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86–842 PDF 2014

BUSINESS ACTIVITY TAX SIMPLIFICATION ACT 

OF 2013 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

REGULATORY REFORM, 

COMMERCIAL AND ANTITRUST LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

ON

H.R. 2992 

FEBRUARY 26, 2014 

Serial No. 113–70 

Printed for the use of the Committee on the Judiciary 

( 

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

COMMITTEE ON THE JUDICIARY 

BOB GOODLATTE, Virginia, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

STEVE CHABOT, Ohio 

SPENCER BACHUS, Alabama 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

RAU ́ L LABRADOR, Idaho 

BLAKE FARENTHOLD, Texas 

GEORGE HOLDING, North Carolina 

DOUG COLLINS, Georgia 

RON DeSANTIS, Florida 

JASON T. SMITH, Missouri 

[Vacant] 

JOHN CONYERS, JR., Michigan 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

JUDY CHU, California 

TED DEUTCH, Florida 

LUIS V. GUTIERREZ, Illinois 

KAREN BASS, California 

CEDRIC RICHMOND, Louisiana 

SUZAN DelBENE, Washington 

JOE GARCIA, Florida 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

SHELLEY HUSBAND, Chief of Staff & General Counsel 

PERRY APELBAUM, 

SUBCOMMITTEE ON REGULATORY REFORM, COMMERCIAL AND ANTITRUST LAW

SPENCER BACHUS, Alabama, Chairman 

BLAKE FARENTHOLD, Texas, Vice-Chairman 

DARRELL E. ISSA, California 

TOM MARINO, Pennsylvania 

GEORGE HOLDING, North Carolina 

DOUG COLLINS, Georgia 

JASON T. SMITH, Missouri 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

SUZAN DelBENE, Washington 

JOE GARCIA, Florida 

HAKEEM JEFFRIES, New York 

DAVID N. CICILLINE, Rhode Island 

DANIEL FLORES, Chief Counsel 

JAMES PARK, Minority Counsel 
(III) 

C O N T E N T S 

FEBRUARY 26, 2014 

Page 

H.R. 2992, the ‘‘Business Activity Tax Simplification Act of 2013’’ ..................... 3 

OPENING STATEMENTS 

The Honorable Spencer Bachus, a Representative in Congress from the State 

of Alabama, and Chairman, Subcommittee on Regulatory Reform, Commercial and Antitrust Law ........................................................................................ 1 

The Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress 

from the State of Tennessee, and Ranking Member, Subcommittee on Regulatory Reform, Commercial and Antitrust Law ................................................. 13 

WITNESSES 

Pete Vegas, Founder and President, Sage V Foods, Los Angeles, CA 

Oral Testimony ..................................................................................................... 62 

Prepared Statement ............................................................................................. 66 

Tony Simmons, President and Chief Executive Officer, McIlhenny Company, 

Avery Island, LA 

Oral Testimony ..................................................................................................... 71 

Prepared Statement ............................................................................................. 73 

Joseph Henchman, Vice President of Legal & State Projects, Tax Foundation, 

Washington, DC 

Oral Testimony ..................................................................................................... 81 

Prepared Statement ............................................................................................. 83 

David Quam, Deputy Director, National Governors Association, Washington, 

DC 

Oral Testimony ..................................................................................................... 96 

Prepared Statement ............................................................................................. 98 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable Henry C. ‘‘Hank’’ Johnson, Jr., a Representative in Congress from the State of Georgia, and Ranking Member, 

Subcommittee on Regulatory Reform, Commercial and Antitrust Law .......... 14 

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 

Congress from the State of Virginia, and Chairman, Committee on the 

Judiciary ............................................................................................................... 18 

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

in Congress from the State of Michigan, and Ranking Member, Committee 

on the Judiciary ................................................................................................... 22 

Material submitted by the Honorable Spencer Bachus, a Representative in 

Congress from the State of Alabama, and Chairman, Subcommittee on 

Regulatory Reform, Commercial and Antitrust Law ........................................ 29 

Material submitted by the Honorable Suzan DelBene, a Representative in 

Congress from the State of Washington, and Member, Subcommittee on 

Regulatory Reform, Commercial and Antitrust Law ........................................ 109 
Page

IV 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the National Marine Manufacturers Association ........... 122 

Prepared Statement of Grady-White-Boats ........................................................... 124 

Prepared Statement of the American Bankers Association ................................. 126 

Prepared Statement of the American Trucking Associations .............................. 130 

Letter from the Council On State Taxation (COST) ............................................. 137 

Letter from the Motion Picture Association of America, Inc. .............................. 141 

Material submitted by the Center on Budget and Policy Priorities .................... 144 

Prepared Statement of the Financial Services Roundtable (FSR) ....................... 175 

Prepared Statement of the Ad Hoc Fair Hotel Tax Collection Coalition ............ 179 

Prepared Statement of Mark Louchheim, President, Bobrick Washroom 

Equipment, Inc., on behalf of the National Association of Manufacturers ..... 180 

Prepared Statement of the Softward Finance & Tax Executives Council 

(SoFTEC) .............................................................................................................. 185 

Letter from Unions opposed to H.R. 2992, the ‘‘Business Activity Tax Simplification Act of 2013’’ ......................................................................................... 189 
(1) 

BUSINESS ACTIVITY TAX SIMPLIFICATION 

ACT OF 2013 

WEDNESDAY, FEBRUARY 26, 2014 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON REGULATORY REFORM, 

COMMERCIAL AND ANTITRUST LAW

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 3:01 p.m., in room 

2141, Rayburn Office Building, the Honorable Spencer Bachus 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Bachus, Goodlatte, Farenthold, Marino, 

Johnson, and DelBene. 

Staff present: (Majority) Anthony Grossi, Counsel; Rachel 

Wolbers, Legislative Assistant for Rep. Farenthold; Philip 

Schwartzfager, Legislative Director for Rep. Bachus; Ashley Lewis, 

Clerk; (Minority) Perry Apelbaum, Minority Staff Director & Chief 

Counsel; Norberto Salinas, Counsel; Slade Bond, Legislative Counsel for Rep. Johnson; and Rosalind Jackson, Professional Staff 

Member. 

Mr. BACHUS. The Subcommittee on Regulatory Reform, Commercial and Antitrust Law hearing will come to order. Without objection, the Chair is authorized to declare recesses of the Committee 

at any time. 

I do want to tell the panel that events on the House floor have 

been changing this week. We were going to consider this bill or 

that bill out of this Committee on the floor, and they keep moving 

that around, and so, we usually do not initially set a hearing for 

4 p.m. We usually have them earlier, but we try to do that. And 

now we find we are going to be on the floor a little later on, so this 

hearing may be fairly compact. But let me give an opening statement. 

Today we will hear testimony regarding the Business Activity 

Tax Simplification Act of 2013, or BATSA. The purpose of this bill, 

which I have co-sponsored, is to establish a clear, uniform, and predictable framework for states and businesses with regard to the application of business activity taxes. States have broad authority to 

assess taxes on individuals, property, and businesses that originate 

from the basic principles of federalism. 

The Constitution has always conferred upon Congress the responsibility to protect against undue burdens to interstate com-
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merce to allow our free market economy to function across state 

borders. There is a thoughtful balance that must be struck between 

these two competing interests. And when acting in interstate commerce matters, Congress must be sure to exercise its power with 

great care and precision. 

The issue before us deals with state taxation policies that affect 

out-of-state businesses. The Judiciary Committee has collected 

much testimony and will receive more testimony today that documents the frustrations of small businesses with state taxing regimes that have been increasingly aggressive in their efforts to collect revenue from out-of-state businesses. 

Small businesses can be easy targets because they have little or 

no direct representation in the state and do not have the resources 

to fight. And I think two of our witnesses are going to be fantastic 

examples of this. In addition, court decisions have created confusing and ambiguous guidelines for what actions taken by an outof-state business will be sufficient for a state to gain authority to 

impose business taxes. 

As a result of unclear judicial precedent, businesses are often 

forced to spend scarce resources on lawyers and accountants to either calculate their tax liability or defend against improper tax 

bills, and often the only option is just simply to write a check. It 

is not the right thing to do, but it is certainly the economically 

right thing to do, and that should not be the case. 

BATSA will bring needed consistency and predictability to what 

we know as nexus standard issues where an out-of-state business 

is subject to business activity taxes. It will enable small businesses 

in particular to more accurately determine their tax liability without impeding the traditional ability of states to assess taxes on enterprises that truly have an active presence within their borders. 

This legislation is a balanced approach that respects states’ prerogatives and preserves the seamless interconnected national economy 

that we all benefit from. 

I now recognize the Ranking Member, Mr. Hank Johnson of 

Georgia, for his opening statement. 

[The bill, H.R. 2992, follows:] 
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Mr. JOHNSON. Thank you, Mr. Chairman, for holding this hearing today. I find it fortuitous that as I assume the Ranking Member position, the Subcommittee turns to addressing state taxation 

issues. I hope this is the beginning of a series of discussions focusing on state taxation. 

Over the past several Congresses, I have worked closely with my 

colleague, Representative Howard Coble, on a common sense solution to simplify and reduce taxes for so many Americans. This Congress we introduced H.R. 1129, the ‘‘Mobile Work Force State Income Tax Simplification Act of 2013.’’ H.R. 1129 is identical to legislation passed by the House last Congress. I hope that this bipartisan legislation will be considered at the appropriate time, and I 

look forward to working with the Chair on it. 

I also look forward to this Committee addressing the remote 

sales tax issue next week. I have long supported leveling the playing field when it comes to sales tax collections. That is why I support H.R. 684, the ‘‘Marketplace Fairness Act.’’ Although I would 

prefer a legislative hearing on that bill, I welcome any movement 

toward addressing the remote sales tax issue. 

There are other issues and related legislative proposals this Subcommittee can discuss. As the former Chair of the Subcommittee 

on Courts and Competition Policy, I look forward to future hearings 

on some of those issues, especially on antitrust issues, another area 

right for this Subcommittee’s attention. 

But today, we focus on H.R. 2992, the ‘‘Business Activity Tax 

Simplification Act of 2013.’’ This legislation would establish a physical presence standard, which must be met before states can impose 

a business activity tax. Proponents of the legislation contend that 

businesses need more certainty in determining what activities are 

taxable, and that a uniform standard would provide that. Opponents of the bill argue that states should determine what activities 

are taxed within their borders, and that the physical presence 

standard created in this bill would invite tax evasion. 

Although I have supported similar legislation in the past, I am 

taking a step back this time to look more closely at the legislation 

and to hear today’s testimony. I hesitate because of the impact this 

legislation may have on state and local governments. Last Congress, the Congressional Budget Office estimated that identical legislation would lead to about $2 billion in lost annual revenues with 

the potential for additional losses in subsequent years. 

When we consider legislation which will have that large of an impact, we need to determine if we need to simply revise the language. We should also study whether there are alternative methods 

which accomplish the same goal of providing more certainty for 

businesses while minimizing any impact on or state and local governments. 

I look forward to hearing from the witnesses, and again I thank 

the Chairman for holding today’s hearing. Thank you, and I yield 

back. 

Mr. BACHUS. Thank you. Without objection, all Members’ opening 

statements will be made a part of the record. 
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[The prepared statement of Mr. Johnson follows:] 
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[The prepared statement of Mr. Goodlatte follows:] 
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[The prepared statement of Mr. Conyers follows:] 
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Mr. BACHUS. Before we introduce today’s witnesses, without objection, I would like to submit for the record letters and written 

testimony in support of BATSA from the International Franchise 

Association, Pro-Help Systems, Fischer and Wieser Specialty 

Foods, Partnership for New York City, the missing Computing 

Technology Industry Association, and the U.S. Chamber of Commerce. 

[The information referred to follows:] 
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Mr. BACHUS. We have a distinguished panel today, and I would 

like to introduce our witnesses now. Having read the experiences 

of Mr. Vegas and Mr. Simmons and your companies, I think that 

the evidence will be helpful to Mr. Johnson and others as they try 

to decide what to do. 

Mr. Vegas is the founder and president of Sage V Foods, which 

specializes in producing rice-based ingredients for use in processed 

foods, and has developed the most complete line of rice products in 

the industry. Prior to Sage V, Mr. Vegas managed a startup rice 

milling company that was a joint venture between Comet Rice and 

the government of Puerto Rico, and ultimately became vice president of marketing for Comet Rice. 

Mr. Vegas graduated from Louisiana State University with a degree in agribusiness, and received his MBA from Harvard Business 

School. We welcome you. 

Mr. Tony Simmons is president, CEO, director, and interim 

chairman of the board of McIlhenny Company. McIlhenny, okay. 

McIlhenny Company is 146-year-old company whose most famous 

product is TABASCO brand pepper sauce. I think we all know 

about the island and everything. Mr. Simmons is the great, great 

grandson of the creator of TABASCO, Edmund McIlhenny, and is 

the seventh family member to assume McIlhenny Company leadership, which is still family owned and operated. 

Prior to accepting the position with McIlhenny Company, Mr. 

Simmons was president and CEO of Manitowoc Southeastern—yes, 

it is the crane people, right, the cranes—an independent crane distributor located in the southeast. And that company is 

headquartered in Wisconsin or Minnesota? 

Mr. SIMMONS. Manitowoc is in Manitowoc, Wisconsin. 

Mr. BACHUS. Wisconsin, okay. Mr. Simmons also serves on the 

board of America’s Wetland Foundation. Mr. Simmons holds a degree in speech from Loyola University in New Orleans. We welcome you. And what is the name of the island? 

Mr. SIMMONS. Avery Island. 

Mr. BACHUS. Avery Island, that is right. I think every restaurant 

in the south either has tabasco sauce or, what is it, Texas Pete, 

that which is not a tabasco sauce. 

Mr. SIMMONS. Never heard of Texas Pete. [Laughter.] 

Mr. BACHUS. That is a great answer. Mr. Joseph Henchman is 

vice president of legal and state projects at the Tax Foundation, a 

non-profit organization dedicated to educating taxpayers about all 

aspects of tax policy. He joined the Tax Foundation in 2005. Mr. 

Henchman’s analysis of fiscal trends, constitutional issues, and tax 

law developments has been featured in numerous print and electronic media, including the New York Times, the Wall Street Journal, CNN, Fortune magazine, and a number of law review journals. 

Mr. Henchman received his bachelor’s degree in political science 

from the University of California at Berkeley and his JD from 

George Washington University Law School. Welcome to you, Mr. 

Henchman. 

Mr. David Quam is deputy director of Federal relations at the 

National Governors Association. He has an extensive track record 

in development policy solutions and effectively advocating positions 

before Congress and the Administration to the Governors Collective 
62 

Policy Priority. Before joining the National Governors Association, 

he was an associate at Powell, Goldstein, Frazer, and Murphy, 

LLP, director of international affairs and general counsel at the 

International Anti-Counterfeiting Coalition, and majority counsel 

on the Senate Judiciary Committee’s Constitution Subcommittee. 

He received his BA from Duke University and his JD from Vanderbilt University School of Law. 

Each of the witnesses’ written testimonies will be entered into 

the record in its entirety, and I ask each of our witnesses to summarize his or her testimony in 5 minutes or less. And we are going 

to have a light which will turn yellow and then red, but if you need 

to go over by 20 or 30 seconds, that is fine with me, although I 

think the Chairman does not really like that, but I am the Subcommittee Chairman, and I do not mind it. 

So at this point, we will still start with the witnesses. Mr. Vegas, 

we will start with you first, and then we will go down the line. 

TESTIMONY OF PETE VEGAS, FOUNDER AND PRESIDENT, 

SAGE V FOODS, LOS ANGELES, CA 

Mr. VEGAS. Okay. Okay. My name is Pete Vegas. I appreciate the 

opportunity to speak with you today. I will tell you I am a little 

concerned that I could be targeted by these states once my name 

becomes public, so I would hope you help me out if that happens. 

Otherwise, this could be a very—— 

Mr. BACHUS. We could pass this. That would help. 

Mr. VEGAS. That would solve the problem. [Laughter.] 

I hope you have had the chance to read my written testimony or 

will read it. Those are my words. Because I defended myself 

against the State of Washington, I have actually learned quite a bit 

about this, probably more than any businessman should know really. 

Mr. BACHUS. And let me say this, and stop the time. Both your 

testimony and, Mr. Simmons, I mean, those are nightmare situations for not only a small business. I would actually call your business a medium-sized business. Really your experience, you are an 

eyewitness to this. So, you have experienced this, and you look at 

it, and how anyone can look at what you have gone through and 

think that is fair or equitable, you know, it is hard to believe that 

that was what we conceived when we gave states the taxing authority. 

Mr. VEGAS. You know, and 5 minutes is not a lot of time, so I’m 

hoping there are questions and I can spend more time, yes. 

So I started my company from scratch. We basically take rice 

and have learned to make new products from rice, have taught people how to use it. Today we sell rice flour, frozen rice, crisp rice 

like goes in granola bars, instant rice. We are an approved supplier 

in almost every major food company in the United States, so we are 

shipping products, you know, pretty much throughout the country. 

Our sales today are about $100 million. You know, I employ over 

200 people. And so from a tax standpoint—and in the last 7 years 

I have built 3 facilities, two in Arkansas and one in Texas. I live 

in California. From a tax standpoint, you know, I am an LLC. That 

means taxes flow straight through to me, so I pay Federal taxes. 
63 

I pay taxes in California. And then I pay taxes in the states where 

I have facilities and properties, like Arkansas and Texas. 

In 2010, I was basically hit, you know, by the State of Washington. Washington has no income tax, so they charge what they 

call a business and occupation tax, which is essentially a tax on 

sales. It is a tax on gross receipts. And to be clear, you know, what 

I am talking about here are business to business taxes. I am not 

selling to a consumer. I am not talking about sales taxes to a consumer like you would discuss with Amazon or someone like that. 

I mean, to make it very clear, I am selling rice flour in bulk rail 

cars to a company in the State of Washington that takes my flour, 

blends it with other ingredients, sells a mix, you know, a batter 

mix basically, to a french fry company that makes French fries, 

that turns around sells it to a large burger chain that then sells 

to their franchises. So if everyone was charging taxes like the State 

of Washington, my flour would be taxed four times before the consumer paid a sales tax on it, okay? 

As a percentage of my income, the tax that I paid in Washington 

is over 16 percent. That is higher than any state in the country, 

okay? And if you start adding up what I pay in Federal taxes and 

state’s taxes, if I paid everyone what Washington charged me, my 

tax bills would be over 70 percent. And I can tell you, I cannot run 

a company when that much of my money is going outside. 

Because I visited the state one time in 7 years, Washington basically sent me a tax bill for over $180,000. It was for 7 years back 

penalties and taxes. And then once you have established nexus, 

even though you stop the activity—I do not visit anymore—it goes 

another 5 years forward. So this could have easily been or would 

be a $300,000 kind of bill. Quite frankly, I have never seen anything like that. I was shocked. You know, I called other businesses, 

friends, to ask, you know, what did they know about this. It is not 

known by people who have not been hit yet, but it is becoming 

more and more prevalent. I had to hire an attorney to explain it 

to me, you know. 

And I can tell you, a company like mine cannot afford to try to 

understand every oddball state in 50 different states. I mean, I had 

a tax accountant last year that wanted to charge me over $100,000 

to do my taxes, okay? Imagine if I had to deal with 50 states coming at me. It is just impossible. 

Every attorney in the State of Washington literally turned me 

down. They said, Pete, it is a waste of your money to fight these 

people. But, you know, I am bullheaded. I was wronged. I did it 

anyway. I mostly defended myself, okay? I went through three appeal processes and eventually won, you know, but that was a huge 

effort on my part. It took a lot of time away from my business. It 

is not something I could do every time a state comes after me. 

And the kind of stuff that Washington tried to trip me up on, 

which I think is common in other states so that you understand, 

the issues are did I have brokers in the state, had I attended trade 

shows in the state, you know, did I sell on a delivered basis instead 

of an FOB basis, could a customer reject my product at destination, 

had I sent a service technician to, like, repair a rail car or help 

them use the product, did I ship on company-owned trucks, do I 
64 

have any product warehoused in the states. Any of these things 

would have established nexus. 

My actual fights in court were mostly related to my visit, you 

know, how many times did I visit. We determined it was one, you 

know, and then I won that case. The next time I went they focused 

on the fact that I had shipped on company-leased rail cars, which 

meant in their mind I had leased equipment in the state. In both 

cases, you know, I prevailed mostly because in the State of Washington, they have a statute that says to establish nexus, the business activity must be related to or maintaining a market in the 

state, okay? And in both cases I proved it did not, you know, which 

means had I made a sales call, a serious sales call, in that one 

visit, they may have established nexus with that. 

And basically because I defended myself, I learned quite a bit 

about the law itself. And what I have learned is there is really 

nothing to date that prevents states from collecting all of their revenue from outsiders. I mean, if you are a politician and you are 

running a state, it is hard to cut your budget. It is hard to reduce 

expenses. It is hard to raise taxes on your voters. It is very easy 

to take advantage of somebody from the outside because we have 

no recourse. We have no vote. And that is exactly what you are seeing more and more of. I mean, it is the old story of taxation without representation. I mean, it is why our country is here today and 

not part of Great Britain. 

I studied the Constitution and Supreme Court rulings. You 

know, the commerce clause is a pretty simple clause really. It basically gives Congress the power to regulate commerce with foreign 

nations and among the several states and with the Indian tribes. 

It makes it very clear that this is Congress’ job, not the job of the 

Supreme Court. Everyone seems to understand that a big part of 

this is to prevent the kind of problem we have today, which is a 

deterrent to interstate commerce. If this goes on, you know, it is 

going to be a huge problem and it is going to prevent interstate 

commerce. 

The last time the Supreme Court visited this, and I am sure you 

will hear more from people that know more about it, was the Quill 

case. And it actually required a physical presence. The Supreme 

Court has never issued a ruling that allowed nexus without a physical presence. 

In my particular situation, I argued the four-pronged test of the 

Auto Transit v. Brady, which is kind of the old golden rule. It had 

a four-pronged test to establish nexus, and this is what I used in 

the State of Washington. And I basically learned it has pretty 

much been negated. The first rule—and you have to pass all four. 

The first rule is substantial nexus, and that is where most people 

argue. How many times does it take to visit to establish substantial 

nexus? 

The second one is fair relationship. And I basically showed the 

budget in the State of Washington and where they spend their 

money—schools, human services, this sort of stuff—and showed 

that I spent no money whatsoever in the State of Washington, 

okay? But that particular prong has kind of been pushed aside by 

the courts. You cannot win on that anymore. 
65 

I argued fair apportionment, which meant I explained what percentage of my taxes were going to the State of Washington and 

how did that compare to the percent of my sales, the percent of my 

assets, the percent of employees in those various states. Very clear 

that Washington was way out of line. Once again, that has no 

meaning in the law today. Everyone ignores that issue. 

The fourth one is non-discrimination, which means you cannot 

discriminate against interstate commerce. That is a complete waste 

of time to argue that one today. 

So essentially what you have is lower courts, you know, State 

revenue services, lower courts in the states, are ignoring what little 

law was set by the Supreme Court. They are establishing their own 

laws, and it is a snowball effect. Every time a court puts some aggressive, you know, determination out there, it sets a precedent 

that everyone uses, and then they move it another step. And then 

eventually you reach the point where we are today. When one of 

my suppliers learned I was coming, they sent me this document 

from the State of Ohio. There are several states today that all they 

require to establish nexus is that you have sales in their state. 

So what I can tell you is this is a very serious problem for companies like mine, and I would really appreciate your help. You need 

to put an end to this, and it is Congress’ job. 

[The prepared statement of Mr. Vegas follows:] 
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Mr. BACHUS. Thank you. Thank you. And we will come back with 

some questions hopefully. 

Mr. Simmons? 

TESTIMONY OF TONY SIMMONS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, McILHENNY COMPANY, AVERY ISLAND, LA 

Mr. SIMMONS. Good afternoon, and thank you. McIlhenny Company currently has 240 employees, most of whom are located at 

Avery Island, Louisiana. 

TABASCO is sold in over 166 countries and bottled in 22 languages and dialects. We make every bottle of TABASCO at Avery 

Island, and you will find our product in almost, if not every, grocery store in America. In addition, we also sell a large percentage 

of our product to the food service industry where it is used by chefs 

in the kitchen and as a condiment on tables. 

Although our only manufacturing plan is in Louisiana, we currently pay state income and/or franchise tax in 13 additional 

states. We are subject to those taxes because we have employees 

and/or tangible personal property in those states which meets the 

physical presence standard in establishing nexus. Additionally, we 

pay income or other forms of business activity tax in seven additional states, thus a total of 21 states including our home state of 

Louisiana. 

I am here today because state and local taxing authorities are increasingly and often retroactively expanding the reach of their 

business activity taxes using an expansive definition of ‘‘substantial 

nexus.’’ I will give you three examples. My goal is to demonstrate 

why a bright line definition of what activity constitutes nexus is so 

important to companies who do business in multiple states. 

First, last year, we responded to an inquiry from a city in Washington state for pertinent information going back to 2003. Not having employees or inventory physically located there, we were confident that we had no filing obligation. Following their review, the 

city argued that our use of an independent sales broker established 

nexus, and levied a business and occupation tax assessment of just 

over $32,000 in tax, penalty, and interest for the tax years from 

2003 through 2008. This levy was based on our company sales of 

TABASCO products for the entire State of Washington. 

In 2009, the city changed is rules to limit collections to those 

sales that occurred within its borders only. Under these revised 

rules, our sales are too small, and we owe no tax. The new rules, 

however, did not prevent the city from seeking payment for sales 

in the years before the change. As this case remains open today, 

I am not able to expand on it further. But suffice it to say that the 

costs of time, energy, and dollars dedicated to the process far outweigh the potential tax obligation, which is an underlying issue 

that surrounds this topic. 

My second example is when we encountered the single business 

tax nexus standards of Michigan back in 2002. Noting that there 

were no McIlhenny company employees, inventories, or real property in the state, and that sales solicitations were performed by an 

independent sales broker in Michigan, we contested Michigan’s attempt to apply its single business tax to our sales within the state. 

Despite extensive correspondence with the state and our numerous 
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appeals on the merits of our case, an audit by the state resulted 

in a back tax liability in excess of $85,000. Again, the process of 

defending our position and subsequent monitoring and compliance 

adds to the overall administrative burden of complying with everchanging tax interpretations. 

Third and finally, our tax advisors have highlighted a developing 

situation where the State of Maine is declaring that promotion of 

a product within a grocery store by a third party representative located in their state creates nexus for the manufacturer and a filing 

obligation based on an analysis and interpretation the state has 

made of an old sales tax case. 

These are just three examples. The task of monitoring, interpreting, and complying with unclear, unwritten, and constantlychanging state and local nexus interpretations places an undue 

burden on our limited resources, and brings uncertainty to our 

business planning and execution. We believe that adopting adopting the principles set forth in BATSA will allow businesses that do 

business in multiple states to have a clearly defined understanding 

of what constitutes nexus. We understand that modernization of 

the law brought about by BATSA may not provide an overall lower 

tax obligation for our company, but we do believe it will provide for 

more efficient compliance efforts and eliminate the uncertainty and 

excessive administration costs that currently exist. 

[The prepared statement of Mr. Simmons follows:] 
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Mr. BACHUS. Thank you. Thank you. 

Mr. Henchman? 

TESTIMONY OF JOSEPH HENCHMAN, VICE PRESIDENT OF 

LEGAL & STATE PROJECTS, TAX FOUNDATION, WASHINGTON, DC 

Mr. HENCHMAN. Mr. Chairman, Mr. Ranking Member, Mr. 

Chairman, thank you for the opportunity to appear before you 

today on the subject of the scope of state business activity taxation. 

And I am one of those people who carries around the Constitution 

with him. I am a lawyer. And in there is your power to regulate 

interstate commerce. The reason it is in there is because before the 

Constitution, the states, left to their own devices, just about 

wrecked the national economy. Port states put taxes on goods going 

into interior states. Interior states taxed the port states, and everyone tried to exempt their own residents and put all their taxes on 

interstate commerce. That crisis a big reason why they all gathered 

in Philadelphia and gave you the power to limit the ability of states 

to tax entities with no physical presence in the state. 

The physical presence rule for business taxation is not only good 

constitutional law, it is good tax policy. Now, I am not an economist, but I am surrounded by them at my office. And they talk 

about the benefit principle, the idea that people and businesses 

should pay taxes in the places where they benefit from government 

services. For businesses, that is where they have property and employees. States should pay for services by taxing the residents who 

live and work in the state and benefit from those services. 

Congress has acted on this before. In 1959, Congress enacted 

P.L. 86272, and was going to do more, but the states said if Congress would just stay away, they as the states would solve it, and 

the thing would get better. They have not. I wish I could say what 

happened to Mr. Vegas was an isolated example, but in many 

states, it is official policy. I could review lots, but in the interest 

of time I brought five pulled from the excellent Annual Survey of 

Tax Officials done by Bloomberg BNA. And with the Chairman’s 

indulgence, I would like to draw attention to some charts that I 

brought. 

The first chart, which is up already, is the question of how long 

nexus lasts in a state if the business stops the activity. The gray 

states say it is just for the taxes measurement period, so if the tax 

is just for a quarter, the nexus only lasts for a quarter. The green 

states apply nexus for the full year. Washington state adds on a 

little bit more, as Mr. Vegas said, beyond that year. A couple of the 

states, the black ones on this chart, they declined to answer the 

question, which is certainly not helpful. California and Georgia 

said it depends, which is also not helpful, and in Indiana, apparently nexus lasts forever. Next chart. 

This chart is whether you have nexus because you have a 

website and you pay some third party to host the website, and that 

third party has a server in the state. You all have websites. Do you 

know where it is hosted, where the server is? Well, if you are a 

company, 14 states say that is enough for you to have nexus in 

that state, and 18 states declined to answer the question. Next 

chart. 
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This chart is a state will find nexus if you send a catalog into 

the state. No people, no sales in the state, just sending a catalog. 

This is pretty open and shut in the case law, and most states are 

good. Those are the blue states. But seven states, the red ones, say 

that is nexus, and two more say it depends. Next chart. 

This chart involves having a non-solicitation back office employee 

telecommuting from the state. Now, under BATSA and under the 

physical presence rule, there should be a finding of nexus in this 

case, so I am not too worried about the yeses. Those are the reds, 

those are the noes, those are the blues. I am not worried about the 

noes because just because a state can tax, it does not mean they 

have to. 

What I am worried about are the eight states, the black ones on 

there, that declined to answer this pretty basic question. That is 

eight states where taxpayers cannot get the answers from their officials to rely on for their business activity. Next chart. 

This chart shows the states that define nexus if you attend a 

trade show in red. Now, this is attend a trade show. It is not exhibiting or selling stuff. Every state finds nexus if you go and have 

a booth at a trade show and sells stuff. This is merely attending 

a trade show will find you nexus in 10 states. Five more states say 

it depends, and five more decline to answer the question. 

This is all basic stuff. The last time we had this hearing, the 

states talked about physical presence would harm their revenue, 

even though these taxes are a tiny portion of their budgets. And 

they are cutting them anyway for in-state companies through single sales factor and tax incentive deals. They talked about how it 

encouraged tax evasion, even though this bill does not change one 

thing about the ability of states to go after tax evaders. They 

talked about state sovereignty even though stuff like this is precisely why Congress has the power to regulate state taxation of 

interstate commerce. 

I hope today we get some answers. If states are handling this 

and Congress does not need to get involved, why is basic guidance 

about nexus all a mess over there? The truth is states do not want 

to fix this problem. Like before the Constitution, they are happy to 

substitute their parochial interests for the national economic interests. They are doing harm, and the court cases have gone both 

ways, so it is time to be on time for there to be a modest national 

framework answering this simple and key question: how far does 

state tax authority over inter-state business extend? If Congress 

does not answer that question, no one will. Thank you. 

[The prepared statement of Mr. Henchman follows:] 
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Mr. BACHUS. Mr. Quam. Is that right? Did I get it right? 

Mr. QUAM. Quam, yes. 

Mr. BACHUS. Quam, I got it right. 

Mr. QUAM. Yes. 

TESTIMONY OF DAVID QUAM, DEPUTY DIRECTOR, 

NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC 

Mr. QUAM. Thank you, Mr. Chairman. Thank you, Member Johnson. Chairman Goodlatte, good to see you, too. 

Thank you for the opportunity to be here again. I actually pulled 

several of the letters and testimony from previous hearings, and I 

think four times I have appeared before this Committee on this 

particular issue. And it is an issue that keeps coming up, and I 

have sympathy for the stories that have been told. I think anybody 

would. Any governor would. 

At the same time, it is a privilege to be here on behalf of the National Governors Association to say we have to oppose this bill. We 

have to oppose it because it does tread on state sovereignty. It does 

not solve the problem that is being articulated. And at the end of 

the day, it does do harm, and it does harm to states. 

Now, this Congress has the ability under the commerce clause— 

I am not going to dispute that—to work on interstate commerce 

and solve those problems. It does not always mean, though, that 

the Congress has to act. But when it does and when it looks at 

state problems or state taxation, there are a couple of guidelines 

that we use to say when is it appropriate for Congress to get involved. And the first one is really do no harm. Do no harm to the 

states because, after all, we are talking about state tax laws. And 

a key premise for governors when it comes to state tax laws is that 

decisions regarding state revenue systems should be made in state 

capitals, not Washington, D.C. 

Unfortunately, this bill, which is identical to a bill passed last Congress and scored by CBO, would take away about $2 billion in 

the first year in state revenues. The changes in nexus would not 

allow states to collect about $2 billion they collect today. Now, for 

the states that is meaningful because states, unlike the Federal 

Government, have to balance their budgets. And so, $2 billion outof-states is $2 billion that either has to be cut or raised in taxes, 

both which can harm the recession or harm states’ ability to recover from the recession that they are still dealing with. 

The $2 billion in the first year is merely the starting point. What 

this bill does, because it provides rules of the road to allow for 

greater tax avoidance, means that states will actually lose more 

money in the out years, $2 billion in the first year, growing in 

years thereafter. 

Now, let us say that we could actually make a bill where you do 

no harm. I think everybody would agree, and even states would 

agree with, be clearer. Tax laws should be clearer. It helps with 

state compliance. It helps states enforce their laws. It helps companies to comply with those laws. 

Unfortunately, the bill before us and previous iterations is not 

clear. It claims to say that physical presence should be the law of 

the land, yet this is physical presence plus. You can actually be in 

the state for 15 days and do business. You can have multiple peo-
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ple in the state doing business for 15 days. You are not going to 

be liable under this bill. That is not physical presence. The loopholes and exceptions to the physical presence standard actually create more problems and are not clear for either states or businesses 

at the end of the day. 

In addition, for the companies that are both here and some of the 

small companies that reside in your states, you are actually increasing the tax burden on them. Why is that? Because some of the 

larger businesses can use the loopholes of this bill to avoid state 

taxation. Those large companies that have the lawyers, that have 

the accountants, that can do the planning, that can shift the property ultimately can create a situation where they do not pay tax. 

There is nowhere income, according to the Congressional Research 

Service that looked at a similar version of this bill 5 or 6 years ago. 

When you take those tax dollars out of a state from some of your 

larger taxpayers, you are increasing the burden on those who cannot do that type of tax planning in your own state. And that is 

some of the small- and medium-sized businesses that reside and 

are visibly present. 

Finally, there has to be a respect for state sovereignty. The 10th 

Amendment did mean something, and at the end of the day, the 

ability to control revenue systems is a key tenant of federalism. 

What that ultimately is at the end of the day is a Federal tax cut, 

Federal corporate tax cut, using state tax dollars, changing this 

nexus standard, so actually taking $2 billion away from the states. 

Now, I should mention that NGA actually participated through 

this Committee in talks over the course of several months with industry to try to find a clear bright line standard. We had discussions about the problems that were raised and how they could be 

addressed. States have actually posed a very clear standard, yet 

one that is economic presence. What I would argue is actually the 

law of the land. Businesses at the end of the day could not get past 

wanting a physical presence standard because that allows for the 

type of planning that they want to do. 

We have no problem with clarity. We have actually had no problem with finding that bright line rule, but it needs to be done within the constitutional and context in which we find ourselves, and 

that is, for business income taxes, economic presence is the law of 

the land. And so, from there we start and we take a look at a bill 

like this and say on behalf of the National Governors Association, 

we must oppose this bill. Thank you. 

[The prepared statement of Mr. Quam follows:] 
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Mr. BACHUS. Thank you. You know, one thing I would say. The 

National Governors Association, you know, you are saying it harms 

the states, this $2 billion. But, you know, the two examples that 

I hear at this end of the table, you have harmed these businesses. 

If the State of Washington, if every state took that approach, you 

would put this man out of business, I would think. I mean, you 

heard the testimony about Maine. If a retailer has an advertisement or a third party advertising his product, I mean, that is pretty far-fetched. 

I would think that, you know, 20 years ago states did not try to 

use this type of collection. I mean, I cannot imagine that they did. 

You know, Mr. Vegas visits a state one time, and, I mean, he is 

opened up to all that. 

My main concern with this, and we talk about jobs, jobs, jobs. 

That is America’s number one problem. You know, we talk about 

home ownership is the American Dream, but if you do not have a 

job, you are never going to own a home. You cannot provide for 

your children. 

Small businesses have historically created 70 percent of the jobs 

in this country. They are not doing that anymore. Large businesses 

are getting bigger and bigger, because just as you said, they can 

afford the lawyers. They are either doing a lot of business in those 

states, or they have the lawyers to fight these things. A small business, I am not sure it could even get started today. A small business of 5, 10 employees, if seven generations ago they started shipping tabasco sauce and they ran into this, it would cost all their 

profits for 1 year in one isolated state. 

I believe that is one reason this sort of thing, whether the states 

feel like they have a right or whatever, this sort of taxing regime 

is going to make it nearly impossible for a small business to be able 

to do business across state lines. I will let you respond to that. 

Mr. QUAM. Well, Mr. Chairman, as I said, the facts as they have 

presented here today, I am very sympathetic. I think there is always a different side to that story and a different side to the case. 

And without the states actually being here to defend themselves 

and not knowing exactly all the different aspects of the states, I am 

not going to get into those specific—— 

Mr. BACHUS. Well, let us just take the example of Maine. He is 

not in Maine. He does not have employees in Maine or Michigan. 

He has an independent contractor. I mean, physical presence ought 

to be physical presence. I mean, we do have a constitutional right 

to not interfere with interstate commerce. And, I mean, my gosh. 

This has a chilling effect on that. 

Mr. QUAM. The physical presence standard that is set up by this 

bill is actually moving backwards when it comes to sort of the—— 

Mr. BACHUS. And any—— 

Mr. QUAM. Rather than interstate commerce where the internet 

has made us borderless, where a small business actually can start 

out of the garage and do business in multiple states, rather than 

finding some of that clarity and find out every business who is 

earning customers in another state, is also, therefore, possibly taking customers away from those businesses—— 

Mr. BACHUS. Well, I will tell you. One thing this taxing policy 

may be doing, it may be driving companies to become basically 
103 

internet companies, I mean, because if they do anything else, if 

they ship a product into a state, they run into this. 

Let me ask you this. You know, we are considering giving the 

state the right to collect sales tax, out-of-state, and that is going 

to be a tremendous boon to the states. To me, that is where the 

emphasis ought to be for the states is pushing that. I mean, I am 

just—— 

Mr. QUAM. Marketplace fairness and passage of marketplace 

fairness is our number one priority. 

Mr. BACHUS. Yes, and I think it should be. And I have been on 

your side of that issue for some time. 

Mr. QUAM. Yes, sir. 

Mr. BACHUS. Not everybody on this Committee is. 

Mr. QUAM. We are working on it. 

Mr. BACHUS. But these are, I mean, nightmare scenarios. 

Mr. QUAM. Mr. Chairman, I am going to go back to what I said 

before. Marketplace fairness where states are simplifying their tax 

laws in order to recognize the 21st century borderless economy and 

to make sales taxes fair so you do not have winners or losers in 

business, the economic presence standard in business activity tax 

is similar. It is borderless. It is about you are doing business in another state and earning customers. 

Now, again, I have sympathy for the two cases that were brought 

up here today. I do not know the factors and I do not know the 

state side. However, to take this one back to a physical presence 

standard, which is really a 1950’s construct where you have to do 

business with a handshake versus today, and then support marketplace fairness, which is moving in the other direction. I think instead what we need to be doing is creating certainty and clarity 

and not picking winners and losers. 

Mr. BACHUS. Well, and let me say this. You know, this is, I 

think, the Chairman’s bill. 

Mr. QUAM. Yes. 

Mr. BACHUS. I believe in it. I am a strong supporter. But, you 

know, you are invited. I mean, you have an open door to come to 

our staff and say I think this is a problem. 

Mr. QUAM. That is exactly why, and some Members of this Committee know this, why we did come up and we tried to talk about 

let us create certainty, but let us create certainty that also works 

for the states and matches the 21st century economy. Unfortunately, we did not get there. Certainty is not a problem that we 

have. We are willing to always have those discussions. 

Mr. BACHUS. Thank you. 

Mr. QUAM. But those two have to go together. Thank you. 

Mr. BACHUS. Thank you. Mr. Johnson is recognized. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

Mr. BACHUS. The representative from Washington state showed 

up. [Laughter.] 

Mr. JOHNSON. Just in time. 

Mr. BACHUS. You would not believe what your state is doing. 

[Laughter.] 

Mr. JOHNSON. Well, I will tell you, all states do not have a business activity tax, do they, Mr. Henchman? 

Mr. HENCHMAN. Three states do not. 
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Mr. JOHNSON. Three states do not. And we would not want to 

force those states to adopt one, I do not think, at this time. So we 

want the states to have some freedom. Clearly the commerce clause 

gives the Federal Government—— 

Mr. HENCHMAN. Right, and this bill, like the bill you sponsored, 

the Mobile Workforce, in a similar way, they are floors. So states 

can be more generous in the protections they provide. They cannot 

have a tax if they choose, but so long as it does not go below what 

the Federal Government prescribes. 

Mr. JOHNSON. Those that do have a business activity tax, though, 

it seems like there should be some uniformity in there so that there 

will not be 47 different schemes that have to be adhered to by today’s modern business. That is just an untenable position to be in. 

But you would disagree with that, Mr. Quam? 

Mr. QUAM. I would say the tenets of federalism allow us to have 

a system of 50 different state laws where state lawmakers get to 

make the choices and in this particular area of what it means for 

nexus. That being said, groups and states, including the Multistate 

Tax Commission, have come up with some uniformity under an economic presence standard that would be very clear that every state 

could use. 

Unfortunately a lot of businesses have pushed back against that, 

have pushed back against efforts to try to find this clarity and this 

middle ground, something that does not do harm to states as far 

as existing revenues, but would create clarity. And so, it is very difficult to find that middle ground when you say, everybody is different, so one standard is going to preempt everybody, allow us to 

do tax planning to actually avoid taxation. It is going to cost states 

$2 billion from what they collect today, and that is a better solution 

than something that does not harm to states. The states have imparted that solution, and create some real clarity. But it is not 

going to present that opportunity for that type of tax avoidance. 

So again, I think there is a ground here that has to be covered, 

but because of the 10th Amendment and federalism, have to tread 

very carefully when we are talking about state tax systems, because the ability to control those tax systems at the end of the day 

is a core of what state sovereignty means. And so, when you move 

into that realm, we have got to be very careful that we do not use 

blunt instruments. This bill, even for physical presence states, will 

preempt every nexus standard in every state. 

Mr. JOHNSON. What is it specifically that you would recommend 

to get at this problem? And certainly it is a problem. 

Mr. QUAM. I think the first place to start is you can look at the 

MTC’s formula for nexus? 

Mr. JOHNSON. MTVs? 

Mr. QUAM. MTC. 

Mr. JOHNSON. MTC. 

Mr. QUAM. Multistate Tax Commission. 

Mr. JOHNSON. Okay. 

Mr. QUAM. Came up with, again, a model for states that states 

could adopt. 

Mr. JOHNSON. What is it called? 

Mr. QUAM. Multistate Tax Commission. 
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Mr. JOHNSON. The Multistate Tax Commission has come up with 

a business activity tax model that can be—— 

Mr. QUAM. A nexus, uh-uh. It is a place to start. It is a place 

where both the states and the businesses can come together and 

talk about—if the constitutional standard today is economic presence, and that is what it is, then let us start from that construct. 

Let us create the certainty we need. States have entered those conversations before and would be willing to do it. But until that time, 

for this Committee to go to a solution that instead is going to create tax avoidance and preempt all states with a more blunt instrument, governors cannot support that at the end of the day. It violates that do no harm principle and violates the sense of do not unnecessarily preempt, do not take a step more than you have to 

when it comes to state tax laws. 

Mr. JOHNSON. Mr. Henchmen, does that sound reasonable to 

you? 

Mr. HENCHMAN. I am sure what the gentleman’s basis is for saying economic presence is the law of the land. The Supreme Court 

has never ruled that. Congress has certainly never legislated that. 

If anything, it has been the other way. Physical presence has been 

the standard since the Constitution. 

So let me just explain why economic presence would be a problem using the examples of the two people you had here. So Mr. 

Vegas makes a product that goes into french fries from his two facilities in Arkansas, and those are where all of his employees are, 

where their kids are going to school, where they see doctors, where 

they use police and fire services. That is where they are paying 

taxes, and that is where the services are being received. 

Under economic presence, what would matter is where his products were sold, so anywhere where french fries are, which I imagine is all 50 states and every country in the world. So somebody 

in East Timor buys a french fry, that means he has got to fill out 

a corporate tax return for East Timor? 

I mean, in the end what that does is it turns the corporate income tax into a sales tax because you are now measuring it all by 

sales. And, you know, states have sales taxes and they can charge 

sales taxes for that kind of stuff. What we are talking about are 

business activity taxes, and those should be premised on the location of property and employees of the business. 

Mr. JOHNSON. Mr. Vegas, do you mean to tell me, I’m 59 years 

old, and I have always had confidence and been self-assured about 

every french fry that I have ever eaten, that it was potato based. 

And now you are telling that it is rice based? [Laughter.] 

Mr. VEGAS. Almost all but one chain has some rice in it. 

Mr. JOHNSON. My goodness. 

Mr. BACHUS. Rice is very good for you. [Laughter.] 

Mr. VEGAS. Since you opened me up, can I just mention one 

thing that people seem to be confused about? 

Mr. JOHNSON. Okay. 

Mr. VEGAS. Business and occupation tax—— 

Mr. JOHNSON. Well, I thought you were going to talk about 

french fries. I am real confused about that, but go ahead, sir. 

[Laughter.] 
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Mr. VEGAS. Let me say this because I think it is important, and 

a lot of people do not get it. Business and occupational tax is an 

additional tax, okay? If you go back to the old standards, which 

still apply in a lot of states. For example, I have facilities in Arkansas. Arkansas has a 7 percent income tax. So if half my business 

is in Arkansas, they get 7 percent of half of my income. But that 

does not kill me because I pay taxes in California that are actually 

higher, 13 percent, so they deduct it. So when you are dealing with 

income taxes, the highest tax you can pay is whatever the highest 

state you are dealing with, which is about 13 percent of this country when you get into New Jersey and California. 

These business and occupational taxes are in addition. Okay. 

They do not get deducted from my income tax. It is a new tax, so 

they are just adding onto what we are already paying. 

Mr. BACHUS. Thank you, Mr. Johnson. 

Mr. JOHNSON. Thank you. 

Mr. BACHUS. I would let Mr. Marino and then I will let the 

gentlelady from Washington who has come in to put out a fire here. 

Mr. JOHNSON. Well, if I might, Mr. Chairman, just to say that 

my mind is all messed up now, Mr. Vegas. [Laughter.] 

Mr. BACHUS. Thank you. Mr. Marino? 

Mr. MARINO. I am sorry for being late. I have three full Committee hearings today and six Subcommittee hearings, and I am 

trying to at least touch base with each one. I am not going to ask 

any questions because I did not hear what was going on, and I am 

sure it would be repetitive to a certain extent. I just want to thank 

you for being here. 

And with that said, this talk about french fries, I have not eaten 

all day, so I do not care if it has rice in it or not. I will eat the 

french fries if you get them to me. Thank you. [Laughter.] 

Mr. BACHUS. Yielded back your time? 

Mr. MARINO. Yes. 

Mr. BACHUS. Ms. DelBene? 

Ms. DELBENE. Good job. So you are getting it now. 

Mr. BACHUS. Yes. 

Ms. DELBENE. He has been practicing pronouncing my name. 

Thanks to all of you for being here today. I will be quick because 

I know they called votes. 

Mr. Quam, when we look at the economic environment today, we 

have millions of U.S. customers who are buying things online. I assume you have bought things on line as well. 

Mr. QUAM. Absolutely. 

Ms. DELBENE. And the Census Bureau at the Department of 

Commerce announced just last week that total e-commerce sales 

for 2013 were estimated to have increased almost 17 percent from 

2012 to the tune of about $263 billion in 2013. And this obviously 

has had huge opportunity and created innovation, and economic 

growth, and jobs. But it has also just changed the way folks do 

business across our country. 

And now that we have that, we know that we need to have tax 

policies that are user friendly, that are workable, that provide clarity, that everyone has talked about here, clarity and certainty to 

businesses and individuals. And I definitely support that. But I 
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also think it is important that we look at the way our economy 

works today and figure out solutions that are up to date. 

Given that there is major economic activity that is going across 

state borders, and many cases, for example, on the internet with 

limited physical presence, we need to take a close look at the physical presence standard and whether this proposal might have unintended consequences. I think you have talked about that. 

But, you know, the Supreme Court had their decision, Quill. It 

is over 20 years old now. And although it has come up in the context of this business activity tax bill, the case was actually about 

sales tax originally. What have been the consequences of that decision on states, especially given now that we have the internet and 

a slightly different economy than when that decision was made? 

And what steps would you like to see Congress take on this issue, 

if any? 

Mr. QUAM. I very much appreciate the question. Yes, I have 

bought things recently on the internet, as have my sons, as have 

probably most everybody here. And the internet has been such a 

boom to the economy. You talked about growth numbers at 17 percent. Coming out of the last 5 years, what other sector can you possibly say that about other than the internet? 

Now, interestingly enough, because of the Quill decision and that 

physical presence standard, we have an uneven playing field when 

it comes to sales tax and sales tax collection. And the Marketplace 

Fairness Act, which is supposed to talk about what can states do 

to simplify their sales taxes, to ease compliance, but require collection, so that folks doing business both online or on Main Street are 

on the same footing with regard to those sales, is a critical question 

of fairness. And right now, that playing field is unlevel. 

And so, one of the top priorities for the National Governors Association is the Marketplace Fairness Act and addressing that question of the inequity caused by a physical presence standard in the 

sales tax realm. The Marketplace Fairness Act would create certainty. It would create fairness. It would simplify and the states 

would simplify their taxes in return for that authority to require 

that collection. 

States today cannot collect about $23 billion in sales tax because 

of the Quill decision. States came together with the business industry—I think this is really critical—to address that problem and say 

what simplifications are needed. The Streamline Sales Tax Agreement is the collective efforts of business and states to solving the 

national problem and say how do we do this together. And at the 

end of the day, that is also good for consumers. It is good for consumers because they see competition and they have competition, 

but also protects the Main Street retailer who is hiring the parttime worker. It becomes about jobs. It also becomes about fairness 

in that economy. 

So the physical presence standard created that inequity. Finding 

a way to, in a borderless economy, just recognize the right of states 

to control their own revenue systems, recognize our Federal system 

when it comes to state taxation, but also find a way to recognize 

that borderless economy, the internet economy, and create fairness 

so there is competition in that marketplace. I think that should be 
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the focus of this Committee and its top priority. My fear is that 

this bill goes in the opposite direction. 

Ms. DELBENE. Thank you. Since we are running out of time here, 

Mr. Chair, I would like to ask for unanimous consent to enter into 

the record a statement from the Federation of Tax Administrators. 

Mr. BACHUS. Without objection. 

[The information referred to follows:] 
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Ms. DELBENE. Thank you. I yield back. 

Mr. BACHUS. And if you need more time. 

Ms. DELBENE. That is fine. I know we have to—— 

Mr. BACHUS. All right, thank you. Well, we thank everyone for 

their attendance at this hearing. I was thinking about Boeing airplanes. They land at all the airports in the country. I may tell my 

counties to start taxing Boeing because their product comes into all 

our cities. That is an economic presence, I guess. 

This concludes today’s hearing. Thanks to all our witnesses for 

attending. Without objection, all Members will have 5 legislative 

days to submit additional written questions for the witnesses or additional materials for the record. 

This hearing is adjourned. We thank you for your presence. 

[Whereupon, at 4:05 p.m., the Subcommittee was adjourned.] 
(121) 

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Æ