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BUSINESS ACTIVITY TAX 

SIMPLIFICATION ACT OF 2008 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON

H.R. 5267 

JUNE 24, 2008 

Serial No. 110–187 

Printed for the use of the Committee on the Judiciary 

( 

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

(II) 

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

PERRY APELBAUM, Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

LINDA T. SA ́ NCHEZ, California, Chairwoman 

JOHN CONYERS, JR., Michigan 

HANK JOHNSON, Georgia 

ZOE LOFGREN, California 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

STEVE COHEN, Tennessee 

CHRIS CANNON, Utah 

JIM JORDAN, Ohio 

RIC KELLER, Florida 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

JUNE 24, 2008 

Page 

THE BILL 

H.R. 5257, the ‘‘Business Activity Tax Simplification Act of 2008’’ ..................... 2 

OPENING STATEMENTS 

The Honorable Linda T. Sa ́nchez, a Representative in Congress from the 

State of California, and Chairwoman, Subcommittee on Commercial and 

Administrative Law ............................................................................................. 1 

The Honorable Jim Jordan, a Representative in Congress from the State 

of Ohio, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 12 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Ranking Member, Committee on the Judiciary ......................... 14 

WITNESSES 

The Honorable Rick Boucher, a Representative in Congress from the State 

of Virginia 

Oral Testimony ..................................................................................................... 17 

Prepared Statement ............................................................................................. 19 

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

of Virginia 

Oral Testimony ..................................................................................................... 20 

Prepared Statement ............................................................................................. 21 

Mr. Mark Ducharme, Vice President and CFO, Monterey Boats, Williston, 

FL 

Oral Testimony ..................................................................................................... 24 

Prepared Statement ............................................................................................. 27 

Mr. R. Bruce Johnson, Commissioner, Utah State Tax Commission, Salt 

Lake City, UT 

Oral Testimony ..................................................................................................... 31 

Prepared Statement ............................................................................................. 33 

Mr. Michael Petricone, Vice President, Technology Policy, Consumer Electronics Association, Arlington, VA 

Oral Testimony ..................................................................................................... 43 

Prepared Statement ............................................................................................. 45 

Mr. David C. Quam, Director, Office of Federal Relations, National Governors 

Association, Washington, DC 

Oral Testimony ..................................................................................................... 50 

Prepared Statement ............................................................................................. 51 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

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

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

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 14 

Prepared Statement of the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Member, Subcommittee on Commercial and Administrative Law ............................................................................... 15 

Page

IV 

Prepared Statement of the Honorable Trent Franks, a Representative in 

Congress from the State of Arizona, and Member, Subcommittee on Commercial and Administrative Law ........................................................................ 16 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Answers to Post-Hearing Questions from Mark Ducharme, Vice President 

and CFO, Monterey Boats, Williston, FL ........................................................... 68 

Answers to Post-Hearing Questions from R. Bruce Johnson, Commissioner, 

Utah State Tax Commission, Salt Lake City, UT ............................................. 71 

Answers to Post-Hearing Questions from Michael Petricone, Vice President, 

Technology Policy, Consumer Electronics Association, Arlington, VA ............ 77 

Post-Hearing Questions submitted to David C. Quam, Director, Office of 

Federal Relations, National Governors Association, Washington, DC ............ 80 

Statements Submitted for the Record .................................................................... 82 

(1) 

BUSINESS ACTIVITY TAX 

SIMPLIFICATION ACT OF 2008 

TUESDAY, JUNE 24, 2008 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCIAL

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

The Subcommittee met, pursuant to notice, at 1:10 p.m., in room 

2237, Rayburn House Office Building, the Honoorable Linda 

Sa ́nchez (Chairwoman of the Subcommittee) presiding. 

Present: Representatives Conyers, Sa ́nchez, Johnson, Lofgren, 

Delahunt, Smith, Jordan, and Feeney. 

Staff present: Norberto Salinas, Majority Counsel; Stewart 

Jeffries, Minority Counsel; and Adam Russell, Majority Professional Staff Member. 

Ms. SA ́ NCHEZ. This hearing of the Committee on the Judiciary, 

Subcommittee on Commercial and Administrative Law will now 

come to order. 

Without objection, the Chair will be authorized to declare a recess of the hearing at any point. 

I am now going to recognize myself for a short statement. 

The growth of marketing and sales of goods and services over the 

Internet is just one example of our country’s movement toward an 

economic system not limited by State borders. 

But this borderless economy has led to confusion for some businesses regarding their tax obligations. Although a State levies 

taxes on companies conducting business within the State, some 

companies have expressed concerns that they are unaware when 

their activities trigger State tax obligations. 

These companies favor a physical presence standard for taxation. 

In essence, the standard would require businesses to pay taxes to 

States in which they own or lease property or effectively station 

employees. 

On the opposing side are the State governments. They oppose 

such an approach contending that, in the future, because more 

transactions and services will occur online, the physical presence 

standard would eviscerate State revenues and prompt tax avoidance schemes. 

The question then becomes how do you clarify the taxation 

standard while protecting State revenues and taxing authorities. 

The legislation we are examining today is H.R. 5267, the ‘‘Business Activity Tax Simplification Act of 2008.’’ 

2 

[The bill, H.R. 5267, follows:] 


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Ms. SA ́ NCHEZ. This bill would prohibit State taxation of interstate commerce of out-of-state transactions involving all forms of 

property. 

The legislation would also establish the physical presence standard advocated by business interests. 

This afternoon’s hearing serves a dual purpose. First, this hearing provides us with the opportunity to learn more about business 

activity taxes and under what circumstances they are levied. 

Second, the testimony provided today will help us determine 

what role Congress has in this matter and whether H.R. 5267 addresses the concerns of businesses that are expected to pay these 

types of taxes while also protecting the interests of State governments to tax business activity within their borders. 

To help us explore these issues, we have six witnesses divided 

into two panels for this hearing. 

For our first panel, we have Representatives Rick Boucher from 

the 9th District of Virginia and Bob Goodlatte from the 6th District 

of Virginia, the authors of the legislation. And they will discuss 

H.R. 5267. 

For our second panel, I am pleased to have Mark Ducharme, vice 

president and CFO of Monterey Boats; R. Bruce Johnson, commissioner of the Utah State Tax Commission; Michael Petricone, vice 

president of technology policy at the Consumer Electronics Association; and David Quam, director of Federal relations at the National 

Governors’ Association. 

As we hear today’s testimony, let us remember that we must balance the interests of State governments to collect revenue with efforts to encourage business development. 

Accordingly, I look forward to this afternoon’s hearing and see it 

as the beginning of a dialogue on this issue. 

I now would like to recognize my colleague, Mr. Jordan, our acting Ranking Member of the Subcommittee for any opening remarks 

he may have. 

Mr. JORDAN. Thank you, Madam Chair. 

Ranking Member Cannon is unable to make the hearing today 

because of the Utah primary. He extends his regrets. 

Today we consider H.R. 5267, the ‘‘Business Activity Tax Simplification Act of 2008,’’ a measure intended to provide greater clarity to businesses in navigating the tax landscape. 

This bill was introduced by Representative Rick Boucher on February 26, 2008, and has 26 co-sponsors. 

Representative Bob Goodlatte, who sponsored similar measures 

in previous Congresses, is the primary Republican co-sponsor of the 

legislation. 

H.R. 5267 is designed to address a fundamental problem relating 

to interstate commerce. Specifically, when is a State justified in 

taxing a business with little or no physical connection with the 

State? 

Congress has examined this issue from time to time over the 

years. Now, with the emergence of the Internet economy and the 

explosion of the service industries, the need for clear, concise taxation standards has become even more urgent. 

In 1995, Congress enacting Public Law 86-272, still enforced 

today, prohibiting States from imposing a business activity tax on 

13 

companies whose only contact with the State is the solicitation of 

orders for tangible goods. 

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

practices that are at odds with the meaning and the intent of Public Law 86-272. 

For example, States have begun to impose a tax on companies 

business activities on gross receipts rather than on net income. 

These developments have wreaked havoc on businesses. These 

businesses have incurred great expense in attempting to decipher 

and, in many cases, litigate the appropriate nexus standard for 

business activity taxes. 

H.R. 5267 would provide some certainty to this issue. It would 

amend Public Law 86-272 to be able 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. 

It establishes a bright line 15-day physical presence requirement 

for the imposition of business activity taxes and would codify the 

current physical presence standard observed for years and elaborated by the Supreme Court in 1992 in Quill v. North Dakota. 

In Quill, the Court required that in order to impose a requirement, that remote vendors collect and remit sales taxes for sales 

made to customers in the State the business must have a physical 

presence within the State. 

During the 107th, 108th, and 109th Congresses, Subcommittee 

considered similar measures sponsored by Mr. Goodlatte. 

The bill in the 107th Congress was reported out favorably by this 

Subcommittee though the full Judiciary Committee did not have an 

opportunity to consider it prior to conclusion of that Congress. 

In the 108th Congress, the Subcommittee did not have an opportunity to consider the bill further after a legislative hearing. 

And in the 109th Congress, the bill was favorably reported out 

of the Committee by voice vote but was not considered by the full 

House. 

I would note that supporters of this legislation have made a 

number of changes from previous versions in order to make the bill 

more palatable to the States. 

One such change was reducing the period of time that triggered 

tax liability from 21 days to 15. This bill also eliminates the number of exceptions to the physical presence test that were contained 

in earlier versions. 

As always, this bill enjoys wide support in the business community, including the Business Roundtable, the National Association 

of Manufacturers, the Motion Picture Association of America, and 

the Software and Information Industry Association, to name only 

a few. 

I recognize that the States continue to have a number of concerns about the legislation, both in terms of how it will impact 

their bottom line and its encroaching into traditional State taxation 

authorities. 

I hope that this hearing can begin a dialogue where both sides 

can try to reach an accommodation on this important issue for 

American businesses. 

14 

I look forward to hearing from all our witnesses today. 

Thank you, Madam Chair. 

Ms. SA ́ NCHEZ. Thank you. I thank the gentleman for his statement, and I would like to recognize Mr. Smith, the distinguished 

Ranking Member of the Committee on the Judiciary for an opening 

statement if he wishes. 

Mr. SMITH. Thank you, Madam Chair. 

First of all, I want to thank our colleagues from the Judiciary 

Committee, Congressman Boucher and Congressman Goodlatte, for 

introducing this piece of legislation. 

It is nice to see two Members of the Committee and two Virginians linking arms to pass such a good piece of legislation. 

H.R. 5267, the Business Activity Tax Simplification Act of 2008, 

creates a physical presence requirement before State governments 

can collect income taxes or other business activity taxes on companies that conduct businesses in their States. 

Without such a physical presence requirement, companies must 

contend with dozens of different rules for determining when they 

owe State business activity taxes. 

The Business Activity Tax Simplification Act brings the law regarding business activity tax into line with the physical presence 

standard that Congress adopted for State sales taxes in 1959. 

This bill would list those conditions that a business must meet 

to establish a physical presence for the purposes of the imposition 

of a business activity tax by States. 

I supported similar legislation in the past because I think that 

businesses deserve some clarity as to when they will owe corporate 

income taxes. 

This bill also will make it easier for small businesses to determine their tax liability, and it will also limit the imposition of taxes 

for the simple act, for example, of driving goods across a State’s 

highways. 

This legislation has tremendous support in the business community. 

We have received over 20 statements for the record in support 

of this legislation from business associations both large and small. 

At the same time, I recognize that some States have concerns 

about this legislation because of its impact on potential revenue. 

I know this Subcommittee has a history of asking the States and 

business stakeholders to sit down and talk about their differences 

when it comes to taxation, so I hope similar such talks can occur 

in the future about this legislation. 

And with that, Madam Chair, I will yield back. 

Thank you for yielding. 

Ms. SA ́ NCHEZ. I thank the gentleman for his statement. 

Without objection, other Members’ opening statements will be included in the record. 

[The prepared statement of Mr. Conyers follows:] 

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

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

While Congress must ensure that the States do not burden interstate commerce 

through their taxing authority, the authority of States to tax activity within their 

15 

borders must be respected. Clearly, we must carefully balance these competing interests. 

Today, we will consider H.R. 5267, the ‘‘Business Activity Tax Simplification Act 

of 2008,’’ which attempts to clarify when a State may tax a business with little or 

no physical connection with the State. 

The bill establishes a physical presence standard for business activity taxes, and 

amends Public Law 86–272 to protect from State net income tax obligations the solicitation of orders of all forms of property and services, not just tangible property. 

Establishing a uniform standard would potentially create certainty for businesses 

and State governments. The business community could presumably better plan its 

development by knowing when and where it is obligated to pay taxes. 

Imposing a physical presence standard, however, could drastically alter the taxing 

landscape. States now generally apply an economic presence standard, whereby a 

company is taxed based on whether it conducts business within the State. 

In this precarious economic environment, where State revenues are already in decline, we should be very careful in considering legislation that could further impact 

State revenues or present tax avoidance possibilities. 

At least with respect to legislation that was similar to H.R. 5267, it was estimated 

that lost State tax revenues could be as high as $8 billion in the first year following 

enactment. 

I think we need to look carefully at this bill to see if it might have a similar negative impact on the States. 

I look forward to today’s hearing, and hope it will achieve three critical objectives. 

First, it should serve as a robust venue where the current standard of economic 

presence, the extent of confusion presented by the current standard, and the bona 

fides of a new standard that would permit a State to tax only companies with a 

physical presence there can be thoroughly examined. 

Second, this hearing should allow us to focus on H.R. 5267, which responds to concerns put forward by the business community regarding confusing State tax obligations. 

Third, this hearing should serve to begin a dialogue on State business activity 

taxes that results in a standard that is predictable, respects State taxing authority, 

and provides for a balanced and fair tax system. 

I thank Chairwoman Sa ́nchez for holding this important hearing, and I very much 

look forward to hearing today from the witnesses. 

[The prepared statement of Mr. Cohen follows:] 

PREPARED STATEMENT OF THE HONORABLE STEVE COHEN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF TENNESSEE, AND MEMBER, SUBCOMMITTEE ON

COMMERCIAL AND ADMINISTRATIVE LAW

The issue that H.R. 5267, the ‘‘Business Activity Tax Simplification Act,’’ seeks 

to address is a complex one. What is the proper scope of a state’s authority to tax 

the business activity of an interstate business? Unfortunately, the Supreme Court 

has provided ambiguous guidance with respect to the constitutionally required 

nexus between a state and an interstate business that is needed for the state to be 

able to impose a business activity tax. 

H.R. 5267 is supposed to answer this question in favor of a ‘‘physical presence’’ 

nexus requirement and a limited definition of taxable business activity. Proponents 

of this bill contend that they seek uniformity and clarity with respect to the state 

tax obligations of businesses, and that the current patchwork of state and local tax 

laws concerning business activity places an unsustainable and impermissible burden 

on interstate commerce. Opponents, meanwhile, maintain that this bill, if enacted 

as written, would cost financially strapped states like Tennessee billions of dollars 

in lost tax revenue, and that will have a negative impact on state government services and employees. I do not see H.R. 5267 as the final answer to the issue of states’ 

authority to impose business activity taxes. Rather, I hope that all the stakeholders 

will use this opportunity to engage in an honest and open discussion amongst them 

so as to reach consensus on establishing a clear and uniform standard with respect 

to business activity taxes. 

[The prepared statement of Mr. Franks follows:] 

16 

PREPARED STATEMENT OF THE HONORABLE TRENT FRANKS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ARIZONA, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Thank you, Madam Chair, for holding this critically important hearing on the 

‘‘Business Activity Tax Simplification Act of 2008.’’ I would also like to express my 

appreciation to the witnesses for joining us here today to discuss this legislation. 

It is rare in this 110th Congress that a proposed law has drawn such diverse support across party lines. A brief glance at this legislation’s cosponsors reveals some 

of the most ardent conservatives lining up with the most passionate liberals in support of this bill. It is equally rare in this Congress that a law has been considered 

which makes government less intrusive, business easier, and regulations clearer. 

Metaphorically, this bill is the white whale of this session. With bipartisan cooperation and sound policy, it unquestionably deserves the full backing of this subcommittee. 

First, I would like to address the concerns of the states, the most visible opponents of this legislation. They claim that the ‘‘Business Activity Tax Simplification 

Act of 2008’’ passes an unfunded mandate onto state governments. This mandate, 

according to the states, comes at an especially difficult financial time for their budgets. Yet financial irresponsibility on the part of the states does not provide an excuse for their laws to interfere with the flow of interstate commerce. Many studies, 

such as from the CATO Institute, document the reckless spending binge indulged 

in by state governments. I do not mean to take the financial problems now faced 

by the states lightly, but they have no business passing on their burden to the detriment of the national economy. Finally, it appears that the states tend to exaggerate the severity of this legislation’s impact on tax revenues. The Tax Foundation 

notes that the estimated revenue loss for the states under similar legislation authored in the 109th Congress is roughly 0.1 percent, so small that it falls within 

typical revenue estimate margins of error. 

This issue of overreaching state laws is not new. Before the Constitution, the 

United States was governed under the Articles of Confederation. Under these Articles, the federal government was powerless to ensure that interstate commerce 

flowed without burdensome impediments. States often engaged in trade wars with 

each other, grinding national commerce to a halt. As a remedy, the new Constitution drafted by the Founding Fathers gave Congress explicit authority in Article I 

to regulate commerce ‘‘among the several states.’’ This legislation clearly falls under 

the purview of the Commerce Clause and within Congress’ enumerated powers. 

With this constitutional authority in mind, the ‘‘Business Activity Tax Simplification Act of 2008’’ modernizes a 49-year-old law to reflect the dramatic changes in 

the nature of our economy, which is increasingly reliant upon networks that cross 

state lines. In a time of slowing economic growth, confusing and irrational policies 

are the last thing that American workers and employers need. Business activity 

taxes are just that. Haphazardly applied and enforced, they unnecessarily impede 

the vibrant interstate commerce that fuels our powerful economic engine. As such, 

Congress has a legitimate and vital responsibility to act. 

In establishing guidelines based upon a ‘‘physical presence’’ standard, this legislation gives much-needed legal clarity to small businesses hoping to expand their operations to other states. Some argue that states can work collectively to make their 

business activity taxes more succinct; yet it is for this very purpose, to address commerce issues that cross state lines, that the federal government exists! I urge all 

of my colleagues to support this common-sense, bipartisan legislation that protects 

the interstate economy so vital to the fabric of this nation. Madam Chair, I yield 

the balance of my time. 

I am now pleased to introduce the witnesses on our first panel 

for today’s hearing. 

Our first witness is Congressman Rick Boucher. 

Mr. Boucher is serving in his thirteenth term in the U.S. House 

of Representatives and represents Virginia’s 9th Congressional District. 

Prior to his election to Congress, he served for 7 years as a member of the Virginia State Senate. 

He is a native of Abingdon, Virginia. 

17 

Congressman Boucher sits on the House Judiciary Committee, 

serving on the Courts, the Internet, and Intellectual Property Subcommittee. 

He also is a Member of the House Energy and Commerce Committee, serving on three Subcommittees: Energy and Air Quality, 

of which he is the Chairman; as well as Telecommunications and 

the Internet; and Commerce Trade and Consumer Protection. 

As Chairman of the Energy and Air Quality Subcommittee, he is 

uniquely positioned to influence Federal legislation relating to a 

broad range of energy-related issues including electricity generation and markets, cool use, pipeline safety, refineries, and the 

Clean Air Act. 

Mr. Boucher is the sponsor of H.R. 5267. 

Our second witness is Congressman Goodlatte. Mr. Goodlatte is 

in his eighth term and represents the 6th Congressional District of 

Virginia. 

Prior to serving in Congress, he was a partner in the law firm 

of Bird, Kinder, and Huffman. 

Congressman Goodlatte also served as district director for former 

Congressman Caldwell Butler. 

Congressman Goodlatte serves on the House Judiciary Subcommittee on Immigration, Citizenship, Refugees, Border Security, 

and International Law and on the Courts, the Internet, and Intellectual Property Subcommittee. 

In addition to serving on the House Judiciary Committee, he 

serves as the Ranking Republican on the House Agriculture Committee. 

Congressman Goodlatte has taken a strong interest in issues 

such as welfare reform and forestry policy. 

Mr. Goodlatte is an original co-sponsor of H.R. 5267. 

I want to thank you both for your willingness to participate in 

today’s hearing. 

And without objection, your written statements will be placed 

into the record in their entirety. 

And we are going ask that you limit your oral remarks to 5 minutes. 

You are, I am sure, more than intimate with the lighting system. 

Sometimes, we forget to start it, but you are forewarned. 

And, of course, if you are caught mid-sentence or mid-thought 

when your time expires, we will allow you to complete your thought 

before moving on. 

So with that, I am going to invite Mr. Boucher to please proceed 

with your testimony. 

TESTIMONY OF THE HONORABLE RICK BOUCHER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA 

Mr. BOUCHER. Chairwoman Sa ́nchez, thank you very much for 

holding this hearing on what Bob and I both believe is a timely 

subject and, according to both of us, an opportunity to comment on 

the legislation that together we have introduced. 

We have been partnered in this exercise for many years, and continue to believe that this measure deserves passage and would 

commend it to the Subcommittee’s consideration. 

18 

I would note this afternoon that the measure is co-sponsored by 

26 Members of the House. 

And I will just take a moment to list of Members of the House 

Judiciary Committee who, on a bipartisan basis, are supporting the 

legislation. 

Representatives Hank Johnson, Bobby Scott, Zoe Lofgren, Arthur 

Davis, Sheila Jackson Lee, Bob Wexler, Anthony Weiner, Elton 

Gallegly, Steve Chabot, Mike Pence, and Tom Feeney. 

So we do have, essentially, equal numbers of Democrats and Republicans on the full Committee co-sponsoring this measure. 

It is an urgently-needed modernization of a 49-year-old statute 

that determines when States can impose State income taxes on the 

sales of tangible personal property within that State. 

Reflecting the economy of its time, that five-decade-old statute 

only applies to State income taxes, and it only applies to the sales 

of tangible personal property. 

Over the years, States have adopted a series of business activity 

taxes that, in some respects, are proxies for the State income tax 

including, among others, gross receipts taxes and a range of license 

arrangements. 

And the States frequently seek to impose those taxes on out-ofstate companies that have no physical presence within the State. 

And over the years, greater volumes of our national commerce 

have been in intangible products and services such as financial 

services and software. 

Our measure modernizes the old law by expanding it to address 

not just State income taxes but also that range of business activity 

taxes that serve as proxies in some cases for the State income 

taxes. 

And we also create situations where there is a more explicit 

bright-line standard for the circumstances in which those taxes can 

be imposed. 

For 49 years, the test has been whether or not an out-of-state 

company has a physical presence within the taxing State. 

We keep that standard, but we provide a much clearer definition 

of what constitutes a physical presence. 

The bill provides certainty for the States and for out-of-state 

companies alike by specifying that physical presence means having 

property or employees within the taxing State for at least days 

within a year. 

If that test is met, State business activity taxes can be imposed 

on the sales that take place within that State. 

In the absence of these needed changes, the current legal uncertainty is producing clearly undesirable result. 

And I will just mention several examples. 

In Louisiana, the threat of business activity taxes has been 

raised against companies that have no physical presence within the 

State but broadcast advertisements from out-of-state into the State 

of Louisiana. 

Several States have attempted to impose business activity taxes 

on credit card companies located outside the State based solely on 

the fact that in-state residents are subscribers to those credit card 

services. 

19 

New Jersey has held trucks belonging to companies with no 

physical presence in New Jersey that were passing through the 

State in order to make deliveries in another State until business 

activity taxes sometimes ranging in the tens of thousands of dollars 

have been paid. 

Many other equally troubling examples could be cited, and I 

think some witnesses, perhaps, will mention some of them. 

Our legislation is a needed modification of an old law which is 

appropriate to the realities of today’s national commerce. 

If offers a certainty that should be welcome to companies doing 

business across State lines and to the taxing authorities at the 

State level alike. 

I very much appreciate the Chairwoman’s focus on this timely 

matter, her very balanced statement, and her indication of welcoming our views and a continued discussion on this subject. 

We very much look forward to working with you and the other 

Members of the Committee as your considerations continue. 

At the end of that process, it is very much our hope that we will 

be able to pass a law which provides a much-needed modernization 

of the term under which State business activity taxes can be imposed on out-of-state companies of them. 

Thank you very much, Madam Chairwoman. 

[The prepared statement of Mr. Boucher follows:] 

PREPARED STATEMENT OF THE HONORABLE RICK BOUCHER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF VIRGINIA

Chairwoman Sa ́nchez, I appreciate your conducting today’s hearing on the Business Activity Tax Simplification Act, which I introduced with my Virginia colleague 

Bob Goodlatte. 

The measure is cosponsored by 26 House Members, including our Committee colleagues Hank Johnson, Bobby Scott, Zoe Lofgren, Artur Davis, Sheila Jackson Lee, 

Bob Wexler, Anthony Weiner, Elton Gallegly, Steve Chabot, Mike Pence, and Tom 

Feeney. 

It is an urgently needed modernization of the 49-year-old federal statute that determines when states can impose state income taxes on the sale of tangible personal 

goods in the state. 

Reflecting the economy of its time, that five decade old law only applies to state 

income taxes and only to the sale within the state of tangible personal property. 

Over the years, states have adopted a series of business activity taxes that are 

proxies for the state income tax, including gross receipts taxes, licensing arrangements, and other charges which states frequently seek to impose on out of state 

companies. 

And over the years, greater volumes of our national commerce have been in intangible products and services, such as financial services and software. 

Our measure modernized the old law by expanding it to address not just state 

income taxes but business activity taxes as well. 

We also make the circumstances under which these taxes can be imposed on out 

of state companies explicit with a bright line standard. 

For 49 years the test has been whether the out of state company has a physical 

presence in the taxing state. 

We keep that standard, but we provide a clearer definition of what constitutes 

physical presence. The bill provides certainty for the states and out of state companies alike by specifying that physical presence means having property or employees 

in the state for at least 15 days annually. If that test is met, state business activity 

taxes can be imposed on the sales that take place in the state. 

In the absence of these needed changes, the current legal uncertainty is producing 

undesirable results. 

In Louisiana, the threat of business activity taxes has been raised against companies that have no physical presence in the state but broadcast advertisements into 

the state from out of state. 

20 

Several states have attempted to impose business activity taxes on credit card 

companies located outside the state, based solely on the fact that in state residents 

subscribe to the credit cards. 

New Jersey has held trucks belonging to companies with no physical presence in 

New Jersey that were passing through the state to make deliveries in another state 

until business activity taxes of tens of thousand of dollars were paid. 

Many other equally troubling examples can be cited. 

Our legislation is a needed modification of an old law which is appropriate to the 

realities of today’s national commerce. It offers a certainty that should be welcome 

to both companies doing business across state lines and state taxing authorities 

alike. 

I appreciate the Committee’s focus on this timely matter and look forward to 

working with you as we take further steps. 

Ms. SA ́ NCHEZ. Thank you, Mr. Boucher. We appreciate your testimony. 

At this time, I would invite Mr. Goodlatte to proceed with his 

testimony. 

TESTIMONY OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA 

Mr. GOODLATTE. Well, thank you, Madam Chairman. I appreciate the opportunity to testify. I appreciate your holding this hearing and your and the other Members of the Committee’s interest 

in this important legislation. 

Many States and some local governments levy corporate income, 

franchise, and other taxes on out-of-state companies that conduct 

business activities within their jurisdiction. 

While providing revenue for States, these taxes also serve to pay 

for the privilege of doing business in a State. 

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 basis that lack substantial connections to 

the State. 

This has led to unfairness and uncertainty, generated contentious, widespread litigation, and hindered business expansion as 

businesses shy away from expanding their presence in other States 

for fear of exposure to unfair tax burdens. 

I understand that some of our witnesses on the next panel will 

detail the specific examples of abuses that are occurring under the 

current ambiguous legal environment. 

Previous actions by the Supreme Court and Congress have laid 

the ground work for a clear, concise, and modern bright-line rule 

in this area. 

In the landmark case of Quill Corporation v. North Dakota, the 

Supreme Court declared that a State cannot impose a tax on an 

out-of-state business unless that business has a substantial nexus 

with the taxing State. 

However, the Court did not define what constituted a substantial 

nexus for purposes of imposing business activity taxes. 

In addition, over 40 years ago, Congress passed legislation to 

prohibit jurisdictions from taxing the income of out-of-state corporations whose in-state presence was nominal. 

21 

Public Law 86-272 set clear, uniformed standards for when 

States could and could not impose such taxes on out-of-state businesses when the business activities involved the solicitation of orders for sales. 

However, like the economy of its time, the scope of Public Law 

86-272 was limited to tangible personal property. 

Our nation’s economy has changed dramatically over the past 40 

years, and this outdated statute needs to be modernized. 

The Business Activity Tax Simplification Act of 2008 both modernizes and provides clarity to an outdated and ambiguous tax environment. 

First, the legislation updates the protections of P. L. 86-272. 

This legislation reflects the changing nature of our economy by 

expanding the scope of protections of that law from just tangible 

personal property to include intangible property and services. 

In addition, our legislation sets forth clear, specific standards to 

govern when businesses should be obligated to pay business activity taxes to a State. 

Specifically, the legislation establishes a physical presence test 

such that an out-of-state company must have a physical presence 

in a State before the State can impose corporate net income taxes 

and other types of business activity taxes. 

The clarity that the Business Activity Tax Simplification Act will 

bring with insure 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. 

At the same time, this legislation will protect the ability of the 

States to ensure that they are fairly compensated when they provide services to businesses that do have a physical presence in the 

State. 

H.R. 5267 has been amended from what the Judiciary Committee 

reported out by voice vote last Congress. 

Specifically, the legislation has been amended to address some of 

the concerns expressed by the States. 

For example, the time period during this an individual or business could be present in a State without constituting a substantial 

physical presence has been reduced from 21 days to 14 days. 

I will end my testimony by mentioning that this legislation has 

strong bipartisan support as noted by my colleague and friend, 

Congressman Boucher, from numerous Members of the House Judiciary Committee. 

And I would strongly urge the Chairman of the Subcommittee 

and Chairman Conyers to move forward with the markup of this 

legislation in the near future. 

And I thank you again for allowing me to participate today. 

[The prepared statement of Mr. Goodlatte follows:] 

PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF VIRGINIA

Madam Chairman and Ranking Member Cannon, thank you for inviting me to 

testify this afternoon about the Business Activity Tax Simplification Act. 

Many states and some local governments levy corporate income, franchise and 

other taxes on out-of-state companies that conduct business activities within their 

22 

jurisdictions. While providing revenue for states, these taxes also serve to pay for 

the privilege of doing business in a state. 

However, with the growth of the Internet, companies are increasingly able to conduct transactions without the constraint of geopolitical boundaries. The growth of 

the high tech industry and interstate business-to-business and business-to-consumer 

transactions raise questions over where multi-state companies should be required 

to pay corporate income and other business activity taxes. 

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, as businesses shy away from expanding 

their presence in other states for fear of exposure to unfair tax burdens. I understand that some of our witnesses on the next panel will detail the specific examples 

of abuses that are occurring under the current ambiguous legal environment. 

Previous actions by the Supreme Court and Congress have laid the groundwork 

for a clear, concise and modern ‘‘bright line’’ rule in this area. In the landmark case 

of Quill Corp. v. North Dakota, the Supreme Court declared that a state cannot impose a tax on an out-of-state business unless that business has a Asubstantial 

nexus@ with the taxing state. However, the Court did not define what constituted 

a ‘‘substantial nexus’’ for purposes of imposing business activity taxes. 

In addition, over forty years ago, Congress passed legislation to prohibit jurisdictions from taxing the income of out-of-state corporations whose in-state presence 

was nominal. Public Law 86–272 set clear, uniform standards for when states could 

and could not impose such taxes on out-of-state businesses when the businesses’ activities involved the solicitation of orders for sales. However, like the economy of its 

time, the scope of Public Law 86–272 was limited to tangible personal property. Our 

nation’s economy has changed dramatically over the past forty years, and this outdated statute needs to be modernized. 

The Business Activity Tax Simplification Act of 2008 both modernizes and provides clarity to an outdated and ambiguous tax environment. First, the legislation 

updates the protections in P.L. 86–272. This legislation reflects the changing nature 

of our economy by expanding the scope of the protections in P.L. 86–272 from just 

tangible personal property to include intangible property and services. 

In addition, our legislation sets forth clear, specific standards to govern when 

businesses should be obliged to pay business activity taxes to a state. Specifically, 

the legislation establishes a ‘‘physical presence’’ test such that an out-of-state company must have a physical presence in a state before the state can impose corporate 

net income taxes and other types of business activity taxes. 

The clarity that the Business Activity Tax Simplification Act will bring 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. At the same time, this legislation 

will protect the ability of states to ensure that they are fairly compensated when 

they provide services to businesses that do have a physical presence in the state. 

H.R. 5267 has been amended from what the Judiciary Committee reported out by 

voice vote last Congress. Specifically, the legislation has been amended to address 

some of the concerns expressed by the States. For example, the time period during 

which an individual or business could be present in a State without constituting a 

substantial physical presence has been reduced from 21 days to 14 days. 

I will end my testimony by mentioning that this legislation has strong bipartisan 

support from numerous Members of the House Judiciary Committee. I would strongly urge the Chairman of the Subcommittee and Chairman Conyers to move forward 

with a markup of this legislation in the near future. 

Ms. SA ́ NCHEZ. We thank you for your testimony, Mr. Goodlatte. 

At this time, it is traditional to begin a round of questioning. I 

don’t have any questions for the first panel. 

I am going to encourage my colleagues not to ask too many questions of the first panel knowing that your schedules, probably, are 

just as busy as ours. 

But if anybody is interested in asking brief questions? No? Nobody? Nope. 

23 

The gentlewoman from California, Ms. Zoe Lofgren, is recognized. 

Ms. LOFGREN. Not a question, but just kudos to our colleagues 

on the Committee for the leadership they have shown on this, not 

just this year, but in past years. 

I really appreciate and am proud to be a co-sponsor. 

Thank you. 

Ms. SA ́ NCHEZ. Anybody else? 

Okay. Gentlemen, that is it. We thank you for your testimony, 

and you are excused to run off to the many other demands on your 

time I am sure that you have. 

Mr. BOUCHER. Thank you, Madam Chairwoman. 

Ms. SA ́ NCHEZ. At this time, I would invite the second panel of 

witnesses to please approach the table. 

It is now my pleasure to introduce our second panel of witnesses 

for today’s hearing. 

Our first witness is Mark Ducharme. And I apologize; I mispronounced your name initially. 

Mr. Ducharme is the vice president and chief financial officer of 

Monterey Boats, a Gainesville, Florida company founded in 1985. 

Prior to his employment at Monterey Boats, he served at James 

Moore and Company from 1995 to 1999, and at Arthur Anderson, 

LLP from 1989 to 1995. 

Mr. Ducharme is a member of the American Institute of Certified 

Public Accountants, the Florida Institute of Certified Public Accountants, and the board of directors of Big Brothers-Big Sisters of 

Mid-Florida. 

We want to welcome you to today’s panel. 

Our second witness is Bruce Johnson, commissioner for the Utah 

State Tax Commission. 

Commissioner Johnson was appointed by Utah Governor Leavitt 

in 1998. 

Prior to his appointment, he was a partner at the law firm of 

Holme, Roberts, and Owen, LLP, where he litigated State and local 

tax disputes and advised clients on State and local tax issues, tax 

exemption issues, and issues relating to tax-exempt municipal financing. 

Commissioner Johnson also was a trial attorney for the tax division of the U.S. Department of Justice. 

Commissioner Johnson serves on the executive committee of the 

Streamlined Sales Tax Governing Board and is a member of the 

Utah Tax Review Commission, and a board member of the National Tax Association. 

He is a recent past chair of the American Bar Association Tax 

Section Committee on State and Local Taxes. 

We want to welcome you to our panel, Mr. Johnson. 

Our third witness is Michael Petricone. 

Mr. Petricone is the senior vice president of governmental affairs 

for the Consumer Electronics Association. He is responsible for representing the consumer electronics industry’s position before Congress and the FCC on critical issues such as digital television, 

broadband, privacy, and home recording rights. 

Mr. Petricone is a frequent speaker on policy issues impacting 

the consumer electronics industry. 

24 

And in 2003, he was featured by ‘‘Dealer Scope’’ magazine as one 

of the technology industry’s top 40 under 40. 

Welcome to you, Mr. Petricone. 

Our final witness is David Quam, who we recognize. He has been 

before this Subcommittee many times. 

He is the director of the Office of Federal Relations for the National Governor’s Association. 

Mr. Quam manages the NGA’s legal and advocacy efforts, working closely with governors, Washington, DC representatives, and 

NGA’s standing committees to advance the associations legislative 

priorities. 

Prior to working at NGA, Mr. Quam served as director of international affairs and general counsel of the International AntiCounterfeiting Coalition, Incorporated. 

He was also an associate of the law firm of Powell, Goldstein, 

Frazer, and Murphy, LLP. 

Additionally, Mr. Quam was counsel on the U.S. Senate Subcommittee on the Constitution, Federalism, and Property Rights for 

the Committee on the Judiciary. 

It is good to have you back again with us, Mr. Quam. 

The lighting system, I would explain for this panel because I 

didn’t for the first. 

When you begin your oral testimony, you will see a green light. 

That green light tells you you have 5 minutes to speak. 

When you have 1 minute remaining, the light will turn from 

green to yellow. That warns you that you have 1 minute left. 

And, of course, when your time expires, you will see a red light. 

If you are caught mid-sentence or mid-thought when the light 

turns red and your time expires, we will allow you to finish that 

thought or sentence before we move on. 

So with that, I also will tell the witnesses that once you have 

given us your oral testimony, Members will be allowed to ask question subject to the 5-minute limit. 

So with that, I am going to ask Mr. Ducharme to please proceed 

with his testimony. 

TESTIMONY OF MARK DUCHARME, VICE PRESIDENT AND CFO, 

MONTEREY BOATS, WILLISTON, FL 

Mr. DUCHARME. Thank you for the opportunity to address the 

Subcommittee concerning the Business Activity Tax Simplification 

Act. 

Monterey Boats is a small fiberglass boat manufacturer located 

in Williston, Florida. 

We build boats 18 to 40 feet. We have approximately 550 employees, and produce approximately 2500 units every year. 

In understanding and discussing our position on State taxing authority, our obligation to pay appropriately mandated taxes are not 

in question. 

However, our ability to compete in our industry requires us to 

pass along these costs in the pricing of our product. 

When the taxing arm of each State does not consistently apply 

the law or provide clear guidance on activities requiring registration as an out-of-state corporation and potential tax obligation, we 

25 

are at a distinct disadvantage not only with the domestic manufacturers but foreign manufacturers as well. 

Our first experience with State nexus in Michigan. The State 

sent us a detailed questionnaire inquiring about our activities within the State. 

Being unfamiliar with the nexus standards and naivete regarding the State’s agenda, we inquired to other boat manufacturers 

their experience with States assessing income and sales tax on outof-state corporations. 

Some manufacturers had not received any contact from States. 

Others had similar experiences that we were having. And still others received inquiries from States we had no contact with. 

Since we do not have property or payroll and sales occur outside 

the State, we deemed our exposure to Michigan assessing tax nonexistent. 

However, in further discussions with Michigan state agents, very 

few follow-up questions were asked regarding our responses to the 

questionnaire as if the question on whether or not we owed Michigan’s single business tax was a foregone conclusion and the questionnaire with a formal process having little significance in determining whether or not we owed any tax. 

We subsequently determined agents from the State were contacting dealers domiciled in the State posing as interested customers to inquire regarding how we delivered the product. 

Did we have sales representatives in the State? 

How often did they visit the dealer? 

Do we assist in unloading the product? 

And how was the warranty process handled? 

Based on the dealer’s responses, it was deemed by the State we 

had an obligation to register, pay tax, and the burden was on us 

to disprove comments made by Monterey Boats’ dealers regardless 

of whether or not the dealer could have made incorrect responses, 

didn’t understand the basis of the questions, or confused us with 

one of the their other product lines. 

Our next experience occurred with the State of New Jersey and 

is nothing short of extortion. 

We received a phone call on October 6, 2004 from someone purporting to be an agent with the New Jersey Division of Taxation. 

The agent indicated he was in possession of our truck with a load 

of boats destined for delivery in the State. 

The agent subsequently indicated the truck was to be impounded 

along with the boats unless we immediately remitted $27,500. 

The investigative agent claimed nexus arose because we deliver 

product into the State on trucks owned by Monterey. 

We also determined the $27,500 figure was determined based on 

a fuel formula having no basis or relation to property, payroll, or 

sales. 

After refusing to remit any funds for tax based on a fuel formula, 

we retained an attorney to intervene on our behalf, and our attorney negotiated the release of the truck and the boats. 

However, on October 7, we received a warrant of execution jeopardy assessment demanding payment for $176,000, again, based on 

some explainable fuel formula. 

26 

In addition, the State placed a lien by levy on fund due to us 

from New Jersey dealers finance company. 

And on December 21, 2004, we filed a petition on protest and request for refund with the conference and appeals branch with the 

State. 

We received a notification letter and a list of questions the State 

wanted us to provide prior to the hearing. 

None of the questions related to use of or delivery of the boats 

on Monterey owned or leased trucks appearing as if of reason for 

New Jersey having authority to impose tax for delivery on product 

on Monterey trucks no longer applied. 

In October 2006, we met with the conference and appeals branch 

to resolve the issue and clarify our responsibility with the State. 

Subsequent to that hearing, we submitted a proposed resolution, 

and to date, no response has been received. 

Our sales are down approximately 13 percent year-to-date. Our 

full-time employee count is down approximately 15 percent. 

We are experiencing an unprecedented amount of pricing pressure in the boating industry requiring us to offer higher and more 

incentives. 

In the short term, we consider rebates and incentives in investment in establishing or increasing our market share. 

However, in the long term, the continued pressure on profitability has consequences: profound layoffs, decreased competition, 

and eventually going out of business. 

Monterey is the largest employer in the surrounding geographic 

area and the loss of jobs has a profound and rippling affect through 

the local economy. 

In order to establish consistent application of doing business, we 

need clear guidance provided by the Business Activity Tax Simplification Act of 2008. 

Thank you. 

[The prepared statement of Mr. Ducharme follows:] 

27 

PREPARED STATEMENT OF MARK DUCHARME


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Ms. SA ́ NCHEZ. Thank you, Mr. Ducharme. I appreciate your testimony. 

At this time, I will invite Mr. Johnson to give his oral testimony. 

TESTIMONY OF R. BRUCE JOHNSON, COMMISSIONER, 

UTAH STATE TAX COMMISSION, SALT LAKE CITY, UT 

Mr. JOHNSON. Thank you, Madam Chairwoman and Members of 

the Subcommittee. 

I appreciate this opportunity to testify today. 

I am Bruce Johnson, one of the commissioners of the Utah State 

Tax Commission. 

I am here today testifying on behalf of the Federation of Tax Administrators and the Multi-State Tax Commission. 

The FTA is an association of tax administrative agencies in all 

of the 50 States, the District of Columbia, Puerto Rico, and New 

York City. 

The Multi-State Tax Commission is an organization of State governments that works with taxpayers to administer, equitably and 

efficiently, tax laws that apply to multi-state and multi-national 

enterprises. 

FTA and MTC both strongly oppose this legislation because the 

bill would result in significant revenue losses for the States. It 

would reverse years of judicial precidents under the basis for State 

taxation. And it would create tax planning opportunities for multistate, large multi-state enterprises that would not be available to 

locally-owned small businesses. 

In addition, we believe that there has been a failure to show an 

adequate need for this legislation. 

The Congressional Budget Office estimated in 2005 that predecessors of the current bill would result in a $3 billion annual revenue loss, the largest unfunded mandate CBO had ever measured. 

The National Governors’ Association estimated an annual range 

of lost State revenues from $4.7 billion to $8 billion with a single 

best estimate of $6.6 billion. 

We are currently in the process of updating those estimates, but 

it appears that the losses under this bill will be the same order of 

magnitude as they were under the prior bill. 

The bill, as proposed, has two major components. First, it expands Public Law 86-272. 

Public Law 86-272 already allows a corporation to have a fulltime sales force in a State, full-time, driving company cars on State 

roads. As long as the activities of that sales force will limited to 

the solicitation of sales of tangible personal property and ancillary 

activities that company is exempt from corporate income tax. 

That is unfortunate enough. That is simply bad policy. 

But this bill—at least 86-272—is limited to corporate income 

taxes and sales of tangible personal property. 

This bill would allow the same full-time sales force to be in a 

State soliciting sales of services and sales of intangible property. It 

would also allow those representatives to be in the State full time 

if they were purchasing agents purchasing sales or services on behalf of a corporation. 

32 

So not only do you have sales people, you have got purchasing 

agents now who can be in a State full time and be exempt from 

taxation. 

Second, the bill would prohibit States from taxing a myriad of 

other activities if the corporation did not have a bricks and mortar 

facility in the State or employees in the State for more than 15 

days. 

But there is also an exception if they were there for transient or 

limited purposes where you can be in the State for more than 15 

days if you are there for a limited purpose. 

What is a Federal court going to do with a limited purpose? If 

I am an architect from out of State and I am in a State for a year 

supervising the construction of a shopping center, am I there for 

a limited purpose? Arguably, I am. 

If that is my only presence in the State, is it transient? Arguably, 

it is. 

This bill will not provide the kind of certainty that its proponents 

hope for. 

It also provides all sorts of tax planning. Let me give you two examples. 

A Utah bank has 10,000 Visa card holders. It pays income tax 

on the fees it receives from merchants and on the interest. 

An out-of-state bank blankets Utah with solicitation for card 

holders, signs up the same 10,000 people to conduct the same 

transactions with Utah retailers, pays the same interest, that bank 

is exempt from Utah income tax. They are competing head to head. 

That doesn’t make any sense in today’s economy. 

Second, two toy stores, both in South Carolina, next to each 

other. They both have the same sales. They both have the same 

profit margin. One has an intangible holding company and pays 3 

percent of its gross sales as a royalty to a Delaware holding company, obliterating its sales tax or its income tax obligation. 

This is simply bad tax policy. It creates an unlevel playing field 

between interstate and local businesses, and we urge you to oppose 

this legislation. 

Thank you. 

[The prepared statement of Mr. Johnson follows:] 

33 

PREPARED STATEMENT OF R. BRUCE JOHNSON


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Ms. SA ́ NCHEZ. Thank you for your testimony, Mr. Johnson. 

At this time, I would invite Mr. Petricone to provide his oral testimony. 

TESTIMONY OF MICHAEL PETRICONE, VICE PRESIDENT, 

TECHNOLOGY POLICY, CONSUMER ELECTRONICS ASSOCIATION, ARLINGTON, VA 

Mr. PETRICONE. Good afternoon, Madam Chairwoman and Members of the Subcommittee. 

The Consumer Electronics Association [Inaudible] to create jobs, 

drive the economy, and—I don’t have to tell you in these tough economic times that [Inaudible]. 

There is one issue, however, that this Subcommittee can immediately address: The growing number of States using economic 

nexus theories to unfairly tax companies that have no physical 

presence within the State. 

No taxation without representation is America’s first governing 

principle. 

Having established our nation under that basis, our founders 

went further. They created a single national economy and imposed 

constitutional safeguards to ensure that States cannot act to impede interstate commerce. 

Unfortunately, the system our founders put in place is now eroding. 

The number of States with a statute or regulation establishing 

economic nexus without a physical presence has now grown to 

more than a dozen. 

The problems caused by this growing patchwork of taxation are 

obvious and they fall disproportionately on our small business 

members. 

As you know, small businesses run close to the bone. To [Inaudible] beneath reasonable taxation in a settled, predictable business 

climate, but increasingly, they face significant costs [Inaudible] 

their State tax liabilities. 

They must meet multiple filing requirements, keep multiple 

records, and deal with multiple sets of regulators. 

It is becoming difficult for them to make any reasonable estimate 

of their projected tax burden. You can imagine the challenges of 

long-term business planning in such an environment. 

Of course, small firms also have fewer resources to challenge 

questionable assessments in far away States. As a practical matter, 

when faced with these levies, they have little choice but to bite the 

bullet and write the check. 

As a technology association, we are especially concerned with the 

burdens the situation places on electronic commerce. 

At the very moment, the Internet grants every business access 

to a national marketplace, a crazy quilt of local tax obligations, 

throws a roadblock across the electronic highway. 

Businesses will avoid sales in the various States, and consumers, 

especially those in the remote areas, will be unable to go online 

and get the goods they need. 

This situation will not resolve itself. In fact, left alone, it will get 

worse. 

44 

Out-of-state businesses present at the timing targets to legislators seeking to raise revenue. Naturally, States have every political 

incentive to exploit their tax burdens as aggressively as possible. 

Meanwhile, States are making conflicting decisions and the Supreme Court has declined to address this issue. Specifically, the 

Supreme Court recently refused to hear two cases challenging the 

constitutionality of the economic nexus approach. Naturally, States 

see this as a green light to press forward with more economic 

nexus legislation. 

Pursuant to your authority under the commerce clause, it is time 

for you to act. There is ample precedent here. 

A few examples: You have moved to prevent multiple States 

taxes on electronic commerce. You have ensured that States cannot 

impose apply-over taxes on airlines. 

And you have restricted taxation of mobile communication services to the State where the service is primarily used. 

Specifically, we now urge you to support H.R. 5267, the Business 

Activity Tax Simplification Act of 2008. The bill provides that, pursuant to the commerce clause, a State may not impose business activity taxes on businesses that have no physical presence in the 

State. 

And the physical presence rule clearly clarifies the State taxation 

landscape. It is easy to understand. It is easy to enforce. Its brightline standard ensures that small businesses know with certainty 

when and where they will be taxed. 

For a business owner, this means fewer resources spent on tax 

compliance and litigation and more resources invested in building 

their business. 

Such an approach would also ensure compliance with our international treaty obligations. In every tax treaty to which the U.S. 

is a party, the universal climate for imposing income taxes on nonresidents is physical presence in the taxing jurisdiction. 

This is a fair and reasonable solution. Contrary to opponents’ 

claims, it will not limit a State’s ability to tax shelters or allow 

businesses to restructure their activities to avoid paying legitimate 

taxes. That is not the intention here. Our members are good corporate citizens. 

We do not object to paying our fair share of taxes. We simply believe that States that provide meaningful benefits to the business, 

like water, roads, fire, police protection, should properly receive the 

tax revenue rather than a distant State that provides no benefits. 

Members of the Committee, the constitution is clear. The right 

to regulate beyond individual States’ borders lies, not with the 

States but with Congress. A bright-line physical presence rule 

eliminates ambiguity, stimulates investment, and promotes interstate commerce. It is good for large and small businesses, and it 

is good for the economy. 

We urge Congress to support H.R. 5267, the Business Activity 

Tax Simplification Act of 2008. 

I commend you for holding this hearing, and I look forward to 

answering your questions. 

[The prepared statement of Mr. Petricone follows:] 

45 

PREPARED STATEMENT OF MICHAEL PETRICONE


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Ms. SA ́ NCHEZ. Thank you, Mr. Petricone. 

At this time, I would like invite Mr. Quam to give his testimony. 

TESTIMONY OF DAVID C. QUAM, DIRECTOR, OFFICE OF FEDERAL RELATIONS, NATIONAL GOVERNORS ASSOCIATION, 

WASHINGTON, DC 

Mr. QUAM. Chairwoman Sa ́nchez, Mr. Jordan, Members of the 

Subcommittee, it is a privilege to go back here before you again on 

behalf of the National Governors’ Association, this time, expressing 

governors’ strong opposition to H.R. 5267, the ‘‘Business Activity 

Tax Simplification Act of 2008.’’ 

It is not often that governors can come together on a consensus 

basis behind a policy and then State that policy clearly. It just so 

happens that in this particular area, we have a very precise process statement from the governors. 

‘‘The nation’s governors oppose any further legislative restriction 

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.’’ 

‘‘H.R. 5267, like its predecessors that we have discussed before, 

represents an unwarranted Federal intrusion into State affairs 

that would allow companies to avoid and evade State business activity taxes, increase the tax burden on small businesses and individuals, alter established constitutional standards for State taxation, and at the end of the day, cost States billions of dollars.’’ 

Rather than going through my written testimony, I wanted to 

focus on something because I think the witnesses covered it. There 

is a distinct question of philosophy here. Everyone talks about— 

and Congressman Goodlatte and Boucher, who I respect a lot— 

talked about modernizing a 49-year-old law. 

The question is should we be modernizing the 49-year-old law. 

That is a difference economy and a different time. 

It was a law put in place when business could only be done by 

a handshake, by traveling into a State. We are in an Internetbased economy, and we have experienced several debates with this 

Committee regarding what an Internet-based and communicationsbased economy means. 

In today’s economy, you can do business in another State without 

ever setting foot there. From a State’s perspective, that means that 

out-of-state companies can come in, compete with your mom-andpop stores and compete with your State businesses but not share 

the tax burden of the roads, the education, which I would argue 

that every company who is doing business in the State benefits 

from the services that are provided by that State. 

I think, philosophically, States have come together with regard 

to simplification of big sales taxes. The Streamlined Sales Tax and 

Use Agreement is an example where States have come together to 

address the complex issue and try to solve a national problem in 

working with business. 

At the end of the day, we are trying to mostly form a physical 

presence standard for sales taxes, which is what Quill said, into 

more of an economic presence standard where remote vendors can 

collect and be asked to collect those sales taxes. 

51 

To comment on the business activity side, say, we are going to 

reverse where we current stand and move backwards 49 years, 

does not make a lot of sense from a tax policy standpoint. 

And certainly, when you are talking about congressional interference with State tax systems, Congress has to be very, very careful about when it crosses that line. 

I would also like to say that this is a bottom-line issue. If I was 

representing a company right now, I also would be on this bill. I 

would support it because it is a $6 billion tax break for business. 

It is $6 billion that will go to almost any business who is not physically present. 

However, it is also a $6 billion tax break that can go to companies who are physically present. 

Under this bill, you can do the type of tax planning where you 

can have two toy stores next to each other; one who has the means 

to hire the tax counselors to actually exploit the loopholes in this 

bill. And all of a sudden, you have the same stores physically 

present in the State, one paying business activity tax and one not. 

That does not seem to be a good standard for Congress to be setting for a modern economy. 

Lastly, there is a lot of talk about States entering into discussions. 

I would agree that clarifying the laws, making it clear, moving 

forward, are discussions worth having, but they must be balanced 

with State interest of sovereignty and the revenue interest of 

States. 

NGA is repeatedly on this issue over the past years, and I think 

Mr. Delahunt made this point at the last hearing. Please get together and have a discussion of how we can move forward. 

Unfortunately, in that time, my phone rang once. And that call 

was to tell me that this bill was being dropped. 

The governors would welcome a discussion, but I think we have 

to talk about what is the question that has to be—what is the question and what is the problem, and then what can we do in a balanced fashion that makes sense, respecting State sovereignty and 

the revenue concerns. 

Thank you, Chairwoman. 

[The prepared statement of Mr. Quam follows:] 

PREPARED STATEMENT OF DAVID C. QUAM

Chairwoman Sanchez, Ranking Member Cannon and members of the Subcommittee, I am pleased to be here on behalf of the National Governors Association 

(NGA) to communicate governors’ strong opposition to H.R. 5267, the ‘‘Business Activity Tax Simplification Act of 2008.’’ 

Governors oppose H.R. 5267: 

Governors’ long-standing policy regarding federal interference with state business 

activity taxes is clear and unambiguous. NGA Policy reads: 

‘‘The nation’s governors oppose any further legislative restriction 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.’’ (NGA Policy Position, EC-9) 

H.R. 5267, the ‘‘Business Activity Tax Simplification Act of 2008,’’ like its predecessors in other Congresses, represents an unwarranted federal intrusion into state 

affairs that would allow companies to avoid and evade state business activity taxes 

(BAT); increase the tax burden on small businesses and individuals; alter estabVerDate Aug 31 2005 12:23 Mar 20, 2009 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 H:\WORK\COMM\062408\43150.000 HJUD1 PsN: 43150
52 

lished constitutional standards for state taxation; and cost states billions in existing 

revenue. While governors welcome the opportunity to discuss issues related to business activity taxes, they urge Congress to oppose measures such as H.R. 5267 that 

would assist large corporations to the detriment of other taxpayers and states. 

1H.R. 5267 violates core principles of federalism: 

Governors oppose H.R. 5267 because it represents an unnecessary intrusion into 

the states’ authority to govern. U.S. courts have long recognized the authority of a 

state to structure its own tax system as a core element of state sovereignty. H.R. 

5267 would interfere with this basic principle by altering the constitutional standard that governs when states may tax companies conducting business within their 

borders. Specifically, the bill would mandate the use of a physical presence standard 

for determining whether an entity can be taxed. This differs from economic presence, such as the ‘‘doing business’’ or ‘‘earning income’’ standards used by most 

states. As discussed below, this change would shrink state tax bases by relieving 

out-of-state businesses of BAT liability while allowing larger in-state companies to 

circumvent tax laws by legalizing questionable tax avoidance schemes. These outcomes would effectively constitute a federal corporate tax cut using state tax dollars—a decision that, fundamentally, should be left to state elected officials. 

1H.R. 5267 would encourage tax evasion and avoidance: 

H.R. 5267 promotes avoidance of state taxation. At a time when the federal government is closing loopholes in the federal tax code, H.R. 5267 would subvert state 

tax systems by creating opportunities for companies to structure corporate affiliates 

and transactions to avoid paying state taxes. 

The bill’s physical presence standard would significantly raise the threshold for 

business income taxation in most states and, according to a January 20, 2006 report 

by the Congressional Research Service (CRS) on similar legislation, lead to more 

‘‘nowhere income.’’ In fact, CRS noted that legislative exceptions to the supposed 

physical presence standard, including its massive expansion of P.L. 86–272 to services, ‘‘would . . . expand the opportunities for tax planning and thus tax avoidance 

and possible evasion.’’ 

If H.R. 5267 provides the opportunity for planning, corporations will use it to 

avoid taxation. For example, a recent Wall Street Journal article demonstrated the 

extent to which corporations already work to avoid state business taxation. (‘‘Inside 

Wal-Mart’s Bid to Slash State Taxes,’’ Wall Street Journal, Oct. 23, 2007.) The article details the extensive tax avoidance strategies of Wal-Mart as it sought to reduce 

its state tax liability through a series of sophisticated strategies, some of which 

states later identified as abusive and illegal tax shelters. A common thread among 

the strategies was the formation of entities in jurisdictions that do not tax certain 

activity, followed by a shift of income to the entity to avoid taxation. If enacted, the 

physical presence nexus standard of H.R. 5267 would federally codify such tax practices and grant corporations with the means to restructure their businesses with a 

federal permission slip to aggressively avoid state taxation. 

H.R. 5267 would harm locally-owned and small businesses: 

H.R. 5267 would favor large, multi-state corporations to the detriment of small 

businesses and individual taxpayers. By raising the jurisdictional standard for taxation, H.R. 5267 would effectively limit a state’s business activity tax base to instate companies. Out-of-state vendors could therefore compete for customers against 

in-state businesses with the advantage of inequitable tax responsibilities. 

At the same time, larger in-state companies with the size and means to hire professionals specializing in tax avoidance could minimize or eliminate their state business tax liability even though they are present in the state. This ability to be physically present yet avoid state taxation places a disproportionate tax burden on 

smaller, in-state businesses and individual taxpayers. Companies willing to compete 

for customers and earn revenue in a state should share the responsibility of paying 

for state services that benefit all businesses. 

H.R. 5267 would alter established constitutional standards: 

H.R. 5267 would alter the existing constitutional standard for taxation of business 

activity. The U.S. Supreme Court has never required a physical presence standard 

for imposing business activity taxes. In fact, since the time of this Subcommittee’s 

last hearing on this topic in 2005, state courts, and through its denial of certiorari, 

the U.S. Supreme Court, have clearly established economic presence, not physical 

presence, as the appropriate standard for determining if a company has sufficient 

contacts to impose a business activity tax. (A&F Trademark, Inc., et al. v. Tolson, 

605 S.E. 2d 187 (N.C. Ct. App. 2004), review denied (N.C., 2005), cert denied, 126 

S. Ct. 353 (2005); Kmart Properties, Inc. v. Taxation and Revenue Dept., No. 21,140 

53 

(N.M. Ct. App. 2001), certx quashed (N.M. 12/29/05); Lanco, Inc. v. Director, Division of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied, 127 S.Ct. 2974 (U.S., 6/18/ 

07); Geoffrey, Inc. v. Oklahoma Tax Commission, 132 P.3d 632 (Okla. Ct. Civ. App., 

12/23/05), review denied (Okla., 3/20/06); Commissioner v. MBNA America Bank, 

N.A., 640 S.E.2d 226 (W.V. 2006), cert. denied, FIA Card Services, N.A. v. Tax Commissioner of West Virginia, 127 S.Ct. 2997 (U.S., 6/18/07)). H.R. 5267 would disrupt 

this well-established constitutional standard and call into question state business 

activity tax systems in every state. 

H.R. 5267 would undermine state revenues: 

H.R. 5267 represents a huge unfunded mandate that will result in the loss of billions of state dollars. A survey released by the National Governors Association found 

that a substantially similar House bill, H.R. 1956, would cost states more than $6.6 

billion annually. (‘‘Impact of H.R. 1956, Business Activity Tax Simplification Act of 

2005, On States,’’ National Governors Association, September 26, 2005.) Preliminary 

cost estimates for H.R. 5267 yield similar results, with first-year loss estimates 

ranging from $20 million in a state like Idaho to over $366 million for New Jersey. 

State losses also will grow as companies restructure to take advantage of H.R. 

5267’s loopholes. California estimates that if enacted, H.R. 5267 would cost the state 

$135 million in 2011 then grow to more than $614 million just two years later. 

This shift in revenue, while beneficial to business, is particularly harmful to 

states because unlike the federal government, states are required to balance their 

budgets. Consequently, when federal action causes states to lose revenues, states 

must act to replace lost funds by either increasing taxes or cutting programs. The 

economic effects of such actions are pro-cyclical in that they make economic 

downturns worse. NGA already predicts that 21 states are likely to face $34 billion 

in budget shortfalls for fiscal year 2009. Federal legislation that would reduce corporate state taxes by $6 billion annually would only further exacerbate the pro-cyclical pressures on states and thereby prolong the economic downturn and delay recovery. 

Conclusion: 

States have demonstrated that they are willing to address state tax issues on a 

national basis. Through projects like the Streamlined Sales and Use Tax Agreement, states have come together with the business community to fashion workable 

solutions that address both private and public sector interests. 

Unfortunately, in the context of business activity taxes, proponents of bills like 

H.R. 5267 have shown little willingness to work with states to either properly define 

the problem or discuss solutions that balance the goals of certainty and consistency 

with state authority and revenue requirements. As a result, NGA will continue to 

oppose legislation like H.R. 5267 and call upon Congress to reject legislation that 

interferes with state business activity tax systems. 

Ms. SA ́ NCHEZ. Thank you, Mr. Quam. 

We will now begin our round of questioning, and I will begin by 

recognizing myself first for 5 minutes of questions. 

Mr. Johnson, businesses contend that it is understandable for 

them to pay taxes when they receive government benefits in return, such as police and fire protection. 

How do you respond to supporters of a physical presence standard who contend that businesses receive no benefit from government under the economic presence standard? 

Mr. JOHNSON. Well, I would respond in two ways, Madam Chair. 

First, I would say that—take the example of the bank, the outof-state bank. 

It is using the same financial infrastructure that a State bank 

is using. It is using the courts to enforce its contractual obligations. 

It is benefitting from the working force and exploiting the market 

in the State the same way that a local bank is. 

It doesn’t have to pay property taxes because it doesn’t have 

property there, but it is certainly exploiting the market and the civilized society that is created there. 

54 

So I think that bank does benefit from the courts, the infrastructure provided by the State. 

Secondly, look at the toy store example. You can have, under this 

bill, you can have an intangible holding company that essentially 

sucks the profit out of a bricks and mortar company and it won’t 

have to pay any tax. 

Under 86-262, you can have those salesmen driving on State 

roads, being protected by the State police force, having company 

cars protected by the State police force and the fire department. 

They simply receive those benefits. They should pay a fair share. 

Ms. SA ́ NCHEZ. Thank you. 

Mr. Quam, I know you have been before this Subcommittee many 

times, but with respect to this particular issue, do you agree that 

there is a problem here? That there is a lack of a clear and uniform 

standard that has made it difficult for businesses to meet their filing obligations and to sort of plan prospectively? 

Mr. QUAM. There are certainly different standards. But as we 

have talked many times, federalism is difficult. 

The sovereignty of States to establish their own revenue systems 

is a core of that sovereignty. And so that will engender certain complexities. 

Ms. SA ́ NCHEZ. But you don’t think that, perhaps, we might be 

able to benefit from a little uniformity or a little more clarity? 

Mr. QUAM. There can be benefits to uniformity. I think they really have to be measured against State sovereignty interests. 

Again, I think States may be willing to discuss, you know, what 

the particular problem is and see if there is a way to clarify. However, States still need the flexibility to control and manage their 

own State systems. 

Differences will always remain. There are some things that can 

be done. Unfortunately, under this bill, what you are really doing 

is gutting the entire system to solve what I think may be a much 

more pointed problem. 

Also, one thing that this bill does not do is establish a clear line. 

Physical presence sounds clear, but not when you incorporate all 

the exceptions that still remain in this bill. 

They might not be line for line like they were in previous measures, but they are still contained in here with some of the exceptions. 

So, unfortunately, we don’t have a bright-line before us. 

Ms. SA ́ NCHEZ. That is a point well-taken. 

You indicate in your written statement that H.R. 5267 would increase the tax burden on small businesses and individuals, and I 

am interested in knowing why you believe that. 

Mr. QUAM. The reason for that is, going back to my example of 

the two toy stores, the fact of the matter is, under physical presence standards, particularly the one in this bill, you can have a 

company that is physically presently that does not pay tax. 

Your small business who does not have the fleet of accountants 

and does not have the tax attorneys to do some of the planning 

necessary to take advantage of the loopholes in this bill is going to 

pay full freight. 

55 

They are going to pay the State business activity tax, the property tax. They are going to pay their taxes as good corporate citizens. 

The company next to them that may be a large conglomerate or 

corporation that has the ability to do that can do the tax planning 

to avoid that State taxation, and now you have two stores running 

the same business. One has a lower tax burden than the other, yet 

both are physically present. 

That increases the burden on those who are there that can’t do 

that tax planning because the tax burden still remains within that 

State. 

Ms. SA ́ NCHEZ. Mr. Petricone, I know that you stated that your 

members are good corporate citizens and that the purpose of this 

bill is not to evade taxes and I want to believe you. 

But I do also know that there are, occasionally, a few bad apples 

that will try to exploit certain advantages. 

I wanted to ask you specifically, earlier this year the New York 

State Bar Association recommended that Congress establish a clear 

nexus standard for a States’ imposition of a business activity tax. 

And it suggested that the standard take into account economic 

presence rather than a pure physical presence test and include a 

reasonable de minimis threshold before imposing a tax on a business. 

Do you like anything at all about the Bar Association’s recommendation? Or are you totally opposed and wholeheartedly just 

a supporter of the physical presence standard? 

Mr. PETRICONE. Well, Madam Chairwoman, there is many ways 

to get there. One thing that small businesses need that is very important to them is certainty. 

They want to know how they are being taxed, where they are 

being taxed, and who they are being taxed by. 

Again, you know, when you have minimal resources, the notion 

of complying with multiple taxing entities operating under multiple 

rules is—I mean, it may sound look a minimal thing, but it is extraordinarily burdensome to you and expensive. 

Ms. SA ́ NCHEZ. Wouldn’t a small business that was subject to de 

minimis standards have some certainty? 

Mr. PETRICONE. Right? Well, the attraction of the physical presence rule for us is that that is far and away the simplest to understand and the simplest to administer. 

While I realize that there are other ways to get there, and that 

is good and that should be discussed, for us, it is the simplicity of 

the physical presence standard that is very attractive. 

Ms. SA ́ NCHEZ. You are a physical presence standard only guy? 

Mr. PETRICONE. That is what we believe to be the best solution, 

yes. 

Ms. SA ́ NCHEZ. Okay. Thank you. 

My time has expired. At this time, I would recognize our acting 

Ranking Member, Mr. Jordan, for 5 minutes of questioning. 

Mr. JORDAN. Thank you, Madam Chair. 

Mr. Johnson, a couple of times, you have mentioned 86-272 is 

clear that a company can have a sales force in a State driving on 

roads—to use your language—and not be subject to tangible personal property tax in that jurisdiction. 

56 

You also said in your opening comments that you think businesses have failed to show that there is adequate need to update 

this 1959 law. 

How do you square what you just said with the example that Mr. 

Ducharme gave with his experience in the State of New Jersey and 

them seizing his property and stopping the boats from being delivered? 

How do you square those two? 

Mr. JOHNSON. Well, I guess I would respond to Mr. Jordan first. 

I would agree that there is a need for some clarity in this area. 

The Multi-State Tax Commission has promulgated a factor presence formula that would provide that most businesses don’t have 

to pay any income tax in a State unless they have either more than 

$500,000 worth of sales, more than $50,000 worth of property, or 

more than $50,000 worth of payroll in the State. 

I think something like that should be adopted by the States uniformly. I think an important part of tax policy is certainty, and 

small businesses do need certainty. 

So to the extent that that problem exists, and it does exist, I 

think the States should work collectively to solve it. We would 

rather have the businesses come to us as States and solve that 

rather than have it imposed at the congressional level. 

Second, I would just say that New Jersey is not here. They provided a letter that describes their jeopardy assessment policy. 

Jeopardy assessments are common in the States. They are also 

used by the Federal Government. 

There is always, at the very least, a post-deprivation due process 

hearing that is required in case those powers are being exercised 

inappropriately. 

You know, without—— 

Mr. JORDAN. Okay. 

Mr. Ducharme, in your experience, you related the New Jersey 

story, are you seeing this more widespread? Are you seeing other 

States being aggressive? 

I mean, give me some of your experiences. 

Mr. DUCHARME. Our personal experience in New Jersey has definitely been the most aggressive. 

The process that we have encountered with the other States that 

have contacted us has been a phone call questionnaire. Mind you, 

that really doesn’t have any merit to whether or not they are going 

to assess tax on you, but it has been more of a formal phone call 

questionnaire return separation process as opposed to what we encountered in the State of New Jersey. 

Mr. JORDAN. Sure. 

Any time any department of taxation is calling you, you certainly 

take notice, I would think. 

Mr. DUCHARME. Yes. 

Mr. JORDAN. I understand how that is. 

Maybe you and Mr. Petricone, give me your general thoughts on 

where you think it is headed. I mean, if we don’t get some clarification, what—give me your thoughts of what you see in the not too 

distant future and how that impacts you. 

And I know you have talked about that some. I will come back 

to you, Mr. Petricone. 

57 

Mr. PETRICONE. Right. Congressman Jordan, what worries me 

about this issue is, left to its own devices, there is an upward—effect. 

Mr. JORDAN. Right. 

Mr. PETRICONE. You know, I mean, if somebody doing this to my 

company, than I am certainly going to do this to your company. 

You know, and you have 50 States, and you have got municipalities and—you know, so there are potentially dozens and dozens of 

jurisdictions where these may be enacted. 

Mr. JORDAN. Right. 

Mr. PETRICONE. So we are afraid—right now, you can say it is 

only a dozen States, what is the big deal. But we are convinced 

that, left to its own devices, it is going to worse. I mean, the condition is there for it to get worse. 

I can also add—— 

Mr. JORDAN. You know, that is the nature of government. 

Mr. PETRICONE [continuing]. Right. And, of course, there is every 

political incentive to export your tax burden, sir. 

Even at the present time, there are a few issues; Congressman— 

gets many calls from our small business members saying, you 

know, this just happened to me, this is terrible, what can I do. 

And at present, there is not a lot I can tell them. 

Mr. JORDAN. Go ahead. I have got one more question for Mr. 

Petricone, but go ahead. 

Mr. DUCHARME. I think the discussions that we have had internally at Monterey have centered around, you know, what is the rationale for this process; how did it begin? 

And it all stems from, and it is our opinion that it is the constraints that State budgets are having that they are looking for additional revenue. 

This seems to be a short-term solution to a long-term issue. 

Monterey Boats, all activity occurs in the State of Florida. 

We have independent sales reps that are not employees of Monterey, so we don’t benefit from any of the resources of the States 

that we deliver boats into. 

We pay income, sales, property, real property taxes in the State 

of Florida. We pay for permits and fuel taxes in the various States 

that we deliver to. 

At the end of the day, our activities within all these States that 

are imposing tax on us, we don’t actually benefit from. The ultimate buyer, yes, they do; but we, as a corporation, do not. 

Ms. SA ́ NCHEZ. The time of gentleman has expired 

I just wanted to make sure the witnesses have your mics on 

when you are answering questions. For recording purposes, we 

need the mics on even though we can hear you. 

At this time, I would like to recognize the Chairman of the full 

Judiciary Committee who has joined us, Mr. Conyers, for 5 minutes 

of questions. 

Chairman CONYERS. Thank you very much, Chairwoman 

Sa ́nchez. 

What a great afternoon here to have standing-room-only. 

Why is it that Subcommittee number five always seems to attract more attention than all the other great Subcommittees that 

exist on the Judiciary Committee? 

58 

Ms. SA ́ NCHEZ. It is because of the Chairwoman, I think. That is 

the short answer, Mr. Conyers. 

Chairman CONYERS. Well, the Chairwoman is correct herself. 

Look, when we started here in the 110th Congress, nobody wanted to go on Subcommittee number five. Now, I am still getting requests for people that ask me to enlarge number five, can they get 

on it for next year, and it goes on and on and on. 

More subpoenas and authorizations for subpoenas come out of 

this Subcommittee than any other—than all the other Subcommittees on the Judiciary Committee. 

Look, and here we are this afternoon, standing-room-only, offices 

on K Street, Pennsylvania Avenue, L Street, Georgetown, are left 

lane barren. And everybody is here. 

I look across the room, the only ones that aren’t here are Members of Congress that have offices in those places that I just named. 

And so we know that something important and significant and 

serious is afoot here. 

Now, what to do? 

Well, let us have some fairness for the business community. 

Okay. But let us remember that the States are catching hell. Most 

of them are insolvent. And so what should we do? 

Well, it devolves upon this powerful Subcommittee under the distinguished leadership of the gentlewoman from California to urge 

that there be further negotiations after this splendid hearing this 

afternoon. 

We have got to start talking with some people. Here, we have 

wonderful divisions here. We heard our first two colleagues on the 

Committee. They are joined by Messrs Pence and Gallegly. 

And, of course, the distinguished gentlelady from California, Ms. 

Lofgren and former magistrate Hank Johnson. 

I mean, the only few people hanging out here uncommitted are 

the gentleman from Massachusetts and the acting, Ranking minority Member here and myself. 

And so we would like the results of this hearing to be the predicate for some other discussion in which we try to resolve what is 

the central dilemma. 

Sure, let us protect business. But tell me what I tell Governor 

Granholm when I go back to Detroit just what we did. We just relieved you of millions of dollars of taxes that would have been coming into Michigan because of the benevolence of the Subcommittee 

number 5 and this work it sent to the full Committee. 

That may present a difficult situation. 

So what advice do you witnesses have here for a person in my 

predicament? 

Ms. SA ́ NCHEZ. And I would note that the witnesses have 5 seconds to answer Mr. Conyers’ question. [Laughter.] 

Chairman CONYERS. Well, I yield back the balance of my time. 

[Laughter.] 

Ms. SA ́ NCHEZ. If anybody would like to take a crack at that briefly? 

Mr. Quam? 

Mr. QUAM. Congressman, I think you make a very good point. 

Taking money away from the States right now is a very bad idea. 

59 

States, of course, have to balance their budgets, so taking $6 billion out of State economies would actually hinder States’ ability to 

recover even from the economic downturn we are in. 

A State such as yours, I think the estimate is almost $500 million under this bill that would be to be filled by the State, a State 

that is having difficulty. 

And I know that the governor has communicated that to you. 

Governors are always willing to talk. I think discussions can be 

warranted. They have to be balanced. 

Clarity and uniformity has to be balanced against State sovereignty and revenue needs. If those discussions can take place 

with balance, there is probably some place to go. 

However, unfortunately, up until now, we haven’t had a bill with 

us that suggests that balance. 

I think discussions within that framework are possible. They are 

going to take some work. But I thank you for your comments regarding this bill and the condition of States. 

Ms. SA ́ NCHEZ. Mr. Johnson? 

Mr. JOHNSON. I would just like to make one brief point. 

In my view, this is not so much a business versus States bill; this 

is a multi-state, sophisticated, large business versus local business. 

In Utah, every dime we get from the income tax, the corporate 

income tax and the individual income tax, go to educate our children. 

We are going to have to get that money from somebody. If we 

can’t get it from multi-state businesses, we are going to have to get 

it from our individual taxpayers or our local businesses. 

That is, to me, where the rubber hits the road on this one. 

Ms. SA ́ NCHEZ. Thank you. 

Mr. Petricone? 

Mr. PETRICONE. Mr. Chairman, I appreciate you being here, and 

I appreciate the very articulate way you put forward the very legitimate concerns of the States. 

Many of the business we represent are small businesses. They 

are trying to create jobs, and they are trying very hard to keep 

their heads above water in a very, very tough economy. 

And they are being hit by these taxes in States, sometimes, they 

hardly knew they were doing business in. 

And, you know, I am getting calls on a regular basis by members 

who want to know what to do. 

Small businesses operate close to the bone. They are now in a position to comply with multiple taxing entities and multiple tax jurisdictions. 

So I would simply ask that you and this Committee, you know, 

do everything you can to come up with an environmental solution 

that is fair to the States who have legitimate revenue needs but 

also to businesses and small businesses that are trying to create 

jobs and keep on moving forward. 

Ms. SA ́ NCHEZ. Thank you. 

At this time, I would like to—Mr. Ducharme, did you want to 

add anything? 

At this time, I would like to recognize the gentlewoman from 

California, Ms. Lofgren for 5 minutes of questioning. 

60 

Ms. LOFGREN. Thank you, Madam Chairwoman, and thank you 

for holding this hearing. 

I do think the hearing is an important one. There are important 

issues presented by all the witnesses here today. 

I actually think—I co-sponsored the bill. I do think that there is 

lack of clarity in the law on what constitutes sufficient nexus for 

taxation. 

It is pretty clear the Supreme Court is not going to provide clarity, so that means that if there is going to be some clarity, probably, we need to play a role. 

As Mr. Conyers has just said, and I think you are noting, there 

is room for the States and the business community to come together on this issue and reach an agreement. 

And I think, you know, it is possible, but we have a role to play 

in helping that to happen. If so, I am willing to do whatever part 

is necessary. Whether or not agreement is reached, I think further 

exploration would be of enormous value. 

You know, my State of California has a $19 billion budget deficit 

and getting larger. I know that if we had the same income tax 

rates that we had when Ronald Reagan was governor, basically, we 

wouldn’t have a deficit. 

So there are many things that States can do, and I am mindful 

that it is, oftentimes, easier to tax the guy who isn’t in your State 

than the guy who is in your State and who has a presence. 

So that is not necessarily the right and responsible way to deal 

with a budget crisis. 

I was in local government—I am only going to be able to say this 

for 6 more months—longer than I have been in the House of Representatives, so I am not hostile to the need to get revenue into 

public services. It is very important. 

But we also need to foster a decent business environment. 

I was wanting to see the letter sent by New Jersey. Apparently, 

we don’t have a copy of it. Hopefully, we can get that later. 

But, Mr. Ducharme, can you explain what the representation 

was made by New Jersey in that letter? 

Mr. DUCHARME. Can you clarify for me the initial jeopardy assessment letter that we received or the notification? 

Ms. LOFGREN. Mr. Johnson said that the State of New Jersey 

had sent a letter for this hearing. Apparently, it cannot be found 

anywhere. Well, you haven’t seen it either. 

Mr. DUCHARME. We received an acknowledgement letter from the 

State of New Jersey notifying us that we had been scheduled a 

date for the Conference and Appeals Branch. 

Ms. LOFGREN. All right. 

Mr. DUCHARME. Is that the letter that you are referring to? 

Ms. LOFGREN. I don’t think that is what Mr. Johnson was referring to. Maybe I can ask Mr. Johnson. 

What was in that letter? 

Mr. JOHNSON. Yes. If I may, I have a copy of a letter that is addressed to the Honorable Linda Sa ́nchez from the State of New Jersey dated June 18, 2008. 

Ms. LOFGREN. I think you are the only one who has that letter, 

so I would love to see it if I could. 

61 

Mr. JOHNSON. We will certainly be pleased to provide copies to 

the Committee. 

Ms. LOFGREN. Maybe the clerk can get it now so I can take a 

gander at it. 

I am wondering, Mr. Petricone, when you talk about intangible 

and the kind of crazy quilt that we have now, why do you think 

that the bill that we are pursuing now actually provides the relief 

that is necessary in terms of uniformity, and how will that not disadvantage States? 

Mr. PETRICONE. Because, Congresswoman, at the very least with 

this bill, everybody is playing under the same rules. There is a definition of physical presence; everybody understands what it means. 

Small businesses and businesses in general know what their liabilities are and who they can be expected to be taxed by. 

The element of certainty is very important to us. 

Ms. LOFGREN. It just strikes me that the—our country was set 

up in a way to not constrain commerce between the various States 

because we are the United States of America. We are not a preE.U. Europe. 

Although this was never intended, perhaps, to disassemble that 

unity. In fact, if you start taxing entities for driving through a 

State, you are burdening, really, the economic entity that is the 

United States. 

So I think this measure is, you know, maybe it is not the perfect 

bill. I am happy to be a co-sponsor, but I think the principle—is 

enormously important, and I think that if the parties can come together and come to some agreement, that would probably be the 

best possible outcome because everybody has got an incentive. 

I mean, if we move forward, States are just afraid they will lose, 

and I think that is a likely outcome unless we can come up with 

some resolution. 

So I think everybody should be motivated. 

I thank the gentlelady for recognizing me. 

Ms. SA ́ NCHEZ. The time of the gentlelady has expired. 

At this time, I would like to recognize Mr. Feeney for his 5 minutes of questions. 

Mr. FEENEY. Well, I thank the Chairman, and I will be brief. 

I was only able to attend the last few minutes of the hearing, so 

I don’t want to be duplicitous of anything that has been asked. 

I should say that I have been a long-time supporter and co-sponsor of the act that is being considered today. 

And I have had a chance to review some of the testimony. 

You know, there is an old rhyme—I spent 12 years in the State 

legislature—that when it comes to raising revenue, the best way to 

do is, according to the rhyme, don’t tax you, don’t tax me, tax the 

guy behind the tree. 

And unfortunately, the guy behind the tree, all too often, is the 

person who is not there physically to defend himself, whether it is 

in the halls of the lobbyists on the last night of a legislative session 

or whether it is because they literally do not have a physical locus 

in the State. 

And, you know, I would suggest there are a couple constitutional 

protections of the so-called dormant clause to the commerce clause 

which has been resurrected in the Quill Case and, of course, I 

62 

think also the 14th amendment has some protections for people 

that are hit from one State with a tax that impacts them. 

Having said that, we have got some States that are understandably, including my State of Florida, had to cut about, oh, 10 percent of expenditures this year from about a $70 billion total State 

budget to $63 billion. 

So understandably, States are under pressure to raise revenues. 

But I think in order to have a balanced playing field to promote 

interstate commerce and to promote fair play, this bill strikes an 

important balance so that States have plenty of revenue options 

available to them, but basically taxing people that do not have a 

physical presence or, you know, I think has some fundamental 

problems. 

I do note that we have a Florida businessman here, and so you 

have had some experience with New Jersey and, perhaps—have 

you had any other States that have aggressively tried to pursue 

collection of taxes from you? 

Mr. DUCHARME. The State of Washington, the State of Michigan, 

the State of New Jersey, and inquiries from South Carolina and 

Maine. 

Mr. FEENEY. And given your experience, I guess I would just ask 

you to sort of speculate other types of businesses, maybe not boat 

manufacturers or your specific business, the uncertainty in the law 

with 49 States that you may ship to or have ancillary business 

with but are not physically located in, what type of uncertainty— 

what type of problems does that create for a business regardless of 

where they are actually physically located? 

What types of potential problems does that create as you are trying to create a business plan, trying to create, plans, a manufacturing facility, borrowing money to expand your business and, 

hopefully, create jobs. 

What type of planning dilemmas does that create for a small 

business person trying to grow into a mid-sized business or a large 

business? 

Mr. DUCHARME. That is a good question. 

The biggest and most pronounced issue is going to be the burden 

of the accumulated costs that we would incur from hiring staff to 

wrap their arms around and get an understanding the various 

States tax issues. 

Hiring and retaining accountants and tax attorneys and attorneys within each State would become a burden that, under the current economic situation, would be very difficult to pass along in the 

pricing of our, in our case, our boats. 

Mr. FEENEY. Well, I think that is a great point, you know, to 

have 50 different sub-accounting departments and tax-planning departments just to make sure you weren’t violating somebody’s laws 

somewhere would create a horrendous choice for small businesses 

trying to grow and make their products available. 

So with that, Madam Chairman, I think this bill, you know, 

strikes a good balance and I thank all of our witnesses and would 

be happy to yield back the balance of my time. 

Ms. SA ́ NCHEZ. The gentleman yields back the balance of his time. 

At this time, I would like to recognize the ever-patient gentleman 

from Massachusetts, Mr. Delahunt for 5 minutes. 

63 

Mr. DELAHUNT. Well, thank you so much for that kind and generous introduction. 

I have been attending these hearings—I should direct this to the 

Chair—long before you came to Congress. As Yogi said, ‘‘It is deja 

vu all over again.’’ 

I am disappointed to hear, Mr. Quam, that your phone rang only 

once since my last admonition. 

Other witnesses have testified, and I concur, that we are dealing 

with a different economy. This is a modern economy. The Internet 

is playing a more and more significant role, and we have to adjust. 

But there is also a political reality here, and I think you, Mr. 

Ducharme and Mr. Petricone, have recognized it. That is, that 

nothing is going to happen with this bill until there is some accommodations. 

You know, I just hear the arguments so eloquently put forward 

by my friend from Florida about the complexity of it all and the 

burdens that, particularly, small business have to endure. 

And the reality is that I think there is sentiment that supports 

dealing with that. 

And I would use the example of the SST—and Mr. Johnson, you 

are very familiar with that, and you are, Mr. Quam—where there 

has been substantial progress made to resolve that in favor of the 

business community to make it more simple. 

But what I see is a lack of political will on the part of the stakeholders to come to the table and to achieve a, I think, a potential 

consensus that you can all work with. 

I find it interesting that those that speak out in support of the 

business activity tax reform, let us call it, are reluctant to express 

their support for the streamlined sales tax when, really, they are 

all part of the same concerns. 

There ought to be, I think—and I have said it before—a grand 

solution, if you will. 

Was it you, Mr. Quam or Mr. Johnson, that indicated it is about 

$6-1/2 billion that would be lost revenue? 

Mr. QUAM. Yes, sir. 

Mr. DELAHUNT. What is the amount—what is the projected lost 

revenue to the States as a result of the Quill decision as it relates 

to the collection of the sales or use tax? 

Mr. QUAM. Last estimates were around $30 billion. 

Mr. DELAHUNT. $30 billion. So we would have a factor of five 

there. 

You know, I am sure there are ways to achieve reconciliation on 

all of these issues. 

I don’t see this particular proposal—maybe it gets out of Committee—but getting it through the Senate and on a President’s 

desk, I think you better go back and give it another shot and sit 

down and bring those other stakeholders that are not represented 

here with you to the tab and sit down with the governors and begin 

those conversations that could very well lead to a resolution. 

And I think there are people on this Subcommittee and the 

gentlelady from California, Ms. Lofgren, offered her good offices. I 

am sure the Chair of the Subcommittee and the Ranking Member 

would also be willing to participate in, somehow, mediating—or 

64 

navigating is probably a more appropriate term—through this difficult, thorny issue. 

Otherwise, you are going to have somebody sitting in this very 

chair 5 years from now, and there will be just be a different set 

of witnesses discussing the same issue. 

So I think Congress is clearly inclined to be supportive, however, 

I don’t see it as a major priority for this particular Congress. 

The will and the intent has to be generated by those impacted. 

With that, I will yield back. 

Ms. SA ́ NCHEZ. The gentleman yields back the balance of his time. 

I would now like to recognize my good colleague from the State 

of Georgia, Mr. Johnson for 5 minutes of questions. 

Mr. JOHNSON OF TEXAS. Thank you, Madam Chair. 

You know, there are various types of cutting instruments. You 

know, you have a meat cleaver that is, perhaps, a very fine cutting 

instrument to a butcher. Then you have a scalpel, which is a very 

fine cutting instrument to a surgeon. 

When one wields a cutting instrument, one must be careful with 

the tool selection. 

And I am not sure that the Supreme Court, on an issue such as 

this, is the kind of cutting instrument that is needed or is the type 

of butcher, if you will, or cutter. They are not the exact kind of cutter that is needed. 

Certainly, you don’t need a butcher on something like this, which 

means you don’t need a meat cleaver. 

And I am not sure that the legislative branch, with, you know, 

435 House members and 100 Senate members can wield a scalpel 

with the precision that that cutting instrument requires. 

But nevertheless, that is what we have. Some would say we don’t 

have a scalpel; we have got a meat cleaver and it is just 435 people 

with meat cleavers trying to chop something up and make something better. 

So I am saying that to say that, you know, the legislative branch, 

we certainly have the power to wield the meat cleaver. The judicial 

branch certainly has the wherewithal to wield a meat cleaver as 

well. 

But it seems to me that with 50 State revenue representatives 

or representatives of States, and with the number of organizations 

that represent large and small businesses, it would seem that those 

entities would get together so that they would not fall victim to either the congressional or judicial wielding of a cutting instrument. 

You just can’t—you don’t want to risk that. So this is the kind 

of situation, I think, that cries out for the parties to get together, 

using the offices of the Congress, to facilitate something that 

makes sense because times have changed since our constitution 

was ratified. 

It is a living document, so that means it is going to be subject 

to interpretation depending on the times. 

And certainly, times have changed. The commerce clause has 

held us in good standing and will continue to do so. But it is a matter of interpreting the time now and how we can have that constitution apply in a way that is efficient for business to operate and 

for America to have businesses, particularly, small businesses, that 

can compete in this global economy. 

65 

Small business is responsible for most of the job creation in this 

country, and I am torn because I support small businesses, but yet 

I am also sensitive to the needs of States and local governments 

to have sufficient revenues to do what we have to do to make life 

better for the people. 

So I am really conflicted. I am a co-sponsor on this bill because 

I do know we have got to have good business for this country to 

remain strong. 

And I will—I think most of the questions have already been 

asked and answered, and I won’t ask you to answer them any 

more. But I will offer my humble offices and expertise should it be 

necessary for the parties to be able to sit down and talk together. 

I will be happy to do whatever I can to help facilitate dialogue 

and discussion. I will yield back the few moments of time that remain. 

Ms. SA ́ NCHEZ. The gentleman yields back. 

We have concluded the hearing for today. 

I want to thank all of the witnesses for their testimony. 

Without objection, Members will have 5 legislative days to submit any additional written questions, when we will then forward to 

the witnesses and ask that you respond as quickly as you can so 

that they can also be made a part of the record. 

Without objection, the record will remain open for 5 legislative 

days for the submission of any additional materials. 

Again, I want to thank everybody for their time and their patience. 

And this hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 2:38 p.m., the Subcommittee was adjourned.] 

(67) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

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ANSWERS TO POST-HEARING QUESTIONS FROM MARK DUCHARME, 

VICE PRESIDENT AND CFO, MONTEREY BOATS, WILLISTON, FL 


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ANSWERS TO POST-HEARING QUESTIONS FROM R. BRUCE JOHNSON, COMMISSIONER, 

UTAH STATE TAX COMMISSION, SALT LAKE CITY, UT 


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ANSWERS TO POST-HEARING QUESTIONS FROM MICHAEL PETRICONE, VICE PRESIDENT, 

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POST-HEARING QUESTIONS SUBMITTED TO DAVID C. QUAM, DIRECTOR, OFFICE OF

FEDERAL RELATIONS, NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC 

———— 

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