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STATE TAXATION: THE ROLE OF CONGRESS IN 

DEVELOPING APPORTIONMENT STANDARDS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MAY 6, 2010 

Serial No. 111–93 

Printed for the use of the Committee on the Judiciary 

( 

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

(II) 

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LUIS V. GUTIERREZ, Illinois 

TAMMY BALDWIN, Wisconsin 

CHARLES A. GONZALEZ, Texas 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

DANIEL MAFFEI, New York 

JARED POLIS, Colorado 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM ROONEY, Florida 

GREGG HARPER, Mississippi 

PERRY APELBAUM, Majority Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

STEVE COHEN, Tennessee, Chairman 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

DANIEL MAFFEI, New York 

ZOE LOFGREN, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

JOHN CONYERS, JR., Michigan 

JUDY CHU, California 

TRENT FRANKS, Arizona 

JIM JORDAN, Ohio 

HOWARD COBLE, North Carolina 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

MAY 6, 2010 

Page 

OPENING STATEMENT 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 1 

WITNESSES 

Mr. John A. Swain, Professor, University of Arizona, James E. Rogers College 

of Law 

Oral Testimony ..................................................................................................... 3 

Prepared Statement ............................................................................................. 5 

Mr. James R. Eads, Jr., Executive Director, Federation of Tax Administrators 

Oral Testimony ..................................................................................................... 15 

Prepared Statement ............................................................................................. 17 

Mr. Daniel B. De Jong, Tax Counsel, Tax Executives Institute, Inc. 

Oral Testimony ..................................................................................................... 30 

Prepared Statement ............................................................................................. 32 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Chairman, Committee on the 

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 51 

Prepared Statement of the Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress from the State of Georgia, and Member, Subcommittee on Commercial and Administrative Law ......................................... 52 

Response to Post-Hearing Questions from John A. Swain, Professor, University of Arizona, James E. Rogers College of Law .............................................. 53 

Response to Post-Hearing Questions from James R. Eads, Jr., Executive 

Director, Federation of Tax Administrators ...................................................... 57 

Response to Post-Hearing Questions from Daniel B. De Jong, Tax Counsel, 

Tax Executives Institute, Inc. ............................................................................. 60 

(1) 

STATE TAXATION: THE ROLE OF CONGRESS 

IN DEVELOPING APPORTIONMENT STANDARDS 

THURSDAY, MAY 6, 2010 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 11:07 a.m., in 

room 2141, Rayburn House Office Building, the Honorable Steve 

Cohen (Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Watt, Scott, and Chu. 

Staff present: (Majority) Norberto Salinas, Counsel; Adam Russell, Professional Staff Member; and Stewart Jeffries, Minority 

Counsel. 

Mr. COHEN. The hearing will commence here with the banging 

of the gavel. [Commenced.] 

This hearing of the Committee on the Judiciary, Subcommittee 

on Commercial and Administrative Law will now come to order. 

Without objection, the Chair will be authorized to declare a recess 

of the hearing, and there will be votes at 11:30, so we will have 

to go and be interrupted at some point. 

I will recognize myself for a short statement. 

In February, this Subcommittee held a hearing on the state tax 

nexus, simply, when a state may impose a tax on an individual or 

business entity. 

Today’s hearing will focus on that next step, assuming that sufficient nexus is established, how should a state determine the imposed tax. States currently follow formulas to apportion the tax 

based on several different factors. 

They include location of the taxpayer’s property, taxpayer’s income, and even the taxpayer’s payroll within that state. That calculation is simple when the taxpayer only conducts business within 

the state, of course, but becomes more complicated when the business’ goods and services are collected—across state lines. 

States must determine what portion of the total value of a multistate taxpayer’s property, and each single state should and can tax 

what they can get away with and what they should get away with. 

These calculations could lead to double taxation or possibly, in a 

very unusual case of somebody who loses their job, undertaxation. 

2 

Considering that many states are actively competing for business 

development investment, especially during the current economic 

climate, states may create apportionment formulas which favor instate businesses over multi-state businesses or vice versa. Such apportionment formulas may also bring in much-needed revenue. 

But do the apportionment formulas burden interstate commerce, 

one of the issues we will deal with. Some contend states need to 

adopt a uniform apportionment standard, however, some of the 

states may not want to be limited by such standards. Others claim 

that businesses have already tax planned or have based investment 

on the differing state tax structures and they don’t want to interrupt that process. 

It is the role of Congress and this Subcommittee in particular to 

review whether state taxation affecting interstate commerce is burdensome. Specifically, we should determine whether the differing 

apportionment formulas utilized in this expanding borderless economy are fair and appropriate. 

We should question whether the differing formulas favor in-state 

taxpayers over multi-state taxpayers. We should consider whether 

uniform apportionment standards are a better alternative, and 

would create a competitively neutral playing field for in-state and 

multi-state businesses. 

And we should discuss whether such a standard would lead to 

a more efficient and robust—we haven’t heard robust since the 

health-care debate—economy. 

I thank the witnesses for appearing today, and I look forward to 

their testimony. And I will now recognize my colleague, Mr. 

Franks, who is not here. Having done that, I will go right along— 

ah. 

Mr. Coble, would you like to give an opening statement? 

Mr. COBLE. [Off Mike.] [Laughter.] 

Mr. COHEN. We are lucky to have you. We are all lucky to be 

here in more ways than one. 

With Mr. Coble’s sage advice, comments and observations, we 

will then go onto the witnesses. And the first witness today—and 

I want to thank everybody for participating. Your written statements will be placed in the record. I ask you to limit your oral remarks to 5 minutes. We have got a lighting system. Green means 

you are in the first 4. Yellow means you are in your last 1. Red 

means you should conclude or be finished. 

Members will be able to ask you questions. The same 5 minutes 

prevail. 

The first witness is Mr. John Swain. I almost made you Lynn 

Swann’s brother. [Laughter.] 

Mr. John Swain, professor of college at University of Arizona, an 

rival school for Mr. Swann, the Rogers College of Law. 

Professor Swain has authored and co-authored numerous books 

including ‘‘The Streamlined Sales and Use Tax,’’ and is a regular 

columnist for State Tax Notes Magazine. He is a frequent speaker 

at state and local tax conferences, consults with state governments 

and other entities on tax law. 

Before entering academia, he was with a firm in Phoenix where 

he practiced in the area of state and local taxation. 

3 

Thank you, Professor Swain. And if you would begin your testimony, and your 5-minute light is now on. 

TESTIMONY OF JOHN A. SWAIN, PROFESSOR, UNIVERSITY OF 

ARIZONA, JAMES E. ROGERS COLLEGE OF LAW 

Mr. SWAIN. Okay. Thank you, Mr. Chairman, and Members of 

the Committee. And I want to thank you for inviting me to testify 

today. 

As the Chairman noted, there is a problem in state taxation, and 

that problem is how do we divide the income of a taxpayer who 

does business in more than one state. And for example, let us 

imagine a business that has customers all over the United States, 

does manufacturing in Michigan, has distribution facilities in Tennessee, maybe does R&D in California. How do we determine how 

much income is earned in each of those jurisdictions? It is a thorny 

problem. The states have a clever and generally good solution to 

that problem. It is called formula apportionment. 

And what the states do is they compute an apportionment ratio 

for that business, and that is computed by the average of three ratios. The first is the sales factor, and we take the sales in state 

over the sales everywhere; that is one ratio. Then we take the payroll in state over payroll everywhere. And we take the property in 

state over the property everywhere. We get those ratios. We average them. And then we come up with an apportionment formula. 

We apply that to the total income of that business to determine 

what income is taxed in that state. 

I think it is—whenever you are dividing a pie, I believe it is good 

to have uniform rules otherwise you run into problem of overallocating or underallocating that pie. For example, let us assume that 

Iowa has an apportionment formula that relies only to sales which, 

in fact, is true. And then let us say Illinois has a formula that employs the traditional three factor formula I just mentioned. 

And then assume there is a business with all its property and 

payroll in Illinois that is making sales into Iowa—all its sales are 

into Iowa. What is going to happen? 

Setting aside nexus questions, what is going to happen is Iowa 

will tax all the income of that business because Iowa only relies on 

sales, and all the sales are in Iowa. But then when Illinois goes to 

compute that taxpayer’s income, sure, there are no sales in that 

state, so the sales factor is zero, but all the property and all the 

payroll are in Illinois, and that matters to Illinois. So Illinois is 

going to tax two-thirds of that business’ income. And that business 

will pay tax on one and two-thirds of its income. 

So that is the problem when we have inconsistent rules. Now, 

the opposite can happen. Assume the same facts but the business 

is located in Iowa and making all of its sales into Illinois. Iowa 

won’t tax that business at all even though it has payroll and property in Iowa because Iowa doesn’t care. It only relies on a sales factor. 

Illinois will only have—the sales factor will be one because all 

the sales are in Illinois, but there is no property or payroll in Illinois. So that ratio will be one-third. And in that case, that business 

will only be taxed on a third of its income. So we can undertaxation 

as well. 

4 

In the 1960’s and 1970’s, there was relative peace in the valley. 

There was relative uniformity among the states, and they used the 

three-factor formula I described. More recently, the lid has been 

blown off of uniformity, largely, because of economic development 

pressures. 

States and taxpayers realizes that every time the business adds 

property, makes a capital investment, adds payroll in a state, their 

tax bill goes up. And so in the name of economic development, 

states have begun to overweight their sales factor which, in effect, 

lowers the weight of the property and sales factors—excuse me— 

property and payroll factors to attract business, to have a more favorable business environment. 

But in this period where some states are changing and some 

aren’t, we have a lack of uniformity and the risk of overtaxation 

and, actually, undertaxation. 

In my view, there is a predicate for intervention that has been 

met because of the compliance burdens of non-uniform rules, because of the risk of double taxation. It is a burden of interstate 

commerce. On the other hand, as I mentioned in my example earlier, there is the opportunity for tax planning and undertaxation 

which I suppose is less of a concern to Congress. Unless the states 

come to Congress, you know, hat in hand and say please save us 

from ourselves, I don’t know that they are going to do that. But 

that would be the other possibility. 

Thank you very much. 

[The prepared statement of Mr. Swain follows:] 

5 

PREPARED STATEMENT OF JOHN A. SWAIN


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Mr. COHEN. Thank you for your testimony. 

And we now recognize Mr. Jim Eads. Mr. Eads has been with us 

before, executive director of the Federation of Tax Administrators 

since September where he kept capping a 30-year career in state 


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tax work. He leads the FTA staff in D.C., and he represents the 

50 states, the District, and New York City. 

Previously, he was director of public affairs for Ryan, a major tax 

consulting company, where he represents their clients regarding 

state tax policy and legislative proposals. Past president of the National Tax Association, former chairman of Electronic Commerce 

Task Force on the Council on State Taxation. 

Thank you, Mr. Eads. The light begins. 

TESTIMONY OF JAMES R. EADS, JR., EXECUTIVE DIRECTOR, 

FEDERATION OF TAX ADMINISTRATORS 

Mr. EADS. Thank you, Mr. Chairman, and Members of the Committee. Thank you for opportunity to appear before you today. 

As the Chairman said, my name is Jim Eads. I am the executive 

director at the Federation of Tax Administrators. The Federation 

is an organization of the state tax agencies of all 50 states as well 

as the District of Columbia and New York City. 

As you know, Navjeet Bal, the commissioner of revenue for the 

Commonwealth of Massachusetts was scheduled to present this 

testimony at the hearing in March which was rescheduled today. 

She could not be here today, and I am honored to be here representing her and the Federation of Tax Administrators. 

We gather at a difficult time for state governments. The recession has taken its toll on our citizens and creates the demand for 

state services and caused record declines in state tax revenues. 

States have responded by cutting services, laying off state workers, 

drawing down rainy-day funds, and, in some cases, raising taxes. 

The Federal Government has been a vital partner to the states, 

providing financial assistance, which has allowed the states to 

meet their balanced-budget requirements without even deeper 

budget cuts. As the states prepare their budgets for the upcoming 

fiscal year, it appears that state revenues are no longer in freefall, 

but state budgets still face enormous challenges as Federal assistance ends, demand for state services remains strong, and state revenues are well below pre-recession levels. 

You asked that we discuss the general issue of apportionment of 

corporate income for state tax purposes and specifically to address 

the question of what role the Congress has or should have in developing apportionment standards. 

This hearing follows on a hearing in February that the Chairman 

mentioned on nexus issues. You heard then from Utah Tax Commission Chairman Bruce Johnson, and I repeat now, a respectful 

request that Congress continue to refrain from Federal legislation 

in areas of state taxation, including apportionment, that are best 

left to the states. An honest and healthy respect for our Federal 

system requires no less. 

For the better part of 50 years now, the states have found a 

workable solution to the issue of determining a corporation’s taxable income through the application of formulary apportionment. It 

has served as a stable and widely accepted means to approximate 

the extent of a business’ activity within a state and has proven sufficiently flexible to address a changing economy. 

As that economy has evolved toward a service and information 

economy, states have responded by adjusting their apportionment 

16 

formula and also by adopting alternative apportionment regulations for particular industries such as financial institutions, telecommunications, airlines, railroads, trucking companies, television 

and radio broadcasting. 

Despite business’ opposition, the multi-state tax commission is 

undertaking an effort to modernize and standardize the sales factor 

for services and intangibles to better reflect today’s economy and 

to promote uniformity amongst the states with respect to this important sector of the economy. 

We believe that the states are the best laboratories for the evolution of apportionment structures that significantly affect their 

own fiscal destiny. State tax administrative agencies are confronted 

daily with issues related to state corporation taxation. They have 

the knowledge, the experience and expertise to craft what we believe are workable solutions. 

Given the diversity and complexity of the American economy and 

the rapid changes that it is undergoing, it is imperative for both 

the business community and the states to maintain their flexibility 

to adjust the apportionment formula to address particular industries and to respond to particular needs of that state. 

Any type of Federal intervention in this effort would have a deleterious effect on the flexibility that is in the current apportionment 

structure and would, in all likelihood, have unintended consequences. Given their expertise, their motivation, and their onthe-ground relations with the business community, the states are 

best positioned to revise formulary apportionment as it applies to 

state taxation of interstate commerce. 

Thank you for your time and for your consideration of this important issue, and I will be glad to respond to questions at the appropriate time. 

[The prepared statement of Mr. Eads follows:] 

17 

PREPARED STATEMENT OF JAMES R. EADS, JR. 


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Mr. COHEN. Thank you, sir. 

We are approaching a record, two witnesses who have not gone 

to the red light. 

You are on the spot, Mr. De Jong. 

Mr. De Jong is a tax counsel at Tax Executives Institute, Inc. He 

focuses primarily on state and local tax issues, drafted several SuVerDate Aug 31 2005 12:50 Jul 14, 2010 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6601 H:\WORK\COMM\050610\56272.000 HJUD1 PsN: 56272

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preme Court amicus briefs, written advocacy pieces on issues ranging from economic nexus is to state add-back statutes and penalties. 

Prior to joining TEI, he worked in the McLean, Virginia, office 

of Ernst and Young. The majority of his time was spent on state 

and local tax practices, assisting clients with a broad variety of 

issues. 

Thank you, Mr. De Jong. Don’t feel any great, you know, burden, 

but it is all on you. [Laughter.] 

TESTIMONY OF DANIEL B. DE JONG, TAX COUNSEL, 

TAX EXECUTIVES INSTITUTE, INC. 

Mr. DE JONG. Thanks for taking away that burden. Is this working for you? 

Mr. COHEN. Your time started. 

Mr. DE JONG. Okay. [Laughter.] 

Good morning, and thank you for your invitation to Tax Executives Institute to participate in this hearing and to provide the 

business perspective on issues related to the apportionment of income for state corporate tax purposes. 

Founded in 1944, TEI is the preeminent worldwide association of 

in-house tax professionals with more than 7,000 members representing over 3,000 of the world’s largest businesses located in the 

United States, in Canada, Europe, and Asia. 

My testimony today will focus on two areas. First, I will discuss 

the practical effects of the current patchwork of state apportionment rules and how they affect multi-state businesses. Second, I 

will describe the challenges that exist to achieving consensus in 

this area. 

But before jumping into apportionment, I think it is also important to note that complexity exists in determining the tax base, the 

pie that Mr. Swain described, that must ultimately be divided 

among the states. This includes determining which entities must 

be included in a tax return which can be complicated, in part, because of the general lack of uniformity among the states. 

After identifying the entities to be included in each state tax return and the tax base of those entities, businesses must apportion 

that income to the various states in which they have nexus. For the 

reasons outlined by Professor Swain, many states have moved 

away from a standard formula based on a corporation’s property, 

payroll, and sales and have used their apportionment formulas to 

benefit and encourage in-state investment. 

For example, by moving the payroll and property factors out of 

the apportionment calculation, the state can benefit in-state businesses by eliminating the ratios tied to the production of a taxpayer’s goods and services. The resulting lack of uniformity increases the compliance burden on multi-state business. 

Perhaps the most striking example of this disconnect is the manner in which receipts from the sale of services and intangibles are 

sourced for purposes of the sales factor. Under many state statutes, 

taxpayers must source those receipts to the state in which the income-producing activity is performed. Many other states, however, 

have begun to source sales to the location where the customer receives the benefit of those services. 

31 

Inconsistent application of these rules can result in both double 

taxation and taxation of less than one hundred percent of a taxpayer’s income. TEI’s written statement includes an example of a 

taxpayer that provides computer help desk services and ultimately 

paid tax twice on half of its income as a result of the varying 

sourcing rules applicable to multi-state service providers. 

The example also shows that these inconsistent rules can work 

in favor of the taxpayer. By moving its headquarters from one state 

to another, the taxpayer in that example would pay state income 

taxes on only half of its income. While the example may seem only 

an interesting hypothetical, situations of a similar nature are not 

uncommon for businesses across the country. 

This brings us to the question: ‘‘Is it possible to achieve consensus on a uniform apportionment standard?’’ Based on experience across the country, the challenge will be significant. Some degree of complexity is inherent in any multi-jurisdictional tax system. Changes in one area would likely benefit some businesses and 

disadvantage others. 

This occurs because the facts and circumstances of each business 

can vary by industry, geographic location, and other factors. Over 

the years, there have been repeated efforts to promote state and 

local tax consistency and uniformity. These efforts have, for the 

most part, met with limited success for a variety of reasons—state 

economic and budgetary pressures, concerns about state sovereignty, geographic and demographic considerations, and interstate or international competitive concerns. 

A one-size-fits-all approach to apportionment may not be uniformly supported by the business community. For example, a uniform apportionment formula that includes a payroll or property factor would increase the state tax burden on businesses that located 

production facilities in states that offered single-sale-factor apportionment formulas in order to attract in-state investment. That 

may also run contrary to policy decisions made by states to promote in-state investments. 

In conclusion, Tax Executives Institute thanks the Subcommittee 

for the opportunity to share our perspective on the complexities of 

our multi-state tax system in general and apportionment matters 

in particular. And with 25 seconds to spare, I welcome the opportunity to answer any questions. [Laughter.] 

[The prepared statement of Mr. De Jong follows:] 

32 

PREPARED STATEMENT OF DANIEL B. DE JONG


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Mr. COHEN. Thank you, Mr. De Jong. What a great panel. I 

think we should give them applause. [Applause.] 

That was very special. 

I am going to yield to Mr. Watt for first questions. Normally— 

Mr. Watt, you are recognized for 3 minutes. 

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Mr. COHEN. Well, I think we have votes at 11:30. I would like 

to give everybody a shot. 

Mr. WATT. Okay. That is fine. I will try to stay within my time. 

My green light is not on, though. So you better start the clock. 

Mr. Eads, you are with this multi-state task force that is doing 

some work in this area. To what extent will they address coming 

up with some uniformity on the definition of ‘‘nexus’’? 

Mr. EADS. I alluded in my testimony to the multi-state tax commission, which is working on an issue with regard to apportionment. I represent the Federation of Tax Administrators which includes all the states’ tax agencies. 

Right now, the issue of nexus is governed by two United States 

Supreme Court decisions based on the Constitution. 

Mr. WATT. I understand that. I am trying to figure out whether 

anybody in this task force or any of the multi-state discussions are 

trying to come up with some kind of uniformity in that area. 

Mr. EADS. There is an effort, yes, among the states to—particularly at the multi-state tax commission—to address the issue of 

nexus as well as issues with regard to apportionment. As you 

might well imagine being a participant in the legislative process, 

getting everyone in a particular group to agree about something, 

sometimes, can be problematic. 

Mr. WATT. Are they anywhere in the neighborhood of having 

some kind of consensus about what the definition of ‘‘nexus’’ is? 

Mr. EADS. Well, it depends on which state—I am sorry—which 

tax we are talking about, Mr. Watt. In the area of sales taxes, 

there is going to be some legislation and has been legislation introduced in the Congress in the past which would establish a universal definition of nexus for sales taxes. 

There is also, pending before this Committee, a bill which would 

also define nexus in the corporate income tax—— 

Mr. WATT. I think you may be missing it. You are lobbying for 

the states to work this out, and then you are telling me about legislation that has been introduced here. So what I am trying to get 

a sense is whether there is any possibility of whether the states, 

if we stay out of this, can resolve this without legislation. 

Mr. EADS. The states can make some progress, but when—as we 

have in the sales tax area, the Supreme Court has ruled based on 

the Constitution. There may not be a whole lot that the states can 

do. The states can act collaboratively, and they probably can even 

act collaboratively within the Constitution. 

But it is very difficult to get there. 

Mr. WATT. Mr. Chairman, I will yield back before my red light 

comes on, too. 

Mr. COHEN. Thank you, sir. I appreciate it. 

Mr. Coble has left the building, like Elvis. 

Mr. Scott, you are recognized. 

Mr. SCOTT. Thank you. 

Professor Swain, you mentioned a situation where people in Iowa 

could, if you run a business out of Iowa which just has a sales— 

if they were in Illinois selling in Illinois taxed at a hundred percent 

and moved their corporate headquarters across the street as Mr. 

De Jong has indicated, would they cut their corporate taxes? 

Mr. SWAIN. Yes. I think—I mean, my scenario was—— 

47 

Mr. SCOTT. If you move a company that is doing business in 

Iowa, selling in Iowa, property in Iowa—if you just pick up your 

corporate headquarters, move—excuse me—in Illinois—and pick up 

just the corporate headquarters and move it to Iowa where all your 

customers all still in Illinois, you could be taxed on one-third—— 

Mr. SWAIN. Yes. You could reduce your tax liability substantially—— 

Mr. SCOTT. You have got population places like Bristol, Tennessee; Bristol, Virgini; Kansas City; Illinois; Kansas City, Missouri. Do people locate across state lines to try to save some 

money? Does that actually happen? 

Mr. SWAIN. Oh, certainly. Certainly. And you have to move your 

operations, not just your headquarters because they count your 

property and your payroll. But if you move your operations, you 

can—you find a tax haven if you can. 

Mr. SCOTT. Now, we are just talking—we are talking about corporate income tax. How many people use all three? Sales, payroll, 

and property? How many just use sales? How much variation is 

there? 

Mr. SWAIN. It is a moving target. It is in my written testimony. 

I am thinking maybe 11 to 14 or somewhere—15’ish—use the traditional formula. I think it is up to about 14 or so that use sales only. 

And the rest are using a superweighted sales factor. It is somewhere in there in my testimony. 

Mr. SCOTT. Now, if you pay your corporate tax in one state, do 

you necessarily get a credit in the other state? 

Mr. SWAIN. No. The interesting thing about the state system is 

it is not a credit system. It is just—each state determines the slice 

of the pie it is going to tax, end of story. No credits for taxes paid 

in other jurisdictions. 

Mr. SCOTT. And how continuous a nexus do we have to have to 

trigger all of this apportionment? 

Mr. SWAIN. Well, that is an open question for income tax, but the 

trend with state courts is that you just need what we call an economic nexus. You don’t need a physical presence in order to trigger 

income tax liability. That hasn’t been determined by the Supreme 

Court, but the clear trend with state courts is to allow what we call 

economic nexus for income taxes. 

Mr. COHEN. Ms. Chu from California, an expert on this as many 

other topics. 

Ms. CHU. Thank you, Mr. Chair. 

Mr. Eads, Professor Swain argues that, without uniform apportionment rules, there is a risk of both overtaxation and undertaxation of multi-state businesses. How do you respond to that? 

Mr. EADS. There is a risk. Professor Swain is correct that there 

is a risk. It is not a perfect system. It is a system that, on a caseby-case basis, has been to the U.S. Supreme Court and been found 

to be constitutional. There is a good body of case law from the Supreme Court about what the states have done and what is constitutional and what is not. 

The struggle that the Congress would have would be if it wanted 

to craft a piece of legislation to find something that would please 

everyone. And as Mr. De Jong said in his testimony, even among 

the business community, that would be hard to do. 

48 

So is it a perfect system? No. Is it a working system that 

achieves—I hesitate to use this term but—rough justice? Yes. 

Ms. CHU. And how about the issue of double taxation in services? 

Of course, we know that tangible goods. It is very clear where that 

tangible good comes from. 

But with services, there is the risk of being double taxed because 

it has to do with where the service is rendered versus where it is 

being received. 

Mr. EADS. Representative Chu, certainly, the evolving nature of 

the economy has put some stresses and strains on the tax system. 

Many state tax laws were drafted in an era when we were a mercantile system. People went to stores and bought things. There 

wasn’t nearly as much service in the economy when many tax laws 

were adopted. 

And so there are some stresses and strains that need to be 

worked out to try to address that segment of the economy to make 

the tax system work and to be fair to taxpayers. 

Ms. CHU. Okay. Thank you. I yield back. 

Mr. COHEN. Let me ask a question or two about maybe—first, 

Mr. Eads. 

You said that you think that we should respect the sovereignty 

of the states and refrain from Federal legislation in the area of apportionment for state taxes purposes. You don’t see any benefit at 

all from any kind of uniformity? 

Mr. EADS. Mr. Chairman, I do. I think the devil is in the details. 

That is—as Mr. De Jong alluded to in his testimony, even amongst 

the business community, it would be hard to find a consensus 

about what the standard should be. That would also be true among 

my members. 

So is there a role for Congress to try to alleviate some burden? 

Yes. As I indicated in my testimony, however, what the Congress 

would have to do is try is avoid those unintended consequences 

that would just create a new set of problems or a new burden that 

business would have to confront. 

The fact of the matter is—— 

Mr. COHEN. And do you not think Congress can do that in its infinite wisdom and its ability to craft, you know, meaningful and 

reasonable and rational legislation devoid of political considerations 

and special influences? 

Mr. EADS. I am a hundred percent confident of the Congress’ 

ability to do that, Mr. Chairman. [Laughter.] 

Mr. COHEN. This Congress too? [Laughter.] 

Thank you for your endorsement. 

Do either of you gentlemen feel that Congress should do anything in this area? Or are you laissez-faire as well? 

Mr. SWAIN. Well, I live—go ahead. I mean, I have kind of the 

ivory-tower perspective. I mean, conceptually, it is a good idea. It 

is what should be done. I understand the politics is difficult. And 

I don’t have much of an opinion on that. 

But, you know, first, do no harm. I think that is what the states 

are worried about; that if Congress tried to do something, it might 

do some harm rather than some good even though, conceptually or 

in the abstract, uniformity makes complete sense. 

Mr. COHEN. And Mr. De Jong? 

49 

Mr. DE JONG. My perspective—our members would probably—to 

answer a question of should there be uniform apportionment standards with a yes, and then you asked each one of them what that 

uniform standard would be, they would probably give you a hundred different answers to what it would be. 

So I think it would be difficult to build up a consensus behind 

a single solution to that problem. It is very complex. 

Mr. COHEN. I want to thank the Members of the Committee for 

attending, and I want to thank the witnesses very much for your 

testimony and time. 

I wish we had more time, but we have to vote—we have the 

healthy—a bill that would help provide for—cash for clunkers is 

what it is. It is called Home Start, a very important bill. And then 

we have to vote for motherhood, literally, voting for Mother’s Day. 

So we all want to get up there and do that to precede apple pie. 

So we thank the witnesses today. Without objection, Members 

have 5 legislative days to submit any additional written questions 

which we will forward to the witnesses and ask you to respond as 

promptly as you did your testimony. 

Without objection, the record will remain open for 5 legislative 

days for submission of any other additional materials. I thank everyone for their time and patience. The hearing is adjourned. 

[Whereupon, at 11:38 a.m., the Subcommittee was adjourned.] 

(51) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDI- CIARY, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Nearly 50 years ago, the House Judiciary Committee established a special subcommittee on State taxation affecting interstate commerce, known as the ‘‘Willis 

Committee,’’ to study these complicated issues and to make recommendations. 

Unfortunately, State taxation affecting interstate commerce has become even 

more complex in the Age of the Internet. 

The Subcommittee on Commercial and Administrative Law has conducted a series 

of hearings—both legislative and oversight—examining these issues, including a 

hearing it conducted last February that focused on defining nexus. 

Today’s oversight hearing considers how States calculate tax liabilities for 

multistate businesses in light of the fact that different States utilize different formulas. 

Given the potential for taxation formulas to burden interstate commerce, it is critical for Congress to understand them. 

Accordingly, I welcome today’s hearing. As we hear testimony from today’s witnesses, we should consider the following three points: 

First, to help our Nation lift itself out of the current economic climate, we should 

work to lessen unnecessary burdens on interstate commerce. As our businesses 

thrive and increase production, more jobs are created. As more workers get back on 

their feet, they create a market for more goods and services that further helps our 

businesses to thrive. 

But to foster our country’s economic revival, businesses need clarity and fair tax 

policies to operate. They need simple and clear tax structures to know what activities will trigger tax liability in a State. 

Accordingly, we should urge the creation of State and local tax policies that are 

clear and fair and that will not burden interstate commerce. 

Second, many State and local governments across the United States are also suffering during this three-year-long economic downturn. 

With reduced revenues and looming fiscal obligations, State and local governments are having to make tough choices to spur economic growth while balancing 

their budgets. 

My home State of Michigan has been hit especially hard as its tax base continues 

to dwindle. In response, Michigan has had to cut spending and tweak its tax policies 

just to stay afloat. 

It’s important, however, that State and local governments create tax policies that 

not only pay for providing essential services, but also spur economic development, 

and in turn, job creation. 

For example, State governments often formulate tax policies in hopes of attracting 

investments and businesses to the State. 

Within these tax policies, State governments have to determine how to tax 

multistate companies. 

We should not at this hearing question the effectiveness of such tax policies. Instead, we should focus on whether these tax policies burden interstate commerce. 

Nonetheless, Congress should take seriously the plight of State and local governments. In fact, last month, this Subcommittee held a hearing on how pending legislation could affect State and local government revenues, especially during the current economic downturn. 

Third, we should encourage State and local governments—together with the relevant taxpayers—to work together to establish tax policies that eliminate over-taxation of multistate taxpayers, while ensuring that there is no under-taxation. 

52 

And we should encourage the parties to work together to lessen the administrative burdens for both businesses and governments. 

To the extent that there are issues involving over-taxation and under-taxation— 

as we know from the creation of the Uniform Division of Income for Tax Purposes 

Act, and its widespread adoption—the interested parties should work collaboratively 

to achieve a tax policy that is mutually beneficial. 

They can choose to follow a uniform standard, or tweak the current differing 

standards, or do nothing at all. 

Although Congress can provide a legislative solution if the relevant parties cannot 

agree upon one, I would hope the interested parties could try to develop their own 

solutions before involving Congress. 

We are interested in how, for instance, the Multi-state Tax Commission will approach the apportionment issue. 

Of course, if there exists a problem that cannot be solved through mutual agreement, then Congress may need to intercede. 

If Congress later chooses to provide a solution, the legislative record from today’s 

hearing should provide us with a basis for creating meaningful legislation. 

I thank Chairman Cohen for holding this very important hearing. And I encourage him and this Subcommittee to continue its review of State taxation issues to 

ensure that State tax policies do not burden interstate commerce. 

f 

PREPARED STATEMENT OF THE HONORABLE HENRY C. ‘‘HANK’’ JOHNSON, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF GEORGIA, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Thank you, Mr. Chairman, for holding this hearing today. 

Today we will examine the general issue of apportionment of corporate income for 

state tax purposes. Specifically, this hearing will give Members the opportunity to 

hear from witnesses about what Congress should do, if anything, in regards to apportionment standards. I hope the witnesses will be able to shed some light on this 

issue. 

Apportionment is a means to attribute a business entity’s income to and among 

the various states in which the entity conducts business. 

When an entity conducts businesses in multiple jurisdictions, it is necessary to 

determine which of the entity’s activities, and how much of the income derived from 

those activities, should be attributed to each jurisdiction in which it conducts business. States currently set their own corporate tax formulas. 

Given the tumultuous economy, and record unemployment, states are hurting. 

States are struggling to create budgets to provide essential services, such as public 

education, police, and fire personnel, for their citizens. Therefore, this is an issue 

that should not be taken lightly. 

As I think about apportionment, several questions come to mind. Should Congress 

step in and legislate? If so, how should Congress proceed? How would federal legislation affect multistate businesses? How would it impact interstate commerce? 

Hopefully, the witnesses can enlighten us on these and other questions. 

I thank the Chairman for holding this hearing today, and I look forward to hearing from the witnesses. 

f 

53 

RESPONSE TO POST-HEARING QUESTIONS FROM JOHN A. SWAIN, PROFESSOR, 

UNIVERSITY OF ARIZONA, JAMES E. ROGERS COLLEGE OF LAW


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RESPONSE TO POST-HEARING QUESTIONS FROM JAMES R. EADS, JR., 

EXECUTIVE DIRECTOR, FEDERATION OF TAX ADMINISTRATORS


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RESPONSE TO POST-HEARING QUESTIONS FROM DANIEL B. DE JONG, 

TAX COUNSEL, TAX EXECUTIVES INSTITUTE, INC. 


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