance with Firm-Level Administrative Costs (May 5, 2008), 

and Slemrod, Joel. ‘‘The Compliance Cost of Taxing Business.’’ Mimeo. University of Michigan. 

(2006). 

tion to be disclosed. The requirements are not consistent in many 

areas such as reporting to FINCEN versus the IRS. This is increasingly perilous as a failure to properly comply comes with enormous 

risk. Rules that were crafted to hammer those with hidden bank 

accounts in Switzerland or Panama leave legitimate businesses in 

an expensive and risky place—even when they have a history of 

paying proper amounts of tax and are trying to be compliant. The 

possible penalties are draconian and can fairly be stated to shock 

the conscience. The penalty structure for failure to report these accounts could penalize the taxpayer 100% of the amount in the account even if there is little or no income tax due. A fresh look at 

the policies, penalties and reporting requirements from a lawmaking perspective is overdue. 

United States procedural requirements also have real world impact on foreign businesses wanting to work with US taxpayers. Experience in working with our clients and CPAs has uncovered situations where, for example, foreign joint ventures have been rejected 

where the foreign company admitted to using a lesser quality competitor because they did not want to deal with the US reporting requirements that came along with the US partner. 

We also have clients who express frustration at losing business 

with foreign partners due to required over-withholding of taxes 

simply by administrative burdens. This is the effect of the extreme 

difficulty that foreign parties doing business with US partners have 

in obtaining US tax identification numbers. While intended to prevent abuse, the practical effect is excess tax withholding on a 

transaction with no practical remedy. In reality, these transactions 

should be granted the benefits of a tax treaty that was put in place 

specifically to facilitate trade in this manner. Many times the difference between the proper amount of tax withholding from a 

transaction compared to the over-withholding by reason of administrative difficulties is enough to kill many business deals for US 

businesses. 

#2 Barriers Created by Complexities of International Expansion and Compliance Costs 

Mr. Chairman, too many times when changes are considered to 

our tax system, whether in changing the law or in issuing guidance 

by the Treasury Department, the costs to the taxpayer in time and 

professional fees are not adequately considered. As could be expected, studies have shown that compliance costs skyrocket when 

dealing with overseas activities.2 While there are a multitude of examples we see frequently, we would like to highlight two areas in 

the cross-border context where the compliance burden, and risk for 

non-compliance, for small business should be addressed. 

The first area can be shown by a real example. In this case, there 

is a small specialized equipment manufacturer looking to expand 

business overseas. They set up a foreign affiliate in the new counSBREP-219A with DISTILLER

34 

try to distribute and sell equipment locally. For this one enterprise 

with a seemingly simple setup comes an almost debilitating compliance cost and/or risk. In this operation there may be inter-company 

payments for equipment purchased or services provided between 

the related entities. There also may be distribution and service/ 

warranty agreements. Under highly complex transfer pricing rules, 

these transactions must be analyzed in comparison to the outside 

marketplace, and the mandatory documentation requirements are 

simply not adapted for small businesses. Furthermore, the rules 

provide for penalty protection against IRS audit if proper analysis 

is completed to support the taxpayer position. Small taxpayers and 

their CPAs are concerned. Transfer pricing is one of the most audited issues by the IRS and billion dollar audit adjustments with 

penalties do not only make the tax press but also the mainstream 

media. Honest taxpayers looking to be compliant with the by-thebook documentation requirements and penalty protection must decide whether to engage economists, lawyers and accountants at significant costs because of the required analysis. 

Currently, there is no saving grace for small business. There are 

no de minimis exceptions for low-risk transactions where little 

abuse occurs, and there are no flexible documentation applications 

for smaller transactions and smaller businesses. Examples do exist 

in other countries where small and medium size businesses are 

subject to simpler rules based on items such as employee number, 

turnover or assets. alliantgroup has met with the IRS and the 

Treasury Department in the past in an effort to create Transfer 

Pricing guidelines that will prevent abuse but not drive smaller 

companies out of cross-border business. This idea of a transfer pricing ‘‘lite’’ would be a huge step forward for those companies with 

limited resources but that want to be compliant with transfer pricing rules. 

We note that during the OECD’s recent Base Erosion and Profit 

Shifting (BEPS) project, consideration was given to how developing 

countries could interpret transfer pricing guidelines. It was recognized that throwing thousands of pages of rules at them and asking 

the tax administrations with limited resources to enforce these convoluted rules was untenable. There is no reason why a similar look 

should not be taken regarding the transfer pricing rules with respect to smaller businesses here in the US. 

Another example where compliance costs are not commensurate 

with the value to the government arises in the area of Passive Foreign Investment Companies (PFICs). While the policy principles behind these rules addressing this specific foreign activity is sound, 

quite simply, the reporting requirements are not applied to the appropriate group of taxpayers. When businesses operating overseas 

make investments or arrange capital, many times they are swept 

into the incredibly complex web of PFIC reporting. There are no 

consolidation or streamlined filing provisions or de minimis exceptions. We have received numerous reports from CPAs and have 

worked with clients regarding the hyper-technical and excessing filing requirements for PFIC situations. Even worse, many of these 

separate forms reported very minor amounts of income and tax 

owed. This is combined with significant penalties for misreporting 

SBREP-219A with DISTILLER

35 

PFIC investments. There is a legitimate question as to whether the 

PFIC reporting rules serve a useful purpose in our tax system. 

There is no question, however, that as designed they are overbroad 

and excessive. 

This moves to the next point, everyone recognizes the IRS is 

stretched thin. Speaking to our CPAs and our clients, they are 

looking for more help from the IRS, including more guidance; more 

educational outreach; and additional trained people with whom to 

talk. Our clients and their CPAs are also concerned the IRS systems be secure. 

#3 There is a Need for Reform in Both the US and the 

Global Tax Environment 

It is, at this point, a truism that the US international tax system 

is broken and in need of reform. While we will not go into what 

reform should look like in this forum, we urge Congress to reform 

the law and before doing so, consider how that reform will impact 

small and mid-size businesses. A one-size fits all rule generally 

makes little sense. This leads to the simplicity part of this hearing. 

Simplicity is a pillar of tax policy that is many times overlooked. 

For complex transactions, sometimes complex rules may be necessary, however, in our experience, many rules are written assuming that well-heeled companies will be able to comply, and that 

there is rampant abuse that must be guarded against. Neither assumption is correct in all cases. We urge that the following questions be asked in each case: (A) is the rule too complicated for 

smaller taxpayers to understand and comply with; (B) What are 

the compliance costs associated with the change; and (C) Is it impossible for tax administration to enforce? 

We have discussed problems in our current system. We would 

also note that our system encourages businesses to keep their foreign profits overseas and not to repatriate them to the US for US 

jobs and investment—commonly referred to as the ‘‘lockout effect’’. 

This is something that big corporations can live with because of the 

size and scope of their global activities, but it is an enormous challenge for small business where every dollar of profit is needed to 

grow and reinvest. This highlights the need to lower the tax rates 

to be competitive globally is even more pressing for small business. 

We all hear stories of large multi-national companies being able to 

lower their effective tax rates to significantly less than the headline 

rate. Small business, especially in the early stages of expansion, do 

not have the resources to engage in sophisticated tax planning and 

need for their cash back home subjecting them to a high effective 

tax rate that very few other multi-national businesses ever experience. 

To this end, Congress should consider additional incentives for 

small and mid-side business attempting to expand overseas. One 

existing example is the highly valuable Interest Charge Domestic 

International Sales Corporation or IC-DISC. This is the last existing export incentive and is a great help for businesses selling domestic goods and services overseas. 

SBREP-219A with DISTILLER

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3OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing. http:// 

dx.doi.org/10.1787/97892642027190en 4OECD (2015), Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, 

OECD. www.oecd.org/tax/beps-explanatory-statement-2015.pdf 

Finally, Mr. Chairman, I would like to place the importance of 

US reform in the context of the global tax environment. In 2014, 

the OECD initiated the Base Erosion and Profit Shifting Project 

(BEPS) where tax policy makers and administrations came together.3 In 2015, the OECD issued final recommendations for tax 

policy changes on 15 so-called ‘‘Action Items’’.4 It can be argued 

that much of BEPS is the result of countries around the globe seeing a pot of US deferred gold. Many of the proposed rules pose 

cause for concern and may create yet more barriers to small business entering or continuing cross-border business. 

While other countries are swiftly implementing these BEPS 

measures, I commend Congress and Treasury6 for taking a slower 

path. While a discussion of each BEPS Action item is beyond this 

hearing, we do want to highlight one example of our concern: country-by-country reporting. 

Country by country reporting brings two concerns for companies. 

First, is the added compliance burden (and costs) for businesses to 

report additional company data. It should go without saying, every 

dollar spent on compliance cost contributes to less jobs on the assembly line. Second, there are real data security and confidentiality 

concerns. We support Treasury and Congress for holding the line 

on exchanging information only through treaties and confidentiality rules being protected against the wishes of many others. We 

want to acknowledge the importance of taking action when information is not protected by other countries. It is important to note, 

while there is currently a threshold for company size on this reporting, history has shown time and again, limits of this type are 

lowered or eliminated to engulf many businesses. 

Conclusion 

Thank you Mr. Chairman Huelskamp and Ranking Member Chu 

for allowing me to testify today on this important topic of tax reform and simplification for small business. Far too often, small and 

mid-size business concerns take a back seat in the tax reform discussion and even more so in the international context. I hope today 

I was able to highlight some real issues facing our nation’s smaller 

business taxpayers when conducting cross-border business. 

SBREP-219A with DISTILLER

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Written Testimony of Julie Verratti 

Director of Business Development and Founder of Denizens 

Brewing Company 

House Small Business Committee 

Subcommittee on Economic Growth, Tax and Capital Access 

April 13, 2016 

Chairman Huelskamp, Ranking Member Chu and members of 

the Subcommittee, thank you for the opportunity to testify at today’s hearing. My name is Julie Verratti. I am the Director of Business Development and co-founder of Denizens Brewing Company in 

Silver Spring, Maryland. I am speaking on behalf of my small business and the Brewers Association, which represents more than 

3,000 craft brewers, 46,000 members of the American Homebrewers 

Association and 1,100 industry suppliers of agricultural commodities, brewing equipment, packaging, and other goods and services 

required by modern breweries. I appreciate the opportunity to testify today. 

My co-founders Emily Bruno, Jeff Ramirez, and I started Denizens in 2014. Denizens is the only woman and minority owned and 

operated brewery in Maryland and a proud member of the Silver 

Spring community. We are both a restaurant and a production 

brewery. We produce beer to be sold in our restaurant and 

throughout Maryland and Washington, D.C. In the short time that 

we have been open, our brewery has experienced solid growth. In 

2015, we produced 1,140 barrels and are on track to produce 1,500 

barrels in this coming year. 

Running a craft brewery like Denizens is similar to running any 

other small business. All of the day-to-day activities and stresses 

like scheduling, marketing, healthcare and payroll are amplified by 

a tight brewing schedule and working to distinguish ourselves in 

a growing industry. Denizens has close to 40 full-time employees 

who range from tipped service positions, kitchen staff, brewing 

staff (manufacturing jobs), and salaried professional positions. All 

of our full-time employees who work 30 or more hours a week, 

whether they are hourly or salaried, are offered medical, dental, 

and vision insurance through the company. 

As the director of business development for the brewery it is my 

responsibility to conduct outside sales, liaise with the state and 

local chamber and brewery guilds and handle all the licensing and 

tax issues that arise. Denizens produces beer in Maryland and we 

sell our beer in Maryland and the District of Columbia. Our tax 

and compliance burdens are significant as we must collect and submit sales tax in our taproom, pay employment taxes, business income taxes, and excise taxes to both the state and federal governments using their separate and individual filing systems. I spend 

up to 5 hours a month working on taxes, which may not seem like 

a lot of time but is significant when you are working to grow your 

business. In the next month my brewery will start distributing in 

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Virginia, which will increase the number of tax regulations that we 

must comply with. Any way that the government could help to 

streamline and decrease this burden would be extremely beneficial 

to craft breweries like mine and smaller breweries that want to 

grow but don’t have the manpower and funds to do so. 

The Brewers Association defines a craft brewery as any brewery 

that is ‘‘small,’’ with an annual production of 6 million barrels of 

beer or less (the 6 million threshold is approximately 3 percent of 

U.S. beer sales, but the vast majority of craft breweries are closer 

in size to mine in the 1,000-10,000 range); ‘‘independent,’’ less than 

25 percent of the craft brewery is owned or controlled (or equivalent economic interest) by an alcoholic beverage industry member 

that is not itself a craft brewer; and ‘‘traditional,’’ a brewery that 

has a majority of its total beverage alcohol volume in beers whose 

flavor derives from traditional or innovative brewing ingredients 

and their fermentation. 

There are more than 4,000 craft breweries in the United States. 

To provide some perspective, Denizens brews less than 2,000 barrels a year. Yet we are larger than 70 percent of the craft breweries 

in the country. I am lucky that I have the tools, knowledge and 

support to navigate the complex tax codes. A craft brewery that 

does not have a similar infrastructure is going to find the same 

tasks much more difficult. Currently breweries are required to comply with different federal and state excise taxes and alcohol regulation agencies. The Alcohol and Tax and Trade Bureau (TTB), the 

IRS and the Maryland Comptroller. Oftentimes, there are different 

requirements about when and what to file. Denizens is required to 

file different taxes bi-weekly, monthly and quarterly with both the 

federal government and the state of Maryland, although we have 

received some relief from the federal requirement that I will discuss below. 

In many cases we have found that even if there is a way to file 

online, it is easier to file the forms in hard copy. I tend to do the 

work for my filings online and then print them out to mail them 

in. It would be significantly more convenient if the federal and 

statement governments worked together to come up with a more 

streamlined process for reporting. A large portion of my time spent 

on taxes is duplicating information from one report to another. As 

Denizens continues to grow, which we plan on doing, we will likely 

expand sales and distribution to other states. To do so means that 

we will nee4d to file excise taxes or sales reports to comply with 

each state’s alcohol beverage laws. We are happy to comply, but 

these tax burdens could be a deterrent for a smaller brewer. There 

are breweries like mine that have the demand for their product 

and the desire to grow but don’t have the personnel or capital to 

do so. 

The federal government has taken the steps to correct some of 

the burdensome biweekly excise tax filing requirements. Last year, 

language was included in the year-end tax extenders package that 

made it so any alcohol producer that pays less than $50,000 in annual federal excise taxes will no longer be required to get a bond 

and will only need to file quarterly. The cost savings is small, but 

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39 

substantial time will be saved by businesses and the TTB as thousands of biweekly returns will be eliminated. This is a perfect example of businesses working with Congress and the Treasury Department and the Alcohol and Tobacco Tax and Trade Bureau to 

come up with a solution that is beneficial to both parties. I hope 

that we will be able to accomplish other process improvements to 

facilitate the growth of the craft brewing industry and to improve 

the efficiency of routine federal approvals and the excise tax collection process. 

With 4,269 breweries in the United States and more opening at 

a rate of 1.9 per day the craft brewing industry is the largest it 

has ever been in this country and it is continuing to grow. Craft 

brewing now represents 12% of the US beer market by volume and 

21% in final retail dollar sales. There is still room for growth, 

something we would like to work with Congress to accomplish. 

As I mentioned previously, breweries like mine pay excise taxes 

on both the state and federal level. They are additional taxes over 

and above our business and payroll taxes, and excise taxes are one 

of the major expenses that I, as a brewery owner, face. In 1976 

Congress wanted to help encourage the growth of American craft 

brewing. The Internal Revenue Code was changed to stipulate a demarcation point for any domestic brewer that produces less than 2 

million barrels of beer a year. Brewers below that threshold pay $7 

per barrel in federal excise taxes on the first 60,000 barrels and 

$18 per barrel on anything over that. When the federal beer excise 

tax was first put into place to finance the Civil War, excise taxes 

were a major source of revenue and most other modern federal 

taxes did not exist. Today, brewers pay all of the same individual 

and corporate taxes paid by all businesses as well as payroll taxes 

on behalf of our employees. Brewers also pay excise taxes to their 

states and in some cases to local governments. 

For almost a decade the Brewers Association has been working 

with Congress to try and pass legislation that recalibrates the federal excise tax to reflect the makeup of the craft brewing industry, 

and to spur additional growth. In the 114th Congress, this legislation is the Craft Beverage Modernization and Tax Reform Act (S. 

1562/H.R. 2903). The Senate version was introduced by Senators 

Wyden (D-OR) and Blunt (R-MO), and the House version was introduced by Representatives Paulsen (R-MN) and Kind (D-WI). This 

legislation would lower the federal excise tax for the brewing industry as well as the wine and distilled spirits industries, and 

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Insert offset folio 39 here 99833.004
40 

make the alcohol beverage excise tax system more progressive for 

smaller producers and it has broad industry support. 

For craft brewers, in particular, this bill would reform the federal 

excise tax structure on beer by: 

• Reducing the federal excise tax to $3.50 per barrel on the 

first 60,000 barrels for domestic brewers producing fewer than 

2 million barrels annually and reducing the amount brewers 

pay from 60,001-2 million to $16 per barrel. 

• Reducing the federal excise tax to $16 per barrel on the 

first 6 million barrels for all other brewers and all beer importers. 

It is legislation like this that would have a major impact on my 

business, as well as other craft brewers. Denizens is a growing 

brewery and if we continue at our current trajectory, we will be at 

capacity within the span of a year. Legislation like the Craft Beverage Modernization and Tax Reform Act would benefit us greatly. 

If we are able to get our federal tax liability reduced we will be 

able to purchase more equipment and kegs to produce more beer 

and hire at least two additional new employees. 

Knowing that we would have access to additional capital is an 

incentive to continue growing and hiring, which will produce more 

federal revenue over time. Whether it is additional payroll taxes for 

newly hired workers, or expanding production to enter a new state 

market, a reduced federal excise tax liability would be extremely 

helpful to the craft brewing industry and the national economy. In 

fact, economists predict that just the beer portion of the bill would 

create an additional 9,000 jobs in the first 12-18 months after it is 

implemented and an additional $320 million in economic growth. 

The Craft Beverage Modernization and Tax Reform Act would be 

good for the country and help to ensure that brewers can continue 

to compete with larger brewers and foreign competitors. 

It is no surprise that this bill has widespread support from not 

just the Brewers Association and the Beer Institute, but also 

groups like the Wine Institute, Wine America, DISCUS, the American Craft Spirits Association, the National Barely Growers, the 

Can Manufacturers Institute and more. The legislation will have a 

widespread impact on a range of different industries from agriculture to retail. Every dollar saved in relief mean nearly $8 of 

growth for the U.S. Economy. The bill also updates tax administration. 

With craft producers in every state and Congressional District 

across the country strong bipartisan support exists for the Craft 

Beverage Modernization and Tax Reform Act. The legislation has 

172 co-sponsors in the House and 33 in the Senate (as of 4/11/ 

2016). There is broad bipartisan support to help encourage the 

growth of the craft brewing industry and continue to create good 

manufacturing and service industry jobs across our country. 

In conclusion, taxes, and tax compliance costs, are the largest expenses that craft brewers like Denizens deal with on a day-to-day 

basis. We are more than happy to pay our fair share, but a recalibration of the federal excise tax would have an extremely posiSBREP-219A with DISTILLER

41 

tive impact on small brewing businesses like mine and the ones in 

your home states. 

Thank you again, I appreciate the subcommittee inviting me to 

testify today on behalf of the Brewers Association and craft brewers across the country. 

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Statement of Henry C. ‘‘Hank’’ Johnson, Jr. for Hearing on 

‘‘Keep It Simple: Small Business Tax Simplification and 

Reform, Main Street Speaks 

April 13, 2016 

H.R. 2315, the Mobile Workforce State Income Tax Simplification 

Act of 2015, is an important, bipartisan bill that will help workers 

across the country. It will also help small and multistate businesses. 

As a proud sponsor of this legislation in both the 110th and 

111th Congresses, I am very familiar with this issue. I welcome my 

colleague Congressman Bishop’s leadership on this bill in the 114th 

Congress. With 134 cosponsors this Congress, it’s clear that Mobile 

Workforce is an idea whose time has come. 

H.R. 2315 would provide for a uniform and easily administrable 

law that will simplify the patchwork of existing inconsistent and 

confusing state rules. It would also reduce administrative costs to 

the state and lessen compliance burdens on consumers. 

For example, AcuityBrands is a leading lighting manufactures 

that employs over 1,000 associates in my home-state of Georgia 

and has over 3,200 associates nationwide who travel extensively 

across the country for training, conferences, and other business. In 

a letter in support of H.R. 2315, Richard Reece, Acuity’s Executive 

Vice President, writes that current state laws are numerous, varied, and often changing, requiring that the company expend significant resources merely interpreting and satisfying states’ requirements. He concludes that ‘‘[u]nified, clear rules and definitions for 

nonresident reporting and withholding obligations would undoubtedly improve compliance rates and it would strike the correct balance between state and sovereignty and ensuring that America’s 

modern mobile workforce is not unduly encumbered.’’ 

We should heed the calls of Acuity and numerous other businesses across the country by enacting H.R. 2315 into law. In closing, I thank Chairman Chabot for calling today’s hearing, and I 

urge my colleagues to support this bill so that it can come to the 

floor for a vote soon. This country’s employees and businesses deserve quick action. 

Æ 

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