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[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

                  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
                               __________

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                           

            Small Business Committee Document Number 114-054
              Available via the GPO Website: www.fdsys.gov
                               ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

99-833                         WASHINGTON : 2016 
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                   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 VELAZQUEZ, 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
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                            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
 
                  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.
    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. 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. 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 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 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.
    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 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 minority-owned 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 six-packs.
    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 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?
    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 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 problems. 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 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.
    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 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 cost-benefit. 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.]
    
    
    
                            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 
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\
---------------------------------------------------------------------------
    \1\ See 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.

    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.
---------------------------------------------------------------------------
    \2\ These 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.

    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\
---------------------------------------------------------------------------
    \3\ See Payroll Issues for Multi-State Employers, 2015 ed., 
American Payroll Association, pp. 4-1 et seq.

    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.
---------------------------------------------------------------------------
    \4\ Ibid.
    \5\ Ibid.

    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 non-resident 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 neighboring 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. Depending 
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 another 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 home-improvement store (which is located across the 
state line).

    CONCLUDING REMARKS

    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.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    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.
---------------------------------------------------------------------------
    \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. Sec. '' references are to the Treasury 
Regulations promulgated under the Code.

    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' average 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\
---------------------------------------------------------------------------
    \2\ IRC Sec. 41(a)
    \3\ IRC Sec. 41(c)(5).

    It is my firm's experience that virtually no small- or 
medium-sized 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\
---------------------------------------------------------------------------
    \4\ Treas. Reg. Sec. 1.41-2(d)(1).
    \5\ Treas. Reg. Sec. 1.41-2(d)(2).

    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 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.
---------------------------------------------------------------------------
    \6\ IRC Section 199

    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.
---------------------------------------------------------------------------
    \7\ Treas. Regs. Sec. 1.199-1(d)(3).

    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 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.
    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 reform 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.
---------------------------------------------------------------------------
    \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-outside-united-states

    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 overly-complex 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 information 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.
---------------------------------------------------------------------------
    \2\ See 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).

    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 country 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-the-book 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 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.

    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.
---------------------------------------------------------------------------
    \3\ OECD (2013), Action Plan on Base Erosion and Profit Shifting, 
OECD Publishing. http://dx.doi.org/10.1787/97892642027190en
    \4\ OECD (2015), Explanatory Statement, OECD/G20 Base Erosion and 
Profit Shifting Project, OECD. www.oecd.org/tax/beps-explanatory-
statement-2015.pdf

    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.
                  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 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 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.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    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 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 positive 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.
 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.

                                 [all]
```