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BUSINESS ACTIVITY TAX

SIMPLIFICATION ACT OF 2003

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

ON

H.R. 3220

MAY 13, 2004

Serial No. 84

Printed for the use of the Committee on the Judiciary

(

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

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

JOHN R. CARTER, Texas 

TOM FEENEY, Florida 

MARSHA BLACKBURN, Tennessee 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina 

JEFF FLAKE, Arizona 

JOHN R. CARTER, Texas 

MARSHA BLACKBURN, Tennessee 

STEVE CHABOT, Ohio 

TOM FEENEY, Florida 

MELVIN L. WATT, North Carolina 

JERROLD NADLER, New York 

TAMMY BALDWIN, Wisconsin 

WILLIAM D. DELAHUNT, Massachusetts 

ANTHONY D. WEINER, New York

RAYMOND V. SMIETANKA, Chief Counsel 

SUSAN A. JENSEN, Counsel 

DIANE K. TAYLOR, Counsel 

JAMES DALEY, Full Committee Counsel 

STEPHANIE MOORE, Minority Counsel 

(III)

C O N T E N T S 

MAY 13, 2004

OPENING STATEMENT 

Page 

The Honorable Chris Cannon, a Representative in Congress From the State 

of Utah, and Chairman, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 1

The Honorable Melvin L. Watt, a Representative in Congress From the State 

of North Carolina, and Ranking Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 2

The Honorable Bob Goodlatte, a Representative in Congress From the State 

of Virginia ............................................................................................................. 3

The Honorable William D. Delahunt, a Representative in Congress From 

the State of Massachusetts ................................................................................. 5

WITNESSES 

Mr. Arthur R. Rosen, Tax Partner, McDermott, Will & Emery 

Oral Testimony ..................................................................................................... 7

Prepared Statement ............................................................................................. 10

Mr. Jamie Van Fossen, State Representative, 81st House District, State of 

Iowa 

Oral Testimony ..................................................................................................... 27

Prepared Statement ............................................................................................. 29

Mr. Rick Clayburgh, Tax Commissioner, State of North Dakota 

Oral Testimony ..................................................................................................... 32

Prepared Statement ............................................................................................. 34

Mr. Vernon T. Turner, Corporate Tax Director, Smithfield Foods, Inc. 

Oral Testimony ..................................................................................................... 36

Prepared Statement ............................................................................................. 37

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Responses to Additional Questions by Mr. Arthur R. Rosen ............................... 52

Responses to Additional Questions by Jamie Van Fossen ................................... 57

Responses to Additional Questions by Mr. Rick Clayburgh ................................. 59

Responses to Additional Questions by Mr. Vernon T. Turner ............................. 61

Prepared Statement of Gregory Meeks, a Representative in Congress From 

the State of New York ......................................................................................... 64

Prepared Statement of Donald J. Borut, Executive Director, National League 

of Cities ................................................................................................................. 66

CRS Report for Congress, ‘‘State Corporate Income Taxes: A Description 

and Analysis,’’ Steven Maguire (Mar. 23, 2004) ................................................ 68

Prepared Document offered by the Honorable Bob Goodlatte, ‘‘Examples of 

Actual & Potential Agressive State Actions and Posisitons Against Outof-State Companies’’ ............................................................................................. 84

Prepared Statement of Edward Yingling, Executive Vice President, American 

Bankers Association ............................................................................................. 87

Prepared Statement of Bo and Kathy Horne, Owners of a Home-Based Software Development Company ............................................................................... 88

Prepared Statement of Duane Parde, Executive Director, American Legislative Exchange Council ......................................................................................... 90

Page

IV

Prepared Statement of James K. Kallstrom, Senior Executive Vice President, 

MBNA Corporation .............................................................................................. 92

Prepared Statement of Mark Nebergall, President, Software Finance & Tax 

Executives Council ............................................................................................... 93

Letter and Amici Curiae Brief from James M. Bell, President, North Carolina 

Manufacturers Association; Philip J. Kirk, Jr., President, North Carolina 

Citizens for Business and Industry; Samuel M. Taylor, Executive Vice 

President, North Carolina Biosciences Organization; and Joan P.H. Myers, 

President and CEO, North Carolina Electronics and Information Technologies Association ............................................................................................. 96

Prepared Statement of Harley T. Duncan, Executive Director, The Federation 

of Tax Administration .......................................................................................... 118

Prepared Statement of the Multistate Tax Commission ...................................... 123

Prepared Statement of Martha E. Stark, Commissioner, New York City Department of Finance ............................................................................................. 128

(1)

BUSINESS ACTIVITY TAX

SIMPLIFICATION ACT OF 2003

THURSDAY, MAY 13, 2004

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, COMMITTEE ON THE JUDICIARY, Washington, DC.

The Subcommittee met, pursuant to call, at 2:05 p.m., in Room 

2141, Rayburn House Office Building, Hon. Chris Cannon (Chair of 

the Subcommittee) Presiding. 

Mr. CANNON. Good afternoon, ladies and gentlemen. This hearing 

of the Subcommittee on Commercial and Administrative Law will 

now come to order. We are here today to consider H.R. 3220, the 

‘‘Business Activity Tax Simplification Act of 2003.’’ This is a measure intended to provide greater clarity for businesses in navigating the tax landscape. This bill was introduced by 

the gentleman from Virginia, Mr. Goodlatte, on October 1 of last 

year. It has 30 cosponsors, of which I am one. We expect Mr. Goodlatte to join us soon. 

H.R. 3220 is designed to address a fundamental problem related 

to interstate commerce. When is a State justified in taxing businesses with little or no physical connection with that State? While 

Congress has examined this issue for years, the emergence of the 

Internet economy has made the need for clear and concise taxation 

standards even more urgent. 

In the simpler days of 1959 Congress enacted Public Law 86– 272, which is still in force today. This law prohibits States from imposing a business activity tax on companies whose only contact 

with a State is the solicitation of orders for tangible goods. 

Since 1959 the economy has reshaped itself dramatically. Companies offer not only tangible goods but intangible property and services to customers across the country. The emergence of the Internet 

has served as the major catalyst of this transformation. But because Public Law 86–272 does not address intangible goods, it falls 

short in addressing the current tax landscape. 

In addition, since 1959 many States appear to have engaged in 

practices that are at odds with the meaning and intent of Public 

Law 86–272. For example, States have begun to impose a tax on 

a company’s business activities on gross receipts rather than on net 

income. These developments have wreaked havoc on businesses 

who have incurred great expense in attempting to decipher and in 

litigating the appropriate nexus standards for business activity 

taxes. 

2

H.R. 3220 would provide some certainty to this dispute. It would 

amend Public Law 86–272 to apply to solicitation activities in connection with all sales, not just sales of tangible personal property. 

It would also cover all business activity taxes, not just net income 

taxes. 

H.R. 3220 would codify the current physical presence standard 

observed for years and elaborated by the Supreme Court in 1992 

in Quill vs. North Dakota. In that case the Court required physical 

presence by accompanying an order for a State to impose a requirement that remote vendors collect and remit sales taxes for sales 

made within the State. 

Similarly, H.R. 3220 stands for the concept that the economic 

burden of actual tax imposition should be borne by those persons 

who received the benefits and protections of a State. It establishes 

a bright line 21-day physical presence requirement for the imposition of business activity taxes. 

During the 107th Congress the House considered a similar measure, H.R. 2526, also sponsored by Mr. Goodlatte. While that bill 

was reported favorably by this Subcommittee, the full Committee 

on the Judiciary did not have the opportunity to consider it prior 

to the conclusion of the Congress. 

Numerous business associations have expressed their strong support for H.R. 3220, including the National Association of Manufacturers, the Direct Marketing Association, the American Trucking 

Association, and the Information Technology Association of America, to name only a few. 

In considering this legislation, Congress recognizes its responsibility under the U.S. Constitution to ensure that States do not unduly burden interstate commerce through the use of their taxing 

authority. We also seek to promote a legally certain and stable 

business environment that will encourage business to make investments. At the same time we endeavor to do so without detracting 

from reasonable concepts of State and local taxing prerogatives. 

I look forward to the testimony of our highly informed panel. 

I ask unanimous consent that Members have 5 legislative days 

until the close of business Thursday, May 20, to submit written 

statements for inclusion in today’s record. 

I yield to Mr. Watt, the Ranking Member of the Subcommittee, 

for an opening statement. 

Mr. WATT. Thank you, Mr. Chairman. I thank the Chairman for 

convening the hearing and I especially thank him for convening the 

hearing on this matter because it seems to me that this is exactly 

the kind of issue that we need to have a full hearing or set of hearings on so that we can understand the consequences of what we are 

doing and where exactly the line should be drawn. 

I am not a cosponsor of the bill but I do not think anybody 

should read anything into that either positively or negatively about 

the bill. It simply means that there are strong advocates who have 

expressed themselves on both sides of this proposed legislation, and 

perhaps the best example of that would be the fact that I have two 

pieces of correspondence which I would like to ask unanimous consent to submit for the record. 

Mr. CANNON. Without objection, so ordered. 

3

Mr. WATT. One from the National League of Cities in opposition 

to the bill and one from Congressman Greg Meeks of New York’s 

Sixth Congressional District in support of the legislation. 

[The information referred to follows in the Appendix] 

Mr. WATT. So I am not brokering for either side in this debate. 

I came to listen and to learn and I feel like we have a great panel 

to help us do that. So I am looking forward to hearing the testimony, and with that I will yield back and we can get on to it. 

Mr. CANNON. I thank the gentleman. The Chair notes and welcomes the presence on the dais of the gentleman from Virginia, Mr. 

Goodlatte. Although not a Member of the Subcommittee, he is a 

Member of the full Judiciary Committee and a sponsor of the legislation which is the subject of today’s hearing. Mr. Goodlatte, we 

welcome you and are grateful for your continuing efforts. 

The Chair exercises the discretion of this instance and would recognize Mr. Goodlatte for 5 minutes for any remarks he wishes to 

make. In addition, let me point out that the rules of the Committee 

require that a person who is not a Member of Committee who is 

going to ask questions needs to have time yielded so even though 

you are the only person here we will make time to yield for Mr. 

Goodlatte to ask questions when we get to that point. 

Mr. WATT. Can I just ask unanimous consent that we waive that 

rule for today’s hearing because I think we would certainly benefit 

from Mr. Goodlatte being able to make an opening statement and 

ask questions. 

Mr. CANNON. Without objection, so ordered. By the way, let me 

say that, Mr. Delahunt, you are a Member of the panel. Would you 

like to make an opening statement before Mr. Goodlatte? 

Mr. DELAHUNT. I will defer to the gentleman. 

Mr. CANNON. I thank you. Mr. Goodlatte, you are recognized for 

5 minutes. 

Mr. GOODLATTE. Mr. Chairman, thank you and I thank the 

Ranking Member for his courtesy and generosity for allowing me 

to participate but thank you even more for holding this important 

hearing. 

With the growth of Internet companies increasingly able to conduct transactions without the constraints of geopolitical boundaries, over the past several years a growing number of jurisdictions 

have sought to collect business activity taxes from businesses located in other States, even though those businesses receive no appreciable benefits from the taxing jurisdiction and even though the 

Supreme Court has ruled that the Constitution prohibits a State 

from imposing taxes on businesses that lack substantial connections to the State. This has led to unfairness and uncertainty, generated contentious, widespread litigation, and hindered business 

expansion due to fear of exposure to unfair tax burdens. 

In order for e-commerce and interstate commerce generally to 

continue to grow and prosper, it is imperative that clear and easy 

navigable rules be set forth regarding when an out-of-State business is obliged to pay business activity taxes to a State. 

Last year I introduced along with Congressman Boucher H.R. 

2320, the Business Activity Tax Simplification Act. This important 

legislation provides a bright line that clarifies State and local authority to collect business activity taxes from out-of-State entities, 

4

which will bring predictability to an unpredictable tax environment 

for businesses and States. 

Specifically, the bill would establish a physical presence test such 

as an out-of-State business would be obliged to pay business activity taxes to a State only if the out-of-State business has a physical 

presence in the taxing State. This physical presence test is not 

new. It basically codifies the majority view among the States that 

the Constitution requires a physical presence as opposed to other 

unclear standards before a State can impose business activity taxes 

on an out-of-State business. 

The Business Activity Tax Simplification Act would also amend 

an outdated Federal statute to bring it up to speed with the current economy. Public Law 86–272, enacted in 1959, provides a 

State may not tax an out-of-State business when the out-of-State 

business’s only contact with the State is the solicitation of orders 

for tangible personal property within that State. The Business Activity Tax Simplification Act amends the public law to change its 

application from merely the solicitation of orders for tangible personal property to cover all products, tangible or intangible, as well 

as services. This change will bring the public law up to speed with 

the economy of the 21st century, which increasingly involves the 

delivery of intangible property and services. 

The Business Activity Tax Simplification Act is good for businesses because it creates certainty. Instead of devoting time and resources to defending frivolous and often conflicting claims from 

multiple-State taxing authorities, this legislation will allow businesses to devote more resources to increasing efficiencies and reducing costs for consumers. Instead of the current tax environment, 

which requires small businesses to run blindfolded through a forest 

of tax regulations in the hopes that they will not somehow trigger 

hidden tax liability in that State, this legislation will create a 

bright line test so that businesses will know the general parameters of when they could be taxed by a State. 

But businesses are not the only ones who would benefit from this 

bill. The Business Activity Tax Simplification Act is good for 

States, too, because it protects in-State businesses from excessive 

taxation from other States. In addition, the physical presence test 

would help ensure that States do not lose tax revenues to other aggressive taxing jurisdictions. States too will benefit from the certainty this legislation provides because they will incur fewer costs 

associated with litigating these matters. 

Furthermore, this bill protects the States’ sovereign power to 

choose the rates and kinds of taxes to impose on businesses that 

are actually physically present within the State. States remain free 

to scope their own tax laws. Some like, the California Franchise 

Tax Board, have argued that States will suffer catastrophic revenue losses under H.R. 3220. However, closer look at the FTB’s assertion reveals it is full of smoke screens and mirrors. The FTB 

speculates about revenues at risk rather than concrete revenue 

losses. It provides no discussion of the data or methodologies that 

went into the study, as is customary, and the study relies on predicting the future behavior of businesses. 

5

Most importantly, it ignores the common law and statutory tools 

that California and other States have at their disposal to attack 

fraudulent corporate tax evasion schemes. 

The Business Activity Tax Simplification Act is good for businesses, good for States, and good for the economy. I look forward 

to hearing the testimony of our export witnesses. 

Mr. Chairman, thank you for allowing me to participate today. 

Mr. CANNON. I thank the gentleman. Mr. Delahunt, did you want 

to make a statement? The gentleman is recognized for 5 minutes. 

Mr. DELAHUNT. I thank the Chair. I just wanted to respond for 

a moment to my friend from Virginia where he argues that it is 

good for the States. I think we are here to learn, as the Ranking 

Member indicated, because I have heard from a number of tax commissioners from various States that obviously hold a contrary position. And again I think it is important to understand that this particular piece of legislation will create some winners and losers. And 

I look forward to that particular testimony because again even absent consideration of the need for revenue from the States, when 

it comes to our private sector I suggest we have to be very careful 

in terms of supporting economic activity. And if it creates in any 

way, shape or form an imbalance in terms of the ability of business 

to produce that economic activity, we should tread carefully. 

I think also my friend from Virginia referenced the constitutionality issue. And I could be wrong, but I presume there has been 

no case brought for litigation which has decided whether this particular form of taxation is constitutional or unconstitutional. In 

Quill vs. North Dakota the Court indicated or limited the test to 

the duty of mail order houses to collect use taxes from customers, 

and the Court acknowledged that as to other taxes such as income 

taxes, and I understand there were two cases pending, it had not 

applied the physical presence test. 

Many of the arguments that I think we are going to hear I think 

have been raised during the course of hearings on the moratorium 

of taxation on the Internet, which I support the position of the 

Chair of the Subcommittee and support it with vigor. But again 

there are other issues that the Subcommittee is dealing with also 

and we have had hearings as far as the collection of the sales tax 

and in moving again in that particular direction with an effort to 

streamline and to stay focused. 

So with those comments, Mr. Chairman, I will yield back. 

Mr. CANNON. I thank the gentleman from Massachusetts. There 

are several items I would like to touch on before we introduce the 

witnesses. 

First of all, the record of this hearing will remain open for 5 legislative days for interested parties to submit statements for inclusion in the hearing record. In addition, Members will have 5 legislative days to submit additional follow-up questions to our witnesses for inclusion in the record. 

As Mr. Delahunt just pointed out, we want to thank Mr. Chabot, 

the gentleman from Ohio, for joining us today. We expect several 

of the Members to be here. I know that all of them have a number 

of questions. 

As Mr. Delahunt just alluded, there are several issues that are 

going on here that are related. The Internet Tax Freedom Act, 

6

which has been passed in its pure and proper form by the House 

of Representatives, now passed in abominable form by the other 

body. We will have to clear that up and I think there will be some 

questions on that, its relationship to the SSTP and of course to the 

BAT. So I expect several questions on that issue. 

Mr. DELAHUNT. Mr. Chairman, can I ask unanimous consent to 

submit a CRS report dated March 23, 2004, entitled ‘‘State Corporate Income Taxes, A Description and Analysis,’’ authored by 

Steven Maguire. 

Mr. CANNON. Without objection, so ordered. 

[The information referred to follows in the Appendix] 

Mr. CANNON. Our first witness is Arthur Rosen, partner in the 

New York City law firm of McDermott, Will & Emery, where he 

chairs the firm’s nationwide State and local tax practice. A graduate of New York University and St. John’s University Law School, 

Mr. Rosen is a leading expert in the area of State and local taxation. He is the past chairman of the State and Local Tax Committee of the ABA’s Tax Section and is a member of the Executive 

Committee of the New York State Bar Association. 

Mr. Rosen is a nationally respected figure in the field of Internet 

and e-commerce taxation. He has worked to shape policy through 

participation in various venues and has lectured extensively 

throughout the country on State and local tax issues. 

Mr. Rosen appeared before the Subcommittee for the hearings on 

H.R. 2526 on September 11, 2001, which was adjourned prematurely for obvious reasons. Mr. Rosen has graciously accepted 

another invitation to provide testimony. We hope our efforts today 

will prove successful. 

Mr. Rosen, welcome back and we look forward to your testimony. 

Our next witness is Jamie Van Fossen, State Representative for 

the 81st House District of the State of Iowa, who is more often on 

this side of the dais than on that. We welcome you. Mr. Van Fossen 

is serving his fifth term as State Representative and his third term 

as chairman of the Iowa House Committee on Ways and Means. 

Mr. Fossen is recognized for his work to lower taxes for job creating 

businesses in Iowa. He introduced Resolution 164, adopted last 

month in the Iowa House, requesting Congress to enact legislation 

updating Public Law 86–272. 

In recognition for his leadership the American Legislative Exchange Council honored Mr. Van Fossen in 2001 as Legislator of 

the Year. He is also a three-time recipient of the Guardian of Small 

Business Award by the National Federation of Independent Business. 

Mr. Van Fossen earned his Bachelor’s Degree from St. Ambrose 

University. When not serving in the legislature, he is an economic 

analyst for Mid-America Energy Company in Davenport. 

Mr. Van Fossen, we congratulate you for your substantial efforts 

and look forward to your testimony from the State perspective. 

Our next witness is Rick Clayburgh, Tax Commissioner of the 

State of North Dakota. Mr. Clayburgh was elected as State Tax 

Commissioner in 1996. Commissioner Clayburgh is a former fourterm State legislator representing a part of the city of Grand Forks 

in the North Dakota House from 1988 to 1996. Mr. Clayburgh is 

the Secretary of the State Board of Equalization as well as the 

7

Treasurer of the Multistate Tax Commission. He is also a member 

of the Federation of Tax Administrators Board of Trustees and is 

actively involve in several charitable organizations, including the 

United Way, the Special Olympics and the Elks club. 

Commissioner Clayburgh earned his Bachelor’s Degree from 

Concordia College in Minnesota and his MBA and law degree from 

the University of North Dakota. We welcome you and we appreciate your testimony. 

Our final witness is Mr. Vernon T. Turner, Corporate Tax Director for Smithfield Foods, Inc., located in Smithfield, Virginia. 

Mr. Turner is responsible for all worldwide tax matters, including Federal, international and State tax issues. He has formed due 

diligence and acquisition structuring for numerous transactions. 

Prior to joining Smithfield Foods, Mr. Turner worked with two 

major accounting firms where he served a diverse client base in 

several industries. 

Mr. Turner earned a Bachelor’s Degree in business administration from James Madison University in Harrisonburg, Virginia. He 

is a licensed certified public accountant in Virginia and New York 

and serves as the State Tax Chairman for the Virginia chapter of 

Tax Executives Institute. 

Mr. Turner,thank you for your appearance here today. I extend 

to you my warm regards and appreciation for your willingness to 

participate in today’s hearing. 

In light of the fact that your written statements will be included 

in the hearing record, I request you limit your oral remarks to 5 

minutes. Accordingly, please feel free to summarize or highlight the 

salient points of your testimony. You will note that we have a lighting system that starts with a green light. After 4 minutes it turns 

to a yellow light and then in 5 minutes it turns to a red light. It 

is my habit to tap the gavel at 5 minutes. We appreciate if you 

would finish up your thoughts within that time frame. You do not 

have to stop. We are not cutting people off. I find it works better 

if everybody knows we have 5 minutes. We will have several people 

here asking you questions, so you will have time to elaborate on 

your ideas. 

After all the witnesses have presented their remarks the Committee Members in the order they arrived will be permitted to ask 

questions of the witnesses subject to the same 5-minute time limit. 

Mr. Rosen, would you proceed with your testimony now? 

STATEMENT OF ARTHUR R. ROSEN, TAX PARTNER, 

McDERMOTT, WILL & EMERY 

Mr. ROSEN. Thank you, Mr. Chairman, Congressman Watt, 

Members of Subcommittee. Thank you for this opportunity to comment on H.R. 3220, the Business Activity Tax Simplification Act, 

or BATSA. I am Arthur Rosen, a member of the international law 

firm of McDermott, Will & Emery. I am here today representing 

the Coalition For Rational and Fair Taxation, or CRAFT, a diverse 

coalition of some of America’s major corporations involved in virtually every industry with locations throughout the United States. 

The underlying principle in BATSA is that only those States and 

localities that provide benefits and protections to a business should 

get that business’ taxes rather than remote jurisdictions that proVerDate 0ct 09 2002 12:18 Jul 07, 2004 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 G:\WORK\COMM\051304\93657.000 HJUD2 PsN: 93657
8

vide no services to the business. BATSA does so in a manner that 

ensures that the business community continues to pay its fair 

share of taxes and puts a stop to unfair and new taxing positions. 

BATSA also modernizes an important Federal law enacted in 

1959. In recent years certain State tax collectors have been advocating a position that a State has the right to impose tax on a business that merely has customers there on the basis of what they call 

‘‘economic nexus’’, even if the business has no physical presence 

there whatsoever. 

While the taxpayers’ position that physical presence is required 

has repeatedly been upheld by courts, those courts and State tribunals have rendered nonuniform decisions. This has led to overall 

confusion regarding the current rules governing State taxation that 

has in turn resulted in a chilling effect on interstate commerce. 

CRAFT strongly supports BATSA and respectfully urges your approval of this legislation. We believe it is essential for Congress to 

act to provide clear guidance to the States in the area of interstate 

commerce. The current situation of uncertainty, overly aggressive 

State revenue departments, and the huge amounts of contentious 

controversy and litigation as well as the specter of enormous tax 

compliance responsibilities related to every State and thousands 

upon thousands of localities has placed a real drag on American 

business, hurting American job growth and harming the entire U.S. 

Economy. 

In my practice I regularly see situations where business will decide not to undertake a new venture for fear of inappropriate State 

tax ramifications. As explained by the Chairman, enactment of 

BATSA will address these problems and ensure that the relevant 

law, Public Law 86–272, reflect the 21st century American economy. 

Perhaps most important, BATSA guarantees fairness in interstate taxation. BATSA is simple, straightforward and quite limited 

and generally preserves the current state of the law. BATSA provides a 21-day test, where businesses that have people, employees, 

agents, or property in the State for more than 21 days during the 

year are subject to tax. 

There are qualitative de minimis exceptions to that. That is 

when the business is merely a customer in the State, when it is 

patronizing local markets, when it is generating other tax revenues 

for the State. 

BATSA also modernizes Public Law 86–272 to make sure it applies to all taxes, not just income taxes, and that it applies to sellers of goods other than tangible personal property. 

There simply is no basis for any contention that BATSA could 

lead to any significant loss of State revenues. BATSA does not depart in any significant degree from what is now being done in the 

States, as has recently been confirmed by the former Executive Director of the Multistate Tax Commission. 

Clearly State and local governments drive virtually all their business activity tax revenue from businesses that maintain employees, 

facilities, inventory or property in their jurisdiction for more than 

21 days in the year. In reality, there simply could not be any material effect on the amount of revenue received by States. 

9

Assertions that BATSA will decrease State revenues due to tax 

planning or, to use the recently overused and politically charged 

term ‘‘tax sheltering,’’ are totally baseless. There is absolutely nothing in BATSA that prevents States from using many of the weapons in their arsenal to combat improper structures and transactions. There are in fact only five or six States that do not have 

specific laws, some long-standing, some recently enacted, that are 

fully effective in addressing these situations. 

The recent MTC press release, for example, relied on a report 

prepared by the California Franchise Tax Board. I have on the 

table, and people can take if they wish, a thorough rational explanation why the assertions and conclusions in the FTB report are 

simply false. 

The United States and its treaty partners have for decades 

adopted and implemented a permanent establishment rule which 

provides that a country will not impose an income tax on a business from another country unless the business maintains a substantial presence in the taxing country. Quite alarmingly, it has 

been said that some smaller countries, citing the efforts of the U.S. 

State revenue departments advocating economic nexus, are now 

saying they want to renegotiate their treaties with the United 

States so that they can begin taxing every U.S. Business that has 

customers in their country. This would be a disaster for the U.S. 

economy. Enactment of BATSA is thus essential for ensuring that 

the current international system of taxation remains intact. 

My comments have only scratched the surface of why enactment 

of BATSA is important to the American economy and to ensure 

basic fairness without any material costs to the States. Thank you 

for your time. I welcome any questions. 

[The prepared statement of Mr. Rosen follows:]

10

PREPARED STATEMENT OF ARTHUR R. ROSEN


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Mr. CANNON. Thank you, Mr. Rosen. 

Mr. Van Fossen. 

STATEMENT OF JAMIE VAN FOSSEN, STATE 

REPRESENTATIVE, 81ST HOUSE DISTRICT, STATE OF IOWA 

Mr. VAN FOSSEN. Chairman Cannon, Representative Watt, and 

Members of the Subcommittee, thank you for the opportunity to 

testify today. My name is Jamie Van Fossen, and I am a State Representative from Iowa, and I chair the House Ways and Means 

Committee at the State House. I also serve as a public sector chair 

for the Tax and Fiscal Policy Task Force at the American Legislative Exchange Council, or ALEC. 

On behalf of the people of Iowa and the over 2,400 State legislator members of ALEC, I am pleased to testify in support of H.R. 

3220, or BATSA, legislation. ALEC is a bipartisan individual membership organization of over 2,400 State legislators. ALEC’s mission is to promote Jeffersonian principles of free markets, individual liberty and federalism and limited government. Our task 

force mission is to study efforts of legislators from across the country and assist them in their lawmaking function. We author and 

study model legislation with the assistance of our private sector 

members on issues ranging from tax limitation to managing a 

State budget crisis, and also to the relationship between State tax 

policy and interstate commerce. 

Last year we took notice of a disturbing trend in State tax policy, 

the erosion of the physical presence standard for the collection of 

business activity taxes. The State revenue departments spurred on 

by a State budget crises are moving more aggressively to collect 

taxes from businesses wholly located in other States. In response 

to this trend and the threat it created for interstate commerce and 

State economic growth, ALEC provided two pieces of model legislation designed to preserve and strengthen the physical presence or 

nexus requirement for imposition of business activities tax. 

We first passed a model resolution calling on Congress to retain 

and strengthen Public Law 86–272 as the Federal standard for the 

State imposition of business activities tax. In our resolution we 

said that the ability of State and local jurisdictions to tax out-ofState businesses should be limited to those situations in which the 

business has employees and/or property in a taxing jurisdiction 

and, accordingly, receives meaningful Government benefits or protections from this jurisdiction. 

Our resolution also asks Congress to update Public Law 86–272 

by extending its protections beyond solicitation of sales of tangible 

personal property to the sales of services and intangibles, therefore 

reflecting the realities of 21st century economy. We then presented 

a model bill that would make physical presence the State standard 

for imposing business activities taxes. The model also defines physical presence in a way that would create certainty for businesses 

and minimize costly litigation on nexus issues. The bill would have 

provided a de minimis threshold of 21 days of physical presence in 

a State before taxation would be triggered. Our model bill has been 

introduced in California, in Iowa, and also has been introduced in 

Wisconsin. 

28

Our model resolution was approved by the Iowa House of Representatives last month as you mentioned, Mr. Chairman. I urge 

you to support the simplification of business activities tax for several reasons: First, because it is consistent with constitutional separation of powers between Federal and State governments; second, 

because it would contribute to State economic growth and job creation; and, third, because it would maintain the principle of tax 

competition among the States. 

I believe as does ALEC that Government powers should be limited. This same belief animated the drafters of the Declaration of 

Independence and the Constitution of the United States and should 

be at the forefront of our thinking in any discussion about interstate commerce and State tax jurisdiction. 

H.R. 3220 is consistent with this core belief because it would 

limit power of State government to place undue burdens on interstate commerce. People are often surprised to learn that ALEC, a 

State focused public policy group, is in favor of Federal restrictions 

on State power. They wonder how we could be in favor of federalism and also advocate for Federal preemption of certain State 

tax on business activities. The answer is simple, federalism is not 

an end into itself. Federalism, like the separation of powers, is the 

tool we use to limit Government’s power and enhance the liberty 

of our citizens. Whenever State government goes beyond its powers 

given to it by the people and the Constitution, such as when the 

State tries to impose business taxes located outside of the State’s 

jurisdiction, we should not hide behind the mantra of federalism 

and excuse the action. 

H.R. 3220 is thus not about the rights of States. It is about the 

rights of people. This bill is not about the right of Iowa and other 

States to maintain historic levels of spending on schools, health 

care and transportation. This bill is about the rights of Iowa business owners and their customers to engage in interstate commerce 

free from the undue burdens associated with paying taxes in multiple States. You are not forced, as opponents of the bill claims, to 

choose between public schools and other funding. You are going to 

have to decide whether federalism means that States have nearly 

unlimited powers to tax or whether federalism is just as much a 

restriction on State power as it is a restriction on Federal power. 

H.R. 3220 is also consistent with the time honored American 

principle of no taxation without representation. Businesses should 

not have to pay taxes in those jurisdictions where they have no 

physical presence, where they derive to substantial benefit from 

the services of Government, and where they have no lasting connection of betterment of culture and society. 

This leads me to the second reason I and ALEC support H.R. 

3220, because it will foster economic growth and job creation, especially at the State level. We should measure fiscal health of a State 

by the gross State product, State jobs and the size of the family 

budget. We should not measure fiscal health by the size and 

growth of the State budget or State revenues. This will in turn be 

good for the viability of State finances. Any threat to our national 

economy is by definition a threat to the States. Enacting legislation 

like H.R. 3220 is the best medicine Congress can prescribe for 

healthy State economies. 

29

H.R. 3220 would also maintain, and I think this gets to the 

point, a healthy tax competition among States. In Iowa we seek to 

create a tax and regulatory environment that is favorable to business locations and job creation. We compete with other States to 

offer the beneficial place to locate business. If other States can tax 

Iowa businesses merely because they have customers that derive 

income from those States, Iowa will lose a major tool we have to 

attract business and jobs. 

Thank you. 

[The prepared statement of Mr. Van Fossen follows:]

PREPARED STATEMENT OF JAMIE VAN FOSSEN

Chairman Cannon, Representative Watt, and members of the subcommittee, 

thank you for the opportunity to testify before the House Judiciary Subcommittee 

on Commercial and Administrative Law. My name is Jamie Van Fossen, and I am 

a State Representative from Iowa. I chair the Iowa House Ways and Means Committee and I also serve as the public sector chair of the Tax and Fiscal Policy Task 

Force at the American Legislative Exchange Council (ALEC). On behalf of the people of Iowa, and the over 2,400 state legislative members of ALEC, I am pleased 

to testify in support of H.R. 3220, the ‘‘Business Activity Tax Simplification Act of 

2003.’’ ALEC is a bi-partisan, individual membership organization of over 2,400 state 

legislators. ALEC’s mission is to promote the Jeffersonian principles of free markets, 

individual liberty, federalism and limited government to our members. I serve as 

the public sector chair of the Tax & Fiscal Policy Task Force. Our task force’s mission is to study the efforts of legislators from across the country and assist them 

in their lawmaking function. We author and study model legislation, with the assistance of our private sector members, on issues ranging from tax limitation, to managing a state budget crisis, to the relationship between state tax policy and interstate commerce. 

Last year, we took notice of a disturbing trend in state tax policy: the erosion of 

the physical presence standard for the collection of business activity taxes. State 

revenue departments, spurred on by the state budget crisis, are moving more aggressively to collect taxes from businesses wholly located in other states. In response 

to this trend and the threat it created for interstate commerce and state economic 

growth, ALEC approved two pieces of model legislation designed to preserve and 

strengthen the physical presence nexus requirement for the imposition of business 

activity taxes. 

We first passed a model resolution calling on Congress to retain and strengthen 

Public Law 86–272 as the federal standard for the state imposition of business activity taxes. In our resolution, we said that the ability of state and local jurisdictions 

to tax out-of-state businesses should be limited to those situations in which the business has employees and/or property in the taxing jurisdiction and accordingly receives meaningful governmental benefits or protections from the jurisdiction. Our 

resolution also asks Congress to update Public Law 86–272 by extending its protections beyond the solicitation of sales of tangible personal property to the sales of 

services and intangibles, thereby reflecting the realities of the 21st century economy. 

We then passed a model bill that would make physical presence the state standard for imposing business activity taxes. The model also defines physical presence 

in a way that would create certainty for businesses and minimize costly litigation 

on nexus issues. The bill would provide a de minimis threshold of 21 days of physical presence in a state before taxation would be triggered. Our model bill has been 

introduced in California and Iowa, and we expect it to be introduced shortly in Wisconsin. Our model resolution was approved by the Iowa House of Representatives 

last month. 

I urge you to support the simplification of business activity taxes for several reasons: first, because it is consistent with the constitutional separation of powers between the federal and state governments; second, because it would contribute to 

state economic growth and job creation, and; third, because it will maintain the 

principle of tax competition among the states. 

I believe, as does ALEC, that government’s power should be limited. This same 

belief animated the drafters of the Declaration of Independence and the Constitution of the United States, and should be at the forefront of our thinking in any discussion about interstate commerce and state tax jurisdiction. H.R. 3220 is consistent 

30

with this core belief because it would limit the power of state government to place 

undue burdens on interstate commerce. People are often surprised to learn that 

ALEC—a state-focused public policy group—is in favor of federal restrictions on 

state tax power. They wonder how we can be in favor of federalism and also advocate for federal preemption of certain state taxes on business activities. The answer 

is simple: federalism is not an end unto itself. Federalism, like the separation of 

powers, is a tool we use to limit government’s power and enhance the liberty of our 

citizens. Whenever state government goes beyond the powers given to it by the people and the Constitution, such as when a state tries to impose taxes on businesses 

located outside its jurisdiction, we should not hide behind the mantra of federalism 

and excuse such action. 

H.R. 3220 is thus not about the rights of the states, it is about the rights of the 

people. This bill is not about the right of Iowa and other states to maintain historic 

levels of spending on schools, health care and transportation. This bill is about the 

rights of Iowa business owners and their customers to engage in interstate commerce free from the undue burdens associated with paying taxes in multiple states. 

You are not forced, as the opponents of this bill claim, to choose between public 

schools and corporate profits. Rather, you are going to decide whether federalism 

is a two way street, granting license to states as well as restricting state power outside its own borders. You are going to have to decide whether federalism means that 

states have nearly unlimited powers to tax, or whether federalism is just as much 

a restriction on state power as it is a restriction on federal power. 

H.R. 3220 is also consistent with the time-honored American principle of ‘‘no taxation without representation.’’ Businesses should not have to pay taxes in those jurisdictions where they have no physical presence, where they derive no substantial 

benefit from the services of government, and where they have no lasting connection 

to the betterment of the culture and society. If we do not draw the line at physical 

presence, it will be difficult to draw it anywhere that would meaningfully limit the 

state’s power to place undue burdens on interstate commerce. The number of states 

in which a business will have to pay taxes will quickly multiply, indeed is already 

multiplying, because of the erosion of the physical presence standard and the need 

to extend the standard to sellers of services and intangibles. 

This leads me to the second reason I, and ALEC, support H.R. 3220: because it 

will foster economic growth and job creation, especially at the state level. We should 

measure fiscal health by the growth in Gross State Product (GSP), state jobs, and 

the size of the family budget. We should not measure fiscal health by the size and 

growth of the state budget or state revenues. This bill will be good for economic 

growth because it will promote the free flow of interstate commerce and create certainty for businesses engaged in interstate commerce. This will in turn be good for 

the viability of state finances. Any threat to our national economy is by definition 

a threat to the states. Enacting legislation like H.R. 3220 is the best medicine Congress can prescribe for healthy state economies. 

H.R. 3220 would also maintain healthy tax competition among the states. In Iowa, 

we seek to create a tax and regulatory environment that is favorable to business 

location and job creation. We compete with other states to offer the most beneficial 

place to locate a business. This tax competition is healthy for Iowa and healthy for 

our national economy. If other states can tax Iowa businesses merely because they 

have customers or derive income in those states, Iowa will lose a major tool we use 

to attract jobs and businesses. 

Iowa has been a leader in the effort to reform and simplify business activity taxes. 

As I mentioned earlier, the Iowa House of Representatives passed a resolution last 

month calling on Congress to enact business activity reforms similar to H.R. 3220. 

As a state lawmaker, I would urge you to enact H.R. 3220 because it promotes federalism, enhances our national economy and thereby increases the financial viability 

of our state governments, and preserves the constitutional principle of tax competition among the states. Thank you.

31


hr164a.eps
32

Mr. CANNON. Thank you, Mr. Van Fossen. I would like to point 

out, in a day when we are hearing claims of outsourcing, if Iowa 

loses job it is likely that America loses jobs. 

Commissioner Clayburgh. 

STATEMENT OF RICK CLAYBURGH, TAX COMMISSIONER, 

STATE OF NORTH DAKOTA 

Mr. CLAYBURGH. Thank you, Mr. Cannon. Chairman Cannon, 

Mr. Watt, Members of the Subcommittee, I am Rick Clayburgh, the 

Commissioner of North Dakota’s Office of State Tax Commission. 

I am speaking to you today on behalf of the National Governors’ Association, and thank you for the opportunity to address the 

issues relating to H.R. 3220, the Business Activity Tax Simplification Act, and the impact that it could have on all States. 

I would like to read a couple of points out of my testimony, but 

you do have a copy of my testimony, and then I would just like to 

address some issues. 

First of all, I would like to reiterate the National Governors’ Association policy on this issue of business activity tax, which is very 

clear. The National Governor’s Association opposes any further legislative restriction on the ability of States to determine their own 

policy on business activity or corporate profit taxes. This is an 


hr164b.eps
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issue of State sovereignty. The U.S. Constitution adequately protects the interests of both States and business. The National Governors’ Association opposes H.R. 3220 because it would unduly 

interfere with the ability of States to determine and manage its 

own policies. 

Members of the Committee, the issues that we are facing are difficult in many respects. As you look at businesses, they are entities 

that are legal fictions that are created on paper and that have no 

physical being. These businesses are present in States through representatives such as buildings, property or inventory they own or 

persons they hire such as employees and independent contractors 

that do the company’s work. They are present in States through activities they undertake such as leasing, contracting, licensing, selling and the like. So the key question that we face is what are the 

activities of a company that have no single physical embodiment 

sufficient to bring it within a State’s taxing jurisdiction. 

The National Governors’ Association is opposed to H.R. 3220 

based on five key points. First of all, it encourages and expands tax 

planning. One of the issues that has come up within States is the 

ability of some businesses to do tax planning in which they can 

channel away from that State legitimate income that has been 

earned within the State. In some cases these have been challenged 

in court and the courts are siding with the States. But there are 

issues that have not been fully litigated. And many tax planners 

for corporations are looking at those issues and saying,’’ I really 

cannot put my company into that position to try to challenge a particular State law to determine if we have a significant presence 

within that State.’’ The passage of H.R. 3220 would actually create 

a situation where tax planners would have an obligation on behalf 

of their corporation and their shareholders to minimize their tax 

obligations within the States. This will increase the burden of taxation on local business and local constituents because they are the 

only ones that will be remaining within a State that will be subject 

to the State’s taxing jurisdiction. 

Second, we truly believe that H.R. 3220 favors big over small. 

H.R. 3220 favors out-of-State businesses over in-State businesses 

and for our State that is not sound economic policy. I believe it is 

very important, and it is one of the reasons and one of the ideas 

that I truly believe in, that State tax policy should be fair and consistent for all taxpayers. H.R. 3220 goes a long way in separating 

that in creating winners and losers. 

Third, I beg to differ, but H.R. 3220 is not clear and it is not simple. It does not create a physical presence standard. It creates 

something less than a physical presence standard. And I would 

argue that we will find in many States that audit activity and litigation will increase as auditors are looking into the activities of a 

business, would have to assess a tax and have the business come 

back and prove the activity that occurred was within one of the 

carve-outs which was established during this Federal legislation. I 

do not believe that is good tax policy. 

Third, it is a step back in time for tax policy. At a time when 

our economy and our country, we are in a situation where we are 

now an electronic, borderless economy, most businesses have the 

ability to operate anywhere at any time without the encumbrance 

34

of a physical presence. However, H.R. 3220 tries to take the 19th 

century tax law on physical presence and impose it on a 21st century borderless economy. That does not make sense. 

Finally, and most importantly, we believe that H.R. 3220 violates 

the principles of federalism. It violates over 225 years of federalism 

by taking decisions regarding economic development and job creation in our own States away from the Governors, the State legislators and mayors and puts it in the hands of Congress. For that reason, Mr. Chairman, and I look forward to answering questions specific to it, and for the reasons outlined in the statement I have provided in my opening comments, the National Governors’ Association strongly urge the Subcommittee to reject H.R. 3220. 

Congress should not implement legislation that will discriminate 

against local merchants and businesses cause States to incur severe revenue losses and set back over 225 years of principles of federalism. 

Mr. Chairman and Members of the Subcommittee, thank you for 

the opportunity to speak with you, and again I welcome the opportunity to address specific questions. 

[The prepared statement of Mr. Clayburgh follows:]

PREPARED STATEMENT OF RICK CLAYBURGH

Chairman Cannon and Members of the Subcommittee, I am Rick Clayburgh, Commissioner of the North Dakota Office of State Tax Commissioner. I am speaking to 

you today on behalf of the National Governors Association and thank you for the 

opportunity to address issues relating to HR 3220, the Business Activity Tax Simplification Act, and the impact it could have on all states. 

NGA policy on the issue of business activity taxes is very clear:

‘‘The nation’s Governors oppose any further legislative restrictions on the ability 

of states to determine their own policy on business activity or corporate profits 

taxes. This is an issue of state sovereignty. The U.S. Constitution adequately 

protects the interests of both states and business.’’

The NGA opposes H.R. 3220 because it would unduly interfere with the ability 

of states to determine and manage their own tax policies. In the simplest of terms, 

HR 3220 would encourage—and in some cases, mandate—businesses to engage in 

tax shelter activities to avoid payment of state corporate income and other business 

activity taxes. It would impose new limits on the ability of states to tax entities engaging in business in the state, and prevent states from taxing income where it is 

earned. It would reduce every state’s revenue base—with aggregate revenue losses 

likely reaching into the billions of dollars per year. It would unfairly shift the tax 

burden to local businesses and render most of these taxes virtually unworkable. 

Most importantly, H.R. 3220 runs directly counter to our system of federalism and 

places Congress in the position of making decisions that for over 225 years have 

been reserved to state and local elected officials. 

Let me put the proposals in HR 3220 in context. When we talk about a state’s 

jurisdiction to tax, also known as nexus, we are asking whether a company has sufficient activities in a state to allow that state to impose a tax on it. Business entities 

are legal fictions created on paper that have no physical being. These businesses are 

present in a state through representatives such as buildings, property, or inventory 

they own or persons they hire, such as employees and independent contractors, to 

do the company’s work. They are present in the state through the activities they 

undertake such as leasing, contracting, licensing, selling, and the like. So, the key 

question is: When are the activities of a company that has no single physical embodiment, sufficient to bring it within the state’s taxing jurisdiction? 

Proponents of HR 3220 will tell you that the legislation establishes a straightforward ‘‘bright line’’ standard of ‘‘physical presence’’ for determining nexus, thus 

providing certainty for the business community. They will also argue that the measure will have little impact on state revenues. Nothing could be further from the 

truth. Let me briefly address some of the issues raised by HR 3220. 

35

Point #1: Simple and Identifiable Standards 

H.R. 3220 purports to establish a bright line physical presence standard for the 

imposition of state and local business activity taxes. In reality, the measure contains 

a series of conditions and carve-outs from the physical presence standard that would 

enable a corporation to engage in a substantial volume of activity in a state without 

being subject to the state’s tax jurisdiction. 

H.R. 3220 provides that an entity may be subjected to tax in a state if it has personnel or property in the state—

• Unless the personnel or property are in the state for fewer than 21 days or

• Unless the personnel or property are engaged solely in the solicitation of sales 

of tangible goods, intangibles or services or

• Unless the personnel or property are engaged in various activities such as 

news gathering, making purchases, or lobbying government officials, or

• Unless the activities of the entity are carried out by a contractor—a con- tractor that might be a wholly-owned subsidiary that may simply perform activities for two related parties.

In other words, there is nothing simple and nothing bright about the standard in 

H.R. 3220, and it certainly goes way beyond mere physical presence before a state 

would be authorized to levy its business activity tax. As an example, a company engaged in ‘‘gathering news’’ could have a permanent building in a state and permanent employees in the state and not be subject to tax. Likewise, a company that 

sold multiple products into a state could use an independent contractor to perform 

all its installation, servicing, and repair services in the state and not be subject to 

tax on its income. 

In short, the so-called ‘‘bright line’’ standard that HR 3220 imposes is more a ruse 

than a reality—and represents a step backward in good tax policy. 

Point #2: HR 3220 Legalizes—and even promotes—increased tax sheltering. By requiring that an entity have a physical presence in a state, H.R. 3220 would legalize 

the use of ‘‘intangible holding companies’’ and other related-party arrangements to 

shift income among states in a manner that avoids taxation. For the past several 

years, states have aggressively fought this form of tax sheltering. Many of those efforts would be for naught if H.R. 3220 is passed. In addition, H.R. 3220 would encourage and possibly require additional tax sheltering. Public companies—where 

corporate officers have a fiduciary duty to shareholders to boost their share prices 

and reduce their tax liabilities—would conceivably be required to take advantage of 

the same tax sheltering opportunities that to this point have been considered risky 

and aggressive. Thus, at the same time that Congress and the Administration are 

strongly advocating measures to curb the use of Bermuda-type tax shelters that affect the federal tax base, H.R. 3220 would encourage Congress to do an about-face 

and put its stamp of approval on legislation that would expand and legalize the use 

of tax shelters for state corporate income tax avoidance. 

Point #3: Impact on State Revenue Bases. H.R. 3220 would have a significant impact on state revenue bases. While the fieldwork to estimate the impact of H.R. 

3220 is still going on, the total impact will undoubtedly reach into the billions of 

dollars per year. In fact, one state has already estimated that the impact of the bill 

would amount to about a 20 percent reduction in its corporation income tax base. 

Point #4: The Impact on Federalism. For 225 years, Congress has recognized the 

sovereign authority of states to raise revenue. This is a fundamental principle of 

federalism that is essential to the proper balance of the state/federal relationship. 

H.R. 3220 would decimate this core principle and supplant the authority and judgment of state and local elected officials with the judgment of Congress. It would 

make Congress and large corporations the arbiters of economic development decisions nationwide. Governors, state legislators, and mayors would no longer independently decide what business is good for the economy of their cities and states, 

what industry it wants to recruit to bring jobs to its citizens, or what type of business development incentives it wants to provide. Rather, enacting H.R. 3220 will establish a system where out-of-state businesses—businesses that compete for local 

customers and benefit from the services of state and local government that support 

the economy—will be exempt from contributing to the local schools, public safety, 

or transportation infrastructure while increasing the burden on in-state companies 

and local businesses. Congress should not damage the ability of state and local governments to use taxes to promote competition and fairness that are both constitutional and a major part of their fiscal systems. 

For the reasons outlined in this statement, the National Governors’ Association 

strongly urges the subcommittee to reject HR 3220. Congress should not implement 

legislation that will discriminate against local merchants and businesses, force 

36

states to incur severe revenue losses, and setback over 225 years of the principles 

of federalism. 

Mr. Chairman and members of the Subcommittee, thank you for the opportunity 

to speak to you today. I welcome the opportunity to answer any questions you may 

have.

Mr. CANNON. Thank you, Mr. Clayburgh. I am certain that we 

will have questions for you. 

Mr. Turner, you are recognized for 5 minutes. 

STATEMENT OF VERNON T. TURNER, CORPORATE TAX 

DIRECTOR, SMITHFIELD FOODS, INC. 

Mr. TURNER. Mr. Chairman and Members of the Subcommittee, 

thank you for inviting me to testify today. It is an honor to appear 

before you to discuss a matter of importance to Smithfield Foods 

and the business community in general. 

My name a Tracy Turner and I am the Corporate Tax Director 

of Smithfield Foods. Smithfield Foods is the world’s largest pork 

processor and hog producer headquartered in Smithfield, Virginia. 

We have worldwide sales of 9 billion and are a Fortune 200 company. Our company has experienced remarkable growth from its 

early origins as a small pork processor. Today we are a worldwide 

company with sales in all 50 States. Our various subsidiaries have 

physical operations in 20 States. 

We incur substantial costs to meet our State tax obligations. On 

an annual basis we are required to file 860 State income tax returns, 450 sales and use tax returns, 3,150 State payroll tax returns and 215 real and personal property returns. This results in 

various State payment of almost $60 million. In spite of our efforts 

to comply with the laws of all the States, we continue to find State 

interpretations of the business activity tax to be difficult and troublesome. 

The U.S. Supreme Court and Congress have decided that States 

may not unduly burden companies that have no physical presence 

in a State with business activity taxes. In 1992, the U.S. Supreme 

Court held in Quill Corporation vs. North Dakota that the U.S. 

Constitution requires a bright line physical presence rule for the 

imposition of use tax collection responsibility. Many scholars and 

State tax experts believe that the Quill standard applies to all 

State taxes, not just use tax. 

Public Law 86–272, still good law, was enacted by the U.S. Congress to provide a similar bright line standard. It bars States from 

imposing a net income tax on companies whose only in-State activity is the solicitation of sales of tangible personal property. Despite 

the decision of the U.S. Supreme Court and Congress, States continue to attempt to tax companies regardless of physical presence. 

States have, for example, enacted and imposed gross receipt taxes, 

net worth taxes, and fixed dollar minimum taxes on out-of-State 

companies underthe theory that Public Law 86–272 bars imposition 

of only net income tax. States have argued, too, that Quill applies 

only to use tax. As a result businesses struggle with multi-state tax 

compliance in the face of confusing and conflicting guidance. This 

situation needs to be clarified and BATSA seeks to do that and 

nothing more. 

Interstate sales are today more the rule than the exception, not 

only for large corporations like Smithfield but small and medium 

37

size enterprises as well. The current state of confusing and arbitrary taxation of multi-State companies that are selling product 

across State lines only serves to chill interstate commerce. BATSA 

will eliminate confusion and the need for companies to engage in 

protracted and costly litigation as a way of ameliorating discrepancies in tax enforcement. 

BATSA does not diminish the ability of States to collect tax revenue. It rationalizes and makes more predictable the process of 

doing so. 

We recently experienced a prime example of the arbitrary and 

confusing application of State income tax laws. This example is not 

a gross exception. In fact it is just a metaphor for a larger problem. 

A collection agent with the New Jersey Department of Taxation recently stopped one of our trucks loaded with refrigerated product 

on the New Jersey Turnpike. The agent held the truck and its driver for several hours and demanded that in order to release the 

truck Smithfield had to wire $150,000 immediately to the New Jersey Department of Taxation. The agent claimed that he had the 

right to hold the truck and its contents because we had failed to 

properly file New Jersey tax returns. 

I informed the New Jersey agent that his claim was unfounded. 

I explained that Public Law 86–272 protected our subsidiary from 

New Jersey taxation since it only engaged in mere solicitation in 

New Jersey and had no physical operations in the State. The agent 

refused to accept this explanation. However, he finally agreed to release the truck and its driver in return for $8,000. We appealed 

this aggressive and incorrect application of Public Law 86–272 to 

the New Jersey State Tax Commissioner. Ultimately, New Jersey 

accepted our contention that we have no physical presence in the 

State and are not subject to New Jersey income tax. They issued 

a refund and an apology for their roadside justice system. 

Our experience is not unique. It is shared by businesses small 

and large. Many small companies do not have the ability to make 

an immediate wire transfer of funds much less obtain recourse 

from aggressive States. We believe that BATSA will clarify the 

physical presence standard embodied in Public Law 86–272 and 

the Quill decision. This is sound public policy and we urge its passage. 

Thank you very much. 

[The prepared statement of Mr. Turner follows:]

PREPARED STATEMENT OF VERNON T. TURNER

Thank you for inviting me to testify today. It’s an honor to appear before you to 

discuss a matter of importance to Smithfield Foods, Inc. and to the business community in general. My name is Tracy Turner, and I am Corporate Tax Director of 

Smithfield Foods, Inc. 

I. INTRODUCTION

• Background on Smithfield Foods, Inc.

Smithfield Foods, Inc. is the world’s largest pork processor and hog producer, 

headquartered in Smithfield, Virginia. We have worldwide sales of $9 billion, and 

are a ‘‘Fortune 200’’ company. Our company has experienced remarkable growth 

from its early origins as a small pork processor. Today, we are a worldwide company, with sales in all fifty states. Our various subsidiaries have physical operations 

in twenty states.

• Why Smithfield is testifying

38

We incur substantial costs to meet our state tax obligations. On an annual basis, 

we are required to file 860 state income tax returns, 450 sales and use tax returns, 

3,150 state payroll tax returns and 215 real and personal property tax returns. This 

results in various state payments of approximately $60 million. In spite of our efforts to comply with laws with all the states, we continue to find state interpretation 

of the business activity tax to be difficult and troublesome. 

II. THE PROBLEM—BUREAUCRATIC ARBITRARINESS

The U.S. Supreme Court and Congress have decided that states may not unduly 

burden companies that have no physical presence in a state with ‘‘business activity 

taxes.’’

In 1992, the U.S. Supreme Court held in Quill Corporation v. North Dakota that 

the U.S. Constitution requires a bright line physical presence rule for the imposition 

of use tax collection responsibility. Many scholars and state tax experts believe that 

the Quill standard applies to all state taxes, not just use tax. 

Public Law 86–272, still good law, was enacted by the U.S. Congress to provide 

a similar bright line standard. It bars states from imposing a net income tax on 

companies whose only in-state activity is the solicitation of sales of tangible personal 

property. 

Despite the decision of the U.S. Supreme Court and Congress, states continue to 

attempt to tax companies regardless of physical presence. States have, for example, 

enacted and imposed gross receipts taxes, net worth taxes and fixed dollar minimum 

taxes on out of state companies under the theory that Public Law 86–272 bars imposition of only net income tax. States have argued too, that Quill applies only to use 

tax. As a result, businesses struggle with multi-state tax compliance in the face of 

conflicting and confusing guidance. This situation needs to be clarified, and BATSA 

seeks to do that and not more. 

III. BATSA

Interstate sales are today more the rule than the exception, not only for large corporations like Smithfield, but small and medium sized enterprises as well. The current state of confusing and arbitrary taxation of multi-state companies that are selling product across state lines only serves to chill interstate commerce. BATSA will 

eliminate confusion and the need for companies to engage in protracted and costly 

litigation as the way of ameliorating discrepancies in tax enforcement. BATSA does 

not diminish the ability of states to collect tax revenue. It rationalizes and makes 

more predictable the process of doing so. 

IV. A RECENT SMITHFIELD EXPERIENCE

We recently experienced a prime example of the arbitrary and confusing application of state income tax laws. This example is not a gross exception. In fact, it is 

just a metaphor of a larger problem. A collection agent with the New Jersey Department of Taxation recently stopped one of our trucks, loaded with refrigerated product, on the New Jersey turnpike. The agent held the truck and its driver for several 

hours, and demanded that, in order to release the truck, Smithfield had to wire 

$150,000 immediately to the New Jersey Department of Taxation. The agent 

claimed that he had the right to hold the truck and its contents because we had 

failed to properly file New Jersey tax returns. 

I informed the New Jersey agent that his claim was unfounded. I explained that 

Public Law 86–272 protected our subsidiary from New Jersey income taxation since 

it only engaged in mere solicitation in New Jersey and had no physical operations 

in the State. The agent refused to accept this explanation. However, he finally 

agreed to release the truck and its driver in return for $8,000. 

We appealed this aggressive and incorrect application of Public Law 86–272 to the 

New Jersey State tax commissioner. Ultimately, New Jersey accepted our contention 

that we have no physical presence in the State and are not subject to New Jersey 

income tax. They issued a refund and an apology for their roadside justice system. 

Our experience is not unique; it is shared by many businesses, large and small. 

Many small companies do not have the ability to make an immediate wire transfer 

of funds much less obtain ultimate recourse from aggressive states. We believe that 

BATSA will clarify the physical presence standard embodied in Public Law 86–272 

and the Quill decision. This is sound public policy and we urge its passage.

Mr. CANNON. Thank you, Mr. Turner. Commissioner, I know you 

are here representing the National Governors’ Association but you 

are also the Treasurer of the MTC. Would you mind if I asked a 

39

couple questions about the MTC and you may or may not speak on 

behalf of them but perhaps could you give us some guidance on 

their thinking. 

Mr. CLAYBURGH. I certainly will. 

Mr. CANNON. I was surprised by the directness of Mr. Rosen’s 

statement that the MTC citing the FTB, Franchise Tax Board of 

California, I think the term ‘‘false’’ was used directly. 

I have been handed actually a copy of a press release that apparently came from the MTC. The Multistate Tax Commission warned 

today that H.R. 3220 would legalize the controversial tax shelter 

schemes. The bill would allow income shifting gains made notorious by a handful of companies in order to avoid paying tax to 

State governments which are still shaky in the wake of a recent 

economic recession. 

That is a pretty intensely political statement by an organization 

that would be thought to be more analytical, and I would like you 

to comment on that if you will, but at the same time,as I mentioned earlier, we have a series of issues here that relate how 

States can tax. We have the Internet Tax Freedom Act, we have 

the Streamlined Sales Tax Proposal, which I believe Mr. Delahunt 

is going to talk about. These are not partisan issues. These are, 

however, thoughtful about taxing ourselves. 

As you know, the Multistate Tax Commission came out with a 

study that is a little bit outrageous, but even if you say it is not 

intended to be so political, it suggested that the States would lose 

somewhere between $4 and $9 billion a year, couched in today’s 

terms, as opposed to the time frame it would take for the Internet 

Tax Freedom Act to have some effect, and that had a fairly profound effect on the legislative process, especially on the other side 

of the building. 

I would actually like to deal with the issue of how political the 

MTC is and why, as opposed to dealing with them here, because 

we have had a very pleasant discussion, rationally, and your presentation was very compelling, but what are State tax commissioners thinking in the long term? 

In other words, I just have to say as an aside that the Tax Commissioner of Utah is a guy named Bruce Johnson, whom you may 

know. Bruce has been a friend of mine for a very long time, but 

I just absolutely hate Bruce. 

For the record, this is a joke, although this is not really a joke. 

The reason is my wife dated him, so he is the perfect human being 

to whom I am always compared and has been for the last 28 years. 

But we recently had a very intense conversation on this subject. 

Why is the State of Utah not looking beyond the issue of the ITFA 

and they are relatively significant taxes they have there, when you 

have, I am not sure what the number is, but Business Week 3 or 

4 weeks ago said that the SSTP said lost revenues on the Internet—I am not sure if that means catalogs and other things—are 

$35 billion. Why are we tripping over $35 billion over what even 

in an exaggerated sense is $4 to $9 billion based upon taxing the 

Internet? 

I am going to give you some time to answer that, but let me add 

that it seems to me in a rational system you would want the goose 

that produces the golden eggs to be well fed and comfortable, 

40

maybe a little bit of exercise, but you do not want to interfere with 

the golden eggs. And information is the context for virtually everything that we are doing in America and in the world to create an 

economically vibrant system. So why on Earth would we want a 

balkanized system of State taxes on our information process? And 

is anybody at the MTC thinking rationally and long term about 

this? 

I am sorry. The rational does go back to the politicized statement 

here. But are we thinking about that and is there some way to 

move the MTC to a position of saying, look, the SSTP is important, 

the BAT is really important, and the ITFA is not very important? 

Mr. CLAYBURGH. Thank you, Mr. Chairman. I will start to answer the question. If I am not getting all your points, please stop 

and clarify for me and I will try to address those. 

First of all, I am here on behalf of the National Governors’ Association. I am the Treasurer of the Multistate Tax Commission, as 

you have stated. I am also on the Board of Trustees of the Federation of Tax Administrators. Very briefly, I want to give a background of myself. I am a Republican. I am elected in the State of 

North Dakota. I am formerly involved in a business. 

Mr. CANNON. That makes you dramatically different from Bruce, 

who actually gets appointed. We love your State’s approach. 

Mr. CLAYBURGH. But I have to disagree in some respects. The 

goal of the Multistate Tax Commission and the reason that a number of States participate in it, and one of the issues that I enumerated in my opening remarks, is something I believe so strongly in 

and that is fairness and consistency within tax administration. 

The Multistate Tax Commission’s real role is trying to deal with 

uniformity, consistency and certainty amongst taxes for businesses 

that are doing business in multiple states. The Commission does 

just an outstanding job there. I do not have any disagreement on 

how the Multistate Tax Commission deals with that. 

The issue and the discussion in the release has to deal with one 

of the aspects and the concerns that have been enumerated publicly across this country, ‘‘what will occur with the issue of tax 

planning?’’

Now you and I both know that 99.99 percent of all corporations 

are outstanding members of our communities, are outstanding 

members of this country. They provide jobs. They provide opportunity. They provide economic growth. They are good for our society. They are good for our State, but they still have an issue that 

impacts those, and that is that legal side or that tax planning that 

may occur with an area that we do not have tax law that is specific 

yet in States, and they are challenging to try to determine what 

is the law in a State. 

Mr. CLAYBURGH. For example, in the K-Mart case in New Mexico 

or Jeffries in North Carolina, that issue of the Multistate Tax Commission is an issue of trying to provide uniformity and consistency. 

I have to tell you, from the standpoint of business activity taxes, 

in my role as tax commissioner in North Dakota, we work with the 

business community in our State, both in State and those from a 

multi-State jurisdiction that do work within our State. Most recently, we sat down with tax preparers and members of our audit 

staff to go over an issue that we had some disagreement with and 

41

gave the tax preparer an opportunity to hear what was the issue 

the tax department was looking at. And it gave the tax department 

an opportunity to understand where the taxpayer was coming from. 

By the time the day was done, it was about a 2-hour meeting, 

we had the issue resolved. And it is not an issue anymore. I have 

been tax commissioner for 8 years in North Dakota and have been 

on the board of the FTA and have been on the board of the MTC. 

I have talked with our Governor, and I have a great relationship, 

as a former legislator, with our legislative leaders in North Dakota. 

We are not aware of, and people have not been bringing to us significant problems, with business activity taxes. 

I am proud of North Dakota and what we have done in the tax 

department. We have been able to reduce the size of our agency. 

And we have been able to focus on customer service and make sure 

people are treated fairly, efficiently and effectively. We have turned 

nearly $4.5 million back in unspent revenue authority. 

I am just giving you a background of where I am coming from. 

The purpose of all of this is, we have a problem with business activity taxes. I think it is important for the business community to 

sit down with the governors and say, ‘‘Here are our issues.’’ States 

are willing and able to sit down and listen. We have shown it, both 

with streamlining and shown it with the sourcing rules with wireless. If we are presented the problem, we can sit down and work 

the issues out in a way that is fair and reasonable to all taxpayers, 

to all businesses and to the States. 

But really, we haven’t been given that opportunity here. This has 

been an issue that really has surfaced here in Congress but is not 

surfacing, for the most part. Now there are specific issues that will 

pop up occasionally, and yes, there are egregious issues that will 

come out from a State. All I am trying to say is, let us sit down 

and let the States sit down with the business community to try to 

resolve this before we take a one-size-fits-all piece of Federal legislation and put it in all States, because what is good for South Carolina may not be good for North Carolina, and what is good for Utah 

may not be good for North Dakota. 

Mr. CANNON. I think an elected tax commissioner would be wonderful for Utah. And I am going to suggest that to my State legislators. 

I did not mean this to be a personal attack, and I hope you will 

do me a favor in your next meeting with your Multistate Tax 

board, I hope they will take a look, first of all, the politicization 

that happened on this bill and the politicization that happened on 

the Internet tax as it went over to the Senate and consider, longterm, where you want to go with this, because I think there were 

serious concerns with that Internet Tax Freedom Act Report that 

went to the credibility of the MTC, and that, I think, is unfortunate. 

I hope you will go back and consider with those folks where 

States ought to be going and what they ought to be thinking, because I would like to see the Internet Tax Freedom Act pass the 

way we passed it here. 

With that, let me yield 5 minutes to the gentleman from North 

Carolina, Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. 

42

I am trying to get a handle on this, so let me ask a couple of 

basic questions. 

Mr. Rosen—any one of you could answer these questions but 

since you testified first—I assume there are States that have no income taxes, is that correct? 

Mr. ROSEN. There are a few. 

Mr. WATT. What are those States? 

Mr. ROSEN. States that have taxes instead of income taxes, a 

number of States, depending on the industry. Some impose gross 

receipts tax. Others have alternate bases based on capital. And the 

State of Nevada has no corporate level tax at all. That is the only 

State with no corporate level tax at all. 

But there are variations on income taxes. And that is the concern 

on one of the changes what is being done to 86–272. The State of 

New Jersey passed a law that says, if you are a corporation and 

you are protected by what Congress has passed, you’ve got to pay 

another tax. And only those companies have to pay a tax based on 

gross receipts. Otherwise, what it is trying to do is trying to beat 

what Congress has tried to enforce. 

Mr. WATT. The question I am trying to get to is, is it theoretically possible that, with a physical presence test, you could conceive that a number of businesses would flock to a State that has 

no income tax if that is the sole criteria? What is the likelihood of 

that? 

Mr. ROSEN. I would think it is almost nil for the following reasons. As we all recognize, the physical presence test has been the 

practical, if not the legal, standard that has been in effect in this 

country forever. 

Mr. WATT. You keep saying that, but we are here because, apparently, that is not working. 

Mr. ROSEN. The States are trying to change it because they are 

trying to tax outside their borders. And so it has been that way. 

So if it were true, every corporation in this country would be located in Nevada. 

But that is not true, because actual businesses and operations 

cannot be dependent totally on tax policy. For example, a number 

of businesses have to have warehouses and factories where people 

are located whether they be employees or markets. So that is 

shown not to be true. We have an example where Nevada has not 

attracted all the businesses in the country. 

Mr. WATT. Okay. Is that possibility increased by the level of technology that we have today as compared to what we had 20 years 

ago? 

Mr. ROSEN. It might be, and that seems to be part of what sovereignty is all about, that States will have tax competition. And if 

a State wants to attract a certain type of business, it can do that. 

And the fact that you have an electronic business located in 

State A with customers in State B, we don’t understand—those of 

us who support BATSA—why State B, where merely customers reside, should get any tax revenue because they are not providing— that State is not providing benefits and protections to the labor and 

capital that company A is putting in to making the profit. 

And generally, jurisdictions that do give protection and benefits, 

the economic inputs that generate income are those that should be 

43

able to collect the tax just as the United States does with its foreign treaty partners. 

Mr. WATT. Let me ask Commissioner Clayburgh and ask him to 

give me the other side of the answer, if you have a different perspective. 

Mr. CLAYBURGH. Thank you, Mr. Chairman, Mr. Watt. 

The situation occurs now that if a business—because many 

States have legislation in place—in North Dakota, we are a combined reporting State. It allows the State to be able to bring into 

the whole picture the business activity of the enterprise that earns 

income attributable to the State of North Dakota. It is determined—what goes into the formula to determine what fairly should 

be taxed and paid to the State of North Dakota. 

Mr. WATT. And what kinds of things are you taking into account 

other than physical presence? 

Mr. CLAYBURGH. In the case I am referring to, if we have an entity or a subsidiary that provides services and helps to address an 

activity of a company that is doing business in North Dakota, that 

can be pulled into the process. And so if you have a situation where 

income may be shifted into a non-income-tax State for the purpose 

of trying to create nowhere income, we have the ability through 

combined reporting to bring that back. 

The issue we have, though, is with H.R. 3220. It doesn’t matter 

if you have those rules. We will lose that aspect within the numerator, and we will see a reduction in an existing tax base. 

Mr. WATT. I am a little confused about what things other than 

physical presence would trigger your belief that your State should 

have the right to tax. 

Mr. CLAYBURGH. Again, Mr. Watt and Mr. Chairman, the focus 

is not physical presence, because that is not the standard for business activity tax. It looks at a number of things. And as I brought 

out in my opening statement, a corporation is a——

Mr. WATT. I am trying to figure out what those things are. Are 

they enumerated in your testimony? 

Mr. CLAYBURGH. Mr. Watt, I can follow up. I am not certain if 

I am following your question specifically. We look at—— Mr. WATT. You say, you look at a number of things other than 

physical presence. 

Mr. CLAYBURGH. We are looking—— Mr. WATT. I am trying to figure out what those number of things 

are that you look at other than physical presence. 

Mr. CLAYBURGH. We will look at economic presence activities; 

items that occur through the corporate structuring in which the 

corporation has some type of economic presence in our State in 

which they are gaining benefit of the laws of the State of North Dakota. 

Mr. WATT. Give me an example. 

Mr. CLAYBURGH. For example, you may have a company that is 

totally housed outside the State of North Dakota that has no physical presence. But they provide support, and they come in and will 

be providing activities into the State in which they hope the State 

of North Dakota has a good road system, that we have a good police system, a police force in place, that we have a court system in 

place to be able to enforce their contracts under our commerce acVerDate 0ct 09 2002 12:18 Jul 07, 2004 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6601 G:\WORK\COMM\051304\93657.000 HJUD2 PsN: 93657
44

tivities. They are also assuming—and this is probably one of the 

things that is lost in all of this. 

That we have an education system in North Dakota that not only 

ensures a well-educated workforce but also a well-educated population. And with higher education and expanded education, people 

do better in jobs and get more income. And that brings more revenue and more dollars into the stream of commerce in this country, 

allowing them to purchase more. So that benefits companies across 

this country. And to say otherwise is ridiculous. 

Mr. WATT. I hear what you are saying. I am just trying to figure 

out what the articulable standard would be. I understand that if 

there is a brick and mortar, there is a physical presence. If there 

are employees, I presume that is a physical presence. How would 

you articulate the standard that you are using? 

Mr. CLAYBURGH. What I have tried to do today and what I am 

trying to do is keep all of my discussions more at the policy level. 

Mr. WATT. I am beyond my time anyway. 

Mr. CLAYBURGH. If I could, I will follow up with a written statement. 

[The information referred to follows in the Appendix] 

Mr. CANNON. The chair would appreciate that, and do it within 

the next 5 days. That will work for our time frame. 

Mr. WATT. I have no further questions. 

Mr. CANNON. Consistent with our earlier unanimous consent or 

agreement, Mr. Goodlatte, would you like to ask questions? 

Mr. GOODLATTE. Mr. Chairman, I thank you for the opportunity. 

I first would like to ask unanimous consent for inclusion in the 

record a very long list of examples of actual and potential aggressive State actions and positions against out-of-State companies that 

are very much along the lines of that described by the representative of Smithfield——

Mr. CANNON. Without objection, so ordered. 

[The information referred to follows in the Appendix] 

Mr. GOODLATTE. That makes this clear. This is not an isolated 

or rare occasion. 

And in response to the testimony of the commissioner from North 

Dakota, I have to tell you, when you say this would encourage and 

expand tax planning, I think just the opposite. And I am going to 

ask the other Members of the panel to respond. I think just the opposite will occur. 

The current morass of laws and the competition and aggressiveness between the States to reach further and further into some of 

the most obscure reasons why they think contact with a State—we 

have had States discuss the fact that your logo appears in the 

State should be sufficient to require business activity. So that 

would be every business in every State. The fact that you drive as 

few as 6 trucks through a State, not stopping, just driving through 

the State would be sufficient contact. The fact that you have a 

server that serves your Web site located in the State would be sufficient contact. The fact that you send a business delegation to participate in a conference and have a booth, not even conduct any 

sales transactions, just be present at a convention for 1 weekend, 

should be sufficient contact in the State. 

45

This causes businesses to have to expend enormous resources in 

terms of tax planning and enormous further resources to dance on 

the head of a pin to comply with these multitude of different 

morasses. And finally, I think it is a very strong argument that 

States waste enormous amounts of resources trying to pick up very 

small amounts of additional revenue by these de minimus contacts 

that businesses have with States. I would like to ask Mr. Rosen 

and others if they would like to respond to the contention that this 

would encourage and expand tax planning. 

Mr. ROSEN. I think it might be important to start with the understanding of the motive here of those who are supporting 

BATSA. And the motive is not to reduce taxes. It is to maintain 

the status quo. The concept of economic nexus is something new 

that the revenue departments are trying to assert. 

Congressman Delahunt asked the question about court cases. 

There have been a number of court cases and State court cases, 

and in every single one of them, the court has established that 

physical presence is a requirement for direct tax outside the tax 

shelter area. In normal business operations, every court, there 

have been five or six decisions, unanimous, held that there must 

be physical presence. We are trying to maintain the status quo. 

As far as tax planning goes, as we said earlier, every State has 

mechanisms at their disposal to fight any structures or transactions they believe inappropriate. They have the common law arguments, such as business purpose, economic substance. Mr. 

Clayburgh’s own State has combined reporting and throwback. And 

when you do that, there is really no opportunity for tax planning. 

Those who do that for a living are going to be in big trouble. 

What this bill would do is have uniformity around the country. 

Mr. Clayburgh talked about one-size-fits-all; that is not a good 

idea. You have to have uniformity, and we think doing things differently State-by-State is dangerous. 

Mr. GOODLATTE. I want to get Mr. Van Fossen, as a State legislator, to respond to the assertion that this bill runs counter to the 

system of federalism. 

Again, in my opinion, that—when you talk about the inter-relationship of States, we are not just talking about what one State can 

do, we are talking about what impact that one State might have 

on all the other States. So if you might comment on that Mr. Van 

Fossen? 

Mr. VAN FOSSEN. Thank you, Congressman. 

That is the tack I take. I reject economic nexus. I am looking at 

it from an Iowa business standpoint. And the fact that Representative Watt asked the genesis of the 1959 law, which was an Iowa 

company—it was Northwest Portland Cement, which was doing 

business in Minnesota. And Minnesota tried to tax that company 

and that led to Congress passing Public Law 86–272. I am looking 

at it from the standpoint of Iowa businesses doing business in another State and those businesses being taxed at a higher rate, in 

this instance, in Minnesota. 

So I think that, as you mentioned, that this does set up uniformity across the country, across the States, that allows businesses—not only large businesses but small businesses—to interact 

with uniformity. 

46

Mr. GOODLATTE. Let me interrupt, as a guest of the Subcommittee, and my time has expired as well, I just want to make 

a couple of very quick points. 

In response to the very clear list that the gentleman from North 

Dakota has given us, favors big over small, I don’t think anything 

could be further from the truth. EBay alone has 450,000 businesses 

where people make their primary income on the Internet on eBay. 

Millions of other people obviously sell things. Many of those are 

corporations that could be entangled in this. Many, many small 

businesses sell in a multitude of places. They have a place where 

they are based and located. They can be taxed there very cleanly, 

very plainly and very simply. And when they have to comply—and 

this is not the sales tax issue, I want to make it clear. 

This bill exempts sales tax from the consideration of this bill. 

You are talking about all other kinds of activities that States try 

to claim a contact with, these small businesses. I think it has exactly the opposite. Big business has more resources to handle this 

morass that they currently confront than small businesses do. 

And finally, not clear and not simple, my goodness, I think you 

might have some problems with some clarity. We are willing to talk 

to anybody who wants to clarify any point in this bill. But compared to the current situation that any business faces, you can’t 

make the argument that this is not clear and not simple compared 

to where we are going right now and where we are heading if we 

do not do something like this legislation. 

And step back in time? Tax policy, no. This is current tax policy 

and having a clear definition based upon physical presence—and 

we can debate what the parameters of that are—I think is the 

soundness that every State needs when their sovereignty is being 

tested by the nature of the Internet more than anything else in history because of the ease with which things go across State lines. 

Having that bright-line test based upon physical presence, I think, 

is a necessary part of States being able to continue to argue that 

they have a reason for existence when the Internet is becoming as 

prevalent as it is. 

Mr. CANNON. I thank the gentleman. 

Let me just point out, I felt that Mr. Turner’s testimony went to 

the point you were just making about the complexity that his company faces is remarkable. And it creates difficulty for any business. 

But the State police authority to stop a truck because of some disagreement on something of thousands and thousands of returns is 

actually quite scary. 

Mr. Delahunt, would you like to take 5 minutes? 

The gentleman is recognized. 

Mr. DELAHUNT. You know, I think we have heard these arguments in different times with different proposals. You know—and 

I agree with my colleague from Virginia and many who serve on 

this Committee, we are at a different time. 

What we see, of course, is a growing percentage of commercial 

activity in this country being dealt with in terms of e-commerce. I 

mean, the numbers are staggering. That is the reality. 

And yet we hear this old test of physical presence and a bright 

line being utilized. There seems to be a certain incongruity there. 

I mean, I was just reflecting for a moment on—I think it is 

47

Citibank, the credit card. They are incorporated in South Dakota 

because there are no limits in terms of interest rates. There are no 

caps. Yet in Massachusetts, I dare say that the economic gain and 

benefit for Citibank credit card profits or revenue sources, it far exceeds what the activity is out in South Dakota. I mean, South Dakota just simply has, you know, a small population. 

So maybe we have to think about new definitions, other than 

physical presence. But I think we ought to get really realistic here, 

and I know that these issues aren’t going to go away. But I said 

earlier that I support the permanent moratorium of the so-called 

Internet Freedom Act. 

I also think it is absolutely essential that we do something about 

the collection of sales-use tax. Now there are some people on this 

Committee that are opposed to that. But I can tell you something, 

I don’t see this bill going anywhere. Maybe it goes through the 

House, but it isn’t going to go through the Senate. You can count 

on that. 

We have already known what has happened to the moratorium 

legislation. It has been held up in the Senate by Republican senators, by the way, some of whom formerly served as governors. 

So I think that Commissioner Clayburgh, maybe it is time as you 

suggest, for the business community, for States and for the small 

business community, you know, to sit down and talk these issues 

out, because nothing is going to happen, I can tell you now, until 

there is some sort of resolution. We can sit here and talk about, 

you know, whether our understanding of the concept of federalism—and it makes for a great, interesting academic conversation, but that is the extent of it. 

Mr. CANNON. Would the gentleman yield? 

Mr. DELAHUNT. Sure. 

Mr. CANNON. This is an odd combination of State versus Federal, 

State against State and Democrat and Republican because it is not 

versus so much here. 

The gentleman from Massachusetts and I agree entirely on the 

fact that we have an irrational system, and it is a system that has 

come to a total stop. In other words, no Internet Tax Freedom Act, 

no SSTP. And we are going nowhere with the business activity tax. 

So somewhere along the line, people who have a problem, that 

is the States—I mean this is—the States do have a problem. And 

I might point out that the Multistate Tax Commission is an interstate compact in the subject of the jurisdiction of this Committee. 

But we are going nowhere, and that is not good for anybody. 

We are going to have a lot of different views on each of those 

subjects. But the reason I think that the gentleman from Massachusetts is talking about the ITFA is because we have a combination of things where people are just saying, ‘‘We are going to hold 

out’’ and as long as that happens, the American people are going 

to say, ‘‘Wait a minute, if the House bill passes, my phone bill is 

going to fall by half,’’ because half of most peoples’ phone bill is 

currently taxed, half to a third. 

So I don’t think the American people are going to stand around 

for this very long. And you need to be thinking of what we can do 

to create a rational system that rationally taxes, that doesn’t distort business decisions and certainly doesn’t impede the foundation 

48

for the next phase of our economic development, which is the Internet. 

And I apologize, and I won’t watch the red on the clock until the 

gentleman is finished. 

Mr. WATT. Would the gentleman yield for my tirade? 

Mr. DELAHUNT. Of course. 

Mr. WATT. I am not going to do a tirade, but that is one reason 

I was suggesting that, if the physical presence standard is not the 

standard, then we need some articulable standard if this is going 

to get off the dime. And I don’t know what that standard is. 

I confess. I didn’t understand it from Mr. Clayburgh. I understood that States have an interest in collecting taxes and that there 

are things other than physical presence that triggers that interest. 

But I am having a little trouble articulating what that standard 

would be. 

And if we are going to clarify this at the Federal level by writing 

a piece of legislation, seems to me that it is not just what we are 

against passing all the time, given the log jam we are in, but somebody needs to be thinking about what the articulable standard is 

and should be to get off this dead log situation. I yield back. 

Mr. DELAHUNT. I think, in addition to the States and clearly 

we—I think everyone on this panel respects the sovereignty of the 

States and the need for them to be able to make decisions. 

At the same time, I think there is a certain reality out there in 

terms of the business community. There will be winners and losers, 

not—you know, the world hasn’t simply come down to eBay. We 

are not just at that stage, in terms of our commerce, where it is 

all electronic. And I think we make a mistake in terms of the social 

implications if we ignore the fact that there is a reality of brickand-mortar stores, particularly the small business within a community, because I can trust you can take this to the bank, Mr. Rosen, 

it is that small independent business store that operates, you 

know, in a small downtown that is going to sponsor the Little 

League. It is not going to be some seller on eBay, or it is not going 

to be eBay. 

So there are a whole array of values that go into this decision. 

And whether it is the Internet Tax Freedom Act or SSTP or this, 

I can tell you now, all right, you will be back here next year, the 

year after, because there are passions on all sides of the issue. 

There are some that just want to say, pedal to the metal, what we 

are going to do is we are going to simplify everything. I think that 

is one value that is a positive value in terms of simplification. 

But there are a whole mix of values that I think have to be 

looked at. And you know, maybe, Mr. Chairman, we ask representatives of the various stakeholders to come and do staff briefings 

and see whether there is a way out of this morass, because you 

have to start talking together, because my own personal assessment is that the political will here in Congress does not exist. 

You know, this bill, filed by my friend from Virginia and my 

other colleague who sits on this Committee, Mr. Boucher, you 

know, maybe it will go to the House, but it ain’t going to happen, 

with all due respect to my friend from Virginia. 

Mr. CANNON. By the way, we can only control the House. We can 

do it. But as the gentleman suggested it takes two bodies. 

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And the gentleman and I have talked on many occasions about 

this issue. It is a bipartisan concern. America needs to solve this 

problem. 

Mr. Rosen, we need to have businesses have clarity in planning. 

We appreciate the comments of all the members of the panel. 

And at this point, the hearing will be adjourned. 

[Whereupon, at 3:30 p.m., the Subcommittee was adjourned.] 

(51)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

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RESPONSES TO ADDITIONAL QUESTIONS SUBMITTED BY JAMIE VAN FOSSEN

June 10, 2004

Honorable Chris Cannon, M.C. 

118 Cannon House Office Bldg. 

Washington, D.C. 20515

Dear Congressman Cannon,

Greetings.

Enclosed please find my responses to questions brought up after the May 13th, 

2004 hearing on Business Activity Taxes (H.R. 3220).


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I want to thank you again for the opportunity to present my support for your 

legislation. I look forward to working with you to preserve federalism. Please 

let me know if I can be of further assistance.

Yours truly,

Jamie Van Fossen 

State Representative 

Chair, Iowa House Ways & Means Committee 

Public Sector Chair, ALEC Tax & Fiscal Policy Task Force

Enclosure: Q & A response

Cc: 

Diane Taylor 

Chris Atkins 

Mike DeConti 

PLEASE COMMENT ON COMMISSIONER CLAYBAUGH’S REMARKS THAT H.R. 

3220 FAVORS BIG BUSINESSES OVER SMALL BUSINESSES

H.R. 3220 would be good for all businesses, big and small. While it would simplify 

the business activity tax obligation for all businesses, it would alleviate a more significant burden for smaller businesses, who cannot afford to have customers in other 

states if they have to pay corporate income taxes in all those states. Large companies will continue to participate in interstate commerce whether H.R. 3220 is enacted or not, because they have the resources to combat overaggressive actions by 

state revenue departments. We are already seeing reports of smaller businesses refusing to have customers in some states, however, because of these aggressive actions. Small business just cannot afford the risk associated with doing business in 

some states. Thus, H.R. 3220 would create more fair competition between small and 

large businesses.

IN YOUR OPINION, WILL H.R. 3220 CREATE COMPETITIVE DISADVANTAGES TO

IN-STATE BUSINESSES?

The codification of the physical presence standard would actually level the playing 

field between in-state and out-of-state businesses, allowing them to compete for customers in all the states. What would truly be bad for in-state businesses would be 

a patchwork system where some states tax based on physical presence and some 

states tax based on economic presence. Congress needs to enact H.R. 3220 because 

it would provide a uniform treatment for all multistate businesses-large or smallengaged in interstate commerce.

H.R. 3220 can only be said to favor in-state businesses if you grant the premise 

that the current practices of many state revenue departments-taxing multistate 

businesses based on economic presence-are sound from a constitutional and policy 

perspective. Economic presence has never been the standard of multistate taxation 

of business income, so the premise relied on by opponents of H.R. 3220 should not 

be granted. H.R. 3220 would codify standard practice throughout United States history.

WOULD H.R. 3220 PERMIT CORPORATIONS TO RESTRUCTURE THEIR

OPERATIONS TO AVOID TAX?

The U.S. Constitution is not a tax shelter. H.R. 3220 embodies the constitutional 

obligation of Congress to ensure and promote the free flow of commerce among the 

states. A physical presence nexus requirement promotes a freer flow of interstate 

commerce than an economic nexus requirement, because most businesses have physical presence in fewer states than they have economic nexus. H.R. 3220 thus promotes a simple and fair model for state taxation of multistate businesses.

DOES H.R. 3220 INFRINGE UPON STATE SOVEREIGNTY?

No. States do not have jurisdiction over interstate commerce. Congress has the 

responsibility to protect the free flow of interstate commerce. The current aggressive 

actions by certain state revenue departments are placing an undue burden on the 

free flow of commerce among the states. States cannot hide behind sovereignty to 

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defend their actions. All governmental power has limits in our American system, including the power of states to raise taxes.

RESPONSES TO ADDITIONAL QUESTIONS SUBMITTED BY RICK CLAYBURGH

QUESTIONS FROM REP. CANNON

1. Please provide a response to the request at the hearing for the appropriate alternative to the physical-presence nexus standard by which 

States could impose business activity taxes.

Response:

Under the U.S. Constitution and the overwhelming majority of state laws, a state 

can impose business activity taxes on companies that are ‘‘doing business’’ in the 

state without regard to whether that business is conducted through a physical presence or other means. P.L. 86–272, which applies to state income taxes, is the only 

national exception to the ‘‘doing business’’ standard.

The National Governors’ Association believes that to the extent there is an issue 

to be addressed it is best addressed by the states. Sovereignty over state taxing authority is a critical element through which states accomplish key tax policy goals 

including funding state programs and services, and structuring economic systems to 

promote fair competition and economic growth. Federal preemption of state taxing 

authority like that epitomized by H.R. 3220 would upset the delicate economic balance between and among states and eventually affect national and international 

economies as well. Congress should not interfere with states’ ability to analyze and 

adjust to the new economy by examining the effect of existing statutes on business, 

the potential economic gain or loss from proposals to alter existing statutes, or their 

discretion to work with the business community to resolve existing differences.

2. You stated in your oral testimony that HR 3220 encourages and expands 

‘‘tax planning,’’ and in your written statement that the bill ‘‘legalizes and 

even promotes increased tax sheltering.’’ In assessing whether HR 3220 

will result in state revenue loss due to tax sheltering, how do you view 

what constitutes a ‘‘tax shelter?’’ Do you consider a ‘‘tax shelter’’ anything which reduces a taxpayer’s tax liability that is not attributable to 

changes in explicitly articulated tax policy? Isn’t legal tax planning a 

normal and legitimate business activity?

Response:

‘‘Tax sheltering,’’ for state income tax purposes, means that an enterprise’s income 

is not being fully reported to a state in a manner that fairly represents the business 

activity actually being conducted the enterprise in that state. Tax sheltering occurs 

when an enterprise creates structures and transactions that artificially shift income 

away from the state where income was earned—as determined by where the enterprise uses its property, employs people or makes sales—to some other state or a foreign jurisdiction. Income tax sheltering may include understating or shifting income 

through transactions that lack economic substance or that fail to conform to applicable law. In the context of gross receipts taxes, sheltering is accomplished through 

the creation of structures and transactions that artificially shift receipts away from 

the state where the sales were made. States generally do not consider efforts by 

companies to report income or receipts in a manner that does not fairly represent 

the business activities in the state to be ‘‘normal and legitimate.’’

Tax sheltering contrasts with legitimate tax planning whereby a company changes 

the actual location or nature of its real economic activity to minimize its tax burden 

often by taking advantage of favorable tax rates or exemptions offered by jurisdictions. Changing the ‘‘real economic activity’’ means generally changing the location 

where an enterprise uses its property, employees or other representatives or where 

it markets its products and services to customers. No one quarrels with legitimate 

tax planning that reflects actual changes in the location of real economic activity.

3. Please provide a response to the remarks of Mr. Rosen that States have 

ample legal tools to combat improper tax sheltering activities by businesses.

Response

The ‘‘legal tools’’ cited at the hearing are neither universal nor sufficient to mitigate the damage that H.R. 3220 would inflict on state tax systems. One of these 

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so-called ‘‘tools’’ is known as ‘‘combined reporting’’, a filing method whereby a company is required to calculate and apportion income among the states jointly for affiliates that, in reality, comprise a single economic enterprise. Sixteen states use 

combined reporting as their general, mandatory filing method. However, this method is typically limited only to domestic affiliates. While combined reporting can correct tax sheltering conducted through domestic intangible holding company affiliates, it cannot reach affiliates set up in off-shore tax havens. More importantly, 

combined reporting would do nothing to correct tax sheltering through the use of 

the safe harbors in H.R. 3220, which would allow companies to engage in major activities in a state through protected entities. H.R. 3220, by greatly expanding tax 

sheltering through safe harbor entities, would significantly reduce the effectiveness 

of combined reporting as method of requiring income to be reported to the states 

where the income was actually earned.

States have one additional tool-royalty, interest and other expense deduction disallowance laws. Like combined reporting, these laws can be used to curb abusive 

transactions involving intangible holding companies. This tool was recently adopted 

in some states and has not been fully tested. Disallowance provisions would not 

remedy the damage caused by the H.R. 3220 physical presence safe harbors.

4. In your testimony you stated that HR 3220 would reduce every State’s 

revenue base, with ‘‘aggregate revenue losses likely reaching into the billions of dollars per year.’’ Will the NGA produce a formal study on HR 

3220? If so, what methodology will be employed for measuring whether 

the bill will result in state tax revenue losses?

Response:

The National Governors Association is currently working with all states to conduct a comprehensive survey of the potential impact of HR 3220. We expect work 

on this survey to be completed soon. Following completion of the survey, we would 

be happy to discuss the results with Members of the Subcommittee.

QUESTIONS FROM REP. COBLE

1. Would you agree that there are cases in which state taxing jurisdictions 

have unfairly and/or aggressively sought payment of businesses activity 

taxes without basis?

Response:

State taxing authorities do not seek payments of business taxes without any 

basis. Rather they enforce their laws within the framework of their laws and regulations and the U.S. and their state constitutions. Without question there have been 

cases involving legitimate disagreements between state tax agencies and companies 

over whether taxes are due. To our knowledge however, there is no evidence of a 

systemic problem that would warrant Congressional intervention over state taxing 

authority

2. If so and with the understanding that you oppose HR 3220, what do you 

suggest be done to address such abuses?

Response:

As stated previously, the National Governors’ Association has no evidence that 

states or state taxing authorities apply taxes without any basis. State tax administrators take pride in insuring that the tax laws of their state are properly and fairly 

applied to all businesses operating in the state. When a business or individual believes it is not being properly treated by a tax agency, it should first bring the issue 

to the attention of the tax agency. Most often (and likely evidenced by the lack of 

current examples presented at the May 13 hearing) these types of issues are handled amicably and to the satisfaction of both the taxpayer and the state. If the dispute continues, every state provides for a form of administrative and judicial review 

to hear complaints and provide appropriate remedies.

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PREPARED STATEMENT OF CONGRESSMAN GREGORY W. MEEKS (NY-06) 

Mr. Chairman, Ranking Member Watt, and my fellow Members of Congress: 

I thank you for allowing me the opportunity to join you today. Although I do not 

sit on this Committee, I feel strongly about the legislation at hand, and I am appreciative that you have allowed me to join in today’s discussion. I would also like to 

make note of my gratitude to Congressmen Boucher and Goodlatte who have led the 

effort in business activity tax nexus clarification for several years. 

H.R. 3220, The Business Activity Tax Simplification Act, would provide a consistent, national jurisdictional standard for the imposition of state and local business activity taxes on interstate commerce. As you know, the legislation addresses 

the need to clarify and modernize the nexus rules that govern the states’ ability to 

impose business activity taxes on companies that do not have a physical presence 

in the taxing jurisdiction. 


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In recent years, many of our states have found themselves in economic crunches. 

These circumstances have led some states to look outside of their borders and seek 

payment of income-based taxes from companies that are not physically present in 

their jurisdiction. This bill would clarify that physical presence is the constitutional 

standard for imposition of business activity taxes and establish a bright-line physical presence nexus standard. Businesses would continue to pay business activity 

taxes in the jurisdictions where they receive direct benefits. This legislation would 

merely clarify the states’ existing authority to tax interstate commerce, not impose 

any new restrictions on the states’ taxing power. 

The benefactors of this legislation are people we, as policymakers, have to answer 

to directly. It is our responsibility to identify and rectify potential barriers to new 

job creation in America. We must ensure that economic expansion creates the largest number of high-quality jobs for those we represent. Should the current level of 

uncertainty and ambiguity of state-level taxes continue, new job creation will be impeded. 

I am a Congressman from the state of New York. New York has a strong tax base 

that we have worked very hard to acquire. For example, we are home to many of 

the country’s leading media companies and financial institutions. In recent years, 

New York companies have been unfairly attacked by other states in search of increased revenues. For example, some states have alleged that income-based taxes 

are due from media corporations simply because they broadcast programs into the 

state. Other states have attempted to impose income-based taxes on banks based 

only on the fact that they have issued credit cards to people in the taxing state. 

States are taking advantage of the current ‘‘grey area.’’ The appropriate nexus 

standard needs to be clarified, so that taxpayers and states can have certainty with 

respect to taxes due. 

In conclusion, this legislation will ensure fairness, minimize litigation, and create 

the kind of legally certain and stable business climate that encourages businesses 

to make investments, expand interstate commerce, grow the economy and create 

new jobs. 

For these reasons, I strongly support this bill and look forward to the testimony 

of today’s witnesses.

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BUSINESS ACTIVITY TAX 

EXAMPLES OF ACTUAL & POTENTIAL AGGRESSIVE STATE ACTIONS AND POSITIONS

AGAINST OUT-OF-STATE COMPANIES

ACTUAL CASES

• In Tennessee, the revenue department attempted to tax an out-of-state company engaging in credit card solicitation activities through direct mailings. 

The department based their authority solely on the presence of the credit 

cards and the ‘‘substantial privilege of carrying on business’’ in Tennessee. 

J.C. Penney National Bank v. Johnson, 19 S.W.3d 831 (Tenn. Ct. App. 1999), 

cert. denied, 531 U.S. 927 (2000). It has been reported that Tennessee, despite 


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having lost this issue in the Tennessee courts, continues to assert this position. In addition, according to a recent survey of top state taxing officials, 

nineteen other states assert that a business could be subject to tax in the 

state merely for issuing credit cards to in-state persons. Special Report: 2004 

Survey of State Tax Departments, 11 Multistate Tax. Rep’t 4, pp. S-9 - S-43, 

at S-36, S-37 (April 23, 2004).

• In Alabama, the revenue department attempted to impose tax on an out-ofstate bank because the bank issued credit cards to Alabama persons and 

leased two MRI machines in Alabama. Dial Bank v. State of Ala. Dep’t of Revenue, Ala. Dep’t of Revenue, A.L.J. Div., Nos. INC. 95–289, F. 95–308 (Aug. 

10, 1998).

• A Minnesota law would have declared that a sufficient connection with the 

state exists when out-of-state health care providers provide care to 20 or more 

Minnesotans or when they solicit business from potential customers in Minnesota, regardless of whether the health care was provided outside of Minnesota. The Minnesota District Court determined that the tax was unconstitutional as applied to several nonresident health care providers that perform 

services outside of Minnesota. See Baertsch v. Minnesota Dep’t of Revenue,

Minn. Dist. Ct., 2nd Jud. Dist. No. C7-93–2680 (Minn. Dist. Ct. 1994); Mercy 

Medical Center v. Anderson, Minn. Dist. Ct., 2nd Jud. Dist. No. C4–93–11658 

(Minn. Dist. Ct. 1995); and MeritCare Hospital v. Commissioner of Revenue,

Minn. Dist. Ct., 2nd Jud. Dist. No. C2–94–12818 (Minn. Dist. Ct. 1995).

• Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App. 2000) (Texas 

could not impose its corporate franchise tax on a business that had merely 

registered to do business in the state). However, according to a recent survey, 

four states still take the position that merely registering to do business in a 

state is a sufficient connection to justify taxation on an out-of-state business. 

Special Report: 2004 Survey of State Tax Departments, 11 Multistate Tax. 

Rep’t 4, pp. S-9 - S-43, at S-10, S-11 (April 23, 2004).

ACTUAL POSITIONS TAKEN AT THE ADMINISTRATIVE LEVEL

• A small South Carolina software company owned by a husband and wife (annual sales of approximately $100,000) sells software out of their home to customers located in many states throughout the U.S. The software sales include 

a license agreement between the company and the purchaser. However, the 

company has no physical presence in any state except South Carolina and 

Georgia. Recently, New Jersey revenue authorities asserted that the software 

licenses created sufficient contacts with the state to justify imposing business 

activity taxes on the company.

Despite the fact that the company’s annual revenues from customers in New 

Jersey over the past few years have been as low as $49, New Jersey’s claim 

against the company would require that the company pay a $500 per year minimum corporate tax and a $100 per year corporate registration fee for as long 

as its software is being used in the state. One can only imagine the result if 

each state imposed similar taxes on this mom and pop operation.

• In Louisiana, the revenue department has threatened to assess business activity taxes on several out-of-state companies based on the fact that those 

companies broadcast programming into the state. The rationale is that these 

out-of-state companies are exploiting the Louisiana market because the programming is seen and/or heard by individuals in Louisiana.

WHAT THE STATES PUBLICLY SAY THEY CAN DO

• The Multistate Tax Commission has endorsed and is actively promoting the 

adoption of its factor-based nexus proposal (as well as the repeal of P.L. 86–

272). Under such standard, a state would be able to impose a business activity tax on any business whose factors exceed certain thresholds; the thresholds are $50,000 in property, $50,000 in payroll, or $500,000 in sales. Under 

the current physical presence standard, a state may tax companies with property and payroll in a jurisdiction but the MTC would go further by allowing 

states to tax businesses that only have customers in a jurisdiction. Ensuring 

the Equity, Integrity and Viability of Multistate Tax Systems, Multistate Tax 

Commission Policy Statement 01–2 (October 17, 2002).

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• A recent Oregon regulation takes the position that the presence of intangible 

property creates a sufficient connection with the state to justify Oregon imposing taxes on out-of- state companies. The regulation would mean that simply maintaining intangible property or receiving franchise fees or royalties 

from Oregon sources would subject an out-of-state company to taxation, even 

if services are performed outside of Oregon. Ore. Admin. R. 150–318.020.

• A recent survey shows that eight states take the position that a business 

whose trucks merely pass through the state six or fewer times in a year— without picking up or delivering goods—have sufficient connections with the 

state to justify imposing business activity taxes on that company. Special Report: 2004 Survey of State Tax Departments, 11 Multistate Tax. Rep’t 4, pp. 

S-9 - S-43, at S-34, S-35 (April 23, 2004).

• According to a recent survey, thirteen states assert that an out-of-state company merely having a website on someone else’s server in the state creates 

a sufficient connection to justify imposing business activity taxes on that outof-state company. Special Report: 2004 Survey of State Tax Departments, 11 

Multistate Tax. Rep’t 4, pp. S-9 - S-43, at S- 12, S-13 (April 23, 2004).

• A recent survey of top state taxing officials indicates that twelve states believe that an out-of-state company listing a telephone number in a local phone 

book located in the state is a sufficient connection with the state to justify 

taxation. Special Report: 2004 Survey of State Tax Departments, 11 Multistate 

Tax. Rep’t 4, pp. S-9 - S-43, at S-10, S- 11 (April 23, 2004).

• A recent survey of top state taxing officials indicates that five states believe 

that an out- of-state company having a bank account with an in-state bank 

is sufficient connection with the state to justify taxation. Special Report: 2004 

Survey of State Tax Departments, 11 Multistate Tax. Rep’t 4, pp. S-9 - S-43, 

at S-36, S-371 (April 23, 2004).

• A recent survey of top state taxing officials indicates that six states believe 

that an out-of- state company negotiating and/or obtaining a bank loan from 

an in-state bank is (or could be) a sufficient connection with the state to justify taxation. Special Report: 2004 Survey of State Tax Departments, 11 

Multistate Tax. Rep’t 4, pp. S-9 - S-43, at S-36, S-371 (April 23, 2004).

• Over half of the states in a recent survey stated that they believed that when 

an out-of- state corporation licenses trademarks to an unrelated entity within 

the state, the out-of- state company would be subject to taxation by the state. 

Special Report: 2004 Survey of State Tax Departments, 11 Multistate Tax. 

Rep’t 4, pp. S-9 - S-43, at S-36, S-37 (April 23, 2004).

POTENTIAL AGGRESSIVE POSITIONS THAT HAVE BEEN TAKEN IN THE

CONTEXT OF OTHER TAXES

• The city of Houston, Texas attempted to impose tax on offshore oil rigs located outside territorial waters or in foreign jurisdictions merely because they 

were owned by oil companies that were located in the city. The adoption of 

this approach by states for business activity tax purposes would have significant consequences for the business community and would raise serious constitutional issues. See, e.g., Vincent J. Schodolski, California county looks to 

heavens for tax revenue, Chicago Tribune, July 13, 2001, at 7.

• Certain localities have attempted to impose local personal property taxes on 

property orbiting in space. For example, the County of Los Angeles, California 

attempted to impose a property tax on a Hughes Electronics, a county-based 

company that owned eight communications satellites permanently orbiting in 

space. Nancy Vogel, Satellite Tax Idea Is Back to Earth; Finance: The State 

Board of Equalization adopts a rule forbidding L.A. County levies on the 

spacecraft. Assessor says he’ll study legal options, Los Angeles Times, July 11, 

2001, at 8.

In addition, the city of Virginia Beach, Virginia also attempted to impose local 

personal property tax on three transponders attached to satellites orbiting in 

space that were owned by a city-based cable company. City of Virginia Beach 

v. International Family Entertainment, 561 S.E.2d 696 (Va. 2002) (the City of 

Virginia Beach did not have the authority to impose its tax on the transponders). If states used the same approach to try to impose business activity 

tax, on the basis that the satellite creates a ‘‘physical presence’’ or because a 

business generates income in the state by passing over the state, there would 

be significant consequences for many industries.

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• In California, the tax department responsible for sales and use taxes attempted to impose use tax collection obligations on an out-of-state company 

whose only contacts with California consisted of entering into advertising contracts with California broadcast and cable television companies on the basis 

that the contracts ‘‘converted’’ the broadcast and cable companies into representatives of the out-of-state business. JS&A Group, Inc. v. State Board of 

Equalization, No. 1075021 (Cal. Ct. App. 1997). The same ‘‘logic’’ could be applied by states to try to impose business activity tax on businesses that merely advertise in a state. JS&A Group, Inc. v. State Board of Equalization, No. 

1075021 (Cal. Ct. App. 1997). • In Florida, the tax department attempted to impose sales tax on an out-ofstate business that provided financial news and information using high-speed 

electronic transmission to a subscriber’s video display terminals on the 

grounds that a sale of tangible personal property occurred because the images 

were perceptible to the senses. Department of Revenue v. Quotron Systems,

Inc., 615 So.2d 774 (Fla. Dist. Ct. App. 1993). States could apply similar 

‘‘logic’’ to try to impose tax on businesses delivering electronic information 

into the state.

• In Missouri, the tax department attempted to impose sales tax on an out-ofstate restaurant franchisor because it placed orders for equipment on behalf 

of its Missouri franchisees, even though the franchisor never acquired title to 

or ownership of the equipment. States could apply similar ‘‘logic’’ to try to impose business activity tax on the out-of-state business. Doctor’s Associates v. 

Director of Revenue, Missouri Admin. Hearing Comm’n, No. 95–001748 (Sept. 

17, 1997).

May 21, 2004

The Honorable Chris Cannon 

U.S. House of Representatives 

Chairman, Subcommittee on Commercial and Administrative Law 

Committee on the Judiciary 

B-353 Rayburn House Office Building 

Washington, DC 20515

Re: Business Activity Tax Simplification Act (H.R. 3220)

Dear Chairman Cannon:

The American Bankers Association (ABA) would like to express support for 

legislation creating a fair, clear, and uniform nexus standard for the imposition of business activity taxes by states and localities. Specifically, we are 

submitting comments to praise H.R. 3220, the Business Activity Tax Simplification Act and thank you for your leadership in advancing this legislation. The ABA brings together all categories of banking institutions to best 

represent the interests of a rapidly changing industry. Its membership - 

which includes community, regional, and money center banks and holding 

companies, as well as savings associations, trust companies and savings 

banks - makes ABA the largest banking trade association in the country.

H.R. 3220 would modernize existing law to ensure that states and localities 

only can impose their business activity taxes in situations where an entity 

has physical presence (i.e. property or employees) and thereby receives related benefits and protections from the jurisdiction. We agree that a physical presence nexus standard should be preserved in order to ensure an equitable and measurable application of the state tax laws for all industries.

ABA believes that certain clarifications to H.R. 3220 would be helpful in 

order to establish a fair, clear and uniform nexus standard. In particular, 

the bill should be revised to ensure that the solicitation of sales also applies 

to financial services and products. The types of financial services that 

should be made a part of H.R. 3220 include lending activities and other 

services such as investment, advisory and custodial services. Moreover, the 

legislation should be expanded to recognize financial transactions that do 

not require shipment or delivery. The current legislation covers only orders 

filled by shipment and delivery. These suggested clarifications recognize the 

intended scope of H.R. 3220 and encourage business investment.

Thank you for your consideration of our views as you advance this important legislation. We look forward to working with you as you proceed with 

this bill.

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Sincerely,

Edward L. Yingling

May 13, 2004

The Honorable Chris Cannon 

The Honorable Melvin Watt 

House Judiciary Subcommittee on Commercial & Administrative Law 

B-353 Rayburn HOB 

Washington, DC 20515

Re: Supporting comments for hearing on H.R. 3220, ‘‘The Business Activity 

Tax Simplification Act of 2003’’ (‘‘BATSA’’)

Dear Mr. Chairman Cannon and Mr. Ranking Member Watt:

1We are writing you today to beg for your support for H.R. 3220, ‘‘The Business Activity Tax Simplification Act of 2003.’’ We stumbled into this issue 

last year and have become deeply committed to the passage of this bill. It 

is no exaggeration when we say this legislation is critical to small businesses everywhere. While we represent no one but ourselves, we are championing this issue because the survival of small business is literally at 

stake. Without relief, some successful businesses will be forced to close or 

downsize. The material below provides a snapshot of the legal nightmare 

that has heavily impacted our business over the past year, and hundreds 

of other small businesses nationwide as well.

We know first hand that many other companies are impacted because we 

have talked with dozens of attorneys, small businessmen, and news editors 

all over the Country about this problem. Unfortunately, many small businesses are not even aware of the problem because they have not been 

trapped, yet. But, it is only a matter of time before the abuses by aggressive 

States become widespread and automated record-matching processes jeopardize thousands of additional small businesses with demands similar to 

those New Jersey is now making upon us.

We are the owners of a home-based software development company with ac- tual 2003 sales (not profits!) of slightly less than $100,000. All work is performed in our home, we are the only employees, and our company is our 

sole source of earned income. Our company is incorporated in Georgia and 

registered in Georgia and South Carolina. We have elected S Corporation 

status, operate and pay taxes as such, and file appropriate returns in Georgia and South Carolina each year. We pay employment taxes to South 

Carolina, and we acknowledge nexus in both Georgia and South Carolina. 

All work is conducted in South Carolina via the telephone, the Internet, 

and the U. S. Postal Service.

The State of New Jersey is now asserting a claim of nexus against our company due solely to the sale of seven intangible software licenses during 

1997–2002. During that period, we generated total revenue from New Jersey-based customers of $6,132. By year, our sales into New Jersey for that 

period were $695, $0, $0, $49, and $5388, respectively. Those are single dollars, not $K, $M, or $B. Of this total, $5,133 was derived from the actual 

license sales and $999 from additional services performed in South Carolina 

after the original sales.

New Jersey acknowledges that its original claim of nexus was based solely

on the continued use of these seven software licenses within the state. If 

the licenses did not exist, the remaining $999 by itself would not then have 

resulted in a claim of nexus. New Jersey’s claim of nexus will be made as 

long as any licenses are in use in the State, even if we cease accepting all 

business from New Jersey customers and generate zero future income from 

the State.

New Jersey’s claim of nexus generates a requirement for our company to 

pay $500 per year as the New Jersey minimum corporate tax and $100 per 

year for Corporate Registration fee, every year, even in years when we have 

zero sales in New Jersey and have no other business activity in the State. 

(If not for the minimum corporate tax and registration fee, our calculated 

tax would be less than $1.00 in our best year.) We have been advised by 

the New Jersey Department of Taxation that the only way to remove our 

future liability for paying this $600 per year fee is to (1) stop accepting all 

89

orders from New Jersey, (2) have zero New Jersey income, (3) terminate all 

existing software licenses, and (4) have our customers remove all licensed 

software from their systems. We have been advised that we cannot terminate our nexus in future years by abandoning our license agreements and 

giving clear title of the software to our customers.

We have met these requirements, as of December 31, 2003, through the following actions:

• We have terminated all of our national advertising. Our sales are down significantly as we attempt to refocus our activity into Georgia and South Carolina 

only.

• We have stopped accepting all orders from New Jersey locations. We will accept 

no business, of any type, from New Jersey locations until small business is given 

the protection it must have in order to participate in Interstate Commerce on a 

free and unhindered basis. In January 2004, we refused to accept a firm order 

for $15,000 of remote services from a New Jersey customer. Needless to say, 

that hurt our business badly.

• We have terminated all software licenses in New Jersey, and our customers 

have removed all licensed software and replaced it with new unlicensed software. As a result, our intellectual property no longer receives the protection it 

must have in order to insure its viability for future enhancements and improvements and for our future income.

These actions have combined to significantly reduce and inhibit our participation in Interstate Commerce, reduce our sales, reduce our personal salaries, and reduce our payments of badly needed Federal and South Carolina 

tax revenues. We have become so concerned about the risk of our continued 

participation in Interstate Commerce that we have begun to ask ourselves: 

‘‘Why bother? Can we afford the risk? Should we terminate the business before it gets worse?′′

Our situation, and that of all small businesses participating in Interstate 

Commerce, is simply intolerable. Had we sold just one $695 license in 1997 

and not derived any further income from New Jersey customers, we would 

still be subject to the requirement of paying $600 per year in New Jersey 

taxes and fees as long as our customers continued to use the licenses. Making the situation even worse, New Jersey has, since we became trapped, expanded its regulations to assert nexus against all companies deriving any 

type of income from New Jersey customers, regardless of physical presence 

or de minimis activity. This latest provision of New Jersey tax regulations 

includes the sale of tangible products and is in direct defiance of Congressional intent and Public Law 86–272. New Jersey’s own Tax Court has 

ruled that a physical presence is required to assert taxing power; nonetheless, New Jersey’s Department of Taxation continues to pursue us. Thus, 

we are forced to pay thousands of dollars in legal fees to defend ourselves; 

and we are continually distracted from pursuing the normal business activities which generate all of our earned income.

No company can survive by paying taxes on zero profits. But, in our case, 

we didn’t even have sales in three of the six years and only $49.00 in a 

fourth. Should all 50 states adopt the same provisions as New Jersey, the 

sale of just one box of paper clips into each state, at any point in time, 

would generate the requirement to file a state tax return in every state and 

to pay $30,000 in minimum taxes and fees per year, forever, even in years 

when no income is generated in those states, unless a way could be found 

to terminate nexus. As you can see, New Jersey does not make that easy. 

Further, no small business can possibly become familiar with the everchanging and widely varying tax laws of 50 States, nor can it withstand the 

financial and administrative burdens of preparing and filing 50 separate 

state tax returns.

New Jersey is not the only State adopting highly aggressive tactics which 

destroy small businesses. Such tactics are becoming more prevalent each 

year, and H.R. 3220 would stop the abuses. This legislation is vital for protecting small business through clear codification of existing judicial precedents and adoption of a uniform standard of physical presence for nexus as 

a specific element of Federal Law.

We realize there are multiple sides to every issue; for BATSA, there are at 

least three:

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• Small businesses: Hopefully, we have adequately conveyed why the passage of H.R. 3220 is absolutely vital for the survival of all small businesses attempting to participate in Interstate Commerce.

• Large businesses:Having worked for large business for many years, we 

understand and support their need for clarity and simplification of the 

rules which would allow them to devote more attention to delivering 

products and services instead of defending themselves in legal actions. 

We realize some States argue that BATSA would encourage use of intangible holding companies to shelter income from State taxation, but there 

are several easy ways for the States to prevent such abuses by businesses 

(see ‘‘The States’’ below).

• The States:I understand the States are screaming about this bill.

(a) Their claim of Federal usurpation of their taxing powers simply does 

not hold water. Because abuses similar to those we are seeing today occurred during the Colonial period, our Founding Fathers understood 

that Federal regulation would be vital toward assuring a vibrant economy and wisely gave the Congress broad powers to regulate Interstate 

Commerce.

(b) Their claims of revenue loss are wildly exaggerated in an effort to defeat this badly needed bill. Simplification always increases income and 

profits, thus taxable income will grow. The distribution of that taxable 

income may change among the States, but it should. We do all work 

from our home; shouldn’t we pay all our taxes to South Carolina? 

Shouldn’t this apply equally to large businesses with no physical presence in a State? If a State’s revenue drops due to passage of this bill, 

it is because the State is already engaging in unfair tactics; and its revenue should and must drop.

(c) We believe the greatest threat to States’ revenues is through the improper use of intangible holding companies. If an intangible holding 

company licenses intangible property to an unrelated company, then it 

should receive the protection the physical presence standard provides. 

If the intangible holding company operates only to avoid taxation, without other legitimate business purposes, the States have several remedies they have traditionally employed to prevent any loss of income, 

and many States have already enacted one or more of them. So, this 

issue is no reason to avoid prompt passage of this bill.

As private citizens, we have concluded the passage of BATSA is the fair 

and right thing to do for all business, both large and small, that it is vital 

for protecting small business, that it is vital for protecting jobs and our 

economy, that States’ claims of various harms are ill-advised and simply 

not true, and that all sales should be treated as intended by the Congress 

when it passed Public Law 86–272. Otherwise, very large portions of our 

economy (i.e., intellectual property, remote services, and small business in 

particular) become highly disadvantaged in their conduct of Interstate marketing activity.

Because physical presence was intended to be the current standard, H.R. 

3220 would neither diminish the taxing powers of state and local jurisdictions nor reduce state and local tax revenues. The bill recognizes Congress’ responsibility to support a strong U.S. economy by ensuring no undue burdens on Interstate Commerce.

We beg for your support of this bill, on our behalf, on behalf of the thousands of small business owners nationwide whose economic futures rely on 

it, and on behalf of a strong National economy which also relies on such 

legislation for its continued and improved strength.

Sincerely,

Bo Horne 

Kathy Horne 

418 East Waterside Drive 

Seneca, SC 29762

May 20, 2004

The Honorable Chris Cannon 

Chairman, Subcommittee on Commercial and Administrative Law 

91

Committee on the Judiciary 

B-353 Rayburn House Office Building 

United States House of Representatives 

Washington, DC 20015

Dear Chairman Cannon and Members of the Committee:

On behalf of the American Legislative Exchange Council (‘‘ALEC’’), a bipartisan, individual membership organization of over 2,400 state legislators, I thank you for the opportunity to submit this letter for the record for 

the May 13, 2004 legislative hearing on H.R. 3220, the ‘‘Business Activity 

Tax Simplification Act of 2003.’’

The purpose of my letter is twofold: to express ALEC’s strong support for 

H.R. 3220, and to specifically rebut a release prepared and distributed at 

the hearing by the National League of Cities that claimed local governments could lose more than $60 billion annually in revenues from the enactment of H.R. 3220.

First, I need only refer to the testimony of Jamie Van Fossen, Chair of the 

Iowa House Ways and Means Committee, and public sector chair of ALEC’s 

Tax and Fiscal Policy Task Force. ALEC supports H.R. 3220 because ‘‘it 

promotes federalism, enhances our national economy and thereby increases 

the financial viability of our state governments, and preserves the constitutional principle of tax competition among the states.’’

Second, as stated by Representative Van Fossen, H.R. 3220 does not force 

a choice ‘‘between public schools and corporate profits.’’ Opponents of the 

bill that make this characterization grossly overstate the revenue impact of 

H.R. 3220 in order to protect overaggressive and unconstitutional imposition of business activity taxes.

A case in point is the $60 billion estimate for local government revenue 

losses cited in the National League of Cities’ release. These sort of numbers, 

increasingly used by certain state and local government groups, are worse 

than unhelpful - they deflect consideration from the real issue. To illustrate, a recent study co-authored by University of Tennessee Professor William Fox, a former President of the National Tax Association, estimated 

that total state and local corporate income taxes in fiscal year 2003 

amounted to $34.6 billion. Even with adding other non-income taxes in the 

study that might be considered business activity taxes, it is hard to reach 

a number that comes close to the $60 billion loss claimed by the National 

League of Cities.

What the National League of Cities appears to be asserting is that H.R. 

3220 would wipe out all business activity tax revenue at the state and local 

level nationwide. If the claim is made with respect to local governments 

only, it is even more absurd. Because the underlying tax principle of H.R. 

3220 is to tax businesses where they are physically located, the National 

League of Cities seems to conclude that all businesses could operate without a physical presence anywhere. This is quite obviously impossible.

Please do not allow unsubstantiated figures like those advanced in the National League of Cities’ release to distract the Committee from its important 

work. H.R. 3220 is of vital importance to the health of our economy and 

the free flow of commerce between the states.

Thank you for your consideration.

Sincerely,

Duane Parde 

Executive Director 

American Legislative Exchange Council (ALEC)

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May 24, 2004

The Honorable Chris Cannon, Chairman 

The Honorable Melvin Watt, Ranking Member 

Subcommittee on Commercial and Administrative Law 

House Judiciary Committee 

United States House of Representatives 

Washington, DC 20515

Re: HR 3220-Response to National League of Cities Letter

Dear Chairman Cannon and Ranking Member Watt:

On behalf of the Software Finance and Tax Executives Council (SoFTEC), 

I write in response to the May 21, 2004 letter sent you by the National 

League of Cities (NLC) regarding HR 3220, the ‘‘Business Activity Tax SimVerDate 0ct 09 2002 12:18 Jul 07, 2004 Jkt 000000 PO 00000 Frm 00097 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051304\93657.000 HJUD2 PsN: 93657

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1See J.C. Penny Nat’l Bank v. Johnson, 19 S.W.3d 831 (Tenn. Ct. App. 1999), appeal den.

(Tenn. 2000), cert. den. 531 U.S. 927, 212 S.Ct. 305 (2000); Rylander v. Bandag Licensing Corporation, 18 S.W.3d 296 (Tex. App. 2000), Motion for Rehearing Denied March 8, 2001; 9.4 Percent Manufactured Housing Service v. Department of Revenue, No. Corp. Inc. 95–162 (Ala. 

Admin. Law Div. Feb.7, 1996); MeritCare Hospital v. Commissioner of Revenue, No. C2–94–

12818, (D.C. Minn. Sept. 22, 1995); cf, Geoffrey, Inc. v. South Carolina Tax Commission, 313 

S.C. 15 (1993) (involved a tax shelter).

plification Act.’’ The NLC’s letter contains inaccuracies and distorts the effect passage of HR 3220 would have on local revenues. SoFTEC asserts that 

passage of HR 3220 would have no more than a minimal impact on local 

revenue from business activities taxes.

SoFTEC is a trade association providing software industry focused public 

policy advocacy in the areas of tax, finance and accounting. Because 

SoFTEC’s member distribute their products to customers in many states 

and localities but have a physical presence in only a few, it naturally has 

an interest in ensuring that your Subcommittee has accurate information 

regarding the effects of HR 3220.

1. Economic Presence Standard:

The NLC, in its letter, asserts that the current business activity tax nexus 

standard is an ‘‘economic presence’’ standard and that HR 3220 would 

change the standard to a ‘‘physical presence’’ standard. To the contrary, 

physical presence is the current nexus standard enforced by the courts and 

HR 3220 would merely codify it.

There is no reported decision in which a court has ever permitted a state 

to impose a business activity tax on an out-of-state company that had no 

more than an economic presence within the state. Each time the courts 

have sustained such a tax the taxpayer had a physical presence in the taxing state. A fair reading of the most recent cases in this area makes it clear 

that for a state or locality to impose a business activity tax on out-of-state 

businesses, there must be a ‘‘substantial physical presence’’ in the state.1

NLC’s assertion that ‘‘economic presence’’ is the current law is not in accord 

with the cases. The current state of the law is that a business must have 

a physical presence in a jurisdiction before that jurisdiction is permitted to 

impose a tax on its business activities.

2. HR 3220 Would Promote Improper Tax Sheltering:

The NLC claims that HR 3220 would legalize a variety of corporate tax 

planning techniques that companies use to minimize their state and local 

tax burden and lead to more ‘‘nowhere income’’ and tax avoidance or evasion. Such claims cannot withstand scrutiny.

A physical presence nexus standard would not prevent states from using 

their existing arsenal of tools traditionally used to combat illegal tax shelters. The courts are split on whether the intangibles holding company device is an improper tax shelter. However, HR 3220 would have no impact 

on states’ ability to use common law sham transaction and economic substance doctrines to attack such shelters. In addition, such devices are inadequate to shelter income from taxation in states that use combined and unitary reporting and/or ‘‘throwback rules.’’ Also, HR 3220 would not prevent 

states from enacting laws that would deny an income tax deduction for royalties paid to an intangibles holding company.

A company’s decision to locate a facility in a low-tax state is not a tax shelter. States often compete with one another for the reputation as a low-tax 

state. Remote sellers, by virtue of their business model, are able to confine 

their activities to a smaller number of taxing jurisdictions. The physical 

presence standard will not allow companies to escape taxes that they currently are legally obligated to pay. Codification of the current physical presence standard merely will clarify for both taxpayers and tax collectors 

where those tax obligations arise.

State and local efforts to overcome sheltering techniques will not be nullified by HR 3220.

3. HR 3220 Would Disadvantage Local Businesses:

NLC asserts that HR 3220 would place local business including manufacturers at a disadvantage by giving tax breaks to out-of-state business operVerDate 0ct 09 2002 12:18 Jul 07, 2004 Jkt 000000 PO 00000 Frm 00098 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051304\93657.000 HJUD2 PsN: 93657
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ating within a state and/or local political subdivision. HR 3220 would not 

discriminate in favor of out-state businesses.

First, in order for a company to be ‘‘operating’’ in a jurisdiction, it must deploy capital or employees. HR. 3220 would treat all businesses that have 

property or employees in a jurisdiction equally. A local business with employees or property in the jurisdiction would be treated the same as an outof-state business with employees or property; the jurisdiction could tax the 

business activities of both businesses. By the same token, local business 

could not be taxed by a foreign jurisdiction where the business deployed no 

employees or property. In this light, HR 3220 actually advantages local 

business by shielding it from foreign taxing jurisdictions where the local 

business deploys no capital.

SoFTEC thanks you for the opportunity to provide this response to the 

NLC’s May 21, 2004 letter. If you have any questions, I may be contacted 

at (202) 331–9633 or mnebergall@softwarefinance.org.

Respectfully submitted,

Mark E. Nebergall 

President 

Software Finance and Tax Executives Council

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STATEMENT OF THE FEDERATION OF TAX ADMINISTRATORS

The Federation of Tax Administrators opposes enactment of H.R. 3220 for the following reasons. 

1. There has been no need demonstrated for this violation of principles of federalism. 

Whatever impact one assigns to this proposed legislation in terms of revenue or 

practical effects, there has been no demonstration of a need for this bill by its proponents beyond some light, anecdotal fare. Principles of federalism dictate that the 

federal government should not encroach on functions of state and local governments 

so integral to their sovereignty as the powers to tax without a clearly demonstrated 

need to do so, and no such need has been demonstrated in this instance. Further, 

the few stories that have been offered purporting to show overreaching by state tax 

agencies involve only de minimis situations - i.e., taxpayers with limited contacts 


brief22.eps
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with a state being subjected to that state’s taxes - while absolutely no justification 

has been presented for the bill’s protecting from taxation income in the millions of 

dollars earned in a state that is shifted out of that state into intangible holding companies. By addressing an asserted problem of companies with relatively minor contacts with states being assessed with those states taxes with a bill that would prevent states from taxing the huge amounts of income of multinational corporations 

indisputably earned within their borders, this bill attempts to swat a fly with a 

sledgehammer - and does all the corresponding damage that metaphor implies. 

Especially in recent years, state and local governments have demonstrated a willingness to work with the business community to develop solutions to problems that 

have been demonstrated to require Congressional attention. For example, state and 

local governments worked with the telecommunications industry to produce the Mobile Telecommunications Sourcing Act in 2000, to address the problem of how to determine which taxing jurisdictions should be able to tax wireless telephone calls 

that can change jurisdictions as they are being made. And, at least partly in response to the U.S. Supreme Court’s acknowledgment of a problem with the complexity of state and local sales and use tax regimes in Quill v. North Dakota, state 

and local governments are currently working with many sectors of the business community to simplify the sales and use taxes as part of the Streamlined Sales Tax 

Project, with an eye toward leveling the playing field for all types of sellers with 

expanded authority to require tax collection. 

Similarly, if the business community were to demonstrate a significant problem, 

such as complexity in business activity taxes (BAT) or over-aggressiveness on the 

part of states in imposing such taxes on businesses with only a de minimis presence 

in the state, the state and local governments would be more than willing to work 

on streamlining those taxes and developing uniform de minimis standards. To have 

one of the states’ most integral sovereign functions be compromised as significantly 

as this bill would compromise the states’ ability to tax, requires that the Federation 

of Tax Administrators object to this bill strenuously.

2. H.R. 3220 does not provide for a physical-presence standard; rather, the 

standard set by the bill is one of physical presence under certain enumerated 

circumstances.

Despite how it has been characterized by its proponents, H.R. 3220 does not provide that a state may tax an entity that has a physical presence in the state. Rather, the bill provides that, while a state may not tax an entity that does not have 

a physical presence in the state, the state may only tax an entity that has one or 

more of certain types of enumerated physical presences in the state, and that list 

of circumstances excludes some very substantial carve-outs of a variety of types of 

physical presence. Some of those carve-outs fall into what has been characterized 

as a de minimis classification - although it might be questionable to consider having 

an unlimited number of employees in a jurisdiction for three weeks a de minimis

presence - but there are also complete carve-outs of whole industries or activities, 

such as purchasing, lobbying and gathering news. So, for example, if this bill became law, a multinational media conglomerate with its headquarters in New York 

City could build a building in Washington, D.C., and staff it with hundreds of fulltime workers, and the District would be prevented from taxing that company.

3. Physical presence is not the current legal standard for BAT nexus.

Without providing a full-blown legal analysis of all of the U.S. Supreme Court’s 

decisions regarding BAT nexus, it is safe to say that the Court has never held that, 

in order for a state to impose a BAT on a nonresident corporation or similar entity, 

that entity had to have a physical presence in the state. In fact, there is no need 

to present an analysis of all relevant Supreme Court cases, because the Supreme 

Court itself told us just that - twice - in its 1992 decision in Quill v. North Dakota, 

504 U.S. 298. 

In Quill, the Court determined that it was going to stay with the standard for 

Commerce Clause nexus for sales and use tax purposes established in its 1967 decision in National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, in 

which the Court held that a vendor whose only contacts with the taxing state were 

by mail or common carrier lacked the substantial nexus required by the Commerce 

Clause. In Quill, the Court referred to this standard, i.e., ‘‘the rule that Bellas Hess

established in the area of sales and use taxes,’’ as a ‘‘bright-line, physical-presence 

requirement.’’

In Quill, the Court was quite explicit in saying that it had never imposed the 

physical-presence requirement for other taxes, saying so twice: ‘‘. . . [W]e have not, 

in our review of other types of taxes, articulated the same physical-presence requirement that Bellas Hess established for sales and use taxes . . .’’ (504 U.S. 314), and, 

120

1Statement of Arthur Rosen on H.R. 3220, May 13, 2004, p. 5. 

2 Ibid., p. 3.

‘‘. . . [I]n our cases subsequent to Bellas Hess and concerning other types of taxes 

we have not adopted a similar bright-line, physical-presence requirement . . .’’ (504 

U.S. 315). Thus, it is clear that the U.S. Supreme Court has never ruled that physical presence is the nexus requirement for BAT. 

Beyond the lack of U.S. Supreme Court authority for applying the physical-presence requirement to taxes other than sales and use taxes, several state court decisions have required only the lesser standard of economic presence for such other 

taxes, including, but not limited to: Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. 1993), cert. denied, 114 S.Ct. 550 (1993) (income tax); 

Comptroller of the Treasury v. SYL, Inc., and Comptroller of the Treasury v. Crown 

Cork & Seal Co. (Delaware), Inc., 825 A.2d 399 (Md. 2003), cert. denied (U.S., 2003) 

(income tax); General Motors Corp. v. City of Seattle, 25 P.3d 1022 (Wash. Ct. App. 

2001), cert. denied, 122 S.Ct. 1915 (2002) (business and occupation tax); Kmart 

Properties, Inc. v. Taxation and Revenue Dept., No. 21,140 (N.M. Ct. App. 2001), appeal pending (income tax); and, Borden Chemicals and Plastics, L.P. v. Zehnder, 726 

N.E.2d 73 (Ill. App. Ct. 2000), appeal denied, 731 N.E.2d 762 (Ill. 2000) (replacement income tax). 

Therefore, while proponents of H.R. 3220 assert that the bill reflects the current 

state of the law, it clearly does not.

4. Physical presence should not be the nexus standard for BAT.

Physical presence should not be the nexus standard for BAT for many reasons, 

including the following: 

It encourages tax planning. Especially as it is structured in H.R. 3220, a physicalpresence standard encourages corporations to engage in tax planning aimed at shifting income away from a taxing state in which it is earned. For example, a corporation could spin off a holding company to hold its intangibles, such as trademarks 

and patents, and incorporate that subsidiary in a low-or-no-tax state such as Delaware, and then have that holding company license the use of the trademarks back 

to the affiliate that operates the stores throughout the states, with the royalties 

flowing back to the holding company approximating the operating company’s income 

- thereby shifting the income earned where the stores are located, to Delaware 

(while the operating company takes a deduction for royalties paid, and the holding 

company loans the funds back to the operating company, with another deduction to 

the operating company for interest on the loans). H.R. 3220 would prevent a state 

that was home to the operating stores from assessing the Delaware holding company with tax on the income earned in its state, as South Carolina successfully did 

in Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. 1993), cert. 

denied, 114 S.Ct. 550 (1993), because the holding company would not have a physical presence in the taxing state, as physical presence is defined in the bill. Ironically, as this example illustrates, while proponents of the bill assert that ‘‘businesses should pay tax where they earn income,’’1 this type of tax planning encouraged by H.R. 3220 would have exactly the opposite effect. 

Also, while proponents of the bill might dismiss any concern about tax planning 

that would result from the bill as speculative, it is clear that such planning would 

occur. First, it is already occurring, as demonstrated by decisions like Geoffrey and 

many others, as well as similar cases in states’ administrative pipelines, not to mention situations the states are not aware of. Moreover, while this tax planning might 

currently be considered risky - and not worth the risk to some corporations who 

might fear the cost of not having their tax planning upheld by the courts, including 

the penalties and interest that would be incurred - enactment of this legislation 

would not only ratify all the current planning that is going on, but also essentially 

require boards of directors of corporations that are in a position to do so to engage 

in all levels of such planning that would be made available under this bill, as a matter of their fiduciary duties to their shareholders. 

The assertion that an out-of-state seller derives no benefit from a state in which 

it has no physical presence is ‘‘indefensible.’’ A proponent of H.R. 3220 states, ‘‘The 

underlying principle of this legislation is that states and localities that provide benefits and protections to a business, like education, roads, fire and police protection, 

water, sewer, etc., should be the ones who receive the benefit of that business’ taxes, 

rather than a remote state that provides no services to the business.’’2 Two noted 

scholars in the field of state and local taxation responded to a similar statement, 

and to the ‘‘no taxation without representation’’ argument, as follows: 

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3Charles E. McLure and Walter Hellerstein, ‘‘Congressional Intervention in State Taxation: 

A Normative Analysis of Three Proposals,’’ State Tax Today, March 1, 2004.

This line of reasoning is indefensible, whether the benefits corporations receive are defined broadly, to mean the ability to earn income, or defined 

more narrowly to mean specific benefits of public spending, one of which 

is the intangible but important ability to enforce contracts, without which 

commerce would be impossible. A profitable corporation clearly enjoys both 

types of benefits. It is true that in-state corporations may receive greater 

benefits than their out-of-state counterparts, for example, because they 

have physical assets that need fire and police protection. But that is a question of the magnitude of benefits and the tax that is appropriate to finance 

them—something that is properly addressed by the choice of apportionment 

formula and the tax rate, not the type of yes/no question that is relevant 

for issues of nexus. The answer must clearly be a resounding yes to the 

question of whether the state has given anything for which it can ask in 

return.

A second invalid argument relies on the Revolutionary War rallying cry ‘‘no taxation without representation.’’ Opponents of tighter nexus rules suggest 

that those rules would violate the basic American principle that there 

should be no taxation without representation. That argument fails on several grounds. First, not all rallying cries of the Revolutionary War made 

their way into the Constitution. An inviolate link between the right to vote 

and the duty to pay tax is not among those that did. Individuals who lack 

the right to vote due to nonresidence are nonetheless (properly) taxable. 

Second, virtually all of the taxes under discussion here are (or would be, 

under a tighter nexus standard) paid or collected by corporations, not by 

individuals. Because corporations do not vote, this argument is something 

of a red herring. Beyond that, out-of- state taxpayers, whether actual or potential and whether corporations or individuals, have the same right to be 

represented by lobbyists as do in-state corporate and individual taxpayers. 

Indeed, corporate officials can probably do their own lobbying without running afoul of existing nexus standards, let alone sensible ones. Thus, this 

charge lacks substance. Third, the same argument could be made against 

payment of property taxes. Finally, and most fundamentally, the type of 

taxation that would occur under sensible nexus rules would not discriminate against out-of-state business (something the U.S. Supreme Court 

would not countenance). Rather, sensible nexus rules would prevent discrimination in favor of out-of-state business by subjecting them to the same 

rules as in-state businesses, except as required to prevent excessive complexity. Even if it were true that out-of-state businesses had no representation, it is difficult to see the harm in requiring that they pay or collect the 

same taxes as their in-state competitors. (With uniform taxation, in-state 

businesses can be expected to help protect the interests of their out-of-state 

competitors in the political arena, because they will pay the same taxes.)3

A physical-presence standard, especially as structured in H.R. 3220, is fundamentally unfair, as it favors out-of-state businesses over in-state businesses, and big businesses over small businesses. H.R. 3220 favors big over small, for, while there is 

nothing in the bill that specifically limits its protections to bigger businesses, in 

practical terms, bigger businesses will have more opportunities available to them to 

engage in the tax-planning activities discussed above. For example, a corporation 

cannot simply establish an affiliate in a low-tax state and assign all of its income 

to that affiliate; if that were to happen, the original taxing state could disregard the 

second corporation as a sham. Instead, there must be at least the guise of a business purpose for setting up that second corporation, and that guise is more available 

to larger corporations that will, for example, have trademarks to put into another 

entity and then license back to the original corporations. Mom-and-pop-type operations most likely do not have those options, and likely do not have the resources 

to pay for the tax-planning services necessary to develop those options. 

H.R. 3220 also favors out-of-state businesses over in-state businesses, as illustrated by the banking industry. Banking is an activity that has proven particularly 

adaptable to the electronic age, with seemingly every service a bank offers - including savings accounts, loans, and investments - able to be conducted without the customer’s presence in a bank building. Under H.R. 3220, the smaller local bank with 

an office in the state will have to pay all of the state’s taxes, while the out-of-state 

bank, which would most likely already be larger and therefore operating with the 

advantage of a number of economies of scale, will also be free of taxes imposed by 

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the state where it has a substantial customer base - thereby producing a multiple 

hit on the community, by taking the local bank’s customers away while not providing any jobs to the community or paying taxes to the community. 

That is another problem with a physical-presence standard: it discourages a business from investing in the communities in which it does business, because the business is motivated to concentrate all of its plant and payroll in tax havens. If, however, the common nexus standard were based on where a business is doing business, 

i.e., economic presence, a business’s decisions about where to locate its property and 

employees would not be driven by tax considerations, but rather, by market and 

other economic factors.

5. The current nexus standard is economic presence.

The current standard for sufficient nexus for a state to impose a BAT on an entity 

operating in interstate commerce under the federal constitution is an economic presence in the state. For example, in its 1944 decision in International Harvester Co. 

v. Wisconsin Department of Taxation, 322 U.S. 435, 441, the U.S. Supreme Court 

upheld a Wisconsin dividend tax imposed on nonresident shareholders, stating that 

personal presence within the state was not essential to the constitutional levy of the 

tax, and no subsequent decision has held otherwise for purposes of a BAT. 

The economic presence standard could take a variety of forms, including, for example, a set amount of property, payroll and/or sales in a state, as has been proposed by both scholars in the field and the Multistate Tax Commission. So, to illustrate, at a certain level of business activity in a state, a multistate bank would be 

viewed as having a sufficient economic presence in the state to support that state’s imposition of its taxes on the bank. Currently, several states have chosen to not impose their BATs to the full extent allowed by the federal constitution, by allowing 

different levels of economic presence without triggering the imposition of a BAT, 

which seems to be a healthy illustration of federalism at work.

6. Beyond the general change in the nexus standard for BAT, H.R. 3220 makes 

other changes to existing law.

H.R. 3220 would negate U.S. Supreme Court decisions upholding attributional 

nexus through independent contractors, such as Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, 107 S.Ct. 2810, a 1987 decision upholding the imposition of Washington’s business and occupation tax based on the use of an in-state 

sales representative, characterized as an independent contractor. Section 3(b)(2) of 

H.R. 3220 prohibits taxation based on the use of a non-employee in the state ‘‘to 

establish or maintain the market in that State,’’ when that non-employee ‘‘performs 

similar functions on behalf of at least one additional business entity during the taxable year.’’ In Tyler Pipe, the Court employed the same language used in the bill, 

when it quoted the lower court for the proposition that ‘‘the crucial factor governing 

nexus is whether the activities performed in this state on behalf of the taxpayer are 

significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.’’ The intention of this provision to overturn the impact 

of cases like Tyler Pipe is clear; under the bill, so long as an independent contractor 

was not captive, i.e., it was used by at least two entities, whether related or not, 

that independent contractor would not supply nexus for any of its employers. 

Also, while different numbers of states’ tax laws regarding what type of presence 

in the state constitutes sufficient nexus for imposing their taxes would be overturned in varying degrees, every state with a business activity tax considers the 

presence of a building in the state sufficient nexus, but H.R. 3220 provides that, for 

some industries, even the ownership of a building with a permanent staff would not 

constitute sufficient nexus.

7. The bill’s expansion of P.L. 86–272 is unwarranted.

On the one hand, H.R. 3220 purports to establish a physical-presence standard, 

but, on the other hand, it expands Public Law 86–272 to cover even more activities 

constituting physical presence than the law covers today. P.L. 86–272 was adopted 

as a ‘‘stop-gap’’ temporary measure in 1959 to give people time to adjust a Supreme 

Court decision, but has been allowed to exist well beyond its usefulness, and now 

is being considered for expansion. An expansion of P.L. 86–272 would contradict 

both the purported purpose of this bill and the tide of business moving into the electronic age.

8. The bill’s carve-outs for particular industries produce outrageous results.

Under Section 3(b)(1)–(3) of H.R. 3220, leasing or owning real property would constitute a taxable physical presence except for such property used for a variety of activities - such as ‘‘activities in connection with a possible purchase of goods or servVerDate 0ct 09 2002 12:18 Jul 07, 2004 Jkt 000000 PO 00000 Frm 00126 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051304\93657.000 HJUD2 PsN: 93657
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ices for the business,’’ lobbying and gathering news - so long as the state is not the 

state of incorporation or commercial domicile. Therefore, a broadcasting network 

could erect a building in a state, and staff it with numerous full-time employees engaged in ‘‘gathering news,’’ and still not be subject to a business activity tax in the 

state. For all other industries, merely placing employees into a separate employment affiliate could be enough to prevent buildings and factories in the state from 

creating nexus. Thus, under the bill, simple paper restructurings could easily preempt state taxation, even where the ex-taxpayer maintains large amounts of plant 

and equipment in the state.

9. The timing of this bill contradicts other activity by Congress.

As noted above, H.R. 3220 not only authorizes and promotes, but could compel 

for fiduciary reasons, what is now considered risky tax planning that makes use of 

a variety of means of sheltering income earned in a state. This effect directly contradicts the current activity of Congress in eliminating a variety of tax-shelter activities for federal income tax purposes. 

The bill also contradicts Congress’s consideration of bills expanding the authority 

of states to require collection of sales and use taxes by interstate sellers; in that 

situation, Congress is considering undoing the current physical-presence requirement for purposes of the only taxes for which that standard is required, sales and 

use taxes, while H.R. 3220 would impose a nexus standard narrower than physical 

presence on taxes for which the physical-presence standard is not now the law. 

Whether or not the bill falls within Congress’s powers under the Commerce 

Clause, this is not an appropriate preemption Congress should be imposing on the 

states. A state’s ability to function is dependent on its ability to fund its operations, 

and the decisions about how to do that are best made at the state level. States generally oppose the federal government’s preemption of their options to tax, but have 

not done so dogmatically. As noted above, state and local governments have worked 

with the business community to address the problem of how to source wireless telephone calls, and are currently working closely with the business community to 

streamline sales and use taxes. In both of those instances, states have worked with 

the business community to address the problems at hand, and then taken those solutions to Congress for their implementation. In this situation, Congress is considering imposing draconian measures on states where there has not even been a serious problem demonstrated to exist. That is not the role of Congress in our federalist 

system.

PREPARED STATEMENT OF MULTISTATE TAX COMMISSION

I. INTRODUCTION

The Multistate Tax Commission is an organization of state governments that 

works with taxpayers to administer, equitably and efficiently, tax laws that apply 

to multistate and multinational enterprises. Created by the Multistate Tax Compact, the Commission is charged by this law with:

• Facilitating the proper determination of State and local tax liability of 

multistate taxpayers, including the equitable apportionment of tax bases and 

settlement of apportionment disputes;

• Promoting uniformity or compatibility in significant components of tax systems;

• Facilitating taxpayer convenience and compliance in the filing of tax returns 

and in other phases of tax administration;

• Avoiding duplicative taxation.

Among the tasks delegated to the Commission is the responsibility to recommend 

uniform nexus standards for the jurisdiction of states to tax multistate companies. 

Further, the Compact incorporates the Uniform Division of Income for Tax Purposes 

which provides specific guidance for how income should be divided among the states. 

In particular, it establishes a policy standard that the income that is reported to 

a state should ‘‘fairly represent’’ the business activity in that state. This policy 

standard is an important benchmark used here to evaluate H.R. 3220. 

The Commission was created in 1967 as an effort by states to protect their tax 

authority in the face of previous proposals to transfer the writing of key features 

of state tax laws from the state legislatures to Congress. For that reason, the Commission has been a voice for preserving the authority of states to determine their 

own tax policy within the limits of the U.S. Constitution. 

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Forty-five States (including the District of Columbia) participate in the Commission, as Compact Members (21), Sovereignty Members (3), Associate Members (18), 

and Project Members (3). 

The Commission is pleased to provide its views on HR 3220, the Business Activity 

Tax Simplification Act.

II. HR 3220 UNRAVELS THE CORE PRINCIPLES OF FEDERALISM

HR 3220 would have a profound impact on the principles of federalism and the 

delicate balance in the federal/state relationship. For over 225 years, Congress has 

recognized the sovereign authority of states to raise revenue. HR 3220 would destroy this core principle and supplant the authority and judgment of state and local 

elected officials with the judgment of Congress. HR 3220 would result in shifting 

the entire burden of funding state and local government onto individual state residents and local businesses that, because of their nature, are unable to take advantage of the myriad of tax planning opportunities established in the legislation. Both 

local and out-of-state businesses impose social costs on state and local infrastructure 

and it is entirely reasonable for state legislatures to require all businesses to assume a fair share of the cost of supporting those services. As stated earlier, all 

states currently share this belief and any action by Congress to summarily invalidate the laws of these states would do great damage to our federal system of government. 

III. THE CURRENT DOING BUSINESS STANDARD VS. PROPOSED PHYSICAL

PRESENCE: SALES AND PROFITS DO MATTER

Corporate income taxes and other business activity taxes have been based from 

their beginning on the twin concepts of taxing income based on the taxpayer’s residence and on where income is earned-its source. Source taxation taxes economic activity that occurs within a state regardless of how that activity is conducted. State 

corporate income taxes are imposed generally either on the ‘‘privilege of conducting 

business’’ in the state or on ‘‘income earned’’ within the state. The Supreme Court 

has made very clear that sales into a state are one of the prime factors for determining that income is earned in that state. Courts have affirmed the application of 

these taxes to those who are participating in a state’s economy whether through 

physical presence or the use of intangibles such as ownership of stock, trademarks, 

patents, and the like, or by selling a product into a state even in the absence of 

any property (tangible or intangible) or people in the state. 

By advocating that companies should be taxed only where they have a physical 

presence, proponents of this concept suggest that sales are not an integral part of 

income-producing activities. It is conceptually and factually wrong to suggest that 

companies can derive income (and thus, profits) without making sales. Without a 

market or customers, no sales can occur, no income is generated and no profits are 

made. 

With respect to multistate companies, states, with the full support and encouragement of the U.S. Supreme Court, have developed over the last eight decades a functional, fair, and equitable system of attributing income among the states in which 

such companies do business. That system consists of apportioning income-sharing 

the tax base-through formulas based on real economic activities engaged in by the 

company: property, payroll and sales. The Supreme Court has been very protective 

to insure that states do not discriminate against multistate businesses and has also 

made sure that state taxes are fairly apportioned. 

One important goal of the system of income taxation established by the states is 

to ensure equal treatment between out-of-state companies doing business in a state 

and local businesses. Ideally, if an out-of-state company and a local business both 

earn $100,000 of profits from within a state, that amount of income should be taxed 

equally by the state. This goal of equity is especially important when the two businesses compete directly with each other for the same customers. Unfortunately, H.R. 

3220 would result in a large number of cases where the $100,000 profit earned in 

a state by the out of state company would become effectively exempt from taxation, 

while the tax burden would continue to fall on the local business. 

H.R. 3220 would disrupt the proper functioning of this long standing state income 

tax system by allowing companies to artificially shift income away from where a 

company is earning the income to tax haven locations. H.R. 3220 establishes a system of ‘‘headquarters only’’ taxation that is directly counter to the system of sharing 

the tax base among the states where real economic activity is occurring. A ‘‘headquarters only’’ system is a colonial concept of taxation that allows companies to earn 

income and benefit from the services of other jurisdictions, but does not ask them 

to make a fair payment for the use of those public services. 

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2 Charles E. McLure and Walter Hellerstein, ‘‘Congressional Intervention in State Taxation: 

A Normative Analysis of Three Proposals, State Tax Notes, March 1, 2004.

H.R. 3220 purports merely to simplify tax rules by establishing a bright line 

nexus standard. This characterization is wrong on many counts. The legislation does 

not establish a bright line of physical presence but contains many exceptions where 

even taxpayers that have clear and substantial physical presence would be protected 

by the legislation from paying tax on the income they earn in a state. Moreover, 

physical presence is inevitably an unworkable standard as all the litigation that has 

followed from the Quill Corp. v. North Dakota decision has shown. Fundamentally, 

even remote businesses find they need to have contacts in a state to service their 

customers or to protect their interests. Businesses use sales representatives in 

states to increase sales. They hire attorneys to sue customers who have not paid. 

They send in employees or agents to perform installation or warranty work. The 

supposed ‘‘abuse’’ cited by the Smithfield Farms witness at the hearing was really 

an indictment of P.L. 86–272, not of the New Jersey tax agency. The company clearly had a physical presence in New Jersey when it was stopped for tax purposes. The 

company argued that its activities were limited to those protected by P.L. 86–272, 

but that could not be determined except after the fact. The dispute in that instant 

was a precursor to expanded disputes that would occur under H.R. 3220, where a 

company would for all outward appearances have a physical presence, but would 

claim that it was exempt under the numerous provisions purportedly defining physical presence. In other words, a bright line physical presence would not necessarily 

be a physical presence under the bill. How is a tax agency supposed to determine 

that a physical presence exists? Physical presence can also be hidden and manipulated by less responsible taxpayers in ways that invite abuse. It is not easy for state 

tax agencies to discover physical presence. Thus, in practice, a physical presence 

standard leads not to equitable certainty in the application of the law, but to uneven 

and uncertain tax results: some companies will be discovered and too many others 

will be hidden. 

It is disingenuous to pretend that market states provide nothing to businesses 

that make sales there. An educated, financially prosperous, secure market is essential for a business to prosper. Recent studies have shown that spending for higher 

quality schooling adds to the growth rate of Gross Domestic Product (GDP). State 

and local taxes pay for more than 90 percent of the costs of the education of its citizens. Clearly, this spending provides a direct benefit to companies making sales into 

a state, because higher incomes generated by educational investments yield higher 

sales and profits for those companies. Furthermore, states and local governments 

provide court systems that give remote sellers confidence to sell to consumers in 

other states knowing they can get recourse in courts in the customers’ states and 

give customers the confidence to buy from remote sellers because the customers 

know they can get recourse in their own courts against the remote sellers. Finally, 

state and local governments provide roads and police and fire protection that ensure 

that the goods purchased from remote sellers will arrive safely. 

The argument that companies selling into a state without a physical presence do 

not receive the benefits of public services from the market state is simply wrong. 

In analyzing the ‘‘no benefits without a physical presence argument,’’ noted tax experts Walter Hellerstein and Charles McLure have stated:

This line of reasoning is indefensible, whether the benefits corporations receive are defined broadly, to mean the ability to earn income, or defined 

more narrowly to mean specific benefits of public spending, one of which 

is the intangible but important ability to enforce contracts, without which 

commerce would be impossible.2

H.R. 3220 disrupts source taxation by preempting states from taxing companies 

that do business in or earn income from within a state, regardless of whether or 

not they have physical presence. However, even a company with major physical 

presence in a state can still shift income away from that state. Under HR 3220, a 

company can create a subsidiary to hold intangibles such as its trademarks that are 

then licensed to the in-state stores. A company can have a significant number of 

employees in a state earning income and assign those employees to an out-of-state 

subsidiary to avoid taxation. A company could even have a building located in a 

state, but benefit from tax-planning opportunities in the legislation to avoid state 

taxes. These are just a few examples of physical presence that would be shielded 

from taxation under HR 3220 that would allow most, if not all, businesses to escape 

taxation. 

HR 3220 would overturn well-developed law in many states which recognizes that 

a business that utilizes new technologies to exploit a state’s market has no less 

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3 In plain terms, ‘‘tax sheltering’’ for state tax purposes means here that income is not being 

reported in proportion to the business activity in the state that gave rise to the income. Instead, 

the income is being shifted to other locations. Tax sheltering may or may not be technically legal 

in various instances, but all tax sheltering falls short of the policy standard of the Uniform Division for Tax Purposes Act that income should be reported to states so that it ‘‘fairly represents’’

where the business activity giving rise to that income occurs. Tax sheltering is to be distinguished from legitimate tax planning which involves changing real business activity-the location 

of jobs, facilities or sales-among states to take advantage of lower tax rates. 4 Congressional Research Service,’’State Corporate Income Taxes: A Description and Analysis’’, March 23, 2004, p. 14.

presence in the state than a local business. Indeed, if presence is measured by sales 

an out-of-state company may well have a greater presence in a state’s economy than 

a large number of small, local businesses including those with which it directly competes. The legislation would preempt state jurisdiction to tax based on the use of 

intangible property in a state or sales made into a state. Both out-of-state and local 

businesses benefit from and impose costs on state services such as education, commercial laws, the state judicial system, and police protections, for which each business should pay its fair share. To exempt remote business from the obligation to 

contribute to the infrastructures and place the entire burden on local businesses 

would allow remote businesses to earn significant income in a state without making 

any contribution toward state services it receives or costs it imposes on a state.

IV. TAX POLICY CONSIDERATIONS

a. HR 3220 promotes tax sheltering that would shift the tax burden unfairly to local businesses. HR 3220 is bad tax policy-it is neither simple, 

efficient or equitable. It would legitimize tax sheltering strategies that 

some multistate businesses use to shift income artificially out of the 

state where it was earned to a state or foreign country that does not tax 

that income.3 Indeed, it will even require public companies that currently disdain tax sheltering to shift income in this manner because of 

the fiduciary duty of the company’s officers to shareholders to reduce the 

company’s tax liability. The result will be that multistate companies 

would secure a tax reduction to the disadvantage of purely local businesses. The Congressional Research Service recognized this failing of HR 

3220 in its recent analysis stating: ‘‘The new regulations as proposed in 

H.R. 3220 could exacerbate underlying inefficiencies because the threshold for business-the 21-day rule, higher than currently exists in most 

states-would increase opportunities for tax planning leading to more ‘‘nowhere income’’. In addition, expanding the number of transactions that 

are covered by P.L. 86–272 also expands the opportunities for tax planning and thus tax avoidance and possible evasion.’’4

b. HR 3220 would have the effect of stifling economic development. HR 

3220 creates a number of winners but also many losers in the business 

world. Some corporations could escape tax liability in every state where 

it does business except in the state of the corporation’s domicile. The result is that more of the tax burden is shifted onto small businesses with 

few resources and local businesses which will almost certainly reduce-or 

even eliminate-their ability to compete in the marketplace. Most importantly, HR 3220 could freeze economic development in place as more and 

more businesses seek to minimize their physical presence in a taxing jurisdiction. If a physical presence standard were established, companies 

would have a disincentive to move jobs and investments into states 

where they have customers. Under a physical presence regime, a company making investments in a state into which they market would suddenly face a new business tax liability. Under the existing ‘‘doing business’’ standard, the company should already be paying income taxes to 

that state. A physical presence standard would have the ironic and highly negative economic effect of inhibiting the free flow of investment 

across state boundaries.

c. HR 3220 adds complexity to state tax laws and insures years of litigation. Supporters of HR 3220 claim the legislation’s physical presence requirement establishes a ‘‘bright line’’ for determining whether a business 

does or does not have nexus with a state. Certain provisions in the proposed legislation belie this assertion-they are neither a physical presence 

test nor a bright line test. Rather, HR 3220 contains a myriad of proviVerDate 0ct 09 2002 12:18 Jul 07, 2004 Jkt 000000 PO 00000 Frm 00130 Fmt 6601 Sfmt 6621 G:\WORK\COMM\051304\93657.000 HJUD2 PsN: 93657
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sions that would allow businesses to establish a physical presence in a 

state and yet escape business activity tax liability altogether. 

Examples of the inequities created by the legislation abound. The physical presence exception granted to businesses engaged in gathering news and event coverage 

is illustrative. This provision would allow an out-of-state news organization to locate 

substantial amounts of real and tangible property and employees in a state yet escape business activity tax liability. This is unfair to in-state taxpayers and also 

other out-of-state taxpayers who would remain subject to a state’s business activity 

tax solely as the result of engaging in a type of business which would not be protected by HR 3220. 

H.R. 3220’s requirement that a business be physically present in a state in order 

to be subject to business activity taxes allows companies to shift income earned in 

a jurisdiction where they are physically present to a jurisdiction that imposes no 

business activity tax. A company could set up a subsidiary holding company in a 

no-tax state, and transfer ownership of its intangible assets-trademarks, patents 

and the like-to its subsidiary. The subsidiary then licenses the use of such intangibles back to the parent, for which it receives royalties from the parent company. The 

parent continues to do business in states where it has both a physical presence and 

sales, but the income earned is shifted out of the state in the form of royalties to 

the subsidiary holding company. 

The interplay between sections of the legislation excepting certain activities in a 

state from the physical presence rule and those excepting certain kinds of tangible 

property present in a state is also unfair to businesses that do not participate in 

such activities, or that own property for different purposes than that allowed by the 

exception. 

For example, the exception to the physical presence rule allowing the presence of 

employees in a state who meet with government officials for purposes other than 

selling goods or services permits that out-of-state company to own substantial property as long as that property is used to meet with government officials. A lobbying 

concern could own retreat facilities, conference facilities or even a condominium for 

use by the employees when they visit a state to lobby. 

The nexus exception pertaining to the presence of tangible property owned by a 

nonresident company located in a state for purposes of being manufactured, assembled and the like is also unfair to other out-of-state businesses that own similar 

property that is present in a state for different reasons. A nonresident company 

could own millions of dollars of property in the form of hazardous materials, machinery components, etc. in a state, which imposes a significant cost to the state in 

the form of services the state provides, such as police and fire protection. Yet, under 

this provision, that company escapes paying its fair share of a portion of the service 

the state renders. 

HR 3220 is bad tax policy because it violates a major canon of good tax policy 

articulated by Adam Smith more than 225 years ago-tax neutrality-taxes should 

interfere as little as possible with business decisions. H.R. 3220 violates this important principle by influencing the way a business organizes itself and influencing a 

firm’s choice of location. H.R. 3220 subsidizes the activities of out-of-state businesses 

and shifts a greater burden of taxation onto local businesses and individual taxpayers.

V. HR 3220 WOULD OVERRULE TAX LAWS IN VIRTUALLY EVERY STATE

BASED ON ECONOMIC ACTIVITY

HR 3220 would overrule state and local laws currently in effect in virtually every 

state. HR 3220 applies not only to the corporate income tax, but to other business 

activity taxes such as public utility gross receipts taxes and gross receipts taxes 

such as the Washington State Business and Occupations Tax. With a very few exceptions, most states and localities impose at least one business activity tax as a 

result of economic activity irrespective of whether the company has a physical presence. For example, Maryland imposes its corporate income tax to the full extent allowed by the U.S. Constitution. Nexus exists in New Mexico when a corporation 

transacts business in or into New Mexico or has a corporate franchise in the state. 

In South Carolina, every C corporation doing business in the state is subject to the 

corporate income tax. ‘‘Doing business’’ is defined as the operation of any business 

enterprise or activity in South Carolina for economic gain. Maryland, South Carolina, and New Mexico have successfully defended their economic presence nexus 

standard against Commerce Clause challenges in their state court systems; the 

United States Supreme Court has denied review of the Maryland and South Carolina cases. HR 3220 would statutorily overrule both the state tax statutes in these 

128

states and the judicial decisions that have sustained the statutes against constitutional challenge. Congress should respect the considered judgment of state legislatures and courts and not impose such an ill-advised jurisdictional requirement on 

the states.

VI. POSSIBLE SOLUTIONS

In context, HR 3220 is an overreaching proposal that seeks to resolve an issue 

absent consideration of fact, analysis, or current law. While businesses have provided several limited examples of controversy with state revenue departments, revenue commissioners have reported few current instances of taxpayer complaints relating to assessment of business activity taxes. Regardless of the perceived extent 

of the problem, finding a solution to the problem-if one is needed-is a matter best 

left to states and businesses themselves. 

There is ample recent history of states and businesses working together to find 

solutions to tax and non-tax issues. In 2001, states, local governments, and the telecommunications industry successfully completed negotiations to formulate sourcing 

rules for mobile telecommunications services. These rules have now been adopted 

by more than 30 states and ratified by Congress. Similarly, states, local governments, and businesses are in the midst of a multi-year cooperative effort to modernize, streamline, and simplify state and local sales tax laws as a part of the 

Streamlined Sales Tax Project. Once completed, this effort will result in administrative cost savings to both sellers and states and provide a mechanism to insure a 

level playing field among all sellers in the marketplace. Similarly, rulemaking-on 

tax and non-tax issues—undertaken by states involves substantial input and consultation with the business community. 

The sourcing and sales tax projects are examples of specialized, highly technical 

areas of state tax law that challenged states and businesses in negotiating solutions 

that resulted in fairness and equity to all parties. Any attempt to revise current 

state business activity tax laws commands the same consideration. As business operations evolve and recognizing the needs of both states and the business community for continual refinement in the business activity tax area, the Commission has 

already developed a proposal for consideration. In 2002, the Commission adopted 

Policy Statement 02-02, which sets forth the Commission’s views on the economic 

presence standard for imposition of business activity taxes. Policy Statement 02-02 

also includes the Commission’s Factor Presence Nexus Standard for Business Activity Taxes, which bases a company’s liability for business activity taxes on a threshold amount of a company’s property, payroll, or sales in a state. The Factor Presence 

Standard is a fair, balanced approach to imposition of business activity taxes that 

provides equity between in-state and out-of-state businesses while eliminating instances of double taxation or instances where businesses may be assessed tax for 

minor amounts of presence in a state. This standard would also make it clear, readily apparent and certain to both companies and tax agencies when a company would 

have nexus with a state-thus producing greater equity and uniformity in the actual 

application of the tax law to different businesses. In addition, the Commission has 

offered to initiate discussions between states and businesses, the goal of which 

would be to find common ground on simple, clear, uniform nexus standard for business activity taxes. Thus far, the business community has been reluctant to engage 

in these discussions. 

Ultimately, a cooperative effort by both states and businesses-one that includes 

a thorough analysis of current business activity tax nexus statutes as well as controversies that have arisen between businesses and states-is the best method for 

maintaining viable state tax systems. 

We hope this information is helpful to the Subcommittee and its staff during its 

ongoing consideration of HR 3220. The Commission would welcome the opportunity 

to answer any questions that Subcommittee Members and staff may have.

PREPARED STATEMENT OF MARTHA E. STARK, COMMISSIONER, NEW YORK CITY

DEPARTMENT OF FINANCE

Mr. Chairman and members of the Committee, my name is Martha Stark and I 

am the Commissioner of Finance for the City of New York. On behalf of Mayor Michael R. Bloomberg, I want to express my strong opposition to H.R. 3220, the Business Activity Tax Simplification Act of 2003. This bill would cause New York City 

to lose as much as $100 million a year in business tax revenue, undermining the 

129

fragile economic recovery that New Yorkers, with Washington’s help, have worked 

so hard to achieve. 

The keys to New York’s thriving business community are safe neighborhoods, 

well-maintained infrastructure, good schools and other essential services. By adopting a new, restrictive definition of what activities constitute nexus, H.R. 3220 would 

effectively limit the tax base of state and local governments to resident individuals 

and to businesses with a high level of physical presence in the jurisdiction beyond 

the level of contacts required by existing constitutional principles. If H.R. 3220 becomes law, the burden for providing those services through tax revenue would become greater not just for local corporations and mom-and-pop stores, but ultimately 

for every taxpayer in New York. That, in turn, would encourage those taxpayers either to leave the jurisdiction or resort to increasingly sophisticated tax avoidance 

schemes. States and the federal government would then have to devote increasing 

amounts of resources to fighting those schemes. Moreover, by protecting out-of-state 

businesses from taxation in many jurisdictions, HR 3220 would lead to a substantial 

increase in the amount of ‘‘nowhere’’ income earned by businesses - i.e., income not 

taxable by any jurisdiction. 

H.R. 3220 is based partly on the premise that taxing authorities are attempting 

to impose taxes on businesses that have a substantial nexus with the jurisdiction 

as required by the Constitution, but no physical contacts with the jurisdiction. In 

fact, this is not widespread and is certainly not the case in New York. Even where 

a substantial nexus is found to exist, constitutional principles require that the 

amount of an entity’s income allocated to a taxing jurisdiction be proportionate to 

its activity there, resulting in a small tax liability for firms with only a limited presence in a jurisdiction. New York has actually adopted nexus safe-harbor rules in recent years permitting out-of-state businesses to engage in certain activity in the 

state, such as attending trade shows or having advertising appear on a server or 

website belonging to a third party, without incurring tax liabilities. 

Taxing jurisdictions are under ever-increasing pressure to attract or retain businesses. One way to do that is to lower the tax burden on traditional ‘‘bricks and 

mortar’’ businesses by giving greater weight in business income tax apportionment 

formulas to the location of a business’ markets. To the extent those bricks and mortar businesses have markets outside the jurisdiction, their taxes would be lowered. 

Proponents of so-called market-state sourcing frequently point to the potential higher revenues generated for states where markets are located as offsetting the lost 

revenue from brick and mortar businesses. 

But this offset is only possible if jurisdictions are allowed to broaden the tax base 

by taxing out-of-state businesses that derive income from the jurisdiction’s markets. 

Legislation such as HR 3220 would move in the opposite direction by making it even 

harder to tax out-of-state businesses that come into a jurisdiction and derive profits 

from customers there. 

H.R. 3220 is also based on the premise that it simplifies taxation by providing 

a bright line test. Although multi-state businesses have to contend with the administrative burden of compliance in multiple taxing jurisdictions whose laws are not 

uniform, H.R. 3220 does not address those concerns by fostering consistency among 

state and local taxing schemes. It simply enables businesses to conduct a multi-state 

business tax-free in many jurisdictions. New York City and other jurisdictions have 

treated businesses without a physical presence very favorably. H.R. 3220 would disrupt the balance that New York City and others have achieved, tipping the scales 

in favor of businesses that reap substantial financial benefit from New Yorkers but 

do not physically locate within the City. 

Combined reporting - which treats a group of affiliated companies engaged in related economic activities as one taxpayer—is crucial to the ability of taxing jurisdictions to reflect correctly the income earned within their borders by affiliated companies with substantial inter-corporate transactions. Among other things, under H.R. 

3220 the combination rules of New York and other combination states could become 

inoperative with regard to non-nexus corporations. 

Equally troubling, H.R. 3220 would allow businesses to engage in significant economic activities within a jurisdiction without triggering nexus. Among these activities are:

• Conducting business through an agent in a taxing jurisdiction as long as the 

agent acts for at least two principals. The principals and agent can be related 

and any pricing between them may not be at arm’s length. Taxing jurisdictions would be limited to forcing an adjustment to the inter-company prices 

among the parties;

130

• The presence in a taxing jurisdiction of the inventory of an out-of-state seller 

of tangible personal property being manufactured by a third-party contractor; 

and

Any other profit-making activity conducted for 21 days or less (other than performances or sporting events before audiences of more than 100) regardless of the 

amount of profit either in absolute terms or in relation to other income of the entity. 

H.R. 3220 would reverse the progress that has been made to enhance interstate tax 

fairness through such recent efforts as the Mobile Telecommunications Sourcing Act 

of 2000 (MTSA). This law was created to provide for the equitable interstate tax 

treatment of wireless telecommunications services in an era of deregulation. The 

MTSA recognized the diminishing importance of physical location in the global marketplace. If enacted, H.R. 3220 would prevent New York City and other localities 

from properly implementing the MTSA. 

National projects, such as the Streamlined Sales Tax Project and the MTSA, are 

the product of government and private sector cooperation. As such, they more effectively address issues of inconsistent taxation of multi-state businesses, while recognizing that the tax burden should be fairly borne by both the bricks and mortar 

businesses and out-of-state businesses serving the same customer base. In contrast, 

no state and local taxing authorities were consulted in the development or drafting 

of H.R. 3220. 

H.R. 3220 would have a damaging impact on New York City and other jurisdictions. At a time when the nature of commerce continues to evolve, taxing jurisdictions need the flexibility to modify their laws and rules, as constitutionally allowed, 

so that they can properly and fairly capture the activity that occurs. Even without 

this bill, taxing jurisdictions are struggling to keep up with economic developments 

in order to maintain vital services. 

For these reasons, the restrictions imposed by H.R. 3220 are not needed. Moreover, the bill would weaken the ability of taxing jurisdictions to adjust to the growing national trends of Internet and interstate commerce. With more firms conducting business online or in multiple states, we need laws to allow taxing jurisdictions to catch up to business trends, not fall further behind. H.R. 3220 would be 

a huge step in the wrong direction. I urge this committee to reject H.R. 3220. 

Thank you.

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