S. HRG. 112–758 

TAX REFORM: WHAT IT MEANS FOR STATE 

AND LOCAL TAX AND FISCAL POLICY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

APRIL 25, 2012 

( 

Printed for the use of the Committee on Finance 

TAX REFORM: WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY 

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WASHINGTON : 

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80–344—PDF 2012

S. HRG. 112–758 

TAX REFORM: WHAT IT MEANS FOR STATE 

AND LOCAL TAX AND FISCAL POLICY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

APRIL 25, 2012 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

Sammartino, Frank, Assistant Director for Tax Analysis, Congressional Budget Office, Washington, DC ................................................................................... 5 

Rueben, Dr. Kim, senior fellow, Urban-Brookings Tax Policy Center, Washington, DC ............................................................................................................. 7 

Hellerstein, Walter, Francis Shackelford professor of taxation, University of 

Georgia School of Law, Athens, GA .................................................................... 8 

Henchman, Joseph, vice president of legal and state projects, Tax Foundation, 

Washington, DC ................................................................................................... 10 

Zinman, Sanford, owner, Zinman Accounting, White Plains, NY ....................... 12 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 29 

Cantwell, Hon. Maria: 

Prepared statement .......................................................................................... 31 

Enzi, Hon. Michael B.: 

Prepared statement with attachments ........................................................... 33 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 3 

Prepared statement .......................................................................................... 44 

Hellerstein, Walter: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 46 

Henchman, Joseph: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 79 

Rueben, Dr. Kim: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 93 

Sammartino, Frank: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 98 

Responses to questions from committee members ......................................... 116 

Zinman, Sanford: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 122 

Responses to questions from committee members ......................................... 131 

COMMUNICATIONS

Airgas, Inc. ............................................................................................................... 137

Amazon.com ............................................................................................................. 139 

American Bankers Association ............................................................................... 143 

American Booksellers Association .......................................................................... 147 

American Federation of State, County, and Municipal Employees (AFSCME) . 149 

American Public Power Association (APPA) ......................................................... 155 

American Trucking Associations ............................................................................ 157 

Page

IV 

Beall’s Inc. and Subsidiaries ................................................................................... 168 

Bond Dealers of America ......................................................................................... 170 

Cardozo School of Law, Yeshiva University .......................................................... 174 

Center for Fiscal Equity .......................................................................................... 184 

Coalition for Rational and Fair Taxation .............................................................. 187 

The Computing Technology Industry Association (CompTIA) ............................. 197 

Consumer Electronics Association (CEA) .............................................................. 204 

Copeland, Dale ......................................................................................................... 205 

Cornett, Hon. Mick .................................................................................................. 207 

Council of Development Finance Agencies (CDFA) .............................................. 212 

Council On State Taxation (COST) ........................................................................ 214 

The Cristol Group .................................................................................................... 219 

Direct Marketing Association, Inc. (DMA) ............................................................ 220 

The Dow Chemical Company .................................................................................. 225 

Download Fairness Coalition .................................................................................. 227 

eBay Inc. ................................................................................................................... 232 

Economists Incorporated ......................................................................................... 238 

FASTSIGNS International, Inc. ............................................................................. 243 

The Federal Tax Authority, LLC (FedTax) ........................................................... 245 

Federation of Tax Administrators .......................................................................... 250 

Fischer and Wieser Specialty Foods, Inc. .............................................................. 255 

Fuhrman, Hon. Stephen .......................................................................................... 263 

Institute on Taxation and Economic Policy (ITEP) .............................................. 265 

International Association of Fire Fighters ............................................................ 275 

International City/County Management Association, et al. ................................. 282 

International Franchise Association (IFA) ............................................................ 285 

Large Public Power Council (LPPC) ...................................................................... 287 

LORD Corporation ................................................................................................... 295 

Macy’s, Inc. ............................................................................................................... 298

Motion Picture Association of America, Inc. .......................................................... 299 

Multistate Tax Commission .................................................................................... 303 

National Association for the Specialty Food Trade, Inc. (NASFT) ...................... 315 

National Association of Counties, et al. ................................................................. 318 

National Conference of State Legislatures ............................................................ 325 

National Education Association (NEA) .................................................................. 338 

National Foreign Trade Council, Inc. (NFTC) ....................................................... 340 

National Governors Association ............................................................................. 341 

National Marine Manufacturers Association ........................................................ 348 

National Retail Federation ..................................................................................... 351 

National Taxpayers Union (NTU) .......................................................................... 356 

Nesset, Hon. Jeff and Hon. Leon Smith ................................................................ 359 

NetChoice ................................................................................................................. 361 

Neutral Posture ....................................................................................................... 373 

New Jersey Bankers Association ............................................................................ 375 

New York Bankers Association .............................................................................. 377 

North American Association of Food Equipment Manufacturers (NAFEM) ...... 380 

Oklahoma Municipal League .................................................................................. 383 

OppenheimerFunds, Inc. ......................................................................................... 386 

Organization for International Investment (OFII) ............................................... 394 

Outdoor Living Brands, Inc. ................................................................................... 400 

Partnership for New York City .............................................................................. 409 

Performance Marketing Association, Inc. .............................................................. 411 

ProHelp Systems, Inc. ............................................................................................. 414 

PulteGroup, Inc. ....................................................................................................... 420 

Retail Industry Leaders Association (RILA) ......................................................... 422 

Sears Holdings Corporation .................................................................................... 426 

Securities Industry and Financial Markets Association (SIFMA) ....................... 428 

Smithfield Foods, Inc. .............................................................................................. 430 

The Soccer Dealers Association .............................................................................. 433 

Software Finance and Tax Executives Council (SOFTEC) .................................. 435 

Specialty Equipment Market Association (SEMA) ............................................... 442 

Stonewall Kitchen LLC ........................................................................................... 445 

Third Way Progressives .......................................................................................... 448 

Twin Falls Area Chamber of Commerce ................................................................ 458 

Washington Retail Association ............................................................................... 460 

Watermark Books and Cafe ́ .................................................................................... 462 

(1) 

TAX REFORM: WHAT IT MEANS FOR STATE 

AND LOCAL TAX AND FISCAL POLICY 

WEDNESDAY, APRIL 25, 2012 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:11 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Wyden, Cantwell, Nelson, Cardin, Hatch, 

Snowe, and Thune. 

Also present: Democratic Staff: Lily Batchelder, Chief Tax Counsel; Holly Porter, Tax Counsel; Tiffany Smith, Tax Counsel; and 

Ryan Abraham, Tax Counsel. Republican Staff: Chris Campbell, 

Staff Director; Mark Prater, Deputy Chief of Staff and Chief Tax 

Counsel; Nick Wyatt, Tax and Nomination Professional Staff Member; and Jim Lyons, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

In Federalist Paper No. 41, James Madison wrote that one of the 

powers conferred on the Federal Government is the ‘‘maintenance 

of harmony and proper intercourse among the States.’’ 

When Madison and our founders crafted the Constitution, they 

debated the proper division of power between the Federal and 

State governments. Today we examine that question when it comes 

to the tax code. 

Most State governments are in tough financial shape. In 2010, 

48 States had budget shortfalls. All States except one are required 

by State law to balance their budgets. That has forced States to 

make tough decisions, such as raising taxes or cutting spending. 

Since the financial crisis, 46 States have cut services; 30 have 

raised taxes. To help States and local governments balance their 

budgets, the Federal Government provides direct support through 

programs like Medicaid. Thirty-six percent of all State revenues 

come from Federal grant programs. 

The Federal Government has also long played an indirect role 

boosting State and local governments through the tax code. Since 

the first income tax law, Congress has exempted interest on State 

and local bonds. This exemption helps cover part of the borrowing 

cost of projects by State and local governments. The interest exemption on bonds totals about $50 billion a year. 

2 

The same is true for State and local taxes; that is, the tax deductions. Since 1913, Congress has allowed some or all of the State 

and local income, general sales, excise, and real property and personal property taxes to be deducted from income for Federal income 

tax purposes. That totals about $66 billion a year. 

These tax exemptions and deductions total more than twice what 

the Federal Government provides to States in highway funding. 

Combined, they cost more than $105 billion per year or, if you add 

in the private activity bonds, close to about $115 or $116 billion a 

year. 

During hard economic times, this Federal support helps cushion 

the blow on State and local finances. It also ensures that State and 

local governments play a role in deciding how some Federal dollars 

are spent. For example, making the interest on bonds tax-exempt 

reduces the interest rate State and local governments pay to finance roads, schools, hospitals, and other construction projects. 

Just this February, voters in Manhattan, MT approved new bonds 

so the community can afford to repair the Manhattan Elementary 

School’s roof. 

Likewise, the deduction for State and local taxes reduces the burden that a State or local government places on its own residents 

in raising revenue. As we reform the tax code to encourage growth 

and make our country more competitive, we need to ask whether 

the current exemptions and deductions make sense. 

State and local taxes could potentially be allowed as above-theline deductions, allowing all taxpayers to benefit. We could also 

consider providing a uniform subsidy for bondholders. Tax-exempt 

bonds subsidize interest paid on such bonds by exempting the interest from the tax, and, currently, the value of this subsidy varies 

based on taxpayers’ marginal income tax rates. 

For every dollar we spend on infrastructure through a tax- exempt bond, $0.20 goes to tax breaks for higher-income taxpayers. 

A uniform subsidy would mean each taxpayer receives the same 

subsidy regardless of tax bracket. The Build America Bonds Program achieved success using just this approach. 

In Montana, the Barrett Hospital in Dillon was outdated and in 

need of constant repair. Dillon issued $30 million of insured Build 

America Bonds at a 3.67-percent interest rate, reducing the borrowing cost to Dillon residents by a full percentage point, saving 

them more than $800,000. The project created 33 full-time jobs. 

Dillon now has a new, state-of-the-art critical access hospital. 

Beyond these provisions in current law, we should also ask what 

else we can be doing to efficiently help State and local governments 

maintain sustainable budgets. We need to make sure our Federal, 

State, and local tax systems are working together. As part of tax 

reform, we should ask how we can help States collect taxes owed 

and how we can encourage standard rules to protect taxpayers 

from multiple taxes and needless complexity. 

We have worked together with the States to simplify rules in the 

past. Originally driven by the States, the international fuel tax 

agreement provides a uniform system for the administration and 

reporting of fuel taxes paid by commercial trucks and buses operating in multiple States. States agreed to simplified administration 

burdens in exchange for ability to enforce fuel use taxes. 

3 

More recently, Congress enacted the Mobile Telecommunications 

Sourcing Act to establish uniform rules under which the States can 

tax mobile calls. 

We should consider how we can learn from these examples. So 

we must work to reform the code. Let us remember the lessons 

from Madison and our Founders. Let us bear in mind the relationship between our Federal tax code and State and local tax systems 

and improve the code to create growth and make the U.S. more 

competitive. And let us do this in a way that improves Federal, 

State, and local budgets. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Thank you, Mr. Chairman. In reading the written testimony of our guests today, I was particularly struck by Mr. 

Hellerstein’s recitation of the Hippocratic Oath: ‘‘First, do no 

harm.’’ 

Too often, Congress forgets this sensible advice. My hope is that 

this hearing, drawing on the wisdom of our five witnesses, will help 

Congress observe and honor Mr. Hellerstein’s admonition. The rush 

for new tax dollars that too often characterizes the Federal legislative process oftentimes leaves issues involving Federal-State tax coordination by the wayside. But we cannot forget that the policies 

being discussed today touch on fundamental constitutional principles—principles of federalism and separation of powers. And, if 

we are to do no harm, it is important to hold hearings such as this 

one. 

Though I do not have all the answers to the specific policy questions this particular hearing will wrestle with, I do have a series 

of bedrock principles that I believe will serve as a useful guide. 

The 10th amendment to our Constitution serves as the lodestar 

for today’s hearing. As the testimony of our witnesses at least implicitly reminds us, under our Constitution of enumerated and limited Federal powers, the powers not delegated to the United States 

by the Constitution or prohibited by it to the States are reserved 

to the States, respectively, or to the people. 

Now, issues involving the Federal impact on State and local revenues impact both the Constitution’s separation of powers between 

the Federal and State Governments and the separate identity of 

the sovereign States. 

Too often, some view the Constitution and its limits on Federal 

power as a hindrance to important objectives. I cannot subscribe to 

this approach. We all take an oath to protect and defend the Constitution. That Constitution, with its limits on Federal power, is 

our greatest strength, not weakness. And in walking the fine line 

between Federal and State powers, we need to be especially mindful of our oath. 

Federal discussions about State finances frequently highlight 

budgetary pressures that have required cuts in spending. These are 

no doubt difficult issues for States, but it simply is not the responVerDate Nov 24 2008 17:22 Apr 22, 2013 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 R:\DOCS\80344.000 TIMD
4 

* For more information, see also, ‘‘Present Law and Background Information Related to State 

and Local Government Finance,’’ Joint Committee on Taxation staff report, April 23, 2012 (JCX– 

36–12), https://www.jct.gov/publications.html?func=startdown&id=4422. 

sibility of the Federal Government to address State budget shortfalls. 

Some argue that the recent recession has uniquely harmed State 

revenues, somehow justifying the use of the Federal Government as 

a backstop. Yet, as the Census Bureau noted in an April 12, 2012 

report, State government tax collections in fiscal year 2011 were 

actually up nearly 8 percent from the revenue collected in fiscal 

year 2010. 

Something else is driving State budget shortfalls, and I think, in 

many instances, the principal issue for States is their own unsustainable spending. Also, it is important to recall that the States are 

already receiving significant support from Federal taxpayers. According to the Joint Committee on Taxation, Federal deductions for 

State and local taxes will diminish Federal taxes by about $347 billion from 2011 to 2015.* These deductions are generally regarded 

as helping States to leverage spending by minimizing the true cost 

of State and local government. And, as someone dedicated to 

States’ rights, I believe that a State should be free to set its own 

tax and spending policies. 

But with rights come responsibilities, and State officials need to 

take responsibility for their own spending decisions. 

In closing, I want to show my appreciation to the members of 

this committee who have a strong interest in these issues involving 

Federal and State interaction. I know Senator Enzi has worked 

very hard for many years on what is now the Marketplace Fairness 

Act. Senator Thune and Senator Wyden have proposed the Digital 

Goods and Services Tax Fairness Act. Senators Snowe, Wyden, 

Menendez, and Nelson are cosponsors of the Wireless Tax Fairness 

Act. Now, your work on these issues is a resource for all of us, and 

I look forward to continuing to work with all of you. 

And thank you, again, Mr. Chairman. The work already done in 

this area, which is substantial, and the opportunities facilitated by 

this hearing, will help us ensure that when we go down the road 

of comprehensive tax reform, we do no harm and possibly even accomplish some good. So I am grateful for this hearing. 

Thanks so much. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. Thank you, Senator. 

I would now like to introduce our witnesses. First is Mr. Frank 

Sammartino. Mr. Sammartino is the Assistant Director for Tax 

Analysis at the Congressional Budget Office. Thank you very much, 

Mr. Sammartino. We depend on you a lot. Thank you for all your 

work. 

Next is Dr. Kim Rueben. Dr. Rueben is a senior fellow at the 

Urban-Brookings Tax Policy Center. Thank you for being here, Dr. 

Rueben. 

The third witness is Mr. Walter Hellerstein. Mr. Hellerstein is 

the Francis Shackelford professor of taxation at the University of 

Georgia School of Law. 

5 

Fourth is Mr. Joseph Henchman, vice president of legal and state 

projects at the Tax Foundation. 

Finally, Mr. Sanford Zinman, owner of Zinman Accounting in 

White Plains, NY. 

Thank you all for coming. 

Our practice here is for your statements automatically to be included and for each of you to speak about 5 minutes. 

It is also my practice—all of you probably have prepared written 

statements. You can read them if you want, but just tell it like it 

is. Do not pull your punches. Be candid. 

Mr. Sammartino? 

STATEMENT OF FRANK SAMMARTINO, ASSISTANT DIRECTOR 

FOR TAX ANALYSIS, CONGRESSIONAL BUDGET OFFICE, 

WASHINGTON, DC 

Mr. SAMMARTINO. Chairman Baucus, Senator Hatch, members of 

the committee, thank you for the invitation to testify on Federal 

support for State and local governments provided through the tax 

code and on some ways in which tax reform might affect that support. My testimony focuses on two particular aspects of current policy—the use of tax-preferred bonds by State and local governments 

and the deductibility of State and local taxes. 

The Federal Government provides preferential tax treatment for 

bonds issued to finance activities of State and local governments. 

As a result, those governments are able to borrow more cheaply 

than they otherwise could. At the end of 2011, State and local governments owed roughly $3 trillion in the form of tax-preferred 

bonds. 

The most common type of tax-preferred bond is one for which interest income is exempt from Federal taxes. Another type of tax 

preference for a State and local bond, which until recently has not 

been much used, is to offer a Federal tax credit in lieu of some or 

all of the interest income from the bond. 

Although a large majority of tax-preferred bonds are traditional 

tax-exempt bonds, such bonds are relatively inefficient mechanisms 

for the Federal Government to transfer funds to State and local 

governments. Specifically, with tax-exempt bonds, the Federal Government forgoes more in tax revenues than State and local governments receive. Estimates suggest that the difference is about $6 

billion per year or about one-fifth of the approximately $30 billion 

in Federal revenues lost through that tax preference. That sum accrues to investors who pay high marginal tax rates. 

In contrast, for tax credit bonds, the revenues foregone by the 

Federal Government are captured entirely by State and local governments. However, tax credit bonds have not been especially well 

received in financial markets until a few years ago. Investors’ lack 

of enthusiasm for such bonds probably stemmed from the limited 

size and temporary nature of most tax credit bond programs and 

an absence of rules for separating tax credits from the associated 

bonds and reselling them. 

In contrast, direct-pay tax credit bonds, for which the value of 

the tax credit takes the form of a payment from the Treasury to 

the State or local government issuing the bond, became a signifiVerDate Nov 24 2008 17:22 Apr 22, 2013 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\80344.000 TIMD
6 

cant source of State and local financing in the years during which 

they were authorized, namely, 2009 and 2010. 

The deductibility of State and local taxes provides another means 

of Federal support for State and local governments. Taxpayers who 

itemize their deductions may claim a deduction from most State 

and local taxes. That taxes-paid deduction provides an indirect 

Federal subsidy to State and local governments because it decreases the net cost to taxpayers of paying such deductible taxes. 

By lowering the net cost of those State and local taxes, the taxespaid deduction encourages State and local governments to impose 

higher taxes and provide more services than they otherwise would 

and to use deductible taxes in place of other taxes. 

According to an estimate by the staff of the Joint Committee on 

Taxation, the tax subsidy provided through this deduction was $67 

billion in 2011. 

How much a given State or local government benefits from this 

deduction depends on the structure of its tax system and the characteristics of the taxpayers who provide revenues to it. For example, a State or local government that finances its spending by using 

a larger share of deductible taxes receives a larger benefit through 

the deductibility provision, as does the State or local government 

whose taxpayers are more likely to itemize deductions. 

In 2009, slightly fewer than one-third of all tax filers claimed the 

deduction for State and local taxes paid. The amount of those taxes 

paid, the tax savings from the deduction, and the likelihood that 

a taxpayer would claim the deduction all generally increase with 

increasing taxpayer incomes. 

Over the next several years, scheduled changes to tax provisions 

and the interaction of the regular income tax and the alternative 

minimum tax will change the number of taxpayers who claim the 

deduction and the associated loss of Federal revenues, because the 

AMT does not allow people to claim the taxes-paid deduction. 

Without further changes to tax law, tax provisions that were 

originally enacted in 2001 and 2003 will expire at the end of 2012, 

increasing regular income tax rates for many taxpayers. Those increases will raise the value of the taxes-paid deduction for those 

who claim it and increase the associated revenue loss for the Federal Government. 

In addition, with the higher tax rates, many taxpayers will shift 

from being subject to the AMT to being subject to only the regular 

income tax and will, therefore, be able to claim the deduction for 

State and local taxes paid. 

If certain tax policies that have recently been in effect were extended rather than allowed to expire, as under current law, the 

revenue effects of the taxes-paid deduction would be different. 

Specifically, if all tax provisions expiring after 2012, including 

the lower regular income tax rates originally enacted in 2001 and 

2003, were extended and the AMT exemption levels were increased 

for years after 2011, there would be two opposing effects on the 

taxes-paid deduction. First, the lower regular income tax rates 

would reduce the tax savings and the associated revenue loss for 

the Federal Government for taxpayers claiming the deduction, but, 

second, the higher AMT exemption levels would reduce the number 

7 

of taxpayers subject to the AMT, thereby increasing the number of 

taxpayers who would claim the deduction. 

That concludes my opening testimony. I will be happy to answer 

questions. 

[The prepared statement of Mr. Sammartino appears in the appendix.] 

The CHAIRMAN. Thank you very much, sir. 

Dr. Rueben, you are next. 

STATEMENT OF DR. KIM RUEBEN, SENIOR FELLOW, 

URBAN-BROOKINGS TAX POLICY CENTER, WASHINGTON, DC 

Dr. RUEBEN. Thank you. Chairman Baucus, Senator Hatch, and 

members of the committee, thank you for inviting me to be here 

today. I am thrilled that you are having this hearing about how 

Federal reform will affect State and local governments. 

With increasing concerns about the Federal deficit, fairness, and 

the complexity and inefficiency of our tax system, the need for fundamental Federal tax reform is critical. Often overlooked, however, 

is the fact that any such reforms will also affect the tax and fiscal 

policies of State and local governments. 

As mentioned by you, Mr. Chairman, before, although this country’s economic condition is improving, State and local governments 

are still struggling to balance their budgets. They also play an important role in our economy, running about half of all domestic 

public programs, and with State and local spending making up 

about 15 percent of GDP. 

Decisions about changing Federal policy should take into account 

the potential effects on State and local government budgets in both 

the short and the long run. 

I make four points today. First, Federal tax policy and reform 

can help or hurt States. Second, unstable Federal tax policy trickles down to the States, and uncertainty is especially problematic 

for States’ budgeting. Third, if fundamental tax reform is undertaken, transition relief might be important for State and local governments. And, finally, Congress can play a role in helping to coordinate or protect the existing State and local tax base. 

Returning to the first point, Federal tax policy and reform can 

help or hurt States. Federal policy affects how attractive specific 

taxes are for State and local governments and, therefore, how those 

governments organize their tax and revenue system. 

State revenue sources, especially income taxes, often piggyback 

on Federal rules. More specifically, statutory changes in Federal 

law can result in significant increases or decreases in State revenue. For example, State income tax revenues increased after the 

1986 tax reform expanded the Federal income tax base and also allowed States to reduce their rates as well. In contrast, the elimination of the State and local tax deduction could increase the cost 

to State and local governments of providing services. 

Second, unstable Federal tax policy trickles down to the States, 

and uncertainty is especially problematic for State and local governments. As mentioned before, State and local governments are 

required to pass balanced budgets every year. This requires being 

able to accurately forecast revenues. Problems with State tax systems are often exacerbated by uncertainty in Federal tax rules. 

8 

Temporary extensions of credits, deductions, and tax rates complicate State forecasting. Policy changes and uncertainty can directly affect State tax bases through changing definitions of income 

or indirectly due to changes in taxpayer behavior. Especially problematic has been uncertainty about future Federal estate taxes, tax 

rates on dividends and income, and dividends and capital gains, 

sources of volatile income for State governments. 

Third, if fundamental tax reform is undertaken, and I hope it is, 

transition relief might be important for State and local governments. Tax changes can help or hurt States, but understanding the 

short-run effects will be important and may require slower adoption of certain policies or some fiscal relief. Understanding the 

state of the economy and the fiscal health of State and local governments will be critical in undertaking any reform. 

Finally, due to our federalist system, Congress has a role in helping to coordinate or protect the existing State and local tax base. 

State and local governments’ ability to raise revenue can be hobbled by limitations that Congress could remove. Most notably, Congress can enact legislation that could help coordinate actions across 

States and would help enable State and local governments to collect taxes on Internet and mail-order sales. 

As we consider tax reform, it is important to remember that our 

actions will also affect State and local governments. 

Thank you, again, for inviting me to appear today. I look forward 

to your questions. 

[The prepared statement of Dr. Rueben appears in the appendix.] 

The CHAIRMAN. Thank you, Dr. Rueben, very much. 

Mr. Hellerstein? 

STATEMENT OF WALTER HELLERSTEIN, FRANCIS SHACKELFORD PROFESSOR OF TAXATION, UNIVERSITY OF GEORGIA 

SCHOOL OF LAW, ATHENS, GA 

Mr. HELLERSTEIN. Thank you, Mr. Chairman. I am honored by 

your invitation to testify today, and I hope I can be of assistance 

to the committee. 

My remarks this morning will be limited to horizontal tax coordination—coordination among State tax regimes—although my written testimony also addresses vertical tax coordination—coordination between Federal and State tax regimes. 

In considering Federal legislation affecting horizontal tax coordination, I think Congress should be guided by three overarching objectives. First, Congress should seek to remove the unreasonable 

burdens that State taxes impose on interstate commerce. Second, 

in pursuing the first objective, Congress should not unreasonably 

restrict the States from exercising their essential taxing powers to 

fulfill their constitutional obligations within our Federal system. 

Third, when possible, Congress should strive to achieve both objectives at once, a point that the chairman has already made. 

Thus, Congress can both prescribe the manner in which States 

may tax interstate commerce, thereby removing burdens that complex State regimes impose on interstate commerce, while, at the 

same time, enable States to exercise their taxing power by eliminating preexisting judicially imposed constraints on State taxing 

power that were designed to prevent the very burdens that ConVerDate Nov 24 2008 17:22 Apr 22, 2013 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 R:\DOCS\80344.000 TIMD
9 

gress has removed through its legislation. I would like to offer the 

committee two examples of the third type of intervention, one of 

them recently enacted, one of them now pending before Congress. 

In my view, the Mobile Telecommunications Sourcing Act, to 

which the chairman has already referred, enacted by Congress in 

2000, is a poster child for horizontal Federal-State tax coordination 

at its best. Prior to this Act, the States’ power to tax interstate 

telecommunications was governed by the rule announced by the 

U.S. Supreme Court under the dormant Commerce Clause in the 

case called Goldberg v. Sweet. In Goldberg, the Court held that the 

only States that have jurisdiction to tax the consumer’s purchase 

of an interstate telephone call are States where the call either 

originates or terminates and is charged or billed. But this rule 

often left the States powerless to tax wireless telecommunications, 

as, for example, when a business traveler who lives in State A, 

where she received and paid her monthly phone bill, made a call 

while on business in State B to a person in State C. 

These and related difficulties led Congress, with the joint support 

of the telecommunications industry and the States, to enact the 

Mobile Telecommunications Sourcing Act, which permits the State 

to tax all mobile telecommunication charges for services provided 

by the customer’s home service provider at the customer’s place of 

primary use, but only at the place of primary use. 

Congress both expanded and contracted State taxing power by 

reference to the preexisting dormant Commerce Clause standard 

established by Goldberg, simultaneously conferring such power 

upon and limiting it to the customer’s place of primary use. 

The Mobile Telecommunications Sourcing Act is, thus, a model 

for Federal-State horizontal tax coordination. It employs Congress’s 

power to both expand and restrain State tax power in a manner 

that allows taxes to be collected in a sensible manner, and, at the 

same time, protects taxpayers from multiple taxation. 

Let me turn, finally, to what I regard as an analog to the Mobile 

Telecommunications Sourcing Act and several related bills that are 

presently pending before Congress relating to the States’ power to 

require out-of-state sellers who have no physical presence in the 

State to collect the sales or use taxes that are due on their sales 

to customers in the State. 

Just as the U.S. Supreme Court’s decision in Goldberg was essential to understanding the problem addressed by the Mobile Telecommunications Sourcing Act, so the U.S. Supreme Court’s decision 

in Quill Corporation v. North Dakota is essential to understanding 

the problem addressed by the proposed legislation. Quill held that 

States have no power under the dormant Commerce Clause to require mail-order sellers to collect sales and use taxes on sales to 

customers in the State unless they are physically present in the 

State. The proposed congressional legislation, reflected in three 

bills, is designed to authorize the States under specified conditions, 

generally requiring harmonization and simplification of their sales 

and use tax regimes, to require collection of sales and use taxes by 

remote sellers despite their lack of physical presence in the State. 

Although the bills differ in their detail, they share in common 

the concept of a deal authorizing collection of taxation from remote 

sellers in return for removal of existing burdens on such sellers 

10 

through simplification and harmonization, as well as the provision 

of tax-compliant software. 

Without burdening this morning’s hearing with the nuances of 

my views on the different bills—they are contained in my written 

testimony—I would say that legislation along the lines of these proposals is precisely the type of horizontal tax coordination that Congress should be considering, on the one hand, and uses Congress’s 

power to provide for increased uniformity and simplicity among 

State tax regimes, as well as the availability of tax-compliant software, thereby reducing burdens on interstate business, on the 

other hand. And, at the same time, it uses Congress’s power to remove judicial restraints from the States’ taxing power that were attributable to the burdens that Congress’s requirement of uniformity 

have now removed. 

Thank you for the opportunity to address this committee. 

[The prepared statement of Mr. Hellerstein appears in the appendix.] 

The CHAIRMAN. Thank you, Mr. Hellerstein, very much. 

Mr. Henchman? 

STATEMENT OF JOSEPH HENCHMAN, VICE PRESIDENT OF 

LEGAL AND STATE PROJECTS, TAX FOUNDATION, WASHINGTON, DC 

Mr. HENCHMAN. Good morning. Thank you, Mr. Chairman, Mr. 

Ranking Member, members of the committee. Thank you for the 

opportunity to testify today on the role that Congress plays in 

State tax policy. 

In the 75 years since our founding, the Tax Foundation has monitored tax policy at the Federal and State levels, and our analysis 

is guided by the principles of economically sound tax policy—simplicity, neutrality, transparency, and stability. 

The main question I want to answer for you is, what is Congress’s role in State tax policy? After all, to be an American is to 

be a believer in federalism, and that means Congress has its areas 

and the States have their areas. Most of the time, Congress should 

let the States do their thing, even if it is bad policy. But, in a very 

few important situations, Congress has the power and the responsibility to get involved in State tax policy—two situations, in fact. 

The first is to preserve the power of the Federal Government. 

States cannot tax the Federal Reserve, for instance, and there are 

Federal laws banning State taxes on non-resident members of Congress and non-resident members of the military. 

The second situation goes to the reason why we adopted the Constitution in the first place, which was mentioned by the chairman 

in his opening statement. States went wild under the Articles of 

Confederation. Port States put punitive taxes on commerce going 

to interior States and vice versa. Tariff wars proliferated. 

So the Constitution was adopted, giving Congress the power to 

restrain States from enacting laws that harm the national economy 

by discriminating against interstate commerce. 

In short, States will put their own interests ahead of the Federal 

interests every time. They have an incentive to shift tax burdens 

from physically present individuals and businesses to those who 

are beyond their borders, non-voters. And, when this behavior is 

11 

not prevented by Congress or the courts, the results can be taxpayer uncertainty, incompatible standards, and harm to national 

economic growth. 

As one example, take a multistate corporation with operations in 

five States. If each of those five States imposes a State corporate 

income tax, the companies’ profit must be divvied up or apportioned among those five States. That is so no State taxes more than 

its fair share and no multiple taxation occurs. 

States game this, bending their apportionment rules to tax profits that were earned in other States. Congress recognized this problem and set up the Willis Commission in 1959 to adopt one uniform 

apportionment standard. That threat was successful in getting the 

States to adopt one on their own, although, without congressional 

force backing it up, the States began drifting away from it soon 

afterwards, and today only 11 States stick with that uniform apportionment rule. The rest have abandoned it to grab revenue from 

other States. 

There are similar situations today which cry out for a uniform 

standard, which I describe in detail in my written statement. Just 

to highlight one problem, this is BNA’s survey of State tax departments. It is a compilation of State questionnaire results on nexuscreating activities for business activity taxes. 

According to the survey results, 13 States find that you are within their taxing jurisdiction if you have a website hosted on another 

entity’s server in that State. One State and DC will tax you if you 

send employees to attend a seminar, even if you engage in no sales 

activity. This volume, while the best source we have today for businesses asking when they can be subject to tax, is littered with footnotes, exceptions, and appendix notations, reinforcing the lack of 

clarity the States have imposed on those who engage in interstate 

commerce. 

We at the Tax Foundation get calls all the time from taxpayers 

caught in a trap by aggressive State nexus standards. The same is 

true with individual income taxes on business travelers, with sales 

tax, and with many other State taxes. 

The States cannot solve these problems on their own. Congress 

told the States to adopt a uniform corporate income tax apportionment standard in 1959, and we are still waiting. Sales taxes, despite the work of the Streamline Project, are getting more complex 

and more numerous each year. 

On income tax, on business travelers, or on sales taxes, the 

States are not budging from their positions. Today, with new technologies, even the smallest businesses can sell their products and 

services in all 50 States. Business travel is easier than ever before. 

The temptation is great to treat interstate commerce like a golden 

goose to be squeezed. This temptation can only be countered by 

well thought-out, uniform rules imposed and enforced at the Federal level. 

Thank you, and, as always, we are eager to be of assistance on 

these issues now and in the future. 

Thank you. 

[The prepared statement of Mr. Henchman appears in the appendix.] 

12 

The CHAIRMAN. Thank you, Mr. Henchman, very, very much. 

Mr. Zinman? 

STATEMENT OF SANFORD ZINMAN, OWNER, 

ZINMAN ACCOUNTING, WHITE PLAINS, NY 

Mr. ZINMAN. Thank you, Mr. Chairman and members of the committee. I am a certified public accountant, I am a member of the 

American Institute of CPAs, and I am currently the national tax 

chair of NCCPAP, the National Conference of CPA Practitioners. 

Accompanying me is Mr. Edward Caine, the national vice president of NCCPAP, who is a CPA in the Philadelphia area. 

You have received my written testimony, and I would like to 

focus on some key issues. The types of taxes which impact taxpayers the most are income taxes of individuals and other entities, 

employment taxes, and State and local sales and use taxes. 

The issue of income taxes for individuals with multistate residency is not new, but has grown in recent years. Many individuals, 

married or single, are purchasing second homes in other States and 

dividing their time between their residences. This poses a problem 

for these taxpayers. 

In which State do they declare residency? Currently, this issue 

is not being decided by the individual, but by the State tax laws, 

and the State governments have become aggressive in seeking additional sources of revenue. Each State sets its own rules to establish and define what residency is for purposes of income taxes, 

sales and use tax, and estate tax. I acknowledge that Federal law 

should not supersede State law, but individuals are left to battle 

with each jurisdiction that wants a piece of the action in their tax 

dollars. 

Businesses which have a nexus in multiple jurisdictions are also 

potentially subject to double or triple taxation. Although all States 

will acknowledge that credit should be given for taxes paid to other 

jurisdictions, those credits will not be given if the State perceives 

that the tax paid to another jurisdiction is improper. Individuals 

and businesses may choose to pay double taxation to avoid a 

lengthy administrative process. After all, these taxes are often deductible federally anyway. 

Regarding employment taxes, workforce mobility is here to stay. 

Federal law recognizes this mobility and offers individuals and entities incentives to ensure that the workers can keep working and 

the companies can keep good workers. However, State and local 

employment laws and regulations vary greatly from State to State. 

The Treasury Department regulations on uniform definition of a 

qualifying dependent have gone a long way toward resolving related income tax issues. A similar effort on who is an employee 

would be extremely helpful and would do a lot to level the playing 

field for employers. 

Next, there is the alternative minimum tax. NCCPAP has long 

advocated for the abolishment of the AMT. The AMT disproportionately affects taxpayers in certain States and areas of the country, 

even though it is clear that was an unintended consequence of the 

law. 

Finally, sales and use tax issues also significantly affect State 

and local governments. Over the past several years, in an effort to 

13 

increase revenue, States have increased their collection efforts. By 

the end of 2011, eight States had enacted click-through nexus provisions and more than 15 States have proposed laws expanding 

sales tax nexus. 

The States have begun to look for any connection that an out-ofState seller might have and could be construed as a physical presence. Some States have enacted legislation imposing a sales tax liability on Internet companies if the company has an agent in the 

State. While most people understand the need for separation of 

Federal and State governments, it is apparent that there is a loss 

of sales tax revenue due to cross-border sales. It should also be 

noted that this represents a potential loss of revenue to main street 

small business retailers who have a physical presence in one State, 

but are not big enough to be a multistate retailer. 

The Multistate Tax Commission, in 2011, directed its sales and 

use tax uniformity subcommittee to begin drafting a model nexus 

statute based on the Amazon case. There is a strong need for Federal oversight of State sales and use tax to ensure that all States 

are able to collect their proper tax revenue. 

Thank you. 

[The prepared statement of Mr. Zinman appears in the appendix.] 

The CHAIRMAN. Thank you, Mr. Zinman, very much. 

We all know that the cry these days is ‘‘tax reform.’’ It is lower 

the rates, broaden the base, simplicity. A lot of people refer back 

to the 1986 tax reform, where there was significant rate reduction 

and base broadening. 

Where in this area—that is, State and local taxes—can Congress 

look to reduce tax expenditures; that is, reduce the deduction, 

change the deduction, if you will, raise revenue, in order to compensate rate reduction? 

Let us assume, for purposes of discussion, that we are talking 

about revenue neutrality here. But we all know we have a tremendous debt, national debt. And without being too dramatic here, we 

also know that if Congress were adjourned today, of the $15 trillion 

national debt that we have, if Congress adjourned today and did 

not reconvene until sometime next year, we would automatically 

shave about $9 trillion over 10 years off that national debt—$9 trillion over 10 years. 

Now, that is just debt reduction. Many suggest we need to raise 

revenue and cut spending in order to address the debt. We know 

the Simpson-Bowles Commission has all kinds of proposals. RivlinDomenici, the Gang of 6, and so forth, almost all of them say we 

should reduce the national debt by $4 trillion over 10 years, and 

we should do it with some combination of spending cuts and revenue raised and try to get annual deficits down to at least 3 percent of GDP. That is what economists tell us is sustainable. 

But in addition to tackling national debt, we have a separate 

problem, which is tax reform. They are separate, but they are also 

joint, because with tax reform, maybe we try to broaden the base 

and lower the rates in a way that also raises revenue. 

So I just ask you. If we have to raise—let us start with the easier 

one. Let us say a revenue-neutral effort to lower rates and broaden 

the base, in this area, where do we cut tax expenditures? Where 

14 

in this area are tax expenditures reduced, in addition to other 

areas of the code—we have other tax expenditures that have to be 

reduced—in order to get the rates down? 

Some talk about the corporate rate is 35 percent, getting it down 

to 25; some say get the top individual rate down to 25. If that 

means we have to cut out some deductions and credits and exclusions here, if we do all this, in this area, if we have to, if Congress 

really wants to, if the American public really wants to have tax reform—I am giving you time to think about this. Where do we start 

to chop away? 

Who is boldest here and wants to lead off? 

Mr. SAMMARTINO. Maybe I will. Of course, the Congressional 

Budget Office does not make recommendations for policy. 

The CHAIRMAN. Right. Right. 

Mr. SAMMARTINO. But we have, in the past, looked at various options in this area, including options to limit the State and local tax 

deduction, and we found that various options, from eliminating it 

completely to placing a cap on it or, in one case, converting it to 

a 15-percent credit, all would raise significant revenues over a 10- 

year period. 

One thing we looked at, in addition, was one of the main features 

of the alternative minimum tax, which is that it eliminates the 

State and local tax deductions for taxpayers who are on the AMT. 

So we considered the same set of options in the context of eliminating the AMT, and we found that for all the options we looked 

at, again, including complete elimination of the State and local deduction, placing a cap on it, and all those options except the option 

for the 15-percent credit, that if you both restricted or eliminated 

the taxes-paid deduction and eliminated the AMT, you would still 

raise revenues through that combination. 

Now, these estimates were done a couple of years ago. More taxpayers would be likely eligible for the AMT. So the numbers might 

change, but still, that is kind of one possible tradeoff one can think 

about in the context of tax reform that we have looked at. 

The CHAIRMAN. Right. And that approach, is it a one-for-one, or 

is this reduction in State revenue less than the gain in Federal revenue? 

Mr. SAMMARTINO. So what we found is that if you were to completely eliminate the taxes-paid deduction and eliminate the AMT, 

it would still be a net revenue increase for the Federal Government. 

The CHAIRMAN. And the effect on the States would be? 

Mr. SAMMARTINO. I mean, the States, it is a problem, because 

you are reducing some of the subsidy to State and local governments. We did not examine what the impact would be. It depends 

on how States would respond to that. 

The CHAIRMAN. I just urge you and urge all panelists and anybody else listening, anyone else who cares about tax reform, to 

start thinking seriously about this and coming up with some reasonable alternatives and reasonable suggestions, creative suggestions on how to do it. 

Yes, Dr. Rueben? My time has expired, but very briefly, please. 

Briefly. 

15 

Dr. RUEBEN. I was just going to say, the other thing that happens when you make this tradeoff between the AMT and State and 

local deductions is you are also changing the distribution. 

It is a way of shifting some of the tax burden away from families 

who are more likely to be on the AMT. So there is some withinState variation that occurs. But I think, in some ways, if you actually had consistent tax policy with reform of the AMT, that would 

be incredibly helpful for States. So you might be able to have some 

sort of tradeoff between limiting the deduction, if you gave them 

more knowledge about what tax systems would look like. 

The CHAIRMAN. Thank you very much. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

This question is for the whole panel. Currently, most taxpayers 

who itemize have a choice of deducting certain taxes paid to State 

and local municipalities. Currently, deductions are allowed for 

State and local real property, personal property, State sales, and 

income taxes. Now, the Joint Committee on Taxation estimates 

that the revenue loss to the Federal Government will be around— 

well, from 2011 to 2015, these deductions will be about $347 billion, if they are extended for that time. 

Now, as Mr. Sammartino notes, by lowering the net cost of those 

State and local taxes, the taxes-paid deduction encourages State 

and local governments to impose higher taxes. 

My question is, how much do these deductions subsidize State 

and local governments? We know what the revenue loss is to the 

Federal Government, but even if one is comfortable subsidizing 

State government, is this a good way to do it? 

Additionally, for Mr. Zinman, how aware is your average client 

of the dynamics of these deductions? Do they understand that they 

are viewed as a benefit to State and local government that might 

increase other taxes? 

So whoever wants to answer that. 

Mr. ZINMAN. I can tell you that 10 years ago, in my office—as 

I have in my written testimony—my typical client for individual income tax was not a wealthy stock trader, but a working person. 

Ten years ago, we did not talk about AMT at all. 

Now, this is the typical conversation, and the conversation centers around how much, in my case, in the New York metropolitan 

area, people are paying for real estate taxes, but are not getting 

a deduction on their Federal tax return because of AMT. And, in 

fact, if nothing happens to AMT, it is projected that by 2013, 50 

percent of Americans will be calculating their taxes using the alternative minimum tax calculation. 

So there are a number of individuals in certain States, and that 

number is growing, who are now faced with an issue. Their issue 

is that they are paying a higher amount of State and local real estate taxes, State and local income taxes, and they are not getting 

the Federal tax deduction that they were hoping to get. 

So the Federal income tax is not offset by what is happening, and 

this is starting to trouble a lot of people. 

Senator HATCH. Thank you. 

Does anybody else care to comment? It is pretty simple. 

16 

Let me go to a second question. President Obama has proposed 

to dramatically reduce the charitable deduction in his latest budget, as well as previous budgets. He does so by proposing to take 

away up to 29 percent of itemized deductions for families that are 

in either of the top two income tax brackets. Now, this appears to 

me to be a policy that would lead to an absolute reduction in charitable giving, and charity should be the last thing that the President is attacking, in my opinion. The President is also going after 

the ability of families and individuals to exclude interest on taxexempt bonds from their income. 

So this question is for the whole panel, anybody who wants to 

answer it. Yes or no? Let me just ask you to give a ‘‘yes’’ or ‘‘no.’’ 

Does everyone on this panel agree with me that the President’s 

proposal will increase borrowing costs for State and local governments? 

Mr. Sammartino? 

Mr. SAMMARTINO. Well, actually, we think it might have just a 

minor effect on borrowing costs, because, when the State and local 

governments have to set an interest rate to sell the amount of 

bonds they want, it is usually—in order to clear the market, they 

have to target that rate to taxpayers with lower marginal tax rates 

to provide enough subsidies so those taxpayers would buy the 

bonds, and I think most of the evidence suggests that that rate is 

something below—at or below 28 percent. 

So the President’s proposal to limit the benefit of itemized deductions to 28 percent would not affect taxpayers whose marginal tax 

rate is at or below 28 percent. Taxpayers above that, if their alternative to buying tax-exempt bonds is to buy a taxable bond, would 

still be better off buying the tax-exempt bonds at current rates 

than buying a taxable bond and paying the tax. 

Now, there could be some effect, because some of those taxpayers 

may decide that they would shift their portfolios a bit. But for most 

taxpayers, we think it is not going to have a very big effect. 

Senator HATCH [presiding]. My time is up. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. And, obviously, 

one of the things that we care about in the Pacific Northwest is tax 

fairness and the fact that we do not have an income tax, and we 

want the ability to deduct our sales tax from our Federal income 

tax obligations. We do have a lot of itemizers because of this. And 

so making sure that we continue that policy and make it permanent is a big priority. 

I did want to follow-up on this tax-exempt bond issue, because 

one of the issues for us is that some of these tax-exempt bonds are 

used to finance public power projects for capital investment. 

And I do not know. Maybe you do not know. Dr. Rueben, I do 

not know if you know the answer to this or not. But what impact 

would this have on utility rates as a result, if we got rid of the taxexempt bond status? 

Dr. RUEBEN. I do not know what the precise rates would be, but 

part of it is going to depend on how transition is done. So part of 

the reason I think any sort of reform, especially in the muni bond 

market, will need to have a certain level of reform and transition 

17 

involved is because financial markets and local government revenues are still kind of not totally recovered. 

So I think whatever we do—and as the Federal Government goes 

forward—if there is some switch in how we treat tax-exempt debt, 

it will be important to think about how specific localities will fare 

under these arrangements. And so having some sort of transition 

period will be pivotal in terms of being better able to understand 

what is going to happen in individual locations. 

Senator CANTWELL. Would that missing advantage then have to 

be covered by ratepayers overall? 

Dr. RUEBEN. Partly, it depends how it is set up. So, if we basically lower the tax-exempt status, it depends on whether it is 

newly issued debt or whether it is existing debt. 

So existing debt, any disadvantage would actually be borne by 

the people who are holding the debt right now. So it is not necessarily the people issuing it. 

If we moved into a new regime where there was a different system which maybe included tax credits rather than a tax-exempt 

status, I think it would depend on the issuing ability. And that is 

why I think having both systems in place, if we were going to do 

some transition for a little while, will be important to see whether 

revenue bonds can be approved at minimal cost to investors and 

issuers. 

Senator CANTWELL. Well, I think this is an important question. 

So we will be following up with you and the committee on this just 

to make sure that public power is not disadvantaged in a bond 

structure, moving forward. 

We are continuing to grow, and we sell a lot of power to California. We sell a lot of power all over. And making sure that people 

have access and continue to build the grid is something very, very 

important to us. It is a key element of our economy. 

So thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. 

I want to thank you and Senator Hatch for holding today’s important hearing, and to thank our panelists for their willingness to 

testify. 

There are a number of very important issues regarding State and 

local taxation that are being discussed today, and I wanted to focus 

on one in particular—the taxation of digital goods and services. 

Last year, I introduced, along with my colleague from Oregon, 

Senator Wyden, the Digital Goods and Services Tax Fairness Act. 

Our legislation would ensure that the fast-growing digital economy 

is not stymied by multiple and discriminatory State and local 

taxes. 

Digital goods and services, such as movie and music downloads 

and cloud computing services, are an ever-increasing and vital part 

of our economy. Just as an example, in 2010, in the United States, 

online retailers sold over 1 billion digital music tracks, totaling 

$1.5 billion in revenue. 

E-book sales in the U.S. reached $1 billion in 2010. They are expected to almost triple by the year 2015. And sales of downloaded 

apps have been especially fast-growing. In 2010, there were 8 bilVerDate Nov 24 2008 17:22 Apr 22, 2013 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 R:\DOCS\80344.000 TIMD
18 

lion apps downloaded in the U.S. Last year, there were 18 billion 

apps downloaded. It is projected that more than 90 billion apps will 

be downloaded by the year 2015. App revenue from smart phone 

downloads is projected to increase from $1.9 billion in 2010 to more 

than $29 billion by the year 2015. 

So, as the digital economy grows, we need to make sure that we 

set some basic rules of the road so that multiple States will not attempt to tax the same downloads. The legislation that Senator 

Wyden and I have introduced simply clarifies that the State with 

the authority to tax the digital download is the State where the 

consumer resides. Our bill does not take away taxing authority 

from States. In fact, it should provide States with greater certainty 

going forward. 

For States such as South Dakota, which does not have an income 

tax and which relies heavily on sales taxes, protecting the State’s 

sales tax base is important, just as it is important that Congress 

extend the deductibility of State sales taxes for taxpayers who 

itemize, a provision that expired at the end of last year. 

I hope the Senate will have an opportunity to consider the Digital Goods and Services Tax Fairness Act later this year, and I appreciate the leadership of the Senator from Oregon on this issue 

and look forward to working with him and with this committee and 

hopefully being able to move this legislation forward. 

I just have a question for anybody on the panel. You identified 

the Mobile Telecommunications Sourcing Act—I think that was 

you, Mr. Hellerstein—as the poster child highlighting the appropriate role for Congress to address certain complexities that surface 

in State and local taxation of interstate commerce. 

Do you see the need—same need, I should say, for Congress to 

set forth a similar framework for digital commerce? 

Mr. HELLERSTEIN. Senator, I think that that would actually— 

that would fit within at least my view of what would be appropriate legislation. It is very important, again, to come back to Senator Hatch’s point about, first, do no harm. It is very important 

that this be done surgically. 

So, if we are to identify a particular State that may tax these 

goods and services and only that State, that, I think, is quite consistent with the Mobile Telecommunications Sourcing Act. On the 

other hand, as I read through this draft bill, I think it would be 

a field day for lawyers given the uncertainties with some of the 

definitions and the scope. So I would just urge this committee or 

whoever is considering this bill to be very, very careful in trying 

to do good, because there are provisions in the bill, as drafted, 

which I would regard as not ideal. 

Senator THUNE. Does anybody else want to comment on that? 

[No response.] 

Senator THUNE. No. Let me ask just a question about this issue. 

If you had a consumer from Washington who is visiting Florida and 

downloads a song that is provided from a server in Utah, which 

State has the legal authority today to receive the tax revenue from 

that purchase? 

Mr. HENCHMAN. They can all try, and that is the problem. 

19 

Senator THUNE. Yes. And without congressional action, is it not 

questionable as to which State, if any, has a right to receive the 

tax revenue from that transaction? 

Mr. HENCHMAN. Absolutely, and they will all try. 

Senator THUNE. Just as a question, too, I think you indicated 

State and local taxes should not impose an undue burden on interstate commerce. 

Does it not make sense, then, if you agree that the purchase of 

downloaded music should be taxed no differently than the local 

purchase of a CD—I mean, if you are going to buy a CD in a 

store—that downloading music ought to be taxed in a similar way? 

Mr. ZINMAN. Conceptually, that makes a lot of sense, yes. Administratively, it may be difficult to do, but conceptually, it makes a 

lot of sense. 

Senator THUNE. But nobody basically disagrees with that concept? Conceptually, it makes sense? 

The Digital Goods and Services Tax Fairness Act does not dictate 

whether or not a State can tax digital transactions, but rather sets 

a framework upon which State and local taxes can be applied to 

this form of commerce in a fair and rational manner. 

Some have asserted there is no such impediment to a rational 

tax structure under existing law, citing the fact that consumers can 

get credits if they pay double taxes. However, would not all stakeholders be better served for Congress to establish some sort of 

framework that will provide the certainty for consumers, providers, 

and State and local governments in the taxes collected from digital 

commerce? 

Mr. HENCHMAN. Yes. 

Senator THUNE. Does anybody disagree with that? 

Mr. HENCHMAN. The States will not do it themselves. 

Senator THUNE. Thanks. Well, I guess the question is, how we 

do it. And we have a proposal out there and, hopefully, with your 

input, we can perhaps refine that and make it stronger and more 

effective. But certainly it is an area that I think needs to be addressed. And, with all the advances that we are seeing in technology and the way that people purchase various things these days, 

we are going to need some kind of a framework, and it seems, to 

me at least, that that is an issue that Congress is going to have 

to deal with. 

So I thank you, Mr. Chairman. And thank you all for sharing 

your insights today. 

The CHAIRMAN. Thank you, Senator. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. And let me thank 

the panelists. 

I want to talk about one of the major sources of revenues for our 

States, and that is the sales and use tax. 

Dr. Rueben, I want to focus on the fact of how much of those revenues are not being collected today. It has been estimated, as a result of out-of-State shipments, and principally through the Internet, that there is $11 billion a year not being collected. 

Now, I got the Maryland number, and the Maryland number is $300 million, which is an interesting number, because the Governor is talking today about bringing the legislature back to a speVerDate Nov 24 2008 17:22 Apr 22, 2013 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 R:\DOCS\80344.000 TIMD
20 

cial session in May because of a $300-million gap and is looking at 

increasing a lot of taxes in our State because we need $300 million 

to balance our budget. 

If we had the sales and use tax, we would have a balanced budget and there would be no need to bring the legislature back into 

session, which brings me to the Marketplace Fairness Act and trying to establish a level playing field. 

You can go to a retail store in Maryland, use your phone to take 

a photograph of its identification, then go on the Internet and get 

that product shipped into Maryland and avoid the sales tax. The 

price might be identical, but you are avoiding the sales tax. And 

to me, this is a matter of tax integrity. 

That person who does that is supposed to pay a use tax. And I 

have heard that retailers or Internet sellers feel it is such a burden 

to have to collect a sales tax. It is a huge burden. They ask Marylanders to pay a use tax. 

So are we not picking winners and losers if we do not take some 

action to provide for a level playing field? 

Dr. RUEBEN. I am a big fan of there being some action to help 

coordinate these issues. I think that as more sales get done on the 

Internet or electronically or through catalogs, I think State and 

local governments are going to be at a disadvantage. And so congressional action to help coordinate this seems like a no-brainer, in 

my perspective. 

Senator CARDIN. Thank you. 

Mr. Zinman, I see that you are anxious to respond. I am going 

to give you a chance. 

Mr. ZINMAN. I am just agreeing. 

Senator CARDIN. Well, good. Let me just pose the question. There 

are two issues that are usually raised by those who have asked for 

delay of Federal action. One is that it is a little complicated because of all the different sales and use taxes. I point out that there 

is free software available that would assist in the collection of this. 

And the other issue is a small business exemption, which is included, by the way, in the Marketplace Fairness Act. 

I am not aware of any small business exemptions on the brickand-mortar requirements to collect sales tax if you have a facility 

located in our State. Is there any administrative reason why we 

should not be moving forward on this? 

Mr. ZINMAN. Absolutely not. If you look at what is happening 

with Best Buy, that is, even though they are multistate, they are 

brick-and-mortar, and they are hurting a lot because of the Internet sales because—I will give you a perfect example. 

An individual can go to New York and buy a set of golf clubs, 

but he has a place in Florida. He buys an expensive set of golf 

clubs. He says, ‘‘Ship it to Florida.’’ No sales tax. It will cost him 

$30 to ship the golf clubs down to Florida. 

Mr. HENCHMAN. And Florida has a very high sales tax. 

Mr. ZINMAN. But he is not paying—he is supposed to pay—I am 

not saying what he is supposed to do. I am saying what actually 

happens. What actually happens is he is not reporting that sales 

tax in Florida. 

Senator CARDIN. I have not checked Florida’s use taxes, but my 

guess is there are not many being filed by individual consumers. 

21 

Mr. ZINMAN. That is right. In New York, we have a line on our 

New York State return—and many States have a line on their tax 

return—asking the taxpayer to voluntarily compute and give back 

the sales tax they should have paid in the form of a use tax. 

But you now take a State like Florida that does not even have 

an income tax form to report this. They have the use tax forms. 

They are there. They are available. But many people who have 

multistate residences—and I am just using New York and Florida 

as an example, because that is a corridor that a lot of people travel—a lot of individuals are ignoring the taxes that they have to 

pay. 

Senator CARDIN. It is my understanding that—and we have a 

form in our State where you can include the use tax. So we have 

that in Maryland. 

The $300-million number I gave you was a net number. 

Mr. ZINMAN. Right. 

Senator CARDIN. I do not know the exact amount of use taxes we 

collect from individual consumers, but it is miniscule. 

Mr. ZINMAN. I am sure it is miniscule. 

Mr. HENCHMAN. Very briefly, I just want to make sure the goal 

of simplification is not minimized here, because, while that retailer 

has to collect and does not get a de minimis threshold, they are 

only collecting one sales tax. Internet retailers would have to track 

and collect 9,600 across the country. 

And, yes, there is software on the rates, but that software does 

not help you distinguish between all the sales tax holidays and all 

the different rates on different products. 

Senator CARDIN. Are you telling me that computers cannot figure 

this out? I have my—— 

Mr. HENCHMAN. It is not computers. It is tracking the—— 

Senator CARDIN. I am amazed at what I can put into my iPad 

and get an answer to immediately. Are you trying to tell me that 

we do not have a computer program that can figure out this issue? 

Mr. HENCHMAN. It is not a question of computer programming, 

but a question of tracking changes in legislative laws. And there 

is a lot of—— 

Senator CARDIN. And my iPad gets me the up-to-date information 

on traffic instantaneously. You are trying to tell me we do not have 

that technology available today? 

Mr. HENCHMAN. I work at the Tax Foundation. We do our best 

to keep track of all State and local laws and changes, and it is difficult for us, and we are not running a business. We are a tax policy—— 

Senator CARDIN. I think you had better get a better program. I 

find this hard to understand that when you have governmental actions, which are very public actions, every time taxes are changed, 

that that cannot be done. 

I am not minimizing the issues of simplicity. And we have been 

talking about this ever since I have been in Congress, which is 20- 

some years. This is being used as an excuse for inaction. It is not 

a problem that cannot be overcome. 

Mr. HENCHMAN. To me, it is not an excuse for inaction. It is an 

excuse for the right kind of action. Some of the bills you mentioned 

have some very good—— 

22 

Senator CARDIN. After 20-some years, do you not think it is time 

for some action? 

Mr. HENCHMAN. I agree. 

Senator CARDIN. Thank you. I appreciate your agreement. 

Mr. HENCHMAN. Some of the bills have some very good simplification rules. 

Senator CARDIN. Thank you, Mr. Chairman. 

The CHAIRMAN. I like that. That is good. [Laughter.] 

That is how you get information out. That is great. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Chairman, in beginning, I want to commend you for what I 

think folks need to understand is really what is at issue with your 

agenda today. What you are essentially doing is giving us an opportunity to lay out the digital rules of the road, and the fact is, if you 

look over history, it has always been this way with the economy. 

When you have new technologies and new developments, you have 

to update the rules of the road. We did it for the railroads. All 

through time, we have had to do it. 

So I want to commend you for the agenda, the way we are looking at these issues, and I am looking forward to working with you. 

Senator Thune talked about one of our bipartisan bills and laid 

out the Digital Goods and Services Tax Fairness Act. And with 

Senator Snowe here, I thought what I would do is take a couple 

of minutes to talk about our other major bipartisan bill, the Wireless Tax Fairness Act. 

Here is the reality, folks. Here is my smart phone. And what we 

are dealing with is, we have smart phones today and dumb tax 

policies, tax policies that have not kept up with the times. 

So we all remember the days of the mobile phone, these big, old 

things, and essentially we have the same tax policies for smart 

phones. And smart phones, of course, are how millions of Americans access the Internet. They are really a lifeline for some of the 

folks with a modest income that the Urban Institute does a lot of 

wonderful work for. 

So what Senator Snowe and I want to do is make sure that, for 

the next 5 years, these smart phones are not subject to what 

amounts to multiple and discriminatory taxes—multiple and discriminatory taxes on wireless communications. 

And, if you look at the last few years and all the taxes that have 

been heaped on wireless technology, we now have many States 

with taxes above 20 percent, the national average over 16 percent. 

So what I would like to do is, first, get on the record, Mr. 

Sammartino, we had the CBO analyze the tax implications of our 

legislation. Now, remember, this is a bill—what Senator Snowe and 

I are advocating is something that would be prospective. It is not 

something that looks back in time. 

It is part of laying out the rules of the road for the digital economy for the future. And it is my understanding that CBO has 

said—in the most recent analysis of July 28th of 2011—that our 

legislation, in the words of CBO, would have no significant cost to 

the Federal Government. And then at page 2 of the analysis, CBO 

did not identify any costs as well to State, local, or tribal governments. 

23 

So here is an opportunity, as we move in the committee of jurisdiction for laying out these rules as they relate to the digital economy, to take a major step forward in something that is literally a 

lifeline for millions of Americans. 

And I want to kind of trace the history from those big mobile 

phones to these wonderful smart phones that are carried by millions to access the net, and we can do it without any net cost to 

either the Federal Government or the State and local governmental 

authorities. 

I would just like to get your confirmation that that is the latest 

analysis by CBO, that the bill that Senator Snowe and I are talking about will not generate new costs to either the Federal Government or the State and local authorities. Is that your understanding, Mr. Sammartino? 

Mr. SAMMARTINO. That is my understanding, Senator. 

Senator WYDEN. Then for you, Mr. Henchman, we have done a 

lot of work with you all at the Tax Foundation. Why don’t you give 

me your thoughts—and we are certainly going to be talking about 

the Marketplace Fairness Act in the days ahead, having followed 

this since the days when I was a coauthor with Senator Sununu 

and Senator McCain of the Internet Nondiscrimination Act. 

We have always tried to come to grips with how to handle a new 

emerging technology. Is not the heart of it trying to have policies 

that have the Federal Government, first of all, do no harm and to 

ensure that there are not multiple and discriminatory taxes that 

come about from these thousands of jurisdictions? 

When I first listened to some of the issues surrounding the Marketplace Fairness Act, I looked out at these scores of taxing jurisdictions, more than 5,000 of them, and some of the stuff just defied 

common sense. You would have jurisdictions that might—I remember there was one that would treat a chocolate bar one way and 

a cookie another way. 

Mr. HENCHMAN. Right. 

Senator WYDEN. Are these not some of the issues that we are 

going to have to deal with as we try in this committee to write 

these digital rules of the road? 

Mr. HENCHMAN. Correct. And, as I specified, it is important that 

simplification be kept in mind, because right now we are up to 

9,600 sales tax jurisdictions, growing by a couple hundred a year. 

We added 400 last year. 

So we are moving away from uniformity and away from simplification in terms of number of rates, definitions, and how complex it is, and there are a lot of things Congress could lay out. And 

as I mentioned, some of the bills offer some very promising simplification options. 

Senator WYDEN. My time has expired, Mr. Chairman. But, again, 

I want to thank you, and I hope people understand what is really 

at issue here, and that is, you are updating what are essentially 

the rules for the modern economy, the economy where the jobs are, 

and I really appreciate your leadership. 

The CHAIRMAN. Thank you, Senator. You are pushing us in that 

direction too, and we deeply appreciate it. 

Senator Snowe? 

24 

Senator SNOWE. Thank you, Mr. Chairman. Thank you for holding this hearing. And I, too, want to underscore what Senator 

Wyden has indicated with respect to this double taxation and, also, 

on the whole issue of wireless technology. 

It has a disproportionate impact on low-income households, not 

to mention defeating our Federal policy of trying to make broadband ubiquitous. And so I think, for all those reasons, I would hope 

that we could pass this legislation, because it is undeniable that 

wireless is playing a very critical role for more than 300 million 

subscribers to wireless, not to mention to our economy. 

I would like to get to the broader issue of tax reform. Because 

as I see it, comparing it to the past when we last engaged in tax 

reform in the U.S. Congress—which, as you know, culminated in 

the passage of the Tax Reform Act of 1986—believe it or not, it was 

2 weeks before mid-term elections. It seems virtually impossible in 

today’s political environment, regrettably. 

I commend the chairman for holding a host of hearings on this 

issue. I just would hope that ultimately we move beyond the issue 

of discussing overall tax reform to making it a more concrete goal 

rather than a theoretical goal, because ultimately, if you look at 

the scope and the entirety of the issues that we are facing in this 

country with respect to the economy, it is subpar economic growth. 

It is the worst post-recession recovery in the history of our country. 

There are two central issues. They are taxes and regulations, and 

providing certainty—certainty to consumers, certainty to businesses, but, also, certainty to State and local governments. 

Think about the range of issues that keeps State and local governments in turmoil, between the failure to pass appropriations 

and budgets on time to the fact that we have an uncertainty with 

respect to the tax code, the disparate issues that affect the economy, and tax policy changes from State to State. 

So I would like to ask the panelists—you, Mr. Henchman, about 

the whole question of tax reform. If Congress could deal with it, 

when should it happen and how should it happen? And is that not 

preferable? I mean, we are talking about a lot of different important issues. 

But, if we start piecemealing our approach, it really is going to 

preempt the overall necessity of overhauling the tax code that has 

had more than 15,000 changes since 1986. 

Mr. HENCHMAN. The template of 1986, I think, is the best one 

that you can go off of. I work mostly in State policy and, generally, 

bolder plans have more success than piecemeal approaches, because, when you are just parceling out one or two deductions to 

eliminate, the beneficiaries of those deductions can concentrate and 

preserve them and then you end up with nothing at all. 

Maryland, a few years ago, looked to broaden its sales tax. It selected a handful of items to broaden it to. The beneficiaries of those 

descended on Annapolis, and eventually it turned into a tax on the 

one thing that had no lobbyists in Annapolis—a tax on computer 

services. Then they hired lobbyists and got that taken out, and 

Maryland ended up with nothing at the end of the day. 

So I do not think that approach works. I think a 1986 approach 

is better—broader, comprehensive. And rather than saying, ‘‘Well, 

should we get rid of this deduction,’’ look at it from the other perVerDate Nov 24 2008 17:22 Apr 22, 2013 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 R:\DOCS\80344.000 TIMD
25 

spective. Start from a blank slate and say, ‘‘What is justifiable? 

What should be included? What is the best way to do it through 

a tax deduction as opposed to through some other way?’’ 

Senator SNOWE. Would anybody else care to comment? Dr. 

Rueben? 

Dr. RUEBEN. I would just say that we should have something 

that has certainty in it, getting rid of a lot of the temporary provisions. I know it is costly if you are undertaking reform and you 

have to pay for things, but I think, from the State perspective, the 

fact that we are doing tax reform, and we are doing tax policy, 

through 1- or 2-year extensions is a problem. So anything that 

could make it more permanent rather than having things expire 

would be useful. 

Senator SNOWE. Well, it is interesting, because one witness who 

testified before this committee in a recent hearing described our 

tax code as a permanent temporary tax code. And I think that that 

is very realistic and true, and I think that that is having a tremendous effect on the private sector, for example, in trying to create 

jobs, to invest in capital equipment, on consumers to make decisions, and, certainly, even on State and local governments having 

to make up the difference and the pressures on their own budgets. 

So I think that that is the ultimate imperative, frankly, and one 

that we need to grapple with sooner rather than later, because ultimately I do not think we are going to see the kind of economic recovery that we deserve in this country and most certainly what the 

American people deserve. 

Thank you. 

The CHAIRMAN. Thank you, Senator. You make an excellent 

point. But I must remind all of us that none of this is easy. It is 

going to require some hard, tough decisions. 

Since 1986, there are 15,000 changes to the code—15,000. In 

1986, with tax reform, there were no extenders. Today, we have 

about 142, something like that; that is, provisions in the code 

which are temporary. They last for a year, 18 months, et cetera. 

And I agree with the theory, and I am going to push hard to 

practice it, that is: deal with these provisions, make them either 

permanent or repeal them. Because you are right, Senator: uncertainty is one of the biggest impediments to growth in this country 

today, in my judgment, and the code certainly adds to that uncertainty. 

But, if we are going to make it more certain, we are going to 

have to make some tough choices, very tough choices. And that 

really means just, to a larger degree, interest groups are going to 

have to subsume their narrow interests and try to come up with 

some alternative that makes a little more sense for the greater 

good. 

The degree to which groups do that, the more likely it is we are 

going to achieve our desired result here. But, if they do not, with 

the narrow special interest politics in this country these days, it is 

going to be extremely difficult to achieve the goal that we all are 

pursuing. 

So I just call on us all to be ready to bite the bullet and to come 

up with constructive alternatives. You cannot beat something with 

26 

nothing. Come up with an alternative that might make a little 

more sense as we work better together. 

It really depends on the degree to which this country comes together and the degree to which people that we work for—we are 

just hired hands. We are just employees. It depends a lot on how 

much our employers really themselves want to come up with a constructive solution to this problem. 

But you are right, Senator. I could not agree more. It is going 

to be difficult. 

Senator Hatch? 

Senator HATCH. Thank you, again, Mr. Chairman. 

Mr. Hellerstein, in your testimony, you stressed the importance 

of adhering to a standard where income taxes are paid by those 

who work or live in a jurisdiction. You also discuss the example of 

a semi-professional soccer player who, though earning a small sum 

of money, nonetheless was obliged or obligated to file tax returns 

in many States. 

In fact, I know this committee used to employ a professional 

minor league baseball umpire who was required to file returns in 

multiple States. And I am interested in your analysis of how States 

have, over the past few years, become increasingly aggressive in 

pursuing taxes from non-residents and how new sources of information have become available in States to facilitate their search for 

revenues. 

Now, when did this trend originate, and how long has it been 

going on? And do you see it increasing in the future? 

Then, finally, Mr. Zinman, if you could answer how you have witnessed States become more aggressive in their search for revenues 

and how this has impacted your clients. Do you think your clients 

are able to make residency decisions with full knowledge of the tax 

implications of their decisions, or does the complexity of State tax 

laws make that difficult? 

So, if I could have you first, Mr. Hellerstein, and then Mr. 

Zinman. 

Mr. HELLERSTEIN. Thank you, Senator. With all due respect, I 

believe it was not my testimony. Presumably, it was Mr. Zinman 

who referred to the soccer player. But I am familiar with the problem of taxing professional athletes, and, more generally—insofar as 

my testimony did address the problem of personal income taxation 

with regard to the role that Congress may play, and, indeed, this 

is an issue that I have testified about before in the House—I believe that Congress has a positive role to play here, at least with 

regard to employees who are temporarily in a State. 

It seems to me both a burden on the employee, not to mention 

on the employer, who has to track 2 or 3 days of work in whatever 

State the employees go to. To provide a uniform standard under 

which employers have certainty and employees have certainty as to 

when they have an obligation, with some threshold—I do not know 

whether it should be 30 days or 40 days—I think is an appropriate 

thing to do, particularly because, like academic disputes, there is 

so little at stake, because to be sure, there are five States that do 

not have income taxes and, for the most part, we are just talking 

about which State gets the revenue. It is not like the revenue is 

going up in smoke. 

27 

But I believe Mr. Zinman may have more colorful examples than 

I do. 

Senator HATCH. Mr. Zinman? 

Mr. ZINMAN. Thank you, Senator. 

First, let us talk about the problems that we have if we are an 

employee. Employees in various States, if they work in various 

States—and that is happening a great deal now—they get taxed in 

those States as non-residents. However, States have certain regulations on how the employers are supposed to report the information, 

and who is an employee and who is not an employee varies from 

State to State. 

It becomes very difficult for an employee to report his information. I had a client this year who was a part-year resident of North 

Carolina and a part-year resident of New York. New York regulations require, whether you are a part-year resident, a non-resident, 

or a full-year resident, to report 100 percent of your earnings on 

your W–2 form in New York, and then the tax preparer or yourself, 

if you have to, allocates out based on the days, which is not always 

correct. So there are a lot of issues that happen. 

Now, as far as the residency decision is concerned, besides family 

and quality of life, the tax rules do matter to a lot of people. A lot 

of people have moved to Florida because of estate tax issues, because of income tax issues, and a lot of people have moved to a 

State like Florida—and this also happens out in the West. They 

move to States that are tax-friendly, especially with estate tax 

issues, and they go there, one, because of quality of life and, two, 

because they can then give more of their estate to their children. 

So these issues do become important. And what becomes even 

more important is that, if you do not do it right, your previous 

State where you resided is going to try to grab some of your assets 

anyway. 

There are a lot of issues about people who reside in two different 

States and each State trying to claim that that person was a resident, and that does impact Federal law also. There was just recently a Tax Court decision in Brown where a husband and wife 

were New York and South Carolina residents, and New York had 

an audit and declared that their capital gains were New York capital gains. They agreed. They paid New York. They paid New York 

the deficiency. They paid penalties and interest, and they claimed 

the credit in South Carolina. The Federal law did not want to allocate the interest expense and the interest income the same way. So 

there was a problem, and the Browns actually, in Federal law, lost 

a little bit of extra money. 

So where you are a resident and how the States look at that residency and how much they go after, that is very important to what 

the decisions are. 

Senator HATCH. Well, thank you. The more I listen to you, I just 

am very grateful that I am just a humble attorney rather than a 

CPA. [Laughter.] 

Mr. ZINMAN. We have a lot of fun doing this stuff. 

Senator HATCH. I will bet you do. 

Let me just end with this. Mr. Sammartino, I noticed in President Obama’s fiscal year 2013 budget that the President’s proposal 

for Build America Bonds resulted in an increase in outlays of $70 

28 

billion, as well as an increase in taxes of $63 billion, according to 

the Joint Committee on Taxation. 

Outlays are defined as spending under the Congressional Budget 

Act. Therefore, the President’s Build America Bonds proposal 

would increase spending by $70 billion and would increase taxes by 

$63 billion. Now, this would naturally increase the size of the Federal Government by at least $63 billion, as I view it. 

Now, do you agree that the President’s proposal increases spend- ing by $70 billion and that it increases revenues by $63 billion? 

And do you agree that outlays are spending? 

Mr. SAMMARTINO. Yes. Those were the numbers that JCT estimated for the proposal, that outlays would go up by $70 billion 

over 10 years and revenues from the reduction in deductible State 

and local taxes would increase by $63 billion. 

CBO agrees that outlays for Build America Bonds are spending, 

but we also recognize that many economists would say that it is 

not clear whether higher revenues from a reduction in the tax expenditure for State and local interest is really a tax increase or a 

spending reduction, even though it is scored on the tax side of the 

budget. 

But, yes, those were the numbers reported in our analysis of the 

President’s budget. 

Senator HATCH [presiding]. Well, thank you. I appreciate that. 

I just want to mention, before we close down shop here, that Senator Enzi would have been here, but he is ranking member on the 

Health, Education, Labor, and Pensions Committee that I have 

been going back and forth to, and he wants to be excused, as he 

should be, because he is the ranking member there and has had 

to be in that markup this whole morning. So we will make excuses 

for him. And he is one of the more active members of this committee, and I just want to make that very clear. 

We are really appreciative of your testimony. There are so many 

other issues that could be raised, but we appreciate the testimony. 

We appreciate the statements that you have put in writing. We 

read those, and, frankly, this has been a very good panel. 

I just want to thank all of you for being here. And with that, we 

will recess until further notice. 

[Whereupon, at 11:40 a.m., the hearing was concluded.] 

(29) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


80344001.eps
30 


80344.002

Just this February, voters in Manhattan, Montana approved new bonds so the community can afford to 

repair the Manhattan Elementary School's roof. Likewise, the deduction for state and local taxes 

reduces the burden that a state or local government places on its own residents in raising revenue. 

As we reform the tax code to encourage growth and make our country more competitive, we need to 

ask whether the current exemptions and deductions make sense. State and local taxes could potentially 

be allowed as above-the-line deductions, allowing all taxpayers to benefit. 

We could also consider providing a uniform subsidy for bond holders. Tax-exempt bonds subsidize 

interest paid on such bonds by exempting the interest from tax. Currently, the value ofthis subsidy 

varies based on taxpayers' marginal income tax rates. For every dollar we spend on infrastructure 

through a tax exempt bond, twenty cents goes to tax breaks for higher-income taxpayers. A uniform 

subsidy would mean each taxpayer receives the same subsidy regardless of tax bracket. 

The Build America Bonds program achieved success using this approach. In Montana, the Barrett 

Hospital in Dillon was outdated and in need of constant repair. Dillon issued $30 million of insured Build 

America Bonds at a 3.67 percent interest rate. This reduced the borrowing cost to Dillon residents by a 

full percentage point, saving them more than $800,000. The project created 33 full-time jobs. Dillon 

now has a new, state-of-the-art, critical-access hospital. 

Beyond these provisions in current law, we should also ask what else we can be doing to efficiently help 

state and local governments maintain sustainable budgets. 

We need to make sure our federal, state and local tax systems are working together. As part oftax 

reform, we should ask how we can help states collect taxes owed and how we can encourage standard 

rules to protect taxpayers from multiple taxes and needless complexity. 

We've worked together with the states to simplify rules in the past. Originally driven by the states, the 

International Fuel Tax Agreement provides a uniform system for the administration and reporting of fuel 

taxes paid by commercial trucks and buses operating in multiple states. States agreed to simplified 

administration burdens in exchange for the ability to enforce fuel use taxes. More recently, Congress 

enacted the Mobile Telecommunications Sourcing Act to establish uniform rules on which states can tax 

mobile calls. We should consider how we can learn from these examples to simplify the code. 

So as we work to reform the tax code, let us remember the lessons from Madison and our founders. Let 

us bear in mind the relationship between our federal tax code and state and local tax systems. Let us 

improve the tax code to create growth and make the U.S. more competitive. And let us do this in a way 

that improves federal, state and local budgets. 

### 
31 


80344.003

Senator Maria Cantwell 

Finance Committee Hearing on 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

April 25, 2012 

Mr. Chairman, thank you for holding this hearing. The federal tax policy has a direct impact on 

state and local tax and fiscal policy; as a result, it is important that we understand the impact that 

making changes at the federal level can have at the state level. 

In this time of economic uncertainty, it is especially important to make sure our constituents can 

depend on consistent, predictable deductions that they can plan around. It is also a matter of 

fairness and of particular importance to me and Washington state is the state and local sales tax 

deduction. 

The deductibility of state and local taxes on federal income tax returns is permanent. However, 

states like mine have to tight every year to extend the sales tax deduction. 

Many of you have argued that the ability to deduct state taxes acts as an indirect subsidy to state 

and local governments by offsetting the cost to taxpayers. State and local governments who can 

count on the ability of its taxpayers to deduct state income taxes receive a larger benefit than 

state governments, like Washington state, which finances its spending by other taxes such as the 

sales tax, which is not deductible on a permanent basis. 

The sales tax deduction was taken away in 1986, and it wasn't restored until 2004. It has been 

extended every year since and it's time to just make it permanent. The 22 percent of Americans 

who claim the state and local sales tax deduction shouldn't be held captive once again. The 

value of the deduction varies depending on individual filing status and tax rate, but for 

Washington state, the $1.8 billion in deductions translated into $500 million or more staying in 

the Washington state economy, which puts an average of$500 back in Washingtonians' pockets. 

Individuals living in places with state income tax are not faced with these same challenges. The 

deduction for state income tax is a permanent. This disparity unfairly punishes my Washington 

constituents as well as the taxpayers of Alaska, Florida, Nevada, South Dakota, Tennessee, 

Texas, and Wyoming. 

Extending and making this deduction permanent are matters of tax fairness. And until we 

address the pros and cons ofthe ability to deduct all state and local taxes, the citizens of my state 

and the eight other states with no income tax deserve the same permanent treatment. 

Congress cannot continue to leave taxpayers hanging, uncertain if their tax benefits would be 

restored by the time they have to file their taxes. We must extend this provision now. Most 

taxpayers work in good faith to comply with the law and pay their taxes. Congress should, at the 

very least, minimize the uncertainty that goes along with this annual obligation. 
32 


80344.004

Additionally, another key federal tax policy impacting states is the treatment of tax-exempt 

bonds. The federal government provides preferential tax treatment for bonds, which in turn 

allows state and local governments to borrow more cheaply than they otherwise could. Taxexempt bonds provide federal assistance to state and localities to subsidize state and local 

infrastructure such as roads, schools and other public goods as well as certain qualifying private 

projects. 

Since 1991, tax-exempt bonds have become a more important source of financing, particularly 

for public investment in transportation facilities, such as highways, and private investment in 

education. 

Over the period 2002 through 2011, State and Local governments have issued on average $384 

billion in tax-exempt bonds. These tax-exempt bonds finance projects such as the Highway 520 

Bridge in Washington state. It is important that we have efficient and effective ways to finance 

large infrastructure projects that promote economic grow1h. 

Tax-exempt bond financing is helping us do that. 1 agree that it is important that we reform our 

tax code. However, I believe it is equally important to examine the potential economic impacts 

changing that would result from changing some of these policies. 

### 
33 


80344.005

Statement for the Senate Finance Committee Hearing: 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

U.S. Senator Michael B. Enzi 

April 25, 2012 

Mr. Chairman, thank you for holding this hearing focusing on how tax reform could 

possibly affect state and local tax and fiscal policy. I truly appreciate yours and Senator 

Hatch's interest in hosting this hearing today. and allowing an open discussion in this 

Committee about the merits of my bill, S. 1832, The Marketplace Fairness Act. 

The Marketplace Fairness Act was written in the aftermath of the Supreme Court's 1992 

Quill decision. Congressional involvement is necessary because the ruling stated that 

the thousands of different state and local sales tax rules were too complicated and 

onerous to require businesses to collect sales taxes unless they had a physical 

presence (store, warehouse, etc.) in the purchaser's home state. The Supreme Court 

essentially "invited" the Congress to decide how to move forward. 

I strongly believe that now is the time for Congress to act. Many Americans do not 

realize that when they buy something online or order something from a catalog from a 

business outside of their own State that they still owe the State sales tax. For over a 

decade, Congress has been debating how to best allow states to collect sales taxes 

from online retailers in a way that puts Main Street businesses on a level playing field 

with online retailers. The Marketplace Fairness Act empowers states to make the 

decision themselves. If they choose to collect already existing sales taxes on all 

purchases, regardless of whether the sale was online or in store, they can. If they want 

to keep things the way they are, it's a state's choice. 

I have been working on this sales tax fairness issue since joining the U.S. Senate in 

1997. As a former small business owner, it is important to level the playing field for all 

retailers - in-store, catalog, and online - so an outdated rule for sales tax collection 

does not adversely impact small businesses and Main Street retailers. On November 9, 

2011, Senator Durbin, Senator Alexander, Senator Tim Johnson and I introduced - with 

six of our other colleagues - the Marketplace Fairness Act to close the 20-year loophole 

that distorts the American marketplace by picking winners and losers, by subsidizing 

some businesses at the expense of other businesses, and subsidizing taxpayers at the 

expense of other taxpayers. All businesses and their retail sales and all consumers and 

their purchases should be treated equally. 

I want to provide you with some highlights of what the Marketplace Fairness Act 

accomplishes: 

• The bill gives states the right to decide to collect - or not to collect - taxes that 

are already owed. 
34 


80344.006

• The legislation would streamline the country's more than 9,000 diverse sales tax 

jurisdictions and provide two options by which states could begin collecting sales 

taxes from online and catalog purchases. 

• The bill gives states two voluntary options that would allow them to collect the 

state sales taxes that are already owed if they choose. The first option is the 

Streamlined Sales and Use Tax Agreement, which is supported by 24 states that 

have already passed laws to simplify their sales tax collection rules. The second 

option puts in place basic minimum simplification measures states can adopt to 

make it easier for out-of-state businesses to comply. 

• The bill also carves out small businesses so that they are not adversely affected 

by the new law by exempting businesses with less than $500,000 in online or 

out-of-state sales from collection requirements. This small business exemption 

will protect small merchants and give new businesses time to get started. 

Do not let the critics get away with saying this kind of simplification cannot be done. In 

the early 1990s when the Quill decision was handed down, the Internet was still in 

diapers and cell phones came with bags and looked like bricks. Cell phones, software, 

computers, technology have all advanced at an exponential pace. The different rates 

and jurisdiction problem is no problem for today's programs. 

As a former mayor and state legislator, I strongly favor giving states the authority to 

require sales and use tax collection from retailers on all sales if they choose to do so. 

Sales taxes go directly to state and local governments, which brings in needed revenue 

for maintaining our schools, fixing our roads and supporting local law enforcement. If 

sales over the Internet continue to go untaxed and electronic commerce continues to 

soar, revenues to state and local governments will plummet. 

My legislation would help both consumers and states by reducing the burden on 

consumers and providing a mechanism that would allow states to systematically and 

fairly collect the taxes already owed to them. At a time when states are increasingly 

turning to the federal government for program funding, it makes sense for Congress to 

authorize states to collect taxes that are already owed .. The states' dependency on 

federal dollars could be offset by collecting taxes that are already owed from everyone 

who owes them at the state level. But if Congress fails to authorize states to collect tax 

on remote sales, and electronic commerce continues to grow, we are implicitly blessing 

a situation where states will be forced to raise other taxes B such as income or property 

taxes B to offset the growing loss of sales tax revenue. I want to avoid that. That is why 

we need to implement a plan that will allow states to generate revenue using 

mechanisms already approved by their local leaders. We need to allow states the 

ability to collect the sales taxes that are already on the books - which if enacted, it is 

estimated to provide $23 billion in fiscal relief in the 2012 alone for the states for which 

Congress does not have to find an offset. 

This will give states less of an excuse to come knocking on the federal door for 

handouts and will reduce the problem of federally attached strings. 
35 


80344.007

The Marketplace Fairness Act is not about new taxes. No one should tax the use ot the 

Internet. No one should tax Internet services. I do, however, have concerns about 

using the Internet as a sales tax loophole. Sales tax collection is already required by 

my home state of Wyoming no matter how or where we buy something if it is not taxed 

by the state we get it from. Under Wyoming law, online purchases are already subject 

to sales tax - it is just not being collected or given to our state. The situation is very 

similar to that of other states. 

Senators Durbin, Alexander, Tim Johnson, and I have worked tirelessly to assist sellers 

and state and local governments to simplify sales and use tax collection and 

administration. For the past several years, I have worked with all interested parties to 

find a mutually agreeable legislative package to introduce. Many hours have been 

dedicated to finding the right solution. I will continue to work with all interested parties 

to improve on the policy issues of concern to the stakeholders. Bill introduction does 

not stop us from negotiating and working together to improve the final product that 

should be enacted into public law. 

The Marketplace Fairness Act is supported by over 200 organizations, including but not 

limited to the National Governors' Association, the National Conference of State 

Legislatures, the U.S. Conference of Mayors, National League of Cities, National 

Association of Counties, the National Retail Federation, and the Retail Industry Leaders 

Association. I would like to submit the entire list into the hearing record. 

Ten years ago, the bills we considered to try to close this loophole were not adequate to 

solve the problem. The Marketplace Fairness Act does solve the problem. It is simple, it 

is about States' rights, and it is about fairness. At a time when State budgets are under 

increasing pressure, Congress should give State and local governments the ability to 

enforce their own laws. I strongly encourage my colleagues to support the Marketplace 

Fairness Act and get it enacted into public law this year. 
36 


80344.008

Joint Statement 

Senators Michael B Enzi, Richard J. Durbin, Lamar Alexander, Tim Johnson, 

John Boozman, Jack Reed, Roy Blunt, Sheldon Whitehouse, Bob Corker, and 

Mark Pryor 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

April 25, 2012 

For the past 20 years, states have been prohibited from enforcing their own sales and use tax 

laws on sales by out-of-state, catalog and online sellers due to the 1992 Supreme Court decision 

Quill Corporation v. North Dakota. Congress has been debating solutions for more than a 

decade, and some states have been forced to take action on their own, leading to greater 

confusion and further distorting the marketplace. Congressional action is necessary because the 

Quill ruling stated that the thousands of different state and local sales tax rules were too 

complicated and onerous to require businesses to collect sales taxes unless they have a physical 

presence in the state. 

The Marketplace Fairness Act (S. 1832) would give states the right to decide for themselves 

whether to collect - or not to collect - sales and use taxes from out-of-state businesses that are 

already owed. The bill would not impose any new tax. This bipartisan legislation was 

introduced by five Republicans and five Democrats on November 9,2011, and since then four 

cosponsors have been added. The legislation is supported by more than 200 business, 

government and labor organizations (see attached), including the National Governors 

Association, the National Conference of State Legislatures, the U.S. Conference of Mayors, 

National League of Cities, National Association of Counties, the National Retail Federation, the 

Retail Industry Leaders Association, and the largest online retailer, Amazon.com. 

The Marketplace Fairness Act gives states two voluntary options that would allow states to 

collect sales taxes that are already owed if they choose. The first option is the Streamlined Sales 

and Use Tax Agreement, which is supported by twenty-four states that have passed laws to 

simplify their sales tax collection rules. The second option puts basic minimum simplification 

measures in place that states can adopt to make it easier for out-of-state businesses to comply. 

Today, if an out-of-state retailer refuses to collect sales and use taxes, the burden is on the 

consumer, who is required to report the tax on his annual income tax return or a separate state tax 

form. However, most consumers are unaware of this legal requirement and very few comply 

with the law. Consumers can be audited and charged with penalties for failing to pay sales and 

use taxes. The Marketplace Fairness Act would eliminate such a burden on consumers. 

Across the country, states and local governments are losing billions in tax revenue already owed. 

On average, states depend on sales and use taxes for 20 percent of their annual revenue. 

According to the National Conference of State Legislatures, this sales tax loophole will cost 

states and local governments $23 billion in avoided taxes in 2012. At a time when State budgets 

are under increasing pressure, Congress should act now to provide states the ability to enforce 

their 0"1'.'0 laws. 
37 


80344.009

The Quill decision also put millions oflocal retailers at a competitive disadvantage by exempting 

remote retailers from tax collection responsibility. Local retailers in our communities are 

required to collect sales taxes, while online and catalog retailers selling in the same state are not 

required to collect any of these taxes. This creates a tax loophole that subsidizes some taxpayers 

at the expense of others and some businesses over others. The Marketplace Fairness Act would 

address and help close this loophole. Additionally, the bill would exempt businesses with less 

than $500,000 in annual online or out-of-state sales from collection requirements, which will 

protect small merchants and give new businesses time to get started. 

State and local governments, retailers, and taxation experts from across the country are urging 

Congress to pass the Marketplace Fairness Act as soon as possible because it gives states the 

right to decide what works best for their local governments, residents, and businesses. The bill 

levels the playing field by allowing states to collect sales taxes from all retailers, regardless of 

their location. Given our fiscal constraints, we should allow states to enforce their own tax laws 

and make sure that state and local governments and businesses are not left behind in tax refornl 

discussions. 

We thank the Finance Committee for holding a hearing to discuss this important issue and we 

urge the Committee to quickly move forward and consider the Marketplace Fairness Act to 

provide states the ability to enforce their own tax laws and level the playing field for retailers. 
38 


80344.010

Support for S. 1832, the Marketplace Fairness Act 

American Federation of Labor and Congress of Industrial Organizations 

Abbell Credit Corporation, Chicago, IL 

Acadia Realty Trust, White Plains, NY 

AFL-CIO Department for Professional Employees 

Airgas, Inc. 

Alabama College Bookstore Association 

Alabama Retail Association 

Alaska Veterinary Medical Association 

Alliance of Wisconsin Retailers 

Amazon.com 

American Apparel and Footwear Association 

American Booksellers Association 

American Federation of State, County and Municipal Employees 

American Federation of Teachers 

American Specialty Toy Retailing Association 

American Veterinary Medical Association 

Arizona Retailers Association 

Arkansas Grocers and Retail Merchants Association 

Association for Christian Retail 

Association of Washington Business 

AutoZone, Inc. 

Balliet's LLC 

Barnes and Noble, Inc. 

Beall's, Inc. 

Bed, Bath, & Beyond, Inc. 

Ben Bridge Jewelers, Seattle, WA 

Best Buy Co., Inc. 

Blake Hunt Ventures, Inc., Danville, CA 

Build-A-Bear Workshop®, Saint Louis, MO 

Buy.com 

California Association of College Store 

California Business Properties Association 

California Retailers Association 

California Veterinary Medical Association 

Carolinas Food Industry Council 

CBL & Associates Properties, Inc., Chattanooga, TN 

Cencor Realty Services, Dallas, TX 

Center on Budget and Policy Priorities 

Certified Commercial Investment Member Institute 

Chesterfield Blue Valley, LLC, St. Louis, MO 

Christian Booksellers Association 

City of Carrollton, Texas 

College Stores of New England (MA, CT, RI, ME, VT, NH) 

College Stores Association of New York State 
39 


80344.011

College Stores Association of North Carolina 

Colorado Retail Council 

Colorado Veterinary Medical Association 

Connecticut Retail Merchants Association 

Consumer Electronics Association 

Consumer Electronics Retailers Coalition 

The Container Store, Dallas, Texas 

The CortiGilchrist Partnership, IIc, AI Corti, Principal, San Diego, CA 

D. Talmage Hocker, The Hocker Group, Louisville, KY 

David Hocker & Associates, Inc., Owensboro, Kentucky 

DDR Corp., Beachwood, OH 

Delaware Veterinary Medical Association 

Dick's Sporting Goods, Inc. 

DLC Management Corp., Tarrytown, NY 

Donahue Schriber Realty Group, Costa Mesa, CA 

Economic Alliance of Snohomish County, WA 

Edens & Avant, Columbia, SC 

Evergreen Devco, Inc., Glendale, CA 

Fairfield Corporation, Battle Creek, MI 

Federal Realty Investment Trust, Rockville, MD 

FedTax, David Campbell, CEO 

Florida Retail Federation 

Food Marketing Institute 

Foot Locker, Inc. 

Footwear Distributors and Retailers of America 

Forest City Enterprises, Inc., Cleveland, OH 

Gap Inc., San Francisco, CA 

Garrison Pacific Properties, San Rafael, CA 

General Growth Properties, Chicago, IL 

Georgia Association of College Stores 

Georgia Retail Association 

Georgia Veterinary Medical Association 

Glimcher Realty Trust, Columbus, OH 

Governing Board of the Streamlined Sales and Use Tax Agreement 

Government Finance Officers Association 

Great Lakes Independent Booksellers Association 

The Greeby Companies, Inc., Chicago, IL 

Hart Realty Advisers, Inc., Simsbury, CT 

The Home Depot, Inc. 

Hy-Vee, Inc. 

Idaho Retailers Association 

Idaho Veterinary Medical Association 

Illinois Association of College Stores 

Illinois Retail Merchants Association 

Illinois State Veterinary Medical Association 

Independent Running Retailer Association 
40 


80344012.eps

Indiana Retail Council 

Indiana Veterinary Medical Association 

Institute of Real Management 

International Association of Fire Fighters 

International Council of Shopping Centers 

International Economic Development Council 

International Federation of Professional and Technical Engineers 

Iowa Retail Federation 

Iowa Veterinary Medical Association 

J.C. Penney Corporation, Inc. 

JCPenney 

Jewelers of America 

Jo-Ann Stores, Inc. 

John Bucksbaum, Private Real Estate InvestorlDeveloper, Former Chairman and CEO 

of General Growth 

Kemper Development Company, Bellevue, WA 

Kentucky Retail Federation 

Kentucky Veterinary Medical Association 

Kimco Realty Corporation, New Hyde Park, NY 

The Kroger Company 

L. Michael Foley and Associates, LLC, La Jolla, CA 

Limited Brands, Inc. 

Los Angeles Area Chamber of Commerce 

Louisiana Retailers Association 

Louisiana Veterinary Medical Association 

Lowes Companies, Inc. 

Maine Merchants Association 

Maine Veterinary Medical Association 

Malcolm Riley and Associates Los Angeles, CA 

Marketing Developments, Inc. MI 

Marshall Music Co., Lansing, MI 

Mary Lou Fiala, CEO, Loft Unlimited, Ponte Vedra Beach Florida 

Maryland Retailers Association 

Massachusetts Veterinary Medical Association 

Meijer, Inc. 

Michigan Association of College Stores 

Michigan Retailers Association 

Michigan Veterinary Medical Association 

Mid States Association of College Stores (lA, NE, KS, MO) 

Middle Atlantic College Stores 

Minnesota Retail Association 

Minnesota Veterinary Medical Association 

Missouri Retailers Association 

Mountains and Plains Independent Booksellers Association 

NAIOP, Commercial Real Estate Development Association 

NAMM, National Association of Music Merchants 
41 


80344.013

National Association of Chain Drug Stores 

National Association of College Stores 

National Association of Counties 

National Association of Real Estate Investment Trusts 

National Association of Realtors 

National Bicycle Dealers Association 

National Conference of State Legislatures 

National Education Association 

National Governors' Association 

National Grocers Association 

National Home Furnishings Association 

National League of Cities 

National Retail Federation 

National School Supply and Equipment Association 

Nebraska Retail Federation 

Nebraska Veterinary Medical Association 

The Neiman Marcus Group, Inc 

Nevada Veterinary Medical Association 

New Atlantic Independent Booksellers Association 

New England Independent Booksellers Association 

New Jersey Retail Merchants Association 

New Jersey Veterinary Medical Association 

New Mexico Retail Association 

Newspaper Association of America 

North American Retail Dealers Association 

North Carolina Retail Merchants Association 

North Carolina Veterinary Medical Association 

North Dakota Retail Association 

Northern California Independent Booksellers Association 

Ohio Association of College Stores 

Ohio Council of Retail Merchants 

Oklahoma Veterinary Medical Association 

Outdoor Industry Association 

Pacific Northwest Booksellers Association 

Pennsylvania Retailers' Association 

Performance Marketing Association 

Pet Industry Joint Advisory Council 

Petco Animal Supplies, Inc. 

PetSmart, Inc. 

Planning Developments, Inc. MI 

The Pratt Company, Mill Valley, CA 

Professional Beauty Association 

Properties, Inc., Chicago, IL 

The Rappaport Companies, McLean, VA 

Real Estate Roundtable 

Realtors Land Institute 
42 


80344.014

REI (Recreational Equipment, Inc.) 

Reininga Corporation, Healdsburg, CA 

Retail Association of Mississippi 

Retail Association of Nevada 

Retail Council of New York State 

Retail Industry Leaders Association 

Retail Merchants of Hawaii 

Retailers Association of Massachusetts 

Rhode Island Retail Federation 

Rocky Mountain Skyline Bookstore Association (CO, MT, NM, WY) 

Safeway, Inc. 

Sears Holdings Corporation 

Seattle Metropolitan Chamber of Commerce 

The Seayco Group, Bentonville, AK 

The Sembler Company, St. Petersburg, FL 

Service Employees International Union 

ShareASale 

Simon Property Group, Indianapolis, IN 

Soccer Dealer Association 

Society of Industrial and Office Realtors 

South Carolina Association of Veterinarians 

South Carolina Retail Merchants Association 

South Dakota Retailers Association 

Southern Independent Booksellers Alliance 

Southwest College Bookstore Association (AR, LA, TX, OK, NM, MS) 

Steiner + Associates LLC, Columbus, Ohio 

Stirling Properties, Covington, LA 

Tanger Factory Outlet Centers, Inc., Greensboro, NC 

Target Corporation 

Taubman Realty Group, Bloomfield Hills, MI 

Tennessee Retail Association 

Tennessee Veterinary Medical Association 

Texas Retailers Association 

The Timberland Company 

Tractor Supply Company 

Tri-State Bookstore Association 

The UAW 

U.S. Conference of Mayors 

Utah Food Industry Association 

Utah Retail Merchants Association 

Utah Veterinary Medical Association 

Vermont Retail Association 

Vestar Development Co. - Phoenix AZ 

Virginia Retail Merchants Association 

Virginia Veterinary Medical Association 

Wal-Mart Stores. Bentonville. AR 
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80344015.eps

Washington Retail Association 

Washington State Veterinary Medical Association 

WOP Partners, LLC, Phoenix, AZ 

The Weitzman Group, Dallas, Texas 

Wendy's Company 

West Virginia Retailers Association 

West Virginia Veterinary Medical Association 

Western Development Corporation, Washington, DC 

Westfield, LLC., Los Angeles, CA 

Wisconsin Association of College Stores 

Wisconsin Veterinary Medical Association 

Wolfe Properties, LLC, St. Louis, MO 

World Floor Covering Association 

Wyoming Retail Association 

Wyoming Veterinary Medical Association 

Zumiez, Inc., Everett, WA 
44 


80344.016

STATEMENT OF HON. ORRIN G. HATCH, RANKING MEMBER 

U.S. SENATE COMMITTEE ON FINANCE HEARING OF APRIL 25, 2012 

TAX REFORM: WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY 

WASHINGTON - U.S. Senator Orrin Hatch (R-Utah), Ranking Member ofthe Senate Finance 

Committee, today delivered the following opening statement at a committee hearing 

examining the impact of tax reform on state and local governments: 

In reading the written testimony of our guests today, I was particularly struck by Mr. 

Hellerstein's recitation of the Hippocratic Oath - first, do no harm. Too often, Congress 

forgets this sensible advice. My hope is that this hearing, drawing on the wisdom of our five 

witnesses, will help Congress observe and honor Mr. Hellerstein's admonition. 

The rush for new tax dollars that too often characterizes the federal legislative process, 

oftentimes leaves issues involving federal-state tax coordination by the wayside. But we cannot 

forget that the policies being discussed today touch-on fundamental constitutional principles of 

federalism and separation of powers. And if we are to do no harm it is important to hold 

hearings such as this one. 

Though I do not have all the answers to the specific policy questions this hearing will 

wrestle with, I do have a series of bedrock principles that I believe will serve as a useful guide. 

The Tenth Amendment to our Constitution serves as the lodestar for today's hearing. As the 

testimony of our witnesses at least implicitly reminds us, under our Constitution of enumerated 

and limited federal powers, the powers not delegated to the United States by the Constitution, 

nor prohibited by it to the States, are reserved to the States respectively, or to the people. 

Issues involving the federal impact on state and local revenues impact both the Constitution's 

separation of powers between the federal and state governments and the separate identity of 

the sovereign states. 

Too often, some view the Constitution and its limits on federal power as a hindrance to 

important objectives. I cannot subscribe to this approach. We all take an oath to protect and 

defend the Constitution. That Constitution, with its limits on federal power, is our greatest 

strength, not a weakness. And in walking the fine line between federal and state powers, we 

need to be especially mindful of our oath. 

Federal discussions about state finances frequently highlight budgetary pressures that 

have required cuts in spending. These are no doubt difficult issues for states, but it Simply is 

not the responsibility of the federal government to address state budget shortfalls. Some argue 

that the recent recession has uniquely harmed state revenues, somehow justifying the use of 

the federal government as a backstop. Yet as the Census Bureau noted in an April 12, 2012 

report, state government tax collections in FY 2011 were actually up nearly 8 percent from the 

reVenue collected in FY 2010. Something else is driving state budget shortfalls, and I think in 

many instances the principal issue for states is their own unsustainable spending. 

Also, it is important to recall that the states are already receiving significant support 

from federal taxpayers. According to the Joint Committee on Taxation, federal deductions for 
45 


80344017.eps

state and local taxes will diminish federal taxes by around $347 billion from 2011 to 2015. 

These deductions are generally regarded as helping states to leverage spending by minimizing 

the true cost of state and local government. As someone dedicated to states' rights, I believe 

that a state should be free to set its own tax and spending policies. But with rights come 

responsibilities. And state officials need to take responsibility for their own spending decisions. 

In dosing, I want to show my appreciation to the Members of this Committee who have 

a strong interest in these issues involving federal and state interaction. I know Senator Enzi has 

worked very hard for many years on what is now the Marketplace Fairness Act. Senator Thune 

and Senator Wyden have proposed the Digital Goods & Services Tax Fairness Act. Senators 

Snowe, Wyden, Menendez and Nelson are cosponsors of the Wireless Tax Fairness Act. Your 

work on these issues is a resource for all of us, and I look forward to continuing to work with all 

of you. 

Thank you again Mr. Chairman. The work already done in this area, which is substantial, 

and the opportunities facilitated by this hearing, will help us ensure that when we go down the 

road of comprehensive tax reform we do no harm, and possibly even accomplish some good. 

### 
46 


80344018.eps

Testimony of Walter Hellerstein 

Francis Shackelford Professor of Taxation 

Distinguished Research Professor 

University of Georgia law School 

Before the 

Committee on Finance 

of the 

United States Senate 

Hearing on 

Tax Reform: 

What It Means for State and Local Tax and Fiscal Policy 

Federal-State Tax Coordination: 

What Congress Should or Should Not Do 

April 25, 2012 
47 


80344.019

I. INTRODUCTION 

I am Walter Helierstein, the Francis Shackelford Professor of Taxation and Distinguished 

Research Professor at the University of Georgia School of Law. I have devoted most of my 

professional life to the study and practice of state taxation and, in particular, to federal 

consitutional and statutory restraints on state taxation of interstate commerce. 

I am honored by the Chairman's invitation to testify today. I welcome the opportunity to 

share with the Committee my views on the implications of federal tax reform for state taxation 

and, in particular, the role of Congress in authorizing or limiting state taxation of interstate 

commerce. I do not appear here on behalf of any client, public or private, and the views I am 

expressing here today reflect my independent professional judgment. 

My testimony provides an overview of federal-state tax coordination in an effort to 

assist this Committee in determining the appropriate role of Congress with regard to matters of 

state taxation. 1 By federal-state tax coordination, I mean both vertical tax coordination 

(coordination between concurrent federal and state tax regimes) and horizontal tax 

coordination (coordination among state tax regimes). If my testimony has an overriding theme, 

it may be best captured by Justice Holmes's wise observation that "a page of history is worth a 

volume of logic."z The historical record of federal-state tax coordination provides important 

lessons regarding the risks and rewards of such coordination and, consequently, guidance for 

evaluating current and future initiatives for such coordination. 

Part 1\ of this testimony considers our experience with vertical federal-state tax 

coordination in connection with concurrent federal and state taxation of wealth transfers and 

of income. Part III considers our experience with horizontal federal-state tax coordination in 

connection with federal efforts to harmonize or restrain state income, excise, and property 

taxes. Part IV examines pending congressional proposals for federal-state tax coordination. Part 

V concludes. 

'My testimony draws freely from "Federal-State Tax Coordination: The Good, the Bad, and the Ugly," a paper 

prepared for a conference on Federal Tax Reform Beyond the Beltway on February 3, 2012, sponsored by the 

UCLA Law School and the Tax Policy Center of the Urban Institute and the Brookings Institution. That paper, in 

turn, draws freely from my earHer work in this area, in particular, Hellerstein, Walter, "The United States," in 

BilioH, Gianluigi, and Claudio Sacchetto, Tax Aspects of Fiscal Federalism: A Comparative Analysis (Amsterdam: 

IBFD, 2011), pp: 25-75; McLure, Charles E., Jr., and Walter Hellerstein, "Congressional Intervention in State 

Taxation: A Normative Analysis ofThree Proposals," 31 State Tax Notes 9 (2004), pp. 721-35; Hellerstein, Walter, 

"Federal Constitutional Limitations on Congressional Power to Legislate Regarding State Taxation of Electronic 

Commerce," 53 National Tax Jouma/4, Part 3 (20oo), pp. 1307-25; see generally Hellerstein, Jerome R, Walter 

Hellerstein, and JohnSwain, State Taxation, Vols.1 and II (Valhalla: Thomson Reuters, 2012 rev.). 

, New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921). 
48 


80344.020

II. VERTICAL FEDERAL-STATE TAX COORDINATION: CONCURRENT TAX BASES 

Historically, the federal government and the states have exercised their taxing powers 

concurrently over two tax bases: income (through both individual and corporate income taxes) 

and wealth transfers (through estate and gift taxes). Federal-state tax coordination (or the lack 

thereof) in both contexts illustrates both the promise and pitfalls of such tax coordination. 

A. Wealth Transfer Taxes 

1. Historical Background 

Perhaps the most illuminating chapter in the history of federal-state tax coordination -

and one that is still being written - involves the coordination of federal and state estate and 

inheritance taxes ("death taxes,,).3 Death taxation has a long history in the United States at both 

the federal and state levels.4 The federal government levied death taxes of various types at 

brief intervals beginning in the late eighteenth century (including the periods 1798-1802, 1861-

70, and 1898-1902). Death taxes were likewise among the earliest levies employed by the 

states, beginning with Pennsylvania's inheritance tax in 1826, followed by similar taxes in 

Louisiana (1828), Virginia (1844), and Maryland, North Carolina, and Alabama shortly 

thereafter.s "By 1916, 43 of the (then) 48 states had adopted some form of inheritance tax and 

state spokesmen regarded the taxation of bequests as their 'special preserve.',,6 

2. The Federal Estate Tax of 1916 and the Adoption of the Credit for State Death 

Taxes 

In 1916, Congress enacted an estate tax that laid the foundation for federal and state 

death taxation for the next century. The primary motivating factor for the tax was the need to 

raise revenue in connection with World War 1.7 The U.S. Supreme Court sustained the levy as an 

"indirect" tax on the transfer of property at death over the objection that it was a "direct" tax 

3 Inheritance taxes are taxes imposed on the right or privilege of receiving property measured by the share of the 

decedent's property transferred to the beneficiary. The tax rate often varies by reference to the closeness of the 

beneficiary's relationship to the decedent. Estate taxes, on the other hand, are taxes on the right or privilege of 

transferrjng property at death/ measured by the value of the estate. The estate tax rate generally takes no account 

of the relationship of the recipient to the decedent. Indeed, the estate tax attaches before, and is independent of, 

the receipt of property by the legatee or distribute. See Helierstein, Hellerstein, and Swain, supra note 1, at ~ 

21.02. 

4 See id. at 11 21.01, and U.S. Advisory Commission on Intergovernmental Relations, Coordination of State and 

Federal Inheritance, Estate, and Gift Taxes (Washington: U.S. Government Printing Office, 1961), on which the 

following historical description heavily relies. 

s Oakes, Eugene E., "The Development of American State Death Taxes, 26 Iowa Low Review 3 (1941), pp. 451-78, at 

pp. 451, 453. 

6 U.S. Advisory Commission on Intergovernmental Relations, supra note 4, at p. 27. 

7 Wilbanks, Stephanie J., Federal Taxation of Wealth Transfers - Cases and Problems (New York: Aspen, 2004), p.5. 
49 


80344.021

on property and therefore unconstitutional because it was not apportioned among the states 

by population.s 

The enactment of the federal estate tax gave rise to intensified controversy over 

federal-state tax relations in the realm of death taxation, which had been the focus of attention 

for some time. A decade earlier, representatives of state interests vigorously opposed President 

Theodore Roosevelt's proposal for a federal inheritance tax. They contended that death taxes 

should be considered as lying exclusively within the states' domain, particularly in light ofthe 

states' long and consistent reliance on this source of revenue as contrasted with the federal 

government's sporadic reliance on such levies. 

Following World War I, state spokesmen demanded that the federal estate tax be 

repealed, reiterating their position that death taxes should be the exclusive province of the 

states.9 When Congress failed to respond immediately to these demands, a levy that was 

initially regarded as a temporary wartime measure became a lightning rod for debate over the 

proper role offederal and state governments in the field of estate and inheritance taxation, 

particularly in light of pressures on state legislatures to raise revenues. By 1922, every state but 

two (Florida and Alabama) had a death tax and controversy increased over the propriety of 

continuing the federal estate tax as a permanent part of the nation's tax structure. 

As a short-term solution to this problem, Congress provided a 25 percent credit for state 

death taxes paid against the amount due under the federal estate tax, thereby effectively 

ceding one-quarter of the death tax base to the states. Pressure nevertheless continued for a 

complete withdrawal of the federal government from the death tax field and the continuing 

opposition to the federal estate tax culminated in two conferences in 1925 held under the 

auspices of the National Tax Association. These conferences resolved that the federal 

government should, in fact, withdraw from the death tax field within a six-year period and in 

the interim should increase the 25 percent credit to 80 percent. 

There was, however, an additional issue - one of interstate tax competition - that 

played a role in the ultimate resolution ofthe issue ofthe federal-state tax coordination 

controversy, which illustrates how questions of horizontal tax coordination can affect the 

resolution of questions of vertical tax coordination. One of the objections of those who 

opposed repeal of the federal estate tax was that its elimination would lead to a "race to the 

bottom" among states in their competition to attract wealthy residents - a competition that 

would undermine the role of death taxes altogether as a significant source of state revenue. 

These fears were exacerbated by Florida's amendment of its constitution in 1924 to prohibit 

8 New York Trust Co. v. Eisner, 256 U.S. 345 (1921). 

9 Lowndes, Charles l.B., Robert Kramer, and John H. McCord, Federal Estate and Gift Taxes (St. Paul: West 

Publishing Co., 3d ed., 1974), p. 584. 
50 


80344.022

inheritance taxation in an effort to lure residents from other states to locate (or at least retire) 

in Florida. 1o Those who were concerned about such interstate tax competition therefore urged 

the continuation of the federal estate tax, but with a credit for state death taxes to address the 

tax assignment issue. 

The compromise that emerged from this controversy was the recognition, on the one 

hand, that the federal estate tax would be a permanent feature of the nation's tax structure, 

and, on the other hand, that the states had a legitimate claim to death tax revenues. The 

compromise was embodied in legislation in 1926 increasing the 25 percent credit for state 

death taxes paid (adopted two years earlier) to 80 percent of the amount due under the federal 

estate tax.ll The legislation was generally viewed as serving two objectives. First, it represented 

a willingness of Congress to cede 80 percent of the death tax base to the states on a permanent 

basis and to reduce the aggregate federal-state tax burden on estates and inheritances. Second, 

the credit served the function of effectively providing a minimum state death tax regime that 

would deter interstate tax competition, because states would presumably be unable to resist 

the opportunity of enacting death taxes (at no tax cost to the their resident decedents or estate 

beneficiaries), because the state death tax would add no net tax burden as long as it did not 

exceed 80 percent ofthe federal tax burden. 

3. Federal-State Death Tax Coordination: 1926-2001 

The provision ofthe federal credit for state death taxes had a profound impact on 

federal-state tax coordination as 80 percent of the death tax base was allocated to the states 

and the states accommodated their death taxes to absorb the full amount of the credit that a 

taxpayer could claim under federal law. Indeed, for the balance of the twentieth century, the 

evolution of state death tax regimes reflected the states' increasing tendency to modify their 

statutes to adopt so-called "pickup" or "sponge" taxes designed to absorb the maximum 

federal estate tax credit and to eliminate estate or inheritance taxes independent of the pickup 

tax.n 

During this period, Congress abandoned the 80/20 "tax base sharing" formula. In 1932, 

when Congress increased federal estate tax rates, it nevertheless froze the available credit for 

10 Although Florida ultimately repealed this amendment in light of the developments discussed immediately below, 

it continues to attract residents from other states as a result of its constitutional prohibition on persona! income 

taxation. 

11 See IRC § 2011. 

12 See Conway, Karen S., and Jonathan C. Rork, "Recent Developments in State 'Death' Taxes," 23 State Tax Notes 

12 (2002), pp. 1041-45. The state death tax statutes designed to absorb the federal estate tax credit took various 

forms. Those states with preexisting death taxes typically imposed additional pickup taxes measured by the 

difference, if any, between the preexisting death tax liability and the maximum allowable federal estate tax credit. 

Such provisions accounted for the existence of two death taxes in a number of states. Other states adopted a 

single pickup tax measured by the federal estate tax credit and repealed preexisting state death taxes, if any. 
51 


80344.023

state death taxes that was available under the lower 1926 rates. Congress continued this 

pattern with future changes in the federal estate tax rates, so that the available credit 

continued to reflect the 80 percent limitation based on 1926 rates and exemptions. Despite the 

modification ofthe original tax base allocation between federal and state governments, the 

basic pattern remained the same with the state statutes largely designed to absorb the 

maximum available federal tax credit. 

In 2001, everyone of 50 states had an estate tax that, in one form or another, was 

linked to the federal estate tax credit. Thirty-seven states and the District of Columbia imposed 

an estate tax that equaled the amount of the federal credit for state death taxes, and they 

imposed no other estate or inheritance tax independent of the levy designed to absorb federal 

estate tax credit. 13 The remaining 13 states imposed their own "independent" inheritance or 

estate taxes in conjunction with a residual pickup tax. 14 In these states, state laws specified that 

if the amount of the "independent" state death tax is less than the credit allowed against the 

federal estate tax, the state tax is increased to the full amount of the available credit. Three of 

these thirteen states were phasing out their separate taxes and were scheduled to rely 

exclusively on the pickup tax in the future. 15 In 2001, $6.4 billion (or 27 percent of the net 

federal estate tax revenue of $23.7 billion) was allocated to the states by virtue of the state 

death tax credit. 16 

4. The Phase-Out of the Federal Estate Tox and the End of Federal-State Death 

Tax Coordination 

In 2001, as part of the tax cutting program of President George W. Bush, Congress 

repealed the federal estate tax (over a ten-year period), and, at the same time, eliminated the 

credit for state death taxes (over a four-year period)Y Under the "sunset provisions" of the 

2001 legislation, the estate tax was scheduled to reemerge, phoenix-like, in its pre-2002 form 

13 McNichol, Elizabeth c., Iris J. Lav, and Daniel Tenny, "States Can Retain Their Estate Taxes Even as the Federal 

Estate Tax Is Phased Out," 23 State Tax Notes 8 (2002), pp. 673·91, at p. 676. 

"Id. 

"Id. at 677. 

16 Internal Revenue Service, Statistics of Income Division, "Estate Tax Returns Field for 2001 Decedents, by State of 

Residence" (Rev. Oct. 2007), available at http://www.irs.gov!taxstats(jndtaxstats!article!0 .. id=210770.00.htm!. 

17 Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. Law No. 107·16, 115 Stat. 38 (2001). The pre· 

2002 credit was reduced by 25 percent for estates of decedents dying during 2002, by 50 percent for estates of 

decedents dying during 2003, by 75 percent for estates of decedents dying during 2004, and it was eliminated for 

estates of decedents dying after 2004. Id. §§ 531, 532, 115 Stat. at 72·73. In place of the state death tax credit, 

Congress provided for a deduction of state death taxes from the value of the federal taxable estate. Id. §§ 531, 

532,115 Stat. at 73. 
52 


80344.024

(including the credit for state death taxes)."8 In fact, in late 2010, Congress temporarily 

reinstated the federal estate tax through 2012."9 The temporarily resurrected tax, however, 

was an emaciated rendition of the once robust levy. Whereas the pre-2002 version of the tax 

applied to estates in excess of $675,000 and at rates up 55 percent, the post-2010 version of 

the tax exempted all estates below $5 million with rates capped at 35 percent. 20 

The reduced profile of the revived federal estate tax was hardly surprising in light of 

existing anti-tax sentiment in the United States and particular animosity towards the federal 

"death tax.,,21 More importantly for present purposes, however, Congress did not reinstate the 

credit for state death taxes in the 2010 legislation. Furthermore, it appears unlikely, given 

current federal revenue concerns, that the credit for state death taxes will be resuscitated in 

the future. It is therefore useful to discuss what is probably the final chapter in federal-state tax 

cooperation in the death tax field. 

The reduction of the federal estate tax, and the repeal of the federal credit for state 

death taxes, had dramatic implications for federal-state tax coordination in the domain of 

death taxation. The actions at the federal level effectively eliminated the state pickup tax base 

in many instances. Unless states responded to these changes by severing the relationship 

between their death tax and the existence ofthe federal estate tax and the availability of a 

federal estate tax credit, they confronted a shrinking and, ultimately, disappearing death tax. 

Of the 50 states that had some form of federally based death tax in 2001,28 had no 

death tax at all by 2012, because their levies were inextricably linked to the existence of a 

federal levy and the federal death tax credit,22 and they had taken no action to enact an 

"independent" death tax. Of the remaining 22 states with some form of death tax, many of 

these states' tax regimes were mere shadows of their former selves, because their residual 

pickup taxes had disappeared and they were left only with their relatively modest 

18 Id. § 901, 115 Stat. at 150. 

19 In late 2010, Congress enacted (and the President signed) the "Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010," P.L. 111·312, 124 Stat. 3296 (2010). 

20 Id. § 302. 

21 See Graetz, Michael J., and Ian Shapiro, Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth 

(Princeton: Princeton University Press, 2005). 

22 2012 State Death Tax Chart (March 26, 2012) available at www.mcguirewoods.com/news· 

resources/publications/taxation/state death tax chart.pdf; see also All States Tax Guide (RIA) ~ 210 (chart of 

state taxes), available at www.checkpoint.thomsonreuters.com. 
53 


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"independent" inheritance or estate taxes. 23 Consequently, as one observer noted, "[i]n an odd 

twist of fate," state death taxes "historically regarded as most appropriately a state-level tax, 

are quickly becoming an artifact of the past at the state level.,,24In short, if one is looking for a 

cautionary tale in the history of federal-state tax coordination in the United States, there is no 

better place to look than the death tax regime,2S as it has variously embodied both the best and 

the worst of federal-state tax coordination at various junctures in our history. 

B. Income Taxes 

1. Federal-State Tax Base Conformity 

As the U.S. Supreme Court has observed, "[c]oncurrent federal and state taxation of 

income ... is a well-established norm,,,26 and, "[a]bsent some explicit directive from Congress, 

we cannot infer that treatment of ... income at the federal level mandates identical treatment 

by the States.,,27In point offact, there has never been any such "mandate," despite Congress's 

recognized power to require national and subnational uniformity.28 Moreover, while Congress 

at one point offered to have the federal government administer state personal income taxes if 

the states would closely conform their taxes to the federal model, not a single state accepted 

the offer. 29 The law embodying the offer was ultimately repealed for lack of use.30 This episode 

23 See id. and supra note 14 and accompanying text. Moreover, in March 2012, Indiana adopted legislation 

phasing out its inheritance tax over nine years beginning in 2013 and ending on December 31,2021. SB 293 (signed 

by Governor Daniels on March 20, 2012). 

24 Nutter, Sarah E., "State Estate, Inheritance, and Gift Taxes: Uncertainty at the Federal Level Passes Down to the 

States," 46 State Tax Notes 7 (2007), pp. 481·501, at p. 484. In fact, states' taxes on inherited wealth fell from 

1.4% of their total tax receipts in 2000 to less than 0.6% in 2010. U.S. Census Bureau of the Census, Annual Survey 

of State Government Tax Collections (2000, 2010), available at http://www.census!gov!govs!statetax(index.html. 

"Indeed, wholly apart from federal-state tax coordination, the uncertainty created at the federal level in light of 

Congress's peripatetic approach to the estate and gift tax is a cautionary tale worthy of study on its own. See 

Kaufman, Beth 5., "The Federal Estate and Gift Tax: A Case Study in Uncertainty," 64 National Tax 10urnal4 (2011), 

pp.943-948. 

" Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 448 (1980). 

21 Id. 

"Thus the U.S. Supreme Court has declared that "(i]t is clearthat the legislative power granted to Congress by the 

Commerce Clause of the Constitution would amply justify the enactment of legislation requiring all States to adhere to 

uniform rules for the division of income." Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 280 (1978). 

" Prior to its repeal, the Federal-State Tax Collection Act of 1972 (the FSTCA), 26 U.s.c. §§ 6361-65 (prior law), 

provided that a state with a "qualified State individual income tax" (Le., a tax closely conforming to the federal 

model) could enter into an agreement with the United States to have its individual income taxes collected and 

administered by the federal government. Among other reqUirements, the qualifying state income tax had to adopt 

the federal income tax regulations "as in effect from time to time" under the Internal Revenue Code. Id. § 6362. As 

originally enacted, the FSTCA provided that it would not be effective until at least two states with collectively more 

than 5 percent of the federal tax returns had entered into an agreement under the statute. That requirement was 
54 


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in the saga of federal-state tax coordination is a testament to deeply held beliefs about state 

sovereignty - and perhaps to the power of deeply entrenched state tax bureaucracies - that 

can impede intergovernmental tax coordination. 

Despite the lack of any congressional mandate for state conformity to the federal 

income tax model, state personal and corporate income taxes in fact closely conform to the 

federal income tax. The pressure for conformity comes from "market" forces, namely, pressure 

from taxpayers for easing compliance and auditing burdens. At one time, some states adopted 

the most extreme form of federal conformity, under which the state tax was simply a 

percentage of the federal tax. Although no state embraces that method today, the 

overwhelming majority of states with broad-based income taxes employ federal adjusted gross 

income (personal income before personal exemptions or deductions) or federal taxable income 

as the computational starting point for determining state taxable income. 

One of the consequences of having de facto conformity in federal and state income tax 

bases is that base-broadening or base-narrowing at the federal level tends to generate a 

response at the state level, because failure to respond ordinarily increases or decreases state 

tax revenues in the absence of a state rate adjustment. The Federal Tax Reform Act of 1986, for 

example, broadened the federal personal income tax while lowering its rates. Some deductions 

were eliminated, others were substantially limited, and the treatment of a variety of specific 

items was altered - all in the name of simplification in a revenue-neutral fashion (because 

federal rates were lowered). For the overwhelming majority of states whose tax bases were 

tied to the federal base but whose tax rates were independent of the federal rate structure, 

base-broadening at the federal level offered the prospect of substantial increases in tax 

revenues if the states did not lower their own rates as the federal government had done. In 

fact, 27 of the 40 states with broad-based personal income taxes enacted reforms during late 

1986 and 1987/1 with most of the states returning at least a portion of the so-called revenue 

"windfall" to state taxpayers.32 

eased by the 1976 Tax Reform Act to provide that the FSTCA would be effective on the first January 1 that was 

more than one year aher at least one state entered into such an agreement. Id. The 1976 Tax Reform Act also 

made it clear that the federal collection plan was to be administered without added costs to the states - a 

provision that was adopted in response to suggestions that the states would or might be charged for the services 

provided by the federal government. Stoltz, Otto G., and George A., Purdy, "Federal Collection of State Individual 

Income Taxes," 1977 Duke Law }ournal1 (1977), pp. 59-141, at p. 92. 

30 The statute was repealed in 1990, eighteen years aher its enactment. 

31 Gold, Steven D., "The Budding Revolution in State Income Taxes," Proceedings of the Eightieth Annual Conference of 

the National Tax Association - Tax Institute of America (1987), pp. 6-11, at p. 7. In 1991, Connecticut became the 

forty-first state to adopt a broad-based personal income tax. 

" Helierstein, Helierstein, and Swain, supra note 1, at ~ 20.02. 
55 


80344.027

By contrast, when Congress narrows the federal tax base in order to stimulate the 

economy, it creates the opposite dilemma for the states. For example, Congress's postSeptember 11, 2001, economic stimulus package gave rise to conformity issues for the states. 

In the Job Creation and Worker Assistance Act of 2002, Congress provided for an additional 

first-year depreciation allowance to encourage investment. The impact of this so-called "bonus 

depreciation" on state revenues - assuming they took no action to decouple their tax regimes 

from the federal model- was substantial. Facing severe budget shortfalls even without the 

revenue impact of bonus depreciation, many states reacted by decoupling their tax regimes 

from the federal tax regime insofar as bonus depreciation was concerned. Some states enacted 

legislation completely decoupling from the bonus depreciation provisions, other states partially 

decoupled, and yet other states conformed to the federal rules. Needless to say, such lack of 

conformity between state and federal tax bases can create havoc for taxpayers and revenue 

administrations.33 

2. Tax "Concessions" 

There are several federal income tax provisions that reflect a sensitivity to the existence 

of concurrent taxation, and the concerns of federal-state tax coordination, even if they may 

more properly be characterized as unilateral tax "concessions" by the Congress rather than 

"coordination" of concurrent tax regimes. Among these are the deduction from the federal tax 

base for state income and property taxes and the exclusion from the federal income tax base of 

interest from state and local government bonds. 

a. Deductibility of State and Local Taxes from the Federal Income Tax Base 

State and local taxes have always been deductible, in whole or in part, from the federal 

income tax base, at least for those who itemized their deductions. 34 The deduction has been 

available whether or not such taxes were associated with the production of income, in which 

case the deduction would be appropriate as a matter of principle in arriving at the proper 

definition of taxable income. For this reason, such deductions (when not associated with the 

production of income) have generally been regarded as "tax expenditures" or subsidies that the 

federal government provides to the states. Accordingly, they may be regarded as form of 

revenue sharing. For fiscal year 2012, for example, the estimated fiscal significance of the 

deductions from federal income taxes for "nonbusiness" state and local government income 

taxes, sales taxes, and personal property taxes, which the tax expenditure budget characterizes 

33 See generally Luna, LeAnn, and Ann Boyd Watts, "Federal Tax Legislative Changes and State Conformity," 47 

State Tax Notes 8 (2008), pp. 619·25 

" Brazer, Harvey E., "The Deductibility of State and Local Taxes Under the Individual Income Tax," U.S. House 

Committee on Ways and Means, 86" Cong., 1" Sess., Tax Revision Compendium, vol. I (Washington: U.s. 

Government Printing Office, 1959), p. 407. For taxpayers who take a "standard" deduction, there is no 

identification of the particular expenses associated with the deduction. 
56 


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as "general purpose fiscal assistance," amounted to $51 billion.3s The fiscal significance of the 

deduction for taxes on real property amounted to another $26.5 billion. 36 

Historically, virtually all state and local taxes were deductible from the federal income 

tax base.37 Over the past half-century, however, the scope of the deduction has narrowed. In 

1964, Congress altered the nature of the deduction from one generally permissible unless 

explicitly denied to one that was permitted only for taxes explicitly mentioned. It thereby 

eliminated the deduction for so-called "sin" taxes (excise taxes on alcohol and tobacco). In 

1978, in the midst of an energy crisis, Congress eliminated the deduction for state gasoline 

taxes. The most significant change occurred as part of the Tax Reform Act of 1986, which 

eliminated the deduction for state and local sales taxes, as part ofthe general policy to broaden 

and simplify the federal tax base in a revenue neutral manner. In 2004, however, Congress 

reinstated the deduction for residents of states without income taxes. Currently, the most 

significant deductions are for state income and local real property taxes. There is an ongoing 

policy debate about whether the deduction for state income taxes should be eliminated. 

b. Exclusion for Interest from State and Local Government Bonds 

The other significant tax concession - with a "cost" to the federal government estimated 

at value of $23.1 billion for fiscal year 201238 - is the exclusion from federal income tax of 

interest from state and local government bonds. 39 Although for many years the immunity of 

state and local bond interest from federal taxation was thought to be constitutionally 

required,40 with the narrowing of the scope of the intergovernmental tax immunity doctrine, 

this view was ultimately abandoned. In 1985, the U.S. Supreme Court explicitly overruled an 

earlier case holding that interest from state bonds was constitutionally immune from tax and 

declared that "a nondiscriminatory federal tax on the interest earned on state bonds does not 

3S u.s. Senate Committee on Finance and US House Committee on Ways and Means, Joint Committee on Taxation, 

Estimates of Tax Expenditures for Fiscal Years 2010-2014 (Washington: US Government Printing Office, 2010), p. 

51. 

"Id. at 39. 

31 See Maguire, Steven, Federal Deductibility 0/ State and Local Taxes (Congressional Research Service Report for 

Congress 2007), p. 1, available at http://www.policyarchive.org!handle!10207!bitstreams!18802.pdf. A provision 

ofthe original income tax of 1913 allowed a deduction for "all ... State, county, school and municipal taxes ... not 

including those assessed against local benefits." Id. see also Oliver, Philip D., Tax Policy (New York: Foundation 

Press, 2'd ed., 2004), p. 839. 

38 U.S. Senate Committee on Finance and U.S. House Committee on Ways and Means, Joint Committee on 

Taxation, Estimates a/Tax Expenditures/or Fiscal Years 2010-2014 (Washington: US GovernmenlPrinting Office, 

2010), p. 45. 

39 IRC § 103. 

40 See Helierstein, Tax Aspects 0/ Fiscal Federalism, supra note 1, at 35-37. 
57 


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violate the intergovernmental tax immunity doctrine." 41 The exclusion of such interest from 

federal income taxation nevertheless survives as a matter of congressional legislation, which 

has embedded that principle in the Internal Revenue Code. 

III. HORIZONTAL FEDERAL-STATE TAX COORDINATION 

A. Overview 

Although there have occasionally been proposals for broad-based federal legislation 

providing for horizontal state tax coordination, such as congressional bills providing for a 

uniform state corporate income tax apportionment formula,42 no federal law providing for 

wide-ranging horizontal state tax coordination has ever been enacted. Instead, virtually the 

entire body of federal law addressed to horizontal state tax coordination has focused on 

narrow, industry-linked issues, often by limiting the states' power to tax in precisely defined 

contexts. Indeed, much ofthis legislation may more properly be characterized as prohibiting 

the exercise of state tax power, whether wisely or not, rather than "coordinating" it. For 

example, federal legislation 

forbids the states from taxing railroad, motor carrier, and air carrier property more 

heavily than other commercial and industrial property;43 

• imposes limitations on the states' power to levy stock transfer taxes;44 

prohibits the states from imposing user charges in connection with the carriage of 

persons in air commerce;4S 

• "supersede[s] any and all State taxes insofar as they now or hereafter relate to any 

employee benefit plan" instituted pursuant to the Employee Retirement Income 

Security Act (ERISA);46 

• prohibits the states from imposing electrical energy taxes discriminating against out-of· 

state purchasers;47 

41 South Corolina v. Baker, 485 U.S. 50S, 526 (1985). 

"See Hellerstein, Helierstein, and Swain, supra note 1, at ~ 8.06 and sources there cited. 

43 49 U.S.c. §11501 (2006) (railroads); 49 U.s.c. § 14502 (2006) (motor carriers); 49 U.S.C. § 40116 (2006) (air 

carriers). 

44 15 U.S.c. § 78bb(d) (2006). 

45 49 U.S.c. § 40116 (2006). 

4& 29 U.S.c. § 1144(a) (2006). 

47 15 USc. § 391 (2006). 
58 


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• prohibits state and local governments from taxing flights of commercial aircraft or any 

activity or service aboard such aircraft unless the aircraft takes off or lands in the taxing 

jurisdiction;4S 

prohibits localities from taxing providers of direct-to-home satellite services;49 

limits state and local franchise fees on cable operators;SO 

prohibits a state, other than the state of the employee's residence, from taxing the 

employee's compensation from an interstate rail carrier, motor carrier, or merchant 

mariner;Sl 

limits the states' authority to require withholding of income taxes from certain 

employees of water carriers;s2 

prohibits states from taxing interstate passenger transportation by motor carriers;s3 it 

imposes specified restraints on state taxation of transactions over the Internet;S4 

authorizes, under specified conditions, state taxation of charges for mobile 

telecommunications services;ss 

bars state taxes whose "purpose" is to provide "compensation for claims for any costs of 

response or damages or claims which may be compensated under [the "Superfund" 

Act],,; 56 and 

• prevents states from imposing income taxes on the "retirement income" of 

nonresidents.s7 

48 49 U.S.c. § 40116(c) (2006). 

49 47 U.S.c. § 251 (2006). 

50 47 U.S.c. § 542 (2006). 

51 49 u.s.c. § 11502 (2006) (railroad employees); 49 U.S.c. § 14503 (2006) (motor carrier employees); 46 U.S.C. § 

11108(b) (2006) (merchant mariner employees). 

52 46 u.s.c. § 11108(a) (2006). 

53 49 U.S.C. § 14505 (2006). 

54lnternetTax Freedom Act, Pub. L. No. 105-277, Div. C, Title XI, § 1104(3), 112 Stat. 2681 (1998) (as amended). 

55 4 U.S.c. § 116 et seq. (2006). 

56 The Federal Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.c. § 9614(c) 

(2006) (commonly known as the "Superfund Act"). 

57 4 U.S.c. § 114 (2006). "Retirement income" is defined as income from qualified plans under the Internal Revenue 

Code as well as certain nonqualified plans that mirror qualified plans. {d. § 114(b)(I). 
59 


80344.031

Even what is arguably the broadest piece of legislation that provides for federal-state tax 

coordination -the provision of a uniform jurisdictional threshold for taxation of income from 

interstate commerce - is limited to income from sales of tangible personal property, and thus 

excludes the increasingly important part of the economy that derives income from services and 

intangibles.58 

If there is a leitmotif running through the federal legislation addressed to horizontal tax 

coordination (broadly conceived to include tax prohibitions), it is probably that the legislation 

typically constitutes a targeted response to a specific problem. For example, a number of the 

federal provisions were direct responses to U.S. Supreme Court decisions: 

The jurisdictional restraint on state taxation of income from interstate 

commerce derived from the sale of tangible personal propertl9 was designed to 

confine the impact of Northwestern States Portland Cement Co. v. Minnesota,60 

which sustained the states' power to impose a fairly apportioned, 

nondiscriminatory tax on net income derived from interstate commerce. 

• The prohibition on state taxation of interstate passenger transportation by 

motor carriers61 was designed to overrule Oklahoma Tax Commission v. Jefferson 

Lines, Inc.,62 which sustained an unapportioned tax on the sale of bus tickets for 

interstate transportation. 

• The bar against states' imposition of user charges in connection with the carriage 

of persons in air commerce63 was designed to overrule Evansv;lIe-Vanderburgh 

Airport Authority District v. Delta Airlines, Inc.,64 which sustained the states' 

power to impose charges to recoup the costs of airport construction and 

maintenance. 

In addition to legislation responding to specific court decisions, some of the legislation 

was addressed to specific abuses (or perceived abuses), such as the assessment of railroad and 

58 15 U.S.c. §§ 381-84 (2006). 

59 15 U.S.c. §§ 381-84 (2006). 

'0 358 U.S. 450 (1959). 

61 49 U.S.c. § 14505 (2006). 

" 514 u.s. 175 (1995). 

"49 u.s.c. § 40116 (2006). 

'4 405 u.s. 707 (1972). 
60 


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other transportation property at a higher percentage of fair market value than that applied to 

other commercial and industrial property. 65 Other provisions were designed to protect 

identifiable federal interests, such as federally authorized employee benefit plans66 or the 

Outer Continental Shelf.67 Still other provisions were intended to foster the development of 

particular economic activity, such as the use ofthe Internet. 68 

Whatever one's views may be as to the wisdom of such legislation,69 the explanation for 

the existing universe of horizontal federal-state tax coordination lies largely in "history" rather 

than "logic," as suggested at the outset.70 

B. A Review of the Record of Horizontal Federal-State Tax Coordination from a 

Policy and Practical Perspective 

While the existing landscape of horizontal federal-state tax coordination may owe its 

features to history rather than logic, it is instructive to examine the results of these 

congressional forays into state taxation as an aid to determining "best practices" in this context. 

Although my examples are selective, I believe they illustrate what works and what does not 

work from a policy and practical perspective in the context of horizontal federal-state tax 

coordination. 

1. What Works Well: The Mobile Telecommunications Sourcing Act 

The Mobile Telecommunications Sourcing Act (MTSA)71 enacted by Congress in 2000 is a 

poster child for horizontal federal-state tax coordination at its best. To understand why, one 

must first appreciate the constitutional rules governing state taxation of interstate 

telecommunications. Under jurisdictional standards that the U.S. Supreme Court articulated in 

Goldberg v. Sweet72 under the dormant Commerce Clause, the "only" states with "a nexus 

55 49 U.S.c. §§ 11501, 14502 40116 (2006). 

" 29 U.S.c. § 1114(a) (2006). 

67 43 U.S.c. § 1333(a)(2) (2006). 

68 Internet Tax Freedom Act, Pub. L. No. 105-277, Div. C, Title XI, § 1104(3), 112 Stat. 2681 (1998) (as amended). 

69 Charles Mclure and I have elsewhere set forth at some length our views as to the normative criteria that ought 

to govern the question of federal intervention in state taxation in the context of three proposals designed to 

achieve horizontal tax coordination Mclure and Hellerstein, supra note 1. Some of these views are set forth in the 

ensuing discussion. 

70 See supra note 2 and accompanying text (quoting New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921) (Holmes, 

J.)). 

71 114 Stat. 626 (July 28, 2000), codified at 4 U.s.c. § 116 et seq. (2006). 

72 488 u.s. 252 (1989). 
61 


80344.033

substantial enough to tax a consumer's purchase of an interstate telephone call" are (1) "a 

State '" which taxes the origination or termination of an interstate telephone call charged to a 

service address within that State" and (2) "a State which taxes the origination or termination of 

an interstate telephone call billed or paid within that State."n The implications of these 

standards for taxation of the wireless telecommunications industry are troublesome to say the 

least. Consider a business traveler who lives in State A, where she receives her monthly phone 

bill, and, while in State B on business, makes a call to State C. Under Goldberg, none of these 

states can tax the charges for the call, because none ofthem can claim that the call either 

originates or terminates in the state ond is charged to a service address in the state or is billed 

or paid within the state. 

The issues become even more complex if the customer is billed not on a transaction-bytransaction basis, but instead pays, say, $50 per month for 500 minutes of calls regardless of 

where the calls originate or terminate. Indeed, if the customer were billed at a flat rate, the 

Goldberg-mandated inquiry would be virtually impossible, since there would be no breakdown 

of the charges for the calls on a transaction-by-transaction basis. A typical wireless phone bill 

simply shows the calls made and the minutes consumed with no itemized price allocation if one 

does not exceed the number of flat rate minutes. Indeed, the "charge" shown for such 

individual calls is "$00.00." 

The difficulties involved in taxing mobile telecommunications under the regime the 

Court established in Goldberg led Congress, with the jOint support of the telecommunications 

industry and the states, to enact the MTSA, which permits the states to tax 011 mobile 

telecommunications charges (for services provided by the customer's "home service provider") 

at the customer's "place of primary use.,,74 The key operative language of the MTSA, which both 

expands and contracts state power to tax charges for mobile telecommunications, provides: 

All charges for mobile telecommunications services that are deemed to be provided by 

the customer's home service provider ... are authorized to be subjected to tax, charge, 

or fee by the taxing jurisdictions whose territorial limits encompass the customer's place 

of primary use, regardless of where the mobile telecommunications services originate, 

terminate, or pass through, and no other jurisdiction may impose taxes, charges, or fees 

on charges for such mobile telecommunications services.75 

The expansion of state power is provided by the grant of authority to the state of the 

customer's home service provider to tax the charge for wireless services regardless of whether 

that state possesses power to tax the call under the preexisting standards of Goldberg v. Sweet. 

73 {d. at 263. 

74 4 U.s.c. § 116 et seq. 

15 Id. § 117(a). 
62 


80344.034

The contraction of state power is contained in the final clause that prevents any state other 

than the state of the customer's home service provider from taxing such charges, even if that 

state possessed power under Goldberg v. Sweet to tax the charge. 

The MTSA is a model for federal-state horizontal tax coordination. It judiciously employs 

Congress's power to both expand and restrain state tax power in a manner that allows taxes to 

be collected in a sensible manner and at the same time protects taxpayers from multiple 

taxation. It is thus a win-win solution for all concerned and constitutes a marked improvement 

over the state of play prior to the enactment ofthe legislation. 76 

76 An analogous model for federal-state tax coordination is reflected in Congress's endorsement of the 

International Fuel Tax Agreement (IFTA). IFTA had its origins in the difficulties that the states confronted in 

implementing their motor fuel taxes, which generally are viewed as user fees with revenues dedicated for 

transportation purposes. See generally Denison, Dwight, and Rex l. Facer, "Interstate Tax Coordination: Lessons 

from the International Fuel Tax Agreement," 58 National Tax lournal3 (2005), pp. 591-603, on which much of the 

discussion of IFTA is based. For practical purposes, states have always allowed individual motorists to pay fuel 

taxes at the pump without attempting to determine the miles driven in a particular jurisdiction. However, states 

have traditionally attempted to enforce fuel taxes on large commercial motor carriers based on an apportionment 

of miles driven in a state. The trucking industry had generally been willing to cooperate in this effort because of the 

importance of highways (and highway funding) to the industry. Nevertheless, the complexities of system prior IFTA 

were daunting. For example, "prior to IFTA a single route from Denver to Los Angeles would require the carrier to 

file tax forms in five different states or to obtain permits from those five states." (d. 592. 

The complexity of the system induced a few states to coordinate their fuel tax collection. In 1983, three 

states initiated ITFA. Shortly thereafter, a National Governors Association working group, funded by Congress, 

proposed a "Model Base State Fuel Use Tax Reporting Agreement," which incorporated the earlier ITFA concepts. 

By 1990, sixteen states had joined ITFA. A year later, Congress took a critical step - essentially making the states an 

"offer they could not refuse" - by requiring that "after September 20, 1996, no State shall establish, maintain, or 

enforce any law or regulation which has its fuel use tax reporting requirements ... which are not in conformity with 

the International Fuel Tax Agreement." Intermodal Surface Transportation Efficiency Act, Pub. l. No. 102-240, § 

4008(g), 105 Stat. 2154 (Dec. 18, 1991), codified at 49 U.S.c. § 31705 (2006). States were further told that they 

"could not ... enforce any law or regulation which provides for the payment of a fuel use tax unless such law or 

regulation is in conformity with the International Fuel Tax Agreement." (d. On the other hand, states that 

conformed to IFTA were effectively empowered to administer and enforce motor fuel taxes through a regime that 

would have been virtually impossible to replicate without congressional authorization. 

To make a long story short, today the 48 contiguous states and 10 Canadian provinces are signatories of 

1FT A. See www.itfach.org. Under IFTA, carriers designate a base reporting state to which they report all their fuel 

tax liabilities both in the base state and in any other state in which they operate. The carrier files its quarterly fuel 

use tax reports to the base state, reporting its operations in all member states. Depending on whether the carrier 

overpaid or underpaid its taxes at the pump, determined by the difference between the taxes paid at the pump 

and the taxes owed based on where its operations occurred, the carrier pays its base state the net taxes due or 

receives a credit for the net taxes overpaid. See Pitcher, Robert c., "The International Fuel Tax Agreement: Are 

There Lessons Here for Sales and Use Tax Taxation?," 25 State Tax Notes 11 (2001), pp. 887-91. The base state 

distributes to the other states what the carrier owes them, or accepts on its behalf credits from the other member 

states. (d. The carrier's base state audits the carrier on bphalf of all the other IFTA members. (d. 

in short, like the MTSA, IFTA refiects the judicious exercise of Congress's power to both expand and 

restrain state tax power in a manner that allows taxes to be collected in a sensible and uniform manner and at the 

same time protects taxpayers from burdensome taxation based on inconsistent rules in different states. It thus 

another example of a win-win solution for both states and taxpayers that would not have been possible without 

congressional intervention. 
63 


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2. What Works Poorly: The Internet Tax Freedom Act 

The Internet Tax Freedom Act (ITFA)77 enacted by Congress in 1998 is a poster child for 

horizontal federal-state tax coordination at its worst. ITFA is normatively flawed, logically 

incoherent, and technically complex if not incomprehensible. Although I can touch only briefly 

on each these problems here, it should suffice to support the conclusion, and I have provided 

more detailed proof elsewhere.78 

ITFA imposed a three-year moratorium (subsequently extended through 201479 ) on 

three types of taxes: (1) taxes on Internet access; (2) discriminatory taxes on electronic 

commerce; and (3) multiple taxes on electronic commerce. 

a. Normative Concerns 

While a normative case can surely be made for barring "discriminatory" or "multiple" 

taxes on electronic commerce, ITFA's definition ofthese terms (considered belowBo) sweeps so 

much more broadly than their common understanding that ITFA's bar on such taxes basically 

raises the question as to whether electronic commerce should be taxed at all. In this respect, it 

raises the same question as that raised by the blanket prohibition of taxes on Internet access. 

As Charles McLure and I concluded after a detailed normative analysis of ITFA,81 the case for 

congressional intervention was mixed: 

The case for exempting Internet access by households is weak, no matter how Internet 

access is defined (narrowly, as embracing only connection to the Internet or more 

broadly to include telecommunications and/or digital content). Even an exemption for 

only basic Internet access is an extremely inefficient way to achieve the posited 

objectives. On the other hand, all business purchases of Internet access, 

telecommunications, and digital content should be tax-exempt.82 

77 Pub. l. No. 105-277, tit. XI, 112 Stat. 2681 (1998). For a general consideration of ITfA, see Hellerstein, Walter, 

"Internet Tax freedom Act Limits States' Power to Tax Internet Access and Electronic Commerce," 90 Journal of 

Taxation 1 (1999), pp. 5-10. ITfA is not to be confused with IfTA - the International fuel Tax Agreementdiscussed in the preceding footnote. 

78 See Hellerstein, supra note 77; McLure and Hellerstein, supra note 1. 

79 See infra notes 89·97 and accompanying text. 

80 See infra notes 83·85 and accompanying text. 

81 McLure and Hellerstein, supra note 1, at 725·30. 

" /d. at 730. 
64 


80344.036

b. Logical Concerns 

Even if one were undisturbed by the normative concerns raised by ITFA, the legislation 

suffers from serious logical defects. For example, ITFA bars multiple taxation of electronic 

commerce and, for this purpose, defines a mUltiple tax as 

any tax that is imposed by one State ... on the same or essentially the same electronic 

commerce that is also subject to another tax imposed by another State ... {whether or not 

at the same rate or on the same basis), without a credit (for example, a resale 

exemption certificate) for taxes paid in other jurisdictions. 83 

Congress excluded from this definition sales or use taxes imposed concurrently by a state and 

its political subdivisions on the same electronic commerce and "a tax on persons engaged in 

electronic commerce which may also have been subject to a sales or use tax thereon.,,84 

Although one can discern Congress's objective in enacting this provision (i.e., to prevent 

the same electronic commerce from being subject to tax by more than one state), the language 

that Congress chose to accomplish that goal is opaque at best. While preventing more than one 

state from taxing "the same electronic commerce" might leave some room for debate, the 

prevention of states from taxing "essentially the same electronic commerce" is almost an 

invitation for controversy. Indeed, it reads more like cocktail party conversation than a carefully 

thought out restraint on state taxing power. 

Moreover, Congress apparently believed that two states can tax "the same" or 

"essentially the same" electronic commerce, even if the two levies are not imposed "on the 

same basis." Does this mean, for example, that Texas may not impose a sales or use tax on 

computer software transmitted via the Internet from a Washington State software producer, 

because "essentially the same electronic commerce" was subjectto Washington's Business and 

Occupation Tax? Or is this the situation to which the "savings clause" was directed (I.e., "a tax 

on persons engaged in electronic commerce"), which is not regarded as a "multiple tax" even if 

the same electronic commerce is subject to sales or use tax? If it is, however, the savings clause 

may defeat Congress's objective, because many state sales taxes are legally imposed on the 

vendor for the privilege of engaging in selling activities 8S (including, one would think, activities 

in electronic commerce). Hence, one could argue that duplicative sales or use taxation of 

electronic commerce is permissible as long as the legal incidence of one state's sales tax falls on 

the seller. 

" Pub. L. No. 105·277, § 1l04(6)(A) (1998). 

" Id. § 1104(6)(6). 

85 See Hellerstein, Walter, Michael J. Mcintyre, and Richard D. Pomp, "Commerce Clause Restraints on State 

Taxation After Je//erson Lines," 51 Tax Law Review 1 (1995), pp. 47·114, at 76. 
65 


80344.037

c. Technical Concerns 

Beyond the normative concerns and concerns with the internal logic of the legislation, 

ITFA is hideously complex and is permeated with technical flaws. Merely describing the 

prohibition on taxation of Internet access and the struggles of state courts and administrative 

tribunals with its meaning makes the point. ITFA was originally enacted in October 1998 as a 

three-year moratorium barring states from taxing charges for "a service that enables users to 

connect to the Internet to access content, information, or other services offered over the 

Internet.,,8G However, a grandfather provision excluded from ITFA's scope a tax on Internet 

access that was "generally imposed and actually enforced prior to October 1, 1998," 87 and it 

also excluded the term "telecommunications services" from the definition of Internet access.S8 

In November 2001, Congress retroactively extended ITFA for two years through October 2003.89 

In late 2004, Congress again retroactively extended the act, this time through 

November 2007. 90 The 2004 extension ofthe moratorium added language making it clear that 

all forms of Internet access were covered by the moratorium, including high-speed wireline 

(DSL) and wireless service (Le., telecommunications services "purchased, used, or sold by a 

provider of Internet access to provide Internet access,,)91 At the same time, the 2004 ITFA 

B6 Pub. L. No. 105-277, §§ 1101(a) (1998). 

87 Id. 

88 Id. § 1104(5). 

"Internet Tax Nondiscrimination Act, Pub. L. No. 107-75,115 Stat. 703 (2001). 

90 Pub. L. No 108-435, 118 Stat. 2615 (2004). 

"Id. § 2(c). The effect of this amendment was apparently to reverse decisions in cases like America Online, Inc. v. 

Pennsylvania, 932 A.2d 332 (Pa. Commw. 2007), alfd, 942 A.2d 236 (Pa. Commw. 2OD8) (en bane), which held that 

the pre-2004 version of ITFA did not bar a Pennsylvania tax on port modem management services that, among 

other things, converted information transmitted over the Internet from digital to analog format for transmission to 

customers, and Concentric Network Corp. v. Pennsylvania, 877 A.2d 542 (Pa. Commw. 2005), which held that the 

pre-2004 version of ITFA did not bar a Pennsylvania tax on an Internet service provider's purchase of data 

transport services used to provide Internet access. Indeed, it is not even clear that the decision in Concentric was 

properly decided under the pre-2004 version of ITFA. The Pennsylvania tax did not apply to data-transport services 

purchased by cable companies and telecommunications carriers. The court held that the distinction did not violate 

the prohibition against "establish[ing] a classification of Internet access service providers ... for purposes of 

establishing a higher tax rate on such providers than the tax rate generally applied to providers of similar 

information services delivered through other means." Pub. L. No. 105-277, § 1l04(2)(A)(iv) (1998). The court 

reasoned that the exclusion was permiSSible because "(i]t is only in their capacity as public utilities or broadcasters 

that the telecommunications carriers or cable operators are permitted an exclusion." Concentric, 877 A.2d at 549. 

As Joseph Bright has observed in commenting on this opinion, however, "[i]fthe federal statutes prohibit 

discrimination, it does not seem to be a sufficientjustification that the discrimination is created by a second state 

statute." Bright, Joseph, "Court's Refund Denial on Internet Data Lines May Err on Federal Statute," 37 State Tax 
66 


80344.038

extension provided that the prohibition did not apply to any tax on a voice or similar service 

using Internet Protocol (voice over Internet Protocol, or VOIP), except to the extent that the 

services were incidental to the Internet access (e.g., voice-capable email or instant 

messaging).9Z 

In 2007, Congress yet again extended the act for an additional seven years through 

November 1, 2014. 93 The 20071TFA amendments expanded the definition of "Internet access" 

to include "a home page, electronic mail, and instant messaging (including voice- and videocapable electronic mail and instant messaging), video clips, and personal electronic storage 

capacity," 94 whether packaged with Internet access or provided independently.9s The 2007 

Notes 1 (2005), p. 28. In an en banc decision rejecting the taxpayer's exception to the panel decision, Concentric 

Network Corp. v. Pennsylvania, 897 A.2d 6 (Pa. Commw. 2006) (en banc), aiI'd per curiam, 922 A.2d 883 (Pa. 2007), 

the court rejected the taxpayer's claim that the levy violated ITFA's bar against taxes on Internet access, on the 

ground that the Pennsylvania tax fell within the "grandfather" clause preserving any tax that "was generally 

imposed and actually enforced prior to October 1, 1998." The en banc court also reaffirmed the panel's decision 

that the tax did not violate the prohibition against establishing a higher tax rate on Internet service providers than 

the rate generally applied to providers of similar information services delivered through other means, because 

"the Tax Code does not classify information service providers, nor does it establish different tax rates on 

information services providers." Concentric, 897 A.2d at 15. The court further observed: 

Moreover, Taxpayer pays sales and use tax because it uses other companies' wirelines to provide its 

services. Taxpayer is not prohibited by the Tax Code from installing its own wirelines or from using some 

other technology to provide its services. If it chooses an alternate solution, it will not pay sales and use tax 

on purchases of telecommunications services. In short, the tax at issue here results not from a 

discriminatory tax on electronic commerce but from Taxpayer's business decisions. 

Id. See also Priv. Ltr. Rul. 5715, Mo. Dep't of Revenue, June 16, 2009, available at 

www.checkpoint.thomsonreuters.com (otherwise applicable sales tax on provision ofTl transport lines and dial 

modem ports to Internet service providers for carrying Internet traffic is preempted by ITFA, as amended in 2007, 

because it includes telecommunications used by an Internet service provider to provide Internet services), Priv, Ltr, 

Rul. 5594, Mo, Dep't of Revenue, Apr, 20, 2009, available at www.checkpoint.thomsonreuters.com (otherwise 

applicable sales tax on lease of broadband capacity to Internet service provider is preempted by ITFA, as amended 

in 2007, because it includes telecommunications used by an Internet service provider to provide Internet services), 

92 Pub, L, No 108-435, § 6, 118 Stat. 2615 (2004), 

"Internet Tax Freedom Act Amendments Act of 2007, Pub, L. No, 110-108, 121 Stat, 1024 (2007). 

94 1d, § 4. 

95 The definition of "Internet access," as revised by the 20071TFA amendments, provides that "Internet access" 

(A) means a service that enables users to connect to the Internet to access content, information, or other 

services offered over the Internet; 

(6) includes the purchase, use or sale of telecommunications by a provider of a service described in 

subparagraph (A) to the extent such telecommunications are purchased, used or sold-

(i) to provide such service; or 

(ii) to otherwise enable users to access content, information or other services offered over the 

Internet; 

(C) includes services that are incidental to the provision of the service described in subparagraph (A) when 

furnished to users as part of such service, such as a home page, electronic mail and instant messaging 
67 


80344.039

amendments further excluded from the definition of "tax on Internet access" taxes that 

Michigan, Ohio, and Texas impose on gross receipts or gross income from business activity (in 

lieu ofthe typical state-level corporate income tax). The 2007 ITFA amendment also extended 

through 2014 the original act's grandfather clause covering preexisting state taxes on Internet 

that were "generally imposed and actually enforced prior to October 1, 1998.,,96 In addition, 

however, the 2007 ITFA amendment adopted a more limited grandfathering provision for 

states that were taxing the telecommunications services that were covered by the moratorium 

for the first time (Le., telecommunications services purchased, used, or sold to provide Internet 

access), which were grandfathered only through June 30,2008.97 

In short, ITFA is exactly what legislation designed to effectuate horizontal federal-state 

coordination should not be - normatively problematic, logically questionable, and a technical 

nightmare. 

3. What Works Passably but Defectively: Public Law 86-272 

Most existing federal legislation designed to effectuate horizontal federal-state tax 

coordination probably falls within the "passable but defective" category, namely, legislation 

that generally achieves its typically narrow objective, but with some collateral damage along 

the way. Public Law 86_272,98 to which I have already alluded, 99 illustrates the point. As noted 

above (albeit without identifying the statute by its popular appellation), Public Law 86-272 was 

enacted in 1959 in direct and immediate response to the U.S. Supreme Court's decision 

Northwestern States Portland Cement Co. v. Minnesota,100 which sustained the states' power to 

impose a fairly apportioned, nondiscriminatory tax on net income derived from interstate 

commerce. The statute prevents the states from taxing net income derived from interstate 

Id. 

(including voice- and video-capable electronic mail and instant messaging), video clips, and personal 

electronic storage capacity; 

(D) does not include voice, audio or video programming, or other products and services (except services 

described in subparagraph (A), (8). (e), or (E)) that utilize Internet protocol or any successor protocol and 

for which there is a charge, regardless of whether such charge is separately stated or aggregated with the 

charge for services described in subparagraph (A), (8), (e), or (E); and 

(E) includes a homepage, electronic mail and instant messaging (including voice- and video-capable 

electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are 

provided independently or not packaged with Internet access. 

96 See supra note 87 and accompanying text. 

"Internet Tax Freedom Act Amendments Act of 2007, Pub. L. No. 110-108, § 3,1215tat. 1024 (2007). 

98 Pub. L. No. 86-272, 73 Stat. 555 (1959), codified at 15 U.s.c. §§ 381-84 (2006). 

" See supra notes 59-60 and accompanying text. 

100 358 U.S. 450 (1959). 
68 


80344.040

commerce when the taxpayer's activities in the state are limited to the "solicitation" of orders 

for sales oftangible personal property that are fulfilled by shipments from outside the state.10l 

Somewhat ironically, Public Law 86-272's prohibition was designed merely as a 

temporary measure - a cease fire in place, as it were while Congress considered broad-based 

legislation for horizontal tax coordination. Title II of Public Law 86-272 assigned to the House 

Judiciary Committee and the Senate Finance Committee the task of making "full and complete 

studies of all matters pertaining to the taxation by the States of income derived within the 

States from the conduct of business activities which are exclusively in furtherance of interstate 

commerce or which are a part of interstate commerce, for the purpose of recommending to the 

Congress proposed legislation providing uniform standards to be observed by the States in 

imposing income taxes on income so derived."loz Despite a committee's production of an 

extensive and invaluable four-volume study (the Willis Committee Report) that recommended 

broad-based legislation providing for horizontal tax coordination/o3 Congress's failure to act on 

these recommendations is, as they say, history. 

What we have instead is the legacy of more than half a century of efforts to determine 

the metes and bounds of a stopgap "minimum nexus" measure designed to protect the 

national common market without unduly restraining the states' power to tax. 104 Without 

prolonging this discussion any further, and indeed, providing an appropriate segue into the next 

part of this testimony/Os it suffices to say that Public Law 86-272, while providing the core of 

tax immunity that Congress intended, at the same time has given rise to (a) considerable 

controversy over the scope of such immunity/o6 attributable in part, perhaps, to the narrow 

focus of the legislation and haste with which it was enacted; (b) an immunity based on a midtwentieth century view of economic activity that may no longer reflect contemporary economic 

reality; (c) different jurisdictional standards depending on whether a taxpayer's income derives 

from the sale of tangible personal property, on the one hand, or from services or intangibles, 

on the other; and (d) extensive state tax planning to take advantage of the federal protection. 

10115 U.S.c. §§ 381-84 (2006). 

102 Pub. L. No. 86-272, Tit. 11,73 Stat. 555 (1959), 

103 Special Subcomm. on State Taxation of Interstate Commerce of the House Comm. on the Judiciary, State 

Taxation oj Interstate Commerce, H.R. Rep. No. 1480, 88th Cong., 2d 5ess. (1964); H.R. Rep. Nos. 565 and 982, 89th 

Cong., 1st 5ess. (1965) 

104 This legacy is reflected in the extensive body of case law and state administrative guidance spawned by Public 

Law 86-272, all of which is treated in detail in Hellerstein, Hellerstein and Swain, supra note 1, at ~~ 6.16-6.28. 

lOS One of the principal current proposals pending before Congress is a broadening of Public Law 86-272. 

106 See id. 
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IV. CURRENT PROPOSALS FOR FEDERAL-STATE TAX COORDINATION 

In light of the checkered history of legislation addressed to federal-state tax 

coordination, perhaps the first thing to say about the current spate of legislative proposals 

aimed at federal-state tax coordination is that "hope springs eternal in the human breast.,,1D7 

Among the legislative proposals recently introduced in Congress include bills that would: 

authorize the states to require remote vendors to collect sales and use taxes on sales to 

in-state purchasers, regardless of their physical-presence in the state (otherwise 

constitutionally required under Qui1/108) under specified conditions generally requiring 

harmonization and simplification of their sales and use tax regimes;109 

• extend the protection of Public Law 86_272110 beyond income from interstate 

commerce derived from the sale of tangible personal property to such income derived 

from all forms of economic activity and making other adjustments in the statute;11l 

• limit and define the circumstances under which states may impose income taxes on 

nonresidents temporarily employed in the state;112 

• prohibit states from imposing "multiple or discriminatory" taxes on the sale or use of 

digital goods and services;113 

• prohibit states from imposing a "discriminatory tax" on any means of providing 

multichannel programming;114 

• impose a five-year moratorium on the imposition of by states or localities of any "new 

discriminatory tax" on mobile services, mobile service providers, or mobile service 

property;11S 

107 Alexander Pope, An Essay on Man, Epistle I (1733). 

lOB Quill Corp. v. North Dakota, 504 U.S. 298 (1992); see generally Hellerstein, Hellerstein, and Swain, supra note 1, 

at 1119.02[3]. 

109 See, e.g., 5.1452, 11i" Cong., 1" Sess (2011) ("Main Street Fairness Act"); H.R. 2701, 112'h Cong., 1" Sess. 

(2011) (same); S. 1832, 11ih Cong., 1" Sess (2011) ("Marketplace Fairness Act"); H.R. 3179, 11ih Cong., 1" S8SS. 

(2011) ("Marketplace Equity Act of 2011"). 

110 See supra notes 98-106 and accompanying text. 

111 H.R. 1439, 11i" Cong., 1" Sess. (2011) ("Business Activity Tax Simplification Act of 2011"). 

112 H.R. 1864, 112'" Cong., 2'd Sess. (2012) ("Mobile Workforce State Income Tax Simplification Act of 2011"). 

113 S. 971, 11ih Cong., 1<' 5ess. (2011) ("Digital Goods and Services Tax Fairness Act of 2011"); H.R. 1860, 11ih 

Cong., 1" Sess. 1860 (2011) (same). 

114 H.R. 1804, 112'h Cong., 1<' Sess. (2011) ("State Video Tax Fairness Act of 2011"). 
70 


80344.042

prohibit a state from imposing a discriminatory tax on the rental of motor vehicles, the 

business of renting motor vehicles, or motor vehicle rental property;116 

• prohibit a state from imposing a new unfair or inequitable E911 fee, tax, or surcharge 

with respect to prepaid mobile services, prepaid mobile service providers, or prepaid 

mobile customers;117 

prohibit a state from imposing a tax on a nonresident individual with respect to any 

time the individual is present in another state;118 and 

make permanent the moratorium on Internet access taxes and the prohibition on 

multiple and discriminatory taxes on electronic commerce. 119 

It is plainly beyond the scope of the present endeavor to undertake a detailed analysis 

of any of these proposals, let alone all of them. Instead the more modest goal of this part of my 

testimony is briefly to examine these proposals in light of whatever lessons one might draw 

from the historical overview of federal-state tax coordination set forth in the preceding 

discussion. 

A. The Main Street Fairness, Marketplace Fairness, and Marketplace Equity Acts 

The Main Street Fairness Act,120 the Marketplace Fairness Act,121 and the Marketplace 

Equity Act of 2011122 are all designed to authorize the states, under specified conditions 

generally requiring harmonization and simplification oftheir sales and use tax regimes, to 

require collection of sales and use taxes with respect to sales by remote sellers, 

notwithstanding their lack of physical presence in the state (otherwise constitutionally required 

by Quil/123 ). Although the bills differ in their detail, such as the extent to which states must 

115 5.543, ll2'h Cong., 1" Sess. (2011) ("Wireless Tax Fairness Act of 2011"); H.R. 1002, ll2'h Cong., 1" Sess. (2011) 

(same). 

116 H.R. 2469, 112th Cong., 1" Sess. (20ll) ("End Discriminatory State Taxes for Automobile Renters Act of 20ll"). 

117 H.R. 3788, ll2th Cong., 2d Sess. (2012) ("E911 Surcharge Fairness Act of 20ll"). 

118 5.1811,112" Cong., 1" Sess. (2011) ("Telecommuter Tax Fairness Act of 2011"). 

119 5.135, 112'h Cong., 1" 5ess. (2011) ("Permanent Internet Tax Freedom Act of 20ll"). 

120 5. 1452, llih Cong., 1" 5ess (2011); H.R. 2701, llih Cong., 1" Sess. (2011). 

121 5. 1832, 11ih Cong., 1" Sess (2011). 

122 H.R. 3179, 112'h Cong., 1" Sess. (2011). 

123 See supra note 108. 
71 


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conform to the provisions of the Streamlined Sales and Use Tax Agreement ("SSUTA"), u, the 

level ofthe exemption of "small" sellers from the tax collection requirement, and the precise 

extent of required harmonization, they share in common the concept of a "deal" authorizing 

collection of taxation from remote sellers in return for removal of existing burdens on such 

sellers through simplification and harmonization. 

After undertaking a detailed analysis of an earlier (but essentially similar) version of the 

most demanding of these bills - the Main Street Fairness Act that applies only to states that 

have conformed to SSUTA - and evaluating it in light of the normative principles that ought to 

govern congressional intervention in state tax matters,125 Charles McLure and I concluded that 

legislation along the lines outlined above was "fundamentally a move in the right direction -

the prescription of simplification and greater uniformity in conjunction with the removal of 

nexus rules that create undesirable economic consequences."l26 We observed, among other 

things, that "under the prescribed conditions of simplification and uniformity, nexus rules 

would no longer be needed to reduce complexity and thus could no longer be justified.,,127 In 

reaching our conclusion, we also identified the requirements of (1) reasonable vendor 

compensation and (2) the existence of "identical" state and local tax bases within any state as 

essential elements ofthe proposal we were endorsing. Finally, we noted that the proposed 

legislation struck "the proper balance between the interests of state sovereignty and those of 

national economic unity.',128 It respected the states' ability to establish their own tax rates, and, 

indeed, even went so far (perhaps further than we would have gone) as to allow the states 

freedom to define their own tax bases, although states were required to employ uniform 

definitions in determining what was and what was not taxable. At the same time, the proposed 

legislation imposed significant requirements on the states to harmonize and simplify their 

124 SSUTA (as amended through December 19, 2011) is reproduced at www.streamlinedsaletax.org. SSUTA is a 

voluntary agreement among the states designed to "simplify and modernize sales and use tax administration in 

order to substantiall reduce the burden of tax compliance." SSUTA § 102. See generally Hellerstein, Hellerstein, 

and Swain, supra note 1, ch. 19A for a detailed consideration of SSUTA. As of early 2012, there were 20 "full 

member" states under SSUTA with most of the other states with sales taxes either "associate members" (in 

principle moving to "full member" status) or "advisory member" (nonconforming) states. See 

www.streamlinedsalestax.org. 

125 Mclure and Hellerstein, supra note 1. 

126 Id. at 731. 

mid. 

128 Id. 
72 


80344.044

systems and thereby to provide the proper foundation for requiring collection by remote sellers 

without subjecting them to unreasonable administrative burdens. 129 

Although I cannot speak for McLure, it is less clear to me that the other versions of the 

sales and use tax collection authorization legislation, at least insofar as they would authorize 

collection by remote vendors by states not conforming to SSUTA, would satisfy the normative 

criteria we identified in our earlier article. To be sure, the alternatives to the SSUTA-conformity 

bills do require, with respect to remote sellers, identical state and local tax bases, a single sales 

and use tax return, a single state-level administrative agency, the provision of adequate 

software to ease compliance burdens, and "hold harmless" provisions that comply with such 

software. 130 On the other hand, there is no provision for compensation of remote sellers, nor is 

there any requirement that the states harmonize the definitions in their tax bases, a key feature 

of the SSUTA legislation. 

Despite my reservations about the merits of some of the proposals for congressional 

legislation addressed to state sales and use tax collection and simplification, the legislation in 

principle constitutes the type of federal-state tax coordination that we should applaud and 

encourage. Like the "poster child" identified above for such legislation,131 the proposed 

legislation combines the congressional relaxation of a judicially created rule restraining state 

tax power along with the imposition of congressionally imposed conditions. In both cases the 

judicially created rule is objectionable (although for different reasons) and in both cases the 

congressionally imposed conditions are desirable. Accordingly, in my judgment at least, 

legislation of this kind is template for future federal-state tax coordination. 

B. The Business Activity Tax Simplification Tax Act of 2011 

The Business Activity Tax Simplification Act of 2011 132 ("BAT Act") amends Public Law 

86-272133 to extend its protection beyond taxes on net income from interstate commerce 

129 Notwithstanding our general agreement with the thrust of the SSUTA and the SSUTA-conformity legislation, we 

noted that there were many aspects of such legislation about which we were less than enthusiastic. Among other 

things, we expressed concern over the question whether"SSUTA's simplification requirements would be "more 

than empty promises," id. at 732; We questioned whether the "small remote seller" thresholds established by 

SSUTA (which seem to change with every meeting of the Governing Board) made any sense, id. (they currently are 

a level of $5 million of "gross national remote sales," SSUTA § 609, with various qualifications); and we noted that 

our support of the legislation, despite some misgivings, was based in part our belief that we were" at a critical 

juncture where Congress has a unique opportunity to act" and that the SSUTA legislation may be "our 'last best 

chance' (at least during our lifetimes) of achieving significant, if less than perfect, reform and improvement of the 

state sales and use tax system." {d. The last statement is even truer today than the day we made it, as our life' 

expectancies shrink. 

,30 5.1832, 11ih Cong., 1" Sess. (2011); H.R. 3179, 11ih Cong., 1" Sess. (2011). 

131 See supra notes 71-76 and accompanying text. 

132 H.R. 1439, 112'" Cong., 1" Sess. (2011). 
73 


80344.045

attributable to the sale of tangible personal property to such income attributable to any form of 

business activity (including the sale of services and intangibles) and to "business activity taxes" 

other than net income taxes, namely, gross receipts taxes. The proposed BAT Act also 

establishes a general nexus requirement of "physical presence" (employees, agents performing 

services, or property in the state), along with de minimis "safe harbor" exceptions (e.g., 

presence in the state for less than 15 days). Earlier in this testimony, I characterized the original 

version of Public Law 86-272 as legislation that "works passably but defectively"l34 In my view, 

the 2011 version is even worse and should be characterized as legislation that "works 

poorly."l3S 

From a normative perspective, the BAT Act is deeply flawed. As in the case of the 

proposed sales tax collection/simplification legislation discussed above, Charles McLure and I 

undertook a detailed analysis of an earlier (but essentially similar) version of the BAT Act from a 

normative perspective/36 and we concluded that it was "clearly inconsistent with the 

normative considerations" there identified. 137 Among other things, we observed that it would 

"expand the scope for the creation of 'nowhere income,m13a i.e., attribution of income to states 

where the taxpayer was not taxable, and thus aggravate the opportunities for tax planning and 

the revenue loss created by Public Law 86-272. We also addressed arguments in support of the 

legislation that we considered to be unsound, in particular, the suggestion by representatives of 

the business community that businesses that are not physically present in a state receive no 

benefits from the state and therefore should not be required to pay taxes to such state. 139 As 

we pointed out, this "line of reasoning is indefenSible, whether the benefits corporations 

receive are defined broadly, to mean the ability to earn income, or defined more narrowly to 

133 See supra notes 98·106 and accompanying text. 

134 See supra Part III(B)(3). 

'" See supra Part III(B)(2). 

135 McLure and Helierstein, supra note 1. 

137 Id. at 734. 

13S ,d. 

139 fd. (citing e.g., Council on State Taxation, "Jurisdiction to Impose Business Activity Tax," a policy position, 

available at: http://www.statetax.org/Content/NavigationMenu/Legislative/PoJicyStatements/Default271.htm 

The identical argument has been repeated throughout the debate over the BAT legislation most recently in 

hearings on current version of the BAT legislation. See Hearing on H.I? 1439: Business Activity Tax Simplification 

Act of 2011, Before the Subcomm. on Courts, Commercial and Administrative Law of the House Comm. on the 

Judiciary, 112'h Can g., 1" Sess. (2011), p. 117 (reproducing Letter from Joseph R. Crosby, Council on State 

Taxation, April 13, 2011). 
74 


80344.046

mean specific benefits of public spending, one of which is the intangible but important ability to 

enforce contracts, without which commerce would be impossible.,,14o 

Moreover, it seems odd, to say the least, that Congress, under the guise of federal-state 

tax coordination, should be enshrining as a touchstone oftaxability a standard first 

promulgated over half-century ago as a stop-gap measure1

•

1 and one more appropriate for the 

economy of the nineteenth century than of the twenty-first. If certainty and administrability are 

the objectives - and these clearly are legitimate objectives that would justify congressional 

legislation prescribing state nexus rules - there are alternatives for certain and administrable 

nexus rules that make much more practical and economic sense than physical presence. Among 

these would be nexus rules based on sales or apportionment factors in the state.142 

C. Mobile Workforce State Income Tax Simplification Act of 2011 

The Mobile Workforce State Income Tax Simplification Act of 2011143 prohibits the 

states from imposing income taxes (and requiring withholding of such taxes) on the wages or 

other remuneration earned by nonresident employees in the state unless they perform duties 

there for more than 30 days during the year. In my view, this is another example of what 

"works well" in federal-state tax coordination. To be sure, there is a clear intrusion into state 

sovereignty, because the states generally enjoy the power to tax the income that nonresidents 

earn within the state. 144 On the other hand, the burden on nonresidents from complying with 

tax reporting obligations arising out of temporary employment in the state and - perhaps even 

more importantly from the standpoint of our national economic market - the burden on 

employers of complying with withholding obligations with respect to such employees can be 

extremely onerous. Moreover, it is worth keeping in mind that we are talking largely about 

which state gets to tax the income in question, not whether the income gets taxed at all, 

140 ,d. 

141 See supra notes 100-102 and accompanying text. 

142 See Mclure and Hellerstein, supra note I, at 734; Avi~Yonah, Reuven, "International Taxation of Electronic 

Commerce," 52 Tax Law Review 3 (1997), 507-556, at pp. 531-41; Helierstein, Walter, "Jurisdiction to Tax Income 

and Consumption in the New Economy: A Theoretical and Comparative Perspective," 38 Georgia Law Review 1 

(2003), pp. 1-70, at pp. 39-49; McLure, Charles E., Jr., "Implementing State Corporate Income Taxes in the Digital 

Age," 53 National Tax Journal 4, Part 3 (2000), pp: 1287-1305, at pp. 1295-97. Indeed, The Multistate Tax 

Commission approved a model "Factor Presence Nexus Standard for Business Activity Taxes" (available at 

www.mtc.gov). 

143 H.R. 1864, 112" Cong .• 2"' Sess. (2012). 

144 Helierstein, Helierstein, and Swain, supra note 1, at ~ 20.05[lJ. 
75 


80344.047

because most states impose personal income taxes on all of the income earned by their 

residents, subject to a credit for taxes paid to other states. 145 

As I testified before a congressional committee considering an earlier (but similar) 

version of the legislation: 

In my opinion, enactment of the Mobile Workforce State Income Tax Fairness 

and Simplification Act of 2007 would constitute an appropriate exercise of congressional 

power. In expressing this opinion, I wish to make it clear that I believe the states have a 

legitimate interest in assuring that workers who earn income in the state pay their fair 

share of the state tax burden for the benefits and prote~tions that the state provides to 

them. The states' legitimate interest, however, must be balanced against the burdens 

that are imposed on multistate enterprises, and on the conduct of interstate commerce, 

by uncertain, inconsistent, and unreasonable withholding obligations imposed by the 

states. Indeed, it is telling that a number of states themselves have implicitly recognized 

these burdens by adopting reciprocal provisions exempting income, or certain classes of 

income, earned by nonresidents in their state if the nonresident's home state grants a 

similar exemption to residents of the exemption-granting state. 146 

D. Prohibitions on "Discriminatory" Taxation of Specified Activities 

A number of bills have been introduced into Congress to prohibit "discrimination" 

against specified activities. These include 

"5 Id. at '11'11 20.04[2], 20.10. 

'46 Hearing on H. R. 3359: Mobile Workforce State Income Tax Fairness and Simplification Act of 2007, Before the 

Subcomm. on Commercial and Administrative Law of the House Comm. on the Judiciary, 110th Cong., 1" Sess. 

(2007), p. 82 (testimony of Walter HeHerstein). The following states have entered into reciprocal agreements 

exempting compensation paid in their states to residents of other states: 

STATE AGREEMENT WITH 

District of Columbia 

Illinois 

MD,VA 

lA, KY, MI, WI 

Indiana KY, MI, OH, PA, WI 

Iowa IL 

Kentucky IL, IN, MI, OH, VA, WV, WI 

Maryland DC, PA, VA, WV 

Michigan IL, IN, KY, MN, OH, WI 

Minnesota MI, NO 

Montana NO 

New Jersey PA 

North Dakota MN, MT 

Ohio IN, KY, MI, PA, WV 

Pennsylvania IN, MD, NJ, OH, VA, WV 

Virginia DC, KY, MD, PA, WV 

West Virginia KY, MD, OH, PA, VA 

Wisconsin IL, IN, KY, MI 

See RIA State and Local Taxes for individual states, available at www.checkpoint.thomsonsonreuters.com(.II.11 55,205, 

55,325, and 55,875 for individual states). 
76 


80344.048

• the Digital Goods and Services Tax Fairness Act of 2011 to prevent states from 

imposing "multiple or discriminatory" taxes on the sale or use of digital goods 

and services;147 

• the State Video Tax Fairness Act of 2011 to prohibit states from imposing a 

"discriminatory tax" on any means of providing multichannel programming;148 

• the Wireless Tax Fairness Act of 2011 to provide a five-year moratorium on the 

imposition by states or localities of any "new discriminatory tax" on mobile 

services, mobile service providers, or mobile service property;149 

the End Discriminatory State Taxes for Automobile Renters Act of 2011 to 

prohibit states from imposing discriminatory taxes on the rental of motor 

vehicles, the business of renting motor vehicles, or motor vehicle rental 

property;150 and 

• the E911 Surcharge Fairness Act of 2011 to prohibit states from imposing new 

unfair or inequitable E911 fees, taxes, or surcharges with respect to prepaid 

mobile services, prepaid mobile service providers, or prepaid mobile 

customers.1S! 

These proposals resemble the targeted proposals typical ofthe limited federal-state tax 

coordination we have witnessed over the years including legislation forbidding states from 

taxing railroad, motor carrier, and air carrier property more heavily than other commercial and 

industrial property;152 legislation forbidding the states from imposing electrical energy taxes 

discriminating against out-of-state purchasers/53 and legislation imposing "discriminatory" 

taxes on electronic commerce.154 As the preceding discussion suggests, in my judgment these 

narrow legislative initiatives have a mixed track record as to whether they work well, work 

poorly, or work passably but defectively. Because the category into which each of the proposals 

147 H.R. 1860, 112" Cong., 1" Sess. 1860 (2011). 

148 H.R. 1804, 112" Cong., 1" Sess. (2011). 

149 S. 543, 112" Cong., 1" Sess. (2011); H.R. 1002, 112" Cong., 1" Sess. (2011) (same). 

150 H.R. 2469, 112'h Cong., 1" Sess. (2011). 

151 H.R. 3788, 1I2th Cong., 2'd Sess. (2012). 

152 49 U.S.c. §§ 11501, § 14502,40116 (2006). 

153 15 U.S.c. § 391 (2006). 

154 Internet Tax Freedom Act, Pub. L. No. 105-277, Div. C, Title XI, § 1104(3),112 Stat. 2681 (1998) (as amended). 
77 


80344.049

described above falls obviously depends on one's perspective. I would only suggest, at a 

minimum, that anyone who takes the time to read the efforts to define "discrimination"and 

related terms in these bills would have a hard time concluding that they would rank above 

"works passably but defectively." Indeed, the language of some ofthe proposals is so badly 

crafted that, at least in their present form, it is hard to imagine how they would not work 

"poorly." Perhaps one can hope for that happy day when every industry and every form of 

economic activity is protected by a federal statute prohibiting "discriminatory" taxation, a term 

that will be defined to require a uniform tax on household purchases (thUS requiring a "sale for 

resale" exemption for all business purchases), so we would actually end up with an ideal retail 

sales tax in the United States.1SS 

E. The Telecommuter Tax Fairness Act of 2011 

The Telecommuter Tax Fairness Act of 2011 would prohibit states from imposing a tax 

on a nonresident individual with respect to any time the individual is present in another 

state. 156 This legislation is designed essentially to bar New York's "convenience of the 

employer" doctrine for determining the taxability of nonresidents' income associated with New 

York-based employment. Although I agree with this legislation as a matter of principle/57 the 

case for congressional intervention into the controversy over New York's taxation of 

nonresidents pales by comparison to the significant issues that ought to be on Congress's 

federal-state tax coordination agenda. 

V. CONCLUSION 

If there is any overarching conclusion that one can draw from this overview of federalstate tax coordination, it may simply be that Congress should keep in mind the admonition of 

the Hippocratic Oath158 - "first, do no harm" - in considering proposals for federal legislation 

that affect state taxation. Although Congress possesses power to provide for federal-state tax 

coordination that unquestionably advances the interests of all stakeholders, and it has 

sometimes exercised its power to achieve that end, it has also exercised its power in ways that 

unquestionably fail to meet that standard. Accordingly, in returning to the point with which this 

155 See Hellerstein, Walter, Kirk J. Stark, John A. Swain, and Joan M. Youngman, State and Local Taxation: Cases and 

Materials, 9th ed. (St. Paul: Thomson Reuters, 2009), p. 611. 

156 S. 1811, 112'h Cong., 1" Sess. (2011). ("Telecommuter Tax Fairness Act of 2011"). This legislation is designed 

essentially to bar New York's "convenience of the employer" doctrine for determining the taxability of 

nonresidents' income associated with New York·based employment. See generally Hellerstein, Hellerstein, and 

Swain, supra note 1, at 11 20.05[4][eJ. 

157 Hellerstein, Walter, "Reconsidering the Constitutionality of the 'Convenience of the Employer' Doctrine," 28 

State Tax Notes 6 (2003), pp. 535-543. 

'" At least as popularly understood, whether historically accurate or not. See Wikipedia, 

http://en.wikipedia.org/wiki/primum _non _nocere. 
78 


80344.050

testimony began - Justice Holmes's observation that "a page of history is worth a volume of 

logic,,159 - perhaps we should aspire to add a few more pages of "logic" to the "volume!' of our 

history in this domain. 

159 New York Trust Co. v. Eisner, 256 U.s. 345, 349 (1921). 
79 


80344.051

Joseph Henchman 

Vice President, Legal & Srate Projects, Tax Foundation 

Hearing on ''Tax Reform: \\;rha( It Means f0I State and Locai Tax ;lDd Fiscal Policy" 

Before the Committee on Finance, 

U.S. Senate 

April25,2012 

Mr. Chairman, Mr, Ranking Member, and members of the Committee: 

I appreciate the opportunity to testify today on the role that Congress plays in smre tax policy. In the 

7'5 years since OUf founding in 1937, the Tax foundation has monitored [ax policy trends at the 

federal and state levels, and our data and research is heavily relied upon hy poliqrmakers, the media} 

and the general public Our analysis is guided by the idea that taxes should be as simple, neutral, 

transparent, and srable as possible, and as a ')01 (c) (3) non-profit, non-partisan organization, we take 

no position on any pending legislation. 

\"'\?e hope that the material we provide today will be helpful in the Committee's consideration of 

these issues. 

\Vhat you have before you is not a new issue, Absent guidelines from Congress or the courts, States 

have an incentive to shift tax hnrdens from physically present individuals and businesses, to those 

\\I"ho arc beyond their borders. Indeed. it was the states' unchecked behavior in this regard that led to 

the Constitutional Convention in tbe tIl'st place. Under the Articles of Confederation, states with 

ports taxed commerce bound for interior states, tarifT \vars proliferated, and rhe national economy 

was imperiled .. As Justice Johnson described in 1824, these actions were "destructive to the harmony 

of the :itates, and fatal to rheir commercial interests abroad. This was the immediate cause that led to 

the forming of a convention."l 

u.s. (9 1. (lH24) Oohnson, J., concurring.!. 
80 


80344.052

And so the Constitution was adopted, and through that document, the Congtess was gtanted the 

power to restrain states from enacting laws that harm the national economy by discriminating 

against interstate commerce.> James Madison noted that these powers would check the "clamors of 

impatient avidity for immediate and immoderate gain" that drive state legislation discriminating 

against non-residents. 3 Justice Stoty later praised the "wisdom and policy in restraining the states 

themselves from the exercise of [taxation] injuriously to the interests of each other. A petty warfare of 

regulation is thus prevented, which would rouse resentments, and create dissensions, to the ruin of 

the harmony and amity of the states.'" 

So strong was this concern that the rule for a century and a half was that states could not tax 

interstate commerce at all.5 This eroded in the 1950s and 1960s as it was recognized that those 

engaged in interstate commerce do enjoy benefits in states where they are present, so it is not unfair 

to have them support those services with taxes. The ccmplete ban on state taxation of interstate 

commerce was abandoned in 1977, replaced by a recognition that resident businesses engaged in 

interstate commerce should pay for the fair share of the state services they consume. In Complete 

Auto Transit, Inc. v. Brady, the U.S. Supreme Court held that states may tax interstate commerce if 

the tax meets a four part test:6 

• nexus, a sufficient connection between the state and the taxpayer; 

• fair apportionment, the state cannot tax beyond its flir share of the taxpayer s income; 

• nondiscrimination, the state must not burden out-ofstate taxpayers while exempting in-state 

taxpayers; 

• fairly related, the tax must be flirly related to services provided to the taxpayer. 

Before and since Complete Auto, the courts have routinely exercised this power to restrain state tax 

infringements on interstate commerce, and these decisions are one of the more non-controversial 

aspects of constitutional law.' Congress has also been active in this arca, legislating limits on state tax 

1 See U.S. CaNST. art. I, § 8, cl. 3 (Interstate Commerce Clause); U.S. CaNST. art. I, § 10, cl. 2 (Import-Export 

Clause); U.S. CaNST. art. I, § 10, cL 3 (Tonnage Clause); U.S. CONST. art. IV, § 2, cl. 1 (Privileges and Immunities 

Clause); U.S. CONST., amend. XlV, § 1 (Privileges or Immunities Clause). 

3 James Madison, THE FEDERALIST NO. 42 (J 788). . 

, I STORY CONST § 497. 

'See, e.g., Freeman 11. Hewit, 329 U.S. 249, 252-53 (1946) ("A State is ... precluded from taking any action which may 

fairly be deemed to have the effect of impeding the free flow of trade between States"); [eloup v. Port lif Mobile, 127 U.S. 

640,648 (1888) ("No State has the right to lay a tax on interstate commerce in any form."). 

'430 U.S. 274 (1977). 

7 The power ofrhe federal courts to act when Congress is silent is inferred as an implication of the Commerce Clause, a 

doctrine often referred to as the "dormant" or "negative" Commerce Clause. See, e.g., Willson v, The Black Bird Creek 

Marsh Co., 27 U.S. 245 (1829). The Commerce Clause prohibits states from imposing a tax on activity out-of-state 

while leaving identical activity in-state untaxed. See Boston Stock Exchange v. State Tax Comm'n. 429 U.S. 318 (1977) 

(invalidating a New York tax imposed solely on activity Out-oF-STate while leaving identical activity in-state untaxed); 

Westinghouse Flee. Co. v. Tully, 466 U.S. 388 (1984) (invalidating a New York scheme exempting activity in-state while 

simultaneously imposed a tax on identical activiry out-of-slate); Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (! 984) 

(invalidating a Hawaii tax imposed on a category of products but exempting activity inpstate); Am. T rocking An'n v. 
81 


80344.053

power where states are incapable of achieving a simplified, uniform system that restrain each state 

from claiming more than its fair share of taxes on interstate commerce." These have included 

prohibiting state taxes on food stamps, Federal Reserve banks, interstate airline and bus travel, 

Scheiner, 483 U,S, 266 (1987) (invalidating a Pennsylvania scheme imposing fees on all trucb while reducing other taxes 

fot trucb in·state only); New Enei'D CO. D, limbach, 486 U,S. 269 (1988) (invalidating an Ohio tax credit to all ethanol 

producers but disallowed for non·Ohio producers); West Lynn Creamery, Inc, v. Healy, 512 U.S. 186 (1994) 

(invalidating a Massachusetts general tax on dairy producers where the revenue was then distributed to domestic dairy 

producers); Camps/NewfoundiOwatdnnd, Inc, v, Town o{Harrison, 520 U.S, 564 (1997) (invalidating Maine's denial of 

the general charitable deducrion to organizations thar primarily seNe non-Maine residents), But see Dep t, of RelJenUe of 

Ky, v, Davis, 553 U,S. 328 (2008) (upholding Kenrucky's exclusion from tax of interest earned hom its state bonds, but 

not other states bonds, on the grounds that Kentucky is acting as a market participant no ditIcrent from any other bond 

issuer), But Sf! 

The Import-Exporr Clause prohibits states from penalizing activity thaI crosses state lines, particularly imports. 

See, e,g., Michelin Corp, v, Wages, 423 U.S, 276, 295 (1976) (stating that the Import. Export Clause prohihits import 

taxes that "create special protective tacitE or particular preferences for certain domesric goods .. ,,"). Justice Clarence 

Thomas, a critic of dormant commerce clause jurisprudence, nonetheless argues that taxes thar discriminate against 

nonresident' should be invalidated by the courts under the Import-Export Clause, See Camps/NewfoundiOwatanna, 520 

U.S. at 610 (Thomas, ]., dissenting) ("That the expansion effected hy mday's decision finds some supporr in rhe morass 

of our negative Commerce Clause case law only selVes to highlight the need ro abandon that failed jurisprudence and to 

consider restoring the original Import-Export Clause check on discriminatory state taxation to what appears to be its 

proper role,"), 

The Tonnage Clause prohibits c1lafges on shipping freight. 

The Privileges and Immunities Clause of Ankle IV and the Privileges or Immunities Clanse of tbe Fourteenth 

Amendment protects the right of citizens to cross stare lines in pursuit oran honest living. See, e.g., United Bldg. 6-

Com,r, Trades p, Mayor, 465 U.S. 208, 219 (1984) (identifYing "pursuit of a common caIling" as a privilege of 

citizenship protected by the Constitution)j Saenz v. Roe, 526 U.S. 489 (1999) (invalidating a law that did not res.trict 

srare travel per se hut discouraged the crossing of state Hnes with a punitive and discriminatory law); id at 51l 

(Rehnquist, )., dissenting) ("The right to travel dearly embraces the right to go from one place [0 another, and prohibits 

States from impeding the free passage of citizens); Erwin Chemerinsky, CONSTITUTIONAL LAW 450 (2d ed, 2002) 

("The vast majoriry of cases under the [Article IV] privileges and immunities clause involve states discriminating against 

out-of-staters with regard to their ability to earn a livelibood."). 

, Puhlie L. 86-272, 73 Stat. 555 (codified at 15 u,s,c. § 381 et seq.) (preempting state and local income taxes on a 

business if the business's in-state activiry is limited to soliciting sales of tangible personal properry) with orders accepted 

outside the state and goods shipped into the state); 4 V.s.c. § III (preempting discriminatory state taxation of federal 

employees); 4 U.S.C. § 113 (preempting state taxation of nonresident members of Congress); 4 U.S.C. § 114 

(preempting discriminatory srate ra."{ation of nonresident pensions)~ 7 U.S.C. § 2013 (preempting stare taxation of food 

stamps); 12 U,S,c. § 531 (preempting srate taxation of Federal Reserve hanb, other than real estate taxes); 15 U,S,c. § 

391 (preempting discriminatory state taxes on electriciry generation or transmission); 31 U.S.C. § 3124 (preempring 

srate taxation of federal debt obligations); 4.3 U,S,c. § 1333 (2)(A) (preempting state taxation ofthe outer continental 

shelf); 45 U.S.C. § 101 (preempring STate income taxation of nonresident waler carrier employees); 45 U.S.C. § 501 

(preempting srare income taxation of nonresident employees of intetstate railroads and motor carriers and Amtrak ticket 

sales); 45 U.S,C. § 801 et seq. (preempting discrimin<ltory state taxarion of interstate railroads); 47 U,S.C. § 151 

(preempting state taxation ofInrcrnet access, aside from grandfathered taxes); 47 U.s.c. § 152 (preempting local bur not 

state taxation of satellite telecommunications services); 49 U.S.C. § 101 (preempting state taxarion of interstate bus and 

motor carrier transportation tickets); 49 U.S.C. § 1513 et seq. (preempting state taxation of interstate air carriers and air 

transportation tickers); 49 V,S,c. § 40116(b) (preempting state taxation of air passengers); 49 U,S.c. § 40116(c) 

(preempting state taxation of flights unless they take off or land in the stare); 49 U,S,c. § 40101 (preempting State 

income taxation of nonresident airline employees); 50 U.S.C. § 574 (preempting state taxation of nonresident members 

of the military stationed temporarily in the state). 
82 


80344.054

satellite services, and nonresident members of the military and nonresident members of Congress.' 

Congress has also banned discriminatory state taxes on federal employees, interstate electriciry 

transmission, and interstate railroads.'o 

This power-to limit state tax authority-is not a power to use lightly. There are many components 

of state tax systems that, frankly, are none of Congress's business, even if they are good or bad public 

policy. Those aspects of state tax systems that are neither motivated by protectionism nor have the 

effect of raiding revenue hom out-of-staters should be left alone as part of our commitment to fifty 

simultaneous laboratories for policy experiments, to paraphrase Justice Brandeis." If bad state policy 

can be corrected by the political pressure of voting resident taxpayers or by the economic pressure of 

the out-migration of people and dollars, it ought to be left to the states to handle. 

However, there are siruations where it is vital that Congress use this power, where the alternative is 

the problem we experienced as a young country under the Articles of Confederation. While everyone 

is for simple taxes and fair taxes, in practice states look for any advantage or opportunity to shift tax 

burdens from voting residents to non-voting non-residents, to benefit in-state businesses and 

individuals by adopting tax policies that discriminate against out-of-state businesses and individuals. 

For all the discussion about how nonresident companies benefit from state services, the real issue 

usually is shifting tax burdens away from voting residents to someone else. Pv; Professor Daniel 

Shaviro has put it, "Perceived tax exportation is a valuable political tool for state legislators, 

permitting them to claim that they provide government services for free."" Without court 

intervention or congressional action (or the threat of congressional action), efforts to get states to 

solve interstate tax issues have historically failed, because as soon as a state thinks they can get a 

bigger share of the pie by breaking the agreement, they do so, and the whole thing unravels. 

Pv; one example, the threat of congressional action by the Willis Commission in 1959 led to the 

adoption of uniform state corporate income tax apportionment rules. This standardization, however, 

only lasted twenty years before Iowa deviated from it to gain an advantage for itself. Many other 

states have followed, and today, only 11 states still adhere to the uniform rule. The trend contin ues 

to move away from uniformity, not towards it, despite the existence of voluntary organizations like 

the Multis;ate Tax Commission (MTC) and the Federation of Tax Administrators (FTA) that exist 

to advance uniformity in such rules. 

9 See id. 

10 See id.. 

11 See New State Ice Co. v. Liebmarm, 285 U.S. 262, 311 (1932) (Brandeis, J" dissenting) ("It is Olle of the happy 

incidents of the federal system that a single courageous State may. jf its citizens choose, senrc as a laboratory; and try 

novel social and economic experiments without risk to the rest of the country. "). 

lZ Daniel Sh3viro, "An Economic and Political Look at Pederalism in Taxation," 90 Mich. L Rev. 895, 957 

(1992). 
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Nexus Based on Physical Presence 

We at the Tax Foundation have monitored the increasing use of tax policy by states to do precisely 

what I have described: shift tax burdens from out-of-state businesses and individuals to benefit instate businesses and individuals, through discriminatory tax policy. These generally involve disputes 

over "nexus" standards: the proper scope of state tax power over non-resident individuals and 

businesses. 

Generally, the historical standard is that states may tax those physically present in the jurisdiction, 

and may not tax those not physically present. This is premised on a view known as the "benefit 

principle": that the taxes you pay should roughly approximate the services you consume. State 

spending overwhelmingly, if not completely, is meant to benefit the people who live and work in the 

jurisdiction. Education, health care, roads, police protection, broadband access, etc.: the primary 

beneficiaries are state residents. The "benefit principle" thus means that residents should be paying 

taxes where they work and live, and jurisdictions should not tax those who don't work and live there. 

A physical presence standard for state taxation would be in line with this fundamental view of 

taxation. 

Developments have arisen in the three major state tax areas (corporate income tax, individual income 

tax and sales tax), as well as with some other state taxes (such as telecommunications taxes, taxes on 

digital goods, car rental taxes, and so forth). Bills have been introduced in the Congress that seek ro 

address some of the problems that have been identified in these areas. 

Recent Developments in State Corporate Income Tax 

Businesses throughout our nation's history have plied their trade across state lines. Today, with new 

technologies, even the smallest businesses can sell their products and services in all fifty states 

through the Internet and through the mail. If such sales can now expose these businesses to tax 

compliance and liability risks in states where they merely have customers, they will be less likely to 

expand their reach into those states. Unless a single nexus standard is established, the conflicting 

standards will impede the desire and the ability of businesses to expand, which harms the nation's 

economic growth potential. 

Frequent and ambiguous alterations of tax codes and the confusion they cause are a key source of the 

growing tax compliance burden. These costs are especially relevant for interstate businesses, both 

large and small. Nonetheless, many states have sought ro impose business activiry taxes on remote 

entities under the general heading of economic nexus without regard to lack of physical presence. 

While a rule premised on the physical presence of employees or business properry can be demarcated 

with predictabiliry, this is not the case with economic nexus. Scholars disagree sharply on what the 

term even means, with many definitions involving case-by-case, defendant-specific, muld-factor 

inquiries that leave businesses generally incapable of foreseeing whether a particular activity will 

create nexus in a given state. 
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The complexities imposed by states' steadily expanding tbeir nexus standards beyond tbe brigbt-line 

physical presence rule can be illustrated with a review of current nexus standards. Each year, tax 

publisher BNA produces the Survey o/State Tax Departments, a compilation of questionnaire results 

on nexus-creating activities submitted ro state taxing autborities. For each scenario, the state 

responds as to whether a particular activity creates nexus. For example: 

• Merely having a phone number listed in a telephone book is treated as sufficient nexuscreating activity in 9 states. 

• Having a website bosted on another entity's server in tbe state creates nexus in 13 states. 

• Sending employees to attend a seminar but engaging in no sales activity creates nexus in 1 

state and the District of Columbia. 

• While sbipping products in non-returnable containers is protected by Public 1. 86-272, 

shipping products into a state in returnable containers creates nexus in 26 states. 

While tbis thick volume remains the best comprehensive guidance for interstate business, it is 

littered with footnotes, exceptions, and "depends" notations, reinforcing the lack of clarity the states 

have imposed on tbose engaged in interstate commerce. For example, 10 states (primarily those wirh 

aggressive nexus rules) requested rhat BNA note tbat they (the states) do not consider any of their 

answers to be binding guidance if the particular situation were actually to arise. 

With the increasing level of economic integration we have today, the economic costs of nexus 

uncertainty burden and impede the economy much more than ever before. As some states follow the 

physical presence rule and others follow some iteration of economic nexus (roughly half the states 

taking each approacb at present for business activity taxes), compliance costs for business engaged in 

interstate commerce will increase. Businesses that expand their sales into states following economic 

nexus will have to file tax returns and understand the local tax base, applicable tax rates, available tax 

incentives, and differing apportionment formulas. Many taxpayers will have to guess about what 

apptoach a state will follow for their situation, leaving them taking a chance on wherher or not to file 

taxes. 

In 2010, for instance, the State of Washington adopted a new standard for "engaging [in business] 

within this state."" Under this definition, a person is engaged in business in Washington when the 

"person generates gross income of the business from sources within this state, such as customers or 

intangible property located in tbis state, regardless of whetber the person is pbysically present in this 

state." 

The apportionment formula applicable to a multistate taxpayer with putative "substantial nexus" 

adopts a cascading set of principles tbat ask the taxpayer, first, to determine (and keep records on) 

where the customer "received the benefit of the taxpayer's service," or where the customer "used the 

taxpayer's intangible property."14 If the taxpayer believes this occurred in more tban one state in the 

Ll Wash. Rev. Code § 82.04.066 (2010) (emphasis added). 

14 Wash. Rev. Code § 82.04.462(3)(b)(i) (2010). 
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customer's operations, the taxpayer is asked to determine where the benefit was "primarily received" 

or the intangible property was "primarily used."15 In an integrated national economy, these tests 

superimpose a challenging subjective analysis on a high-volume accounting process. The taxpayer has 

the burden of showing these tests are not reasonably answerable, of course, before it may move on to 

the other five possible allocation rules under the starute. 

Addirionally, the Respondent Department of Revenue has adopted emergency rules that, for 

example, allocate to Washington receipts paid by a business customer for a service-if it is not 

related to real or tangible personal property-if the service "relates to the [customer's] business 

activities in this state."'6 Under the emergency rule, an our-of-state entity with no ptoperty or 

employees in Washington can be found to have putative "substantial nexus" with Washington if the 

services it performs for a client are deemed to be "relate[dl to [the client's] business activities in" 

Washington and if the fees from this client andlor similar clients exceed $250,000 in a tax year. 

The Washington example shows how economic nexus exacerbates the uncertainties and compounds 

the burdensome recordkeeping that attend doing business with customers in other states. Why, you 

may ask, did Washington adopt this? Tax exportation was one explicit reason. The Department of 

Revenue summarized the ptospective impact of Washington's 2010 legislation as requiring tax 

payments from "out-of-state businesses [that] currently do millions of dollars in business with the 

state but pay ~because they lack physical nexus."'7 At the same time, they write, "[m]any 

Washington-based businesses will see reduced taxes" (emphasis original)." 

A physical presence standard for business activity taxes would halt these growing state efforts to 

export tax burdens. A physical presence standard would also have the benefit of focusing states on 

raising their tax revenue from those who work and live in the jurisdiction. 

Recent Developments in State Individual Income Tax 

Half the states require nontesident employees to set up individual income tax withholding for their 

first day of travel into the state." 16 more states also require withholding after a certain point. And 

that's just withholding, nor the obligation to file a rerum or pay taxes.20 

A few years ago, we got a call from a woman in Ohio. Her son was a semi-professional soccer goalie 

and he had earned $28,000. Spread across rhis woman's kitchen table were 10 state income tax 

rerurns, divvying up the tax on $28k. States are becoming more aggressive with nonresident income 

"Wash. Rev. Code § 82.04.462(3)(b)(ii) (2010). 

16 Wash. Admin. Code § 458-20-19402(5)(a)(i)(C)(II) (emergency rule effective Jan. 28, 2011 through Scpo 24, 2011), 

htlp:lldor wa.rov/Docs/Rules/draftI20-19402-19403cdefrmdraft20 11-4'l'df. 

17 Washington Srate Deparrment of Revenue, "Economic Nexus Summary" Oan. ] 9, 201 0) at 2-3 (emphasis original). 

I8Id 

1'J See Council on State Taxation, "Nonresident Personal Income Tax Withholding." 

20Jd 
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taxes, hunting schedules via Twitter, demanding travel vouchers, generally imposing a colossal 

compliance burden that is a net revenue wash, transferring tax dollars from low-tax, low-expense 

states to the states with the highest tax burdens.21 We regularly receive reports of state tax 

departments demanding access ro business travel records. 

Traditionally imposed only on athletes and entertainers, increasing availability of public schedules is 

enabling states to reach further down into the business traveler community. Current state practices 

of expanding individual income tax nexus standards ro more professionals and business travelers 

threaten to disrupt interstate commerce and falsely suggest that business travelers earn their income 

in traveling states and not from the home office. In recent hearings, members of the House of 

Representatives have shown their outrage at these state practices. 

Tax systems should aim to treat like transactions alike, whether the sener is remote or in-state. 

Income tax should be paid by those who work or live in a jurisdiction. However, the economy incurs 

enormous deadweight loss if income tax obligations kick in at minimal levels of activity. One 

proposed standard is restricting states' power to tax individuals who work in a state for less than 30 

days, which would shield de minimis activity while affirming state power to tax those who are 

genuinely working in the state for extended periods. An alternative income-based standard would be 

difficult to implement in practice and would be less effective at allowing businesses and their 

employees to foresee tax liability in a state. 

Recent Developments in State Sales Tax: Background 

There are a number of proposals to reverse a series of U.S. Supreme Court decisions (most recently 

the Quill decision of 1992) that prohibit states from imposing sales tax collection obligations on 

businesses with no property or employee in the state. This "physical presence" standard is meant to 

prevent states from shifting tax burdens to non-residents away from residents who are the primaty 

beneficiaty of state services, while also protecting the free flow of interstate commerce from the 

compliance costs of non-uniform and numerous (9,600+) sales tax jurisdictions in the United States. 

The steadily increasing growth of Internet-based commerce has however led to frustration with this 

standard, primarily due to disparate sales tax treatment of similar goods within states that has no 

economic basis. This can be addressed while also ensuring that some standard exists to restrain states 

from engaging in destructive behavior, such as tax exporting to non-voters or imposing heavy 

compliance costs on interstate businesses, that the Congress is empowered to prevent. Further, 

because economic integration is greater now than it has ever been before, the economic costs of 

nexus uncertainty are also greater today and can ripple through the economy much more quickly. 

Substantial progress has been made in recent months toward possible solutions that could (1) 

simplifY sales tax systems and avoid discriminatoty compliance costs, (2) eliminate non-neutral tax 

21 See David Hoffman & Scott A. Hodge, "Nonresident State and Local Income Taxes in the United States," TAX 

FOUNDATION SPECIAL REpORT No. 130 0u!. 1, 2004), hnp:llwww.laxfoundalioll.vrgfre;earchlshowI94 hun!. 
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rates on similar products sold by online and brick-and-mortar businesses, (3) limit taxation in a state 

ro mose residents who enjoy the benefits of state services, (4) prevent multiple taxation of interstate 

commerce, and (5) prevent unconstitutional and fragmented state attempts to impose such tax 

burdens in a destructive manner. 

These actions are only the latest chapter in a long saga over the ptoper tax treatment of sales made 

over the Internet, and an even longer saga over the proper scope of state taxing authority. At its core 

is a dispute over which is more important: limiting state power to tax nonresidents and thus harm 

the national economy, or ensuring that some transactions do not escape tax because they are 

conducted online. Discussions following a recent compromise in California suggest that there are 

policy options that could achieve both ends. 

Recent Developments in State Sales Tax: Quill 

What is nexus for a remote seller? In 1967, the U.S. Supreme Court held that a business does not 

have nexus with a state if the business has no retail outlets, solicitors, or property in the state, and 

communicates with customers only by mail or common carrier as part of a general interstate 

business." Otherwise, the Court concluded, states could "entangle National's interstate business in a 

virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose a 

fair share of the cost of the local government." This decision was reaffirmed after the Complete Auto 

test was announced in 1977.23 

During the 1980s, some academics and many states criticized National Bella.s Hess as archaic, 

formalistic, and outmoded. Officials were encouraged to ignore the decision, and some state courts 

disregarded it, even as the number of sales taxes rose from 2,300 to 6,000. Different murky 

definitions of economic nexus have been proposed: 

• Engaged in exploiting me local market on a regular, systematic, large-scale basis. 

• Presence of intangible property or affiliates 

• Number of customers in state, value of assets or deposits in the state, and receipts 

attributable to sources in the state 

• Analysis of frequency, quantity, and systematic nature of taxpayer's economic contacts with 

the state 

• Derivation of economic benefits from state's residents 

Defying me Court rulings, North Dakota enacted a law requiring the out-of-state Quill Corp. to 

collect sales tax on its sales to 3,000 in-state customers. Any state that advertised three times in the 

state was liable. In the case, the U.S. Supreme Court reaffirmed National Bellas Hess and Complete 

21 See National Belks Hm, Inc. v. Dept. of Revenue of Ill., 386 U.S. 753, 759-60 (1967). 

See Nail Geographic Society v. Ca. Bd Of Equalization, 430 U.S. 551, 559 (1977). 
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AutO.24 There they stated that the physical presence rule "firmly establishes the boundaries of 

legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation 

concerning those taxes." Justice By ton White dissented, arguing two points that continue to be made 

today: (1) injustice that some sales escape taxation and (2) arguing that technological change had 

made discriminatory compliance costs no longer burdensome. 

Recent Developments in State Sales Tax: Efforts to Change Quill 

Today, there are over 9,600 state and local sales tax jutisdictions in the United States. There are 

different rates on different items, they change frequently, and are not even aligned to 9-digit zip 

codes. States are reluctant to cooperate on even basic rules and definitions. 

The Streamlined Sales Tax Project (SSTP) was launched in 2000 with the mission of getting states 

to adopt changes to their sales taxes to make them simple and uniform. SSTP then hopes to 

convince Congress or the courts to overrule Quill and allow use tax collection obligations on out-ofstate companies ("Main Street Fairness Act"). 

However, the SSTP has abandoned simplification efforts and any attempt to reduce the number of 

sales tax jurisdictions, instead focusing on uniformity efforts. In many cases, the Project has enabled 

state sales tax complexity by permitting separate tax rates for certain goods. States generally are 

reluctant to yield parochial advantages, even with the possibility of online sales tax revenue in return, 

undermining their argument to Congress as part of the Main Street Fairness Act that they have 

succeeded in their mission. Large states have generally avoided the SSTP, and membership has been 

stuck at 20-something states for some time. 

This in turn has led to impatience from states and others. 

Recent Developments in State Sales Tax: Efforts to DefY Quill 

In 2008, New York adopted an "Amazon" tax, nicknamed after the Internet retailer as the most 

visible target. The law held that a person or business with no physical presence in the state 

nevertheless has nexus if it (1) enters into agreement with in-state resident involving commissions for 

referring potential customers; and (2) has gross receipts from sales by out-of-state company from 

referrals within the state are more than $10,000 in a 12-month period. 

Amazon.com & Overstock.com responded by terminating affiliate programs in New York, and 

Amazon.com filed a lawsuit in state court. The law was upheld by a trial judge (New York's trial 

courts are called the "New York Supreme Court," causing confusion about who upheld the Amazon 

tax as constitutional); the judge concluded that Amazon.com's in-state affiliates are necessaty and 

significant to establishing and maintaining out-of-state company's market in the state. But because 

they make up only 1.5% of sales, that was the basis for the appeal. The New York Supreme Court, 

14 See Quill Corp. v. North Dakota, 504 U.S. 298 (1992). 
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Appellate Division ruled in late 2010 that law is not facially unconstitutional but may be 

unconstitutional for Amazon. The case was remanded to the lower court, but Amazon is appealing 

to state's highest court, the New York Court of Appeals. The case is ongoing. 

In 2009, Rhode Island and North Carolina adopted identical New York-style laws. Neither has seen 

any revenue and Rhode Island has actually seen revenue loss due to reduced income tax collections 

from terminated in-state affiliates. Laws were also passed in California and Hawaii but vetoed. 

In 2010, Colorado considered the same law but faced opposition from in-state affiliates. Instead it 

adopted a law (H.B. 10-1193) designed to push Amazon into collecting use taxes without explicitly 

requiring it. Any out-of-state retailer that is part of "a controlled group of corporations" with at least 

one member with physical presence in Colorado, all the retailers in the group have nexus with 

Colorado. However, the "only" obligation with this nexus is notification: 

• "[NlotifY Colorado putchasers that sales or use tax is due on certain putchases made from 

the retailer and that the State of Colorado requires the purchaser to file a sales or use tax 

return." Penalty of $5 per failure per customer, plus criminal penalties 

• "[NotifYl all Colorado purchasers by January 31 of each year showing such information as 

the Colorado Department of Revenue shall require by rule and the total amount paid by the 

purchaser for Colorado purchases made from the retailer in the previous calendar year. Such 

notification shall include, if available, the dates of purchases, the amounts of each purchase, 

and the category of the purchase, including, ifknown by the retailer, whether the purchase is 

exempt or not exempt ftom taxation." Must be sent separately from other shipments and be 

by first-class mail. CC to State. Penalty of$10 per failure per customer, plus criminal 

penalties. 

Amazon.com terminated affiliate programs in Colorado, and the Direct Marketing Association filed 

lawsuit in federal court. In January 2010, a federal judge stayed the law stayed as probably 

unconstiturional on First Amendment grounds, and the law was thrown out completely in April 

2012.25 

North Carolina followed Colorado by adopting regulation with similar/notification requirements. 

They demanded out-of-state companies provide them with all customer purchase information dating 

from 2003, by April 19,2010. Amazon.com and the ACLU filed lawsuit in federal court, arguing 

that "[e}ach order of a book, movie, CD or other expressive work potentially reveals an intimate fact 

about an Amazon customer." Examples of purchases by North Carolina residents: 

• Bipolar Disorder: A Guide for Parents and Families 

• He Had It Coming: How to Outsmart Your Husband and Win Your Divorce 

2j See Mark Robyn, "Colorado Amazon Regulations Ruled Unconstitutional," (Apr. 4, 2012), 

hup:i j..,vww.taxfoundation.urg/blog/show/2811 l.html 
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• Living with Alcoholism: Your Guide to Dealing with Alcohol Abuse and Addiction While Getting 

the Alcoholism Treatment You Need 

• What to Do When You Can't Get Pregnant: The Complete Guide to All the Technologies for 

Couples Facing Fertility Problems 

• Outing Yourself: How to Come out as Lesbian or Gay to Your Family, Friends, and Coworkers 

• Lolita (1962) 

• Brokeback Mountain (2005) 

• Fahrenheit 9111 (2004) 

A federal judge struck down the North Carolina regulation as violating First Amendment in October 

2010. 

In 2011, Illinois and Arkansas enacted New York-style laws. California enacted one but after a 

possible repeal referendum was proposed, the state and Amazon.com reached an agreement whereby 

Amazon.com will develop a physical presence in the state (i.e .• build warehouses). 

Recent Developments in State Sales Tax: Possible Solutions 

Florida "iStart" Proposal This state legislative proposal would require the State of Florida to create 

software ("Internet Sales Tax Automated Revenue Tracking") to enable one-stop sales tax calculation 

and payment. The state would make it available to retailers selling in Florida and under license to 

other states. The state would also pay compensation to vendors who collect, and the law prohibits 

disclosure of purchase information. When revenue from the software exceeds $5 billion per year, the 

state sales tax is automatically reduced by 1 percentage point. 

Origin-Based Taxation. This proposal is premised on the benefit principle, the idea that the taxes 

one pays are a rough approximation for the government services consumed. State spending 

ovetwhelmingly, if not exclusively, is meant to benefit those who live and work in the jurisdiction. 

Education, health care, roads, police: the primary beneficiaries are in-state residents. Thus, 

individuals and businesses should pay taxes where they work and live; jurisdictions should not tax 

those who don't work and live there. In practice for sales tax, Amazon.com would colleer 

Washington sales tax on all transactions. Amazon employees use Washington state services. 

Resident-purchasers of Amazon products pay other taxes to their states. This solution is in line with 

brick-and-mortar practice: tax based on where business is, not where customer is from. It levels 

playing field (as opposed to the Main Street Fairness Act or "Amazon" raxes, where brick-and-mortar 

comply only with taxes where they are physically present while online companies must comply wirh 

thousands). 

While some may criticize origin-based taxation as enabling Internet-based businesses to escape 

taxarion by locating in states that do not tax sales, individuals do not all congregate in states with no 

income tax and corporations do not all congregate in states with no corporate income tax. Stares 
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compete not only over taxes but over stare services, transportation, education, weather, and other 

factors. 

National Online Sales Tax. If states are unwilling to simplify their tax systems to prevent 

complexities ftom being imposed on those engaged in national online commerce, anorher option 

would be [0 implement a single default national sales tax to be imposed on online transactions, with 

the revenue distributed among the states. This could be on its own or distinct from other options 

and would eliminate much of the disparity between goods purchased in brick-and-mortar stores and 

goods purchased online. Ideally, implementation should be revenue-neutral, with the revenue 

collected used ro reduce other taxes. 

Marketpwce Fairness ActlMarketpwce Equity Act Proposals. Two recent proposals would eliminate 

the physical presence rule but otherwise make advances towards ensuring that states reduce the 

burdens associated with collecring their sales taxes. Example provisions include requirements that 

states have a single srate-Ievel agene), that administer all sales tax rules, offer one tax return and audit 

for the entire state, require one uniform tax base for the entire stare, provide software that identifies 

the applicable tax rate for a sale, including local rates and hold sellers harmless for any software errors 

or mistakes by the state, provide 30 days notice of any local sales tax rate change, and exempt sellers 

with a de minimis level of collections. Effective simplification is a necessity for any federal proposal. 

Recent Developments in Other State Taxes 

Other proposals are pending in the Congress regarding discriminatoty state taxes in other state tax 

areas. One bill, for example, would adopt a uniform rule on which state may tax a digital purchase. 

At present, where a resident of State A could easily access rhe Internet in State B to download a 

purchase from a business in State C from its servers in Srate D, a system that works out which state 

may tax the transaction is crucial. 

Other proposals focus on new targeted state taxes on products primarily used in interstate commerce 

or by out-of-state travelers, such as cell phone taxes and car rental taxes. These are most similar to 

past congressional actions prohibiting discriminarory taxation of inters tare railroad properry and 

prohibiting new targeted taxes on Internet access, both of which have been successful at restraining 

state tax policy from harming interstate commerce. 

Conclusion 

Businesses throughout our nation's history have plied their trade across state lines. Today, with new 

technologies, even the smallest businesses can sell their products and services in all fifry states 

through the Internet and through the mail. Business travel is easier than ever before. If such sales, 

travel, or activiry can now expose these businesses to tax compliance and liability risks in states where 

they merely have customers, they will be less likely ro expand their reach into those states. Interstate 

commerce is not a golden goose that can be squeezed without adverse effects on economic growrh. 
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Unless a single uniform nexus standard is established, the conflicting standards will impede the 

desire and the ability of businesses to expand, which harms the nation's economic growth potentiaL 

We at the Tax Foundation track the numerous rates, bases, exemptions, credits, adjustments, 

phaseouts, exclusions, and deductions that litter our federal and state rax codes. Frequent and 

ambiguous alterations of tax codes and the confusion they cause are a key source of the growing tax 

compliance burden. We have several staffers as well as computer-based and publication subscriptions 

dedicated to being up to date and accurate on the frequent changes to the many taxes in our 

countty, but even we have trouble doing it. It would be extremely difficult for individuals and 

businesses who are in business to sell a good or service, not to conduct tax policy research. 

Congress can obtain evidence from interested stakeholders and take political and economic factors 

into consideration when developing new rules of taxation. The Supreme Court, by contrasr, must 

develop broad doctrine in a case-by-case fashion, based on the facts of the particular case before 

them. (Additionally, the Court seems to have an aversion to tax cases.) This is why congressional 

action, which can be more comprehensive and accountable than judicial action, and can better 

address issues of transition, retroactivity, and d~ minimis exemptions, may now be the besr vehicle 

for preventing burdens to interstate commerce. It is up to Congress to exercise its power to protect 

interstate commerce. 

We now live in a world of iPods, telecommuting, and Amazon.com. It is a testament to the Framers 

rhat their warnings about states' incentives to hinder the national economy remain rrue today. 

Some may argue that faster roads and powerful compurers mean that states should now be able to 

rax evetything everywhere. While some constitutional principles surely must be revisited to be 

applied to new circumstances, the idea thar parochial state interests should not be permitted to 

burden interstate commerce remains a timeless principle regardless of how sophisticated technology 

may become. 

Allovr THE TAX FOlJNDATION 

The Tax Foundation is a non-partisan, non-profit research institution founded in 1937 to educate taxpayers 

on tax policy. Based in Washington, D.C., our economic and policy analysis is guided by the principles of 

sound tax policy: simplicity, neutrality, transparency, and stability. 

AllOtiT THF CENTER FOR LEG,H REFORM 1\1' THE TAX FOUNDATION 

The Tax Foundation's Center for Legal Reform educates the legal community and the general public abour 

economics and principled tax policy. Our research efforts focus on the scope of taxing authority, the 

definirlon of tax, economic incidence, and taxpayer protections. 
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What Federal Tax Reform Means for State and Local Tax and Fiscal Policies 

Kim Rueben* 

Senior Fellow, 

Urban-Brookings Tax Policy Center 

www.taxpolicycenter.org 

Testimony before the Senate Committee on Finance, United States Senate 

April 25, 2012 

Chairman Baucus, Ranking Member Hatch, and Members of the Senate Finance 

Committee, thank you for inviting me to appear today to discuss federal tax reform 

and what it means for the tax and fiscal policies of state and local governments. 

With increasing concerns about the federal deficit, fairness, and the complexity and 

inefficiency of our tax system, the need for fundamental federal tax reform is critical. 

Often overlooked, however, is the fact that any such reforms will also affect the tax 

and fiscal policies of state and local governments. As you consider possible changes 

in federal policy and, I hope, move toward a tax system that more efficiently raises 

revenue to provide federal services, it is important to recognize how federal actions 

affect state and local governments, as well as how state and local government 

actions can interact with and sometimes undo federal policy. 

This hearing will touch on many subjects that affect state and local governments: 

broad fiscal. policy, tax coordination and competition, tax-exempt bond markets. and 

fundamental income tax reform. I will focus my remarks on the current structure of 

state and local tax systems and how uncertainty about federal tax policy affects state 

and local governments' ability to forecast their own revenues. I will then examine 

how the federal tax code affects state and local budgets and how fundamental 

changes in the federal tax code may affect state and local governments. Our current 

system could definitely benefit from improvement: it is important to take into 

account how any changes shape not only federal revenues and economic activity but 

• The views expressed here are my own; they do not necessarily reflect the views of the Urban 

Institute, its trustees, or its fundcrs. I have drawn on discussions and papers prepared for the 

"Federal Tax Reform Beyond the Beltway" conference on February 3, 2012, co-hosted by the Tax 

Policy Center and UCLA Law School and sponsored by the MacArthur Foundation, especially work coauthored with Kirk Stark of UCLA. Fiona Blackshaw, Leonard Burman, Tracy Gordon, Donald Marron, 

Kirk Stark and Roberton Williams provided helpful comments, but all errors are my own. 
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also the ability of state and local governments to access funds as well as the fiscal 

choices state and local governments make. 

Although the country's economic condition is improving, state and local 

governments are still struggling to balance their budgets. Thus, decisions about 

changing federal policy should take into account the potential effects on state and 

local government budgets in both the short and the long run. 

I will make seven points today about the relationship between federal tax reform 

and state and local fiscal policies. 

1. Although state revenues are recovering. state and local governments are still 

under enormous financial stress in the qjtermath Qjthe Great Recession. 

Although the federal budget is roughly twice as large as states',1 many federal 

programs are actually managed by the states. For example, state and county 

governments administer most Medicaid spending. Similarly, state and local 

governments are chiefly responsible for the development of transportation 

infrastructure. Aided by transfers from the federal government, state and 

local governments run about half of all public programs. They are 

predominant funders of K-12 education. But effective administration of those 

programs depends on states having stable revenue sources to finance their 

share of costs. 

2. Although federal grants and stimulus have helped states weather the 

downturn, other federal policies have exacerbated states' problems. 2 Federal 

policy affects how attractive certain taxes are for state and local governments 

and, therefore, how those governments organize their tax and revenue 

systems. State revenue sources-especially income taxes-often piggyback 

on federal rules. More specifically, statutory changes in federal law can 

result in significant increases or decreases in state revenue. For example, 

state income tax revenue increased after the 1986 tax reform expanded the 

federal income tax base. On the other hand, state revenues have become 

1 According to the National Income and Product Accounts, state and local government current 

receipts exceeded $2 trillion in 2010, including $500 billion in federal grants in aid. While federal 

revenues totaled $2.4 trillion, federal expenditures were $3.7 trillion (including grants in aid to state 

and local governments). When federal defense spending is excluded, state and local government 

spending is roughly equivalent to federal spending (15 percent vs. 18 percent of GDP) (SEA 2011). 

2 Gordon (2012) examines what lessons the federal government can learn from states and examines 

the federalJstate relationship in the aftermath of the Great Recession. 
95 


80344.067

more volatile over time as states have become more reliant on income taxes.3 

This is partly a result of the deductibility of state and local taxes on federal 

income tax returns. Deductibility effectively subsidizes state and local 

governments by offsetting the cost to taxpayers. By its very design, the 

deduction for state and local taxes favors certain fiscal choices over others. 

For example, only taxpayers who itemize their returns can benefit from the 

deduction. Because high-income taxpayers are more likely to itemize their 

deductions, state and local governments have an incentive to make their tax 

systems more progressive as a means of shifting more of the state's tax 

burden onto federal taxpayers.4 This effect is intensified by the fact that 

deductions are most valuable to taxpayers with the highest marginal tax rate 

- the federal deduction is worth more to a taxpayer subject to a 35 percent 

tax rate than a taxpayer subject to a 15 percent tax rate. Again the clear 

incentive introduced by federal law is for states to concentrate their tax 

burdens on high-income households. This is not inherently bad; however, 

progressive income taxes tend to be more volatile than alternative revenue 

sources, thereby creating problems for governments that operate under 

balanced budget rules. In particular, they have less flexibility to respond to 

changing economic conditions. 

3. Unstable federal tax policY trickles down to the states. Problems with state tax 

systems are exacerbated by uncertainty in federal tax rules. Temporary 

extensions of credits, deductions, and tax rates complicate state forecasting, 

particularly for state tax systems that piggyback on the federal code. Policy 

changes and uncertainty can lead taxpayer to change their behavior in ways 

that can indirectly affect state and local revenues and make projecting state 

revenues more difficult. For example, the California Legislative Analyst's 

Office 2012-2013 Budget: Economic and Revenue Outlook says that 

"Perhaps the most significant economic risks for this forecast relate to the 

unknown future direction of federal fiscal and tax policy." Especially 

problematic has been uncertainty about future federal estate taxes and tax 

rates on dividends and capital gains. 

3 Increasing income inequality and income volatility have made state income tax receipts more 

volatile-up in good times, sharply down in bad (Pew Center 2011). 

4 Metcalf (2011) finds that federal deductibility continues to have a significant and large effect on the 

use of deductible taxes at the state and local level. 
96 


80344.068

4. The federal tax code makes the value ofdeductions and credits uncertain. 

Because of phaseouts of tax preferences as well as the alternative minimum 

tax (AMT), taxpayers often cannot predict whether they will benefit from 

particular tax breaks. For example, the deduction for state and local taxes 

reduces the net cost of these taxes for taxpayers who can claim a deduction 

for them. The AMT disallows the deduction, however, and taxpayers often 

don't know whether they will be subject to the AMT before they fill out their 

tax returns. That uncertainty has been greater in recent years as Congress 

has temporarily increased the AMT exemption every year or two, sometimes 

only at the end of the tax year. Further, the probability of having to pay the 

AMT varies both across states (depending on the characteristics of their tax 

systems and other factors like house prices) and across types of households. 

Families in New York and California, for example, pay above-average state 

and local taxes and are also more likely to be subject to the AMT.5 

5. Reform of the federal tax Ii,.Ystem could benefit state and local governments if 

the effects on their tax systems are explicitly considered. A streamlined federal 

income tax with fewer deductions and straightforward credits and 

deductions could allow for simpler state income tax returns. Many states 

already offer earned income credits and child care credits that piggy-back on 

the federal credits. Similarly, if federal tax reform includes the introduction 

of a value-added tax, state and local governments could replace their existing 

sales taxes with a consumption tax using the federal tax base whichwould 

likely be broader than the existing retail sales tax base including services plus 

web purchases. However, iffederal reform is not done carefully, it could 

exacerbate existing problems and further complicate tax preparation, if 

states feel the need to introduce more provisions into their own codes to 

maintain their tax bases. 

6. The current state ofthe economy and still-fragile state and local budgets may 

require that transition reli/ifto state and local governments accompanv tax 

reform. That could be especially true if the federal government moves quickly 

to change tax provisions that affect states and localities. For example, 

changing the deductibility of mortgage interest on second homes or moving 

from a deduction to a credit for mortgage interest could affect both house 

5 Rueben and Stark (2012) examine differences across states in the prevalence and average size of 

the state and local tax deduction and the AMT; they also examine the distributional effects of varying 

the characteristics of the state and local tax deduction. 
97 


80344.069

values and property-tax revenues. Changing the deductibility of state and 

local taxes and effectively eliminating the subsidy from the federal 

government could create pressure to cut state income tax rates just as 

revenues are recovering from the recession. Understanding the economic 

impact of such changes is critical. Providing relief through a transition period 

could lessen the impact on state and local revenues. Note, however, that 

temporary provisions and announced future changes can both affect 

taxpayer behavior. 

7. Congress can take specific actions to help cOQrdinate and protect existing state 

and local tax sYstems. State and local governments' ability to raise revenue 

can be hobbled by limitations that Congress could remove. Most notably, 

Congress could enact legislation that would enable state and local 

governments to collect taxes on internet and mail-order sales. Doing so could 

help stop the erosion of sales tax receipts as more and more commerce takes 

place online. 

Thank you again for inviting me to appear today. I look forward to your 

questions. 

References 

Bureau of Economic Analysis (BEA). National Income and Product Accounts: Tables 

3.1-3.3. U.S. Department of Commerce, November 22, 2011. 

California Legislative Analyst Office. "The 2012-13 Budget: Economic and Revenue 

Update." February 27, 2012. 

Gordon, Tracy. "What States Can, and Can't, Teach the Federal Government about 

Budgets." Brookings Institution Working Paper, 2012. 

Pew Center on the States and Nelson A. Rockefeller Institute of Government. States' 

Revenue Estimating: Cracks in the Crystal Ball. Washington, DC: Pew Center on 

the States, November 23, 2011. 

Rueben, Kim, and Kirk Stark. "Federal Tax Reform and the Deduction for State and 

Local Taxes." Tax Policy Center Working Paper, 2012. 
98 


80344.070

Testimony 

Federal Support for State and 

Local Governments Through the Tax Code 

Frank Sammartino 

Assistant Director for Tax Analysis 

Before the 

Committee on Finance 

United State Senate 

April 25, 2012 

This docu"!'1't is embargoed untit i~ isdeliveret{"! 

10:00 a. m. (El)1) on Wednesd4y. April25. 2012. The 

';',itenlS 1M! not be publis/)ed, ,!:ansmitte~ .rotherwise 

co'!'munic'ated"" any print, broadcast, or electronic 

media before that time; 
99 


80344.071

Contents 

Federal Financial Support to State and Local Governments 

Magnitude of Federal Financial Support 

Tax Subsidies vs. Grants 

Tax-Preferred Bonds 

Types of Tax-Preferred Bonds 

Uses of Tax-Preferred Bonds 

Impact of Tax-Preferred Bonds on State and Local Budgets 

2 

2 

3 

Increasing the Efficiency of Federal Tax Preferences for State and Local Borrowing 7 

Deductibility of State and Local Taxes 9 

Impact on State and Local Taxes and Spending 10 

Disuibution of Benefits by State II 

Distribution of Benefits by Income Groups 12 

Policy Options 13 

Tables 

Figures 

1. Governmental and Build America Bonds Issued, 2009 

2. Selected Measures of State and Local Tax Deductibili<y. 2009 

1. Percentage of Taxpayers Who Itemized and Who Claimed the 

Taxes-Paid Deduction, 1985 to 2009 

2. Types of Taxes Claimed Under the Taxes-Paid Deduction, 1993 to 2009 

14 
100 


80344.072

Chairman Baucus, Senator Hatch, and members of the 

Committee, thank you for the invitation to testify on federal support for state and local governments provided 

through the tax code and on some ways in which tax 

refOrm might affect that support. My testimony focuses 

on two particular aspects of current policy: (1) the use of 

tax-preferred bonds by state and local governments for 

subsidizing investment in capital-intensive projects for 

such things as highways) water resources, and school 

buildings and (2) the deductibility of state and local I raxes. 

The federal government provides preferential tax treatment for bonds issued ro finance activities of state and 

local governments. As a resulr, those governments are able 

to borrow more cheaply than they otherwise could. At 

the end of20II! state and local governments owed 

roughly $3 trillion in the fotm of tax-preferred bonds. 

The most common type of tax-preferred bond is one fOr 

which interest income is exempt from federal taxes. 

Another type of tax preference for a state or local bond, 

which until recently has not been much used, is to offer a 

federal tax credit in lieu of some or all of the interest 

income from the bond. 

Although a large majority of tax-preferred bonds are traditional tax-exempt bonds, such bonds are a relatively 

inefficient mechanism for the federal government to 

transfer funds to state and local governments. SpecificalJy, 

with tax-exempt bonds, the federal government forgoes 

more in tax revenues than state and local governments 

receive. Estimates suggest that the difference is about 

$6 billion per year--or about one-fifth of the approximately $30 billion in federal revenues: lost through that 

tax preference. That sum accrues co investors who pay 

high marginal tax rates. In conttast, for tax-credit bonds, 

the revenues forgone by the federal government are captured entirely by state and local governments. 

However, tax-credit bonds have not been especially well 

received in financial markets until a few years ago. Inves~ 

tors' lack of enthusiasm for such bonds probably 

1. For previous analysis of these topics, see Congressional Budget 

Office and Joint Committee on Taxation, Subsidizing Infrastruc~ 

fllre itwe.rtnunt ullth 1(1x~PnftrJ'{'J B{md.; (October 2009): and 

Congressional Budge[ Offi~e, lJ)£ Dedu"i/Jility (is/tltt' dud Loca! 

Taxes (February 2008). 

stemmed from the limited size and temporary nature of 

most tax-credit bond programs and an absence of rules 

for separating tax credits from the associated bonds and 

reselling them. In contrast, "direct-pay" tax-credit 

bonds-for which the value of the tax credit takes the 

form of a payment from the Treasury to the state or local 

government issuing the bond-became a significant 

source of state and local fmancing in the years during 

which they were authorized. namely, 2009 and 2010. 

The deducribility of state and local taxes provides another 

means of federal support for state and local governments. 

Taxpayers who itemize their deductions may daim a 

deduction for most state and local raxes. That "taxespaid" deduction provides an indirect federal subsidy to 

state and local governments because it decreases the net 

cost to taxpayers of paying such deductible taxes. By 

lowering the net cost of those state and local taxes, the 

raxes-paid deduction encourages state and local governments to impose higher taxes and provide more services 

than they otherwise would and to use deductible taxes in 

place of some nondeductible taxes. According to an estimare by the staff of the Joint Committee on Taxation, the 

tax subsidy provided through this deduction was 

$67 billion in 2011.' 

How much a given State or local government benefits 

from this deduction depends on the structure of its tax 

system and the characteristics of the taxpayers who 

provide revenues ro it. For example, a state or local government that finances its spending by using a larger 

share of taxes that are deductible under the federal individual income taX receives a larger benefit through the 

deductibility provision than does an otherwise identical 

government that finances its spending by using a smaller 

share of taxes that are deductible. All else being equal, a 

state or local government whose taxpayers are more likely 

to itemize deductions also gains a greater benefit than 

does a government whose taXpayers tend to claim the 

standard deduction. 

In 2009, slightly fewer than one-third of all tax filers 

claimed the deduction for state and local taxes paid. The 

amount of those taxes paid generally increased with 

income, as did the tax saving from [he deduction and the 

2. Joint Committee on Taxation, Estimates of Federal Ta.'It 

Expmditum. 2011-2015. JCS-1-12 Q,nu,'Y 17. 2012). 
101 


80344.073

likelihood that a taxpayer would claim the deduction. For 

example, approximately 25 percent of tax filers with 

income under $100,000 claimed the deduction in 2009, 

compared with over 85 petcent of tax filers with income 

of $1 00,000 or more. 

Over the next several years, scheduled changes to tax provisions and the interaction of the regular income tax and 

the alternative minimum tax (AMT) will change the 

number of taxpayers who claim the deduction and the 

associated loss of federal revenues because the AMT does 

not allow people to claim the taxes-paid deducrion. 

Without further changes to tax law, the number of taxpayers subject (0 rhe AMT will rise in 2012 because 

temporarily higher Al\1:T exemption levels expired at the 

end of last year; as a result, fewer people will be able to 

claim the taxes-paid deduction. Also, without further 

changes to tax law, tax provisions originally enacted in 

2001 and 2003 will expire at the end of20 12, increasing 

regular income tax rates for many taxpayers. Those 

increases will raise the value of the taxes-paid deduction 

for those who claim it and increase the associated revenue 

loss for the federal government. In addition, with the 

higher tax rates, many taxpayers will shift from being 

subject to the AMT (even if the current lower AMT 

exemption levels remain in place) to being subject to only 

the regular income tax and will therefore be able to claim 

the deduction for state and local taxes paid. 

If certain tax policies that have recently been in effect 

were extended rather than being allowed to expire, as 

under current law, the revenue effects of the taxes~pajd 

deduction would be different. Specifically, if all tax provisions expiring after 2012 (including the lower regular 

income tax rates originally enacted in 2001 and 2003) 

were extended and the AMT exemption levels were 

increased for years after 2011, there would be two oppos~ 

ing effects on the taxes-paid deduction. First, the lower 

regular income tax rates would reduce the tax saving and 

associated revenue loss for the federal government for tax~ 

payers claiming the deduction. Second, the higher AMT 

exemption levels would reduce the number of taxpayers 

subject to the AMT, thereby increasing the number of 

taxpayers who would claim the deduction. 

2 

Federal Financial Support to State and 

Local Governments The federal government provides financial support (0 

state and local governments in a variety of ways. The largest amount comes to state and local governments in the 

form of grants, but the federal government also delivers 

support through the federal tax code by provisions that 

make it Jess expensive for state and local governments to 

raise revenues through their own tax. collections and to 

borrow money by issuing bonds. That federal financial 

supporr covers the gamut of state and local government 

activities-including ones involving education, assistance 

to individuals and families with limited resources, transportation sysrems, and other infrastructure projects. 

Magnitude of Federal Financial Support 

Federal outlays for grants to state and local governments 

totaled $607 billion in 2011, or roughly one-quarter of 

all state and local government expenditures (which in 

2011 amounted to $2.5 trillion).' Health care programs 

accounted for nearly half of those grants, including 

$275 billion for Medicaid. Most of the remaining grants 

went to fund programs in income security; education, 

training, employmenr, and social servicesj and transpor~ 

ration. Such grants are funded through both annual 

appropriations and the authorizing legislation of some 

mandatory programs. 4 

Another type of federal fmancial support is in the form of 

tax subsidies that make it less costly for State and local 

governments to raise revenues through taxes or to borrow. 

In 2011, according to estimates by the staff of the Joint 

Committee on Taxation, the federal tax subsidy deriving 

from the deduction for state and local taxes was $67 billion, and the tax subsidy for bonds issued by state and 

local governments totahl about $30 billion. The rax 

subsidy for state and local taxes is one of the largest "tax 

expenditures" in the individual income tax, exceeded only 

by the exclusion of pension contributions and earnings, 

the exclusion of employers' contributions for health care, 

3. Budget of the United States Government, Fiscal Year 2013: Analytical Perspectiws, Table 18.1; and Department of Commerce, 

Bureau of Economic Analysis, National Income and Product 

Accounts, February 13, 2012, Table 3.3. 

4. The federal government al"o offers loans and loan guarantees to 

state and local governments for a number of different purposes) 

includin~ state unemployment programs, communi£), development projects, and disaster aid. 
102 


80344.074

the reduced tax rate for capital gains and dividends, and 

the deduction of mortgage interest.s 

Tax Subsidies vs. Grants 

The mechanisms by which the fi:deral government gives 

financial support to state and local governments offer different degrees of federal control over the amount 'of the 

support) the uses of those federal funds, the distrihution 

of that supporr across jurisdictions and individuals. and 

transparency in the federal budget process. 

The amount of the federal tax subsidy for the state and 

local tax deduction and for tax-preferred state and local 

bonds depends on state and local governments' tax and 

spending policies and on the tax circumstances of the 

individuals who opt to take the deduction and the individuals and firms who putchase those government bonds. 

The amount of some fedetal grants to state and local governments is specified in the appropriating or authorizing 

legislation of the grant program. For other programs, 

including Medicaid, the authorizing legislation sets out 

how rhe spending is to be divided between the federal 

government and state and local governments but also 

gives those governments considerable decisionmaking 

power that helps to determine the amount of federal 

spending. 

Control avec the use of federal funds varies widely 

depending on the financing mechanism. For subsidies 

provided through the federal tax system, (he federal 

government has no control over how state and local 

governments spend the funds as long as the subsidized tax 

revenues and bonds are used for a governmental purpose. 

For grants, the federal government may specify the purpose for which the funds are to be spent, impose other 

conditions on that spending. and require stare and local 

governments to spend our of their own resources. However, the fungibility of those federal grant funds raises 

the possibility that state and local governments may 

5. See Joint Committee on Taxation, Estimate; of Federal Tax 

F.xpenditures, 2011--2015. Tax expenditures are defined under the 

Congressional Budget and Impoundment Control Act of 1974 as 

"revenue losses attributable to provisions of the Federa1 tax laws 

which allow a special exdU5ion, exemption, or deduction from 

gross income or which provide a special credit, a preferential rate 

of tax, Of a deferral of tax liability." Tax expenditure estimates, 

unlike tL"Vcnue estimates, do not take into account any changes in 

taxpayers' behavior in response to changes in the tax code. 

3 

reallocate their other spending as a result of the federal 

grants they receive. 

The distribution of the federal tax subsidies that support 

state and local governments depends on the mix of state 

and local policies at play and the incomes of residents. 

Although specific individuals and firms may have smaller 

federal tax liabilities as a result of those tax subsidies, the 

benefits of those subsidies may extend to all residents to 

whom federally subsidized state and local government 

goods and services are provided. Federal grants are typically allocated among state and local governments by 

formulas or other rules set out in legislation. The parricipanrs in those grant programs may be the most direct 

beneficiaries, bur others in their communities may receive 

spillover benefits. 

The federal tax subsidies that support state and local 

governments do not appear as spending in the federal 

budget, making the amounts of suppOrt less evident, 

though the staff of the Joint Committee on Taxation 

provides annual estimates of those and other tax expenditures separately. In contrast. grants to state and local 

governments are specified in appropriating Or authorizing 

legislation as either a dollar amount or a formula with a 

set of criteria for spending the funds. They appear in the 

federal budget as either discretionary or mandatory 

spending as determined by the specifics of each grant 

program. For discretionary programs. lawmakers make 

decisions abour appropriation amounts annually. 

Tax-Preferred Bonds The federal government offers preferential tax treatment 

for bonds issued by srate and local governments to 

finance governmental activities. Most tax-preferred bonds 

are used to finance schools, transportation infrastructure, 

utilities, and other capital~intensive projects. Although 

there are several ways in which the tax preference may be 

structured, in all ca."\es state and local governments face 

lower borrowing COstS than they would othenvise. 

Types ofTax-Preferred Bonds 

Borrowing by state and local governments benefits from 

several types of federal tax preferences. The most com~ 

monly used tax preference is the exclusion from federal 

income tax ofinterest paid on bonds issued to finance the 

activities of state and local governments. Such tax-exempt 

bonds~known as governmental bonds---enable state and 
103 


80344.075

local governmenrs to borrow more cheaply than they 

could otherwise. 

Another type of tax-exempt bond-qualified private 

activity bonds, or QPABs-is also issued by state and 

local governmenrs. In contrast to governmental bonds, 

QPABs reduce the costs to the private sector of financing 

some projects that provide public benefits. Although the 

issuance of QPABs can be advantageous to state and local 

finances-for example, by encouraging the private sector 

to undertake projects whose public benefits would otherwise either have gone untealized or required government 

investment to bring about-states and localities are not 

responsible for the interest and principal payments on 

such bonds. Consequently, QPABs are not the focus of 

this testimony (although the findings of some studies 

cited later in this section apply to them as well as to 

governmental bonds).' 

A final type of tax pteference for state and local borrowing takes the form of a tax credit to buyers of bonds 

issued ro finance governmental activities. Such bonds 

have not generally proved popular with investors, how~ 

ever, and recently have been reconfigured to allow the 

state and local governments issuing them to claim the tax 

credits in the form of direct payments from the Treasury. 

Particularly in 2009 and 2010, when the American 

Recovery and Reinvestment Act of 2009 (Public Law 

111-5) authorized Build America Bonds, for which 

those direct payments to issuers occurred, tax-credit 

bonds became a significant source of federal financial 

support for state and local borrowing. Greater use of such 

direct~pay tax-credit bonds and tax-credit bonds more 

generally offers rhe prospect of both increased efficiency 

in providing a federal financial subsidy to state and local 

governments and greater transparency in how that subsidy is delivered. 

Uses of Tax-Preferred Bonds 

With the exception of some types of tax-preferred bonds, 

states and localities can use tax-preferred debt to finance 

just about any government activity.7 According to the 

6. According to an estimate by the Federal Reserye, at the end of 

2011 the amount of outstanding qualified private activity 

bonds was approximately $752 billion. See Federal Reserve, 

Flow of Funds (statistical rdease, March 8, 2012), 

\\,,>\w.federalreserve.goYirdcasesh I f. For a comprehensive discus~ 

s10n of QPABs and other tax-preferred bonds, see Congressional 

Budget Office and Joint Committee on Taxation, Sldw"d,::ing 

JII/1~IJSlru{'1I1n' !I1/YSl1JU'lif fI'll/! l,ix-J~'('(ff'!wl Bonds. 

4 

data in the Flow of Funds reports published by the 

Federal Reserve, at the end of2011 there was approximately $3 trillion in outstanding liabilities of state and 

local governments, almost all of which (98 percent) was 

in the form oflong-term debt.' More [han half ofthat 

debt was issued by localities. According to the latest available data from the Bureau of the Census, long-term outstanding debt obligations of local governmems totaled 

$1.6 <rillion at the end of the second quarter of 2009, 

and the corresponding figure for states was $1 ttillion. 9 

Most of those long-term governmental bonds, as well as 

Build America Bonds during the several years in which 

they were authorized, were issued to finance capital 

spending (or investment). 

State and local governments vary in their amount of outstanding debt and the interest payments associated with 

it depending on the purpose for which the debt has been 

issued-reflecting the different focus of each level of 

government. For example, states have a larger amount of 

outstanding debt and interest payments from investments 

in highway infrastructure than do localities; states' annual 

capital spending for that purpose is several times larger 

than localities'. For investment in utilities infrastructure 

(such as water and gas facilities), the situation is reversed. 

State and local governments sometimes also use shortterm governmental bonds (with a maturity of Iess than 

13 months) to finance government operations~ particu~ 

larly during periods when revenues fall below expenses. 

But such bonds (known as revenue anticipation notes, or 

RAN s) account for only about 2 percent of the debr owed 

by those governments. 

To finance new capital spending by state and local governments, $216.4 billion in governmental and Build 

America Bonds was issued in 2009 (see Table 1 ).10 About 

60 percent of those proceeds financed investment in 

education, transportation, and utilities. The shares for 

7. However, issuing tax-preferred bonds to reali7£ arbitrage gains (by 

investing bond proceed~ to earn a higher, taxable rate of return) is 

prohibited. 

B. See Federal Reserve, Flow of Funds (statistical release, March 8, 

2012), w\\w.fcdcralr(·:-;cfvc.gov/rde,lsesfzl/. 

9. See Bureau of the Census, State and Local Government Finances 

by Level of Government and by State: 2008-09, \\,v\v.censu<;.gud 

gon!e~tilTlarc!. 

10. That total omits $3.7 billion of other tax-credit honds that were 

used primarily to finance scbool construction. 
104 


80344.076

Table 1. 

Governmental and Build America Bonds Issued, 2009 

(Billions of dollars) 

Total 

Purpose of Bond Amount Percent 

Education 91.9 28 

Transportation 50.1 15 

Utilities 44.9 14 

Environment 20.8 6 

Public Safety 7.4 

Health and Hospital 7.8 

Housing 1.0 

RANs and Other Bonds 2.0 1 

Unspecified Purposes 101.9 31 

Total 327.8 100 

Amount 

65.5 

38.4 

25.2 

15.1 

6.2 

5.1 

0.6 

1.7 

58.7 

216.4 

Bonds for New Capital Spending 

Total Amount, by Type 

Percent Governmental Build America 

30 

18 

12 

27 

100 

45.9 

20.1 

18.2 

10.9 

4.3 

2.6 

0.3 

1.6 

47.1 

151.1 

19.6 

18.3 

7.0 

4.1 

1.9 

2.5 

0.3 

0.1 

11.6 

65.3 

Source: Congressional Budget Office based on data from the Internal Revenue Service. 

Notes: Governmental bonds have a maturity of at least 13 months. 

Build America Bonds were authorized by the American Recovery and Reinvestment Act for issuance in 2009 and 2010. The Build 

America Bonds reported in this table were direct-pay tax-credit bonds. 

The table omits $3.7 billion of other tax credit bonds that were used primarily to finance school construction. 

Numbers may not add up totals because of rounding. 

note. 

those various purposes are very similar to the average 

amounts since 1991.11 

Build America Bonds accounted for 30 percent 

($65.3 billion) of the total amount of such bonds issued 

in 2009. All of those Build America Bonds rook the form 

of direct-pay tax-credit bonds. The amount almost doubled in 2010 (to abour $115 billion). Their popularity 

stemmed from several factors. Because the interest rate 

subsidy of 35 percent that the federal government provided was considerably larger than the reduction in 

financing cOSts that stare and local governments could 

obtain by issuing tradirional tax-preferred bonds, those 

governments were eager to issue Build America Bonds. In 

addition, because the interest payment is fully raxable, 

pension funds and orher investors with low or no income 

tax liability had an incenrive to purchase them. 

11, Note that over 30 percent of the proceeds from governmental 

bonds issued in 2009 were reported by their issuers as being for 

"other purposes," which means either that the specific purpose(s) 

listed on the reporting form did not apply or that the issuer did 

not allocate the bonds' proceeds among separate purposes. That 

share is also very close to its average from 1991 to 2009. 

5 

Impact of Tax-Preferred Bonds on State and Local 

Budgets 

Federal tax exemptions for interest income from governmental bonds enable issuers of such debt to sell bonds 

that pay lower rates of interest than do taxable bonds 

with the same maturity, risk, and orher characteristics. 

The lower the rate of interest that stare and local governments must pay on rheir debt, the more funds they have 

available to provide government operarions and the 

greater the amount of debt they can service and, therefore, the greater the amount of investment they can 

make.12 

12. lbe interest rate subsidy &om Build.America Bond .. and other 

tax-credit bonds ha. .. a similar impact on state and local budgets. 

Debt-service payments are made from current revenues and in 

many states are subject to requirements for a balanced budget, 

which constrain the funds available for government operations. In 

contrast, expenditures for capital investments.--o&en from the 

proceeds from issuing tax-exempt bonds-are reponed in a capital 

budget and are not subject to those requirements. for a detailed 

discussion of capital budgeting, see Congressional Budget Office, 

Clpiu! Btldg('tiJlg (May 2008). 
105 


80344.077

The interest rate those governments pay is the rate that 

matches the supply of tax-exempt bonds with the 

demand for them, which is determined by the last buyer 

needed to equalize supply with demand and "clear" the 

market. That interest rate is therefore the yield that all 

issuers of comparable tax-exempt debt must pay. Because 

purchasers of tax-exempt bonds demand a return that is 

ar least as high as the after-tax yield they could obtain 

ITom comparable taxable bonds, the amount by which 

the federal tax preference lowers the rate of interest on 

tax-exempt bonds-and thus the amount of savings in 

financing costs enjoyed by state and local governmentslargely depends on the income tax rate of the marketdearing buyer of tax-exempt bonds. 

Data on tax-exempt and taxable bond transactions allow 

a rough estimate of the marginal tax rate for the marketdearing buyer of tax-exempt bonds and, hence, the 

amount that states and localities saVe in financing costs 

by issuing such bonds. In 2009, the average yield on 

(taxable) high-grade corporate bonds was 5.3 percent, 

and the average yield on tax-exempt municipal bonds of 

similar creditworthiness was 4.6 percent-a difference of 

0.7 percentage points, or approximately 13 percent of the 

taxable return. That 13 percent also represents the marginal tax rate at which an investor would be indifferent 

between purchasing a taxable bond yielding 5.3 percent 

and a tax-exempt bond yielding 4.6 percent. I' 

The implicit tax rate for market-dearing buyers of taxexempt bonds from 2008 to 2010 ranged from 13 percent to 16 percent, considerably lower than the average of 

21 percem during the prior two decades. 14 Investors' 

appetite for risk, the desired time horizon of their invest~ 

13. The precision of the estimated tax rate depends heavily on the 

comparability of the tax-exempt and taxable: bonds. In particular, 

depending upon how the "comparable" taxable bond is selected. 

different levels of COSt savings can result. For example, if the taxexempt bond is compared with aU,S. 1reasury security, the 

estimated marginal income tax rate For the markef~dearing bond 

buyer will be smaller than if if is compared with a corporate bond 

(as in the example in the text). 

Additionally. because the data on hoth tax-exempt and taxable 

interest rates used in this analysis are averages for bonds in each 

category thac may still vary somewhat in terms of their risk, their 

time to maturity, the nature of their interest payments (fixed ver~ 

sus variahle), and other features, the marginal tax rate implied for 

the market~dearing buyer of tax-exempt bonds may not be equal 

to the rate specified by the tax code, In 2009, for example, the 

marginal personal income tax rate for such buyers was either 

10 percent or 15 percent. 

6 

ments. and other features of the bonds can also influence 

{he demand for taxable and tax-exempt debt. Turbulence 

in financial markets during the 2008-20 I 0 period led 

investors to favor less risky deb[-such as U.S. Treasury 

securities--over tax~exempt debt, thereby raising the (relative) yield on state and local bonds. For example, the 

yields on U,S. Treasury securities with 10~ and 30-year 

maturities in 2009 were 3.3 percent and 4.1 percenr, 

respectively, which are considerably lower than the contemporaneous yield of 4.6 percent on tax-exempt 

bonds-in spite of the fact that U.S. Treasury securities 

are subject to federal income [ax.15 

It is possible to use the implied savings in interest rare 

costs from a comparison of tax-exempt and taxable bond 

yields to roughly determine rhe impact of the tax exemption of governmental bonds on state and local budgets. 

For example, in 2007-the year immediately preceding 

the turmoil in financial markets and the exceptionally 

low implied reduction in financing costs through issuing 

tax~exempt bonds-state and local governments issued 

$200 billion in governmental bonds for new capital 

spending. The comparison of the yields on high-grade 

corporate bonds and tax-exempt bonds of comparable 

creditworthiness (5.6 percent and 4.4 percent, respectively) suggests that the tax exclusion for bond interest 

income shaved 1.2 percentage points off of the interest 

rate those governments would have paid if they had 

issued taxable debt. Thus, the tax exclusion provided 

States and localities a first~year interest subsidy of over 

$2 billion on the debr they issued in 2007 to fund their 

activities. 16 

14. See Joint Committee on Taxation, Pment Low and IssueJ Related 

tolnjrastntcture Finance, JCX-83-0B (October 24, 2008), p. 28, 

\\"\\w,hollS('.g~wjlnj\-8J-08.pdf). The implied tax rates during 

that time ranged from 17 percent to 27 percent. 

15. The bond yields cited in this testimony come from Council 

of Economic Advisers, Economic Report of the President 

(February 2012), Appendix B, Table B-73, p. 404, 

,""ww.whitl.'hou'i{".g.tlV!adI11tnisu.ltion!cop/ceal 

('con ornic·· rq'on ~(lf .. t bc-Pr (:,1 d en t. 

16. A similar calculation for 2009 suggeStS that the reduction in firstyear financing costs for state and local governments amounted to 

roughly $1 billion. However, the tax exclusion for interest income 

from governmental bonds was not £he only type of fc...'-cieral financ~ 

ing subsidy provided to those gov1;rnments in that year. As 

described in more detail elsewhere in the testimony, issuers of 

Build America Bonds also received direct payments from the federal government tbat defrayed a substantial portion of the interest 

payable on that deht. 
106 


80344.078

Increasing the Efficiency of Federal Tax Preferences 

for State and Local Borrowing 

From the federal government's perspective, tax-exempt 

bonds are an inefficient means of providing a subsidy 

for debt financing. The amount of rhe tax preference provided is larger than the financing subsidy conveyed to 

state and local governments. As the issuers of tax-exempt 

debt expand the pool of bond purchasers until it is sufficiently large to exhaust the amount of debt they are 

offering, they draw in buyers from ever lower income 

tax brackets by raising the interest Tate enough so that the 

yield on tax-exempt bonds is competitive with the aftertax rare of return on taxable investments available to 

those buyers. As a result, the market-clearing buyer of 

tax-exempt bonds will typically demand a tax-exempt 

yield that exceeds what an individual in a higher income 

tax bracket requires to purchase those bonds. Because 

there ate multiple tax brackets and the market-clearing 

purchaser of municipal bonds will probably be in a lower 

bracket than many other bondholders, the loss of federal 

receipts is greater than the reduction in interest costs for 

the issuers of the tax~exempr bonds. 

Several analysts suggest that about 80 percent of the tax 

expenditures from tax-exempt bonds translates into lower 

borrowing costs for states and localities~ with the remaining 20 percent taking the form of a federal transfer to 

bondholders in higher tax brackets. 17 Consequently, a 

direct appropriation of funds to state and local governments would subsidize more spending per dollar of 

impact all the federal budget. 

Tax expenditures for tax-exempt bonds are estimated as 

the product of forgone taxable income and the marginal 

income tax rate of the average holder of tax-exempt 

bonds-where forgone taxable income is estimated on 

] 7. See Dennis Zimmerman, The PrilJ4tf Use of7izx~Exempt Bonds: 

OmtTolling Public Subsidy of Private Activity (Washington, D.C.: 

Urban Institute Press, 1991), pp. 103-104; and James Potetba 

and Arturo Ramirez Verdugo, "Portfolio Substitution and the 

Revenue Cost of the Fedc[".allncome Tax Exemption for State and 

Local Government Bonds, National Tax Journal, vol. 64, no. 2 

(June 2011), pp. 591-613. The latter authors estimate that in 

2003, the marginal income tax: rate for the average investor in 

tax~exempt bonds was 26.8 percent, and the tax rate for the 

market-dearing buyer of municipal bonds was between 13 percent 

and 22 percent. Their analysis is restricted to households and does 

not include corporations, which account for between one-quaner 

and one-third of the total faX expenditures from tax-exempt bonds 

estimated for the 2008-2012 period. 

7 

the basis of the outstanding srock of tax-exempt debt 

and an estimate of the rerurn that would be realized if 

those bond holdings were instead in the form of taxable 

investments (usually assumed to be taxable bonds of 

I;::omparable risk and maturity), For 2011, according to 

estimates by the staff of the Joint Committee on Taxation, those tax expenditures by the federal government 

totaled $30.4 billion." If20 percent of rhe federal reve· 

nue loss from taX-exempt bonds accrued to bondholders 

in higher tax brackets without lowering borrowing costs. 

then the transfer to them was approximately $6 billion. 

Using tax~exempt bonds to finance government activities 

is regressive, because the amount by which the benefits 

captured by investors in governmental bonds exceeds the 

issuers' cost savings increases with taxpayers' marginal tax 

rates. One study estimates that eliminating the tax 

exemption on srate and local debt (including qualiHed 

private activiry bonds) would teduce after-tax income 

primarily for taxpayers in the highest income quintileand particularly for individuals in the top 1 percenr of the 

income distribution. 19 Another study estimates that 

53 percenr of the outstanding stock of tax-exempt bonds 

in 2003 was held by households with marginal tax rates 

in excess of 30 percent. with the holdings of the remaining tax-exempt bonds distributed throughout most of the 

lower income tax brackets.20 

Tax-Credit Bonds. Starting in the late 1990s, lawmakers 

turned to tax-credit bonds as a way to address the ineffi~ 

dency of tax-exempt financing. Early forms of tax-credit 

bonds allowed bondholders to receive a credit against 

their federal income tax liability instead of the cash interest typically paid on the bonds. The amount of the tax 

credit equals the credit rate, which is set by the Secretary 

18. Joint Committee on Taxation, Estimates ofFakral Tax 

F .. xpenditum, 2011-2015. 

19. The decrease in after-tax income that results from eliminating the 

tax exemption is estimated to be at or ncar UfO for all but the top 

income quintile; afreHax: income falls by 0.24 percent for that 

quintile and 0.50 percent for the top 1 percent. See Leonard 

Burman, Eric Toder, and Christopher Geissler, "How Big Are 

Total Individual Income Tax Expenditures, and \X1ho Benefits 

from Them?" Discussion Paper No. 31 (Washington, D.C.: 

Urban Institute, December 2008), p. 11, www.urharl.org! 

puhlicJtion:-i! 00 12-14.htmL 

20. See James Poterba and .Arturo Ramirez Verdugo, "Portfolio 

Substitution and the Revenue Cost of the Federal Income Tax 

Exemption for State and Local Government Bonds," 
107 


80344.079

of the Treasury) multiplied by the face amount of the 

holder's bond, Because bondholders pay taxes on the 

amount of credit they claim, tax-credit bonds do not, in 

contrast to taX-exempt debt, provide a revenue transfer to 

investors in high marginal tax brackets. As a result, the 

tax preferences for tax-credit bonds reduce state and local 

borrowing costs dollar for dollar, Tax-credit bonds also 

allow the amount of federal subsidy to vary on the basis 

of the desirability, from the federal government's perspec~ 

tive, of the different types of projects being financed. 

Thus, tax-credit bonds offer the promise of increasing the 

efficiency with which federal resources are allocated to 

support infrastructure and other investments) as well as 

altering the distribution of those resources. 

The early tax-credit bond programs were nor particularly 

well received by financial markets for a number of rea~ 

sons, including the limited size and temporary nature of 

the programs and the absence of rules for separating tax 

credits from the associated bonds and reselling them 

(which could have made such bonds advantageous to 

investors whose income tax liability did not allow them to 

immediately claim the full value of the credit), 

Build America Bonds. The American Recovery and 

Reinvestment Acr authorized Build America Bonds, a 

new type of tax-credit bond that was sold only in 2009 

and 2010, State and local governments were authorized 

to issue Build America Bonds either as traditional tax~ 

credit bonds or, if certain conditions were met, as directpay tax-credit bonds (known as qualified Build America 

Bonds), In contrast to earlier tax-credit bonds, Build 

America Bonds had an interest rate (or coupon) that 

was set by the issuers rathet than by the Secretary of the 

Treasury. In the direct~pay scenario, a credit equal to 

35 percent of each interest payment could be claimed by 

an issuer in lieu of a tax credit going to the bondholder. 

Because state and local governments issuing direct-pay 

Build America Bonds are not liable for taxes on that 

credit, they pay less interest rhan they would for Build 

America Bonds that provide the creditS to bondholders, 

As a result, the direct~pay version of the bonds proved to 

be the one (hat issuers used, and the amount issued was 

substantial, Sales of those bonds totaled roughly 

$181 billion during rhe 2009-2010 period, 

Direct~pay tax-credit bonds offer several advantages over 

other rypes of tax-preferred bonds. Making a payment 

directly to state and local governments to compensate 

them for the interest they pay on direct-pay tax-credit 

bonds is a more cost-effective way to provide a federal 

subsidy than offering a tax exemption on interest income. 

CBO has estimated that replacing the current tax exclusion on interest income from governmental bonds (and 

qualified private activity bonds) with direct-pay bonds 

at a 15 percent subsidy rate-roughly equal to the 

implicit subsidy rate discussed above for governmental 

bonds issued in 2009-would reduce budget deficits by 

$305 billion from 2012 to 2016 and by $142,7 billion 

from 2012 to 2021,21 

Making subsidy paymenrs to the issuers of bonds could 

improve federal budgeting pracrice, By paying stare and 

local bond issuers a direct subsidy, the federal government 

would know the exact amount of financing subsidy ir was 

providing in a given year. That information would allow 

for several types of evaluations. For example, policymakers could readily compare the cost of that subsidy with 

the cost of other types of assistance ro state and local gov~ 

ernmenrs for similar purposes. In addition, policymakers 

could examine the distribution of the federal financing 

subsidy among states. The federal tax exemption redistributes funds to constituents in the states and localities 

that make especially heavy use of it, but the amounts 

by which individual states and localities benefit are not 

evident in the federal budget. 

Making paymenrs directly to bond issuers could also 

increase the federal government's control over the amount 

of its financial assistance. Under currene practice, the fed~ 

era! government's control over the amounr of the subsidy 

provided through the tax exemption is limited. The 

amount is not decided through the annual appropriation 

process-as is, for example, spending on infrastructure 

and other discretionary programs. Indeed, because the 

savings in interest costs enjoyed by state and local borrowers by issuing tax-exempt rather than taxable bonds 

depends largely upon the marginal income tax rate of 

the market-clearing bond buyer, the amounr of subsidy 

delivered by that tax preference is mainly determined 

indirectly by the federal tax code (along with other factors 

that influence the demand for tax-exempt bonds). 

21. See Congressional Budget Office, "'"'"WOW L'H' ;N",en: 

and Revenue OptimlJ (March 2011), p. 
108 


80344080.eps

Figure 1. 

Percentage of Taxpayers Who Itemized 

and Who Claimed the Taxes-Paid 

Deduction, 1985 to 2009 

(Percent) 

40 kI, 

38 

36 

34 

32 

30 

28 

26 

oLI ~~~~~~~~~~~~ 

1985 1988 1991 1994 1997 2000 2003 2006 2009 

Source: Congressional Budget Office based on data from the 

Internal Revenue Service. 

Note: The taxes-paid deduction allows taxpayers to deduct from 

their adjusted gross Income some of the taxes they pay to 

state and loca! governments, including income, real estate, 

personal property, and other taxes. From 2004 to 2009, 

taxpayers had the option to deduct general sales taxes in 

lieu of income taxes. 

Deductibility of State and Local Taxes 

Taxpayers who itemize deductions on their federal 

income tax returns may, with some limitations, deduct 

payments for certain state and local taxes from their 

reported income. In particular, under the rules for determining tax liability for 2011, taxpayers who itemized 

their deductions could deduct from their adjusted gross 

income (AGl) State and local real estate taxes, personal 

property taxes, and either income taxes or general sales 

taxes. About one-third of tax filers opted to itemize 

deductions on their federal income tax returns in 2009 

(the most recent year for which complete data are available), and nearly all of them claimed a deduction for state 

and local taxes paid (see Figure 1). State and local income 

taxes and real estate taxes made up rhe majoriry of the 

state and local tax deductions claimed, constituting 

55 percent and 39 percent of the total, respectively. 

Deductions for sales taxes were about 4 percent of the 

9 

total, and personal property taxes were just over 1 percent 

(see Figure 2). 

Over the next few years, scheduled changes to tax provisions and the interaction of the regular income tax and 

the alternative minimum tax will change the number of 

taxpayers who claim the deduction and the associated loss 

of federal revenues. (The AlvfT is a parallel income tax 

system wirh fewer exemptions, deductions, and tax rates 

than the regular income tax. Taxpayers potentially subject 

to the AlvfT must calculate their taxes under both the 

regular income tax and the AMT and pay the higher 

amount.) 

Under current law, rhe amount of the loss of federal 

revenues is projected to diminish in 2012 because more 

taxpayers will pay the AMT, which does not allow people 

to claim the taxes-paid deduction. The number of taxpayers subject to the AMT will rise under current law because 

Figure 2. 

Types of Taxes Claimed Under the 

Taxes-Paid Deduction, 1993 to 2009 

(Percentage of all taxes deducted) 

70 

50 

40 Real Estate 

30 

20 

Income 

1993 1995 1997 1999 2001 2003 2005 2007 2009 

Source: Congressional Budget Office based on data from the 

Internal Revenue Service. 

Note: The taxes-paid deduction allows taxpayers to deduct from 

their adjusted gross income some of the taxes they pay to 

state and local governments, including income, real estate, 

personal property, and other taxes. From 2004 to 2009, 

taxpayers had the option to deduct general sales taxes in 

lieu of income taxes. 

a. "Other" in 2009 includes the sales tax deduction for purchases 

of new vehicles. 
109 


80344.081

temporarily higher AMT exemption amounts expired at 

the end of2011. Without changes in the tax code-such 

as additional increases in the AMT exemption level like 

those enacted in recent years-more and more taxpayers 

wm pay the AMT over rime as their income grows. 

The scheduled expiration after 2012 of tax provisions 

originally enacted in 2001 and 2003 will raise regular 

income tax rates for many taxpayers, boosting the value 

of the taxes-paid deduction for those who claim it and 

increasing the associated revenue loss for the federal government. With the higher tax rates for the regular income 

tax, many taxpayers will move from being subject to the 

AMT back to being subject only to the regular income 

tax-under which they are permitted to claim the deduction for state and local taxes. Those shifts will further 

increase the number of taxpayers claiming the taxes-paid 

deduction and the associated revenue loss. 

Impact on State and Local Taxes and Spending 

The taxes-paid deduction, which has been in place in 

some form since the inception of the modern federal 

income tax, benefits the taxpayers who claim it and provides an indirect federal subsidy to the state and local 

governments that levy deductible taxes-because it 

decreases the net cost to taxpayers of paying those taxes. 

By lowering the net cost of certain state and local taxes, 

the taxes-paid deduction encourages state and local governments to impose higher taxes and to provide more 

setvices than they otherwise would. 

Two competing factors are the basis of the principal arguments in favor of and opposed to the deduction: on the 

one hand. the federal government's interest in assisting 

state and local governments in providing public services 

that have benefiTS beyond their borders and, on the other 

hand, the possibility that such assistance may generate an 

inefficiently large volume of services that are strictly local 

in nature. 

If deductible taxes are simply charges that cover the value 

of services desired by taxpayers who have chosen to live in 

a particular state or local community, the tationale for 

subsidizing those services at the federal level is weak 

(unless localities face significant differences in the cost of 

providing services). For example, to better suit their pteferences for street lights, parks, and even public safety, citizens may SOrt themselves into different communities that 

provide different amounts of those services. It is not evident why the federal government should subsidize those 

10 

citizens who prefer to consume more of such services. In 

fact, the original legislation enacting the federal income 

tax explicitly labeled as nondeductible local taxes paid in 

return for local benefits. 

Some deductible taxes, though, afe clearly not charges for 

services that provide only local benefits but instead 

finance services, such as public assistance and education, 

that provide benefits that "spill over" to people in other 

states and localities. Such spillovers provide a rationale for 

federal support. Another rarionale for federal support is 

that state income taxes are generally considered to have a 

redistributive function, although the extent to which they 

redistribute income varies widely and is small relative to 

the redistributive capacity of the federal income tax. 

Three other points merit consideration. First, the taxespaid deduction may simply encourage state and local 

governments to use deductible taxes in place of nondeductible taxes (levies such as selective-rather than 

general-sales taxes) without increasing spending for 

the desired acrivities. If so, the subsidy does not effectively encourage those governments to provide services 

that generate national benefits. A number of studies show 

that deductibility affects the mix of taxes that states and 

localities choose for financing their activities, but there is 

relatively little evidence that deductibility increases 

spending for services?2 

Second, a common argument for allowing taxpayers to 

deduct state and local taxes is that such a deduction 

prevents double taxation of income. The contention is 

22. Martin S. Feldstein and GUben E. Metcalf ("The Effect of Federal 

Tax Deductibility on State and Local Taxes and Spending," Journ.al of Political Economy, voL 95, no. 4 [1987], pp. 710-736) find 

that among a cross-section of states, deductibility raises the share 

of rt.'Venues that subsidized taxes make up bur has no consistent 

effect on spending. Douglas Holtt-Eakin and Harvey S. Rosen 

("Tax Deductibility and Municipal Budget Structure," in Rosen, 

cd .• The Fiscal Behavior of State and Local Governments: Selected 

Papers o/Hartley S. Rosen [Lyme, N.H., Elgar, 1997], pp. 43-72) 

document a similar effect, smaller but more precL~dy measured. 

Gilbert E. Metcalf ("Tax Exporting, Federal Deductibility, and 

State Tax Structure," journal afPolicy Analysi" and l\1anagrment, 

vol. 12, no. I [1993], pp. 109~126), using data On the states from 

1980 to 1988, finds that the income tax share of taxes is sensitive 

to the subsidy from deductibility but the sales tax share is not. 

Holtz.-Eakin and Rosen ("Federal Deductibility and Local Property Tax Rates," journal ofUrhan. Economics, vol. 27, no. 3 [1990], 

pp. 269-284), using a sample of municipal governments from 

1976 to 1980, find that deductibility increa~es local property tax 
110 


80344.082

that resources claimed as taxes by state and local governments are not truly available to raxpayers and thus should 

not be considered part of the basis for federal taxation. In 

fact, that argument involves some of the same issues just 

discussed. If state and local taxes are benefit charges and 

reflect the amount of state and local public services that 

taxpayers desire and receive from their governments, then 

such taxes are appropriate to indude in the basis for a levy 

that rests on the concept of people's ability to pay. Alternatively, if state and local taxes finance services whose 

benefits spill over to other localities, then the federal 

subsidy may be justified regardless of the issue of double 

taxation. 

Third, another argument for the taxes~paid deduction 

involves its effect on marginal tax rates (that is, the tax 

rate on the last dollar of income). By reducing the com~ 

bined federal, state, and local marginal tax rate on 

income, the deduction lessens the deterrent to earning 

income that is inherent in high faX rates. But that reduction in the distortion to choices by individuals (choices 

between work and leisure) is achieved by an increase in 

the distortion to choices by state and local governments 

(choices between deductible and nondeductible taxes and 

choices about the kinds and amounts of services the gov~ 

ecnmenrs provide). The overall effects and the extent to 

which choices are distorted by the various incentives 

depend on the behavior of individuals and governments. 

Distribution of Benefits by State 

How benefits from the taxes-paid deduction are distributed among states and localities depends on the structure 

of governments' tax systems and the characteristics of the 

taxpayers who provide revenues to those governments. 

For example, a state or local government that finances irs 

spending by using a larger share of taxes that are deductible under the federal individual income tax receives a 

larger subsidy through the deductibility provision than 

does an otherwise identical government that finances irs 

spending through a smaller share of deductible taxes. In 

addition, a state or local government whose taxpayers are 

more likely to itemize deductions also gains a greater ben~ 

efit. all else being equal, than does a government whose 

taxpayers tend to claim the standard deduction. 

How much of state and local governments~ revenues 

drawn from their own sources are subsidized through the 

taxes-paid deducrion? A starting point for estimating that 

subsidy is assessing the share of all revenues collected by 

state and local governments from taxes that the federal 

11 

tax code labels as deductible. That measure exceeds the 

amount of the subsidy in two respects: Taxpayers do not 

claim all legally deductible taxes on their returns (because 

not all taxpayers itemize and because the deduction is 

limited for some taxpayers), and the subsidy does not 

equal the total amount deducted but is the resulting 

reduction in federal tax revenues. 

In 2004, taxes made up about 50 percent of states' "ownsource" revenues?;~ The potentially deductible portion 

of those taxes was about 17 percent of such revenues; 

shares ranged from a low neal' zero in Alaska to highs near 

40 percent in Washington and Tennessee. Revenues from 

direct federal transfers--constituting just under 24 per~ 

cent of revenues from all sources-made up a larger share 

of states' total revenues than did potentially deductible 

taxes. 

State governments tend to raise most of their tax 

revenues from income and sales taxes, but local governments depend primarily on property taxes for revenues. 

In 2004, about 38 percent oflocaliries' own-source 

revenues came from property taxes and another 2 percent 

came from income taxes, both of which are potentially 

deductible. Although the potentially deductible share of 

localities' own-source revenues therefore averaged 40 percent, shares varied widely across the country-ranging 

from about 15 percent for localities in Alabama and 

Arkansas to about 75 percent for those in New Hampshire and New Jersey. 

Using the share of own-source revenues raised by potentially deductible taxes to assess the benefi[s [hat state and 

local governments receive from the deductibility provision does not account for differences in the percentage of 

residents' total income that different governments collect 

as own-source revenues. For example, a state government 

that collects in revenues a larger share of its residents' 

total income receives a larger federal subsidy than does a 

state government that has the same share of its revenues 

derived from potentially deductible taxes but rhat has a 

lower overall revenue burden. However, potentially 

deductible taxes as a share of state and local governments' 

own-source revenues and as a share of the total income of 

state residents are fairly well correlated. That correlation 

suggests that most of the variation among states in the 

subsidy attributable to the deductibility provision results 

23. See Congressional Budget Office, JIll' f)tductibilit)· r{Stdtc dnd 

Lom/ MX{,5. 
111 


80344.083

from differences in the mix of taxes that the governments 

choose rather than from differences in their overall tax 

burdens. 

Considering the states on a regional basis reveals a few 

general patterns about the distribution of potentially 

deductible taxes. The share of own-source revenues represented by potentially deductible taxes and the share of 

taxpayers' total income represented by such raxes tends to 

he larger in the Northeastern states. States in the South 

and Southwest-with the exception of Florida and Texas 

in the years when the sales tax was a potentially deductible tax-tend to have smaller shares of potentially 

deductible taxes by either measure. 

The amount of potentially deductible taxes that are ultimately deducted on individuals' tax returns depends on 

whether those taxpayers itemize their deductions or take 

the standard deduction. Taxpayers with higher income 

tend to have both more itemized. deductions apart from 

that for state and local taxes and higher state and local 

taxes; they are therefore are more likely to have itemized 

deductions that exceed the standard deduction (which 

does not vary by income or state) and to choose to itemize. Thus, states with taxpayers whose average income is 

comparatively high will have a larger share of taxpayers 

who itemize deductions. The states in which taxpayers 

claim rhe largest shares of the deduction are states with 

large populations and, in particular, large populations 

of high-income itemizing taxpayers. The percentage of 

taxpayers who itemize is highest in New England, the 

Middle and South Atlantic regions, and the Mountain 

and Pacific regions (see Table 2). Taxpayers in the Middle 

Atlantic and Pacific regions claim the largest percentages 

of total deductions. 

For taxpayers, one indicator of the benefit provided by 

the taxes-paid deduction is how much the deduction 

reduces their income subject to taxation-specifically, the 

percentage deduction from their AGT. CBO estimated 

such benefits by state for 2009 by dividing the total 

deductions taken by residents of a state by the total AGI 

in that state. CBO further divided those figures by the 

average of the share of the AGI deducted in all states; residents of states that have relative shares above 1 have a 

larger percentage deduction from AGI than the national 

average, and residents of states that have relative shates 

below 1 have a smaller percentage deduction rhan the 

national average. According to that measure, taxpayers in 

the Middle Atlantic region, southern New England, and 

12 

the Far West benefit most from the deduction, a geographic distribution that corresponds more closely to the 

distribution of high-income taxpayers among the states 

rhan to the distribution of potentially deductible taxes 

among the states. 

The interaction between taxpayers' incomes and state and 

local tax burdens also influences how the benefits from 

the taxes-paid deduction are distribured among the states. 

Although taxpayers in states that have a large percentage 

deduction from AGI tend to claim larger deductions at 

all income levels than do taxpayers in states that have a 

small percentage deduction, the difference in claimed 

deductions increases as income rises. That 1s, the difference between the claimed deductions of taxpayers in 

large-share states and small-share states is greatest for 

the highest-income taxpayers. That fmding implies that 

the benefits from the deductibility provision depend on 

the progressiviry of state and local taxes as well as their 

average level. 

Distribution of Benefits by Income Groups 

High-income households are more likely than lowor moderate-income households to benefit from the 

taxes-paid deduction. The probability that taxpayers will 

itemize, the amount of state and local taxes paid, and the 

reduction in federal income taxes for each dollar of state 

and local taxes deducted all increase with income. 

Individuals who choose to itemize and deduct the state 

and local taxes they have paid decrease their federal tax 

liability by the amount of their deductible state and local 

taxes multiplied by their marginal tax rate under the individual income tax. Because the likelihood of itemizing 

and the marginal tax rate increase with income, taxpayers 

who benefit from the taxes-paid deduction in its current 

form are concentrated in the upper part of the income 

distribution. 

Slightly less than one-third of all tax filers deducted state 

and local taxes in 2009, and the percentage claiming the 

deduction varied widely among income groups. Approximately 25 percent of tax filers with income less than 

$100,000 took the deduction, compared with about 

87 percent of tax filers with income of$100,000 or more. 

The latter group, who made up roughly 12 percent of filers, accounted for 64 percent of the value of all state and 

local tax deductions claimed, with an average of about 

$18,300 in deductible [axes for each rerum on which the 

deduction was claimed. 
112 


80344.084

The tax saving from each dollar of the taxes-paid deduction increases with income because of the progressivity of 

federal income tax rates. In general, under the individual 

income tax, the higher a taxpayer's income is, rhe higher 

will be his or her marginal tax rate and therefore the 

larger the reduction in federal tax liability gained from 

deducting an additional dollar of state Of local tax. 

According to CBO's estimates, in 2009 approximately 

73 percent of the tax benefit of the taxes-paid deduction 

accrued to taxpayers with income above $100,000. 

Among those with income above $100,000, taxpayers 

with income between $100,000 and $200,000 received 

just under 35 percent of the total benefit, and taxpayers 

with income of more than $1 million received slightly 

more than 20 percent of the benefit. 

Policy Options 

When policymakers discussed major tax reform in the 

1980s, one of the many proposals they considered was 

the elimination of the deduction for state and local raxes 

paid. The Tax Reform Act of 1986, the outcome of those 

deliberations, repealed only the deduction for general 

sales taxes. 

The Omnibus Budget Reconciliation Act of 1990 

enacted a general limit on itemized deductions under 

which certain itemized deductions-including that for 

state and local taxes-were reduced by 3 percent of the 

amount by which a taxpayer's adjusted gross income 

exceeded an indexed rhreshold~ with a maximum reducrion of 80 percent of deductible expenses. However, that 

limit has since been rolled back. The Economic Growth 

and Tax Relief Reconciliation Act of 200 I gradually 

phased out the limit and completely eliminated it by 

2010, and the Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of2010 extended 

the elimination of the general limit on itemized deductions through 2012. Without further changes in law, the 

general limit will again apply beginning in 2013. 

In addition, the American Jobs Creation Act, enacted in 

2004, reinstated the sales tax deduction that the Tax 

Reform Act of 1986 had eliminated. The 2004 law 

allowed taxpayers to deduct either income taxes or sales 

taxes-but not both-in 2004 and 2005. (Before the 

change enacted in 1986, taxpayers could deduct both 

income taxes and general sales taxes.) Subsequent legislation extended thar provision to 2006 and 2007, and then 

through 2009, and then again through 2011. 

13 

In its 2011 report on options for reducing the deficit, 

CBO considered two options for changing the taxes-paid 

deduction: eliminating the deduction and limiting the 

deduction to 2 percenr of adjusred gross income.14 

The options would have the following estimared effects 

relative to rhe outcomes under current law: 

• Eliminating the deduction would increase federal revenues by an estimated $862 billion from 2012 through 

2021, and limiting the deduction to 2 percent of AGI 

would increase revenues by an estimated $629 billion 

over the same period. 25 Both options would have the 

greatest impact on higher-income taxpayers, particularly in 2013. In 2012, eliminating the taxes-paid 

deduction would increase taxes for 48 percent of tax 

filers with income of$IOO,OOO or more (approximately 12 percent of all tax filers in 2012), but in 

2013 it would have that effect for 76 percent of those 

tax filers (under an assumption that the tax rate reductions originally enacted in 2001 and 2003 expire as 

scheduled). By comparison, limiting the deduction to 

2 percent of AGI would taise taxes for 44 percent of 

taxpayers with income between $50,000 and 

$100,000 in 2012 and for 49 percent of such taxpayers in 2013. 

• Eliminating the taxes-paid deduction would produce 

the largest decrease in average income measured after 

individual income taxes (after-tax income) for taxpayers with income of $500,000 or more. For example, 

under that option, average after-tax income in 2012 

would fall by 1.3 percent for taxpayers whose income 

was between $500,000 and $1 million and by 

1.7 percent for taxpayers whose income was $1 million or more. After-tax income for those groups would 

fall even more in 2013, after the tax rate reductions 

originally enacted in 200 I and 2003 expired, by 

2.9 percent and 2.7 percent, respectively. 

24. See Congressional Budget Office, Ner/uollt, lhl' 

(lIId Rt"l'l!nlll' Opti(liIJ, pp. 148-149. The CBO report 

ibili!)! (lSWC dml Lam! TrIXCJ considers additional options, including ;eplacing the deduction with a 15 percent credit. The 2005 

President's Advisory Panel on Federal Tax RefOrm recommended 

the complete elimination of the deduction. 

25. futimates of the options' effects on federal revenues were provided 

by the staff of the Joint Committee on Taxation. 
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80344.085

Table 2. 

Selected Measures of State and Local Tax Deductibility, 2009 

By State 

Alabama 

Alaska 

Arizona 

Arkansas 

california 

Colorado 

Connecticut 

Delaware 

District of 

Percentage of 

Taxpayers Who 

Itemized 

29.4 

25.8 

35.6 

24.6 

37.2 

39,2 

44.0 

363 

Percentage of 

Total Deductions 

Claimed 

LO 

0.2 

L9 

0.5 

16.6 

1.8 

2.0 

0.3 

Average 

Taxes-Paid Deduction 

per Return Claiming 

the Deduction 

(Dollars) 

5,117 

4,332 

6,282 

7,240 

12,486 

6,840 

14,863 

7,170 

Percentage of 

AGI Dedu cted 

12 

L9 

4.4 

3.9 

7.6 

4.5 

8.2 

4.6 

Ratio of 

Deduction Share to 

AGIShare 

0.84 

0.60 

LlO 

0]8 

1.30 

LOS 

Ll2 

0.96 

Columbia 40.8 03 12,683 6.9 L09 

Florida 28.9 5.2 5,934 33 0.89 

Georgia 37.1 3.0 7,333 5.6 Ll2 

Hawaii 32.5 0.5 7,116 4.5 Ll2 

Idaho 33.2 0.4 6,772 4.9 LOS 

Illinois 34.4 4.1 9,269 5.4 0.92 

Indiana 27.0 1.3 6,810 3.9 0]4 

Iowa 30.6 0] 7,779 4] 0.80 

Kansas 30,2 0] 8,840 5.1 0.85 

Kentucky 28.8 0.9 7,914 5.0 0.84 

Louisiana 24.2 0.9 6,347 3.1 0]5 

Maine 30.6 03 9,307 6.1 0.90 

Maryland 49.1 33 11,097 8.1 1.39 

Massachusetts 40.1 2.9 11,720 6.8 L03 

Michigan 32,2 2.5 7,876 53 0.91 

Minnesota 39.6 2.0 9,286 6.4 LOS 

Mississippi 24.0 0.5 5,569 3.2 0.80 

Missouri 30.3 1.5 7,727 4.7 0.87 

Montana 30,2 0.3 6,934 4.6 0.93 

Nebraska 29.8 0.5 8,810 5.2 0.84 

Nevada 33.4 0.9 5,071 3.1 L06 

New Hampshire 35.8 0.5 8,283 4.9 LOO 

New Jersey 43.9 4.6 14,655 9.1 Ll9 

New Mexico 25.8 0.4 5,704 33 0]9 

New York 36.6 8.8 16,897 93 Ll4 

North carolina 34.8 2.7 8,124 5.8 LOS --------------------------------------------------------------_. 

• Eliminating the deduction would have a small effect 

on taxpayets with income between $50,000 and 

$100,000; their after-tax income would drop by about 

0.7 percent in 2012 and 2013. The reduction in aftertax income fur income groups below $50,000 would 

be 0.3 percent or less. 

14 

Continued 

• Under both of the options, the change in after-tax 

income for raxpayers who pay the AMT would be 

quite different in 2012 from the change in 2013. For 

example) eliminating the taxes-paid deduction would 

decrease the average after-tax income of taxpayers 

whose income was between $200,000 and $500,000 

by only 0.3 percent in 2012. Most taxpayers in that 
114 


80344086.eps

Average 

Taxes~Paid Deduction 

Percentage of Percentage of per Return Claiming Ratio of 

Taxpayers Who Total Deductions the Deduction Percentage of Deduction Share to 

Itemized Claimed (Dollars) AGI Deducted AGI Share 

By State (Continued) 

North Dakota 19.7 0.1 6,710 2.5 0.52 

Ohio 30.8 2.8 8,565 5.5 0.85 

Oklahoma 27.0 0.8 6,547 3.6 0.80 

Oregon 39.8 1.4 9,095 7.2 1.28 

Pennsylvania 30.5 3.5 9,237 5.2 0.84 

Rhode Island 36.7 0.4 10,446 7.1 1.03 

South carolina 30.8 1.2 6,977 4.8 1.00 

South Dakota 19.5 0.1 4,787 1.9 0.57 

Tennessee 24.2 1.2 4,546 2.3 0.74 

Texas 25.1 5.3 6,704 3.0 0.70 

Utah 39.5 0.9 6,513 4.9 1.19 

Vermont 29.7 0.2 9,667 5.9 0.98 

Virginia 40.9 3.3 9,229 5.9 1.10 

Washington 35.7 2.2 6,092 3.6 0.94 

West Virginia 18.4 0.3 7,772 3.2 0.57 

Wisconsin 35.7 1.8 9,918 6.9 0.99 

Wyoming 24.7 0.1 4,729 1.9 0.65 

All States 35.2 100.0 6,767 5.4 1.00 

By Census Division 

New England 39.1 6.2 11,968 7.0 1.04 

Middle Atlantic 36.3 16.9 14,293 8.2 1.07 

South Atlantic 38.7 19.5 7,972 5.2 1.05 

East north central 32.2 12.6 8,617 5.4 0.89 

East south central 26.6 3.7 5,709 3.3 0.80 

West north central 32.0 5.6 8,395 5.1 0.88 

West south central 25.1 7.6 6,684 3.1 0.72 

Mountain 35.0 6.8 9,439 4.2 1.04 

Pacific 35.9 21.2 11,064 6.7 1.20 

Source: Congressional Budget Office based on data from the Internal Revenue Service. 

Notes: The taxes-paid deduction alJows taxpayers to deduct from their adjusted gross income some of the taxes they pay to state and local 

governments, including income, real estate, personal property, and other taxes. In 2009, taxpayers had the option to deduct general 

sales taxes in lieu of income taxes. 

AGI = adjusted gross income. 

income range will pay the A.c\.rfT this year under 

current law and thus will not be able to claim the 

taxes-paid deduction. In 2013, when tax reductions 

enacted in 2001 and 2003 are currently scheduled to 

have expired, many taxpayers with income between 

$200,000 and $500,000 will shift from being subject 

to the AMT to being subject to only the regular 

15 

income tax~under which they may claim the 

deduction. Eliminating the taxes-paid deduction 

would reduce the average after-tax income of taxpayets 

in that income range by 1.4 percent in 2013. 

The effects of any changes to the taxes-paid deduction 

would depend critically on any future changes to the 
115 


80344.087

AMT. CBO analyzed each of the options under the 

assumption thar current law would remain in place (that 

is, the AMT exemption amounts would revert to their 

pre-200llevels in 2012 and would not be indexed for 

inflation). Because the deduction for state and local taxes 

is the largest item (for taxpayers considered altogether) 

that must be added back to income under the AMT, lawmakers' .choices regarding the AMT would substantially 

affect the revenues derived from those options. 

Under current law, the number of taxpayers who pay the 

AMT will grow each year because the exemption 

amounts and ~\r{T tax brackets are not indexed for inflation. As the scope of the AMT expands, fewer people will 

benefit from the deduction for state and local taxes. However, policymakers have routinely increased the AMT 

exemption amount, and if that happened again in the 

future, fewer taxpayers would be subject to the AMT, 

and, consequently, more could claim the deduction for 

state and local taxes. In that cac;;e, the revenues gained 

16 

from eliminating the deduction would be larger than 

those under current law. 

In an analysis several years ago, eBO considered the 

combined effects under current law of permanently 

raising and indexing the AMT exemption levels and 

indexing the AMT while also eliminating the deduction 

for state and local taxes?" The results at that time indicated that the gain in revenues from eliminating the 

deduction would more than offset the loss in revenues 

from indexing the AMT. The gain from eliminating the 

deduction would be smaller, however, if the lower regular 

income tax rates originally enacted in 2001 and 2003 

were permanently extended. 

26. See Congressional Budget Office, The Dedurtibili(y ~fSfl1te fwd 

LomI7ax('.i (February 2008). That report also considered the com~ 

bined effec[S of indexing the .t\.i\1T and additional options for 

limiting, rather than eliminating, the taxes~paid deduction, 
116 


80344.088

Senate Finance Committee Hearing 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April 2Sth, 2012 

Questions for Mr. Frank Sammartino 

Questions from Chairman Baucus 

1. Currently, tax laws provide a deduction for State and local taxes. Should these 

deductions be eliminated or limited as part of tax reform? Why or why not? 

What's the benefit to the federal government for these provisions being a part of the 

federal tax system? 

Is it fair that only taxpayers that itemize their deductions get the benefit of the deduction 

for State and local taxes? 

Answer: 

Two competing arguments are often given in favor of and opposed to the federal deduction for 

state and local taxes: on the one hand, the federal government's interest in assisting state and 

local governments in providing public services that have benefits beyond their borders 'and, on 

the other hand, the possibility that such assistance may generate an inefficiently large volume of 

services that are strictly local in nature. If deductible taxes are simply charges that cover the 

value of services desired by taxpayers who have chosen to live in a particular state or local 

community, the rationale for subsidizing those services at the federal level is weak (unless 

localities face significant differences in the cost of providing services). For example, to better 

suit their preferences for streetlights, parks, and even public safety, citizens may sort themselves 

into different communities that provide different amounts ofthose services. It is not evident why 

the federal government should subsidize those citizens who prefer to consume more of such 

services. In fact, the original legislation enacting the federal income tax explicitly labeled as 

nondeductible local taxes paid in return for local benefits. 

Some deductible taxes, though, are clearly not charges for services that provide only local 

benefits but instead finance services, such as public assistance and education, that provide 

benefits that "spill over" to people in other states and localities. Such spillovers provide a 

rationale for federal support. Another rationale for federal support is that state income taxes are 

generally considered to have a redistributive function, although the extent to which they 

redistribute income varies widely and is small relative to the redistributive capacity of the federal 

income tax. It is generally thought that redistributive programs are a federal responsibility 

because population mobility across regions can constrain similar state and local government 

programs. 

Three other points merit consideration. First, the taxes paid deduction may simply encourage 

state and local governments to use deductible taxes in place of nondeductible taxes (levies such 

as selective---rather than general-sales taxes) without increasing spending for the desired 
117 


80344.089

activities. Ifso, the subsidy does not effectively encourage those governments to provide 

services that generate national benefits. A number of studies show that deductibility affects the 

mix of taxes that states and localities choose for financing their activities, but there is relatively 

little evidence that deductibility increases spending for services. 

Second, a common argument for allowing taxpayers to deduct state and local taxes is that such a 

deduction prevents double taxation of income. The contention is that resources claimed as taxes 

by state and local governments are not truly available to taxpayers and thus should not be 

considered part of the basis for federal taxation. In fact, that argument involves some of the same 

issues just discussed. If state and local taxes are benefit charges and reflect the amount of state 

and local public services that taxpayers desire and receive from their governments, then such 

taxes are appropriate to include in the basis for a levy that rests on the concept of people's ability 

to pay. Alternatively, ifstate and local taxes finance services whose benefits spill over to other 

localities, then the federal subsidy may be justified regardless of the issue of double taxation. 

Third, another argument for the taxes-paid deduction involves its effect on marginal tax rates 

(that is, the tax rate on the last dollar of income). By reducing the combined federal, state, and 

local marginal tax rate on income, the deduction lessens the deterrent to earning income that is 

inherent in high tax rates. But that reduction in the distortion to choices by individuals (choices 

between work and leisure) is achieved by an increase in the distortion to choices by state and 

local governments (choices between deductible and nondeductible taxes and choices about the 

kinds and amounts of services the governments provide). The overall effects and the extent to 

which choices are distorted by the various incentives depend on the behavior of individuals and 

governments. 

High-income households are more likely than low or moderate-income households to benefit 

from the taxes-paid deduction. The probability that taxpayers will itemize, the amount of state 

and local taxes paid, and the reduction in federal income taxes for each dollar of state and local 

taxes deducted all increase with income. Individuals who choose to itemize and deduct the state 

and local taxes they have paid decrease their federal tax liability by the amount of their 

deductible state and local taxes multiplied by their marginal tax rate under the individual income 

tax. Because the likelihood of itemizing and the marginal tax rate increase with income, 

taxpayers who benefit from the taxes-paid deduction in its current form are concentrated in the 

upper part of the income distribution. Slightly less than one-third of all tax filers deducted state 

and local taxes in 2009, and the percentage claiming the deduction varied widely among income 

groups. Approximately 25 percent of tax filers with income less than $100,000 took the 

deduction, compared with about 87 percent of tax filers with income of$IOO,OOO or more. The 

latter group, who made up roughly 12 percent of filers, accounted for 64 percent ofthe value of 

all state and local tax deductions claimed, with an average of about $18,300 in deductible taxes 

for each return on which the deduction was claimed. 

The tax saving from each dollar ofthe taxes-paid deduction increases with income because ofthe 

progressivity of federal income tax rates. In general, under the individual income tax, the higher 

a taxpayer's income is, the higher will be his or her marginal tax rate and therefore the larger the 

reduction in federal tax liability gained from deducting an additional dollar of state or local tax. 

According to CBO's estimates, in 2009 approximately 73 percent of the tax benefit of the taxes-
118 


80344.090

paid deduction accrued to taxpayers with income above $100,000. Among those with income 

above $100,000, taxpayers with income between $100,000 and $200,000 received just under 35 

percent of the total benefit, and taxpayers with income of more than $1 million received slightly 

more than 20 percent of the benefit. 

Questions from Senator Hatch 

1. Currently most taxpayers who itemize have the choice of deducting certain taxes paid to 

state and local municipalities. Currently deductions are allowed for state and local real 

property, personal property, state sales, and income taxes. 

The Joint Committee on Taxation estimates that the revenue loss to the Federal 

government from 2011 to 2015 of these deductions will be $347 billion, ifit is extended 

for that time. As Mr. Sammartino notes, "By lowering the net cost of those state and 

local taxes, the taxes-paid deduction encourages state and local governments to impose 

higher taxes ... " 

My question is, how much do these deductions subsidize state and local governments? 

We know what the revenue loss is to the federal government, but even if one is 

comfortable subsidizing state government, is this a good way to do it? 

Answer: 

The taxes-paid deduction, which has been in place in some form since the inception of the 

modern federal income tax, benefits the taxpayers who claim it and provides an indirect federal 

subsidy to the state and local governments that levy deductible taxes-because it decreases the 

net cost to taxpayers of paying those taxes. By lowering the net cost of certain state and local 

taxes, the taxes-paid deduction encourages state and local governments to impose higher taxes 

and to provide more services than they otherwise would. 

A starting point for estimating how much of state and local governments' revenues are 

subsidized through the taxes-paid deduction is assessing the share of all revenues collected by 

state and local governments from taxes that the federal tax code labels as deductible. That 

measure exceeds the amount of the subsidy in two respects: Taxpayers do not claim alllegaJIy 

deductible taxes on their returns (because not all taxpayers itemize and because the deduction is 

limited for some taxpayers), and the subsidy does not equal the total amount deducted but is the 

resulting reduction in federal tax revenues. 

In 2004, taxes made up about 50 percent of states' "own-source" revenues.] The potentially 

deductible portion of those taxes was about 17 percent of such revenues; shares ranged from a 

low near zero in Alaska to highs near 40 percent in Washington and Tennessee. State 

governments tend to raise most of their tax revenues from income and sales taxes, but local 

governments depend primarily on property taxes for revenues. In 2004, about 38 percent of 

I Own-source revenues are all revenues not received from another government or from government-run utilities, 

liquor stores, or insurance funds. Charges such as fees for education and hospitals make up most of the nontax 

portion of own~source revenues. 
119 


80344.091

localities' own-source revenues came from property taxes and another 2 percent came from 

income taxes, both of which are potentially deductible. Although the potentially deductible share 

oflocalities' own-source revenues therefore averaged 40 percent, shares varied widely across the 

country-ranging from about 15 percent for localities in Alabama and Arkansas to about 75 

percent for those in New Hampshire and New Jersey. 

One of the criteria for evaluating whether a federal subsidy is an efficient use of scarce federal 

resources is the national benefits that it provides. Ifthe taxes-paid deduction encourages state 

and local governments to use deductible taxes to fund additional services that create spillover 

benefits to other regions ofthe country, then the deduction provides a benefit to the taxpayers 

across the country who finance the deduction. If the deduction does not prompt states or 

localities to change their behavior in that way, or if they use deductible taxes in place of 

nondeductible levies and do not offer additional services with spillover benefits, then the 

deduction is not providing that same benefit to taxpayers across the country. A number of studies 

show that deductibility affects the mix of taxes that states and localities choose for financing 

their activities, but there is relatively little evidence that deductibility increases spending for 

services. 

2. President Obama has proposed to dramatically reduce the charitable deduction in his 

latest budget, as well as previous budgets. He does so by proposing to take away up to 

29% of itemized deductions for families that are in either of the top two income tax 

brackets. This will reduce charitable giving. Charity should be the last thing that the 

President is attacking. 

The President is also going after the ability of families and individuals to exclude interest 

on tax-exempt bonds from their income. This question is for the whole panel. 

Yes or no-do you agree with me that the President's proposal will increase borrowing 

costs for state and local governments? Please explain. 

Answer: 

Under current law, individual taxpayers may reduce their taxable income by excluding certain 

typcs or amounts of income, including interest from state and local government bonds; as a 

result, such bonds are often known as tax-exempt bonds. The tax reduction from the last dollar of 

income excluded is $1.00 times the taxpayer's marginal income tax rate, where the marginal rate 

is the tax rate on the last dollar of income. For example, the value of excluding the last dollar of 

tax-exempt interest is 35 cents for a taxpayer in the 35 percent tax bracket. President Obama has 

proposed limiting the tax value of specified deductions and exclusions, including the exclusion 

of interest from state and local bonds, to 28 percent. 

CBO has not closely studied the effect of the President's proposal on state and local borrowing 

costs, but some rough calculations suggest that state and local borrowing costs would not be 

affected very much by a 28 percent cap.2 Specifically, taxpayers in the 28 percent and lower tax 

2 The President's FY2013 budget includes other proposals that would have an impact on the market for state and 

local debt, most notably the proposal to expand and make permanent the Build America Bond (BAB) program 
120 


80344.092

brackets would not be affected by the cap, while taxpayers in higher tax brackets would still find 

it advantageous to purchase tax-exempt bonds rather than comparable taxable bonds. 

To understand that conclusion, begin with the point that the interest rate that state and local 

governments pay on tax-exempt bonds is the rate that matches the supply of those bonds with the 

demand for them, which is determined by the last buyer needed to equalize supply with demand 

and "clear" the market. All issuers of comparable tax-exempt debt (that is, debt that is 

comparable in its risk and other characteristics) pay that interest rate. Because purchasers oftaxexempt bonds demand a return that is at least as high as the after-tax yield they could obtain from 

comparable taxable bonds, the amount by which the federal tax preference lowers the rate of 

interest on tax-exempt bonds-and thus the amount of savings in financing costs enjoyed by 

state and local governments-largely depends on the income tax rate ofthe market-clearing 

buyer of tax-exempt bonds. 

Data on tax-exempt and taxable bond transactions allow a rough estimate ofthe marginal tax rate 

for the market-clearing buyer of tax-exempt bonds and, hence, the amount that states and 

localities save in financing costs by issuing such bonds. In 2009, the average yield on (taxable) 

high-grade corporate bonds was 5.3 percent, and the average yield on tax-exempt municipal 

bonds of similar creditworthiness was 4.6 percent-a difference of 0.7 percentage points, or 

approximately 13 percent of the taxable return. That 13 percent also represents the marginal tax 

rate at which an investor would be indifferent between purchasing a taxable bond yielding 5.3 

percent and a tax-exempt bond yielding 4.6 percent. The implicit tax rate for market-clearing 

buyers of tax-exempt bonds from 2008 to 2010 ranged from 13 percent to 16 percent, 

considerably lower than the average of21 percent during the prior two decades. Investors' 

appetite for risk, the desired time horizon oftheir investments, and other features ofthe bonds 

can also influence the demand for taxable and tax-exempt debt. 

Investors in tax brackets above the implicit tax rate for market-clearing buyers thus are able to 

purchase tax-exempt state and local bonds with yields that exceed the after-tax yields they 

receive from comparable taxable corporate bonds. For example, a taxpayer in the 35 percent 

bracket would be indifferent between a taxable corporate bond yielding 5.3 percent and a taxexempt bond yielding about 3.5 percent-but could (in 2009) purchase tax-exempt debt yielding 

4.6 percent. Even if the tax benefit was capped at 28 percent, tax-exempt bondholders in upper 

tax brackets would still receive after-tax yields on tax-exempt bonds that would be higher than 

the after-tax yields that would receive on comparable taxable bonds: At a 28 percent rate, a 

taxpayer would be indifferent between a taxable corporate bond yielding 5.3 percent and a taxexempt bond yielding about 3.8 percent-which is still well below the 4.6 percent rate that such 

bonds were paying in 2009. Thus, because the market-clearing rate on tax-exempt bonds tends to 

be less than 28 percent below the rate on comparable taxable bonds, purchasing tax-exempt 

bonds would still be advantageous to bondholders in upper tax brackets even with a 28 percent 

cap. 

(which was authorized for calendar years 2009 and 2010). In addition to allowing BABs to be issued ror more 

purposes than under their initial authorization, the President proposes to provide a 30 percent interest subsidy to 

state and local borrowers in 2013, and 28 percent thereafter. The discussion in this response does not take into 

account how implementation of those other proposals would influence the borrowing costs of state and local 

governments lhat issue tax-exempt debt. 
121 


80344.093

However, not all of the tax-exempt earnings of upper-bracket bondholders are necessarily in 

excess of the earnings necessary to induce those bond holders to hold the amount of tax-exempt 

bonds they hold. As the issuers of tax-exempt debt raise the yield on bonds to bring in potential 

buyers from lower tax brackets to clear the market, they may induce upper-bracket bondholders 

to buy even more bonds than they would have at a lower tax-exempt yield that left them 

indifferent between a tax-exempt and a taxable bond. Effectively, the federal government would 

be paying a premium to induce upper-bracket bondholders to adjust their investment portfolios to 

hold more tax-exempt debt. To the extent this is the case, a 28 percent cap would reduce the 

demand for tax-exempt bonds and raise the cost of borrowing for state and local governments. In 

CBO's judgment, this effect is probably small. 
122 


80344.094

NATIONAL CONFERENCE OF CPA PRACTITIONERS 

22 Jericho Turnpike, Suite 110 

Mineola, NY 11501 

T: 516-333-8282 

F: 516-333-4099 

My name is Sanford Zinman .. 1 am a Certified Public Accountant, member of the 

American Institute of CPA's and am currently the National Tax Chair of the 

National Conference of CPA Practitioners, (NCCPAP), as well as the President of 

the Westchester I Rockland New York Chapter. NCCPAP is a professional 

organization that advocates on issues that affect Certified Public Accountants in 

public practice and their small business and individual clients located throughout 

the United States. NCCPAP members serve more than 500,000 businesses and 

individual clients and are in continual communication with regulatory bodies to 

keep them apprised of the needs of the local CPA practitioner. 

Accompanying me is Mr. Edward Caine, Vice President of NCCPAP who is a CPA in 

the Philadelphia PA area with a practice similar to mine with clients throughout 

the United States and overseas. 

I am the sole owner of a CPA firm in White Plains, New York which I started 

almost 30 years ago. I have been preparing individual and small business tax 

returns as well as sales tax and payroll tax returns for over 35 years. I regularly 

prepare several hundred income tax returns during any given year and am in the 

trenches with my clients discussing tax law changes, tax interpretation and 

projections for planning and estate tax purposes. Although my clients are mostly 

in the New York, New Jersey and Connecticut area I have many clients in Florida, 

Alabama, California, Massachusetts, Nebraska, Tennessee and Washington DC. In 

this respect my practice is the same as many members of NCCPAP and other CPA 

firms throughout the United States. 

The issues regarding the impact of Federal tax provisions which provide benefits 

and detriments to the states are broad and wide ranging. 
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From a practical standpoint, or from the standpoint of a CPA professional who is 

dealing with taxpayer issues daily, there is a need to address the varied types of 

taxes and how they impact the taxpayer and the tax collector. 

The types of taxes which impact taxpayers the most are: Income taxes of 

individuals and other entities, the related financial planning and estate planning 

issues faced by these individuals and other entities, employment taxes and State 

and local sales and use taxes. 

Income Taxes of Individuals and Other Entities: 

Multi State Residency Issues: 

The issue of income tax for individuals with multi-state residency, especially for 

those who are retired, has grown in recent years. As the pre-baby boom 

generation is being joined with the beginning of the baby boomers, many of these 

individuals, married or single, are purchasing second (and in some cases, third) 

residences in other states and dividing their time between their residences. This 

poses a problem for these taxpayers-in which state do they declare residency? 

Currently this issue is not being decided by the individual, but by state tax laws. 

The state governments have become aggressive in seeking additional sources of 

revenue. This is not a recent event, but has been going on for many years. For 

example, the State of New York took a unique position on residency 20 years ago. 

If an individual sold their home and moved to a different state, cutting all ties 

with New York State, with one exception - their burial plot located in New York 

State, New York claimed that, because the plan was to return to the State, the 

individual would be required to file New York State Resident Income Tax Returns. 

When word of this came out, there was such uproar that the State of New York 

quickly reversed this position. Today, determination of residency is somewhat 

different. However, factors that will be considered in determining residency 

include, but are not limited to: the number of days spent in each state, where 

their prized posseSSions are located, where they are registered to vote, where 

their car is registered, where their primary care physicians are, and the size of 

their various residences. Many states are aggreSSively asserting that individuals 
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are residents to collect resident income tax, use tax and the all important estate 

tax. I have used New York and Florida as an obvious example but these multistate issues are prevalent in many jurisdictions. There are Ohio-Florida, ColoradoNevada transplants and many others. 

Another factor that presents a problem for the aging segment of the population is 

that when taxpayers purchase a second residence in another state, often only one 

spouse will take the necessary steps for establishing residency in that state such 

as registering a second vehicle, and registering to vote in that state. This is often 

done to minimize real property taxes. The State of Florida has limits as to how 

much real property taxes can increase on a primary residence for Florida 

homesteaders. If however, that residence is not the primary residence, then the 

real property taxes can increase by greater amounts from year to year. This can 

lead to a problem with a surviving spouse who then passes. 

As example: a couple from New York purchases a second residence in Florida. 

Spouse #1 declares Florida residency, gets a Florida driver's license, registers to 

vote in Florida, etc., while Spouse #2 remains a New York resident. Spouse #1 

dies and Spouse #2 spends most of the next 20 years living in Florida, but never 

makes the changes with regard to their own residency. When Spouse #2 passes 

away, the estate of Spouse #2 has to file an estate tax return in New York. This is 

necessary even though, while alive for the past 20 years, Spouse #2 was not 

required to file in New York because the taxpayer was not living in New York. But 

for the technicality that the individual did not bother to make the necessary 

change to establish residency in Florida the executor now has to file an estate tax 

return in a state in which the individual did not live. 

A taxpayer faces many tax complexities when relocating from state to state. For 

example, a couple just relocated from New Jersey to California in October of 

2011. Their income includes self-employment income, interest, dividends, capital 

gain transactions, and rental property, and they have the usual gambit of itemized 

deductions. In order to properly prepare their state returns, all of the income and 

expense items need to be allocated between the two states. So the federal 

government includes 100% of all the items and the states require that each item 

on the return be allocated appropriately to the respective states. So, three 

Schedule C's reporting self-employment income were prepared, one for the 
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federal, one for NJ and one for CA. Three Schedule B's reporting interest and 

dividend income were prepared, etc. 

Tax Treaties: 

The United States government has income tax treaties with many countries. 

However, many of the states do not recognize these treaties, so a non resident 

alien may not be required to pay federal taxes under a treaty but the individual 

may be required to pay state taxes. Example: A New Jersey partnership with two 

partners from Israel sold its technology rights to an Israeli Corporation. The Israeli 

corporation pays royalties to the New Jersey partnership based on sales of the 

developed product. In accordance with the US/Israeli treaty, the Israeli partners 

pay U.S. federal tax on the royalty generated from the sale of product to U.S. 

customers only. As the State of New Jersey does not honor the tax treaty, the 

State imposes a tax, in this case, on 100% of the royalty paid worldwide. 

Business Jurisdiction Issues: 

I acknowledge that federal law should not usurp state law, but individuals are left 

to battle with each jurisdiction that wants a piece of the action and their tax 

dollars. This also happens with other entities. Businesses which have nexus in 

multiple jurisdictions are also potentially subject to double or triple taxation. 

Although all states will acknowledge that credits should be given for taxes paid to 

other jurisdictions, those credits will not be given if the state perceives that the 

tax paid to another jurisdiction is improper. This again leaves the taxpayer in the 

uncomfortable position of either risking a wrong move or overpaying taxes to 

avoid lengthy administrative hearings. 

Alternative Minimum Tax: 

And then there is dreaded Alternative Minimum Tax ("AMT"). The National 

Conference of CPA Practitioners has long advocated for the abolishment of the 

alternative minimum tax. More than being a regressive tax and a hardship on a 
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portion of the taxpaying public that was not the original target of this tax; the 

AMT disproportionately affects taxpayers in certain states and areas of the 

country. While it is clear that this was an unintended consequence of the law, 

Congress has been unable to address the elimination of this tax. 

The tax practices of many of our members are, like my practice, comprised of 

couples who are earning very good salaries so they can afford to live in 

communities with high income and real estate taxes. As little as ten years ago, 

none of these individuals had to think about the AMT when they considered 

where to live and purchased their homes. Now, it is a regular discussion that is 

happening within many tax practitioners' offices. Many of these taxpayers are 

located in the New York metropolitan area because that is where they were able 

to find work. And, no, they are not all wealthy money managers or hedge fund 

traders. These taxpayers are often regular, middle-class working people; 

teachers, police officers, civil servants, executives and business owners. But the 

wages they must earn and the state and local taxes they must pay makes them 

subject to a 25 to 28% federal tax bracket. These same people would be paying a 

15 to 20% federal tax rate if they lived in a lower taxed state and they would be 

living the same life style. But there is no consideration of regional or local cost of 

living standards within the AMT rules. So these middle class, two worker families 

trying to save for college for their kids are being hammered on their federal taxes. 

This problem only compounds itself because these taxpayers have to earn more 

to offset the extra federal tax burden. This is an area where federal policy could 

assist the states. In theory, if federal taxes were lowered for these taxpayers, 

their disposable net income would be increased and there might be fewer 

objections to state and local income and property taxes. 

Financial Planning issues for Individuals. Estates and Businesses: 

Having just discussed the problems faced by individuals related to the AMT, I 

would like to discuss how this and other tax issues affect the individual and 

business taxpayers. I will start with a background story. 
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One of my clients is an estate and elder law attorney who earns a good living, 

works in one state and lives in another. Last year, just after I had completed his 

2010 tax return, he asked me to help him plan for 2011. He wanted to know what 

I thought was going to happen with tax rates, AMT and specific items such as 

bonus depreciation and Internal Revenue Code section 179. My response was in 

the form of a question. I asked him what the estate tax exemption was going to 

be in 2012 and 2013 and if there would still be a tie in with the gift taxes. We 

agreed that we knew very little a bout the near future cha nges of tax law. How 

can someone plan to pay the correct amount of tax to the federal government 

(and even the state) in April or June or even September when, all too often, no 

one knows what will happen until December. This uncertainty is a recipe for 

disaster. 

Similarly there are many practical issues that tax preparers face when preparing 

income tax returns that are the result of legislation enacted in November or 

December. An example of this is Form 8949 - Sales and Other Dispositions of 

Capital Assets. 

This issue arose very late in the year and has caused concern and, at times, an 

extra burden within the tax preparer community and amongst the taxpayers 

themselves. 

Many financial advisors have written to their clients advising them that the return 

preparer should note that the cost basis of their stock sales was incorrectly 

calculated regardless of whether this is or is not true. That is easy for the financial 

advisors to write because they are not signing the returns as true and correct. 

However, this is also a correct statement since the advisors were often unable to 

receive the transaction information within a reasonable time frame to determine 

if all the trades were properly recorded. This has placed additional burden on the 

taxpayers and tax preparers and will impact the Internal Revenue Service when 

these returns are audited. The brokerage houses must generate and provide 

corrected 1099 forms to taxpayers (sometimes after the filing deadline). 

Taxpayers must then file amended income tax returns. Until the modernized e-
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file system is completely operational, the taxpayer must file the federal and 

respective state returns on paper and the Internal Revenue Service and State 

service centers must process the amended tax return manually. This causes an 

additional burden on all. 

Employment Taxes: 

Workforce mobility is here to stay. Workers travel to different states either to 

find new work or better payor because they are temporarily reassigned to a 

different location by their employers. Federal law recognizes this mobility and 

offers individuals and entities incentives to insure that workers can keep working 

and companies can keep good workers. However, state and local employment 

laws and regulations vary greatly from state to state. In addition, there is no 

uniform definition of which types of workers are employees and which are 

independent contractors. Even within states, there are different definitions of 

who is an employee for withholding tax, unemployment insurance, worker's 

compensation insurance and other employment related taxes. Connecticut 

employers who are also Massachusetts employers must be very careful about the 

employment laws within each state in determining if a recipient of money is an 

employee or an independent contractor. In most, if not all states, federal 

guidelines do not control the state determination of employment status. Equally 

important, employee wage reporting requirements vary widely from state to 

state causing difficulty for small employers who are preparing employee W-2 

forms. Individual employee issues are addressed separately. As indicated, the 

federal government should not be attempting to usurp state rights or 

jurisdictional standing, but, to help promote more business activities; the federal 

government must assume a more active role in the administration of employment 

taxes and encourage a uniform definition of who is an employee. The Treasury 

department regulations on the uniform definition of a qualifying dependent have 

gone a long way to resolving the related income tax issues. A similar effort on 

who is an employee would be extremely helpful and would do a lot to level the 

playing field for employers. 
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Sales and Use Taxes: 

Sales and use tax issues significantly affect state and local governments. Over the 

past several years, in an effort to increase revenues, states have increased their 

collection efforts. By the end of 2011 eight states have enacted click-through 

nexus provisions and more than fifteen states have proposed laws expanding 

sales tax nexus. Based on the Supreme Court decision in the Quill case there has 

been the requirement of a physical presence in the state before that state could 

assert nexus. The states have begun to look for any connection that an out-ofstate seller might have that could be construed as a physical presence and some 

states have enacted legislation imposing a sales tax liability on internet companies 

if the company has agents in the state. With the explosion of internet sales states 

are now looking at ways to expand the range of activities which creates nexus. 

One can look at the recent Overstock.com and Amazon.com cases to see the 

trend of state regulations and the pursuit of lost sales and use tax revenue. 

Additionally, many states are now requiring individuals to report use tax on 

taxable items purchased out of state on their state income tax returns in an effort 

to reclaim some of the lost revenue. 

While most people understand the need for separation of federal and state 

governments, it is apparent that there is a loss of sales tax revenue due to cross 

border sales. It should also be obvious that this represents a loss of revenue to 

brick and mortar small business retailers who have a physical presence in a state 

but are not big enough to be a multi state retailer. In areas where state borders 

are nearby, companies may choose to establish their offices in one state just so 

they can sell in another and may deliberately run their business in a specific way 

to avoid the sales tax collection issues. Often businesses look to establish 

themselves in sales tax friendly states with the ability to sell to neighboring 

jurisdictions and to avoid collecting and paying sales tax to the destination state. I 

have had experiences with business owners who specifically try to establish their 

businesses in states neighboring New York to avoid the higher rate of sales tax 

and the complexity of the sales tax forms. I was also privy a case where a jeweler, 
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with offices in Manhattan, sold and shipped items to customer's homes in other 

states to avoid the collection and remittance of sales tax on big ticket items. 

The Multistate Tax Commission, in 2011, directed its sales and use tax uniformity 

subcommittee to begin drafting a model nexus statute based on the Amazon 

case. There is a strong need for federal oversight of state sales and use tax to 

insure that all states are able to collect their proper tax revenue. 

Respectfully submitted, 

Sanford Zinman, CPA 

On behalf of the National Conference of CPA Practitioners. 
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Senate Finance Committee Hearing 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April 25, 2012 

Responses to Questions for Mr. Sanford Zinman 

Questions/rom Chairman Baucus 

I. Currently, tax laws provide a deduction for state and local taxes. Should these deductions 

be eliminated or limited as part of tax reform? Why or why not? 

What is the benefit to the federal government for these provisions being a part of the 

federal tax system? 

Is it fair that only taxpayers who itemize their deductions get the benefit of the deduction 

for state and local taxes? 

Under current law, the potential deduction for state and local income, sales and property taxes 

are allowed against an individual's income. This was true even in 1913 when "All national, 

state, county, school and municipal taxes paid within the year" were part of the General 

Deductions allowed against an individual's income as part of the calculation of taxable income. 

While there are several explanations written for why these specific deductions were originally 

allowed, it later became a component offederal government public policy to encourage and 

support home ownership. The allowance of a deduction for real property tax as well as the 

deduction of mortgage interest on property theoretically encourages home ownership throughout 

the country. Often the outlay, net of federal and state tax, is the same as a rent payment. Until 

recent years, this was the standard for many individuals, and it still allows individuals to afford 

home ownership. 

The standard deduction allows individuals who have few "itemized deductions" to take a greater 

deduction against their adjusted gross income than they might be able to claim if they were 

required to deduct only itemized deductions. Renters, for example, would not have deductions 

for mortgage interest or real property tax. In recent years, the standard deduction has increased. 

This allows individuals to reduce their taxable income without home o\\<nership. 

Currently, in much ofthe country, those who are able to afford the deduction for state and local 

property tax (i.e., those who are able to afford a home and obtain a mortgage) are often those 

individuals whose deductions are limited by factors such as the Alternative Minimum Tax 

(AMT). In areas of the country where real estate taxes are significant and, consequently, the 

requisite income to pay these taxes is relatively great, the deduction for these taxes is restricted 

or eliminated due to the AMT. 

The deductions for state and local income and real property taxes are still some of the most 

significant deductions for taxpayers who do claim itemized deductions even though some of the 
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benefits are restricted by the AMT. Some 37.2 million taxpayers claimed the deduction for these 

taxes in 2002, writing off $336.6 billion-or about $9,000 per taxpayer. It represented 

approximately 37% of itemized deductions and generated slightly more in deductions than 

itemized deductions for deductible state and local taxes and twice as much in deductions as 

charitable donations. 

Questions from Senator Hatch 

1. President Obama has proposed to dramatically reduce the charitable deduction in his 

latest budget, as well as previous budgets. He does so by proposing to take away up to 

29% of itemized deductions for families that are in either of the top two income tax 

brackets. This will reduce charitable giving. Charity should be the last thing that the 

President is attacking. 

The President is also going after the ability offamilies and individuals to exclude interest 

on tax-exempt bonds from their income. This question is for the whole panel. 

Yes or no-do you agree with me that the President's proposal will increase borrowing 

costs for state and local governments? Please explain. 

As indicated in Mr. Sammartino's testimony, the federal government offers preferential tax 

treatment for bonds issued by state and local governments to finance certain governmental 

activities. These bonds are often issued at below market rates because of their preferential tax 

status. I experienced this first hand as a member of my local school board. We were able to 

construct a new middle school building only because of the low rate we were able to get on 

bonds we floated to finance the project. This also translated to lower taxes for the residents of 

the school district. Across the country this debt is significant and, without the preferential 

treatment, the needed construction projects would not be possible. 

During uncertain economic times there will always be a flight to safety, and states and 

municipalities with high credit ratings will reap the benefit by having the ability to issue their 

bonds which will be in demand. This was not always the case. If we look back about 40 years 

ago, many municipalities were paying premiums on their tax-free bonds and there were limited 

numbers of people willing to purchase these bonds. The interest rate on and demand for taxexempt bonds is based on the creditworthiness of the state or municipality and the preferential 

tax treatment as well as current market conditions. 

While municipal bonds, with the benefit of double or triple tax-free status factored, may pay 

several times a bank short -term CD rate, they often pay the same effective rates as corporate 

bonds with the same ratings. The current safety and security of municipal bonds as well as the 

tax-free status of the interest make them a preferable investment to many individual investors. 
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Questions from Senator Snowe 

1. Do you think a national standard to address overlapping and inconsistent requirements is 

the correct way to balance the rights of states to raise revenue with the rights of taxpayers 

to tax laws that make compliance possible? There is legislation in the House that would 

set a 30-day standard for work performed in a state before income taxes would be 

required. Do you think the House bill achieves that balance? 

2. How burdensome would it be for employers to implement time and place of attendance 

systems for employees who do not otherwise "punch a clock" at their place of work? 

Question I - States should and do have the ability to set employment standards within their 

respective jurisdictions. However, our mobile workforce needs to know that the rules controlling 

their work environment will be consistent from location to location. Additionally, employers 

should not have to "reinvent the wheel" each time an employee changes their employment 

location (which may be just across the street) but not their residence. Many small businesses 

have significant regulatory burdens (and costs associated with these requirements) with regard to 

compliance with non-resident state and local withholding and employment laws. Employers 

often, unintentionally, violate the letter of the law when employees cross state borders and earn 

money in another location. Salaried and hourly employees who work in multi-state 

environments should report their income in the location where they work and where their income 

is earned. This is usually not done. Additionally, telecommuting causes additional problems as 

an employee may be physically in one location but earning their income in another location and 

being paid according to the employer's office location. The House bill attempts to address some 

of these issues. While I support the concept of a 30-day window, we must all be aware of 

potential abuses of this exception. For example, a resident ski instructor from New York could 

easily travel to and work in Vermont in mid-December through early January and again in late 

January through mid February, etc. His employer would not have to pay employment or 

withholding taxes to Vermont although the governmental services (i.e., police and sanitation) 

would be provided by that state. Obviously any broad scope bill would have areas of omission, 

and H.R. 1864 does try to ease the employment tax collection and reporting burden on 

employers. 

Question 2 I do not see any significant burden for an employer to implement a time and place 

of attendance system for employees. Currently, under tax law, employers and employees must 

document their job locations for proper reimbursement or income tax deductions. The additional 

record keeping should not be onerous. 

Questions from Senator Enzi 

1. I understand that the tax return for the state ofN ew York has a line on it for residents to 

report the sales and use tax owed. In fact, I am told that it comes with an instruction that 

says, "Do not leave line 59 blank." 
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As a practitioner in the state of New York, wouldn't it be easier ifthe transaction taxes 

were just collected at the point of sale? 

2. You have indicated that complying with an expanded duty to collect would hurt small 

businesses. However, these are taxes owed by consumers today. As a practitioner, how 

do you advise your clients to comply with their existing use tax requirements when sales 

taxes are not collected from purchases made on-line? 

3. Last November, a group of bipartisan cosponsors and I introduced the Marketplace 

Fairness Act. For over a decade, Congress has been debating how to best allow states to 

collect sales taxes from online retailers in a way that puts Main Street businesses on a 

level playing field with online retailers. The Marketplace Fairness Act empowers states to 

make the decision themselves. If they choose to collect already existing sales taxes on all 

purchases, regardless of whether the sale was online or in store, they can. If they want to 

keep things the way they are, it's a state's choice. 

Some have commented that legislation like this should be part of tax reform. However, I 

don't see it that way. I don't see a relationship between this bill and the upcoming 

negotiations on individual and corporate tax rates and the breadth of the income tax base. 

Do you agree that this is an issue that is not and should not be confused with tax reform? 

Do you agree that Congress does not need to wait for tax reform as the context in which 

to enact something along the lines of the Marketplace Fairness Act? 

Question I - The short answer is an obvious "yes." It would be easier for both the purchaser and 

seller if the sales taxes were paid by the purchaser at the time of purchase based on the delivery 

location. What is more important is that the collection of taxes at the point of sale would result 

in the proper collection of taxes as well as the ease of collection of information. Most 

consumers, either individuals or businesses are willing (albeit reluctantly) to pay their fair share 

of sales taxes as long as the assessment and collection of these taxes is done in a fair and 

efficient manner. Currently, the burden is on the taxpayer to maintain proper records of the 

various transactions of the use tax due for sales taxes which were not collected by the seller. 

This can be a very complicated and time-consuming process and forces an undue burden on an 

individual or a business. Additionally, the only way to currently enforce the proper collection of 

these taxes is through an onerous and complete audit of a taxpayer's records, which is 

economically infeasible. Many individuals in New York just list $0 on line 59 assuming that the 

probability of an audit is very limited and knowing that the effective statute of limitations runs 

three years. 

Question 2 - Many businesses consider the expanded duty of collecting sales taxes imposed by 

other jurisdictions in which they do not do business difficult. Often small business owners look 

to avoid the charging and collection of sales tax by shipping product to another state. The 

collection duty requires knowledge of specific state and local rules or relatively sophisticated 

sales tax software. While compliance is not at all impossible, it does make for a cumbersome 

system. Even much of the sophisticated software has difficulty identifying the nuances of the 

sales tax rules in different slates and localities. However, nuances of the law should not bc an 
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excuse to avoid the law. I believe that the Marketplace Fairness Act goes a long way to 

overcome many of the obstacles to the states collecting their fair share of sales taxes due. 

Question 3 - NCCPAP supports the passage of the Act. The Marketplace Fairness Act is an 

important step to addressing the sales tax collection process especially in light of the recent 

Illinois court ruling. I believe that sales tax is a tax which should not be linked with income or 

employment tax legislation. Consequently any sales tax refonn should not be joined with other 

tax refonn associated with the Internal Revenue Code. Additionally, the proper assessment and 

collection of all sales tax is a significant fiscal issue and should be addressed promptly. 
(137) 

COMMUNICATIONS


80344108.eps
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The Supreme Court, in its 1992 Quill decision, ruled that remote sellers, who didn't have a 

physical presence in the purchaser's state, could not be required to collect state sales tax. The 

explosion of the Internet over the last 20 years, and improvements in express mail delivery, have 

made remote selling of commodities nearly as common as local selling. Things have changed 

quite a bit since the Internet and on-line shopping came onto the scene, and Congress needs to 

address those changes now. 

In response to the Supreme Court's concerns, the Streamlined Sales and Use Tax Agreement 

(SSUTA) was developed to assist states in administering a simpler and more uniform sales and 

use tax system. Twenty four states have already enacted legislation to implement the terms of 

the SSUTA. However, some states appear to be unwilling to implement the terms of SSUTA 

until federal legislation is enacted to require out-of-state sellers to collect existing sales or use 

taxes. Smart legislation, such as the Marketplace Fairness Act, will protect small sellers, which 

are in fact local businesses. 

State taxation of all remote sales would help level the domestic playing field between large 

national businesses selling remotely and small local traditional businesses. Providing for state 

taxation on all sales will end a discriminatory tax practice. The current system centralizes retail 

sales and results in struggling local economies. Equalization would also increase state 

government tax revenues - as much as $23 billion in 2012 - a significant factor in a period of 

tight budgets. 

Straightening up this outdated system is a clear, simple step in promoting fairness in our 

country's fiscal policy. Airgas provides building blocks for the American economy. We supply 

the construction, health care, energy, transportation, and other industries with critical products 

and services. We are proud to have a local presence throughout the United States and look 

forward to continuing our work in promoting local, regional, and national economic 

development. Accordingly, we encourage Congress to enact legislation for state taxation of 

remote transactions, like Internet sales, that reflects the realities of modem commerce and helps 

ensure that all U.S. companies are treated equally, and fairly. 
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April 25, 2012 

The Honorable Max Baucus 

Chairman 

Committee on Finance 

United States Senate 

511 Hart Office Building 

Washington, DC 20510 

The Honorable Orrin G. Hatch 

Ranking Member 

Committee on Finance 

United States Senate 

104 Hart Office Building 

Washington, DC 20510 

ama~on.com. 

Re: Hearing on Tax Reform: What It Means for State and local Tax and Fiscal Policy 

Dear Chairman Baucus and Ranking Member Hatch: 

Thank you for convening today's hearing on the very important subject of "Tax Reform: What It Means for 

State and local Tax and Fiscal Policy." On behalf of Amazon.com, I am pleased to submit the following 

comments and respectfully ask that this letter and its two attachments be included in the record of the 

hearing. 

Amazon has long supported an even-handed nationwide framework for state sales tax collection, and only 

Congress may create this framework. To this end, Amazon believes that Congress should authorize the 

states to require out-of-state sellers to collect the sales tax already owed, and we strongly support 

enactment of S. 1832, a bipartisan bill already before your Committee. 

At the Philadelphia Convention, which the Founders convened principally to consider the challenging issue 

of trade among the states, Congress was granted exclusive power to regulate interstate commerce. 

Exactly two centuries later, in 1987, North Dakota challenged this exclusivity and, following five years of 

litigation, the U.S. Supreme Court held in Quill v. North Dakota that requiring out-of-state sellers to collect 

tax would impose an unconstitutional burden on interstate commerce. The Quill court also confirmed that 

Congress eventually could "disagree with our conclusions" and that this issue is "not only one that 

Congress may be better qualified to resolve, but also one that Congress has the ultimate power to 

resolve." 

Far from an e-commerce "loophole," the constitutional limitation on states' authority to collect sales tax is 

at the core of our Nation's founding principles. For this reason, Amazon has steadfastly opposed state 

attempts to require out-of-state sellers to collect absent congressional authorization. We believe that, 

instead, Congress should enact S. 1832, the Marketplace Fairness Act, to authorize the states to require 

out-of-state retailers to collect sales tax at the time of purchase and remit those taxes on behalf of 
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consumers. (See attached Letter to Senators Michael Enzi, Richard Durbin, and Lamar Alexander, dated 

November 9,2011, referencing the bill that became numbered S.1832.) 

Congress should enact S. 1832 to protect the states' rights, address the states' fiscal needs, and level the 

playing field for all sellers. 

Congress should act to protect the states' right to make their own revenue policy choices. For example, 

some states have chosen to eschew personal income tax, making them particularly vulnerable to 

uncollected sales tax. The right of any state to make such policy choice effective should be protected by 

allowing states to ensure that sales and use taxes already owed are collected in a uniform manner, 

including when sales are made across state lines. And doing so would not violate pledges that are limited 

to questions of income tax rates and deductions. 

The states' financial needs should be addressed. The states face serious budget shortfalls. Adopting sales 

tax collection reform is a way for Congress to help the states without spending federal funds. S. 1832 

would simply allow the states to collect more efficiently the billions of dollars of uncollected sales/use tax 

revenue already owed. 

Fairness among sellers also should be created and maintained. Sellers should compete on a level playingfield. Congress should not exempt too many sellers from interstate collection, for these sellers will obtain 

a lasting un-level playing field versus Main Street and other retailers. Congress should rectify the current 

imbalance and avoid a future imbalance. 

The facts in the Quill decision arose a quarter of a century ago, and the Supreme Court's decision was 

rendered a year before the World Wide Web was invented. With today's computing and communications 

teChnology, widespread collection no longer would be an unconstitutional burden on interstate 

commerce, and Congress feasibly can authorize the states to require all but the smallest volume sellers to 

collect. Much attention has been paid to the size of a "small seller exception" threshold in federal 

legislation - and rightfully so. Such a threshold, which would exempt some sellers from a collection 

requirement, must be kept low to attain the objectives of protecting states' rights, addressing the states' 

needs, and creating fairness among sellers. 

In this context, several kinds of small volume sellers must be considered. Foremost are the Main Street 

small business retailers who, unless the small seller exception threshold is kept very low, will forever face 

an un-level playing field compared to a newly-created exempt class of out-of-state sellers. Next are the 

online advertising affiliates, tens of thousands of whom have lost jobs or income as the result of 

ineffective, counterproductive sales tax laws recently enacted in many states. Congressional adoption of 

reform legislation would immediately restore the lost jobs and income by creating a uniform framework 

for sales tax collection. 

Small volume online sellers have received most of the attention, and not without reason. No one wants 

these sellers to shoulder alone burdens compared to those faced by the small business retailers who 

already collect sales tax in our local communities. Yet no one should want these online sellers to have a 

newly-created un-level playing field advantage over small Main Street businesses, and no one should want 

government to pick business model winners and losers this way. 
141 


80344.112

The consequences of the threshold level are significant, because - as described in the attached report on 

economic research commissioned by Amazon - a surprisingly large fraction of e-commerce is conducted 

by smaller volume sellers. For example, only one percent of online sellers sell more than $150,000 per 

year, and only one third of one percent sell more than $500,000. In other words, a $150,000 exception 

would exempt 99% of online sellers from any collection responsibility on remote sales. The $500,000 

threshold in S. 1832 would exempt 99.7% of online sellers. (See attached report "Online Retail Sellers and 

Sales Volume Thresholds, by Malowane and Siwek, dated April 2012.) 

Fortunately, today's computing and communications technology will readily allow all online sellers to 

collect and remit tax like Main Street retailers. Large volume online sellers already have and use this 

technology. Amazon, for example, collects tax on sales to consumers in states where our retail businesses 

have nexus. And the online arms of large multichannel retailers collect in the states where they have 

retail stores. Quite obviously, state sales tax can be collected nationwide, and the technology is not 

limited to large sellers. Rather, service providers also make the technology available to medium and small 

volume sellers. Thus, collection is either by sellers or for sellers. There are many service providers 

already: ADP, Avalara, and FedTax, for example. Ecommerce platforms like Amazon and eBay also can use 

their sophisticated computing technology to help their third party sellers by collecting sales tax for them, 

and Amazon is committed to providing such a service. 

In conclusion, Congress may, should, and feasibly can attain the objectives of protecting states' rights, 

addressing the states' needs without federal spending, and leveling the playing field for all sellers. 

Amazon is grateful for the opportunity to submit these comments, and we look forward to working with 

you and your colleagues in Congress to pass S. 1832 as soon as possible. 

Please let me know if you have any questions. 

Sincerely yours, 

Paul Misener 

Vice President for Global Public Policy 
142 


80344.113

November 9,2011 

The Honorable Michael Enzi 

United States Senate 

379A Russell Senate Office Building 

Washington, DC 20510 

The Honorable Richard Durbin 

United States Senate 

711 Hart Senate Office Building 

Washington, DC 20510 

The Honorable Lamar Alexander 

United States Senate 

455 Dirksen Senate Office Building 

Washington, DC 20510 

amazon.com' ~ 

Re: Federal Legislation on Interstate Sales Tax Collection 

Dear Senators: 

Thank you very much for your legislation on interstate sales tax collection. 

Amazon strongly supports enactment of your bill and will work with you, your colleagues in Congress, 

retailers, and the states to get this bi-partisan legislation passed. It's a win-win resolution - and as 

analysts have noted, Amazon offers customers the best prices with or without sales tax. 

If enacted, your bill will allow states to require out of state retailers to collect sales tax at the time of 

purchase and remit those taxes on behalf of customers, and it will facilitate collection on behalf of third 

party sellers. Thus, your bill will allow states to obtain additional revenue without new taxes or federal 

spending and will make it easy for consumers and small retailers to comply with state sales tax laws. 

Amazon is grateful for your hard work on this issue, and we look forward to working with you and your 

colleagues in Congress to pass this legislation. 

Please let me know if you have any questions. 

Sincerely yours, 

Paul Misener 

Vice President for Global Public Policy 

PC 
143 


80344.114

Statement for the Record 

On Behalf of the 

AMERICAN BANKERS ASSOCIATION 

For the Hearing 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

, i. 20 

Before the 

United States Senate Committee on Finance 

April 25, 2012 

~I American 

Bankers 

Association 
144 


80344.115

Statement for the Record on Behalf of the 

AMERICAN BANKERS ASSOCIATION 

For the Hearing 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

Before the United States Senate Committee on Finance 

The American Bankers Association (ABA) is pleased that the Committee is holding this 

important hearing (Tax Reform: What it Means for State and Local Tax and Fiscal Policy) and 

appreciates the opportunity to submit a statement for the record. The American Bankers 

Association represents banks of all sizes and charters and is the voice of the nation's $13 trillion 

banking industry and its two million employees. 

We would like to share with the Committee our concerns about the problems raised by state 

nexus rules under which states extend their taxing powers to out-of-state businesses. These nexus 

taxation rules relating to business activity taxes can have a significant impact on banks, particularly 

community banks that operate near state borders. ABA encourages the Senate to act on legislation 

that would mirror a bill currently introduced in the House - H.R. 1439, the Business Activity Tax 

Simplification Act which we strongly support. 

Today, banks of all sizes face difficulties associated with the uncertainty of states' business 

activity taxes. Over the last few years, states have developed a variety of expansive nexus rules. 

Some states apply a physical presence rule, some an economic nexus rule, and others a hybrid 

version that includes both physical presence and economic nexus. The differences in the 

application of the nexus standard greatly increase compliance and legal expenses for banks costs 

that will ultimately be borne by customers and our economy at large. 

To address these concerns, ABA strongly supports H.R. 1439, the Business Activity Tax 

Simplification Act (BATSA), which would modernize existing law to ensure that states and 

localities can impose business activity taxes only in certain clearly defined situations, such as when 

an entity has physical presence (i.e., property or employees) and thereby receives related benefits 

and protections from the jurisdiction. We encourage Congress to enact BA TSA in order to provide 

businesses with more certainty on this issue. 

In this statement we detail three key points: 

'Y Inconsistent and unclear taxation standards between states subject businesses to litigation 

and other onerous business costs, which are especially harmful to small businesses. 

'Y Greater certainty for businesses will foster a more stable business environment that 

encourages investment and creates new jobs. 

'Y BATSA will help minimize litigation costs and uncertainty for businesses by: 

o Clarifying that entities must have a physical presence in the taxing jurisdiction in 

order to be subject to state and local taxes; and 

o Providing a clear definition of "physical presence." 
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80344.116

I. Inconsistent and unclear taxation standards between states subject businesses to 

litigation and other onerous business costs, whicb are especially harmful to small 

businesses. 

An increasing number of states have enacted, or are considering, legislation that would 

lower the threshold of what constitutes "substantial nexus" for purposes of taxing an out-of-state 

business' activity within the state. However, there is no unifonn definition or application of 

substantial nexus among the states and no set rules or parameters for detennining how a state would 

apply the nexus standard it varies from state to state. Therefore, each state applies its 0','.'11 nexus 

standard to detennine when an out-of-state business that has contacts with the state is required to 

pay income tax. In fact, in some states, the presence of even one customer within the state would 

establish the state's required nexus for applying its business income tax to an out-of-state business. 

This type of application of the nexus standard is devastating for small businesses, especially 

community banks, because they do not possess the substantial resources required to comply with a 

proliferation of different state tax laws. There are more than 2,500 banks and savings associations 

with 25 or fewer employees; 750 of these have 10 or fewer employees. Many of these community 

banks operate near state borders and, therefore, have contacts with consumers residing in different 

states. Additionally, many financial institutions now provide services to customers online, which 

allow people nationwide to take advantage of increased competition and better services to fit their 

individual needs. Without a uniform standard, these banks find themselves subject to different 

states' standards, resulting in undue costs and burdens. 

II. Greater certainty for businesses will foster a more stable business environment tbat 

encourages investment and creates new jobs. 

The additional costs resulting from the application of different state taxation standards divert 

resources businesses could invest in areas such as product innovation, improved customer service, 

or additional employees. The result would be fewer products offered to consumers at higher prices. 

Worse yet, without business certainty, some financial service providers may cease doing business in 

those states where additional tax burdens exist. Therefore, states that aggressively tax out-of-state 

businesses are creating incentives that may ultimately reduce choices available to consumers in their 

states. Consumers may experience reduced access to credit and increased credit costs, which is 

clearly not good for them or the economic health of their communities. 

III. BATSA will help minimize litigation costs and uncertainty for businesses by (1) 

clarifying that entities must have a physical presence in the taxiug jurisdiction in order 

to be subject to state and local taxes, and (2) providing a clear definition of physical 

presence. 

BA TSA would remove uncertainty by codifying in federal law that an actual physical 

presence in a state is required in order for a state to impose a tax on an out -of-state business. It also 

would include a bright-line test that would establish a minimal amount of activity a business must 

perfonn in a state before it is subject to income taxes and additional paperwork. Finally, this bill 
146 


80344.117

would help limit businesses' exposure to unanticipated taxes, thus reducing compliance and legal 

costs associated with frivolous nexus claims. 

Conclusion 

As you continue your efforts on tax reform in the Senate, ABA strongly encourages 

legislation that would provide a uniform definition for the nexus standard to be employed by states 

in establishing whether an out-of-state business should be subject to tax for activities conducted 

within the state. BA TSA provides such a mechanism and we urge consideration of a bill in the 

Senate that mirrors these provisions. Such a bill would greatly help streamline the out-of-state 

business activity tax within states and limit businesses' exposure to burdensome and costly taxes. 
147 


80344.118

Oren Teicher, CEO 

American Booksellers Association 

200 White Plains Road 

Tarrytown, NY 10591 

Written Testimony, submitted for the 

Senate Committee on Finance hearing: 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April 25, 2012 

Dear Chairman Baucus, Ranking Member Hatch, and Distinguished Members of the Committee: 

The American Booksellers Association is a national, not-for-profit trade association whose 

mission is to protect and promote the interests of its members: independently owned bookstores, 

large and small, that have storefront locations and e-commerce websites based in towns and 

cities nationwide. 

On behalf of our independent bookstore members, we wish to express our support for the 

bipartisan Marketplace Fairness Act (S.1832), which would give states the right to decide to 

collect -- or not to collect - sales and use taxes for online sales from out-of-state businesses. 

Importantly, this bill would not impose a new tax, as these are taxes that are already owed. 

For more than a decade, our members have worked at an unfair competitive disadvantage 

compared to remote, online retailers that have nexus in states but have skirted their obligation to 

collect and remit sales tax. Many of these remote retailers have a physical presence via 

warehouses, offices, distribution facilities, or a broad network of online affiliates (that act as a 

virtual sales force for online sellers). 

While our members are more than capable of competing with their online competitors in an open 

and fair marketplace, it is very difficult for any business owner, no matter how savvy, to compete 

at a disadvantage equal to their community's sales tax rate. 

Something has to be done, sooner rather than later. As online commerce has grown, each year 

more and more consumers eschew shopping on Main Street in the mistaken belief that products 

purchased online are "duty free." This is not the case, as consumers owe a use tax when they 

purchase an item online and no sales tax is charged. That, however, is not a well-known law, and, 

more importantly, use tax laws are almost impossible to enforce. 

The resulting loss of sales tax revenue and its impact on Main Street's ability to compete has 

forced many of our member bookstore owners to reduce staff, staff hours, or forced them to 

forgo the hiring of new employees. A level playing field and a free market where the state 

government isn't unintentionally subsidizing the competitors of its own in-state businesses 

would go a long way toward increasing revenues and creating jobs nationwide. 
148 


80344.119

The Marketplace Fairness Act would solve this inequity by authorizing states that choose to do 

so to require remote retailers to collect and remit sales tax. This is crucial. Some states have 

already clarified their sales tax laws to account for the clear fact that online affiliates are modernday sales agents, but even so, many states have been reluctant to follow suit for fear they will 

bring about a lawsuit from a large, corporate online retailer that wishes to maintain its 

inequitable competitive edge over Main Street -- or, in some cases, because of a different 

interpretation of the 1992 Quill vs. North Dakota Supreme Court decision. 

S. 1832 would put the sales tax collection issue back into the hands of the states, where it 

belongs. 

Thank you for your consideration in this important matter. 

Sincerely, 

Oren Teicher, CEO 

American Booksellers Association 

200 White Plains Road 

Tarrytown, New York 10591 

914.373.66111oren@bookweb.org 
149 


80344120.eps

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Statement for the Record 

of the 

American Federation of State, County 

and Municipal Employees (AFSCME) 

For the Hearing on 

Tax Reform: What It Means for State 

and Local Tax and Fiscal Policy 

Before the 

Committee on Finance 

U.S. Senate 

April 25, 2012 

American Federation of State, County and Municipal Employees, AFL-CIO TEL (201) 429-1000 FAX (202,429-12<;13 TOO (202) 659--0446 WEB www,afscme.org 1625 L Streec. NW, Washtngmn, DC 200)6-5687 
150 


80344.121

Statement for the Record 

of the 

American Federation of State, County and Municipal Employees (AFSCME) 

For the Hearing on 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

Before the 

Committee on Finance 

U.S. Senate 

April 25, 2012 

This statement for the record of the hearing "Tax Reform: What It Means for State and 

Local Tax and Fiscal Policy" is submitted on behalf of the 1.6 million members of the American 

Federation of State, County and Municipal Employees (AFSCME). AFSCME members work for 

all levels and all types of government, including states, cities, counties, school districts, and other 

jurisdictions. We advocate for excellence in public services, fairness in the workplace, and 

prosperity and opportunity for all working families. AFSCME members are a diverse group of 

people sharing a common commitment to public service, and a fundamental part of our mission 

is to advocate for the vital public services and infrastructure that keep our families safe and 

strengthen our communities. 

How federal tax reform is structured will have a significant impact on state and local 

governments which are a vital part of our federal system. AFSCME supports progressive federal 

tax policies that help ensure state and local governments can invest adequately in public 

education, health care, job creation, infrastructure, and the social safety net. We oppose 

regressive tax policies and those that undermine state and local government's ability to meet the 

needs of their residents. 

In summary, AFSCME supports the bipaltisan Enzi-Durbin-Alexandcr "Marketplace 

Fairness Act," S. 1832. As a general rule, AFSCME opposes preempting state government and 

local government tax authority. We also support the existing federal personal income tax 

deductions for state and local government taxes, the existing federal tax exclusion for interest 

income from state and local government public purpose bonds, and reinstating Build America 

Bonds with helpful changes. Further, AFSCME recommends considering alternatives, including 

tax credits, to certain business deductions, where they currently result in reduced state tax 

revenues. 

I. State and Local Government Taxing Authority 

Marketplace Fairness Act 

AFSCME strongly supports the bipartisan "Marketplace Fairness Act" (S. 1832), 

introduced by Senators Enzi (R-WY), Durbin (D-IL) and Alexander (R-TN). This bill is needed 

because it empowers state and local governments to collect sales or "use" tax already owed by 

buyers on their remote purchases of goods and services via the internet, phone and mail. It would 

close an unfair loophole that allows e-tailers and other remote sellers to avoid collecting sales 

taxes, thereby unfairly disadvantaging brick and mortar businesses. S. 1832 would help enable 

these Main Street brick and mortar retailers to compete fairly on a level field against out-of-state 
151 


80344.122

e-retailers. It is important to close this loophole because it influences consumer behavior and 

purchases, and it diverts sizable revenues from states and localities. 

In 2012, experts estimate the cumulative nationwide total of uncollected state and local 

government use taxes is $23 billion. While revenues of this magnitude are always important, 

given the recent and ongoing struggles of America's economy and the resulting state and local 

government budget shortfalls, these jurisdictions need these revenues to adequately invest in job 

creation, infrastructure, health care, public education, and other vital public services. S. 1832 

would simultaneously reduce pressure on states and localities to increase taxes and/or reduce 

services; and eliminate the unfair advantage of internet-based businesses over bricks and mortar 

stores. 

It is important to highlight that S. 1832 would not enact any new taxes. S. 1832 merely 

authorizes states and localities to require sellers to collect already authorized but currently 

uncollected taxes. The 45 states (and the District of Columbia) currently imposing a sales tax, 

also impose a parallel use tax, which requires that buyers who do not pay sale taxes on their 

remote purchases do pay an equivalent use tax on these purchases. We also note S. 1832 has no 

cost to the federal government. It is not an unfunded mandate. 

A broad and ideologically diverse coalition supports S. 1832. AFSCME joins in support 

of S. 1832 with other labor unions representing the public sector; state and local government 

interest groups; and hundreds of various businesses, including small mom and pop shops, large 

corporations, and trade associations representing diverse interests. For example, ajoint labor 

union sign-on letter in support of the "Marketplace Fairness Act" (S. 1832) is attached at the end 

of this testimony. Moreover, S. 1832 has strong bipartisan Senate support urging enactment. 

State or Local Government Tax Authority Preemption 

AFSCME strongly opposes restricting or preempting state government or local 

government tax authority. Proposed policies in support of this objective would establish harmful, 

inappropriate, and costly precedents of federal preemption over state and local fiscal decisions. 

Congress should not prevent a state or local government from deciding its own needed 

combination of taxes, fees or revenues. Currently, each state and locality decides its own tax 

base, rates and revenue goals. For example, each jurisdiction has the autonomy to decide its own 

unique combination of taxable goods and services, set its own varied tax rates, address the needs 

of its local economy and meet its re'venue needs. We believe this should remain an inherent 

function of state and local governments. 

During the current and prior congressional sessions, many special interest preemption 

bills were introduced and debated targeting various specific products, industries and taxes. 

However, they all share one major theme in common. Under the pretense of "tax simplification" 

or "tax fairness," these preemption proposals are designed to reduce taxes, mostly on businesses 

that are otherwise due to states and localities, and thereby reduce the revenues needed to 

adequately invest in public education, health care, job creation, infrastructure and the social 

safety net. For these reasons, AFSCME is opposed to proposals which restrict or preempt state or 

local government tax authority, including: 
152 


80344.123

The Digital Goods and Services Tax Fairness Act (S. 971 & H.R. 1860); 

The Wireless Tax Fairness Act (S. 543 & H.R. 1002); 

S. 1934, which contains a pennanent moratorium on internet access taxes and 

discriminatory taxes on electronic commerce, and prohibits state taxation of certain travel 

services; 

• The End Discriminatory State Taxes for Automobile Renters Act (H.R. 2469); 

The Mobile Workforce State Income Tax Simplification Act (H.R. 1864); and 

The Business Activity Tax Simplification Act from previous Congresses. 

II. Federal Income Tax Deductions and Exclusions 

Federal Personal Income Tax Deductions 

AFSCME strongly supports retaining the existing federal personal income tax deduction 

for state and local government income tax and property tax. AFSCME also supports the federal 

deduction for state and local government retail sales taxes, which expired Dec. 31, 2011. The 

deduction for state and local taxes has been a vital part of the federal income tax system since it 

began. It was one of only two deductions specifically provided for in the Income Tax Act of 

1861. These vital deductions recognize the principles of federalism, avoid double taxation, and 

ease state and local government financing for needed public services and infrastructure. 

Moreover, they arc esscntial to maintaining and enhancing thc progressivity and adequacy of 

state and local tax systems. 

Federal Tax Exclusions for Interest Income and Build America Bonds 

AFSCME strongly supports the existing federal tax exclusions for interest income from 

state and local government public purpose bonds. This exclusion helps state and local 

governments reduce their financing costs for modernizing infrastructure, including America's 

public schools, mass transit and transportation network, and systems for delivering safe drinking 

water, electricity and other daily necessities. 

We also have been a strong supporter of Build America Bonds. Given its recent 

expiration, AFSCME supports a pennanent program for Build America Bonds. This could 

include proposals for a 28% federal subsidy level, which is intended to be revenue neutral 

compared to estimated future federal tax expenditures for tax-exempt bonds, andlor enhancing 

eligible uses to include short-tenn government working capital financings of governmental 

operating expenses. 

Tax Credits for Certain Business Deductions 

Almost every state links its tax code to the federal internal revenue code for both personal 

income tax and corporate income tax purposes. Thus, some federal tax provisions, notably 

domestic production deduction and bonus depreciation, result in significantly reduced state tax 

revenues. To the extent these provisions remain in the code, it would be useful to consider other 

options for implementing these provisions, to which states are not linked, such as tax credits. 
153 


80344.124

III. Conclusion 

Federal tax policy has a direct and significant impact on state and local government 

finances. It is therefore important that careful consideration be given to the consequences, 

intended or not, of changes in tederallaw which affect the ability of states, cities, counties and 

other jurisdictions to provide vital public services for the common good. In considering various 

tax reform proposals, careful consideration should be given to preserving state and local tax 

authority and fostering an environment offairness, growth and stability. 
154 


80344.125

April 24, 2012 

Unions strongly support bipartisan "Marketplace Fairness Act" (S. 1832), which empowers 

state and local governments to collect sales and use tax from remote sellers 

Dear Senator: 

Our undersigned labor unions strongly support the bipartisan Enzi-Durbin-Alexander "Marketplace 

Fairness Act" (S. 1832). It grants states, which streamline their tax systems to facilitate certain business 

transactions, the authority needcd to collect the sales and use taxcs they are owed. We urge you to support S. 

1832 and vote for it when the opportunity arises. 

Our unions have long supportcd constructivc Congressional proposals that enable state and local 

governments to collect sales and use tax from remote and online scllers of goods and services. W c advocate 

for closing tax loopholes that allow scllers to avoid collecting sales tax on hundreds of millions of remote 

purchases made via internet, telephone, and mail. While the loopholes always cause problems, they are very 

troubling now because states and localities suffer from years of broadly reduced revenues. In addition, out of 

state and online sales are skyrocketing along with uncollected sales and use taxes. Also, these loopholes 

inflict increasingly unfair competitivc disadvantages on Main Street and mom-and-pop retailers. According 

to University of Tennessee economics professor Dr. William Fox, uncollected use tax from all remote sales 

in 20 I 2 will cost statc and local governments a cumulative $23 billion. 

Now is the time to enact S. 1832. First, Congress has clear constitutional authority to act to regulate 

interstate commerce of online and remote sales and S. 1832 has bipartisan support. Second, state and local 

governments arc urging Congress to act and strongly support S. 1832. Their ongoing participation in 

developing the Strcamlined Sales and Use Tax Agrecment demonstrates effective and efficient solutions 

exist. Third, both large and small businesscs support S. 1832 because it levels the playing field for 

businesses and streamlines sales tax systcms. Fourth, the claim that it is too burdensome to require small 

business remote sellers to collect sales and use tax is no longer convincing. Most experts now agrce that 

accurate and affordable sales tax collection software exists and enables relatively effortless collection of 

sales taxes. S. 1832 also protccts sellers with a hold harmless for calculating and collecting sales taxes with 

data and certified technology provided by participating states. 

"Marketplace Fairness Act" would not enact new taxes. The affected taxes already exist under 

current law in all 45 states (and the District of Columbia), which impose a sales and use tax. Unfortunately, 

millions of U.S. consumers either unknowingly or purposely do not pay existing use taxes on their remote 

and online purchases. S. 1832 merely provides states the authority and ability to collect these existing 

uncollected taxcs. We also note that S. 1832 has no cost to the federal government. 

Given America's ongoing economic challenges, we think Congress should grant state and local 

governments the legal authority to collect taxes already owed on remote and online sales, which would 

simultaneously ensure businesses face a level playing field competing for consumers. 

We urge you to support and vote for the "Marketplace Fairness Act" (S. 1832). 

Sincerely, 

American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) 

American Federation of State, County and Municipal Employees (AFSCME) 

American Federation of Teachers (AFT) 

Department for Professional Employees, AFL-CIO 

International Association of Fire Fighters (IAFF) 

International Federation of Professional and Technical Engineers (IFPTE) 

National Education Association (NEA) 

Service Employees International Union (SEIU) 

The International Union, United Automobile, Aerospace and Agricultural Implcment Workers of America 

(UAW) 
155 


80344.126

Point of Contact: Joy Ditto 

202-467-2954 

jditto@publicpower.org 

Statement 

Of the 

American 

Public Power 

Association 

1875 Connecticut Avenue, NW 

Suite 1200 

Wa$hington, DC 20009·5715 

AMERICAN PUBLIC POWER ASSOCIATION 

Submitted to the 

SENATE FINANCE COMMITTEE 

For the hearing on 

Ph: 202A67.2900 

Fax: 202.467.2910 

1NWw.APPAnet.org 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

Submitted May 9, 2012 

The American Public Power Association (APPA) appreciates the opportunity to submit this 

statement regarding tax reform and what it means for state and local tax and fiscal policy. While 

a number of issues relating to tax reform will have a direct effect on our members, this statement 

will focus on tax-exempt financing through tax-exempt bonds. 

Byway of background, APP A is the national service organization representing the interests of 

over 2,000 municipal and other state- and locally-owned, not-for-profit utilities throughout the 

United States (all but Hawaii). Collectively, public power utilities deliver electricity to one of 

every seven electricity consumers (approximately 46 million people), serving some of the 

nation's largest cities. However, the vast majority of APPA's members serve communities with 

populations of 10,000 people or less. 

Overall, public power systems primary purpose is to provide reliable, efficient service to local 

customers at the lowest possible cost, consistent with good environmental stewardship. Public power 

systems are locally created governmental institutions that address a basic community need: they 

operate on a not-for-profit basis to provide an essential public service, reliably and efficiently, at a 

reasonable price. 

The majority of APPA members finance electric infrastructure througb the issuance of debt to 

the domestic capital markets. Federal tax exemption for interest paid on such debt permits 

municipal issuers to sell public purpose debt at lower interest rates when compared to debt the 

interest on which is subject to federal income tax. Most of the overall infrastructure in the United 

States is financed througb the issuance of tax -exempt bonds. 

It is a long-standing principle that the federal government should not tax interest on municipal 

bonds. This reflects the basic "federalism" principle that one level of government should not tax 
156 


80344.127

another. This principle applies-with some exceptions-to almost all forms of govermnent 

financing. So, just as state and local governments do not assess property taxes on federal 

property within their jurisdictions and do not tax interest on Treasury bills, notes or bonds, so the 

federal govermnent should not tax municipal bond interest. 

This principle was at the core of the 1895 Supreme Court decision that, as a Constitutional 

matter, the federal govermnent could not impose such a tax. I The Revenue Act of 1913 codified 

this exemption, restated in Section 103(a) of the Internal Revenue Code of 1954 and reaffirmed 

in the Tax Reform Act of 1986. While the latter greatly reduced private activities that may be 

financed with tax-exempt bond proceeds, it did not fundamentally alter the exemption for bond 

financing of public activities as is being considered. 

Even after the Supreme Court found that the federal govermnent could regulate municipal bonds 

in 19882

-a decision taken as opening the door to begin taxing bond interest-Congress has 

continued to honor the principle that the federal government should not tax state and local bonds. 

Of late, however, there has been a disturbing willingness among some policymakers to consider 

abandoning this principle.3 As an obvious result, confirmed by recent analysis, such a change 

would increase the cost of state and local borrowing, in turn leading to an immediate reduction in 

investments in infrastructure. This is bad economic policy at two levels: it would result in fewer 

jobs for those who would build, repair, and improve this infrastructure; and it would hurt the 

businesses who rely on this infrastructure to be productive. 

It is also an unnecessary step. While some rationalize the decision to propose a tax on state and 

local bonds with the argument that "everything must be on the table," some major tax reform 

proposals retain the tax exemption for such bonds.4 

As a result, APPA believes that tax-exempt financing should be preserved and enhanced-not 

further limited. This includes reversing the limits put on tax-exempt bonds in the Tax Reform 

Act of 1986. Tax-exempt financing is critical for maintaining infrastructure, updating electric 

utility services, providing electricity at reasonable costs for ratepayers, and creating jobs. In sum, 

APPA opposes any efforts through tax reform, or other legislation, to undermine or limit this 

important financing tool. 

Thank you again for this opportunity to discuss the effect of federal tax reform on state and local 

tax and fiscal policy. 

1 Pollock v Farmers' Loan & Trust Company, 157 US 429 (1895). 

2 South Carolina v. Baker 485 US 505 (1988). 

3 National Commission on Fiscal Responsibility and Reform, "The Moment of Truth" (Draft Report) 31 Dec. 2010 

(proposing the taxation of interest on new issues); Bipartisan Tax Fairness and Simplification Act of 2011, S. 727, § 

111, 112'" Cong .. 1st Sess. (20 II) (proposing the conversion of the exclusion of interest into a capped tax credit); 

U.S. Dept. of Treasury, General Explanations of the Administration's Fiscal Year 2013 Revenue Proposals, 73, 

(Feb. 2012) (limiting the value of the exclusion of bond interest to 28 percent). 

4 Bipartisan Policy Center. "Restoring America's Future: Reviving the Economy, Cutting Spending and Debt, and 

Creating a Simple, Pro-Growth Tax System" 128 (Dec. 28, 2010). 
157 


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Prepared Statement of 

American Trucking Associations 

Before the 

Committee on Finance 

United States Senate 

April 25, 2012 

Hearing on State & Local 

Tax & Fiscal Policy 
158 


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Mr, Chairman, Ranking Member Hatch, and members a/the Committee: 

The health of this Nation's economy depends critically on interstate commerce, and 

interstate commerce in tum depends very heavily on efficient freight transportation. 

Most of that freight is carried by truck some 67% by tonnage and some 81 % as 

measured by transportation receipts, The interstate motor carrier industry is 

correspondingly large, comprising several hundred thousand for-hire trucking companies. 

Although a few carriers are large, the overwhelming majority of trucking companies are, 

by any definition, small businesses. The average trucking company operates a fleet of 

only six trucks, and there are many thousands of operations with only a single vehicle.! 

In many respects, these small businesses resemble their counterparts in other industries, 

except that even the smallest motor carriers may travel into dozens of states in the regular 

course of their business. 

Our industry faces a serious threat of disproportionate compliance costs related to state 

business taxation, from states in which trucking companies do little or no business and 

with which they have few if any of the connections that are commonly considered to 

establish tax nexus. The American Trucking Associations appreciates this opportunity to 

join with other industries to support the call for federal relief from overreaching and 

inequitable state taxation of interstate commerce.2 We emphasize that our industry'S 

primary concern in this area is compliance costs rather than the amount of taxes involved. 

The relief we request should affect aggregate state revenues little if at all. We urge 

Congress to enact such business tax relief promptly. 

Background 

Until 1980, interstate motor carriers were subject to strict federal regulation in an 

economic sense. Prior to deregulation, individual trucking companies did not typically 

travel in more than a few states and therefore were not exposed to taxation in many 

states. The great expansion in the number of trucking companies and in the scope of their 

operations in a largely deregulated economy has changed that. And with deregulation, 

states began to tap what they saw as a new source of revenue. The fact that trucking 

companies might be involved in critical areas of interstate commerce seems to have made 

them more rather than less attractive 0 bj ects for taxation for states and localities, since, in 

any given place, most of the trucks passing through do not represent local residents but 

businesses from outside the state. 

1 Some 90% of motor carriers operate fewer than six trucks; only some 3% operate more than twenty, 

American Trucking Assns" 2012 American Trucking Trends, ATA: Arlington, VA, 2012, pp, iv-vi. 

2 AT A is the national trade association of the American trucking industry, It is a united federation of motor 

carriers, state trucking associations, and national trucking conferences created to promote and protect the 

interests of the motor carrier industry, ATA's membership includes nearly 2,000 trucking companies and 

suppliers of motor carrier equipment and services. Directly and indirectly through our affiliated 

organizations, ATA encompasses over 37,000 companies and every type and class of motor carrier 

operation, 
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80344.130

Prior Congressional Action 

Time and again since 1980, Congress has had to step in to protect the motor carrier 

industry from the effects of state and local taxation, to restrict the taxing authority of 

these jurisdictions and the manner in which they may administer otherwise valid taxes. 

Some years ago, for example, a number of states began to assess personal income taxes 

against interstate truck drivers who merely drove through in the course of their 

employment. Congress responded to this intolerable situation by prohibiting any state 

but the state of residence from taxing an interstate transportation worker, and from 

requiring transportation company employers from withholding wages except for the state 

ofresidence.3 Again, following a U.S. Supreme Court decision on a state tax issue that 

could drastically have affected interstate bus operators, Congress stepped in to give this 

segment of the motor carrier industry the relief it needed.4 And in the Motor Carrier Act 

of 1980 itself, Congress provided the industry protection against discriminatory state and 

local property taxes and access to federal district courts to invoke that protection. 5 

Because of deregulation and the competition it has so successfully fostered, trucking is 

today a low-margin industry. Deregulation of our industry has saved the overall 

American economy billions in reduced transportation costs, but truck rates remain much 

lower in real terms than they were in 1980.6 In a typical year, the average for-hire 

trucking operation may clear a 2% to 3% profit very roughly, 3 to 6 cents per mile 

traveled by a truck. In a bad year, the average industry profit may sink close to zero.? 

Compared to many other industries, motor carriers commonly have little in the way of net 

income for states to subj ect to tax. 

The recent recession was very hard on the trucking industry, as it was on so many other 

businesses. The deregulated industry had never faced times like these. Motor carriers 

that have survived the last few years now face both very high fuel prices and 

unprecedentedly high prices for the replacement of their equipment. Those higher truck 

prices are driven in large part by the cost of environmental regulation, and smaller 

trucking operations are in many instances hard-pressed to find financing for the 

equipment they need to buy. Unwarrantedly high state and local tax compliance costs 

are, for a growing number of our members, another source of hardship. 

Under economic regulation, except for the largest operations, motor carriers fulfilled their 

state business tax obligations at home. To a great extent, this has remained the case: 

small trucking companies, like small businesses in other industries, file corporate tax 

reports in their state of domicile and in perhaps one or two others where a significant 

3 See. 49 U.S.c. 14503. 

4 See, 49 U.S.C. 14505. 

5 Congress has granted the railroad industry much more comprehensive protection in this respect, however; 

compare 49 U.S. 14502(b) with 49 U.S.C. 11501(b). 

6 American Trucking Assns., 2012 American Trucking Trends, op. cit., p. 18. 

7 Statistics from 1993 through 2002. American Trucking Assns., 2004 American Trucking Trends, AT A: 

Alexandria, VA, p. 15. The U.S. DOT has yet to release data for more recent years. 
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proportion of their business may occur. 8 Indeed, the typical smaller trucking operation 

has but one place of business - in its home state - and has no property or payroll in any 

other jurisdiction.9 

Held for Ransom 

Imagine now if you will the situation of a small trucking company, one that might be 

based in any state and operates only a few trucks. In the course of its business, it gets a 

call to pick up or to deliver a load in New Jersey, a state it may enter only occasionally. 

In New Jersey, perhaps at a rest stop or a shipper or consignee's loading dock, an agent 

of the New Jersey Division of Taxation approaches the truck, identifies himself to the 

driver, states that the company hasn't registered for the state's corporate tax, and asks the 

driver how long the company has been picking up or delivering loads in New Jersey. The 

driver is unlikely to know, of course, but will probably venture some number of years. 

The state multiplies the number given by $1,100, and the resulting sum serves as a 

'Jeopardy assessment" of corporate tax - in practical effect the ransom for the truck, the 

driver, and its cargo. The truck and cargo is impounded, the driver is told to contact the 

company and that the truck will be released only when the money is wired to the state. If 

the driver protests at the outrage, he may be taken to jail. There is evidence that New 

Jersey has assessed some 40,000 interstate motor carriers in this manner over the last five 

to ten years, most of them small businesses.! 0 New] ersey does accord a carrier the 

option of appealing an assessment once it has been paid - but the process is long, 

laborious, expensive, and uncertain. 

Other State Campaigns 

New Jersey is - so far the only state that has attacked interstate commerce by truck so 

aggressively. Periodically, however, and typically in difficult economic times like the 

present, one or more states mount a general campaign to force smaller trucking 

companies located outside their borders but traveling on their roads to pay their business 

taxes. Such a campaign typically starts with a widespread mailing of a "nexus 

questionnaire" to hundreds or thousands of motor carriers that have paid operating taxes 

, All interstate trucking operations, large and small, pay vehicle registration fees and motor fuel taxes for 

the use of the roads to each state in which they travel. Carriers fulfill these obligations to pay taxes through 

two organizations the International Registration Plan and the International Fuel Tax Agreement which, 

under Congressional mandate (see, 49 U.S.C. 3170 I ,if.), ensure that all states administer these tax 

programs by means of a uniform structure that guarantees to all states the revenues due them and minimizes 

administrative costs for state and motor carrier alike. These operating taxes are not at issue here. 

9 Larger companies, of course, with facilities in multiple states, are obligated to file returns in those states 

as well as where their home offices are located. 

10 Note too that owner·operators that have incorporated, and many have, are also subject to the New Jersey 

tax, even though they may never operate in the state under their own interstate authority, but always while 

leased to another carrier. Sometimes, therefore, the presence of a single truck, making a single delivery of 

freight, is nexus as far as New Jersey is concerned, that is - for two entities. In hard economic times, a 

jeopardy tax assessment such as those New Jersey has been in the habit of levying on the industry could 

easily be the last straw for a company attempting to stave off bankruptcy. 
161 


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to the state. I I Companies that answer the questionnaire and return it and those that do 

not return it receive increasingly threatening communications from the state until they do 

- typically then receive a further letter from the state, advising them that the state has 

determined that they have nexus there and enclosing a bill, typically for several years 

(occasionally even decades) of back taxes, plus penalty and interest. 

Particularly for smaller motor carriers, this is a cruel absurdity. Typically, the state that 

seeks to force interstate motor carriers to pay its business taxes not only assesses for 

years of back taxes, but also either imposes a minimum corporate tax or taxes gross rather 

than net receipts. 12 Through the use of these gimmicks, a state will have magnified the 

claimed liability out of all proportion either to the carrier's travel in the state or to its net 

income. 

A large, unanticipated assessment for back taxes frequently represents a disaster for a 

small (or even a larger) motor carrier. For the more distant back years, the carrier will 

also be precluded by the statute of limitations from amending the returns it filed with its 

home state and claiming a credit. Last - and definitely not least - are the accountant's 

fees the carrier must pay to have the newly required return prepared. These can run 

upwards of $1 ,500 for even a single, relatively simple corporate tax report. And this is an 

expense the carrier can look forward to bearing in each year into the future, for once it 

starts filing an annual tax return with a state it cannot easily stop doing so. 

It is these compliance costs - the accountant's costs, and the sheer labor, time, and 

trouble involved in complying with numerous varying state requirements - of which our 

industry most complains. Trucking companies are not trying to avoid their tax 

obligations; they understand that the government services they really avail themselves of 

must be paid for. But they do object to paying exorbitant costs for complying with the 

requirements of states where they have no establishment, where they have little business, 

and where the nexus rules, where they published at all, are extremely vague as regards 

interstate trucking operations. 

State Nexus Standards 

What do states commonly assert as tax nexus for an interstate motor carrier? This is 

often unclear; state tax statutes and regulations often have nothing specific to motor 

carrier nexus, and provisions adequate for less mobile industries can be perplexing for 

administrator and carrier alike when applied to trucking. Moreover, while it is 

undoubtedly the case that a state may under the U.S. Constitution levy a tax on an 

11 When the Pennsylvania Department of Revenue began its "nexus campaign" against the industry about 

1993, it mailed out threatening notices and assessments to some 30,000 interstate trucking companies. 

12 California, Massachusetts, New Jersey, New York, and Pennsylvania have all aggressively sought to tax 

interstate motor carriers while they imposed minimum taxes of several hundred to well over $1,000 per 

year. Michigan and Pennsylvania have sought to impose taxes based at least in part on gross receipts on 

the industry. Other states that regularly seek to impose their business taxes on interstate motor carriers with 

only slight contacts with the state include Illinois, Nebraska, Ohio, Virginia, and Wisconsin. 
162 


80344.133

interstate motor carrier, to the U.S. Supreme Court has left this area of the law in 

obscurity. A state may make a mere assertion of nexus rather than define it exactly. 

Until recently, no state has sought to collect tax from a motor carrier that merely travels 

on its roads and has no business at all in the state, but now at least a couple of states seem 

prepared to try to collect money on even that slim basis. I4 

This uncertainty in the law leaves motor carriers in a quandary, not knowing whether to 

file in a given state or not. Many motor carriers, typically on the advice of their 

accountants, file in many more states than may be warranted, and spend thousands of 

dollars annually in accountants' fees to pay perhaps hundreds of dollars or less in state 

taxes. IS Others, in the absence of any indication from a state that out-of-state carriers 

need to file there, forego filing until suddenly the state changes its position and sends out 

bills for three, five, seven, or more years of back taxes to thousands of interstate carriers. 

Motor carriers commonly find it extremely difficult to pass on these compliance costs to 

their customers. 

State Retaliation 

The year 2009 saw something new in this difficult area an instance of one state 

threatening to retaliate against another because of the latter's aggressive pursuit of 

business taxes motor carriers based in the former. Colorado Joint Resolution HJR09-

1024, adopted May 6, 2009, and attached to this testimony, first recites the elements of 

the problem we are addressing here, and then encourages the Colorado Department of 

Revenue to increase its enforcement of Colorado business taxes against carriers based in 

states that have "unreasonably" burdened Colorado's. In somewhat similar fashion, 

South Dakota Senate Concurrent Resolution 7, adopted March 9, 2009, and also attached 

to this testimony, calls on the state of Nebraska to "provide tax relief and amnesty" to 

trucking companies based in South Dakota. The situations these resolutions seek to 

address are serious, but it may be evident that state efforts of this sort could easily make 

things worse rather than better for interstate motor carriers. A federal solution is needed. 

The current economic times only make this more urgent. 

A Federal Solution 

For the reasons we have outlined, interstate motor carriers are now approaching Congress 

for relief from the efforts of states to impose their taxes on interstate trucking companies 

that have only very tenuous contacts with those states. Public Law 86-272 is of very 

limited if indeed any assistance to our industry, and the provisions of that law, which 

13 In fact, the leading case in this area, Complete Auto Transit v. Brady, 430 U.S. 274 (1977), involved state 

taxation of a motor carrier. 

14 Nebraska and New Mexico have recently asserted nexus for motor carriers on the basis solely of such 

"pass-through" miles, no other contact with the state being, in their view, legally necessary. Carriers that 

ignore or question Nebraska's collection efforts may have liens filed against their equipment. 

15 Filing in many states has another danger for interstate motor carriers: overlapping state apportionment 

formulas can capture more than all of a carrier's net income for state taxation. See, for example, 

Consolidated Freightways Corp. of Delaware v. Wisconsin Dept. of Revenue, 477 N.W.2d 44 (Wise., 

1991). 
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80344.134

was both necessary and appropriate for its time, urgently need updating to reflect the 

Nation's deregulated, more mobile, more service-oriented economy. Trucking 

companies - and interstate commerce, to which trucking is so critical - need protection 

from taxation by a state when they do not have a significant physical or legal 

establishment within its borders. Nor, because of our industry's operations, would a 

solution such as that offered by the Business Activities Tax Simplification Act, H.R. 

1439, provide much relief to motor carriers. The provisions of that legislation would 

leave the nexus rules for motor carriers largely undefined. 

We recommend that Congress pass legislation that would permit a state to impose a 

business tax on a for-hire interstate motor carrier only if that carrier has real property or 

has obtained intrastate operating authority in that state, or is incorporated or has its 

principal place of business in that state. This will leave the vast majority of motor 

carriers to report and pay business taxes only at home, and would leave the aggregate 

state taxes collected from the motor carrier industry as a whole substantially unchanged. 

In many respects, our proposal closely resembles the relief we cited earlier that Congress 

enacted for truck drivers, when those employees were being harassed by states they 

merely drove through in furtherance of interstate commerce. Local government 

impositions on motor carriers can also be a significant burden. Congress should extend 

whatever relief it may enact with respect to state motor carrier taxation to cover local 

taxes as well. 

We anticipate that a bill incorporating our solution to this pressing problem will shortly 

be introduced. We recommend it to the Committee's attention, and urge Congress to 

enact such relief for motor carriers promptly. 

We appreciate very much this opportunity to testify before the Committee. 

Robert C. Pitcher 

Vice President, State Laws 

American Trucking Associations 
164 


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SENATE CONCURRENT RESOLUTION NO.7 

A CONCURRENT RESOLUTION, Requesting the State of Nebraska to provide tax relief and 

amnesty for certain South Dakota trucking companies. 

WHEREAS, the State ofN ebraska has recently notified many South Dakota trucking companies 

that they are required to file Nebraska state income tax returns; and 

WHEREAS, the State of Nebraska has a state income tax which applies to the trucking industry 

and is administered by special trucking rules. The Department of Revenue from the State of 

Nebraska has contacted many South Dakota trucking companies to ascertain their potential income 

tax obligation to the State of Nebraska. These companies were unaware of their income tax 

obligation to the State of Nebraska; and 

WHEREAS, the actual taxable revenue is apportioned to Nebraska for those loads that are loaded 

and unloaded in Nebraska. Otherwise, apportionment is based on all the miles traveled in Nebraska 

divided by the overall miles traveled by the trucking company; and 

WHEREAS, the South Dakota trucking companies did not anticipate that they could incur a 

Nebraska income tax obligation for miles traveled in Nebraska when the load was either loaded or 

unloaded within the boundaries of another state or country; and 

WHEREAS, economic times have been extremely difficult for many industries and individuals 

as well as govermnental units, especially state govermnents. It is understandable in these difficult 

times, that states look for every source of revenue; and 

WHEREAS, the State of Nebraska and the State of South Dakota have each agreed to a tax 

amnesty policy regarding other forms oftaxation. For example, the Streamlined Sales Tax Project 

amnesty program is an attempt to have potential tax payers report and pay their current and future 

tax obligations in a timely manner without worry of substantial penalty; and 

WHEREAS, South Dakota trucking companies are now better informed of their income tax 

obligation to the State of Nebraska and the rules that administer and apply that income tax: 

NOW, THEREFORE, BE IT RESOLVED, by the Senate of the Eighty-fourth Legislature ofthe 

State of South Dakota, the House of Representatives concurring therein, that the South Dakota 

Legislature requests the Nebraska Legislature to forgive all or part of the income tax due for past 
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years on South Dakota trucking companies and to apply this tax on current and future income. 

Favorable resolution of this matter by the Nebraska Legislature will provide relief to an industry that 

also faces financial struggles; and 

BE IT FURTHER RESOLVED, that the South Dakota Legislature requests the Nebraska 

Legislature to develop an amnesty program for out-of-state trucking companies. The amnesty 

program will encourage the trucking companies to file income tax returns and pay their tax 

obligations in a timely manner without fear of severe penalties and interest; and 

BE IT FURTHER RESOLVED, that the South Dakota Legislature expresses its appreciation for 

the Nebraska Legislature'S consideration of this matter. 
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Adopted by the Senate, 

Concurred in by the House of Representatives, 

Dennis Daugaard 

President of the Senate 

Timothy A. Rave 

Speaker of the House 

March 5, 2009 

March 9, 2009 

Trudy Evenstad 

Secretary of the Senate 

Karen Gerdes 

Chief Clerk of the House 
167 


80344.138

CONCERNING ACTION OF THE STATE OF NEBRASKA IN 

SUBJECTING INTERSTATE MOTOR CARRIERS BASED IN 

COLORADO TO UNWARRANTED TAXATION. 

WHEREAS, Colorado's interstate motor carrier industry is an essential component 

of this state's economy; and 

WHEREAS, Colorado's interstate motor carrier industry is made up 

overwhelmingly of small businesses; and 

WHEREAS, the state of Nebraska has for the past several years been seeking to 

subject interstate motor carriers based in Colorado to corporate income taxation in 

that state, although such carriers have no real property, assets, or employees in 

Nebraska; and 

WHEREAS, although the imposition of such taxes by the state of Nebraska 

involves a recent change in position by the revenue agency of that state, Nebraska 

has sought many years of back taxes from interstate motor carriers based in 

Colorado; and 

WHEREAS, the burden of such unwarranted taxation and the heavy associated 

compliance costs is particularly significant for Colorado motor carriers in this time 

of economic distress; and 

WHEREAS, the Colorado Department of Revenue has never sought to impose a 

similar tax on interstate motor carriers based in the state of Nebraska and without 

real property, assets or employees in this state, now, therefore, 

Be It Resalved by the Hause a/Representatives a/the Sixty-seventh 

General Assembly a/the State a/Colorado, the Senate concurring herein: 

That, should the state of Nebraska persist in its campaign to subject interstate 

motor carriers based in Colorado to such unwarranted taxation, the Colorado 

Department of Revenue is hereby directed to impose a similar tax, under existing 

Colorado statute and the regulations of the Department, upon interstate motor 

carriers based in Nebraska and traveling on the roads and highways of this state. 
168 


80344.139

Statement for the Record 

On behalf of 

Beall's Inc. & Subsidiaries 

1806 38th Avenue East 

Bradenton, FL 34208 

Before the 

United States Senate Committee on Finance 

April 25, 2012 

Beall's Inc. appreciates the opportunity to submit a statement for the record of the Senate 

Finance Committee hearing on '"Tax Reform: What it Means tor State and Local Tax and 

Fiscal Policy:' Beall's has a great interest in clarifying the nexus rules that govern the 

states' ability to impose business activity taxes on non-resident companies. To that end, 

we strongly urge that Congress enact H.R. 1439, the Business Activity Tax 

Simplification Act ("BATS A"). 

The U.S. Constitution prohibits the states from imposing any tax on an out-of-state 

business unless that business has a "substantial nexus" with the taxing jurisdiction. In the 

context of state sales and use taxes, the U.S. Supreme Court has construed such 

"substantial nexus" requirement to mean that a business must have more than a de 

minimis physical prescnce in a state before it can be required to collect and remit that 

state's sales or use taxes. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992); 

National Bellas Hess, Inc. v. Department of Revenue of IlL 386 U.S. 753 (1967). The 

state courts that have considered the issue are split on whether the physical presencc test, 

articulated by the U.S. Supreme Court in the context of sales and use taxes, applies 

equally to business activity taxes. 

Over the past several years, a number of states have become increasingly aggressive and 

creative in attempting to expand the reach of their business activity taxes to burden 

companies that have no connection to the taxing jurisdiction. Those states have adopted 

so-called economic nexus theories in an effort to tax the income of out-of-state 

corporations carrying on virtually no income-producing activity in those jurisdictions. It 

is easy to see the appeal to a state in collecting revenue from non-residents, however. 

such tax assessments unconstitutionally burden interstate commerce. 

Beall's strongly supports enactment of BATSA as a means of clarifying the appropriate 

business activity tax nexus standard. BA TSA would make clear that a state can impose 

corporate income and similar taxes only on companies that have a meaningful presence in 

the taxing jurisdiction. Pursuant to the bill, a state or locality cannot impose a business 
169 


80344.140

actIvIty tax on a company unless that business has a physical presence (such as 

employees, an office or property that is either leased or owned) in that state for more than 

fourteen days in a taxable year. The bill protects businesses from business activity 

taxation if the company merely solicits sales in the state or enters the state only to 

purchase goods or property. The bill would not impose any new restriction on the states' 

taxing power. but would merely clarify the states' existing authority to tax interstate 

commerce. 

BA TSA would apply to all direct taxes levied by states. This includes income taxes. 

gross receipts taxes, gross profits taxes, single business taxes, franchise taxes, capital 

stock taxes and business and occupation taxes. BA TSA would not apply to transaction 

taxes based on gross receipts, such as sales and use taxes or gross premium charges on 

insurance companies. 

The Congressional Budget Office did not score the federal revenue impact ofB.R. 1439 

in the current Congress because of a change in its scoring protocols. But, in a previous 

Congress, COO estimated that BATSA would increase federal revenue by $3.1 billion 

over 10 years. The revenue would result from lower federal deductions for state and 

local tax assessments that would be disallowed if the bill were enacted. In short. jf 

BATSA became law, our ballooning federal deficit would decline. 

Moreover. enactment of BATSA would lead to greater investment in U.S. business 

growth and jobs by clarifying the standards for the imposition of business activity taxes 

by states and localities on multi state businesses and by resolving widespread uncertainty 

caused by inconsistent and ambiguous state interpretations of the constitutional standard 

for state taxation of interstate commcrce. 

It is time for Congress to step in and put a stop to aggressive state taxation that threatens 

interstate commerce. We respectfully urge Congress to address this issue this year by 

enacting BATSA into law. 
170 


80344.141

Bond 

Dealers of 

America 

United States Senate 

Committee on Finance 

Hearing on 

"Tax Reform: What it Means for 

State and Local Fiscal Policy" 

April 25, 2012 

Statement Submitted by: 

Bond Dealers of America 

21 Dupont Circle, NW 

Ste.750 

Washington, DC 20036 

Ph: 202-204-7901 

Mike Nicholas, 

Chief Executive Officer 
171 


80344.142

The Bond Dealers of America (BDA) is pleased to submit this statement to the United States 

Senate Finance Committee as a part of its written record of the April 25, 2012 hearing to 

examine "Tax Reform: What it Means for State and Local Fiscal Policy." 

The Bond Dealers of America is the only Washington, DC-based organization that represents the 

unique legislative and regulatory interests of national, middle-market dealers of fixed-income 

securities. BDA members work directly with municipal and state governments and financing 

agencies to facilitate the flow of capital used to fund capital projects that are critical to the 

economic livelihood and employment base throughout the country. 

BDA members work closely with municipal and state governments to facilitate the issuance of 

municipal bonds-including tax-exempt bonds, tax-credit bonds, bank-qualified bonds, direct 

subsidy bonds and refundings. BDA broker/dealers often act as advisors to governments to 

assist them in determining which type of bond is the most effective from both financing and tax 

perspectives. 

Tax-exempt municipal bonds are the cornerstone of state and municipal finance. Taxexempt municipal bonds are the most accessible and effective source of financing for state and 

local governments. Currently, there is $3.7 trillion worth of capital in the municipal market, with 

roughly 70 percent of the outstanding bonds held by individuals either through direct investment 

or indirectly through mutual funds. Tax-exempt bonds are issued by thousands of governmental 

entities, including States, counties, cities, municipal water, sewer, and electric utilities, and 

agencies formed for various other purposes including health care, higher education, airports, 

ports, and housing. Nearly all long-term tax-exempt bonds are issued to finance capital 

expenditures. Short-term borrowings are used by some cities, counties, and States to help better 

match expenditures with tax revenues, since tax revenues may come in unevenly throughout the 

year. 

Interest on municipal bonds has been exempt from federal income tax since the first federal tax 

code was adopted in 1913. Throughout dozens oftax debates, Congress has chosen again and 

again to preserve the tax-exemption for municipal debt as a sign of the federal government's 

commitment to maintain the delicate balance between the federal and state governments and to 

sustain the state and local government role in contributing to a strong national economy. 

The importance of retaining the current tax law treatment for municipal bonds. Proposals 

to limit or eliminate the tax-exemption for municipal bonds have grown out of debate at the 

federal level on ways to reduce the federal debt and deficit to put the federal government on a 

path to fiscal stability. The current Administration has proposed limiting the value of itemized 

deductions (including tax-exempt interest) to 28 percent for individuals in the highest income 

class. The Simpson-Bowles Commission recommended elimination of the federal tax deduction 

for tax-exempt interest. These proposals have been structured to raise a significant amount of 

revenue for the federal government and to, in the case of the Administration's proposal, insure 

that all income classes receive a commensurate benefit from the deduction. 

BDA believes proposals to limit or eliminate the tax-exempt status for municipal bonds are 

misguided from both economic and policy perspectives. Economically, state and local 
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governments are just now beginning to emerge from the recession and are rebuilding their 

historically strong balance sheets. Unlike the federal government, every state (except Vermont) 

is required by its state constitution to annually balance its budget. States cannot sell debt to 

tinance budget gaps and must tum to spending cuts or tax increases to balance their books. 

These tiscal restrictions combined with an increasing responsibility passed down from the 

federal government to fund federal programs like Medicaid and education have strapped many 

state and local government treasuries. For decades, state and local governments have relied upon 

effective, low-cost tax-exempt municipal bonds as a means to fund capital projects that provide 

critical services and create jobs-and the billions of dollars in financing costs governments have 

saved by utilizing tax -exempt financing has been used by state and local governments to fund 

and expand capital projects, maintain essential programs, or reduce taxpayer burdens. 

BDA believes-unequivocably-for these simple reasons that the current tax law treatment of 

interest on municipal bonds must remain unchanged. Eliminating this valuable exemption 

would rattle capital markets, dramatically increase the cost of financing infrastructure 

improvements across the country, and force state and local governments to shift billions of 

dollars of increased financing and administrative costs to taxpayers in the form of higher taxes or 

higher user fees-not just to taxpayers who invest in bonds, but every taxpayer. 

The Potential Impact of Limiting or Eliminating the Tax-Exemption for Municipal Bonds. 

All levels of government benefit from a vibrant, stable capital market for financing state and 

local government infrastructure. The benetits of tax-exempt financing are well-documented 

whereas the potential risks of instability are sometimes ignored. 

a. The cost of financing capital projects could increase exponentially. It is indisputable that 

limiting or eliminating the tax-exemption for interest on municipal bonds would increase the 

cost of municipal debt and hinder infrastructure development. Without access to tax-exempt 

financing, market analysts estimate the yields that state and local governments would be 

compelled to pay to attract investors could increase as much as 25-50 basis points, which 

may make projects too expensive to undertake or could force state and local governments to 

defer or downsize some infrastructure projects. Additionally, yields on debt may need to rise 

even further if investors abandon municipal bonds in favor of higher yields in corporate 

bonds or other investment vehicles. Such activity could leave state and local governments 

without adequate sources of cost-effective financing to devote to capital projects. 

b. Taxpayers-not governments-would bear the increased costs of financing. In a municipal 

market worth $3.7 trillion, state and local governments have been able to save over $700 

billion in financing costs directly tied to tax-exempt bonds. If tax-exempt municipal bonds 

are eliminated as a financing mechanism for capital projects, state and local governments and 

issuers will have little choice but to use more expensive forms of capital financing (i.e., 

taxable bonds and tax-credit bonds) and pass-on additional financing costs they incur to 

every taxpayer in the form of higher taxes and fees (for example, higher property taxes, sales 

taxes, and utility fees). 

c. Small issuers will lose market access. Tax-exempt municipal bonds are widely used by state 

and local governments, but, nationwidc, local government issuances ofthese bonds outpace 
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those issued at the state level. In 2011,55 percent ($155.9 Billion) of tax-exempt bonds were 

issued by local governments, while 42 percent ($120.7 Billion) were issued at the state level. 

(Educational institutions, direct issuers and electric cooperatives account for the remaining 4 

percent ($11.1 Billion).1 The use of tax-exempt fmancing by small communities represents a 

key component in their fiscal plans. Requiring small communities to issue taxable rather 

than tax-exempt debt could increase interest costs by 25 percent. Issuance costs can be 

further impacted by the frequency that an issuer goes to market, e.g. municipalities that issue 

bonds less often and whose credit standing is not analyzed frequently could face higher 

administrative costs and yield demands than large issuers whose fiscal condition is wellknown to investors and underwriters. Further, without access to the tax-exempt market, 

small issuers will find it increasingly difficult to compete for investors in other markets as the 

attractive nature of large issuances offered by states or metropolitan cities will overshadow 

those of small issuers, further driving-up yields and the cost of financing in general. 

Summary 

The municipal market is the backbone of state and local government finance and a key 

component in a vibrant federal economy. Congress and the Administration must continue to 

recognize the vital role that municipal bonds play in providing states and municipalities with 

cost-effective fmancing for capital projects, including roads, bridges, schools, community health 

and higher education facilities. Insuring that states and municipalities can continue to fund 

capital projects by effective means reduces the burden on every taxpayer and all levels of 

government. Bond Dealers of America urges Congress to reaffirm nearly 100 years of federal 

tax law by retaining the current tax law treatment of municipal bonds. 

1 Source: Thomson Reuters (based on data available on April 9, 2012). 
174 


80344145.eps

CARDOZO 

BENJAMIN N. CARDOZO SCHOOL OF LAW. YESHIVA UNIVERSITY 

Edward A. Zelinsky 

Professor of Law 

Senate Committee on Finance 

April 30, 20~2 

Attn: Editorial and Document Section 

Rm. SD-2~9 

Dirksen Senate Office Building 

Washington, DC 20510-6200 

Dear sirs: 

(212)790-0277 

~AX (212) 790-0205 

E-MAILzelimky@prodigynet 

Enclosed please find a statement for inclusion in the record of 

the Committee's hearing held on April 25, 2012 under the title 

"Tax Reform: What It Means for State and Local Tax and Fiscal 

Policy." 

Please do not hesitate to contact me if there is any question 

about the enclosed statement. 

Many thanks. 

SiZ~ 

Edward A. Zelinsky 

Morris and Annie Trachman 

Professor of Law 

BROOKDALE CENTER· 55 FifTH AVENUE· NEW YORK. NY 10003-4391 
175 


80344.146

Statement of Professor Edward A. Zelinsky" Supporting 

the Telecommuter Tax Fairness Act 

I thank the Senate Finance Committee for the opportunity to 

submit a statement for the record of the Committee's hearing held 

on April 25, 2012 under the title "Tax Reform: What It Means for 

State and Local Tax and Fiscal Policy." I urge that the Committee 

pass and send to the full Senate the Telecommuter Tax Fairness 

Act of 2011,2 introduced by Senator Lieberman and cosponsored by 

Senator Blumenthal. This Act responds to the growing national 

importance of telecommuting and the need to prevent other states 

from emulating New York's destructive double taxation of 

nonresident telecommuters. 

By way of background, I am the Morris and Annie Trachman 

Professor of Law at the Benjamin N. Cardozo School of Law of 

Yeshiva University - though the views I present in this statement 

are my personal opinions. I teach and write in the area of state 

and local taxation and was also the taxpayer in Zelinsky v. Tax 

Appeals Tribunal. 3 In that case, I challenged New York's double 

income taxation of nonresident telecommuters on the days they 

work at their out-of-state homes. The Telecommuter Tax Fairness 

Act, if enacted into law, would bar such double taxation by New 

York and other states. 

New York's double income taxation of nonresident 

telecommuters defeats our national interests even as such double 

taxation damages the Empire State's own economy. The Telecommuter 

Tax Fairness Act would end the double taxation of nonresident 

telecommuters and would preclude other states from emulating New 

York's destructive tax practices in this area. 

Congress in the past has used its authority under the 

Commerce Clause to curb similarly dysfunctional state tax 

policies.' Congress should use that authority today by enacting 

1 Edward A. Zelinsky is the Morris and Annie Trachman 

Professor of Law at the Benjamin N. Cardozo School of Law of 

Yeshiva University. His office address is Room 941, 55 Fifth 

Avenue, New York, New York 10003. 

2 S. 1811. 

3 1 N.Y.3d 85, cert. denied, 541 U.S. 1009 (2004). 

, See, e.g., 4 U.S.C. § 114 (forbidding a state from taxing 

"any retirement income of an individual" unless such individual 
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the Telecommuter Tax Fairness Act and thereby ensure that 

nonresident telecommuters are not double income taxed on the days 

they work at home. 

The first section of this statement provides the background 

to the Act. In this first section, I discuss New York's 

"convenience of the employer" doctrine which authorizes double 

income taxation of nonresident telecommuters, my litigation 

against such taxation, the unconstitutionality of such double 

taxation under the Due Process and Commerce Clauses, and the 

strong scholarly consensus against the double taxation of 

nonresident telecommuters caused by the convenience of the 

employer rule. In the next section, I summarize the major 

provisions of the Telecommuter Tax Fairness Act. 

In the third and final section of this statement I address 

the testimony to the Committee of Professor Walter Hellerstein. 

Professor Hellerstein agrees that the employer convenience 

doctrine is unconstitutional and is bad tax policy because of the 

double taxation it causes but thinks there are higher priorities 

for Congress to address. For two reasons, I disagree with my 

colleague on this latter point and contend that the problem of 

the double taxation of nonresident telecommuters deserves 

Congress' immediate attention. Telecommuting is an important and 

valuable national trend which should be taxed by the states in a 

fair and sensible manner. Moreover, Congress' failure to pass the 

Telecommuter Tax Fairness Act will, in the not too distant 

future, lead to a race-to-the-bottom as other states emulate New 

York's unconstitutional and ill-considered double income taxation 

of nonresident telecommuters on the days they work at their outof-state homes. 

Consequently, the Committee should view passage of the Act 

as a high national priority. The Telecommuter Tax Fairness Act is 

important because telecommuting is important. 

is "a resident or domiciliary of such State"). 
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Background: "Convenience of the Employer" 

I did not set out to become the poster boy for the evils of 

double taxing nonresident telecommuters. It just turned out that 

way. As noted above, I am a law professor at Yeshiva University's 

Cardozo School of Law.s State and local taxation is among the 

areas in which I teach and write. I live in New Haven, 

Connecticut. During the semester, I commute on three days each 

week to Manhattan to teach at Cardozo. I spend my nonteaching 

days at my home in New Haven, Connecticut, researching, grading 

and writing. On the days when I research, grade and write at 

home, modern technology, e.g., email, cell phones, the internet, 

gives me access to legal databases and also permits me to stay in 

touch with my colleagues and students in Manhattan (and other 

locations) even though I am at home in Connecticut. My lifestyle 

thus exemplifies the benefits to me and to the society at large 

of telecommuting, facilitated by contemporary technologies. 

When New York, under its so-called "convenience of the 

employer" doctrine, sought to impose New York state income 

taxation for the days I worked at home in New Haven, I resisted. 

On the days when I write, grade and research at home, 

Connecticut, not New York, provides the public services I receive 

on those days. If I need an EMT when I work at home, it is 

Connecticut, not New York, which supplies that EMT. Connecticut, 

not New York, similarly provides me with police protection and 

sewage and water services on the days I work at home. Connecticut 

has a strong rationale for taxing the income I earn working at 

home, both because I am a Connecticut resident and because, on 

such days, Connecticut provides the public services I use. 

Moreover, long-standing decisions of the U.S. Supreme Court 

restrict the taxing authority of the states to the income earned 

within their respective boundaries.' Implementing this 

restriction under the dormant Commerce Clause and the Due Process 

Clause of the U.S. Constitution, the Supreme Court has held that 

S To reiterate: This statement reflects my personal views. 

Neither Yeshiva University nor the Cardozo School of Law has 

reviewed or approved this statement. 

6 Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450, 

463 n. 11 (1995) ("For nonresidents ... jurisdictions generally may 

tax only income earned within the jurisdiction."); Cook v. Tait, 

265 U.S. 47, 55 (1924) ("The taxing power of a State, it was 

decided, encountered at its borders the taxing power of other 

States and was limited by them."). 
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states must apportion the tax liabilities of nonresidents to 

avoid the kind of double taxation which New York inflicts on 

interstate telecommuters by taxing them on days they work at home 

and thus legitimately owe income taxes to their home states. 

Under the rule of apportionment, each state with nexus to a 

nonresident may tax only that state's respective share of the 

nonresident's taxable activity.7 

Despite these decisions of the U.S. Supreme Court, in 

Zelinsky v. Tax Appeals Tribunal' and again in Huckaby v. New 

York State Division of Tax Appeals,' New York's highest court 

refused to curb the so-called "convenience of the employer" 

doctrine under which New York double taxes nonresident 

telecommuters. In simplest terms, New York refuses to apportion, 

that is to say, New York insists on taxing all of my salary 

rather than the portion of my salary I earn on days when I teach 

within New York's borders .'0 

For the years involved in my litigation, Connecticut, as the 

state where I resided and which provided me with public services 

on the days I worked at home, legitimately taxed the income I 

earned on such days. New York, under its employer convenience 

rule, imposed a second state tax on the income I earned working 

at home in Connecticut. Neither state gave a credit for the 

7 MeadWestvaco Corp. v. Illinois Department of Revenue, 553 

U.S. 16, 24 (2008) ("The Commerce Clause forbids the States to 

levy taxes that discriminate against interstate commerce or that 

burden it by subjecting activities to multiple or unfairly 

apportioned taxation"); Complete Auto Transit, Inc. v. Brady, 430 

U.S. 274, 279 (1977) (tax on interstate commerce must be "fairly 

apportioned"); Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 

653, 663 (1948) (tax must be "fairly apportioned" between New 

York and other states) . 

8 1 N.Y.3d 85, cert. denied, 541 U.S. 1009 (2004). 

9 4 N.Y.3d 427, cert. denied, 546 U.S. 976 (2005). 

10 For a more extended discussion of the constitutional and 

practical problems caused by the double taxation of nonresident 

telecommuters' incomes, see Edward A. Zelinsky, New York's 

"Convenience of the Employer" Rule is unconsti tutional," 48 STATE 

TAX NOTES 553 (2008). See, also, Edward A. Zelinsky, Swine Flu, 

Telecommuting and New York's Extraterritorial Taxation of 

Nonresidents' Incomes, OUPblog, 

http://blog.oup.com/2009/05/swine-flu/. 
179 


80344.150

income taxes I paid to the other. The double income taxation 

which resulted imposes a substantial burden on telecommuting at 

precisely the time we should instead be encouraging telecommuting 

to reduce congestion and to expand employment opportunities for 

the parents of young children, for the physically handicapped, 

and for individuals who live far from metropolitan work centers. 

The Telecommuter Tax Fairness Act, if enacted into law, 

would overturn Zelinsky, Huckaby and other decisions of the New 

York courts upholding the Empire State's double income taxation 

of nonresident telecommuters. As discussed below, the Act would 

accomplish this by forbidding the state taxation of a 

nonresident's income unless such income is earned by the 

nonresident's physical presence in the taxing state. The Act 

would preclude all states from utilizing "the convenience of the 

employer" doctrine or similar rules to double tax nonresident 

telecommuters on the days they work at their out-of-state homes. 

The problem of such double taxation is of nationwide 

significance and is not limited to the New York metropolitan 

area. Mr. Huckaby was telecommuting from his home in Nashville, 

Tennessee but New York taxed him under the employer convenience 

rubric for the income he earned working at home in Tennessee -

even though Mr. Huckaby is a Tennessee resident and Tennessee 

(not New York) provided Mr. Huckaby's public services on the days 

he worked at home in Nashville. New York similarly taxed Mr. 

Kakar under the employer convenience banner on days he worked at 

home in Arizona."1 These are not isolated cases but, rather, 

reflect New York's deliberate projection of its taxing authority 

beyond its borders to tax telecommuters throughout the nation 

under New York's "convenience of the employer" doctrine. 

As my case and those of countless other telecommuters 

demonstrate, Congress must enforce the apportionment principle in 

these settings so that all states tax only within their borders 

and tax only their respective portions of the taxable incomes of 

nonresident telecommuters. The Telecommuter Tax Fairness Act 

would require, in a case like mine, that New York apportion, that 

is to say, tax only the portion of my income earned on the days I 

am physically present teaching in New York. The Act would thereby 

eliminate the double taxation caused by New York's "convenience 

of the employer" rule, a rule more properly labeled "the noapportionment/double tax" rule. 

11 In the Matter of the Petition of Manohar and Asha Kakar, 

DTA No. 820440 (February 16, 2006), 2006 STATE TAX TODAY 41-23. 
180 


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I served in both the legislative and executive branches of 

New Haven's city government. From these experiences and from a 

philosophic commitment to federalism, I believe in the selfgovernment of states and their localities. However, our system of 

federalism requires the national government to umpire when 

particular states overreach. That is why the Constitution 

authorizes Congress to supervise interstate commerce under the 

Commerce Clause rather than permitting each state to erect tax 

and regulatory barriers impeding the movement of people, capital 

and ideas across state boundaries. 

Nicole Belson Goluboff is the leading legal commentator on 

telecommuting and a critic of the double income taxation of 

telecommuters caused by New York's employer convenience rule. She 

observes that telecommuting both facilitates work by important 

segments of the population and implements important social 

policies including traffic reduction and livability.'2 In terms 

of constitutionality, Professor Hellerstein concludes that New 

York's employer convenience doctrine ~ignores the distinction 

between the state's" plenary authority to tax all of a resident's 

income and its more limited, source-based power to tax the income 

of a nonresident. '3 On days when nonresidents work at their outof-state homes, New York is not ~providing benefits or 

protections with respect to the production of [the nonresident's] 

income"" and thus lacks the constitutional authority to tax that 

income: 

Because there can be no serious dispute 

concerning the power of a state where an 

employee performs his services to tax the 

employee's income from such services, the 

state of the employee's base of operations 

would appear to lack the power to tax such 

income on an unapportioned basis. 15 

Similarly, Professor Morgan L. Holcomb argues that "the 

Zelinsky court erred" in sustaining the employer convenience 

12 Nicole Belson Goluboff, The Telecommuter Tax Fairness Act 

Is Back, and the Climate Is Right, 44 STATE TAX NOTES 109 (2007). 

13 Walter Hellerstein, STATE TAXATION (3 cd ed. 2007) at para. 

20.05 [4] [e] 

14 Id. 

15 Id. 
181 


80344.152

doctrine against Commerce Clause challenge."' So too Professor 

William V. Vetter observes that, under the dormant Commerce 

Clause, the employer convenience doctrine flunks the external 

consistency requirement for a properly apportioned tax: 

[T]he "convenience of the employer" rule 

necessarily creates the risk of multiple 

taxation ... A rule that creates a recognizable 

risk of double taxation does not pass the 

external consistency test and is therefore 

void under Commerce Clause principles. 

Eliminating the risk is the enacting state's 

duty and is not to be foisted on to other 

states .'7 

The Telecommuter Tax Fairness Act 

If enacted into law, the Telecommuter Tax Fairness Act would 

prevent New York or any other state from taxing nonresident 

telecommuters on the days they work at their out-of-state homes. 

Specifically, under the Act, a state could only tax income earned 

by any "nonresident individual" if such nonresident earns such 

income by being "physically present" in such state .'8 Thus, in 

cases like mine,'9 Mr. Huckaby's20 and Mr. Kakar's,21 New York (or 

any other state) could only tax the income we earn while 

16 Morgan L. Holcomb, Tax My Ride: Taxing Commuters in our 

National Economy, University of Minnesota Law School, Legal 

Studies Research Paper Series, Research Paper No. 07-36, 2007, at 

43, available at http://ssrn.com/abstract=1007088. See also 

Morgan L. Holcomb, Tax My Ride: Taxing Commuters in Our National 

Economy, 46 STATE TAX NOTES 679 (2007) (hereinafter, Holcomb, 

"STN") . 

17 William V. Vetter, New York's Convenience of the Employer 

Rule Conveniently Collects Cash From Nonresidents, Part 2, 42 

STATE TAX NOTES 229, 238 (2006) (emphasis omitted) . 

18 The Telecommuter Tax Fairness Act of 2011, S.1811, § 2(a) 

(adding proposed 4 U.S.C. § 127(a)). 

19 1 N.Y.3d 85, cert. denied, 541 U.S. 1009 (2004). 

20 4 N.Y.3d 427, cert. denied, 546 U.S. 976 (2005). 

21 In the Matter of the Petition of Manohar and Asha Kakar, 

DTA No. 820440 (February 16, 2006), 2006 STATE TAX TODAY 41-23. 
182 


80344.153

physically present in that state, not the income we earn working 

at our out-of-state residences. This would eliminate the double 

taxation of nonresident telecommuters on the days they work at 

their out-of-state homes. 

To protect this physical presence requirement for 

nonresident income taxation, the Act, if it became law, would 

explicitly prevent a state from utilizing "any convenience of the 

employer test or any similar test" to "deem a nonresident 

indi vidual to be present in or working in such State." 22 Also to 

protect the physical presence rule for state taxation of 

nonresidents' incomes, the Act would prevent a state from taxing 

a nonresident by disregarding the nonresident's "work time" in 

another state. 23 Thus, for example, on a Wednesday when I 

research and write at my home in New Haven, Connecticut, New York 

could not tax the income Cardozo pays me on that day, either 

through a "convenience of the employer" test or by declaring that 

that is not a normal work day for me as a law professor and that 

my salary for that day must be allocated to a teaching day when I 

am physically present in New York. 

The Act would protect from double taxation income earned by 

a nonresident either as an employee or as an independent 

contractor. 2< 

Professor Hellerstein's Testimony 

As noted above, Professor Hellerstein joins the scholarly 

consensus which holds that New York's double taxation of 

telecommuting nonresidents under the employer convenience banner 

is unconstitutional. 25 He reiterates that conclusion in his 

written testimony before the Committee by saying that he agrees 

with the Telecommunter Tax Fairness Act "as a matter of 

principle.,,26 However, Professor Hellerstein suggests that 

22 The Telecommuter Tax Fairness Act of 2011, S.1811, § 2(a) 

(adding proposed 4 U.S.C. § 127(b». 

23 rd. (adding proposed 4 U.S.C. § 127 (c». 

,. rd. (adding proposed 4 U.S.C. § 127 (d) (7» 

25 Walter Hellerstein, STATE TAXATION (3 rd ed. 2007) at para. 

20.05[4]le]. 

26 Testimony of Walter Hellerstein at page 31. 
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Congress currently has more pressing priorities in this area.27 

I agree with Professor Hellerstein that there are many vital 

questions in this area which Congress must address." However, 

for two reasons, I contend that passage of the Telecommuter Tax 

Fairness Act should be a high priority. First, the Act is 

important because telecommuting is important. This valuable 

national trend should be taxed by the states in a fair and 

sensible manner. However, Congress' failure to legislate is 

effectively an invitation to the states to emulate New York's 

destructive and unconstitutional double taxation of nonresident 

telecommuters on the days such telecommuters work at their outof-state homes. 

Hence, the second reason the Telecommuter Tax Fairness Act 

should be a high priority for this Committee and for Congress as 

a whole: Failure to pass this Act into law will, in the not too 

distant future, lead to a race-to-the-bottom as other states 

follow New York's unconstitutional and ill-considered double 

income taxation of nonresident telecommuters. 

Conclusion 

Congress should use its Commerce Clause authority to enact 

The Telecommuter Tax Fairness Act and thereby declare a strong 

national policy encouraging telecommuting across state lines. 

Telecommuting is an important element of a national strategy to 

reduce traffic, make our metropolitan areas more livable and open 

employment opportunities. The Telecommuter Tax Fairness Act, by 

forbidding states from double income taxing nonresident 

telecommuters, would further these important policies. The Act 

should be an important priority for this Committee and for 

Congress as a whole. 

27 Id. 

28 It is, for example, important for Congress to give the 

states the authority to collect their respective sales and use 

taxes as to internet and mail order sales. Edward A. Zelinsky, 

California's Once and Future "Amazon" Law, 62 STATE TAX NOTES 83, 

97 (2011). See, also, Edward A. Zelinsky, The Lesson of the 2009 

Holiday Shopping Season: Tax Internet Sales, OUPblog, 

http://blog.oup.com/2010/01/tax-internet-sales/. 
184 


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Comments for the Record 

Senate Finance Committee 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

Wednesday, April 25, 2012,10:00 AM 

By Michael G. Bindner 

Center for Fiscal Equity 

4 Canterbury Square, Suite 302 

Alexandria, VA 22304 

Chairman Baucus and Ranking Member Hatch, thank: you for the opportunity to submit these 

comments for the record to the Senate Finance Committee. As always, our comments are in the 

context of our four part tax reform plan: 

• A Value Added Tax (VAT) to fund domestic military spending and domestic 

discretionary spending with a rate between 10% and 13%, which makes sure very 

American pays something. 

• Personal income surtaxes on joint and widowed filers with net annual incomes of 

$100,000 and single filers earning $50,000 per year to fund net interest payments, debt 

retirement and overseas and strategic military spending and other international spending, 

with graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would 

also pay taxes on distributions from estates, but not the assets themselves, with 

distributions from sales to a qualified ESOP continuing to be exempt. 

• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income 

cap, which allows for lower payment levels to wealthier retirees without making bend 

points more progressive. 

• A VAT -like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT 

with additional tax expenditures for family support, health care and the private delivery 

of govemmental services, to fund entitlement spending and replace income tax filing for 

most people (including people who file without paying), the corporate income tax, 

business tax filing through individual income taxes and the employer contribution to 

OASI, all payroll taxes for hospital insurance, disability insurance, unemployment 

insurance and survivors under age 60. 

Our proposals have several impacts on state and local tax and fiscal policy. Those states with 

fixed conformity provisions regarding income taxation in law or their constitutions will be 

greatly affected by enactment of a simplified income tax which treats distributions from 

inheritance as normal income. Indeed, if they do not enact similar reform, which includes a 

much higher income floor for filing, many more heirs will be touched by this provision than in 

federal law. As most state income tax rate structures are much less progressive than the federal 

system, many states will be able to abandon income taxation altogether, possibly increasing use 

of Land Value Taxes if some form of redistributive tax is still desired. 
185 


80344.156

If the basic structure of refonn is adopted in the states, the biggest change will be the need for a 

common base between federal and state consumption taxes. Shifting from retail sales taxes and 

gross receipts taxes to value added taxes and V AT -like net business receipts taxes will change 

the nature of most state taxation, while enabling ease of collection of taxes on online sales, since 

taxes would be levied at every stage of the production process. 

If a common base agreement can be negotiated for these taxes, state treasurers can collect both 

their own taxes and the federal taxes, as well as analytical infonnation on tax credit usage, which 

can then be shared with the U.S. Internal Revenue Service in order to track income accruing to 

payers of the federal high income surtax, as well as to recipients of the federal child tax credit, 

which would be paid to employees with wages under the NBRT and then verified by a mailing 

from both the employer and the Internal Revenue Service, with employees verifying that their 

employees paid every dollar to them reported as a credit. 

Our hope is that states would match the Child Tax Credit at a level consistent with their cost of 

living. Some states might even include higher credits for certain high-cost counties, for instance, 

Northern Virginia. 

The NBRT at both the state and federal levels should fund services to families, including 

education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, 

Supplemental Nutrition Assistance, Medicare and Medicaid. If society acts compassionately to 

prisoners and shifts from punishment to treatment for mentally ill and addicted offenders, 

funding for these services would be from the NBRT rather than the VAT. 

States may also include several of the educational and social service credits recommended under 

our proposal. The NBR T could be used to shift governmental spending from public agencies to 

private providers without any involvement by the government - especially if the several states 

adopted an identical tax structure. Either employers as donors or workers as recipients could 

designate that revenues that would otherwise be collected for public schools would instead fund 

the public or private school of their choice. Private mental health providers could be preferred on 

the same basis over public mental health institutions. This is a feature that is impossible with the 

FairTax or a V AT alone. 

To extract health care cost savings under the NBRT, allow companies to offer services privately 

to both employees and retirees in exchange for a substantial tax benefit, provided that services 

are at least as generous as the current programs. Employers who fund catastrophic care would get 

an even higher benefit, with the proviso that any care so provided be superior to the care 

available through Medicaid. Making employers responsible for most costs and for all cost 

savings allows them to use some market power to get lower rates, but not so much that the free 

market is destroyed. Increasing Part B and Part D premiums also makes it more likely that an 

employer-based system will be supported by retirees. 

Enacting the NBRT is probably the most promising way to decrease health care costs from their 

current upward spiral - as employers who would be financially responsible for this care through 

taxes would have a real incentive to limit spending in a way that individual taxpayers simply do 

not have the means or incentive to exercise. While not all employers would participate, those 

who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be 

established so that participating employers might trade credits for the funding of fonner 

employees who retired elsewhere, so that no one must pay unduly for the medical costs of 

workers who spent the majority of their careers in the service of other employers. 
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Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a V AT 

credit. 

There will be no impact on the states of FICA reforms, except to the extent that our suggested 

reforms yield a higher base benefit for seniors, which will decrease their need for state social 

service benefits. 

Income tax simplification will eliminate the deduction for state income and property taxes. The 

extent to which state income taxes are eliminated will also eliminate the demand for these, 

although if states adopt higher land value taxes for redistributive purposes, some residual 

deduction for this tax may need to be included in the federal tax code, although doing so will 

simply require higher federal rates to make up the difference. Additionally, abandonment of the 

state income tax deduction has been seen as a reason to entirely federalize Medicaid as an offset. 

Doing so may be appropriate, however if participants in subsidized and paid adult education are 

covered by the provider's insurance as if employees and retirees long term care needs are 

increasingly covered by the firms they retired from as an offset to Net Business Receipts Taxes, 

the question of funding Medicaid may be a minor footnote. 

Thank you for the opportunity to address the committee. We are, of course, available for direct 

testimony or to answer questions by members and staff. 
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COALITION FOR 

RATIONAL 

AND 

FAIR 

TAXATION 

do McDermott Will & Emery LLP 

340 Madison Avenue 

New York, NY 10173 

Senator Max Baucus, Chainnan 

Senator Orrin Hatch, Ranking Member 

Senate Committee on Finance 

United States Senate 

215 Dirksen Senate Office Building 

Washington, DC 20002 

April 25,2012 

Re: Hearing on Tax Reform: What It Means for State and Local Tax and Fiscal 

Policy 

Dear Chainnan Baucus and Ranking Member Hatch: 

Thank you for the opportunity to submit this statement for the record for the April 25, 

2012 hearing on Tax Refonn: What It Means for State and Local Tax and Fiscal Policy on behalf 

of the Coalition for Rational and Fair Taxation ("CRAFT'), CRAFT is a diverse coalition of 

some of America's major corporations involved in interstate commerce, including technology 

companies, broadcasters, interstate direct retailers, publishers, financial services businesses, 

traditional manufacturers, and multi state entertainment and service businesses, CRAFT 

members operate throughout the United States, employ hundreds of thousands of American 

workers and generate billions of dollars for the nation's economy. While the hearing concerns 

many state and local tax issues that apply to CRAFT members and other businesses involved in 

interstate commerce, CRAFT members are particularly concerned about the lack of a national 

standard regarding when states and localities may tax out-of-state businesses. 

CRAFT believes that the bright-line, quantifiable physical presence nexus standard, as 

provided in the business activity tax simplification act ("BA TSA"), introduced as the Business 

Activity Tax Simplification Act of 2011, H.R. 1439, is the appropriate standard for state and 

local taxation of out-of-state businesses. Further, CRAFT believes that the modernization of 

Public Law 86-272, as BATSA would accomplish, is essential for the health and growth of the 

American economy. In today's electronic commerce world, maintaining the physical presence 

standard is more important than ever; while businesses can have customers in other states, the 

governments of those other states still provide protections only to businesses and residents that 

are physically located within their borders. Therefore, CRAFT strongly supports BA TSA and 

respectfully urges the approval of this legislation for consideration by the full Congress and 

ultimate enactment. CRAFT believes that it is essential for Congress to provide clear guidance 

to the states in the area of state taxing jurisdiction, remove the drag that the current climate of 
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uncertainty and unpredictability places on American businesses, and thereby protect American 

jobs and enhance the American economy. 

I. BACKGROUND 

The principal motivation for the adoption of the United States Constitution as a 

replacement to the Articles of Confederation was a desire to establish and ensure the 

maintenance of a single, integrated, robust American economy. This is reflected in the 

Commerce Clause, which provides Congress with the authority to safeguard the free flow of 

interstate commerce. Enacting legislation regarding states and localities imposing, regulating, or 

removing tax burdens placed on transactions in interstate commerce is not only within Congress' 

realm of authority, it is also - we respectfully submit Congress' responsibility. 

Unfortunately, some state revenue departments and state legislatures have been creating 

barriers to interstate commerce by aggressively attempting to impose direct taxes on out-of-state 

businesses that have little or no connection with their state. Specifically, some state revenue 

departments have asserted that they can tax a business based merely on its economic presence in 

the state - such as the presence of customers - based on the recently-minted notion of "economic 

nexus." The "economic nexus" concept flies in the face of the current state of business activity 

taxation, which is largely based on the eminently valid notion that a business should only be 

subject to tax by a state from which the business receives benefits and protections. And worse, it 

creates significant uncertainty that has a chilling effect on interstate economic activity, 

dampening business expansion and job growth. As a practicing attorney, I regularly advise 

businesses that ultimately decide not to engage in a particular transaction out of concern that they 

might become subject to tax liability in that state. It is entirely appropriate for Congress to 

intervene to prevent individual states from erecting such barriers to trade, and to protect and 

promote the free flow of commerce between the states for the benefit of the American economy.! 

There can be no doubt that the rapid growth of electronic commerce continues to 

drastically alter the shape of the American and global economies. As businesses adapt to the 

"new order" of conducting business, efforts by state revenue departments to expand their taxing 

jurisdiction to cover activities conducted in other jurisdictions constitute a significant burden on 

the business community's ability to carry on business. Left unchecked, this attempted expansion 

of the states' taxing power will have a chilling effect on the entire economy as tax burdens, 

compliance costs, litigation, and uncertainty escalate. Clearly, the time is ripe for Congress to 

consider when state and local governments should and should not be permitted to require out-ofstate businesses to pay business activity taxes. It appears eminently fair and reasonable for 

Congress to provide relief from unfair and unreasonable impositions of business activity taxes on 

out-of-state businesses that have little or no physical connection with the state or locality. 

I See, e.g., Diann L. Smith, Supreme Court Would Uphold P.L 86-272 (letter to the editors), 25 State Tax Notes 135 

(Julv 8. 2002) (discuss in!! the authoritv of Con!!fess to regulate interstate commerce 1. 
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80344.160

Confronted with aggressive - and often constitutionally questionable - efforts of state 

revenue departments to tax their income when they have little or no presence in the jurisdiction, 

American businesses are faced with a difficult choice. They can challenge the specific tax 

imposition - but must bear substantial litigation costs to do so. Or, they can knuckle under to the 

state revenue departments and pay the asserted tax - but then they risk being subject to multiple 

taxation and risk violating their fiduciary responsibilities to their shareholders (by paying invalid 

taxes) and hence, become subject to shareholder lawsuits. Unfortunately, the latter choice is 

sometimes made, especially since some state revenue departments are utilizing "hardball" 

tactics.2 Moreover, the compliance burdens of state business activity taxation can be immense. 

Think of an interstate business with customers in all 50 states. A recent study found that over 

3,000 state and local taxing jurisdictions currently impose some type of business activity tax, and 

thousands more have the authority to impose such taxes but do not currently do SO.3 If economic 

nexus were the standard, that business would be faced with having to file an income or franchise 

tax return with every state, and pay license or similar taxes to thousands of localities. 

BA TSA is designed to address the issue of when a state should have authority to impose 

a direct tax on a business that has no or only a minimal connection to the state. BATSA applies 

to state and local business activity taxes, which are direct taxes that are imposed on businesses 

engaged in interstate commerce, such as corporate income taxes, gross receipts taxes, franchise 

taxes, gross profits taxes, and capital stock taxes. BATSA does not apply to other taxes, like 

personal income taxes, gross premium taxes imposed on insurance companies, sales and use 

taxes or other transaction taxes. 

The underlying principle of this legislation is that only states and localities that provide 

meaningful benefits and protections to a business like education, roads, fire and police 

protection, water, sewers, etc. - should be the ones who receive the benefit of that business' 

taxes, rather than a remote state that provides no services to the business. Further, businesses 

should only pay tax to those states and localities where they earn their income, and income is 

only earned where a business is actually located. By imposing a physical presence standard for 

business activity taxes, BA TSA ensures that the economic burden of state tax impositions is 

appropriately borne only by those businesses that receive such benefits and protection from the 

taxing state and ensures that businesses pay these taxes only to those states and localities where 

they have earned income. Perhaps most important, BATSA's physical presence nexus standard 

is entirely consistent with the jurisdictional standard that the federal government uses in tax 

treaties with its trading partners. 

Z See, e.g., Business Activity Tax Simplification Act 0/2008: Hearing on HR. 5267 Be/ore the House Comm. on 

Small Business, I 10th Congo (2008) (testimony of BaIT)' Godwin, on behalf of National Marine Manufacturers 

Association). 

3 Ernst & Young. State and Local Jurisdictions Imposing Income, Franchise, and Gross Receipts Taxes on Business 

(March 7, 2007). 
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A. A BRIEF HISTORY 

The question of when a state has the authority to impose a tax directly on a business 

domiciled outside the state is a long-standing issue in constitutional jurisprudence.4 In many 

ways, the issues BA TSA seeks to resolve first came to the fore in a 1959 United States Supreme 

Court decision. In Northwestern States Portland Cement, the Supreme Court ruled that a 

corporation with several sales people assigned to an office located in the State of Minnesota 

could be subjected to that state's direct tax scheme,5 overturning a "well-settled rule ... that 

solicitation in interstate commerce was protected from taxation in the State where the solicitation 

took place.,,6 As a result, Congress responded rapidly, enacting Public Law 86-272 a mere six 

months later. Public Law 86-272 prohibits states and localities from imposing income taxes on a 

business whose activities within the state are limited to soliciting sales of tangible personal 

property, if those orders are accepted outside the state and the goods are shipped or delivered 

into the state from outside the state.? Subsequently, the Congressional Willis Commission 

studied this and other interstate tax issues and concluded that, among other things, a business 

should not be subject to a direct tax imposition by a state in which it merely had customers. 8 

B. WHERE WEARE TODAY 

Nearly fifty years later, we are no closer to a definitive answer as to when may the states 

impose their business activity taxes on out-of-state businesses. In recent years, certain states and 

state revenue department organizations have been advocating the position that a state has the 

right to impose tax on a business that merely has customers there, even if the business has no 

physical presence in the state whatsoever.9 This "economic nexus" argument marks a departure 

from what businesses and other states have believed (and continue to believe) to be the proper 

jurisdictional standard for state taxation of business activity taxes. Specifically, CRAFT 

members believe that a state can impose direct taxes only on businesses that have a physical 

4 See, e.g., Walter HeHerstein, Stale Taxation of Interstate Buriness: Perspectives on Two Centuries of 

Constitutional A4judication, 41 Tax Law. 37 (1987). 

, Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959). 

6 Wisconsin Dep't 0/ Revenue v. William Wrigley Jr. Co., 505 U.S. 214, 238 (1992) (Kennedy, J., dissenting). 

7 P.L. No. 86-272,73 Stat. 555 (codified at 15 U.S.C. §§ 381 el seq.). 

, Special Subcomm. on State Taxation oflnterstate Commerce of the House Comm. on the Judiciary of the U.S. 

House of Representatives, "State Taxation oflnterstate Commerce," H.R. Rep. No. 1480, 88th Cong., 2d Sess. 

(1964); H.R. Reps. Nos. 565 and 952, 89th Congo (1965), Vol. I, Part VI., ch. 39, 42. See also W. Val Oveson, 

Lessons in Slale Tax Simplification, 2002 State Tax Today 18-39 (Jan. 20, 2002). 

9 A survey conducted by BNA Tax Analysts demonstrates the extent to which the states are asserting the right to 

impose tax on out-of-state businesses based on so-called "economic nexus" grounds. Special Report: 2008 Survey 

a/Slate Tax Deparlments, 15 Multistate Tax. Rep't 4, pp. S-15 - S-53 (April 25, 2008). See also Ensuring the 

Equity, Integrity and Viability 0/ Mullislale Tax Systems, Multistate Tax Commission Policy Statement 01-2 

(October 17,2002). Accord Letter from Elizabeth Harchenko, Director, Oregon Department of Revenue, to Senator 

Ron Wyden (July 16,2001). See also Doug Sheppard, The Certainty a/Disagreement on Business Activity Tax 

Nexus, 25 State Tax Notes 420 (Aug. 5, 2002). 
191 


80344.162

presence in the state.· v Although this issue has been litigated, state courts and tribunals have 

rendered non-uniform decisions. I! Unfortunately, the Supreme Court has not granted a writ of 

certiorari in any relevant case. 12 

The bottom line is that businesses should only pay tax where they earn income. It may 

be true that without sales there can be no income. But, while this may make for a nice sound 

bite, it simply is not relevant. Economists agree that income is eamed where an individual or 

business entity employs its labor and capital, i.e., where he, she or it actually performs work. 13 

Proponents of an economic nexus standard argue that the states provide benefits for the 

welfare of society as a whole and, therefore, the states should be able to collect tax from all U.s. 

businesses, wherever located. Such an argument is not only ludicrous, but it ignores the fact that 

businesses pay federal taxes for such general benefits and protections. Proponents of an 

economic nexus standard also argue that states have spent significant amounts of revenue to 

maintain an infrastructure for interstate commerce. But businesses only receive meaningful 

benefits and if they are actually located within a jurisdiction. Further, while a state government 

may expend resources to maintain an infrastructure for interstate commerce, it does so for the 

benefit of its constituents and not for the benefit of out-of-state sellers. Imposing business 

activity taxes on out-of-state businesses is truly "taxation without representation.,,14 

II. BATSA PROVIDES AN ApPROPRIATE SOLUTION 

A. PROV1SlONSOFBATSA 

BA TSA ensures fair and equitable taxation of out-of-state businesses by codifying the 

physical presence standard and by modernizing Public Law 86-272. BATSA codifies the 

physical presence standard through the following provisions: 

• BATSA provides that a state or locality may not impose business activity taxes on 

businesses that do not have a "physical presence" within the taxing jurisdiction. 

10 The Business Activity Tax Simplification Act of2003: Hearing on HR. 3220 Before the Subcommittee on 

Commercial and Administrative Law of the House Comm. on the Judiciary, 108th Congo (2004) (statements of 

Arthur R. Rosen on Behalf of the Coalition for Rational and Fair Taxation, Jamie Van Fossen, Chair oflowa House 

Ways and Means Committee, and Vernon T. Turner, Smithfield Foods, Inc.). 

II See, Joseph Henchman, Why the Quill Physical Presence Rule Shouldn 'f Go the Wc:ry of Personal Jurisdiction, 46 

State Tax Notes 387 (Nov. 5, 2007). 

12 See, e.g.. Geoffrey, Inc. V. Mass. Comm'r of Rev., 899 N.E.2d 87 (Mass. 2009), cerf denied 2009 U.S. LEXIS 

4584 (2009). 

13 As noted by one state tax expert, "'[i]ncome,' we were told long ago, 'may be defined as the gain derived from 

capital, from labor, or from both combined.'" W. Hellerstein, On the Proposed Single-Factor Formula in Michigan, 

State Tax Notes, Oct. 2, 1995, at 1000 (quoting Eisner v. Macomber, 252 U.S. 189,207 (1920)). 

14 Although a business with a physical presence may not vote, it is clearly part of the jurisdiction'S local society and 

is able to bave an impact on the government's policies and practices. 
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• BATSA provides exceptions for certain quantitatively and qualitatively de minimis 

activities in determining if the requisite physical presence requirement is met. 15 

• BATSA also provides that an out-of-state business will be considered to have a physical 

presence in a state whenever that business uses the services of an agent (excluding an 

employee) to perform services that establish or maintain the taxpayer's market in that 

state, but only if the agent does not perform business services in the state for any other 

person. 16 

• BATSA provides that, in the context of a consolidated/combined return, the group return 

can only include in its apportionment factor numerators the in-state apportionment factors 

from corporations that have a physical presence in the state. 

BATSA also modernizes Public Law 86-272 through the following provisions: 

• BATSA expands the protections of Public Law 86-272 to include all sales and 

transactions, not just sales of tangible personal property. 17 

• BATSA ensures that Public Law 86-272 covers all business activity taxes, not just net 

income taxes, and thereby prevents aggressive states from avoiding the restrictions on 

state taxing jurisdiction imposed by Public Law 86-272. 18 

• BA TSA also provides that certain qualitatively de minimis activities will be protected by 

the modernized provisions of Public Law 86-272, including patronizing the local market 

(rather than exploiting the market) and mere information gathering. 

B. COMPARISON TO CURRENT COMMON LA W 

The physical presence nexus standard in BA TSA is consistent with the current state of 

the law. An out-of-state business must have nexus under both the Due Process Clause and the 

Commerce Clause before a state has the authority to impose tax on that business. The Supreme 

Court has determined that the Commerce Clause requires the existence of a "substantial nexus" 

15 Quantitatively, a business must have physical presence in a taxing jurisdiction for at least 15 days during a taxable 

year. Qualitatively, BATSA provides that presence in a state to conduct limited or transient activities will not be 

considered in detennining whether a business has the requisite physical presence in the jurisdiction. 

16 Attribution of physical presence for business activity tax purposes has been allowed in only one U.S. Supreme 

Court case where the in~state person perfonned market enhancement activities and only when those activities were 

conducted for a single out-of-state person. Tyler Pipe Industries Inc. v. Washinglon Slale Dep 'I of Rev .• 483 U.S. 

232 (1987). 

" It is important to note that the business activity tax nexus provisions of BATSA and Public Law 86-272 are two 

separate constraints on state taxation of interstate commerce and each law operates independently ofthe other. 

Thus, any activities protected by Public Law 86-272, as modernized by BA TSA, will not create a physical presence 

for that business, regardless of whether the protected activities occur in the taxing jurisdiction for more than 15 days. 

IS Some states have attempted to avoid Public Law 86-272 by establishing taxes on business activity that are 

measured by means other than the net income of the business. Examples include the Ohio Commercial Activity 

Tax, which imposes a tax based on gross receipts, the Texas Margin Tax, which imposes a tax based on "gross 

margin" (i.e., total revenues less either cost of goods sold or compensation), and the Michigan Business Tax which 

has a modified gross receipts component. 
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between the taxing state and the putative taxpayer, whereas the Due Process Clause requires only 

a "minimum" connection. In Quill, the Supreme Court determined that, in the context of a 

business collecting sales and use taxes from its customers, the substantial nexus requirement 

could be satisfied only by the taxpayer having a non de minimis physical presence in the state; 

the Court refrained from articulating the appropriate measure for business activity taxes. 19 The 

Supreme Court has not granted a writ of certiorari in a case that would permit it to address the 

business activity tax nexus issue. 

Since the Supreme Court has not yet ruled on this issue, we must use clear logic and 

review what state courts and tribunals have recently decided. The answer is clear: if non-de 

minimis physical presence is the test for a mere collection and remission situation such as is the 

case for sales and use taxes, physical presence must be, at a bare minimum, the appropriate test 

for the imposition of direct taxes such as business activity taxes. Indeed, the standard for 

business activity taxes should, if anything, be higher than the standard for sales taxes for at least 

two reasons. First, a business activity tax is an actual direct tax, and not a mere obligation to 

collect tax from someone else?O Second, the risk of multiple taxation is higher for income taxes 

than for sales and use taxes21 Several of the state-level decisions on this issue have concluded 

that there is no principled reason for there to be any lower of a standard for business activity 

taxes than for sales and use taxes?2 Finally, the complexities, intricacies, and inconsistencies 

among business activity taxes easily overshadow the administrative difficulties related to sales 

and use tax. n 

19 Quill Corp. v. North Dakota, 504 U.S. 298 (1992). 

20 "As an original matter, it might have been possible to distinguish between jurisdiction to tax and jurisdiction to 

compel collection of taxes as agent for the State, but we have rejected that." Quill Corp. v. North Dakota, 504 U.S. 

298, 319 (U.S. 1992) (Scalia, J., concurring in part and concurring in the judgment) (citing National Geographic 

Society v. California Bd. of Equalization, 430 U.S. 551,558 (1977); Scripta. Inc. v. Carson, 362 U.S. 207, 211 

(1960». See also National Geographic Soc. v. California Bd. of Equalization, 430 U.S. 551, 558 (1977) ("Other 

fairly apportioned, non-discriminatory direct taxes have also been sustained when the taxes have been shown to be 

fairly related to the services provided the out-of-state seller by the taxing State. The case for the validity of the 

imposition upon the out-of-state seller enjoying such services of a duty to collect a use tax is even stronger." 

(citations omitted». 

21 See, e.g., National Geographic Soc. v. California Bd. of Equalization, 430 U.S. 551,558 (U.S. 1977). 

12 This includes J.e. Penney National Bank v. Johnson, 19 S.W.3d 831 (Tenn. CI. App. 1999), cert. denied, 531 U.S. 

927 (2000); America Online v. Johnson, No. 97-3786-111, Tenn. Chancery CI. (Mar. 13,2001); Cerro Copper 

Prods .. Inc., No. F-94-444, 1995 Ala. Tax LEXIS 211 (Ala. Dep'l of Revenue Dec. II, 1995), reh'g denied, 1996 

Ala. Tax LEXIS 17 (Ala Dep't of Revenue Jan. 29, 1996) (But see Lami v. State of Alabama Department of 

Revenue, 968 So. 2d 18 (AL Ct. Civ. App. 2006». 

13 See Gupta & Mills, Does Disconformity In State Corporate Income Tax Systems Affect Compliance Cost 

Burdens? 56 Nat'l Tax 1.355 (June 2003) (discussing the compliance costs associated with slate income taxcs). 
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80344165.eps

III. OTHER CONSIDERATIONS 

A. FEDERALISM 

Contrary to the arguments of some opponents of clarifying the standards for state 

business activity taxes,24 considerations of federalism support passing this legislation. A 

fundamental aspect of American federalism is that Congress has the authority and responsibility 

to ensure that interstate commerce is not burdened by state actions (including taxation of such 

commerce)25 No one disagrees that tension exists between a state's authority to tax and the 

authority of Congress to regulate interstate commerce. However, the very adoption of the 

Constitution was itself a backlash against the ability of states to impede commerce between the 

states; in adopting the Constitution, which expressly grants Congress the authority to regulate 

interstate commerce, the states relinquished a portion of their sovereignty.26 Moreover, the 

Supreme Court has explicitly noted Congress' role in the area of multi state taxation.27 

BATSA simply codifies the traditional jurisdictional standards for when a state or local 

government may impose a tax on a business engaged in interstate commerce. In essence, 

economic nexus allows one state to impose tax on activity that actually occurs in a sister state, 

therefore impinging on the sister state's jurisdiction to oversee and protect the business activities 

occurring within its borders. By codifying the physical presence standard, BA TSA strikes the 

correct balance between state autonomy/sovereignty and interstate commerce. 

B. EFFECT ON INTERNATIONAL TAXA TION AND AMERICAN COMPETITIVENESS 

Our eountry' s own history and the federal government's position in the context of 

international taxation provide a strong reason to establish a physical presence nexus standard. 

Specifically, a physical presence nexus standard would promote consistency between 

international tax and state tax jurisdictional standards. 

For over 80 years, the United States, along with most other countries in the world, has 

adopted and implemented a so-called "permanent establishment" standard in its income tax 

treaties with foreign jurisdictions. This "permanent establishment" standard is derived from the 

Model Tax Convention of the Organisation for Economic Co-operation and Development 

24 See, e.g., Federalism at Risk: A Report by the MU/listate Tax Commission, Multistate Tax Commission (June 

2003); Respecting Federalism, Multistate Tax Commission Policy Statement 03-01. 

" See. e.g .. Diann L. Smith, Supreme Court Would Uphold P.L. 86-272 (letter to the editors), 25 State Tax Notes 

135 (July 8, 2002) (discussing the authority of Congress to regulate interstate commerce). 

26 See Adam D. Thierer, A Delicate Balance: Federalism. Interstate Commerce, and Economic Freedom in the 

Technological Age, The Heritage Foundation (1998) (citing Alexander Hamilton, Federalist No. 22). 

27 Barclay's Bank PIC v. Franchise Tax Bd. of Cal., 512 U.S. 298 (1994); Quill Corp. v. North Dakota, 504 U.S. 

298 (1992). See also Eugene F. Corrigan, Searchingfor the Truth, 26 State Tax Notes 677 (Dec. 9,2002) ("No 

amount of state legislation of any kind can extend a state's taxing jurisdiction beyond the limits set by the Supreme 

Court; and that Court has, for all practical purposes, washed its hands of the matter, deferring it to Congress."). 
195 


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("OECD,,).28 Specifically, the OECD Model Tax Convention aims to limit double taxation, i.e., 

situations in which a company is taxed both by the country in which the company is domiciled 

("resident country") and by a country that is the source of all or part of the company's income 

("source country,,).29 Under the terms of the OECD Model Tax Convention, before a source 

country may impose a direct tax on a nonresident business' commercial profits, the foreign 

taxpayer must have a "permanent establishment" in the source country, which is defined 

generally as a fixed place of business through which the business of an enterprise is wholly or 

partly carried on.)O In other words, the OECD Model Tax Convention employs a physical 

presence jurisdictional standard.)] 

Although this "permanent establishment" standard has been in place for many decades, 

the OECD was recently charged with revisiting the concept in light of electronic commerce and 

the changing global economy. After careful consideration, the OECD maintained its firm 

reliance on physical presence. Not only is BATSA's physical presence nexus standard consistent 

conceptually with the OECD "permanent establishment" jurisdictional standard, but BATSA's 

physical presence standard accomplishes the same policy goals by providing a bright-line 

standard that is clear and equitable. If a more expansive jurisdictional standard is adopted for 

state tax purposes than that used by the federal governrnent for international tax purposes, it 

would surely dampen foreign investment in the United States. 

Indeed, foreign businesses are often shocked to learn that while treaties may insulate 

them from federal taxation, state taxation can still be imposed. Addressing the problems of state 

tax uncertainty and the risk of litigation costs clearly has the potential to encourage additional 

foreign investment in the U.S., thus creating new jobs throughout the country. 

IV. CONCLUSION 

A physical presence nexus standard Rrovides a clear test that is consistent with the 

principles of current law and sound tax policy'2 and that is consistent with Public Law 86-272, a 

time-tested and valid Congressional policy. Physical presence is also an accepted standard for 

" Jerome B. Libin & Timothy H. Gillis, It"s a Small World After Ali: The Intersection o/Tax Jurisdiction at 

International. National. and Subnational Levels, 38 Ga. L. Rev. 197,204 (2003). 

2. Organisation for Economic Co-operation and Development, Model Tax Convention on Income and on Capital, 

art. 7 (Jan. 28, 2003) ("OECD Model Tax Convention"), n. I. 

30 OECD Model Tax Convention, Anicles 5, 7. 

Jt See Libin & Gillis, supra note 39, at 204. 

32 Professor Richard Pomp, who testified as a tax policy expen on behalf of the taxpayer in Lanco Inc. v. Director. 

Div. a/Tax 'n, N.J. Tax Ct., No. 005329-97 (Oct. 23. 2003), articulated "six principles of tax policy ...• s 

representing the values inherent in the commerce clause: desirability of a clear or "bright-line" test, consistency 

with settled expectations, reduction oflitigation and promotion of interstate investment, non-discriminatory 

treatment of the service sector, avoidance of multiple taxation, and efficiency of administration." Lonco Inc. v. 

Direc/Or. Div. o/Tax 'n, N.J. Tax Ct., No. 005329-97 at 15-16 (Oct. 23, 2003). Professor Pomp concluded that a 

physical presence standard better advanced these principles than a standard based on economic nexus principles. Id. 

a116. 
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time-tested and valid Congressional policy. Physical presence is also an accepted standard for 

determining nexus.33 And, a physical presence test for nexus is consistent with the established 

principle that a tax should not be imposed by a state unless that state provides meaningful 

benefits or protections to the taxpayer. BA TSA provides simple and identifiable standards that 

will significantly minimize litigation by establishing clear rules for all states, thereby freeing 

scarce resources for more productive uses both in and out of government.34 

Moreover, our country's own history and the federal government's position in the context 

of international taxation provide sufficient reason to avoid an economic nexus standard. If a 

foreign country tried to tax the profits of U.S. companies simply because the U.S. firms exported 

goods to that country, the U.S. government and business community would be outraged. It is 

precisely for this reason that U.S. income tax treaties provide the nexus concept of "permanent 

establishment." A physical presence standard places an appropriate limit on states gaining 

taxation powers over out-of-state firms and conforms to common sense notions of fair play. 

What the entire nexus issue boils down to is fairness. The bright-line physical presence 

nexus standard of BA TSA provides the most fair and equitable standard. This is true primarily 

because businesses have a reasonable expectation of taxation only when they are the recipients of 

meaningful benefits and protections provided by the taxing jurisdiction. Additionally, businesses 

should only pay tax to those jurisdictions where they earn income. 

At this time, there is no indication that the business activity tax nexus issue will be settled 

absent Congressional action. BA TSA will not cause any meaningful dislocations in any state's 

revenue sources and will not encourage mass tax sheltering activities. Instead, its enactment will 

ensure that the U.S. business community, and thus the American economy, are not unduly 

burdened by unfair attempts at taxation without representation. 

Sincer~~ 

Arth~ R. Ros~n --. 

McDermott Will & Emery LLP 

340 Madison Avenue 

New York, NY 10173 

Counsel, Coalition for Rational and Fair Taxation 

J3 See, e.g., Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess, Inc. v. Department of 

Revenue, 386 U.S. 753 (1967). 

,. While it is unrealistic that BA TSA will end all controversies concerning the state tax business activity tax nexus, 

any statule that adds nationwide clarification obviously reduces the amounl of controversy and litigation by 

narrowing the areas of dispute. For example. in the nearly fifty years since its enaclment, Public Law 86-272 has 

generated relatively rew cases, perhaps a score or two. On the other hand, areas outside its coverage have been 

litigated extensively and al great expense. 
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Com pT I A" 

"Tax Reform: What it Means 

for State and Local Tax and Fiscal Policy" 

Senate Finance Committee 

April 25, 2012 

Submitted by: 

The Computing Technology Industry Association (CompTIA) 

515 2nd Street, NE 

Washington, DC 20001 
198 


80344.169

Introduction. 

Good afternoon, Chairman Baucus, Ranking Member Hatch, and distinguished 

members of the Committee. This testimony is submitted on behalf of the Computing 

Technology Industry Association (CompTlA) representing the information 

technology industry." 

We want to thank Chairman Baucus and Members of this Committee for holding this 

important hearing concerning the effects of tax reform on state and local tax and 

fiscal policy. From the perspective of a small tech business, tax issues are measured 

in terms of cost and compliance burden; it does not matter whether the cost or 

burden is imposed by the federal government or a state or local government entitythe bottom line for these businesses is still "what is my cost" and "what is my 

compliance burden." Thus, as we move forward to consider the effects of tax reform 

on state and local fiscal and tax policy, we must be sure that federal tax reform does 

not merely shift costs and compliance burdens to state and local governments. 

Small businesses are already greatly impacted by state tax compliance burdens, and 

we believe that tax reform must bring certainty and simplification to a myriad of 

interstate tax issues. 

About CompTlA. 

CompTiA is the voice of the world's $3 trillion information technology industry. 

CompTIA is a non-profit trade association representing the information 

technology (IT) industry. CompTIA represents over 2,000 corporate 

members and 1,000 business partners. Our members are at the forefront of 

innovation and provide a critical backbone that supports broader commerce 

and job creation. These members include computer hardware manufacturers, 

software developers, technology distributors and IT specialists that help 

organizations integrate and use technology products and services. CompTIA 

is dedicated to serving its membership by advancing industry innovation and 

growth through its educational programs, market research, networking 

events, professional certifications, and public policy advocacy. 

Based upon a recent CompTIA survey, we estimate that one in twelve (or about 12 

million American adults) considers him or herself to be an IT worker. This is larger 

than the number of American adults classified by the Bureau of Labor Statistics 

(BLS) as employed in farming. mining, and construction combined. This is also close 

to the number of adults classified by BLS as working in manufacturing or 

transportation. CompTIA has concluded that the IT workforce is now one of the 

largest and most important parts of the American political community. 
199 


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In view ofthe size and breadth of information technology in our national economy 

and the way in which state laws impact the industry, we submit testimony today 

that focuses on a matter that significantly impacts the industry: Interstate taxation. 

The Issue: Policy Concerns Defined by Interstate Taxation Issues. 

Although the term "Internet Taxation" has become a common term in tax policy 

debates and proposals, the Internet is merely the facilitating medium: The core 

issue is actually one of "interstate taxation," not "Internet taxation." While the tax in 

question might take on various forms, such as a sales tax, use tax or income tax, the 

common issue is: Which jurisdiction is permitted to tax a transaction having 

interstate components? This question becomes more blurred when the interstate 

transaction is performed over the Internet, as opposed to a physical party-to-party 

transaction across state borders. Currently, there are at least three types of 

legislation addressing Internet tax issues concerning interstate transactions that 

impact CompTIA members: 

1. Interstate sales of goods and services: "Main Street Fairness Act" (H.R 2701 

and S. 1452), Marketplace Fairness Act (5. 1832) and Marketplace Equity Act 

(HR 3179) 

2. Interstate sales of digital products: "Digital Goods and Services Tax Fairness 

Act of 2011" (H.R 1860 and S. 971) 

3. Interstate business activities: "Business Activity Tax Simplification Act of 

2011" (H.R.1439) 

While both the interstate sales and digital products legislation emphasize Internet 

transactions, the real issues are (i) consistency/complexity in determining which 

jurisdiction can tax a transaction, and (ii) what party is responsible for collecting 

and/ or paying the tax to the taxing jurisdiction. These same two issues also 

characterize the Business Activity Tax that applies to interstate transactions, 

whether or not accomplished via the Internet. 

While the utility of the Internet clearly makes interstate transactions more common 

the core issue is: Which government jurisdiction can tax a transaction, not whether 

the transaction was facilitated by the Internet 

So, in discussing the application of these interstate (aka "Internet taxation") tax 

issues, the concerns to small businesses become: 

a. The compliance burden and potential liability that could be imposed. on 

businesses resulting from the uncertainty as to which state can tax a 

transaction; and 
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b. The compliance burden that might be imposed on businesses to pay, 

collect and/or remit sales taxes for all states/taxing jurisdictions. 

1. Interstate Sales of Goods and Services. 

Main Street Fairness Act (H.R. 2701 and S. 1452]. This bill would grant states the 

authority to require any seller to collect and file sales tax returns on all interstate 

sales, provided that state is a full member of the Streamlined Sales and Use Tax 

Agreement. The intent of this legislation is to bring some uniformity to state sales 

tax requirements. Under current law established in a 1992 Supreme Court decision, 

a seller is only required to collect sales tax and file returns if that seller has a 

physical nexus to the state into which the sale is made. While this legislation does 

require the Streamlined Sales and Use Tax Agreement to include a small seller 

exemption, it defers to the participating states to determine the small seller 

threshold. 

The Marketplace Fairness Act (S. 18321. This bill acts much like the Main Street 

Fairness Act, but would extend the authority to require out of state sellers to collect 

sales tax, provided that state is a full member of the Streamlined Sales and Use Tax 

Agreement or meets certain national thresholds and simplification requirements. 

Basically, the Marketplace Fairness Act does not lock states into adopting the 

Streamlined Sales and Use Tax Agreement, provided the state adopts comparable 

simplification. Thus, the Marketplace Fairness Act provides more flexibility for the 

states to make their own decisions concerning whether to join the Streamlined Sales 

and Use Tax Agreement or whether to adopt other provisions to come into 

compliance. This bill also contains a "small seller" exemption for businesses that 

have annual receipts of $500,000 or less from remote sales. 

Marketplace Equity Act (HR 3179). This legislation is also similar to the Main Street 

Fairness Act, but would only extend the authority to require out of state sellers to 

collect sales tax, after the state implements a simplified system for administration of 

sales and use tax collection with respect to remote sellers. Unlike the Main Street 

Fairness Act and the Marketplace Fairness Act, this legislation does not invoke the 

Streamlined Sales and Use Tax Agreement. This bill also includes a "small seller" 

exemption that would exempt businesses with annual receipts of $1,000,000 or less 

from remote sales. 

CompT/A Position. While each of the above bills requires a "small seller" exemption, 

the actual effect on "small businesses"is uncertain. Whether the exemption level is 

set at $500,000 or $1 million or more in annual revenues, the real issue for small 

businesses is whether they can absorb the added compliance costs of collecting and 
201 


80344.172

remitting sales taxes under the new regime. Further, using an arbitrary "small 

seller" exemption dollar amount ($500,000 or $1,000,000 in annual revenues) 

ignores the reality that profit margins vary widely, depending upon the product or 

service being provided. A small business that has a 50% profit margin on revenue of 

$500,000 might be able to absorb the additional compliance costs, but a small 

business with a 5% profit margin on revenue of $500,000 would be 

disproportionately affected by this new cost. Clearly, mandating collection and 

reporting of sales taxes from mUltiple jurisdictions could cause some small 

businesses to abandon Internet sales. 

Accordingly, this leaves only two options for small businesses: (i) oppose this 

legislation, or (ii) advocate for an exemption for small businesses, as opposed to 

small sellers. SBA has established and maintains detailed small business size 

standards that define a small business based on its industry. CompTlA asserts that 

adopting an exemption for small businesses based on the SBA size standards is 

much more logical than a static dollar sales amount applied across the board (which 

would have a disproportionate and uneven effect on small businesses). 

The bottom line is that small businesses should not be exposed to new compliance 

costs and requirements. It is simply unfair for the states to be allowed to shift their 

tax collection burden onto the backs of small businesses. 

2. Interstate Sales of Digital Products. 

Whereas the interstate sales legislation applies to remote sales of goods or services, 

the "Digital Goods and Services Tax Fairness Act of 2011" (H.R. 1860 and S. 971) is 

restricted to the Internet sales of "digital goods or digital services." For example, a 

person who lives in Colorado flies to ll\inois where that person downloads a digital 

program from a server located in California. The question is which jurisdiction has 

the authority to tax this purchase? Illinois would claim that the sale was made in 

illinOis, thus it has the right to charge a sales tax; California might assert that the 

purchase was made at the server in California giving it the right to collect the tax; 

and Colorado would claim that it has the right to tax its residents on purchases. H.R. 

2011 simplifies these potential conflicts by limiting the collection of sales taxes on 

digital goods and services to the jurisdiction encompassing the buyer's tax address. 

It is important to note that the Digital Goods and Services Tax Fairness Act does not 

authorize or prohibit the application of sales tax on the purchase of goods. It simply 

provides that the tax address of the buyer determines which state has the authority 

to tax the sale, which ensures that mUltiple states will not attempt to tax the same 

purchase. Thus, as with the interstate sales bills, the goal of the Digital Goods and 

Services Tax Fairness Act is to (i) provide consistency in determining which 
202 


80344.173

jurisdiction can tax a transaction, and (ii) determine which party IS responsIble tor 

collecting and! or paying over the tax to the taxing jurisdiction. 

CompTIA Position. CompTIA supports this legislation. It would define a bright line to 

determine which state is permitted to tax a transaction; this would eliminate 

potential compliance costs for the provider and additional tax costs for the 

consumer that could result when two or more states claim competing authorities to 

tax a single transaction. 

3. Interstate Business Activities, 

The "Business Activity Tax Simplification Act of 2011" (H.R. 1439) would establish a 

physical presence nexus standard. This means that in order for a state to tax a 

business activity, that business must have a tangible connection to the state, such as 

an office or a sales force. This physical presence nexus requirement would apply to 

both Internet and non-Internet transactions. 

In a 1992 decision (Quill Corp. v. North Dakota), the U.S. Supreme Court held that in 

order for a state to tax a non-resident individual or business, the individual or 

business must have a nexus to the taxing state, such as a real physical presence. 

Commonly, physical presence has been interpreted as having an office or place of 

business in the state, or employing workers that operate within the state. However, 

since the Quill decision was rendered, states have continuously sought to maintain 

or expand both their tax bases and collections, by chipping away at the physical 

nexus requirement. 

The rationale for the physical nexus is that it is principally unfair for a state to 

require a business to collect sales and use taxes when that business has no physical 

presence in the taxing state. Yet, while physical nexus continues to be the law of the 

land with respect to sales and use tax collections, some states are now seeking to 

ignore this requirement for other forms oftaxation asserting that an "economic 

nexus" or "virtual nexus" is sufficient. 

Using the economic nexus theory, some states have attempted to tax any transaction 

that touches the state, whether or not the parties are physically located in the state. 

For example, the "Amazon tax" laws passed by some states would require any nonresident seller to collect and remit sales tax if that seller acquires customers through 

a link on the website of an in-state business. This requirement applies even though 

the out-of-state business has no other presence in the state. 

Again as with the interstate sales legislation and the digital products sales, the 

common thread is consistency and complexity in determining which jurisdiction has 

the authority to tax a transaction. 
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80344.174

CompTIA position: CompTIA urges Congress to pass H.R. 1439, the "Business 

Activity Tax Simplification Act of 2011" which would establish consistent rules 

concerning nexus to (i) expand the federal prohibition against state taxation of 

interstate commerce to include taxation of out-of-state transactions involving all 

forms of property (such as intangible personal property and services) and (ii) 

prohibit state taxation of an out-of-state entity unless such entity has a physical 

presence in the taxing state. The issue is not whether a tax should be paid, but 

rather, to which jurisdiction a tax should be paid. 

Conclusion. 

Increasingly, small businesses are being burdened by the variety and amount of 

taxes that must be paid, as well as the costs of compliance. While CompTIA fully 

supports the tenet that all businesses should pay their rightful share of taxes, we 

believe this goal can and should be accomplished in the most orderly and least 

burdensome method. 

For our small tech company members, the main issues are certainty and compliance 

costs. We believe that including a strong small business exemption in any Interstate 

sales tax legislation is essential. We also believe that providing certainty as to which 

state/iurisdiction can tax digital products and services, as well as other interstate 

business activities, is essential. 

As Congress considers various aspects of tax reform, careful attention should be 

given so that federal tax reform does not merely shift costs and compliance burdens 

to state and local governments. Small businesses are already greatly impacted by 

state tax compliance burdens, and we believe that tax reform should and must work 

to bring certainty and simplification to a myriad of compliance-laden interstate tax 

issues. 
204 


80344.175

Before the Senate Committee on Finance 

Unitcd States Senate 

Hearing on Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

Statement ofthe 

Consumer Electronics Association (CEA) 

April 25, 2012 

Chairman Max Baucus, Ranking Member Orrin Hatch and Members of the Committee on 

Finance, on behalf of the Consumer Electronics Association (CEA), thank you for the opportunity to 

submit a written statement for today's hearing on Tax Refonn: Whut It Means for State and Local Tax 

and Fiscal Policy. 

CEA is the preeminent trade association representing American innovators and entrepreneurs, 

both large and small, who are consumer technology companies. CEA's over 2,000 corporate members 

include manufacturers, Internet providers and retailers. Our members design, produce and sell products 

and provide services that enable millions upon millions of consumers every day to access the wonders of 

the Internet. 

As the Committee considers the impact of tax reform on state and local governments, we urge 

consideration of legislation that would close a loophole currently harming traditional brick-and-mortar 

retail businesses while assisting the states in collecting approximately $23 billion in uncollected state 

sales taxes. 

We believe that S. 1832, the Marketplace Fairness Act, a bipartisan bill introduced by a strong 

bi-partisan group of ten Senators, five Democrats and five Republicans led by Senators Durbin, Enzi, 

and Alexander, is an effective solution to rectiJY this inequity in today's marketplace. 

First, let it be clear that the "Marketplace Fairness Act" would not enact new taxes. The 

legislation simply closes a loophole created by a decades-old Supreme Court ruling, issued in 1992 

before the pervasiveness ofInternet commerce. The ruling prohibits states from requiring remote sellers 

to collect sales and use taxes owed on purchases from out-of-state vendors. 

This loophole has created an unfair price disadvantage for brick-and-mortar retail businesses and 

has placed an undue burden on consumers who do not realize they owe the sales tax if it is not collected 

by the seller. Additionally, in the year 2012, this loophole will cost state and local governments $23 

billion in uncollected sales and use taxes. 

We believe that the Marketplace Fairness Act represents the best thinking of all the stakeholders 

by providing a roadmap forward for states to collect sales taxes, simpliJY their sales tax statutes, and 

assist vendors with compliance, while providing for a robust small business exemption. 

To put it simply, it is a common sense legislation that will help states with their own budget 

shortfalls without increasing the federal deficit, and close a decade old loophole that will level the 

playing field for all online retailers. 
205 


80344.176

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

April 25, 2012 10:00 am 

Dale Copeland 

1128 S. E. Greystone Avenue 

Bartlesville, OK 74006 

How might tax reform affect states and local municipalities? A simple change by Congress would have 

a zero net effect on the federal budget but would supply potentially millions, even billions, of dollars in 

revenue to states and cities that collect sales taxes. These taxes are already owed under state laws, but 

are avoided due to an uncorrected flaw in federal law. 

The explosion of the Internet and on-line commerce has been a boon for the vast majority of citizens. It 

provides access to information and materials hitherto largely unavailable without considerable effort 

and expense. This is a good and desirable consequence in a field that could not have imagined the 

results and unintended consequences of electronic data transfer just a decade or two ago. 

Some of those unintended consequences are now increasingly blossoming into evidence across the 

entire spectrum of government, business and tax law. No longer is commerce easily conducted nor 

regulated only within particular governmental boundaries. In turn, this creates gaps that savvy 

merchants find and exploit to their advantage. Unfortunately, these gaps also penalize merchants who 

"play by the rules" in providing product displays, product knowledge, after sale support, hiring local 

employees and the support of a myriad of local activities ranging from Little League, Scouts, Kiwanis, 

Rotary, etc. and service on local non-profit groups. Remote merchants provide none of this, even 

touting on their web sites that the main reason to buy from them is "NO SALES TAX!" Obviously, in 

my appliance sales and service repair business of more than 40 years in Bartlesville, OK, we are deeply 

involved in our community and work diligently in support of the community services listed above. But, 

even if we match the sales price of on-line merchants we are still always priced 8-1/2% too high since we 

will collect local sales taxes. 

The increasingly common practice of "Showrooming" is another inequitable practice where shoppers 

use (I say 'Use' with the worst possible meaning) a local brick and mortar business to learn about and 

select a purchase, then they can go on-line to make their purchase and avoid sales taxes. The local 

merchant who employs staff, maintains a local presence with the attendant property taxes, and supports 

local ball teams, Scouts and other local causes is penalized twice. First when he pays to provide a 

service to shoppers with bis inventory, knowledgeable staff and other costs, only to lose the sale to an 

out of state seller trading on a flaw in the tax codes. And second when the same customer expects after 

sale support of their purchase from the local merchant they beat out of a sale with their tax evasion. In 

the end even the customer suffers a loss when they are unable to get local support for their purchases 

and local government services decline along with declining revenue. How long can such an inequity 

continue? 

I currently serve as the Ward 5 Councilman for the Bartlesville City Council and 1 see another 

consequence of these remote merchants' unfair competition as they are not only failing to collect sales 

taxes (sometimes called use taxes), but they provide no support of our community and its citizens. 

Municipalities in the state of Oklahoma rely almost totally on sales taxes for their operational budgets. 

It has been estimated that Oklahoma loses hundreds of millions of dollars each year in unpaid tax on 

sales from remote on-line merchant and catalog sales. Although present law requires Oklahoma citizens 
206 


80344.177

to track and pay use taxes for out of state purchases when filing annual income tax reports, few do so 

and the sheer numbers prevent the state from effectively addressing this unlawful evasion of tax 

payments. Because of the current flaw in federal law our state is limited in its ability to recover these 

revenues at their source as they do with in-state merchants. In the final analysis this is a simple matter 

offairness and the present system is inherently unfair. 

Decades ago the argument was put forth that the Internet was in its infancy and thus somehow deserved 

the subsidy that this tax omission provided. But today, by any measure, the Internet is a massive force 

that can in no way be considered an infant. One may hear that it is "too hard" to collect sales tax for the 

multitude of taxing districts across the nation. But many remote merchants already do so. And these 

same merchants easily track thousands of suppliers, thousands of products and millions of customers in 

their data files. You likely have received contacts from them suggesting purchases based on past sales 

made months, even years ago, thus proving they have the ability to maintain, track and act with ease on 

the large amounts of data they utilize. The claims of "it's too hard" just don't ring true, but rather seem 

an excuse to maintain the unfair advantage they currently enjoy. A large number of states and the 

District of Columbia have worked together in support of the Streamlined Sales and Use Tax Agreement 

to further lessen any burden on remote merchants. 

All that local merchants and municipalities ask is a level playing field. 

The Supreme Court has ruled that the Congress can easily correct this inequity with a simple action like 

that provided in S. 1832 by Senator Durbin and others. This is not a new tax nor an "Internet tax," but 

simply allows the collection of taxes already owed by buyers under state law. It also provides 

exemptions for small or individual sales and provides a quite high dollar threshold to qualifY. It is hard 

to imagine a multi-million dollar business complaining that the burden such a change makes would 

somehow render them unable to compete. Of course, the local merchant already operates under that 

burden and many brick and mortar merchants also conduct on-line sales. It is only fair to establish a 

level playing field for all merchants, regardless of their location. 

I encourage you to restore fairness to all merchants while making it possible for local municipalities 

like Bartlesville, OK, to collect the taxes already owed under current state law. In this way free choice 

is retained and local brick and mortar merchants can fairly compete on a level playing field while 

continuing to support our communities. And city councils can continue providing our citizens the 

services they desire and deserve. 

Respectfully submitted, 

Dale W. Copeland 

Owner, Copeland Appliance 

Councilman, Ward 5, City of Bartlesville, OK 
207 


80344.178

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

United States Senate Committee on Finance 

Wednesday, April 25, 2012, 10:00 AM 

215 Dirksen Senate Office Building 

Washington D.C. 

Testimony provided by: 

Mick Cornett 

Mayor 

City of Oklahoma City 

200 N. Walker Ave., 3rd Floor 

Oklahoma City, OK 73102 

Thank you for the opportunity to testify before you and this Committee on the importance of 

passing S. 1832, The Marketplace Fairness Act, out of your committee. 

The stability of the Federal, State and local budgets is a national concern. The long term 

commitments at each level of government often out strip even the most optimistic projections for 

future income. We hear time and time again that this emerging crisis has been long known, but 

that the structures for collecting taxes and committing future spending have not been altered to 

avert this course. This has most often been described by elected officials as "kicking the can 

down the road." We are facing a part of this crisis with our inability to collect sales tax for our 

citizen's internet sales purchases, but S. 1832 provides a solution and would end the twenty year 

history of kicking that can down the road. 

Oklahoma City, like all cities in Oklahoma, relies heavily on sales tax to support operations. As 

technology advances and internet shopping becomes more prevalent, the City is losing an 

estimated $15-18 million annually to electronic vendors and internet sales. The Streamlined 

Sales and Use Tax project has been in process for several years and has resulted in a bill that 

would address this tax loophole. 

This issue has been lingering for decades. In 1992, a Supreme Court ruling came out in the case 

Quill Corporation v. North Dakota, 204 US. 298 (1992) which stated that a retailer with no 

physical presence cannot be required to collect and remit sales taxes. This ruling was made 

when the internet was in its infancy. Today, online commerce has advanced to the extent that an 

estimated 10% of all purchases are made electronically, and this percentage continues to grow. 

The Quill ruling offered a remedy to the unequal treatment of online and brick & mortar 

retailers. Congress could provide a single solution that would apply to retailers across the 

country. For the past 10 years, a group has been working to create a nationwide agreement to 

simplify the administration of sales taxes. They have created the Streamlined Sales and Use Tax 

Agreement (SSUTA) and to date, 24 states have signed on to the agreement. The provisions of 

the SSUTA require centralized collection and consistent definitions in each state to streamline 

administration of the taxes and simplify the collection process for vendors. 
208 


80344.179

Online retailers have begun to collect and remit sales taxes in those states that are participating in 

the SSUT A. However, several online retailers have fought efforts to level the playing field and 

address the competitive disadvantage of brick and mortar businesses. The current situation 

creates an unfair advantage over our local businesses as their profit margin is lowered by the 

price differential created by electronic businesses who will not collect and remit state and local 

taxes. 

It has been argued that this is a new tax and, therefore, any etTorts to apply current sales tax laws 

to e-commerce should be opposed. This is not a new tax. It is the same tax applied to products 

that are purchased in a different way. 

Arguments by opponents of sales taxes on electronically purchased goods primarily focus on the 

unfairness of taxing a retailer that does not have a physical presence in the state. This argument 

is completely otT base since the retailer is not being taxed. The payer of the tax is the purchaser 

ofthe product the resident of the local jurisdiction. 

Another argument by opponents of taxes in general is that the government should cut back to live 

within the revenues it receives. Oklahoma City has done that repeatedly as our revenues have 

not grown in proportion to the service demands of our citizens. As the chart below shows, the 

City's inflation adjusted sales tax revenue has not kept pace with the inflation adjusted income of 

our citizens. 

;';29.000 

~2S,OOO 

~26.000 

~ 

Oklahoma City Per Capita Personal Income and Sales Tax 

Collected Per Person {Inflation Adjusted} 

~ ~ ~ " .... ~ - ...... . ..... - --", .. 

/ \. ...--. ~ /\ 

'\...../ ~ 

~ 

" 

L ., .. -.. '" ., . .. ' \/ 

v 

- - - -.!c:Uw:ted Percapita In:onl! 

--.!dj~t!l!dsal.;o:'nI.~ p!!rcapitil 

~lS0 

::175 

:J70 

;:;:165 

DIt,J S{\urc.e-.s: Percapita In:onl3i:c ones from U.S. BUI1:!auQf Ecooonlc '!'na!\sisoldahonB{'it.,' MSt.p!!l"5ona! ire am:: perea pita for 1\.""(lo. 

~. xuoard 101:l FIl!rcapita In:on-eestinBtii!S con:efromc<uS(ononistRlJ1;sall e',,'iUlS . sales. T.I.ds Gillenl fwd satestaf 

,ol1JJ:t'tic,~ l;f~ratej b-:,'fiscai\eardi'.'ided b;'4nOtal populationestimaw from the (it",of O!o:lal'OIlB cit,.' F'lannil"€ Do::partl11mt. 

~J"!fJa~i,?_~~ ~!~11_~:e~t?r.!:01~.f~~ !~ ~ ~~J£~~~ .. ~~ LreCp!",(\, ~t!!~~9..u:t! .. FEei~_~.: 
209 


80344.180

We already have laws in place that will allow for the collection of taxes on electronic sales from 

out of state vendors in the form of a use tax. However, there is no mechanism for the 

enforcement of a use tax. Out of state vendors have no compelling responsibility to provide the 

tax commission with information to enforce the tax and the taxpayer has only their own 

conscience to guide their remittance of the tax. While I am hesitant to draw a comparison to the 

Internal Revenue Service, in this case it is relevant. Imagine if the e-commerce segment of the 

economy was exempt from reporting their employees' earnings and collecting and remitting 

payroll taxes for them. The IRS would not be able to enforce Federal tax regulations and would 

only require employees to report whatever their consciences required as wages. Putting all of 

the issues aside about existing complexities and faults with Federal tax policy, imagine the chaos 

that would be created by this "loophole". This is the scenario facing cities and towns across 

America as retail sales are increasingly made online. 

E-commerce offers tremendous advantages and opportunities to our residents, especially here in 

the middle of the country and in smaller population centers where retail opportunities are much 

more limited than they are on the east and west coasts. However, electronic retailers are 

provided a significant profit advantage by the "loophole" created by not having to collect sales 

taxes. This will, in time, cause the death of main street businesses in our country, especially in 

the areas where the population and income levels cannot support the diversity of retail 

opportunities offered on the coasts. 

This consequence of the Quill Supreme Court decision was not anticipated or intended but it will 

be no less devastating to small and medium sized cities and their residents. In 1992, when the 

Quill ruling was made many people did not anticipate electronic commerce would become the 

segment of the economy that it is today. Online commerce has advanced to the extent that an 

estimated 10 percent of all purchases are made electronically and recent news reports indicated 

retail sales were up 16 percent this holiday season. Forrester Research reports that online sales 

are expected to grow 10 percent per year and exceed half of all U.S. retail sales by 2014. Online 

retailers charging the same prices as brick and mortar retailers can profit up to 10 percent from 

the unfair competitive advantage created by not collecting and remitting sales taxes. 

The "Marketplace Fairness Act" would have a profound impact on the City of Oklahoma City. 

The graphs (below) show the revenue breakout for the State of Oklahoma and the City of 

Oklahoma City. More than half of Oklahoma City's general fund revenue is derived from sales 

tax. In terms of expenditures, nearly 66% of revenue is spent on public safety. Annually, $15-

18 million from Oklahoma City's sales tax revenue translates into funding that could pay for 150 

to 180 firefighters or police officers. Staffing in our public safety departments is a constant 

challenge because Oklahoma City covers 620 square miles and needs to provide service to our 

more densely populated urban areas in addition to developments or pockets of density that may 

be in outlying areas. 
210 


80344.181

State of Oklahoma FY 'I2Gclleral Revellue Budget- ~~W;!.!!!!~ 

City of Oklahoma City FY '12 General Revenlle Blldget- $364 Million 
211 


80344.182

City of Oklahoma City FY '12 General Expenditures by FUllction- :;::;;:=;.,,;,:.==::. 

In addition to my testimony today, the Oklahoma Municipal League is presenting testimony to 

this Committee endorsed by all the cities and towns in our state. It out the importance the 

collection of sales tax is (0 the future stability of our state and our Tax collection systems 

at the state alld local level were developed in response to the negative impact of the loss of farms 

and businesses during the Depression because of the inability to pay property tax. When the sales 

tax was adopted in Oklahoma it was justified as a fair way to tax the commerce, or wealth, of the 

state. through the assessment of a tax on the citizens participating in that commerce. As an 

increasing number of our citizens' purchase on the internet with no sales tax being collected the 

historical foundation tor Oklahoma's overall tax collection system is shaken. 

In addition to being the primary tax source for the daily operation of our city including police 

and fire, our sales tax has provided the tlnancing t()r the 19-year effort to revitalize economic 

in our city. A special one cent sales tax, dedicated to building public has 

altered Ollr future. We have built or rebuilt all of our schools, our 

navigable river is now the US Olympic rowing site and we have over $3 billion new 

investment in the downtown area. We also have the OKC Thunder. Our citizens voted 

tax and established an oversight program to guide its implementation. These are the same 

citizens who increasingly use the internet fo!' its convenience and scope and who will support tbe 

City's participation in the implementation of S. 1832. 

The Supreme Court recognized the fairness and the need for the collection of local taxes on OU1-

oj~state sales. just said that we needed to find a way to create a fair and non obtrusive way 

to collect these taxes. The states and cities and the vast majority of retailers in the cOllntry 

have done that through the careful drafting of S. 1832. We urge the Finance Committee to 

continue its tradition of simple and clear tax and to pass this bili out of committee. 
212 


80344.183

April 25, 2012 

The Honorable Max Baucus 

Chairman, Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Baucus and Senator Hatch, 

The Honorable Orrin Hatch 

Ranking Member, Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

As you prepare today to discuss the implications tax reform may have on state and local governments, 

the Council of Development Finance Agencies (CDFA) would like to bring to your attention the need to 

maximize the use of and improve the flexibility of Private Activity Bonds (PABs). PASs, in our decades of 

experience, are the single most effective tool in spurring state and local economic development, and are 

often the only available financing mechanism for small to mid-size manufacturers seeking to invest in 

their businesses and create jobs. 

CDFA is a national association dedicated to the advancement of development finance concerns and 

interests. CD FA is comprised of the nation's leading and most knowledgeable members of the 

development finance community representing 300 public, private and non-profit development entities. 

Members are state, county and municipal development finance agencies and authorities that provide or 

otherwise support economic development financing programs, including tax-exempt and taxable bonds, 

credit enhancement programs, and direct debt and equity investments as well as a variety of nongovernmental and private organizations ranging from regional and large investment banks to 

commercial finance companies to bond counsel, bond insurers, trustees, venture capital companies, 

rating agencies, and other organizations interested in development finance. 

To assist in your tax reform deliberations, CDFA has developed a list of 7 greatly needed improvements. 

In no particular order, our proposed improvements are as follows: 

1. Expand the scope of manufacturing facilities eligible for Industrial Development Bond (IDS) 

financing so that state and local bond issuers can help finance facilities that produce new and 

promising products and technologies, in addition to financing those facilities that manufacture 

more straight-forward, tangible items. This relatively small change would provide thousands of 

manufacturers with access to the capital markets. 
213 


80344.184

Z. Ensure manufacturing facilities financed with lOBs are not subject to illogical restrictions 

imposed by the out-of-date "functionally related and subordinate" rule. 

3. Expand the Z% de minimis rule for lOBs so that financial institutions are permitted to purchase 

"new money" tax-exempt bonds issued in an aggregate amount not to exceed Z% of their 

adjusted bases of assets. 

4. Increase the capital expenditure limitation for lOBs from $ZO million to $40 million, or remove 

this limitation entirely so that lOB financings are current with the cost of business investments in 

today's economic climate. 

5. Eliminate the restriction on the use of accelerated depreciation by companies using lOB 

financing. 

6. Increase the maximum lOB bond size limitation from $10 million to $30 million and allow future 

limitation increases to be adjusted with inflation - again so that the tool is able to keep pace 

with the economy over time. 

7. Expand and raise the small issuer limit for bank deductibility on IDBs and 501 (c)(3) bonds to $30 

million from $10 million and allow the limit to be applied to the borrower instead ofthe conduit 

issuer. 

To make the case for these proposed improvements, CDFA assembled a working group and polled its 

more-than-300 state, local and municipal member organizations. An astounding 100% of respondents 

agreed that Congress should make these much needed and overdue improvements to industrial 

development bonds. We are hopeful that this strong indicator will persuade the committee that 

common-sense, bi-partisan and low-cost reforms can be made to dramatically improve an already 

successful tool to create manufacturing jobs now. 

CDFA, as always, is grateful for the opportunity to discuss these important development finance tools 

with the Committee and remains willing and able to serve as a resource during your time of deliberation 

and decision making. 

Sincerely, 

Toby Rittner 

President & CEO 

Council of Development Finance Agencies 
214 


80344185.eps

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ICOST 

__ COUNCiL ON STA1"J<: TAXATION 

The Honorable Max Baucus 

Chairman 

May 9, 2012 

United States Senate Committee on Finance 

219 Dirksen Senate Office Building 

Washington, DC 20510 

Douglas L. Lindholm 

President and Executive Director 

(202) 484-5212 

dlindholm@cost.org 

Re: Hearing on "Tax Reform: What it Means for State and Local Tax and 

Fiscal Policy" (April 25, 2012) 

Dear Chairman Baucus: 

Thank you for the opportunity to submit this statement on behalf of the 

Council On State Taxation (COST) for the record of the April 25, 2012 hearing 

on "Tax Reform: What it Means for State and Local Tax and Fiscal Policy." 

States arc undeniably struggling with their budgets in the wake of the 

recession, and any federal tax reform initiative must consider how such reform 

will impact state tax systems. However, Congress must also consider the crushing 

administrative burden imposed by 50 state and countless local tax systems, and 

their impact on our nation's ability to remain competitive in a global economy_ 

Towards that end, COST has identified three areas in which we believe 

that Congress can and should provide meaningful simplification in the area of 

state taxation: nonresident withholding, business activity tax nexus, and remote 

sales tax collection. 

About COST 

COST is a nonprofit trade association based in Washington, DC. COST 

was formed in 1969 as an advisory committee to the Council of State Chambers 

of Commerce and today has an independent membership of nearly 600 major 

corporations engaged in interstate and international business. COST's objective is 

to preserve and promote equitable and nondiscriminatory state and local taxation 

of multi state business entities. 

122 C Street. N.W .. Suite 330' Washington. DC 20001-2109' Tel: 202/484-5222· Fax: 2021484-5229 • www.cost.org 
215 


80344.186

Daunting Compliance Issues for Travelling Employees 

On February 3, 2012, the House Judiciary Committee reported out H.R. 1864, the Mobile 

Workforce State Income Tax Simplification Act of2011. The problems H.R. 1864 seeks to 

address can be simply stated: every business day hundreds ofthousands of employees across the 

country are sent by their employers to work in nonresident states. The vast majority of these trips 

are temporary in nature, whereby the employee conducts business in the nonresident state for a 

short period oftime and then returns to his or her resident state. 

Employees who travel outside oftheir home state for business purposes are subject to 

onerous administrative burdens because, in addition to filing federal and resident state income 

tax returns, they may also be legally required to file an income tax return in every other state into 

which they travel, even if they are there for only one day. So too, employers are extremely hard 

pressed to comply with the varying and disparate rules that relate to tax withholding on income 

earned by their employees while traveling. It is important to note that this tax compliance issue 

affects all employers: large and small businesses, charities and other non-profits, and even 

government agencies. 

The problems created by these inconsistent state laws are universally acknowledged. 

There is also general agreement regarding the solution: create a simple, national threshold 

protecting employees who travel on temporary assignments to nonresident states. Indeed, the 

Multistate Tax Commission (MTC) on July 27, 2011, adopted a model state statute that is 

patterned after H.R. 1864. Unfortunately, model state legislation will never solve the problem. 

There is not a single example in the history of this country to suggest that voluntary adoption by 

all the states of a model statute to promote tax simplification is achievable. To this point, the 

MTC model statute has, to date, only been adopted in one state, and to our knowledge is not 

current! y proposed in any other. 

H.R. 1864 would provide a workable, national framework for the administration of, and 

compliance with, the states' withholding and nonresident income tax payment laws. Under H.R. 

1864, an employee working in a nonresident state for thirty or fewer days would not pay 

personal income tax to the nonresident state, but rather would remain fully taxable in their 

resident state on all earnings. Employers would not be required to withhold taxes in the 

nonresident state for employees whose travel falls below the thirty day threshold. This uniform 

rule would greatly ease compliance for all employers and would provide much needed 

simplification for employees who travel as part of their work. 

The mobility of our national workforce is one of our nation's greatest assets, and that 

flexibility is essential to our continued global competitiveness and ability to create jobs. That 

flexibility is hindered by the current hodgepodge of state laws. Employees who travel outside of 

their home states for temporary work periods, and their employers, will remain subj ect to today' s 

onerous burdens without Congressional action. Thus, COST respectfully requests the Finance 

Committee's support for the speedy adoption of tax reform for travelling employees as embodied 

in H.R. 1864. 
216 


80344.187

Uncertainty in "Nexus" Rules for Multistate Businesses 

The House Judiciary Committee, on October 21,2011, also reported out H.R. 1439, the 

Business Activity Tax Simplification Act of 20 11. The first, and perhaps the most important 

determination a business must make with regard to its business activity (e.g., income, franchise, 

privilege) taxes is whether the business is actually subject to tax in a particular state. That is, 

does the business have "nexus" with the state? Taxing businesses with only limited links to a 

jurisdiction has long been considered a burden on interstate commerce because of the high 

compliance costs associated with the taxation of such fleeting or nominal activity. It is not an 

exaggeration to note that since the first state business activity tax was imposed, taxpayers have 

never been certain as to what activities will be subject to taxation by a state or municipal 

jurisdiction. 

The United States Supreme Court has offered some guidance and at least one bright line 

rule as to the requisite level of activities sufficient to subject a business to a state's tax without 

creating an impermissible burden on interstate commerce. In the Court's 1992 Quill decision, the 

Court retained its bright line rule that a state cannot impose a sales tax collection liability on a 

seller that does not have a physical presence in a state. However, the Court invited Congress to 

legislate in the area of nexus for state tax purposes, stating: "[O]ur decision is made easier by the 

fact that the underlying issue is not only one that Congress may be better qualified to resolve, but 

one that Congress has the ultimate power to resolve." 

In absence of Congressional action following the Court's decision, states (and 

municipalities) have become increasingly aggressive in attempting to assert business activity tax 

jurisdiction over interstate commerce. These efforts to reach companies with minimal or no 

physical presence in a state have led to litigation in state courts with mixed results - not 

unexpected given the lack of clear guidance from either Congress or the United States Supreme 

Court. Conflicting state laws and court decisions create tremendous uncertainty and expense for 

taxpayers. Multistate businesses are deeply concerned both by this uncertainty and efforts by the 

states to impose tax on businesses that do not have physical presence in a state, thereby 

burdening interstate commerce and limiting cost-effective market options. Congress, 

accordingly, with plenary authority under the Commerce Clause, not only has the Constitutional 

duty to remedy the existing uncertainty, but also serves as the measure of last resort for the 

courts and for multi state companies on this issue. 

COST believes that Congress should exercise its authority under the Commerce Clause to 

recognize physical presence as the nexus standard for business activity taxes. In doing so, 

Congress should include a de minimis threshold based on the temporary presence of employees, 

agents and property in the state. Congress should also modernize P.L. 86-272 by including 

services and intangibles in its scope, extending its application to all direct taxes, extending its 

coverage to activities subject to local taxes, and clarifying its definition of independent 

contractor. 

Determination of jurisdiction to tax should be guided by one fundamental principle: a 

government has the right to impose burdens - economic and administrative - only on businesses 
217 


80344.188

that receive meaningful benefits or protections from that government. In the context of business 

activity taxes, this guiding principle means that businesses that are not physically present in a 

jurisdiction, and are therefore not receiving benefits or protections from the jurisdiction, should 

not be required to pay tax to that jurisdiction. Such a test also delineates a clear line to guide both 

businesses and the states (including their localities) on when a business can be subject to a state's 

tax. 

As noted, in 1992 the Supreme Court invited Congress to legislate in the arena of nexus. 

Nearly twenty years later there has yet to be Congressional action on this matter. Once again, in 

2012, Congress has the opportunity to properly construct a bright-line physical presence nexus 

standard that will promote fairness, eliminate uncertainty for both the business community and 

states, and significantly reduce the frequency and costs oflitigation. Toward that end, COST 

respectfully requests the Finance Committee's support of the business activity tax nexus 

standards contained in H.R. 1439. 

Sales Tax Complexity, Inequity 

The existing state and local sales and use tax system creates burdensome and unnecessary 

complexity - this complexity imposes substantial costs on vendors, states, and consumers. A 

simplified sales tax system offers the potential to promote equitable and nondiscriminatory 

taxation, reduce tax rates for consumers, reduce administrative burdens for both business and the 

states, and improve compliance. Telecommunications transaction taxes should also be governed 

by such a simplified system. 

Under the previously cited Quill decision, vendors with a physical presence in a state are 

required to collect and remit sales tax on taxable sales in a state. Vendors without a physical 

presence are not required to collect sales tax, but consumers are legally liable for use tax on 

taxable purchases when no sales tax is collected by the vendor. Congress has authority to remove 

this existing limitation and allow states to compel remote vendors to collect and remit sales tax, 

and, as noted above, has expressly been invited to do so by the U.S. Supreme Court. COST 

believes that collection authority should be provided to States that radically simplifY their sales 

and use tax system. 

Several pieces oflegislation implicating this issue are currently pending in Congress, 

including the Main Street Fairness Act (S. 1452! H.R. 2701), the Marketplace Equity Act of 

2011 (H.R. 3179), and the Marketplace Fairness Act (S. 1832). In general, these proposals seek 

to grant sales tax collection authority to states that adopt sales tax simplification measures, such 

as the simplification embodied in the Streamlined Sales and Use Tax Agreement (which has been 

adopted in whole or in part by 24 states). COST urges Congress to find a reasonable balance 

between the goal of updating the current compliance framework for remote sales tax collection 

and the need to ease the administrative burdens imposed on interstate commerce by the current 

system. 
218 


80344.189

Conclusion 

In your Hearing Statement, you said: "As part of tax reform, we should ask how we can 

help states collect taxes owed and how we can encourage standard rules to protect taxpayers 

from multiple taxes and needless complexity." The three areas described above - nonresident 

withholding, business activity tax nexus, and remote sales taxation - are ripe for Congressional 

action to both protect taxpayers and aid in state tax administration through the adoption of fair, 

easily administered rules for travelling employees and multi state businesses. Specifically, COST 

urges the Finance Committee to approve measures consistent with those already approved in the 

House Judiciary Committee - H.R. 1864, the Mobile Workforce State Income Tax 

Simplification Act of2011, and H.R. 1439, the Business Activity Tax Simplification Act of2011 

and to approve legislation that would both ensure simplification of state and local sales taxes 

and the collection of such taxes by all sellers, regardless of the seller's location. COST stands 

ready to assist the Committee and answer any questions with respect to these and other areas of 

state and local taxation implicating interstate commerce. 

Sincerely, 

Douglas L. Lindholm 

cc: COST Board of Directors 
219 


80344.190

THE CRisTOL GROUp 

(954) 4B6·412~ 

Fax (954) 486·413J 

4600 W. COMMERCIAL BLVO.· SUITE 3. FT. LAUDERDALE, FL 333H 

4118/2012 

Honorable Max Baucus, Chainnan 

Honorable Orrin Hatch, Ranking Member 

United States Senate 

Committee on Finance 

Attn.: Editorial and Document Section 

Rm. SD·219 

Dirksen Senate Office Bldg. 

Washington, DC 20510·6200 

Re: April 25 Hearing: Tax Reform: What it Means for State and Local Tax and Fiscal Policy 

Dear Honorable Chairman Baueus, Ranking Member Hatch and Members of the Committee: 

I am the owner of The Cristol Group, Inc., a specialty food rep group headquartered here in Fort Lauderdale, Florida. We 

represent over 40 manufacturers of gounnet food products to the retail trade, mostly mom & pop retailers t:rying to stay in 

business in these hard times in Florida, Georgia, and Alabama where in the last six years we have lost over 200 small retail 

customers .. We have over a dozen Independent reps driving around their territories (paying $4.00 a gallon for gasoline) selling 

our lines. which are shipped from many states directly to our customers. Our reps commissions are lower than ever, and another 

tax is all they need to go on unemployment. We are all just trying to bang on during the economic crisis. Of course any additional 

tax we would have to pay will have to come from the sales reps cOnuWssions as a deduction. 

As a Florida resident and business owner for over a quarter century and a specialty food broker in Florida for 27 years, 

we desperately need your support of the Business Activity Tax Simplification Act (H.R. 1439). BATSA would prevent unlawful 

impediments to the free flow of commerce among the states by clarifying that no state may impose a business activity tax on any 

entity that lacks a physical presence in the taxing jurisdiction. The bill would provide a brightMline definition of physical 

presence. In addition. the Act would modernize current law (Pub. L. 86-272) relating to state authority to impose Det income 

taxes on certain income derived from interstate commerce to cover services and intangible property. Thus, businesses would 

continue to pay business activity taxes to those jurisdictions that provide them with meaningful benefits and protections. We, as a 

company and the 12 Florida residents that work with us are hanging by a thread in this economic depressed business climate. 

Some of our 1099 independent representatives cross over state lines into GA & AL and our company could be greatly 

impacted and would have to close and file Chapter 13 if we got hit with tax bills from these neighboring states. The BATSABili 

is our only protection from states who are trolling for tax dollars anywhere they can find them and is our only hope of keeping our 

business viable until this crisis blows over. It has ,to be enacted this year. It's taken too long already. Please don't "do nothing". 

Waiting will cause many ofus to fail. Your constituents don't want Walmart to be the only store left to shop. Small businesses are 

the life blood of neighborhoods. These are the people we service. Their average orders are less than $500.00. Ofthat we get about 

5 to 10%. 

PLEASE do what you can to help us and small businesses like oUTS who have small sales but no physical presence in 

neighboring states stay viable in today's reality. 

Thanks for your aoticipated support of this important bill. 

Thank you for your time and attention to this important matter. 

Sincerely, 

Sam Cristol, President 

The Cristol Group, Inc. 
220 


80344.191

STATEMENT OF THE 

DIRECT MARKETING ASSOCIATION 

REGARDING THE 

COMMITTEE ON FINANCE 

OFTHE 

UNITED STATES SENATE 

HEARING ON 

T AX REFORM: WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY 

APRIL 25, 2012 

JERRY CERASALE 

SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS 

DIRECT MARKETING ASSOCIATION, INC. 

1615 L STREET, NW SUITE 1100 

WASHINGTON, DC 20036 

202-861-2423 

I. INTRODUCTION 

The Direct Marketing Association (DMA) thanks Senator Baucus, Chairman, Senator Hatch, 

Ranking Member, and members of the Committee on Finance for this opportunity to present its 

views on the efforts of states to impose tax and tax collection obligations on retailers who are 

located outside of their states and who have no physical presence in that state. The states are 

asking Congress to grant them authority to conscript non-citizen businesses to become their tax 

collectors. These efforts are not federal tax reform-they are not state tax reform. They 

represent states seeking to impose a 1930's tax regime on 21" Century commerce rather than 

reforming their tax regimes and seeking Congressional help. In addition states are imposing 

business activity taxes upon companies with no presence, no employees, and no political voice in 

the state. These efforts combined are attempts to extend the taxing reach of states far beyond 

their borders. This undermines and regulates interstate commerce. 

DMA is the leading global trade association of businesses and nonprofit organizations using and 

supporting direct marketing via channels including mail, telephone, direct TV, radio and the 

Internet. Founded in 1917, the DMA currently has over 2,000 member companies across the 

United States and 53 foreign countries. 

DMA would like to discuss specifically state efforts to require remote (out-of-state) sellers to 

become unpaid tax collectors for states under the Streamlined Sales and Use Tax Agreement 

(SSUTA) and to pay business activity taxes. 

II. STREAMLINED SALES AND USE TAX AGREEMENT 

The U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), ruled that without 

specific authorization from Congress, states could not impose tax collection burdens upon 

remote sellers that have no "physical presence" as this would interfere with interstate commerce. 
221 


80344.192

Moreover, if allowed by Congress, the myriad of state tax jurisdictions with resulting variance in 

rates, definitions, and audits would create a complex and administratively costly nationwide sales 

tax collection system. The costs of that collection are a tax on the out-of-state business. It is 

significant that these remote sellers' businesses do not receive police or fire protection from 

those states-they are not present in them. Their employees and their families do not receive 

educational or social services from those states-the businesses have no employees located in 

those states. 

Governments, as well as businesses, face challenging financial decisions in these economic 

times. State legislatures have very difficult budget determinations and are looking at both cutting 

costs and increasing revenues. However, proponents of the SSUTA have cited grossly 

exaggerated revenue estimates of uncollected sales and use taxes due to remote sales. In 

particular, proponents have cited a 2000 University of Tennessee study that includes 

unbelievable estimates as to the amount of the uncollected sales tax. A revised Tennessee study 

lowered its initial estimate from $45 billion to $24 billion, even the revised estimates will not be 

realized. 

It is important to note that the Tennessee study rests on a number of faulty assumptions and is 

not based on U.S. Government data. Further, the study's implication that states are "losing" a 

substantial portion of their sales tax revenues to electronic commerce is simply false. The vast 

majority of e-commerce transactions are not with consumers, but rather with businesses, and 

such business transactions almost always are subject to tax collection or direct payment of use 

taxes by the purchaser. 

In contrast, the independent firm, Forrester Research, has estimated that the loss of tax revenue 

due to state residents not paying use taxes for remote sales is $3 billion nationwide-a fraction of 

the $24 billion estimated in the revised Tennessee study. A 2007 DMA-commissioned study, 

based on U.S. Commerce Department data, estimates that in 2006 uncollected sales tax 

nationally totaled $4.2 billion. There is no $24 billion pot of gold. 

In light of the Quill decision, the states began a project to simplify the sales tax regimes that a 

remote seller would face ifrequired to become the foreign state's tax collector. The SSUTA goal 

was to remove that complexity and create a 21 sl century, Internet-friendly tax regime to 

encourage economic growth throughout the national marketplace. However, the SSUTA has 

failed to either remove complexity or create that 21 ,t century tax policy standard. To be blunt, the 

SSUTA is a document drafted by tax administrators, and, as might be expected, it has resulted in 

little in the way of tax simplification. 

Specifically, the SSUTA: 

• Has not reduced the number of sales tax jurisdictions in the Nation, which currently 

number over 9,000; 

• Has not reduced the number of state and local sales tax rates; 

• Has not reduced the number of audits to which an interstate seller would be subject (each 

state revenue department would still conduct its own independent audit); 
222 


80344.193

• Has not established a long-promised uniform vendor compensation to cover the 

substantial cost of tax collection; and 

• Has not established a single remittance procedure. 

Moreover, the Governing Board of SSUT A has granted exceptions to its feeble simplification 

initiatives to win approval of the states. Recently, the Board granted an exception from the 

SSUTA-defined rule for Massachusetts when calculating the sales tax on articles of clothing over 

$100. SSUTA ""ill continue to grant exceptions that mil increase the complexity of sales tax 

collection. States are enacting sales tax holidays-some for all purchases under a capped price; 

others for specific products (such as hurricane preparedness) on a specific date. Those actions, 

while important for the state and its citizens, further complicate a nationmde sales tax collection 

regime. 

As you can see, tax collection has not been simplified since the inception of SSUT A. In fact, 

SSUTA is "streamlined" in name only. 

To better appreciate the failings of the SSUTA, it is instructive to consider its history. The 

Streamlined Sales Tax Project was launched in 2000 on the heels of two earlier joint 

government/industry initiatives: the National Tax Association (NTA) Communications and 

Electronic Commerce Tax Project, and the Congressionally-established Advisory Commission 

on Electronic Commerce. Both projects had concluded that the existing state sales tax system 

was one of daunting complexity, and that true simplification would require sweeping reforms. 

Perhaps most emblematic of the SSUTA's failure to achieve genuine sales tax reform was the 

early demise of the single-most important step toward simplification: the adoption of a single 

sales tax rate per state for all commerce (both over-the-counter sales and interstate sales). Had 

the SSUT A adopted this so-called "one rate per state" proposal, this single act could have 

eliminated the problem of merchant compliance with thousands oflocal tax jurisdictions with 

different tax rates. 

To put this "one rate per state" issue in perspective, the United States is the only economically 

developed country in the world with a system of sub-state transaction taxes, not only for counties 

and municipalities, but also for school districts, transportation districts, sanitation districts, sports 

arena districts, and other local jurisdictions. In light of this wildly complex system, the adoption 

of the "one rate per state" standard was the unanimous recommendation of the NTA's ECommerce Project (which included delegates of the National Conference of State Legislatures, 

National Governors Association, and US Conference of Mayors) and was in the majority report 

recommendation of the Congressional Advisory Commission. 

Those failings increase the burden on out-of-state sellers. Being subject to 45 separate state 

audits requires a tax department. Those businesses would be required to have multiple state 

registrations and multiple remittance procedures. The cost stemming from tax collection would 

be passed to consumers, constituting an anti-stimulus at a time when our nation is working to 

stimulate the economy. Moreover, remote sellers with locations only in states that do not impose 

sales taxes, and that, in tum, have no process in place to collect any sales taxes, would be 
223 


80344.194

required to create an entirely new tax department within their company and establish entHeIy 

new accounting and ordering protocols. Those remote sellers would face even greater burdens. 

Any discussion of tax reform concerning non-citizen companies becoming tax collectors for 

states, should require tax reform in terms of simplification of state sales tax regimes. Only after 

that reform should Congress consider granting additional interstate taxing authority to the states 

with the proviso that the tax regime simplification must remain in place. 

III. BliSINESS ACTIVITY TAXES 

Broad imposition of business franchise, corporation net income, and gross receipts taxes 

(cornmonly called Business Activity Taxes) on small and mid-sized out-of-state remote direct 

marketers would constitute a tremendous new tax compliance burden. Currently, there are at 

least 3,300 separate state and local business activity taxes imposed by state and local 

governments and over 12,600 jurisdictions have the authority to collect such a tax. Just as the 

Supreme Court found in its Quill decision, precisely the same burdens created if sales and use 

tax obligations were imposed by the nation's over 9,000 sales and use tax jurisdictions would 

also result from allowing the thousands of state and local jurisdictions that have the authority to 

impose a business activity tax to extend their taxing authority across state borders to businesses 

with no stores, offices, factories or employees within their territories. 

Despite assertions that business activity taxes do not appear to cause the same degree of 

compliance burdens as sales and use tax collection, the reality is that compliance with state 

income taxes and gross receipts taxes is extremely complicated and varies greatly from state to 

state. Forty-five states, along with the District of Columbia, impose such a tax. States differ 

tremendously in how income is allocated and apportioned, in how the tax base is defined, in what 

tax rates apply and in a host of other issues. 

States also have varying rules regarding reporting and filing procedures, including which 

corporations must tile a return, whether related entities should file together or separately, what 

due dates apply for filing and remitting taxes, and whether federal extensions are accepted. 

Roughly half the states allow combined reporting, whereas and other half require or allow 

separate reporting by each entity within an affiliated group. Among the states that follow 

combined reporting of unitary businesses, there are dramatic differences regarding the level of 

combination. 

Another cause of considerable complexity is the fact that the states have different rules for 

allocating and apportioning a multi-state corporation's income among the states in which it does 

business. Most states use a three-factor formula (i.e., sales, property and payroll) to apportion 

business income. Some states weigh all factors equally, other states double-weight the sales 

factor, and some states place even more emphasis on sales. Furthermore, while sales are 

typically assigned to a particular state based on a destination test, some states use a "tluowback 

rule" that reassigns sales to the state of origin if the corporation is not taxable in the destination 

state. States also differ in their definitions of the tax base, with varying stances on what items of 

income and deduction are included in taxable income. States have different depreciation rules, 

rules for deduction of net operating losses, and the list goes on. 
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Large companies with accounting staffs and outside consultants may be able to navigate 

successfully through the labyrinth of state income tax compliance, but smaller companies do not 

have the resources to meet these compliance obligations. Further, the differing apportionment 

standards among states place a business, especially a smaller company, at risk of duplicative 

over-taxation. This risk is increased by the fact that there is no centralized resource to which 

businesses can tum in determining, let alone meeting, their obligations. 

Moreover, the prospect of challenging an incorrect assessment in a remote jurisdiction is 

daunting. For example, a small Montana business sells gourmet food products over the Internet. 

With a good website and a great set of recipes, there is no limit to the national- or even 

international- markets this start-up business could reach. However, if one of New Mexico's 

100-plus taxing municipalities issued an assessment against the company for a local gross 

receipts tax based on sales made to its citizens, and the Montana business believed the measure 

oftaxes was in error and challenges the assessment, it would have to hire local counsel familiar 

~ith local tax law, proceeding first through the administrative protest and, if unsuccessful, then 

through the judicial process. Furthermore, in many states, the business must pay the tax before it 

can challenge the assessment in state court; only then is it permitted to sue for a refund. Such a 

procedure would be inordinately expensive for a small retailer, which would be left with little 

choice but to pay the tax and forget its objections. Faced with potentially hundreds of such 

practically incontestable assessments, the small Montana food company could fall victim to 

"death by a thousand cuts." The detrimental impact on small business cannot be overstated. 

IV. CONCLUSION 

The bright-line physical presence test in Quill should remain for collection of sales and use taxes 

without significant simplification reform of state sales tax regimes. The burden of each on 

interstate commerce is large, and this is a time when our economy can ill afford such a burden. 

Congress should not grant the states authority to expand business activity taxes or forced sales 

and use tax collection beyond their borders. Federalism does not work efficiently- or fairlywhen a legislature attempts to export its tax laws across state borders. A system in which 50 state 

governments, and thousands ofiocalities, impose their myriad sales and use tax regimes on 

businesses in each of the other 49 states would be chaotic, both as a matter of tax administration 

and business compliance. The end result of expanded nexus will be nothing less than a crazy 

quilt of non-uniform tax laws and compliance obligations that will further stagnate the consumer 

sector of the economy and aggravate an already grossly inefficient system of multi-state tax 

administration. The patchwork quilt of business activity taxes, rules, definitions, reporting, etc. 

will chill the one growing engine of our economy, Internet commerce, by burdening new start-up 

companies before they have the opportunity to grow. 

DMA urges Congress both to uphold the physical nexus standard of Quill rather than extending 

taxing authority of states to include the collection of sales and use tax beyond their borders 

without significant simplification reform by the states, and to impose the Quill standard to states 

applying business activity taxes to remote sellers. 
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Contact: William L. Curry, Chief Tax Officer 

2030 Dow Center 

Midland, MI 48674 

Phone: 800-422-8193 (main) 

Written Statement of The Dow Chemical Company 

Before the United States Senate Committee on Finance 

Hearing on "Tax Reform: What it Mealls for State alld Local Tax alld Fiscal Policy" 

April 25, 2012 

The Dow Chemical Company applauds the Senate Finance Committee for its attention to 

state tax issues. In particular, we would like to direct the Committee's attention to the 

issue of business activity tax nexus. We at Dow strongly support the Business Activity 

Tax Simplification Act ("BATSA"), H.R. 1439, and respectfully urge the Congress to 

enact that bill into law this year. 

The income of multi-state businesses, like ours, traditionally has been subject to state 

income and similar taxes only in those jurisdictions in which the business has a physical 

presence, such as employees, an office or inventory. More recently, however, some 

states have asserted the right to assess business activity taxes on non-resident companies 

that have merely an economic presence (i.e., sales or royalties), but no physical presence, 

in the taxing jurisdiction. State courts that have heard cases challenging such 

assessments have split on whether or not such taxes violate the U.S. Constitution's 

Commerce Clause. The U.S. Supreme Court has declined to hear the issue, indicating 

that Congress is better suited to resolve the matter. 

The business community needs Congress to step in now with a legislative solution to the 

problem. By enacting BATSA, Congress will satisfy its constitutional responsibility to 

ensure that interstate commerce is not burdened by state overreaching, without interfering 

with the ability of the states to tax companies that are properly subject to their 

jurisdiction. Specifically, BATSA would clarify that physical presence is required for 

state assessments of income and similar taxes on non-resident companies. It would also 

provide a clear and consistent definition of physical presence. 

Enactment of BA TSA would promote fairness by ensuring that husinesses that recci ve 

the benefits and protections provided by state and local governments pay their fair share 

for those services. The bill also would provide taxpayers and states with legal certainty 

regarding where a business owes income taxes, resulting in lower compliance costs, less 

litigation and a stable business climate in which tax considcrations do not hinder business 

decisions. Finally, the bill would result in greater conformity for business activity taxes 

at the state and local level with the "permanent establishment" standard that is used by 

the U.S. in its treaties with foreign countries. 
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Without passage of BA TSA, taxpayers will continue to face insufficient clarity on 

whether there is an obligation to file an income tax return. For example, some states 

today believe that an author that receives royalties from the sale of books is subject to tax 

in every state where the book is sold. Conceptually this doesn't sound very difficult, but 

imagine being that author and trying to file your tax returns without knowing the states of 

sale. Now imagine a corporation like Dow that owns thousands of patents, some of 

which it chooses to license to independent licensees. Some ofthese patents may be 

related to a specific product while others may be related to the manufacturing processes 

used to make various products. In many instances, the royalties for the use of a patent is 

based upon sales for administrative ease. In the case of a patent related to a 

manufacturing process, some states may argue that the patent was used in the state where 

the manufacturing took place and the royalty income is taxable in that state. Other states 

may argue that the same royalty is taxable in the state(s) where the product using the 

licensed patent was sold. To further complicate the picture, making these decisions often 

requires the review of each license agreement. As you can imagine, this is very difficult 

to determine and creates great uncertainty to businesses trying to determine in which 

states they are subject to tax. In addition to the uncertainty created, this creates the 

potential for the same royalty to be taxed by multiple states (both the state of manufacture 

and the state where the end product is sold) despite the fact that the owner of the patent 

has no connection to either state. This uncertainty creates unnecessary costs and 

administrative burdens. 

We hope this uncertainty can be resolved through passage of BA TSA. 

Thank you for the opportunity to comment on this matter. 

About Dow: Dow combines the power of science and technology to passionately 

innovate what is essential to human progress. The Company connects chemistry and 

innovation with the principles of sustainability to hclp address many of the world's most 

challenging problems such as the need for clean water, renewable energy generation and 

conservation, and increasing agricultural productivity. Dow's diversified industry-leading 

portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses 

delivers a broad range of technology-based products and solutions to customers in 

approximately 160 countries and in high growth sectors such as electronics, water, 

energy, coatings and agriculture. In 2011, Dow had annual sales of $60 billion and 

employed approximately 25,000 people in the United States. The Company's more than 

5,000 products are manufactured at 197 sitcs in 36 countries across the globe. More 

information about Dow can be found at www.dow.com. 
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Testimony on Behalf of the Download Fairness Coalition 

Committee on Finance 

Tax Reform: What it Means for State and Local Tax and Fiscal Policy 

April 25, 20112 

Download Fairness Coalition 

455 Mass. Ave., NW 

1ih Floor 

Washington, D.C. 20001 
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80344.199

Testimony on Behalf of the Download Fairness Coalition 

Chairman Baucus, Ranking Member Hatch, and members of the Committee, on 

behalf of the Download Fairness Coalition, we welcome the opportunity to 

present testimony in support of S. 971, the Digital Goods and Services Tax 

Fairness Act authored by members of the Committee, Senators Wyden and 

Thune, and cosponsored by Senator Snowe. In addition, Senator McCain is a 

cosponsor of the bill. 

Our coalition, including 29 companies and organizations, banded together last 

year to drive a solution to a very real problem, and one that Congress must 

address. Without action by Congress, the digitial market - downloadable songs, 

aps, books, and movies - could be subject to unfair and duplicative taxes that will 

cost consumers more money and hamstring growth of a major sector within our 

economy. The Download Fairness Coalition is a diverse group of consumers and 

organizations that are committed to ensuring a framework is enacted to guide the 

taxation of digital goods and services before consumers, American businesses, 

and states are unfairly impacted. 

Each of you and your staff is well versed in the use of electronic devices. Our 

society has become extremely comfortable with the notion of hitting buttons and 

having things delivered to us. Our focus is purely on the digital world of bits flying 

through the air and moving those bits to the digital platforms we carry around 

each day, including our cell phones, our kindles, our Ipads, and similar devices. 

A recent Pew report entitled, Digital Differences, April 13, 2012, provides a 

number of important statistics for you to consider. 

1. 80% of Americans use the internet; 

2. 88% of Americans have a cell phone, 57% have a laptop, 19% own an ereader, and 19% have a tablet, and the trend of e-book and tablet 

purchases continues to climb, from a standing start to an increase of 9% 

from August 2011 to January 2012; and, 

3. 71% of adult internet users buy products on-line. 
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80344200.eps

All of this data suggests that Americans are utilizing these platforms more and 

more, driving the new digital economy. The sale of digital goods, such as 

downloadable software, music, movies, games, and books, continues to increase. 

In 2010, for example, U.S. online retailers sold 1.17 billion digital music tracks 

totaling $1.5 billion in revenue. Similarly, e-book sales in the United States 

reached $1 billion and are expected to almost triple by 2015. Amazon carries 

almost one million titles available for download on its Kindle e-book reader and 

has found that when it carries both a physical and digital edition of a book, it sells 

six Kindle books for every ten physical books. On mobile devices, U.S. consumers 

downloaded almost 1.6 billion free and paid apps in 2010, generating 

approximately $1.6 billion in paid app revenue. Apple announced recently it had 

delivered its 25th billionth app. Android, late last year announced it delivered over 

10 billion apps. 

The appetite for digital goods is growing at a phenomenal rate; however, state tax 

laws have not kept pace with the new digital economy. This is the problem that 

needs to be addressed, and only Congress can solve this problem. 

In the digital world, we do not walk into a store in downtown Bozeman, or Salt 

Lake City, and buy a product. We could be anywhere, at the top of Big Sky, 

Solitutde, Mt. Bachelor or viewing Mr. Rushmore, and search our electronic 

device for a song or a movie and hit "accept." The product is delivered 

immediately. 

What state has the right to impose a sales tax on that transaction? The spot 

where you hit the button, the location of where the server is for the company 

seJling the song, or the state where you reside? It is a critical question and 

without an answer, the shape of digital commerce remains in limbo, for both the 

consumers and those obligated to collect and remit the taxes. 

S. 971 would specifically establish a framework for the states to follow, should 

they decide to tax digital goods. The simplest way to describe the framework is 

that a consumer would be taxed in his or her home state. 
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1. The framework is based on one that Congress enacted some 10 years 

ago with respect to mobile phones through the Mobile 

Telecommunications Sourcing Act, P.L. 106-252, which sourced a 

purchase - for the purpose of taxation, to the consumer's address. In 

the case of digital goods, only the the state where the consumer's 

address is located would have the ability to tax a purchase. 

2. The right of each state is preserved, enabling each to make its own 

determination regarding which goods and services they want to tax. 

3. Consumers residing in that state (or at least those old enough to vote) 

would have a say with their state government on those decisions. 

4. That same consumer would not be subject to another state's tax, 

imposing a duplicative tax, or an unfair tax on the transaction. 

As shown in Figure 1, more than 20 states currently collect taxes on digital goods. 

These states have created these taxes either by statute or administrative changes 

to the tax code. Of these, 13 states have enacted sales tax statutes specifically to 

tax digital goods or services, including: Indiana, Kentucky, Mississippi, Nebraska, 

New Jersey, North Carolina, South Dakota, Tennessee, Utah, Vermont, 

Washington, Wisconsin, and Wyoming. A number of other states have or are 

currently exploring the possibility of passing a tax on digital goods and services. 

States should have the ability to make their own revenue decisions, but as more 

states choose to tax these products, there is inevidably more confusion around 

which state can tax these purchases inviting more risk to both the consumer and 

the provider. It is, therefore, timely to pass this legislation now, before the risk of 

a potential problem has real impacts on consumers and our economy. 
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80344.202

Figure 1: 

Digital Goods - Legislative Activity 

Taxability as of 2012 under generally applied sales taxes 

AK 

Before a House Judiciary Committee hearing last May, Rob Atkinson, President of 

the Information Technology and Innovation Foundation noted that "by creating a 

fairer and more consistent tax system for digital goods, this legislation will help 

promote and sustain our growing digital economy." 

We urge you to enact S. 971. 
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The Honorable Max Baucus 

Chainnan 

Committee on Finance 

United States Senate 

May 8, 2012 

51l Hart Office Building Washington, DC 20510 

The Honorable Orrin G, Hatch 

Ranking Member 

Committee on Finance 

United States Senate 

104 Han Office Building Washington, DC 20510 

1250 E,;< St,""" XU!, Suit<, 12C1' 

'IIJM1im9wn, :tJC 2CCC5 

25,2012, Hearing Entitled: Tax Reform: What II Means/iir Siale and Local Tax and 

Dear Chairman Baucus and Ranking Member Hatch: 

Thank you for convening a hearing on federal tax reform and its impact on state and local 

govemmcnts. The hearing is very timely. and we appreciate the Committee's leadership on state 

taxation issues related to tax reform. 

I would like to address the issue oflntemet sales taxes, which could negatively impact 

small business retailers in every state using the Internet to reach customers across America and 

around the world. Over the past 16 years, eBay Inc. has been a platform that has encouraged 

small business gro;;1h and development and as a small business platform, we have experienced 

firsthand the challenges that small retailers face in the current retail environment. With this 

experience in mind, I would like to discuss three growing concerns related to the [nternel sales 

tax debate and small business protection: 

Big Retail v, Small Retail: Mega-billion dollar retailers arc dominating online retaiL 

just as they have Main Street retail. Even under current sales tax law, small online 

retailers have lost 11% of their share of the eCommerce market in just two years. 

What would happen when they would be forced to collect and remit in over 9,500 tax 

jurisdictions? 
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• Fairness v. Sameness: Many have claimed that "fairness" means all retailers using 

the Internet should be held to the same remote sales tax standard. If fairness is 

considered sameness then small businesses should be receiving the same shipping 

costs and sweetheart tax deals that mega-billion dollar retailers receive. 

• Misleading Data: There are those that believe small businesses should not be 

protected from new sales tax burdens. In an effort to sway policymakers, Amazon 

has commissioned a study entitled, Online Retail Sellers and Sales Volume 

Thresholds, that implies a majority of small businesses would be protected by the 

threshold in S. 1832. The study distorts retailer data by including millions of 

consumers who occasionally sell on the Internet in its data. 

The Internet and Small Business Growth 

eBay Inc. connects millions of buyers and sellers across the globe everyday through the 

eBay platfonn, which is the world's largest online marketplace and through PayPal, which 

enables individuals and businesses to securely, easily and quickly send and receive online 

payments. We also reach millions of consumers through specialized marketplaces such as 

StubHub, the world's largest ticket marketplace; and eBay Classifieds sites, which together are 

available in more than 1,000 cities around the world. 

Among those that use the eBay platfonn are hundreds of thousands of U.S. small 

businesses and entrepreneurs who are located in every state and congressional district across the 

country. The Internet and the eBay marketplace provide these small businesses and entrepreneurs 

with relatively low-cost access to potential buyers far outside the limits of their traditional 

geographic footprint. eBay cares about how proposals to expand remote sales tax collection 

would impact these small business retailers and entrepreneurs because they have always been at 

the heart of the eBay business model. Our success is tied directly to their success. 

Technology and the Internet are now central to almost every retail business model. This 

is true for businesses of all sizes, including small businesses. By opening up new markets, the 

Internet empowers particularly small businesses to grow outside of traditionally disadvantaged 

communities and compete nationwide. eBay and the Internet also open international markets to 

small business retailers in ways unimaginable just fifteen years ago, 

The debate about remote sales tax policy on the Internet stretches back over a decade. 

While much of the rhetoric fueling the call for increased remote sales tax collection has stood 

still, the world of retail has changed. The very idea that this debate is about "The Internet" v. 

"Stores" is a false paradigm. All sustainable 21 st Century retail business models, both large and 

small, use the Internet and other technology tools. All 21 st Century retail business models have 

some physical facilities, whether stores, management offices, warehouses or distribution centers. 

The debate has really come down to "Big Retail" v. "Small Retail" and whether or not it is smart 

public policy to treat a small business the same as a mega-billion dollar retailer. 
234 


80344.205

Big Retail v. Small Retail 

At the heart of the story has been the expanding dominance of giant retailers at the 

expense of small business. Over the past 30 years, giants have grown more dominant in retail, 

while small independent retailers have been pushed to the edges. To illustrate, big-box retailers 

accounted for 42% of total retail sales in 1987. As of July 2010, their market share had jumped 

to 87%.1 In addition, retail giants make up 18 of the Top 25 retail websites today. 

These same retail giants are trying to use a bill named the Main Street Fairness Act (S. 

1832) to disadvantage small businesses and require them to have the same tax burden, even 

though they do not have the physical presence or other benefits that larger retailers enjoy. The 

giant billion-dollar retailers with their national stores or distribution networks can offer key 

services like in-store pick up, same day delivery, free or significantly lower-cost shipping, and 

in-store returns of items bought online. Consumers value those features, and the biggest of the 

big are better positioned to offer those services. 

In online retail, being giant has its advantages just as it does in traditional brick and 

mortar retail and physical presence brings real world benefits to retailers Small retailers tend to 

have very limited physical presence and therefore do not fully enjoy the advantages that larger 

retailers possess. Today, the retail benefits of physical presence come with a tax cost, and retail 

businesses have understood that rule for years. 

Even though giant retailers have a larger sales tax burden due to their larger physical 

presence, the benefits have outweighed the tax cost. In fact, in the current landscape, large 

"Brick and Click" retailers and the largest online retailer Amazon have experienced healthy 

growth. On the other hand, the share of online sales by retailers with less than $20 million in 

sales is falling. And not surprisingly, the giant retailers who are now dominating the Internet 

marketplace are lined up, united in proposing a change in remote sales tax law that will harm the 

smaller retailers who do not have national physical presence. While small business retailers are 

active online and are adopting technology, they do not enjoy any particular advantage and face 

significant competition from large retailers who are also adopting the full range of technologies. 

Small business retailers using the Internet face meaningful threats and we are concerned about 

what the landscape could look like if they are forced to collect and remit sales taxes in over 

9,500 tax jurisdictions when their customers would not enjoy the benefits oflocal presence that 

the largest retailers can pair with the tax costs today. 

Market share data helps cut through the rhetoric and illustrates that small business 

retailers face meaningful challenges today without a new tax burden being placed on them by the 

US Congress. In short, if small business retailers using the Internet were gaining unfair 

advantages from current remote sales tax laws, one would expect that their share of Internet sales 

would be growing. As you can see from the chart below, it is not the case. Just as importantly, 

the idea that small business retailers on the Internet are a threat to the survival of small business 

store fronts is ridiculous. The threat to small independent retailers is coming from giant multibillion dollar competitors online and offline, which has been the case for nearly half a century. 

I ConsumerReports.org. (July 2010). America's Top Stores: 30,000 Readers Reveal the Best Places to Shop fi" 

Practically Anything. Consumer Reports 
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80344.206

US eCommerce share retailer size 

2008 to 2010 

I 

• 

Fairness Y. Sameness 

You hear a lot about fairness in this debate. Some have claimed that a "level playing 

field" means all retailers using the Internet should be held to the same remote sales tax standard. 

However. sameness is not fairness, and the playing field is already unlevel. Small business 

retailers have proportionally higher costs of doing business, including providing employee 

benefits. And one must especially consider the costs of shipping when discussing e-commerce. 

Shipping prices. as with other costs, are directly related to sales volumes and how close the 

retailer is to the customer. 

There are also many direct tax benefits enjoyed by the largest retailers that never flow 

down to their small business competitors. These include state and local property tax breaks and 

sales tax exclusions. Do those who want a "level playing field" demand that all small business 

retailers get the same tax credits. the same sales tax exclusions and the same shipping rates? If 

and when they do. we will be the first to endorse changing Quill and lifting the prohibition 

against remote sales tax collection and remittance. 

There has also been a lot of discussion about how the current remote sales tax structure is 

unfair for state and local governments that are hemorrhaging money in this current economic 

environment. Although eEay is sympathetic to states' budget woes, recent reports have 

indicated that with the rise of the "Brick & Click" retailers who are now collecting and remitting 

in most tax jurisdictions, the amount of uncollected revenue has actually been dramatically 
236 


80344.207

reduced. In fact, according to a study by economists Jeffrey Eisenach and Robert Litan, 

uncollected revenues (from firms with more than $5 million in remote sales) will average 

approximately $2.67 billion over the 2008-2012 period, or about two tenths of one percent of 

total state and local tax revenues. 2 Is it really worth changing the sales tax law in a way that 

would disadvantage small business retailers using the Internet for about two tenths of one percent 

of total state and local tax revenues? 

In addition, in a recent report by the National Governors Association and the National 

Association of State Budget Officers, state revenues are starting to improve and 38 states 

reported that they had higher general fund spending in fiscal 20 II compared to fiscal. J States are 

rebounding from the recession, and although this is a slow process, it is our concern that placing 

additional burdens on small business retailers using the Internet that operate in every state across 

the country is not a way to promote the growth of a larger tax base. 

Current law regarding remote state sales tax authority is not perfect, and there have been 

problems. A few large online retailers have not operated in the spirit of the law, failing to collect 

sales taxes where they have physical presence, which has in tum aggravated this issue and 

brought it to a breaking point. However, their smaller competitors are and do collect and remit 

sales taxes for purchases made both online and offline. In addition, states have chosen not to 

enforce their consumer Use Tax laws and have instead opted for an approach that would burden 

out of state businesses, which although politically expedient will not encourage small businesses 

growth and development nationally. These are real problems with the current system. 

But current remote sales tax policies for small business retailers using the Internet are a 

positive aspect of the current system. Protecting real small businesses from blanket remote sales 

tax collection is beneficial for retail competition and economic growth, and should be retained in 

any new remote sales tax regime. And the reality is that there will always be small business 

retailers who you want to protect and allow to grow. A true small business exemption will be an 

incubator for new retail businesses, who we hope will graduate into any new collection regime. 

Unfortunately, the authors of recent remote sales tax bills have walked away from true 

small business protections. Starting in 2010, remote sales tax bills dropped the term "small 

business exemption" and replaced it with the term "small seller exception". They want small 

businesses to be collecting online everywhere. Obviously, we disagree. 

Misleading Data 

Additionally, there have been studies that claim that S. 1832 protects 99.7% of online 

sellers. This report is very misleading, as it does not differentiate between casual sellers who 

occasionally sell on the Internet and actual small business retailers that use the Internet as part of 

their business. It is misleading to include occasional sellers in a study that claims to illustrate the 

impact of a tax increase on small business. No one expects a casual seller to collect and remit 

sales taxes; the same way no one expects a garage sale to collect sales taxes. Distorting retailer 

2 "Uncollected Sales Taxes on Electronic Commerce: A Reality Check"; Eisenach and Litan: 2010. 

3 "The Fiscal survey of States: 20 II" : 

http://www.nasbo.orgfsites/defaultifi1es/2011%20Fall%20Fiscal%20Survev%20of.1020 States.pdf 
237 


80344.208

data by including millions of consumers who occasionally sell on the Internet is an effort to hide 

the real negative impact on real small business retailers who are working to provide meaningful 

competition to established retail giants. 

Real Small Business Protection 

If you believe that real small businesses should not be harmed by a change in remote 

sales tax law, then the definition of a small business is an important one. Congress traditionally 

delegates authority to the Small Business Administration (SBA) to set small business size 

standards. The SBA's unique position allows it take into account the intricate differences in 

diverse business models. 4 We think that the SBA is the appropriate authority for defining which 

small business retailers should continue to operate under current law. 

For all ofthese reasons, eBay strongly supports S.Res. 309. This bipartisan resolution 

opposes new tax collection requirements for small online businesses and entrepreneurs. The 

Resolution, which was introduced Senators Wyden and Ayotte, calls for policies to maintain the 

principle that small businesses should not be held to the same standard as large retail businesses 

with significant presence. 

To conclude, eBay's business is tied to the success of the small businesses that use our 

platform. Not surprisingly, our focus has been to protect small business retailers using the 

Internet. eBay supports a robust Small Business Exemption being included in any new remote 

sales tax regime and will continue to urge members of the Committee to do the same. 

C:~~- Tod Cohen 

Vice President and Deputy General Counsel, Govemment Relations 

eBay Inc. 

4 Small Business Administration 2012 size standards: http://www.sba.gov/contentltable-small-business-sizestandards 
238 


80344.209

Online Retail Sellers and Sales Volume Thresholds 

Laura A. Malowane, M.B.A., Ll.B., Ph.D., and Stephen E. Siwek, M.B.A. 

Economists Incorporated' 

April 2012 

This report presents estimates of online retailer counts and sales in the United States. The report was 

prepared at the request of Amazon.com. 

Introduction 

Congress faces important questions in the context of "Marketplace Fairness" online sales tax collection 

legislation, particularly with respect to the establishment of a "small seller exception." The SSE is the 

minimum sales threshold above which online retailers would be required to collect sales taxes. With 

such an SSE, Congress would deny states the choice of whether to require online sellers below the 

threshold to collect sales tax like their main street competitors. 

Key questions are: What fraction of ecommerce is conducted by sellers with various sales volumes? 

And what portion of online sellers sell more than a specified annual sales volume? Or, in a specific 

example: what is the minimum annual sales volume earned by the Top 1% of online sellers? 

Although little information is directly available about the total online interstate sales of any but the very 

largest volume sellers, answers to these questions can be reliably calculated by extrapolating from the 

available data. The following brief report provides the basis and results of such calculations. 

The purpose of our study of ecommerce was to determine the number and percentage of US online 

sellers above and below various annual sales volume thresholds. Given that there are many millions of 

online seliers, it is fairly obvious, for example, that there are far fewer sellers that sell more than 

$500,000 annually than there are sellers that sell less than $500,000. The core question, then, is how 

many - and what percentage of - sellers have sales above and below such a threshold? 

1 Economists Incorporated is an economic research and consulting firm with offices in Washington, D.C., 

and San Francisco, CA. 
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Estimating the Distribution of Online Retailers 

When economists arrange sales data for large populations of enterprises in order of their sales volume, 

they frequently derive, in statistical form, the linear or nonlinear "curve" that "best fits" the distribution 

of the available data. If details are known about only a portion of the distribution, details about the 

remainder of the distribution can be calculated with considerable precision so long as the total number 

of enterprises in the popUlation is known or can be reasonably estimated. 

In the case of US ecommerce, there is a wealth of information available about the largest 500 online 

sellers and so, by extrapolating from this information, the online sales levels achieved by less-large, 

medium, and small sellers can be calculated with confidence. We have done this and conclude that, 

conservatively assuming there are only five million US online sellers, only one percent of US online 

sellers have more than $150,000 annually in remote sales. Details of our analysis follow. 

To determine the online sales of different volume sellers we began with the most recent data available; 

2010 ecommerce sales data from the Internet Retailer: Top 500 Guide, 2011 Edition. In 2010, the largest 

500 ecommerce sellers ("Top 500") had combined global sales of $150 billion. We adjusted this total in 

order to derive an estimate of the Top 500's US-only sales. To do this we compiled the actual North 

American sales achieved by the largest online seller. Based on information provided by the Top 500 

Guide, we then assumed that about 94% of all the other sellers' ecommerce sales were US sales. 

Next, we arrayed the Top 500 sellers from largest to smallest (i.e., we ranked them 1 through 500 based 

on sales). This enabled us to evaluate how sales per seller decline as the ranking of the seller increases 

(or, said another way, how cumulative sales of all sellers at or below that ranking begin to flatten as the 

ranking of the seller increases). In order to calculate this relationship for the 501" seller and beyond, a 

logarithmic curve was fit to the cumulative sales data for the 251" to 500'h sellers (which we found to 

provide more robust predictive power for both smaller retailers and the industry as a whole than if all 

the Top 500 sellers were included). The resulting chart is shown in Graph 1. 
240 


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Graph I 

Cumulative US Sales of Top 251-500 E-Commerce Retailers 

(With Fitted Trend Line) 

2010 

! lZLo;:lO,CQll {lOO ,i"""_"""""",,,, ___ ,, __ _ 

r = 8 ,2;'~,.EU:.7'8"'m.r;x:) ~ 75.E-4J ,6£7 '{It; Rl = 0.99 

l5: ~l ;"'t} 2Sl 291 3Cl 311 3:':1 .B1 341 Hl 5"1 371 lSI 391 -401 4li 421 431 441 451 llel 471 481 491 5Cl 

Sw:bl!er of JDtHDd RRtailen S4rttd by s..m ,".olwm 

The computer-derived equation for the curve in Graph 1 is: 

y = $8.29 Billion * In (x) + $75.84 Billion; where x represents the rank of a particular seller and y 

represents the $ cumulative sales for all sellers up to and including the sales of the seller at rank x.' 

We used this curve and equation to extrapolate how sales per seller will continue to decline beyond the 

largest 500 sellers all the way to the very smallest volume sellers. That is, more crucially for the 

purposes of Congress, the equation for this curve can be used to estimate the sales volume per seller at 

any particular sales rank. The equation for such a calculation is: 

'The precise formula for this equation is y = $8.2928 Billion In (xl + $75.8437 Billion 
241 


80344.212

z = $8.29 Billion • [In (x) -In (x-I)]; where z represents the $ sales of the seller at rank x. 3 

Finally, because the questions before Congress are centered on interstate (a.k.a., "remote") sales, we 

endeavored to correct for in-state (local) sales on which we, again conservatively, assumed that taxes 

already are being collected. To do this we began with the Top 500 sellers and examined individual seller 

websites and annual SEC filings to determine in which states each seller has nexus. We then apportioned 

each seller's US ecommerce sales by state using a weighting of gross domestic product by state. Each 

seller's remote sales were calculated to include only those sales in states in which they do not have 

nexus. To estimate the remote sales of sellers above the 501" ranking, we used the data and above 

methodology for the 451" to SOOth seller, which resulted in an assumption that 93% of total ecommerce 

sales by sellers not in the Top 500 are remote. 

From these equations, the number and percentage of sellers above and below various sales volume 

thresholds can be calculated. Table 1 presents sample results very conservatively assuming only five 

million total US online sellers: A few years ago, eBay reported that it alone had well over 20 million 

sellers worldwide; if just - and very conservatively - a third of those are US sellers, the eBay ecommerce 

platform alone would have over seven million sellers.' 

Table 1 

Sales Threshold Sellers Above Sales Threshold 

Number Fraction 

$150,000 50,000 1% 

$250,000 30,000 0.6% 

$500,000 15,000 0.3% 

$750,000 10,000 0.2% 

$1,000,000 7,500 0.15% 

As shown in Table 1, for example, the ecommerce remote sales made by the lowest selling seller in the 

top one percent (i.e., the seller ranked as the 50,000th largest) is roughly $150,000. That is, less than 

one percent of online sellers have remote sales above $150,000. Further, only the fraction 0.0015 (i.e., 

0.15 percent or just three-twentieths of one percent) of sellers have annual remote sales that exceed 

$1,000,000. Note also that a very large fraction of total remote sales - representing an equally large 

fraction of available revenue to the states - is from sellers below this threshold. Indeed, by our 

3 The precise formula for this equation is z = $8.2928 Billion • [In (x) In (X-1ll 

4 See "The Long Tail is longer than You Think," Bailey, et aI., University of Maryland (2008). 

, http://files.shareholder.com!downloads!ebay!635891719xOx292439!4d7755b4-c83a-470a-b96f4f94cb2e488c!eBay JDEuropeMarketingMay2009 FINALFINAl.pdf 
242 


80344.213

calculations, 31% of remote taxable sales would. come from sellers with remote sales volume below 

$150,000 per year and 39% would come from sellers with remote sales volumes below $500,000 per 

year.' 

In the context of the Marketplace Fairness legislation before Congress, if the small seller exception were 

set at $150,000 in remote sales, about 50,000 sellers would be included within this largest 1% of sellers, 

and the remaining over 4,950,000 ecommerce sellers - about 99% of online sellers - would not be 

subject to online sales tax collection. 

In order to assess the sensitivity of these results to our assumed 5 million sellers figure, we performed 

similar calculations with varying assumptions about the total number of US ecommerce sellers. With 

even more total sellers assumed, the lowest volume seller in the Top 1% of sellers is smaller. For 

example, by assuming 10 million online sellers, a seller with $83,000 of annual remote sales would be in 

the Top 1%, or assuming 12.5 million sellers reveals that a $66,000 per year seller would be in the Top 

1 %. But, again, very conservatively assuming only five million total online sellers, the Top 1% of sellers 

includes only those with annual remote sales above $150,000 and, thus, a small seller exception set at 

$150,000 would exclude 99% of online sellers. 

*.* •• *. 

, Remote taxable sales exclude estimates for the following items: 1) online sales in states with no sales 

tax; 2) online motor vehicle sales; and 3) sales of non-taxable products such as contacts lenses. 
243 


80344214.eps

f=ASfSIGNS 

More than fast. More than signs. 

Apriln.2012 

Honorable Max Baucus 

Honorable Orrin Hatch 

Senate Committee on Finance 

Attn. Editorial and Document Section 

Rm. SD·21'! 

Dirksen Senate Otlice Bldg. 

W"shington. DC 20510·6200 

Rc: April 25, 2012 Hearing on Tux RL'fhrm: What if ,".Jeans/or Slate 

and I.()cal Tax and Fiscal Poli('r' 

Dear Chainnan Baucus, Ranking Member I latch and Members o1'thc Committee: 

On hchalfoffASTSIGNS lntcrtl<.ltional. Inc., I would like to thank you t<}r holding this 

hearing and urge the Committee to address a state lax issue of critical importance to ~)ur 

company: business activity tax nexus. At its most bask, the issue involves the 

connection that a state must huve \\'ith a company before it is constitutionally authorized 

tux its income. We believe that Congress must act to protect interstate commerce from 

overly ag,gressive state taxation by enacting the Business Activity Tax Simplification Act 

("IlATSA"). !l.R. 1439. 

fASTSIGNS is a franchi!'>or of sign and graphic businesses. \Vc have 470 locatIons 

within the U.S. Each of our fmnchised locations pays federal and state income taxes in 

the states they arc located. Our corporate oilkc is in Can-oilton. Texas, a D:.lllas suburb. 

\Ve have ficld-based employees in 8 other states, 

Like all franchise companies. our business mouel involves the license of our trademark 

and other intellectual property to franchisees located across the country. Although Ollr 

tj'anchisces arc physically present in 45 states, FASTSIGNS Intcmationalmaintains 

property. employees andior offices only in 9. While our employees make oCJ.:asional 

visits to our fn.lOchisee's place!'> of business, the duration of such ViSIts is limited. and the 

services that we furnish to our ti"<mchisccs arc implemented almost entirely at our 

principal otlices and by means of telephone, the Internet anu the mail. 

FAS rSIGNS IntcrnCltlonal, Inc 
244 


80344215.eps

Traditionally, the states did not attempt to subject non-resident franchisors to business 

activity taxes on royalty income unless the franchisor clearly established a physical 

presence in the taxing state by owning or leasing real propcrty~ operating its own outlets 

or maintaining an office or employees in the jurisdiction. (Keep in mind that those states 

already - and appropriately - tax the ineome of the franchisees located in their 

jurisdiction.) Recently, however, some states have argued that the mere presence of a 

franchisor's intangihle property in their jurisdiction satisfies the "substantial nexus" 

requirement mandated by the U.S. Constitution's Commerce Clause for statc taxation of 

non-resident businesses. 

Taken to their logical extreme, these ncw arguments for state tax nexus would result in 

our company being subject to income taxation, including interest and penalties, by every 

state in which we have a franchisee. That scenario would represent a radical departure 

from the traditional reach of slate taxing authority, and it would result in an enormous 

incrcase in our tax liability and related compliance burdens. 

In the past 24 months. the following states (whcre we have no physical prescncc nor 

employees) are making a case that we owe tax: Arizona, California, Missouri, Oregon. 

Pennsylvania, South Carolina and Wisconsin. This uncertainty makes it very difficult to 

conduct business. 

Clearly, federal legislation is needed. BATSA would clearly define when companics 

should be obliged to pay business activity taxes while preventing arbitrary state taxation 

of interstate commerce. FASTSIGNS International is committed to paying all tax 

rightfully owed. But, clear, predictable and fair standards for state taxation of interstate 

business are essential to the future health and growth of companies like ours. Absent 

enactment of BA TSA, our business and others similarly situated will sutTer contractions 

of investments, reduced employment and a decline in profits. Given the current state of 

the economy, that scenario presents a real threat to our survival. 

Thank you for the opportunity to present these comments. 

~~I C .... ","_ IJf i 

Chief Executive Officer 

CM/gf 
245 


80344221.eps

FEOTAX 

STATEMENT SUBMITTED FOR THE RECORD TO 

THE UN ITED STATES SENATE 

COMMITIEE ON FINANCE 

FUll COMM ITTEE HEARING 

TAX REFORM AND WHAT IT MEANS FOR 

STATE AND lOCAL TAX AND FISCAL POLICY 

APRIL 25.2012 

l)lrtK,SfN S(NAT{ OFFICE IIUILDING 

WAHliNGTON, DC 20510· 6200 

ATTN: EDITORIAL AND DOCUMENT SECTION 

\tM,5O-219 

STATEMENT SUIIMITT£D BY 

R. DAVID l. CAMPBElL 

C l<ll'f EXICUTIVEOrfiCU 

~ND 

JOAN WAGNON" 

J:X£CUTlvrVlcr rRtSIOFNT 

THE FEDERAL TAX AUTHORITY. llC 

1(.2 E.-.5T A~F NlIf 

NOIIWAlK, CT. Ob8St.s715 

. , 

TIoKCloud 
246 


80344.222

Alexander Hamilton wrote in The Federalist in 1788 that "individual States should possess an 

independent and uncontrollable authority to raise their own revenues for the support of their own 

wants.') 

Today the discussion about state sovereignty over matters of taxation continues unabated. State 

revenue directors have seen firsthand how the actions of the federal government have affected state 

and local revenues. Members of Congress are increasingly bombarded by requests for action because 

state laws arc restrictive to business or seen as unfair. There are any numbers of examples where 

congressional action has been beneficial or harmful to states. 

But the issue that has been most devastating ro state and local government has resulted from 

Congressional inaction, rather than action: the failure of Congress to overturn Quill v North 

Dakota."i 

The Marketplace Fairness Act (MFA), S. 1832, sponsored by a bipartisan group of senators (Enzi, 

Durbin, Alexander, et. a1.) is a good solution to the revenue ptoblems of states, but more 

importantly, it gives states a better mechanism than they have now to collect the taxes they already 

levy." 

The MFA also corrects a growing imbalance between groups of retailers. Under the current court 

ruling, tax is collected on some sales and not on other sales of the exact same items. Why should tax 

be collected on a book or camera purchased from a local business and not on an identical item 

purchased from a mail order or internet business? 

Remote sales are growing at double digit rates.' However, states' inability to collect sales tax on these 

sales results in the erosion of the states' tax bases. Certainly this unfairness is not the hallmark of 

good tax policy! Congress is creating winners and losers among the retail community by its inaction. 

Opponents cite two specific reasons for allowing this unfair situation to continue: a) that remote 

collection would be overly burdensome and complex, and b) that any systems necessaty for remote 

collection would be ptohibitively costly. This testimony will provide technical information for 

Congress to consider when evaluating those arguments. 

l. THE COMPLEXITY ARGUMENT 

Technology has advanced considerably since the 1967 and 1992 Supreme Court rulings that created 

the current sales tax situation. Even the more recent of these, Quill, occurred before the first 

graphical browser was invented, before most homes had internet connections, and long before ecommerce forever changed the retail landscape. Today, forty-five years after Bellas Hess and twenty 

years after Quill, online marketplaces and auction sites easily manage millions of items for sale at any 

given moment. 
247 


80344.223

Today, keeping track of a few thousand local tax rates and filing requirements is not an 

insurmountable technical, administrative, or financial burden. TaxCloud, the sales tax management 

system created by FedTax, proves this point by calculating and collecting sales tax on any purchase 

for any tax jurisdiction in the United States in less than one second. The service is free ro all rctailers. 

The technologies necessary to create such a system are not new; they are well-established. In fact, 

they are currently being used throughoUt e-commerce. They are Applicadon Programming Interfaces 

and Web Services. An Application Programming Interface (API) allows dissimilar and unrelated 

;ystems to communicate with each other using pre-established syntax and structure. Web Services 

allow APls to be used for machine-to-machine interactions over the internet. Both are now 

commonly used in e-commerce-for example, in real-time-shipping, which allows a retailer to 

provide its customers with accurate, real-time quotes for shipping costs based on at least five 

variables, including weight, size, delivery speed, origin, and destination. Often customers can even 

compare shipping costs among multiple shippers. 

With APls, Web Services, and other technological advances of the past twenty years, it is now 

possible for remote retailers to easily keep track of evety state's tax laws. 

To minimize or completely eliminate the undue burdens cited in Bellas Hess and Quill, more than 

half of the states with sales tax have worked together for twelve years to create the Streamlined Sales 

and Use Tax Agreement (SSUTA). These states provide free rates and boundaries databases for all of 

their respective taxing jurisdictions, and regularly issue updates when rules, rates, or boundaries 

change. In addition these states also certifY and pay for software and service providers to manage 

sales tax compliance on behalf of retailers.~i The Marketplace Fairness Act requires that any states 

seeking remote collecdon authoriry shall comply with SSUTA or provide comparable rates and 

boundaries information as well as certified software and services that retailers can rely upon to 

achieve compliance with minimal burden.'" 

Ironically, those who argue most strenuously that remote collection would be too complex are a few 

large online businesses that already rely on these same technologies every day, in every transaction. 

The plain fact is that online retailers operate the largest marketplaces in the world by relying on 

technology to simplifY and automate a host of historically burdensome chores, including payment 

automation, location-specific marketing, personalized recommendations, and even Duties and Value 

Added Tax management for foreign governments. 

II. THE COSTS-OF-COMPLIANCE OR UNDUE BURDEN ARGUMENT 

Opponents also argue that even if technology can solve the technical burden of keeping track of 

rates, jurisdictions, and filing complexities, such software would be prohihitively costly, particularly 

for small businesses. T axCloud is provided to retailers at no COSt-SO the argument that such 
248 


80344.224

software would be prohibitively costly should be flatly disregarded. However, the costs-ofcompliance argument also maintains that even if the software is free, businesses will still be burdened 

with the cost of integrating such software into their existing systems. 

This line of argument ignores the realiry that all but the very largest retailers rely upon pre-written 

software and/or online hosted platforms for e-commerce and order management. Retailers rely upon 

these systems ro avoid the cOSts of developing, managing, and maintaining such systems on their 

own, costs that are magnified by the changing nature of e-commerce. It is no secret that e-commerce 

is constantly changing to respond to evolving cyber-crime threats, payments and securiry industry 

best-practices, and, yes, legislative requirements. When their retailer clients need to collect sales tax, 

platform vendors will provide ways for them to do so, embedded within the platforms that retailers 

already use. 

E-commerce platform vendors are intensely competitive and focused; they take pride in not only 

complying with evolving requirements but often surpassing them, occasionally with stunning results. 

For example, much of the cloud computing infrastructure now transforming every corner of the 

technology sector can be traced to several of the largest e-commerce companies adapting to comply 

with the Sarbanes Oxley Act of 2002. Most platforms already provide basic sales tax management 

features for their clients. Upon enactment of MFA, these existing systems will quickly be adapted to 

ensure compliance. 

To conclude, modern technology has made it easy for retailers to collect sales tax for any state in the 

U.S. T axCloud enables retailers of any size to easily collect sales tax and comply with the ptovisions 

of The Marketplace Fairness Act-for free. More information is available at TaxCloud.net. 

And in addition to T axCloud, five other companies are certified by the Streamlined Sales Tax 

Governing Board and ready to assist when Congress authorizes collection-and no doubt hundreds 

more will emerge soon after legislation is passed, because the free-market system will provide the 

incentive for entrepreneurs and innovators ro develop these products. 

Please don't wait to enact the Marketplace Fairness Act until all the parts of tax reform are in place. 

Passing this one bill can be the foundation for future reform as well as provide great benefit to both 

state and local governments. It also benefits brick and mortar retailers. Creating the same taX 

collection system for retailers whether they sell online on in a store is only fair. 

Chief Executive Officer 

C:t~. !vr~ (/ Joan Wagnon 

Executive Vice President 
249 


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Endnotes 

, David Campbell, Chief Executive Officer of The Federal Tax Authority (FedT ax), lounded the company in 2008. 

FedTax is a Washingron State Limited Liability Company with operations in Washington, Connecticut, and Kansas. Its 

management team includes highly experienced professionals who have been directly involved in huilding some of the 

most recognizable brands in c-commerce, including MasterCard, Google, WebMD, Microsoft, Expedia, and American 

Express. 

,i Joan Wagnon served as Secretary of Revenue in Kansas from 2003 to 2011. She also chaired the Streamlined Sales Tax 

Governing Board in 2008-9 and the Multistate Tax Commission from 2006 to 2008. She served on the Board of 

Directors of the Federation of Tax Administrators for 8 years before joining FedTax to work toward the passage of 

federal legislation granting states' collection authority over remote sales. 

j)j The notion that out-of-state retailers would find it overly burdensome to keep track of every state)s sales tax rules can 

be traced directly to the 1967 Supreme Court ruling in National Bellas Hess I), Illinois Department of Revenue. In its 

majority opinion, the court ruled that ''the many variations in rates of tax, in allowable exemptions. and in 

administrative and record-keeping requirements could entangle National's interstate business in a virtual welter of 

complicated obligations to local jurisdictions" (emphasis added). 

In 1992, the matter of remote sales tax coIlection came before the Supreme Court again in Quilt v. North Dakota. This 

time, the court reaffirmed the earlier Bellas Hess decision by a ruling of 8 to 1, primarily on the basis of stare decisis. The 

ruling went on to state, "[Olur decision is made easier by the fact that the underlying issue is not only one that Congress 

may be better qualified to resolve, but also one that Congress has the ultimate power to resolve." 

FedTax frequently cites the earlier Bellas Hess quote bec::ause it summari7..es the ruling's basis in complexity and burden, 

which has rippled forward to the present day and created a tidal wave of unintended consequences. This ruling has 

shielded all out-of-state retailers from the obligation to colIeet sales tax, based purely on the notion that it would place 

too much of a burden on businesses. Perhaps it would bave, in 1967. That was the year the floppy disk was invented at 

IBM. 

IV States typically depend on voluntary means of collecting from individuals, such as a voluntary line on the income tax 

form. Audit procedures, wbich are used for businesses, are ineffective for consumers. 

v On Cyber Monday (rhe first Monday after Thanksgiving) in 201 I, over $1.2 billion in sales were transacted online. On 

mat day alone, approximately $58 million in sales tax went uncollected. 

vi FedTax has been designated a Certified Service Provider (CSP) by the Streamlined Sales Tax Governing Board 

specifically fur its TaxCloud service. There are six CSPs and 24 member and associate member states. 

v,j Although "software and services" is not defined in the Marketplace fairness Act, likely it will include Application 

Programming Interfaces (APIs), Web Services, rates and boundaries databases, and a process for certifying service 

providers to process returns accurately under state laws. 
250 


80344216.eps

Statement 

ofthe 

Federation of Tax Administrators 

On tbe Topic of 

Tax Reform: What it means for State and Local 

Government Tax and Fiscal Policy 

Committee On Finance 

United States Senate 

April 25, 2012 

For additional infonnation call: 

Marty Moms 

202.301.7296 
251 


80344.217

Introduction 

The Federation of Tax Administrators (FTA) is an association of the tax agencies in the 50 

states, District of Columbia and New York City. Its members are responsible for collection of 

state tax revenues and administration of state tax laws. Federal tax reform issues can affect state 

tax administration and state tax revenues by billions of dollars. The relationship between state 

and federal taxation is one of the cornerstones of our nation's Constitutional framework, and we 

appreciate the Committee's recognition that the federal and state structures are an interrelated 

system. 

FT A's mission encompasses matters that affect fairness, burden and conformity. In terms of this 

hearing, others are best suited to address certain issues before the Committee, including the 

interest exemption for state bonds and the deductibility of state income and sales taxes. FT A has, 

however, long supported Streamlined efforts to simplify sales taxes, but has also opposed certain 

federal legislation that would unduly constrain the ability of state and local governments to set 

their own tax and fiscal policies. 

The most critical tax issue facing states is the application of sales tax to sales by remote sellers. 

Granting states the authority to require all sellers to collect sales taxes from all customers will 

level the playing field for competing businesses, improve compliance with taxes that are already 

owed and remove artificial restrictions that inhibit business investment. The second-most critical 

issue is the extent to which preemption bills currently pending before Congress, like the Digital 

Goods and Services Tax Fairness Act, would limit or alter constitutional and administrable state 

tax laws. 

Leveling the Playing Field for Sellers 

FTA supports the objectives of S. 1832, the Marketplace Fairness Act. The estabiislunent and 

explosion of the Internet as a marketplace has redefined the world of commerce forever. At one 

time considered principally an enforcement problem for the states, the disparate tax treatment 

between remote and local sales, which has existed for many decades, now poses challenges for 

"bricks and mortar" and Internet businesses alike. This legislation should not be delayed or 

encumbered by special preemption legislation. 

The Marketplace Fairness Act and related bills respond to the U.S. Supreme Court's decisions in 

National Bellas Hess and Quill. I These decisions are widely read to exempt a seller from 

collecting sales tax from customers who are in a state where the seller has no physical presence. 

These taxes are owed but frequently go unpaid, giving the seller in that case a competitive 

advantage over traditional retailers. 

We have provided teclmical comments to the Committee on elements in any legislation that 

would assure the maximum participation of the states under the Act. The most important of these 

elements are: 

1 National Bellas Hess, Inc. v. Illinois Dep't of Revenue, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 

U.S. 298 (1992), 
252 


80344.218

• Authority granted to states that are either members of the Streamlined Sales and Use Tax 

Agreement (SSUTA) or that choose to conform their laws to federal statutory standards. 

• Ability for states to designate the specific taxes covered by the generic pbrase "sales and 

use taxes." 

• Flexibility to recognize exceptions from uniform rate and base requirements that have 

already been agreed to between states and industry groups under SSUTA. 

• Authority for states to continue to impose origin sourcing for intrastate sales or sales by 

non-remote sellers. 

• Recognition that states may have additional ways of lowering burdens on remote sellers 

and the retention of authority for states to use these approaches as well. 

• Preservation of state authority to require sellers to maintain necessary records. 

• Exclusion of any mandatory vendor compensation provision, as this requirement would 

significantly reduce state participation. 

Effects of Preemption Legislation 

Congress is considering bills that would restrict the authority of state or local lawmakers to 

design tax policies best suited to their constituencies. State lawmakers have responsibility for 

governmental programs and fiscal policies. Imposing restrictions on state tax policy constrains 

the ability of state lawmakers to serve their electorates. Restrictions can also make it difficult to 

administer and enforce state tax laws. 

FT A recognizes the role of Congress in regulating interstate commerce. We evaluate federal laws 

that would limit or preempt state taxes against certain criteria, including whether 1) there is 

objective evidence that state policy has unduly affected interstate commerce; 2) states are 

working on a solution; 3) the proposed federal law would negatively affect state revenue; and 4) 

the law is likely to have unintended consequences. 

With these criteria in mind, we offer select comments about bills that are now or may soon be 

before the Committee. 

The Digital Goods and Services Tax Fairness Act 

Illustrates FTA's Opposition to Preemption Legislation 

The Digital Goods and Services Tax Fairness Act of 2011 (H.R. 1860 and S. 971) fails to meet 

many of the criteria FTA uses to evaluate preemption legislation. 

1. Is There Objective Evidence that State Policy has Unduly Affected Interstate 

Commerce? There is no discernible, let alone pressing, need for the legislation. States do 

not widely subject digital goods or services to taxation (with the long-standing exception 

of software). They are not therefore discriminating against digital goods and services. 

Indeed, they cannot. Doing so would be illegal under the Internet Tax Freedom Act 

(ITFA), which specifically prohibits multiple or discriminatory taxes on electronic 

commerce. No state or local tax law has been invalidated based on the ITF A. 
253 


80344.219

2. Will the Legislation Negatively Affect State Revenue? The states that have closely 

examined this bill believe they would suffer significant revenue losses. The bill relieves 

sellers from general record-keeping requirements and makes sourcing elective to such an 

extent that the bill invites abuse. 

3. Are States Working on a Solution? Members of the SSUTA are working with 

representatives from industry and business groups to address sourcing issues for sales of 

digital goods. The confluence of the SSUTA project with debate on the Marketplace 

Fairness Act could create a false impression that there is a relationship between the two. 

We ask the Committee to recognize that there is not. 

This work should be allowed to continue in its present forum. Creating such a policy 

requires the flexibility to adjust to new business models and technologies over time 

without the rules of taxability being set in stone by federal law. The solution is evolving 

because the field is evolving. No federal law can be expected to adapt itself to this rapidly 

shifting field of technology. 

4. Is the Law Likely to Have Unintended Consequences? Many of the terms are 

undefined or poorly defined. This will create uncertainty, disruption of tax administration 

and litigation. 

FT A has discussed its concern over the effects of the bill at great length with the Committee on 

the Judiciary in the House of Representatives and with industry representatives. We have 

provided written comments on virtually every provision, with examples of problems that result 

from each. 

Further objections to S. 971 include: 

The legislation grants advantages to large businesses over small in-state businesses. 

It waives the Tax Injunction Act. 

The only way the bill works as intended is for it to apply to all excise taxes, not just 

general sales taxes. 

The bill's numerous technical deficiencies are too long to list but include: 

Sourcing rules have many terms that are either not defined or are insufficiently 

defmed; and 

Rules exempting "intermediaries" from having to collect taxes open tax avoidance 

opportunities. 

Other Special Preemption Legislation 

There are eight other bills2 pending in the Senate and House that would preempt state or local 

2 The bills not listed here are: 

End Discriminatory State Taxes for Automobile Renters Act of2011 (H.R. 2469) 

State Video Fairness Act of2011 (H.R. 1804) 

Permanent Internet Tax Freedom Act of 20 11 (S. 135) 

The Telecommuter Tax Fairness Act (S. 1811) 
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taxes for the benefit of some interest group. In each case, we believe federal interference in the 

taxing authority of state and local governments is unwarranted. These would cause the greatest 

harm: 

The Wireless Tax Fairness Act of 2011 (H.R. 1002 and S. 543) 

This bill would create a five-year moratorium on changes to wireless tax laws that do not 

conform to the bill's ill-defined standards of what is a "discriminatory tax." If a state or local 

government changes an existing statute, the new law could be voided by judicial challenge. The 

result would be to eliminate ongoing state efforts to reform and simplify their taxation of 

telecommunications and related communications services. 

A bill ..• to repeal certain communications taxes and for otber purposes (S. 1934) 

This bill would make permanent the moratorium on taxation of charges for Internet access. It 

further includes a prohibition oftax on "amounts charged or retained for facilitating the booking 

of air transportation, hotel accommodations, car rental or other travel-related services." The 

portion of this bill dealing with hotel taxes alone could result in an annual revenue loss of $2 

billion to $3 billion. 

The Mobile Workforce State Income Tax and Fairness Simplification Act of 2011 (H.R. 

1864) 

As originally drafted, this bill would have prevented states from taxing income earned in the 

state unless the individual was present for more than 60 days. Proponents are now seeking a 30-

day threshold. Among the technical deficiencies, there is no dollar-threshold exclusion, 

presenting tax avoidance opportunities for the highest-income workers. The bill also relieves 

employers from any obligation to keep records in the manner traditionally required for 

compliance purposes. In response to this bill, the Multistate Tax Commission engaged with 

industry groups to come up with a structure that both industry and the states could support. FT A 

has participated for years in extensive discussions with industry representatives under the 

auspices of the Committee on the Judiciary in the House of Representatives on both substantive 

and administrative issues that, unless corrected, we believe will undermine state income tax 

enforcement. The State of New York alone would experience a revenue loss of $106 million 

annually from this proposal. 

The Business Activity Tax Simplification Act of 2011 (H.R. 1439) 

This bill would fundamentally and substantially narrow the states' authority to tax business 

activity within their borders. (It imposes the same outdated construct that the Marketplace 

Fairness Act seeks to repeal.) Enforcement of state corporate income taxation of large interstate 

and international businesses would become so difficult that unprecedented tax-avoidance 

opportunities would result. The bill would reverse years of judicial precedent finding that such 

taxes are fair. The National Governors Association estimated that this legislation could grow 

over time to $7.9 billion annually; the Congressional Budget Office estimates that it will cost $2 

billion in the first year alone. 

Again, we thank the Committee for the opportunity to present our views on the important 

implications oftax reform for state and local government tax and fiscal policy. 
255 


80344.226

S PEe I A L T Y F 0 ODS 

Letter of Support by Mark B. Wieser 

Founder of Fischer & Wieser Specialty Foods, Inc. 

411 South Lincoln Street 

Fredericksburg, TX 78624 

to the 

United States Senate Committee on Finance 

for the hearing on 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April 25, 2012 

Chainnan Baucus, Ranking Member Hatch and Members of the Committee, I 

would like to commend you for holding a hearing on "Tax Refonn: What It Means for 

State and Local Tax and Fiscal Policy," and I respectfully urge that you consider the 

important issue of nexus rules applicable to state assessment of business activity taxes 

against nonresident companies. All companies doing business in interstate commerce, 

especially small businesses like ours, urgently need Congress to enact a federal solution 

like the Business Activity Tax Simplification Act (H.R. 1439). 

I am the founder and chainnan of the board of Fischer & Wieser Specialty Foods, 

Inc., located in the small Texas county of Gillespie, the same county that has produced 

three outstanding Americans: Fleet Admiral Chester W. Nimitz, Commander-in-Chief of 

the Pacific Fleet during World War II, President Lyndon B. Johnson and the fonner 

Commandant of the United States Marine Corps, General Michael Hagee. 
256 


80344.227

Our company was founded in 1969, as a roadside market that I named das Peach 

Haus, to sell the area's delicious and famous "Fredericksburg Peaches." To supplement 

my market I asked my mother make her home-made jams and jellies for me to sell, and I 

discovered within a few years that there was a growing market for her "home-made" 

goodness. In 1986, with a former student, Case D. Fischer, who had worked for me all 

through his high school years, we incorporated the business and began marketing jams, 

jellies, mustards, salsas, and sauces to the wholesale trade, to up-scale department chains, 

and to gourmet stores under the "Fischer & Wieser" brand. 

To give ourselves exposure we began participating in and attending area, state 

and, eventually, national shows. Mr. Fischer began to apply the skills he learned while 

studying Food Science at Texas A & M University and began developing new products 

by combining different fruits with the Chipotle pepper. Sampling and participating in 

local events and fairs convinced us that we had developed a new and exiting flavor to 

introduce to Americans. (We were the first to introduce the chipotle pepper to the 

American palate.) 

As members of the National Association ofthe Specialty Food Trade (NASFT) 

we were permitted to enter new products into national competition if nominated and 

recognized by a sufficient number of members of the retail trade. In New York City, in 

1997, we won the highest national award given by the NASFT for our new Original 

Roasted Raspberry Chipotle Sauce"". It was nominated for being the best selling 

product for that year. Since 1997, it continues to be the best selling condiment in the 

United States. In other words, it is a product that sells, if simply sampled by retailers. In 

fact it flies off the shelves. (I personally, have sold over 23 cases (276 bottles) in a single 

afternoon at stores belonging to national chains (Whole Foods) simply by offering a taste 

to passing shoppers.) 

Today, Fischer & Wieser Specialty Foods, Inc. sells to retailers in all fifty states, 

throughout Mexico, to parts of Canada and Australia, and our first container will be 

shipped to the United Kingdom in March. We have also exported to Germany and 
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80344.228

Taiwan from time to time. We sell to all the major national food chains, including 

Costco, Sams, Kroger, Safeway and a host of regional, up-scale groceries. By 2005 

Fischer & Wieser products had captured 2.7% of the national specialty marinade market 

for companies having more than ten million in annual sales. 

We employ approximately seventy-five employees and are the largest privatelyowned business in our small town. Our weekly payroll injects over forty thousand 

dollars into our local economy. Unfortunately, what most people do not understand 

about food manufacturing is that the margin (profit) is very small. In the grocery trade, 

net profits near 3% are considered excellent. 

Our introduction to the Business Activity Tax Nexus issue was sudden and came 

as a complete surprise. I have to admit, I had never even heard of the term until 2007, 

when the company received a questionnaire from the State of Washington, asking if we 

were selling products there, if we had visited anyone in the state, and a number of other 

questions that we thought were for the purpose of completing a survey. We completed 

the form and returned it. There was no indication whatsoever in that questionnaire that 

the State of Washington was going apply a tax on our sales. Given that our company has 

never had a physical presence in Washington, we were quite shocked when we were 

assessed more than $15,000.00 in taxes and penalties for the previous five years, merely 

for selling to businesses headquartered in that State. 

We paid the taxes that were assessed, and I began to research what Nexus was all 

about. Meanwhile, we appealed the decision, SUbmitting numerous court cases that 

supported our case to the Washington Department of Revenue. We had a final hearing in 

March 2010. An attorney, familiar with the state of Washington's interpretation oflaws, 

however, had told us not to expect to win and for us to consider taking the state to court 

would cost more than the amount of money we were asking to be returned. Additionally, 

I had read that over 10,000 appeals to the Washington Department of Revenue have been 

made by companies, such as ours, suddenly finding themselves subject to Nexus laws. I 

had found no reversals up to our hearing, as its rulings were based on laws passed by the 
258 


80344.229

Washington legislature, and the Washington Department of Revenue repeatedly had ruled 

that it was not permitted to overrule the legislature. I had also found that they 

consistently ignore all federal laws. 

We based our appeal on PL 86-272 after reviewing numerous court cases that 

have dealt with Nexus issues. We felt confident that we would not be subject to 

Washington taxes as we had established no physical presence. To support our appeal, 

we submitted no fewer than three dozen typical examples of activities that are typically 

cited to support a state's claim towards establishing Nexus, none of which we performed. 

We asked the State of Washington what they were using to support their claim that Nexus 

had been established. Unfortunately, we soon discovered that those things that normally 

establish Nexus did not matter, for the state of Washington felt it had no obligation to 

comply with PL 86-272. 

We had our hearing before the Board in March of 2010 and, after giving sworn 

testimony, rested our case. A month later, the ruling came down, and we had won! The 

Department appealed, and we submitted additional written testimony. Again, the Board 

ruled to uphold its decision. It was a first! The Department refunded all our money with 

interest. 

While we won, we know that other companies are still at risk, and this bill simply 

must be enacted into law or more and more American businesses will fall victims to 

unbridled states seeking revenues where ever they can find them. 

The only in-state activity acknowledged by Fischer & Wieser Specialty Foods, 

Inc. on the State of Washington questionnaire was to acknowledge that we had sent a 

representative, as a courtesy, to call upon a distributor headquartered in the State. He 

took no orders in the state (and never has). In all the cases that we cited in our defense, 

such an activity had been shown in case after case not to be sufficient to confer Nexus. 

The State of Washington has, however, made it quite clear that, in their estimation, the 

sending of a representative into their State, no matter if only for a single hour, is 
259 


80344.230

sufficient to establish Nexus for the assessment of income-based tax. In addition, the 

State claimed that we must be sending a representative into the jurisdiction to support and 

maintain our level of sales. This assertion is nonsense and simply not true. We have a 

product that taste alone sells! We are far too small a company to develop marketing 

plans for any state. 

Additionally, Washington has made it quite clear that it considers its tax a 

Business and Occupation Tax (B&O), and consequently argues that it is not a tax 

covered by PL 86-272. Specifically, the State says that PL 86-272 applies only to states 

that have enacted a "Net" income tax. Since the state of Washington has subsequently 

enacted a "Gross" income tax their argument is that they are not subject to the 

requirements of PL 86-272. As you may know, at the time that PL 86-272 was passed, 

few states had taxes based on "net sales." It did not necessarily take a Philadelphia 

lawyer for these states to figure out that if they modified their tax laws to apply to "gross 

sales," they could completely avoid PL 86-272. Just like little kids, states discovered 

new ways to avoid PL 86-272. This has become a game, and it has caused significant 

problems that only Congress can resolve. The U.S. Supreme Court has consistently 

refused to resolve this problem, recognizing the role that Congress should play in this 

matter. Fischer & Wieser Specialty Foods, Inc. and hundreds of small companies across 

the land simply cannot afford to hire attorneys to take states, such as Washington, to 

court to force them to abide by the intent of PL 86-272. That is why we so strongly 

recommend enactment of BATSA. 

Incidentally, in my research I have discovered that the state of Washington is also 

of the opinion that it has the right to assert Nexus if the driver of a common carrier 

delivering product does not have the explicit authority to inspect and to reject products 

the driver may deem to be of questionable quality. This is just one more example of how 

states have circumvented the intent of federal law. What common carrier in this nation 

would accept or assume such responsibility? 
260 


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The state of Washington has also said that they have the right to inspect our books 

and that we are required by its laws to keep accurate records of all shipments and to have 

such records available at all times and in compliance with its laws. While we have 

employed an independent outside audit of our books for more than a decade, we simply 

cannot afford the additional expense to keep separate books for every state. To comply 

with all laws required by the state of Washington would force us to comply with the laws 

of all fifty states and every taxing authority within those states. I understand that this 

could reasonably be determined to be more than 3,200 individual and separate taxing 

entities! For large companies this might be possible. For small companies this becomes 

an unbearable cost of doing business. 

Additionally, our largest customer in the state of Washington serves as the 

regional headquarters for the northwestern division of Costco. It acts as the buyer for all 

its stores located in the States of Oregon, Idaho, Montana, Alaska and Hawaii. The State 

of Washington insists it has the right to tax products delivered directly to other states 

outside the State of Washington simply because Costco's regional office is located there. 

We have no way of knowing where Costco places our products or whether or not our 

products cross into Washington before being delivered. Consequently, we very likely are 

paying taxes on products that were never actually sent into that state. The consequences 

ofthis, iffollowed by every state, would destroy commerce in the United States. 

Beginning in 2009, in an effort to avoid a claim of tax due to Washington for 

2009 and years thereafter, I ordered our representatives not to enter the State of 

Washington. The State of Washington accepted that commitment, but advised that its 

laws provide that Nexus, once established, is deemed to remain in effect for five years. 

Incidentally, the initial order by the Northwest Region of Costco was not the 

result of a sales call made by our company to the state of Washington. Fischer & Wieser 

Specialty Foods, Inc. first began selling to other regional divisions of Costco after their 

buyers called on our booth at the NASFT. NASFT national shows occur only in January 

or February on the west coast, normally in San Francisco, and on the east coast in June or 
261 


80344.232

early July, always in New York City. It was our product's ability to produce outstanding 

sales in the Southwest Region of Costco that caught the attention of other Costco regional 

offices. The Northwest Region began to send its first orders and subsequent orders 

directly to our company offices in Texas upon their own initiative and without any 

Fischer & Wieser Specialty Foods, Inc. representative calling upon that region. 

Fortunately, the State of Washington is the only state where we are not physically 

present that has actively sought to tax us; however, we realistically face similar taxes 

from all other states if BATSA does not become law. We simply cannot afford to 

continue to operate if we are not protected from arbitrary and unscrupulous 

interpretations of Nexus by the various states. The same fact holds true for thousands of 

small companies across this nation. 

I can assure you, if Fischer & Wieser Specialty Foods, Inc. had offices, property 

or employees in any state other than Texas, or if it enjoyed the protections and benefits 

provided by the legislature of any other state, we would willingly and understandingly 

pay our fair share of taxes due to that state. But, for a business to be subject to state 

income tax based on a whim does not contribute to the economic success of this nation. 

Fischer & Wieser Specialty Foods, Inc. is asking Congress to enact BATSA, a bill 

that will clearly spell out what will establish Nexus, thereby freeing small businesses 

from the unnecessary costs incurred in by the need for constant court cases and appeals. 

Many of us thought that all the issues relating to commerce between the states had all 

been resolved when the Articles of Confederation were set aside in favor of a new 

Constitution. It had become so very clear and so thoroughly understood by those who 

believed in forming a better and more perfect union that this nation could not grow strong 

if each state restricted the exercise of a national free trade. Those patriots understood the 

problem and resolved the problem. I am simply asking that this Committee clarify the 

physical presence nexus standard and once again strengthen and guarantee forever the 

principle of free trade between the states. 
262 


80344.233

We pray that this testimony is helpful and beneficial to the Committee. Thank 

you. 

Sincerely, 

Mark B. Wieser, Chairman 

Fischer & Wieser Specialty Foods, Inc. 

www.jeUy.com 

411 South Lincoln Street 

Fredericksburg, Texas 78624 

mark.wieser@jelly.com 

830-990-8256 

830-997-7194 ex 8256 

Fax 830-997-0455 
263 


80344.234

Councilmember Stephen Fuhrman 

City ofWarr Acres, Oklahoma 

Owner, A Cleaner Place 

12409 N Rockwell Ave 

Oklahoma City OK 73142 

405-491-9500 

sfuhrman@vacshack.com 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

United States Senate Committee on Finance 

Wednesday, April 25, 2012, 10:00 AM 

215 Dirksen Senate Office Building 

Washington, D.C. 

Honorable Members of the Committee: 

As a freshman member ofthe Warr Acres OK City Council I was in shock when I discovered 

that 91 % of our city's funding is sales tax. Imagine if you will that if only 10% of those 

purchases are done online without sales tax collected. The city of Warr Acres would be losing 

approximately $560,980 in revenue annually. With fewer than ten thousand residents, that mere 

10% does not include the State of Oklahoma's portion of the sales tax remitted. 

As online shopping grows, cities grow more dependent on consumers' voluntary remission of 

their "use tax". Warr Acres could raise its sales tax rate. However, if we did, we would drive an 

even larger wedge between the uncollected sales tax online and our local retailers, causing an 

even larger unfair advantage. This loophole is already causing local businesses to close their 

doors. At what point do we say enough is enough? I think the time is now. 

Currently the City of Warr Acres is struggling to fund even the simplest of projects like patching 

cracks in city streets, replacing old fire trucks or even just hiring additional police officers. 

These are items that need to be done and are expected by the residents of our city. Want to boost 

our local economy, please allow our state and local governments the power to collect the sales 

tax that is due to them. 

As I canvased my areas before my election, I spoke with many of the residents ofWarr Acres. 

learned that most of these residents had no idea that sales tax was even owed for online 

purchases. Why don't they know? Because many in federal and state leadership do not 

acknowledge that the problem exists and furthermore are afraid that rewriting and enforcing 

existing laws might cost them an election. It is for this reason, I am so grateful to the members 

of the Senate Finance Committee for taking on this issue on behalf of our nation's cities and 

towns and will be relieved to see legislation, such as S. 1832 The Marketplace Fairness Act, 

moved out of committee and passed into law. 
264 


80344.235

As a small business owner in Oklahoma City I have an even broader perspective on sales tax 

fairness. I am co-owner of a brick and mortar store along with an e-commerce website. I have 

watched over the years as my brick and mortar sales have continually struggled while my 

internet sales have somewhat increased. The amazing thing is even though I have software in 

place to collect nationwide sales tax I would be foolish to do so. For now, my website does 

collect sales tax for Oklahoma. Not surprisingly, I've had no purchases from within Oklahoma, 

presumably for that very reason. It is the same website; yet out of state customers use it while 

in-state customers do not. 

In my brick and mortar store I see several customers per week coming into my store. Engaging 

and asking my expertise about a product only to leave and purchase the same item for the sale 

price online minus the sales tax. I have even had customers attempt to return products they 

purchase from me in my store unless I discount the product to include sales tax so it matches 

online prices. 

I sincerely appreciate the opportunity to provide my testimony on this subject as a city official, 

an online vendor and a brick and mortar business owner. I trust the committee will consider the 

plight of Oklahoma cities and towns and business owners like me as you consider tax reform 

issues relating to sales tax and the internet. 

Respectfully, 

~ 

~~ ~~ 

Stephen Fuhrman 

A Cleaner Place 

VacShack.com Inc. 

12409 N Rockwell Ave 

Oklahoma City OK 73142 

405-491-9500 

sfuhrman@vacshack.com 
265 


80344236.eps

.IYEP 

INSTITUTE ON TAXATION AND ECONOMIC POlICY 

~~f!i~~~~~::t~o~ 

Informing the debate over 

tax policy nationwide 

How Federal Tax Reform Can Help or Hurt State and Local Governments 

Matthew Gardner, Executive Director ofthe Institute on Taxation and Economic Policy 

Testimony before the Senate Committee on Finance, United States Senate for Hearing: 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April25,2012 

Thank you for the opportunity to submit this written testimony. My name is Matt Gardner and I am the Executive 

Director ofthe Institute on Taxation and Economic Policy (ITEP), a Washington-De-based nonprofit research group. 

lTEP's research focuses on federal and state tax policy issues with an emphasis on the goals of sustainability, 

transparency and fairness in the tax laws. 

Federal tax reform can affect state and local taxes in several ways. The federal government can create/ repeal or 

change tax expenditures in a way that is passed on to the states because virtually every state has tax rules linked to 

the federal rules. The federal government can subsidize state and local governments' ability to raise taxes and can 

subsidize their ability to borrow funds to finance capital investments. Finally, the federal government can regulate 

state and local governments' ability to raise taxes in a way that coordinates and harmonizes their tax rules or In a way 

restricts their taxing power and makes their tax systems more complex. 

My testimony makes four points. 

1. Federal tax reform can provide state governments an opportunity to improve their finances by 

repealing or reducing tax expenditures. 

2. The federal income tax deduction for state and local taxes is indeed a tax expenditure that reduces 

the amount of revenue collected by the federal personal income tax, but in many ways is more justified 

than many other tax expenditures. 

3. The federal government's practice of not taxing the interest income on state and local bonds is an 

inefficient way to subsidize state and local governments, and the President's proposal to extend Build 

America Bonds would mitigate this problem. 

4. When lawmakers consider legislation intended to coordinate tax rules among the states, they must 

distinguish proposals that will truly achieve this result (like the Marketplace Fairness Act) from those 

that simply restrict states' taxing powers at the behest of corporate interests (like the Business Activity 

Tax Simplification Act). 

www.itepnet.org • itep@itepnet.org 

1616 P. Street NW, Suite 200 • Washinqton, DC 20036' 202.299.1066 
266 


80344237.eps

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TtlI, <ould be parlkulatly Import,nl lod.y, • • ,I.le govemmerH. ha.e)u>l _,lfn<f<1 ~ !I.eOlbl d. pp In .even,,", 

(>II record. for lhe llsul yea. lhitll. about 10 begin, 30 "ate> p.ojected budget gao. (I.ome 01 which hav."lread~ 

be.1> do.edl totaling S'9 billion. Ten mIn ~tlil ~i .. e budgel gam llOlally S3.7 billion) too lhe <umonl r,KItI ye.>.,' 

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~~fI. Howeve., fed~.1 old /tom 1m. economic """"flY ilCl eNCIM IrI win'''' oIlOO9 hI> <(>II'" 10 "" ..,d. aM the 

.e,ulling d'Op.of1l" ,,,,,,"ding at lhe ,IOle and klca! """" """eo., an .ntl-stlmulu. 1O the ""onomy, potenllally 

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fI('," ecOtl<lmk <ICIWTIlum. 

The Federa l Income ~ Oeductlo ... forStat" 

.nd l oul T"ns Hn SignlfiunlJuSllflntlo ... s 

WhM ta.payen uku"t .. 110"" f_flIl per""",1 

Incom" la"" .. tl>r,' ••• allOWl'd 10 ItMll,. deduCTi"", 

(\~t I., deduct cl!t1ain ""P"'''''' from thel. Income 10 

uleut.,,, ta'ollbH! Incomel 01 ta~ the ,tanda." 

deduction If 'hit II Qfl!"'et 'han ,"" ' um oI lhelt 

ilMtIzed dKluction .. One- of tht 11e-mlled deduct'ons 

thaI ,educ ... fed.r.1 ta •• bH! IncQftl@III<!"""Ii."", 

deductlOll fo< ,me and local ta ~$, 

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locallaxn I> IIsted~, a 'tio. e' J>I!1Id'lu'e" In '!'pOI'> 

complied annually by the C""!ItU,k>r.aI Joinl 

Commlltee on T •• alio"and I~e T .... Wty 

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267 


80344.238

Department. That means that the deduction is defined by analysts as a subsidy that is paid through the tax code 

rather than as a direct payment from the government. 

The deduction for state and local taxes paid is often seen as a subsidy for state and local governments because it 

effectively transfers the cost of some state and local taxes away from the residents who directly pay them to the 

federal government. For example, if a state imposes a higher income tax rate on residents who are in the 35 percent 

federal income tax bracket, that means that each dollar of additional state income taxes reduces federal income taxes 

on these high-income residents by as much as 35 cents.' The state government may thus be more willing to enact the 

tax increase because its high-income residents will really only pay 65 percent ofthe tax increase, while the federal 

government will effectively pay the remaining 35 percent. 

1. Tax Expenditureora Way to Define Taxable Income? 

Viewed a different way, the deduction for state and local taxes is not a tax expenditure at all, but instead is a way to 

define the amount of income a taxpayer has available to pay federal income taxes. State and local taxes are an 

expense that reduces one's ability to pay federal income taxes in a way that is generally out ofthe control of the 

taxpayer. A taxpayer in a high-tax state has less income to pay federal income taxes than a taxpayer with the same 

pre-tax income but residing in a low-tax state. 

Most other itemized deductions are for expenses that the taxpayer has more control over, like home mortgage 

interest or charitable giving. 

2. Addressing Spillover Effects of State and Local Public Investments 

Another argument in favor ofthe itemized deduction for state and local taxes paid is that the public investments 

funded by state and local taxes produce benefits for the entire nation. This can be seen as a justification for the 

deduction for state and local taxes paid because it encourages state and local governments to raise the tax revenue to 

fund these public investments that the jurisdictions might otherwise not make. 

For example, state and local governments provide roads that, in addition to serving local residents, facilitate interstate 

commerce. State and local governments also provide education to those who may leave the jurisdiction and boost 

the skill level ofthe nation as a whole, boosting the productivity of the national economy. State and local 

governments may have an incentive to provide less of these public investments than is optimal for the nation because 

the benefits partly go to those outside the jurisdiction. 

It is probably impossible to quantify exactly what fraction of the benefits of public investments accrue to those 

outside the jurisdiction instead of those residing in the jurisdiction, but it seems unreasonable to deny the existence 

ofthese "spillover" effects. 

The federal government also directly subsidizes (with direct cash payments) state and local governments to 

encourage them to make these public investments. Indeed, 85 percent of the federal subsidies to state and local 

jurisdictions in 2011 took the form of direct spending rather than tax subsidies.' 

2 The Alternative Minimum Tax (AMn and the "Pease" limitation on itemized deductions can, in some cases, limit the savings a highM 

income individual would otherwise derive from the itemized deduction for state and local taxes paid. 

3 Office of Management and Budget Analytical Perspectives, Budget of the United States Government Fiscal Year 2013, pages 252-253, 

302. http://www.whitehouse.gov/omb/budgetlAnalytical Perspectives/ 
268 


80344.239

3. Prioritize Repeal of Most Regressive Tax Expenditures First 

One approach for lawmakers contemplating tax reform is to 

prioritize repeal oftax expenditures based on how regressive 

they are. This would be in keeping with special attention 

Congress and the public have lately paid to income 

inequality and tax fairness. Under this approach, it is not 

obvious that lawmakers would prioritize repeal of the 

deduction for state and local taxes, for two reasons. 

First, as already explained, it might make sense to view the 

deduction for state and local taxes paid not as a tax 

expenditure, but as a way to help define income. Second, 

even if one does view the deduction as a tax expenditure, 

repeal of another category of tax expenditures (the tax 

preferences for investment income) would take a far higher 

priority. 

Share onax Increase from Repealing FederalTax 

Expenditures in 2012 

Income Deduction for Preferentiallncom 

Group State and Local Tax Rate for Capital 

Taxes Paid Gains & Dividends 

Lowest 20% 0% 0% 

Second 20% 0% 0% 

Middle 20% 3% 1% 

Fourth 20% 14% 4% 

Next 15% 37% 10% 

Next 4% 17% 14% 

Top 1% 29% 71% 

ALL 100% 100% 

Source: Institute on Taxation and Economic Policy 

(1TEP) microsimulation tax model, May 2012 

For example, 29 percent of the benefits of the deduction for state and local taxes will go to the richest one percent of 

taxpayers this year, and 46 percent will go to the richest five percent of taxpayers. This means the deduction certainly 

benefits the rich disproportionately. However, the special, low income tax rate for capital gains and stock dividends is 

much more skewed toward the rich, with 71 percent of the benefits going to the richest one percent of taxpayers and 

85 percent of the benefits going to the richest five percent of taxpayers. The fact that this income tax preference for 

capital gains and stock dividends has a very weak policy rationale, combined with its extremely regressive impact, 

should prompt lawmakers to prioritize its repeal as part oftax reform.' 

Unfortunately, many proposals offered as "tax reform" would repeal or limit the deduction for state and local taxes 

paid (and other itemized deductions) but leave in place or even expand the income tax preferences for investment 

income.' This is exactly backwards. 

Federal Subsidies for State and Local Debt Would Be More Efficient Under the President's Build 

America Bonds Proposal 

In general, the federal personal income tax does not tax interest payments made by state and local governments to 

their bondholders. State and local governments are therefore able to pay a lower interest rate to bondholders, who 

will accept a lower interest payment because it will not be taxed. 

Unfortunately, the amount of money that state and local governments save by paying lower interest rates is less than 

the amount of revenue that the federal government loses. In other words, the personal income tax exclusion for taxexempt bond interest is an inefficient way to subsidize state and local governments because the subsidy to the state 

4 For more details, see Citizens for Tax Justice, "Policy Options to Raise Revenue," March 8, 2012. 

http://ctLorq/pdf/revenueraisers2012.pdf 

5 For example, the budget plan devised by Republican House Budget Committee Chairman Paul Ryan would reduce or eliminate 

unspecified deductions and tax credits but leave in place the tax preference for capital gains and stock dividends. See Citizens for Tax 

Justice, "Ryan Budget Plan Would Cut Income Taxes for Millionaires by at Least $187,000 Annually and Facilitate Corporate Tax 

Avoidance," March 22, 2012. http://wWWct! 0t9.iJ::Ldf/ryanplan.pdf Other proposals go further. For example, during his 2012 presidential 

campaign, f6rmer Republican House Speaker Newt Gingrich proposed a "flat tax" that would actually have two rates, zero percent for 

capital gains, stock dividends and interest and 15 percent for other income, and would not allow a deduction for state and local taxes 

paid. 
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and local governments is less that the amount of revenue that the federal government loses. The difference is a 

windfall to bondholders. 

This occurs because most olthe bondholders have a marginal income tax rate of 35 percent (because they are highincome individuals or corporations that pay the 35 percent corporate income tax rate) who could be motivated to buy 

the bonds ilthe interest paid on them was enough to at least equal the interest income they would receive from 

ordinary bonds after paying income taxes on that income. But state and local governments often find that they need 

to make the bonds attractive to individuals with lower marginal tax rates, and thus pay interest at rates that are higher 

than needed to attract the majority oltheir bond holders (those with a marginal tax rate of 35 percent). The majority 

of the bondholders are thus getting a benefit in excess of what would be necessary to motivate them to buy the 

bonds. 

In his written testimony for this committee, Frank Sammartino of the Congressional Budget Office explains, 

"In 2009, the average yield on (taxable) high-grade corporate bonds was 5.3 percent, and the average yield on 

tax-exempt municipal bonds of similar creditworthiness was 4.6 percent-a difference of 0.7 percentage points, 

or approximately 13 percent of the taxable return. That 13 percent also represents the marginal tax rate at which 

an investor would be indifferent between purchasing a taxable bond yielding 5.3 percent and a tax-exempt bond 

yielding 4.6 percent." 

Sammartino goes on to cite studies showing that most of the bondholders are taxpayers with a marginal tax rate that 

is much higher than that and, as a result, about 20 percent of the revenues foregone by the federal government are a 

subsidy to these bondholders rather than to the state and local governments issuing the bonds. 6 

This problem would be remedied under the President's proposal to revive and reform Build America Bonds, a special 

type of bond that state and local governments were allowed to issue in 2009 and 2010 under the economic recovery 

act enacted in the winter of 2009. The interest paid on these bonds is not excluded from the income of the 

bondholders. Instead, the federal government simply makes a payment of a certain percentage of the interest 

payments to the state and local governments. The government issuing the bonds can afford to pay interest at market 

rates, and the subsidy takes the form of a direct payment that goes entirely to the state or local government. The 

bonds are also attractive to some tax exempt entities (like pension funds) that have no incentive to buy the state and 

local bonds that pay interest at lower rates but are tax-free. 

The direct payments made from the federal government to the state and local issuers ofthe bonds issued in 2009 and 

2010 equal 35 percent of the interest paid, which was particularly generous and was intended to help state and local 

governments weather the recession. The proposal included in the President's most recent budget plan would make 

Build America Bonds permanently available and would provide state and local bond issuers direct payments equal to 

28 percent of the interest paid to bondholders. The Obama administration estimates that this is the rate at which 

encouraging a switch from traditional tax-exempt bonds to Build America Bonds would be roughly revenue-neutral 

for the federal government.' 

A key point about this proposal is that it is roughly revenue-neutral precisely because it would replace a wasteful tax 

subsidy with a better targeted subSidy that is provided through direct spending by the federal government. 

., Frank Sammartino, "Federal Support for State and Local Governments Through the Tax Code," Testimony Before the Committee on 

Finance, April 25, 2012. http://finance.senate.qovlimo/media/poc!T estimony%20ofO/020Sammartino.pdf 

7 U.s. Treasury Department, "General Explanations ofthe Administration's Fiscal Year 2013 Revenue Proposals, February 2012, page 11. 

http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2Q13.pdf 
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Technically, federal tax revenue will rise (because there will be fewer taxpayers benefiting from the income tax 

exclusion for interest on state and local debt) and federal outlays will rise (because payments will be made directly 

from the federal government to the state and local governments). But from a budgetary and economic perspective, 

little will have changed except that the subsidy will be more efficiently targeted at the state and local governments it 

is intended to help. 

This point has not been fully understood. For example, the Finance Committee ranking Republican, Senator Orrin 

Hatch of Utah, said at the hearing on this topic on April 25 that the President's Build America Bonds proposal would 

result in "an increase in taxes of $63 billion" over ten years and that "this would naturally increase the size of the 

federal government by $63 billion" over ten years. 

This view fails to recognize that the federal government can provide the exact same type of subsidy through the tax 

code or through direct payments. Changing a tax subsidy into a direct payment is simply paying the subsidy in a 

different, potentially more efficient way. In the case of state and local bonds, the Current subsidy provided through 

the tax code is less efficiently targeted to the intended recipients (state and local governments) than would be the 

case if the subsidy were provided as direct payments (payments made from the federal government to state and local 

jurisdictions to offset part of their interest expense). 

Lawmakers Must Distinguish Proposals to Coordinate and Streamline State and local Taxes from 

those Intended Only to Restrict Them 

Congress frequently considers proposals for regUlating state and local tax administration. These proposals can either 

facilitate state and local governments' exercising their taxing authority in a fair, efficient way, or limit their taxing 

authority and complicate taxes in response to heavy lobbying from multistate corporations and other special 

interests. While some proposals to coordinate tax rules between state and local governments would ease efficient 

collection of taxes, many of these proposals are simply ways to restrict state and local taxes at the behest of 

corporations and other powerful interests. Lawmakers need to distinguish between the two. 

1. Taxing the Income of Corporations and Other Businesses 

When determining the extent to which a state can tax the income of a particular business under current law, the first 

question is whether or not the business has sufficient contacts with the state to be taxed at all (whether the business 

has sufficient "nexus" with the state to be taxed by it). The second question is how states allocate among themselves 

the income ofthose businesses that do have sufficient nexus to be taxed. 

In the 1950s and 1960s, Congress hindered states from answering the first question in a sensible way, but nonetheless 

helped states answer the second question in a sensible way. 

Under Public Law 86-272, enacted in 1959, Congress dedared that a business selling physical goods in a state would 

not have sufficient "nexus" with the state to justify being taxed unless the business had a "physical presence" 

(generally meaning property or employees) in the state. This meant that a state could not tax a company's income if 

that company did not have stores or physical operations in a state but solicited orders for sales of goods to be shipped 

from outside the state. 

This physical presence standard has done more harm than good. The so-called "Business Activity Tax Simplification 

Act (BATSA)" would extend the same standard to businesses with income from other types of sales (sales of services or 

intangible products) into a given state, and would wreak havoc on state tax collections for reasons that will be 

explained below. 
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While the 1959 act unnecessarily and restrictively defined the "nexus" a company must have in order for a state to tax 

its income, it left open the question of how exactly states should tax the income of those businesses that do have 

sufficient nexus. To explore this question, the act established a special subcommittee known as the Willis Committee 

that actually did help states coordinate their tax collection efforts in an efficient way. 

The Willis Committee Report is an example of Congress facilitating coordinated and efficient tax collection among the 

states without actually enacting any federal legislation. Rather, the Willis Committee's very suggestion that Congress 

should enact legislation to fairly apportion business income to states based on certain factors prompted most of the 

states with a corporate income tax to adopt a similar proposal known as the Uniform Division of Income for Tax 

Purposes Act (UDITPA).' 

The basic idea behind UDITPA is that a business with sufficient nexus with a given state will have a portion of its 

income taxed by that state based on the percentage of property, payroll and sales in the state. While there might be 

many ways, in theory, to define the proportion of income a multistate business earned in a particular state, this 

method is the most straightforward and fairest way. If each state adopted UDITPA and continued to follow it, then 

each portion of a multistate business's income would be taxed once, and only once. 

In recent years, states have strayed from the basic principles behind UDITPA by altering their apportionment formula 

(by, for example, double-weighting the sales factor) or by replacing it entirely with a single-factor formula relying on 

sales alone. Many states have been convinced that companies will be more willing to locate headquarters or 

operations within their borders if having payroll and property in the state does not increase the percentage of the 

company's income subject to state taxes.9 

This has made state tax collection more complicated, less efficient, and less fair. A company in State A might be 

subject to State A's corporate income tax under an apportionment formula that considers three factors (the 

percentage of property, payroll and sales in the state) but if State A adopts a single-factor formula based on sales, 

some of the company's income could escape taxation entirely. 

This can happen because the company sells many of its goods to a state that does not have a corporate income tax or 

a state where the company does not have any physical presence, meaning it lacks the sufficient "nexus" to be taxed by 

that state. The possibility of such "nowhere" income (income that is not taxable in any state) is obviously very 

attractive to multi state corporations, which lobby states to enact single-factor formulas based on sales.lO 

It is quite ironic that one ofthe witnesses at the April 25 Finance Committee hearing on this topic claimed that states 

have strayed from the basic three-factor apportionment formula in order to "grab" income from other states. States 

have strayed from the three-factor formula mainly at the behest of corporations that understood this would enable 

their tax avoidance.ll Congress should be very careful that any proposal to coordinate state taxes on business income 

move us back to the simple, straight-forward three-factor apportionment formula rather than away from that formula. 

S Joe Huddleston and Shirley Sicilian, 'The Project to Revise UD!TPA," from the Proceedings of the 

New York University Institute on State and Local Taxation, 2009. 

http://www ,mtc.gov/up!oadedFiles/Multistate Tax (ommission/Uniformity/Minutes!The%20Project%20toO/020Revise%20U D1TPA.pdf 

9 Institute on Taxation and Economic Policy, "Corporate Income Tax Apportionment and the 'Single Sales Factor/II August 2011. 

http://www.itepnet.org/odf/pbllssf.pdf 

10 Institute on Taxation and Economic Policy, "'Nowhere Income' and the Throwback Rule," AU9ust 201l. 

http://wwwjtepnetorglpdflpb39throw.pdf 

\t The result, as highlighted in a December 2011 report by my organization, is that an astonishing number of Fortune 500 corporations 

are finding ways to avoid paying any state corporate income taxes despite being hugely profitable. See Institute on Taxation and 

Economic Policy and Citizens for Tax Justice, "Corporate Tax Dodging in the Fifty States, 2008-2010," December 7, 2011. 

www,ctLorg!corporatetaxdodgersSOstates: 
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Unfortunately, the most prominent pending legislation in this area would move the country in the wrong direction by 

further restricting the level of 'nexus" of business must have with a state in orderfor its income to be taxed by that 

state. 

This legislation is the so-called Business Activity Tax Simplification Act (BATSA), H.R. 1439. This legislation would make 

state and local taxes on businesses dramatically more complex, increase litigation related to business taxes, increase 

government interference in the market and reduce revenue to state and local governments by billions of dollars each 

yeaT. 12 

Even ifthe "physical presence" standard made any sense, it would not matter under H.R. 1439 because it is notthe 

standard set out in the bill. The bill has many 'safe harbors" which are essentially loopholes allowing large 

corporations with lobbying clout to avoid state and local taxes even though they have what any rational person 

would call a "physical presence" in the jurisdiction. 

For example, under BATSA, a company that sends a full-time worker into another state each day to install equipment 

could be subject to that state's taxes. However, if the company created two subsidiaries which each provided half of 

the equipment and which each hired the worker to perform the installations, the state would not be able to tax the 

business under BATSA. 

The state would also be unable to tax a business ifthe employee was only sent into the state 14 days each year, or if 

the company created several subsidiaries that each hired the employee and sent him or her into the state for just 14 

days each year. 

If the company warehoused items in the state before shipping them to customers, one would think this constitutes 

"physical presence," but under BATSA it might not. Items could be warehoused in the state by a second company that 

ships them to customers and this second company could also be exempt from the state's business activity taxes under 

the exception for third-party "fulfillment" activities. 

Perhaps the most outrageous abuses would occur when a company is actually based in the state in question. Such a 

company might create subsidiaries in other states (states without business activity taxes) and transfer trademarks and 

logos to them. The company would then pay royalties to those subsidiaries forthe use ofthe trademarks and logos, 

and these payments would reduce or even wipe out the income reported to the state where the company is based. 

Most states currently have laws that allow them to tax the out-of-state subsidiaries receiving royalties in this scenario, 

but BATSA would nUllify those laws so that this type of tax avoidance would increase dramatically. 

The various intricacies of BATSA that would encourage more aggressive tax planning would naturally lead to 

increased litigation. Besides that, some of the safe harbors in BATSA are not defined at all, which will certainly leave 

state and local governments no choice but to call upon the courts to interpret the provisions ofthe law when 

companies manipulate them. 

For example, even a company that has physical property and employees in a state will not have a "physical presence" 

there under BATSA if the property and employees are only used to carry out "limited and transient business activity," 

which is left undefined. It's difficult to imagine how this ambiguity would not lead to increased litigation. 

12 For more details on the problems with the Business Activity Tax Simplification Act, see Michael Mazerov, "Proposed 'Business Activtty 

Tax Nexus' Legislation Would Seriously Undermine State Taxes on Corporate Profits And Harm the Economy," Center on Budget and 

Policy Priorities, updated April 13, 2011. http://www.cbpp.org!cmsfindex.cfm?fa-view&id=424 
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Perhaps some lawmakers may comfort themselves with the notion that despite all of these problems, in the end 

BATSA will mean the government has a lighter hand in the economy because businesses will be taxed by fewer state 

and local governments. 

To the contrary, BATSA is the ultimate example of government picking "winners and losers" among businesses 

competing against each other. BATSA would create artificial advantages for very large, multi-state companies that 

conduct most of their business online or overthe phone and which have the resources to engage in the type of tax 

avoidance schemes already described. 

2. Requiring Businesses to Collect Sales Taxes on Interstate Sales 

Whereas the preVious section of this testimony addressed the extent to which a state can tax a multistate business's 

income, another question is the extent to which a state can require a multistate business to collect sales taxes. This 

question has nothing to do with taxes on the business's income, but merely asks whether or not the business must 

take the administrative step of collecting sales taxes that its customers are required to pay. 

In a jurisdiction that imposes a sales tax, a business that sells a product from a physical store is required to collect the 

sales tax from the buyer. The sales tax is not paid by the seller but by the buyer, whose total purchase price includes 

the sales tax as well as the underlying retail price ofthe product. The business that sells the product is merely required 

to collect the tax and pass it on to the state or local government. 

However, when a person in the state buys a product online, the state is often unable to require the business selling 

the product to collect the sales tax because the business does not have a physical presence in the state. This level of 

"nexus'! (the connection that a business must have with a state before the state can require it to collect sales taxes) 

was imposed not by Congress but by the U.s. Supreme Court's interpretation of the Commerce Clause in a 1992 

decision.13 

Under the Supreme Court's decision, Congress can decide to grant the states the authority to require out-of-state 

businesses to collect sales taxes on sales into their jurisdictions. This would make it far easierforstate and local 

governments to adapt to the internet age. 

The question is not whether or not sales taxes should be imposed, but who has responsibility for collecting them and 

delivering them to the state or local government. In states with sales taxes, internet purchases (and other purchases 

from out-of-state businesses) are subject to the sales tax, but the buyers themselves are required to calculate the sales 

tax and send it to the state or local government. (In these cases the tax is technically called a "use tax.") But these rules 

are unenforceable. Needless to say, almost no one who buys a product from Amazon thinks to calculate their sales 

taxes and send a payment to their state or local government. 

A bill before Congress would allow states to require internet sellers and other out-of-state sellers to collect sales taxes 

in return for states simplifying their sales taxes. The legislation, the Marketplace Fairness Act, S. 1832, is an example of 

a federal proposal that really would help states coordinate their tax rules and collect revenue in a more efficient way. 

In order to benefit from the law, states would be required to conform their sales tax laws to the Streamlined Sales and 

Use Tax Agreement (SSUTA) (which was forged by representatives of several states to harmonize sales tax rules) or 

take other steps to simplify their sales taxes. 

Currently twenty states are full members of SSUTA and four states have "associate member" status, meaning they are 

on their way to becoming full members. SSUTA does not restrict member states' power to set their own sales tax rates 

\3 Quill Corporation v, North Dakota (U.S. 1992). 
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or even their power to determine the base of their sales tax (which sales are subject to the sales tax) but requires them 

to use uniform definitions to define the sales tax base. This addresses the complexity that motivated the Supreme 

Court's 1992 decision - the complexity that would otherwise be faced by multistate business with sales in several 

jurisdictions with different sales tax rules." 

New technology, combined with the harmonized sales tax rules under SSUTA, would make it relatively easy for 

internet retailers to determine what sale taxes apply in a customer's jurisdiction. We know this because major retailers 

that have a "physical presence" in numerous states, like Best Buy and Barnes and Noble, already collect sales taxes on 

sales made over the internet, in addition to those made inside their physical stores. Similarly, Amazon collects sales tax 

on behalf of a huge number of merchants located all around the country that sell via its website, though it mostly 

refuses to do so on items it sells directly. Netflix's CEO summed up the reality of the tax complexity problem when he 

said, 'We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this ... It's 

not very hard."" 

Opponents of the Marketplace Fairness Act have incorrectly labeled it a tax hike. The bill doesn't actually create a new 

tax. nor does it raise an existing one. Rather, it merely creates a mechanism to collect taxes that have always been 

owed. 

Failing to collect these taxes creates two major problems. First, states are losing out on badly needed reVenUe. 

Second, traditional brick and mortar stores are at a competitive disadvantage when their customers have to pay a tax 

that online shoppers are able to evade. There is no reason for large online retailers like Amazon to have this sort of 

competitive advantage - which exists only because of tax law - over businesses that operate in traditional, physical 

stores. 

As an extreme example of this second problem, in many instances customers will go so far as to examine and "try out" 

merchandise at stores, only to return home and purchase the same product online in orderto evade their sales tax 

responsibility. It's no surprise then that numerous organizations representing retail owners, such as the Retail Industry 

Leaders Association (RILA), support the bill." 

14 Institute on Taxation and Economic Policy, "How Can States Collect Taxes Owed on Internet Sales?" July 2011. 

http://wwwJtepnet.org/pdfJpb2quill.pdf 

lS!d. 

16 Joint Statement of Senators Michael B. Enzi, Richard J. Durbin. Lamar Alexander, Tim Johnson, John Boozman, Jack Reed, Roy Blunt, 

Sheldon Whitehouse, Bob Corker, Mark Pryor for Hearing: Tax Reform: What It Means for State and local Tax and Fiscal Policy, April 25, 

2012. 
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INTERNATIONAL ASSOCIATION OF FIRE FIGlITERS® 

HAROLD A SCHAITBERGER THOMAS H, MILLER 

General President General Secretary-Treasurer 

Statement of 

General 

Hearing on State 

Senate 

17t')0 NF,\!\'YOflK AVENUE, l\i W" WA~:;H1NG1'QN> $ FAX (202) 737-8418 ~ WWVv',LAFF.ORG 
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Introduction 

Chainnan Baucus, Ranking Member Hatch, and all the distinguished Senators on this committee, 

I would like to thank you for holding this important hearing on how tax refonn will impact state 

and local governments. As the General President of the International Association of Fire 

Fighters (IAFF), I speak today on behalf of the nearly 300,000 men and women who risk their 

lives to provide fire, rescue and emergency medical services protection to over 85 percent of our 

nation's population. 

Although IAFF members are committed first and foremost to protecting their communities, they 

are not immune to the fiscal challenges posed by these difficult economic times. As employees 

of state and local governments, their livelihoods and their ability to respond effectively to the 

next house fire or the next heart attack is linked to the budget shortfalls facing far too many 

governmental jurisdictions. 

The stark reality is that the Great Recession has decimated state and local government budgets. 

According to the Center on Budget and Policy Priorities, state and local governments have 

closed shortfalls amounting to over $530 billion over the last four years. Despite an improving 

economic outlook, budget shortfalls still persist. Thirty states have either projected shortfalls or 

have accounted for shortfalls that total $49 billion for FY2013. Without additional revenue to 

balance their budgets, states and local governments will be forced to cut back on essential 

services, possibly leading to layoffs, station closings and brownouts for the fire service. 

Additional cuts to the fire service will only exacerbate the dire jobs picture for state and local 

governments. Since 2009, 611,000 public sector jobs have been lost as a result of the Great 

Recession. 

That is why today's hearing is so important. As this distinguished committee weighs 

comprehensive tax refonn, it should not overlook tax issues important and unique to state and 

local governments. In some instances, such as S. 1832, the "Marketplace Fairness Act," this 

committee could act to make sales tax policy more equitable while improving revenue streams 

for state and local governments, and it could do so independent of tax refonn. Alternatively, this 

committee could enact policies that would harm the fiscal outlook for state and local" 

governments by eliminating or capping the deductibility of state and local taxes, eliminating taxexempt bonds, or by passing federal bills that would preempt the sovereign taxing authority of 

state and local governments. Therefore, I respectfully request that this committee first pass the 

"Marketplace Fairness Act," and second do no harm to state and local governments. 

s. 1832, the "Marketplace Fairness Act" 

Throughout the nation, reduced revenue is forcing states and local governments to undertake 

drastic measures to balance their budgets. Despite modest improvements in the past two years, 

revenues for state and local governments remain at historic lows. As of the third quarter of 20 11, 

state revenues were still 7 percent less than when the Great Recession began. According to the 
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Center on Budget and Policy Priorities, this budget hole is so great that even with a robust 8 

percent rate of growth, it would take 7 years to get back on track. 

One factor contributing to budget shortfalls both at the state and local level is the dramatic 

increase of online sales. Many e-retailers are not required to charge sales and use taxes because 

they do not have a physical presence in the state where the purchase is made. This special tax 

preference gives e-retailers an unfair competitive advantage over traditional "brick and mortar" 

businesses, which must charge sales taxes on every item sold, from a pack of gum to a new car. 

As more consumers have chosen to buy goods and services online, total sales tax receipts for 

state and local governments have plummeted. A recent University of Tennessee study found that 

state and local governments are losing $23 billion each year due to e-commerce. In addition, 

property tax receipts, which help fund municipal fire departments and school districts, have also 

been affected as more brick and mortar stores go out of business due to the unfair competition 

from out-of-state e-retailers. 

To address this problem, Congress should pass S. 1832, the "Marketplace Fairness Act." This 

bipartisan legislation would allow local main street retailers to compete more effectively against 

out-of-state e-retailers, give states the ability to enforce their own sales and use tax laws, relieve 

consumers of the legal burden to report to state tax departments the sales and use taxes they owe 

for online purchases, and help governors and mayors collect taxes already owed, reducing the 

need to raise new taxes. 

Importantly, this bill does not create new taxes or increase existing taxes. Under current law, 

consumers living in states with a sales tax are required to remit use taxes for online purchases. 

Compliance with the law is poor, because most consumers are unaware of their tax obligations. 

The "Marketplace Fairness Act" simply gives states a way to enforce existing sales and use tax 

laws while eliminating the competitive advantage currently enjoyed by remote retailers at the 

expense of local businesses. For states without a sales tax, nothing would change. The 

"Marketplace Fairness Act" does not require a state to adopt a sales tax. That decision will still 

rest with the citizens of each state. 

In addition to bipartisan support in Congress, a large coalition of organizations has formed to 

urge passage of the "Marketplace Fairness Act." Government representatives such as the 

National Governors Association and the U.S. Conference of Mayors, business groups such as the 

National Retail Federation and the International Council of Shopping Centers, Fortune 500 

companies such as Amazon and Best Buy, and labor unions alI support this important legislation. 

At a time when business and labor are often at odds, I hope that this committee, which is famous 

for finding bipartisan solutions to our great nation's problems, will take special note of this 

unique coalition. 

Finally, I urge this committee to pass the "Marketplace Fairness Act" separately from 

comprehensive tax reform. Any effort to fundamentally reshape the United States tax code will 
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be a Herculean task for this Congress or future Congresses. But the fire stations facing closures 

due to budget shortfalls cannot wait until there is a filibuster-proof majority in support of a broad 

tax plan, just as the mom-and-pop store on Main Street cannot wait for a conference committee 

report to be filed. This commonsense and bipartisan legislation deserves consideration in this 

Congress, in this session. 

Federal Preemption 

The second dynamic that could hinder the ability of states and localities to continue generating 

revenue is a series of federal bills that directly usurp the sovereign rights of state and local 

governments to impose certain taxes. These initiatives, which are often championed by 

legislators who otherwise support federalism and states' rights, would potentially cost states 

billions of dollars by preempting existing state and local taxes. 

In addition to the loss of revenue, proposals to restrict states taxing authority trample on the 

rights of states and local governments to establish policies that address the specific needs of their 

citizens. Although tax laws can vary from jurisdiction to jurisdiction, they reflect the decisions 

of a democratically elected government. The federal government should not preempt the will of 

the people by imposing one-size-fits-all solutions from Washington. 

The IAFF urges this committee to oppose the following bills: 

• H.R. 1439, the "Business Activity Tax Simplification Act," would allow large businesses 

and corporations to avoid paying taxes to states and localities. For the first time ever, 

states and localities would be prohibited from imposing existing taxes on legitimate 

business activity by creating a new physical presence rule, which would significantly 

weaken the current "economic nexus" standard. As a result, H.R. 1439 would limit state 

and local governments from keeping their own tax systems, and would reward large 

profitable corporations for making business decisions designed to aggressively avoid 

taxes. The Congressional Budget Office has determined that H.R. 1439 would be an 

unfunded mandate on state and local governments, costing $2 billion in the first full year 

after enactment. 

• H.R. 1002/S.543, the "Wireless Tax Fairness Act," would prohibit for five years state and 

local governments from raising additional revenue on cell phone services. Specifically, 

the bill would prohibit state and local governments from imposing certain new taxes on 

providers of wireless communications service for five years after enactment of the 

legislation. States and local governments are still struggling to balance their budgets 

even as the economy slowly recovers. A new federal mandate restricting their ability to 

raise additional revenue would fail to take into account that state and local tax systems 

vary greatly among jurisdictions, taxing goods and services at different rates to meet the 

specific needs of its citizens. The federal government should not be dictating to 

sovereign state and local governments how best to meet those needs. 
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• H.R. 1864, the "Mobile Workforce State Income Tax Simplification Act," would restrict 

states from taxing income eamed while working in that state. Specifically, it would 

prohibit every state government from taxing the income eamed in that state of an 

individual residing in another state, if that non-resident works less than 30 days in the 

state seeking to impose the tax. H.R. 1864 ignores the reality that state tax systems are 

autonomous and differ from state to state. It would unfairly impose a one-size-fits-all 

federal mandate on states and could open the door to subsequent legislation restricting 

local governments as well. CBO estimates H.R. 1864 will lead to revenue losses in a 

number of states, including California, Illinois, and Massachusetts. New York state 

estimates that it would lose between $95 million and $115 million starting in 2013. 

• H.R. 2469, the "End Discriminatory State Taxes for Automobile Renters Act," would ban 

state and local governments from applying certain types of taxes on car rentals. 

Specifically, the bill would seek to ban so-called "discriminatory" taxes on car rentals or 

car rental companies without any regard to the factors that state and local governments 

use to determine the specific needs of their constituents. For example, Revere, 

Massachusetts used revenue from rental car taxes to build police and fire stations, and 

Arlington County, Virginia uses revenue from car rental taxes to help pay for police, fire 

fighter and emergency medical services to Reagan National Airport, the Pentagon, 

Arlington National Cemetery, and other popular tourist destinations. The federal 

government should not undermine these local decisions with a blanket, one-size-fits-all 

mandate. 

• S. 8711H.R. 1860, the "Digital Goods and Services Tax Fairness Act of 2011," would 

regulate state and local governments taxing authority of downloaded music, movies and 

online services. Proponents of the legislation argue that it would protect consumers from 

discriminatory or multiple taxes on e-commerce. But existing law already provides these 

protections. The "Internet Tax Freedom Act" currently bans "multiple or discriminatory 

taxes on electronic commerce," with a definition of "electronic commerce" sufficiently broad 

as to encompass all digital goods and services. As a result, the actual occurrence of multiple 

taxes on a single digital good or service is rare beyond hypothetical examples cited by the 

bill's proponents. Furthermore, unlike other federal preemption bills that are prospective, S. 

871/H.R. 1860 is retroactive, banning tax laws that were passed by democratically elected 

state governments. Considering the lack of actual harm caused by the alleged problem, it is 

shocking that the bill would adopt such a far-reaching and unprecedented assault on the 

taxing authority of state and local governments. 

State and Local Tax Deductions 

Since the inception of the modem income tax in 1913, taxpayers have been able to deduct state 

and local taxes in some form from their federal tax liability. Over the years, Congress enacted 

certain amendments to the "taxes-paid" deduction, such as the elimination of sin taxes in 1964, 

motor fuel taxes in 1978, and general sales taxes in 1986. But Congress has repeatedly preserved 

the taxes-paid deduction as a fundamental part of our tax system, and for good reason. 
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The taxes-paid deduction underscores a basic premise that one's tax liability should be based on 

one's ability to pay. Eliminating the taxes-paid deduction would change this premise by 

instituting a federal tax on income already lost through the payment of state and local taxes. In 

other words, it would amount to the federal government double-taxing its citizens. I am not a 

professional pollster, but I would imagine that avoiding a double-tax on the American public is 

one reason why the taxes-paid deduction has withstood the test of time. 

I am, however, a former employee of a municipal government, and I can attest to the benefits 

that the taxes-paid deduction provides. Numerous studies have shown that removing the taxespaid deduction would reduce services funded by state and local governments. The fire service 

certainly is not immune to this threat with a majority of our funds coming from property taxes, 

which are deductible from federal taxes. Any change to the taxes-paid deduction could result in 

a diminished fire service. 

I would also like to point out that the fire service provides benefits that extend beyond the 

immediate taxing locality. Especially since 9/11, the fire service has taken on an expanded role, 

serving as our nation's domestic responders to a wide array of regional and national threats. 

From wildfues, floods, tornadoes, and terrorist attacks, the fire service repeatedly responds to 

large-scale threats while simultaneously serving its core function as its community's fust 

responders. By reducing the financial impact of state and local taxes, the taxes-paid deduction 

allows the fire service to meet both its local and national objectives. Whether you are a resident 

of Montana, Utah, or Maryland, all residents benefit when the fire service is adequately staffed 

and funded. Consequently, I respectfully request that the committee maintain the current 

deduction for state and local taxes. 

Tax-Exempt Governmental Bonds 

Under present law, state and local governments can issue bonds that produce tax-exempt interest 

for the investor. This tax preference allows state and local governments to maintain lower 

borrowing costs because investors are willing to accept interest rates that are lower than with 

taxable bonds. Recent proposals such as the Simpson-Bowles Commission called for the 

elimination of the tax-exempt status for all new bonds. Other proposals would call for replacing 

the tax-exempt status with a direct federal subsidy or tax credit to borrowers. 

The IAFF urges this committee to leave intact the current exemption for state and municipal 

bonds. For decades, these bonds have helped state and local govemments fund critical 

infrastructure proj ects, including new roads, bridges, water systems, and schools. Particularly at 

a time when the economy is still struggling to recover from the worst recession since the Great 

Depression, the federal government should be searching for ways to boost the construction 

trades, not depress them. 

Higher borrowing costs will have disastrous consequences for state and local governments. 

Bond issuers will face greater uncertainty when setting higher interest rates. In addition, higher 
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borrowing costs will lead to either reducing the size and scope of new infrastructure projects, 

burdensome new taxes, or both. 

Conclusion 

On behalf of the IAFF, I would like to thank the distinguished chairman and ranking member for 

holding this important hearing on state and local tax issues. As you proceed with the difficult 

task of passing comprehensive tax reform, I would urge you to keep in mind the views of the 

IAFF. Our members' ability respond swiftly to any and all threats to our great country hinges on 

the most fundamental compact between the individual and society; that is, the ability to raise 

revenue to fund essential government services. In this regard, I urge you to pass S. 1832, the 

"Marketplace Fairness Act," and to do so independent of tax reform. In addition, I urge you to 

reject any bills that would preempt the sovereign taxing authority of state and local governments, 

and to preserve the current deductions for state and local taxes and tax-exempt bonds. 
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International City/County Management Association 

National Association of Counties 

National League of Cities 

U.S. Conference of Mayors 

Government Finance Officers Association 

National Association of State Auditors, Comptrollers and Treasurers 

National Association of State Treasurers 

American Public Gas Association 

American Public Power Association 

Council of Development Finance Agencies 

Council of Infrastructure Financing Authorities 

Education Finance Council 

International Municipal Lawyers Association 

Large Public Power Council 

National Association of College and University Business Officers 

National Association of HeaJtb & Higber Education Facilities Authorities 

National Association of Local Housing Finance Agencies 

National Association of School Administrators 

National Council of State Housing Agencies 

National School Boards Association 

Bond Dealers of America 

Investment Company Institute 

National Association of Bond Lawyers 

National Association oflndependent Public Finance Advisors 

Securities Industry and Financial Markets Association 

April 23. 2012 

The Honorable Max Baucus 

Chairman. Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Baucus and Senator Hatch: 

The Honorable Orrin Hatch 

Ranking Member, Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

The state and local government associations and other organizations listed above representing participants 

involved in the municipal bond market, commend you for holding a hearing on the impact of tax reform 

proposals on state and local governments. Our associations look fOIWard to testifYing in future hearings 

as government representatives and market participants. This submission is limited to a discussion of the 

importance of tax-exempt bonds. We urge Congress' continuing support and commitment to tax-exempt 

bond financing in recognition of the critical role it plays in the ability of state and local governments to 

fund national priorities, particularly infrastructure. 

Maintaining the tax-exempt status ofmunicipal bonds is essential to help our national economy grow, 

create jobs, and best serve the constituencies of every community. Three-quarters of the total United 

States investment in infrastructure is provided by state and local governments. and tax-exempt bonds are 

the primary financing tool used by over 50,000 state and local governments to accomplish these 

infrastructure goals. 
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Our citizens and communities benefit in many ways from the issuance of tax-exempt bonds. They are 

used to build and maintain elementary and secondary schools, as well as colleges and universities, which 

help develop an educated workforce. They are used to build our roads and airports, all of which are 

essential for supporting commerce. They address the country's water infrastructure, electric utility and 

affordable housing needs. Tax-exempt bonds also finance public safety infrastructure that ensures local 

and national security. Nearly four million miles of roadways, 500,000 bridges, 1,000 mass transit 

systems, 16,000 airports, 25,000 miles ofintercoastal waterways, 70,000 dams, 900,000 miles of pipe in 

water systems, and 15,000 waste water treatment plants have been financed through municipal bonds. 

(National League of Cities) 

States and localities determine if bonds should be issued to meet the needs of their citizens, generally 

through a vote by elected officials or through voter referenda. Placing the decision-making at the state 

and local levels ensures effective resource allocation and avoids inefficient decisions due to federal 

bureaucracy, cumbersome grant programs, earmarking and similar processes. An extensive federal 

legislative and regulatory regime exists under the Internal Revenue Code to ensure that tax-exempt bonds 

are used properly. 

State and local governmental bonds have been issued since the mid-1800s, and the federal tax exemption 

was included in the country's income tax code since its promUlgation in 1913. Through the taxexemption, the federal government continues to provide critical support for the development and 

maintenance of essential facilities and services, which it cannot practically replicate by other means. 

Without the tax-exemption, state and local governments would pay more to raise capital, a cost that 

ultimately would be borne by taxpayers, through reduced infrastructure spending, decreased economic 

development, higher taxes or higher user fees. 

The ability to sell bonds with interest exempt from federal income taxes reduces the interest paid for 

borrowed funds by approximately 25 percent (SIFMA). Tax-exempt bond issuance has remained stable 

compared to GDP over the past 10 years, averaging around 14.8%, and has actually declined since the 

1980s. State and local governments are not overextended in debt. In fact, debt service is typically only 

about 5% of the general fund budgets of state and municipal governments. The tax-exemption represents 

a fair allocation of the cost of projects between the federal and state/local levels of government. State and 

local borrowers are responsible for repaying the principal and interest on a bond. The federal contribution 

is provided in the form of theoretically foregone tax revenue and represents an important, but relatively 

small portion of total project costs. As a result, the federal contribution is significantly leveraged. 

Municipal bonds offer a healthy investment for American families in America's communities. Seventy 

percent of municipal bonds are held by individuals, directly or through mutual funds (Thompsen Reuters). 

Investors choose to purchase municipal bonds, even though the investment return is less than if they 

purchased corporate or other taxable bonds, because the tax-exemption results in an equivalent after-tax 

benefit. Furthermore, as a class of investment, all investment grades of municipal bonds have proven to 

be safer investments than AAA corporate bonds (Municipal Market Advisors). 

Our experience informs that tax-exempt financing is a well-established market providing a cost-effective 

mechanism for financing infrastructure and meeting needs of our citizens. Any changes that would 

replace, compromise, dampen or eliminate tax-exempt financing immediately or retroactively, 

particularly those offered as deficit reduction alternatives, should be carefully and cautiously analyzed by 

the committee. 

Thank you again for the opportunity to comment on this important issue. We look forward to continuing 

conversations with you and your staff about these important issues. 
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Sincerely, 

International City/County Management Association, Elizabeth Kellar, 202-289-4262 

National Association of Counties, Michael Belarmino, 202-942-4254 

National League of Cities, Lars Etzkorn, 202-626-3173 

U.S. Conference of Mayors, Larry Jones, 202-861-6709 

Government Finance Officers Association, Susan Gaffney, 202-393-8468 

National Assn of State Auditors, Comptrollers and Treasurers, Cornelia Chebinou, 202-624-5451 

National Association of State Treasurers, Jon Lawniczak, 859-244-8175 

American Public Gas Association, Dave Schryver, 202-464-0835 

American Public Power Association, Joy Ditto, 202.467.2954 

Council of Development Finance Agencies, Toby Rittner, 614-224-1300 

Council ofInfrastructure Financing Authorities, Rick Farrell, 202-547-1866 

Education Finance Council, Vince Sampson, 202-955-5510 

International Municipal Lawyers Association, Chuck Thompson, 202-742-1016 

Large Public Power Council, Noreen Roche-Carter, 916-732-6509 

National Association of College and University Business Officers, Liz Clark, 202-861-2553 

National Assn of Health & Higher Education Facilities Authorities, Chuck Samuels, 202-434-7311 

National Association of Local Housing Finance Agencies, John Murphy, 202-367-I197 

National Association of School Administrators, Bruce Hunter, 703-875-0738 

National Council of State Housing Agencies, Garth Riemen, 202-624-7710 

National School Boards Association, Deborah Rigsby, 703-838-6208 

Bond Dealers of America, Mike Nicholas, 202-204-7901 

Investment Company Institute, Jane Heinrichs, 202-371-5410 

National Association of Bond Lawyers, Bill Daly, 202-503-3303 

National Association of Independent Public Finance Advisors, Colette Irwin-Knott, 317-465-1504 

Securities Industry and Financial Markets Association, Michael Decker, 202-962-7430 

cc: All members of Senate Committee on Finance 
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IFA~el Franchising' 

IIfJDIIWIOUL fFlAMClltSl ASSoCtAnDII ' 

April 24, 2012 

Honorable Max Baucus, Chairman 

Honorable Orrin Hatch, Ranking Member 

United States Senate, Committee on Finance 

Attn: Editorial and Document Section 

Room SD-210 

Dirksen Senate Office Building 

Washington, DC 20510-6200 

RE: April 25 Senate Finance Committee Hearing on Tax Reform: What it Means for State 

and Local Tax and Fiscal Policy 

Dear Chairman Baucus, Ranking Member Hatch and Members of the Committee 

As the Senate Finance Committee prepares to hear testimony on federal tax reform as it relates to 

state and local tax policy, the International Franchise Association urges you to support business 

activity tax nexus reform. 

Effective reform of the business activity tax nexus would establish a bright-line rule that all states 

would follow by codifying the traditional physical presence governing state imposition of corporate 

income tax and comparable business activity taxes. The legislation is consistent with the U.S. 

Supreme Court's decision in Quill Corp. v. North Dakota (1992), which justified the prohibition of 

states forCing out-of-state corporations to collect certain taxes unless it established a physical 

presence in the taxing state. 

Despite the Court's rulings, states desperate for revenue have attempted to collect corporate 

income and other taxes from franchise companies because of a vague "economic presence" 

standard, which can include intangibles such as trademarks, trade names, intellectual property or 

advertising. As part of franchise agreements franchisors and franchisees share trademarks and 

brands, forcing franchise companies to pay millions of dollars in back taxes to states in which they 

do not own or operate a single location. 

Differences in tax nexus policies from state to state add to the debilitating uncertainty for our 

nation's job creators in this still challenging economic recovery. BATSA would ensure that a single 

standard of taxation applies for taxing multi-state companies, such as most franchisors, taking some 

of the confusion out of interstate commerce. We urge the Senate to take up legislation similar to 

H.R. 1439, the Business Activity Tax Simplification Act ("BATSA"), a bipartisan bill sponsored by 
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Reps. Goodlatte (R-VA) and Scott (DNA) in the U.S. House of Representatives, that would clarify this 

troubling inconsistency in state taxation, protect American businesses from over-reaching tax 

collections and litigation, and promote certainty in the business environment. 

Sincerely, 

Jay Perron 

Vice President, Government Relations & Public Policy 

International Franchise Association 
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.....wv.o.!ppc.org 

The Large Public Power Counc 

po Bo. 34321, Washington DC, 20043 I P (202) 430'()1011 F (843) 276-8351 I Ippc@lppc,org 

Statement of Large Public Power Council 

United States Senate 

Committee on Finance 

Hearing on 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April 25, 2012 

AUstin Energy (IX) • Chel:::1n County PUD rNA} • Clark. Public Utilities (WA) .. Colorado Springs Utilities (CO) • CPS Energy (TX) 

ElectriCities of North Carolina, Inc. (NC) • Grant County PUD (WA) .. liD (CA) • JEA (FL) • long Island Power Authority (NY) 

los Angeles Department of Water and Power (CA) • Lower Colorado River Authority (TX) • MEAG Power (GA) • Nebraska Public Power District (NE) 

New York Power Authority (NY). Omaha Public Power District (NE) • DUe (FL) • Platte River Power Authority (CO) 

Puerto Rico Electric Power Authority (PR» • Sacramento Municipal Utility District (CA) • Salt River Project (Al) • Santee Cooper (SC) 

Seattle City Light rNA) .. Snohomish County PUD rNA)· Tacoma Public Utflities (WA) 
288 


80344.259

Chairman Baucus, Ranking Member Hatch and members of the Committee. Thank you for the 

opportunity to submit testimony for the record on "Tax Reform: What It Means for State and 

Local Tax and Fiscal Policy." As your Committee continues its examination of comprehensive 

tax reform, it is critical that the Committee carefully consider the importance of tax-exempt 

financing to state and local governments, including public power systems. For nearly a century, 

tax-exempt financing has allowed governmental entities to invest in essential infrastructure in a 

cost-effective manner, including roads and schools for cities and counties, and generation and 

transmission facilities for public power systems. 

Proposals that would restrict, means-test or eliminate the longstanding federal income tax 

exemption for interest from municipal bonds will increase the cost of providing governmental 

services, with the burden ultimately shouldered by taxpayers in already hard-pressed 

communities throughout the country. In addition, proposals to substitute the tax credit bond or 

subsidized taxable bond mechanisms for tax-exempt financing, rather than complement it, are 

also flawed because, as we discuss in detail below, past experience with programs such as 

Clean Energy Renewable Bonds and Build America Bonds has demonstrated that not all state 

and local entities can utilize this tool efficiently, nor have the financial markets developed to fully 

deal with these new instruments. 

Large Public Power Council 

Public power utilities are locally owned and controlled, not-far-profit power systems that 

serve more than 46 million people in 49 of our 50 states, or about 14 percent of the nation's 

electricity consumers. The Large Public Power Council (LPPC) is an organization comprised of 

25 of the largest of these systems. Members are located in 11 states and Puerto Rico, and 

provide reliable, low-cost electricity to some of the largest communities in the country, including 

Los Angeles, Seattle, New York, Omaha, Phoenix, Sacramento, San Antonio, Jacksonville, 

Orlando and Austin. LPPC member utilities own and operate more than 86,000 megawatts of 

generation capacity and over 35,000 circuit miles of high voltage transmission lines. 

Importance of Tax-Exempt Financing 

Since the first federal tax laws were enacted, state and local governments (which by definition 

own and operate public power systems) have had the ability to utilize federally tax-exempt 

financing. Governmental entities have limited means to raise funds for their communities' 

capital needs. They cannot sell stock and so are permitted to raise capital by issuing federally 
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tax-exempt bonds, which carry lower interest rates that are fully passed through to reduce the 

cost of governmental services such as the building of roads, schools, and public safety 

infrastructure. Public power systems use tax-exempt bonds to finance their electric generation, 

transmission, and distribution assets, as well as related facilities. Given the capital-intensive 

nature and long-lived assets of an electric utility, tax-exempt debt is essential to operating a 

viable public power system. 

Public power systems borrow on a long-term basis to finance their long-lived assets. The only 

sensible means of funding an electric generation or transmission project that can cost hundreds 

of millions or even billions of dollars and that has a 40 or 50 year life is to borrow all or much of 

the cost of the project and spread the cost over its useful life. The cost is then shared by all the 

customers that will benefit from the project. 

State and local governments, and ultimately their citizens, average an estimated two percentage 

point savings by using tax-exempt debt to finance investment in public infrastructure. Over the 

past few decades, tax-exempt finance has generated trillions of dollars of investment in vital 

public infrastructure and has saved state and local governments hundreds of billions of dollars 

in interest costs. 

Overview and Regulation of the Tax-Exempt Bond Market 

The tax-exempt bonds market currently is a $3.7 trillion market, and consists of over 50,000 

issuers. According to Moody's and Fitch Ratings, the historical default rate in the entire 

municipal sector is substantially below the corporate default rate at less than 1/3 of 1 %. In fact, 

since 1970 over two-thirds of this small percentage of defaults has been related to debt issued 

by special entities for health care and housing projects, and very few from public power systems, 

cities, counties. 

There is a longstanding and comprehensive federal legislative and regulatory system in place to 

regulate the tax-exempt bond market. Federal tax laws significantly limit the purposes for which 

tax-exempt bonds may be issued and the investment of tax-exempt bond proceeds. These 

rules are particularly restrictive for public power systems. For example, in the case of public 

power bond issuances, regardless of the size of the borrowing, no more than $15 million (or 

10% of the total, if less than $15 million) of the proceeds can benefit entities that are determined 

to constitute private use. Furthermore, the IRS "private use rules" effectively prevent issuers 
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from using tax-exempt bonds to build larger facilities than are required to meet the needs of 

their communities or to issue bonds with longer terms than needed. In combination, these rules 

ensure that tax-exempt bonds are used for legitimate governmental purposes. 

The SEC and Municipal Securities Rulemaking Board regulate the manner in which state and 

local governments may sell their bonds and provide rules on the types of disclosure required in 

connection with the sale of municipal bonds, as well as ongoing annual and material event 

disclosure. Both the IRS and SEC have active enforcement programs for state and local bonds 

to help ensure that the applicable rules are satisfied. 

Implications of Elimination or Replacement of State and Local Interest Exclusion 

Some claim that tax-exempt bonds are an inefficient method of reducing the borrowing costs of 

State and local governments and suggest that tax credit bonds or other forms of subsidy are a 

better alternative. These claims ignore the fact that, despite numerous efforts at creating 

workable tax credit bond programs, there is no viable replacement to the $3.7 trillion tax-exempt 

bond market. The tax credit bond programs created in recent years as alternatives to taxexempt bonds have had little acceptance among investors, and the prices that investors have 

been willing to pay have resulted in tax credit bonds having their own inefficiencies. Given the 

lack of SUbstantial investor interest in tax credit bonds, it is simply not credible to expect that 

tens of billions of dollars in tax credit bonds could be issued each year without creating 

inefficiencies that exceed the purported inefficiencies of tax-exempt bonds. 

The most effective alternative to tax-exempt bonds-Build America Bonds-was not a tax credit 

bond. It was a direct cash payment by the federal government to the issuers of these bonds, 

rather than a tax credit to investors. It was, in contrast to the tax credit bond programs, a highly 

successful program. However, its success was largely the result of the program providing a 

level of subsidy that exceeded that provided by tax-exempt bonds. Further, while Build America 

Bonds are an excellent complement to tax-exempt bonds, they are not an alternative since the 

taxable bond market is simply not equipped to deal with the tens of thousands of State and local 

governments of all shapes and sizes that routinely participate in the municipal bond market, with 

the result that many local governments would be shut out of the bond market and forced to pay 

higher interest rates. 
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Implications of Limitation on Deducibility of Tax-Exempt Interest 

President Obama's budget proposal released on February 13, 2012 included a provision that 

would impose tax on interest on municipal bonds owned by certain high-income earners. Late 

last year, the President's Jobs Act and Deficit Reduction Plan included similar provisions to 

offset spending and reduce federal deficits. Similarly, Chairman Baucus in his opening 

statement for this hearing suggested that all investors in tax-exem pt bonds could receive a 

"uniform subsidy," regardless of differing marginal tax rates. 

LPPC has strong concerns with these proposals. It is critical to understand that any tax on 

investors in tax-exempt bonds (or other reduction in investor benefits from tax-exempt bonds) is, 

in reality, a tax on the issuers of those bonds. This is because Investors in municipal bonds will 

demand higher yields to make up for the lost benefit and uncertain tax treatment. Moreover, the 

Administration's proposal would be retroactive to already-issued bonds-an unprecedented and 

unfair effective date for a proposal applicable to municipal bonds. 

LPPC sent your Committee a letter in opposition to this provision in the President's budget, 

which is attached to this testimony for your reference. 

Industry analysts have projected that enactment of the Administration's proposal to cap 

deductibility of municipal bond interest at 28% could increase interest rates .4 to .75%, 

depending on a number of variables. The increase would be primarily caused by the higher 

rates demanded by investors to offset their tax increase and to reflect added uncertainty about 

future tax treatment. Over the last 10 years, public power has averaged approximately $20 

billion in new bond issuances each year, with an average term 20 years. Based on these 

figures, an increase in rates between .4 and .75% would translate into an additional $1.6 - $3 

billion in borrowing costs paid by public power customers over the life of a single years issuance 

of bonds. Since this increase would be perpetually added to annual bond issuances going 

forward as public power continues to invest in infrastructure, the cumulative impact after 10 

years could be $15-$30 billion of additional annual debt service payments. While this impact is 

clearly significant to public power customers, it is important to note that this is only a fraction of 

the overall market and the impact to all other state and local governments would be 

substantially larger. 
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Conclusion 

Chairman Baucus and members of the Committee, thank you again for the time and attention 

you and your staff have dedicated to examining the implications of tax reform on state and local 

tax and fiscal policy. 

As the Finance Committee continues its work on issues related to tax reform, LPPC reiterates 

its firmly held position that proposals that restrict, means-test or eliminate the longstanding 

federal income tax exemption for interest from municipal bonds will increase the cost of 

providing governmental services, with the burden ultimately shouldered by taxpayers in already 

hard-pressed communities throughout the country. 

The tax-exempt bonds market is a $3.7 trillion market with an extremely small default rate that is 

critical to the funding of state and local infrastructure projects. Without it, state and local 

governments will be faced with higher borrowing costs that jeopardize their abilities to meet the 

increasing needs of their populations, potentially resulting in additional federal assistance. 

We urge the Committee to preserve current law treatment of tax exempt financing and to 

consider proposals such as tax credit bonds and subsidized taxable bond mechanisms as 

opportunities to complement, not substitute, its nearly century long place in our federal tax law. 

Attachment LPPC February 13, 2012 letter to Chairman Baucus and Ranking Member Hatch 
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80344.264

February 13th, 2012 

The Honorable Max Baucus 

United States Senate 

511 Hart Senate Office Building 

Washington, D.C. 20515 

ower Co 

300 North Washington Street, Sulte 4D5, Alexandria. VA 22314 

7\J3i7,l-Q·1750 (p.-'"\ooci .. 7U3,,740-17iD (fax) 

lppc@lppcJ)(9(e-mail) 

The Honorable Orrin Hatch 

United States Senate 

104 Hart Senate Office Building 

Washington, D.C. 20515 

Dear Chairman Baucus and Ranking Member Hatch: 

The Large Public Power Council, representing 25 of the largest publicly-owned electric utilities in the 

United States, * would like to express its strong opposition to a provision in the President's FY 2013 

budget proposal that would impose tax on the interest received on municipal bonds owned by certain 

high-income earners. While intended to limit the benefit of the municipal bond interest exemption for 

higher-income taxpayers, the President's proposal actually would be a tax, not on high-income investors, 

but on state and local governments and other municipal entities, including publicly-owned electric 

utilities. This is because investors will continue to invest in municipal bonds, but demand a higher 

interest rate to make up for the new tax. 

The net result of the President's proposal is a substantial increase in interest rates on municipal bonds 

and higher costs for investments in essential infrastructure. As you know, state and local governmental 

entities are not able to issue stock; their only access to the capital markets to finance infrastructure 

projects is through the municipal bond market. Any proposal that places an additional burden on 

investors in that market directly translates into additional financing costs for municipalities. As not-forprofit entities, these additional costs are ultimately passed through its citizens, including publicly-owned 

utility customers. Moreover, this provision would be applied retroactively to already-issued bonds-an 

unprecedented and unfair effective date for issuers of municipal bonds that creates uncertainty and could 

increase borrowing costs long before the legislation is even considered. 

We urge you to reject this proposal resoundingly. As publicly-owned utilities, we, like other municipal 

entities, are struggling to provide affordable and reliable services to our customers in the face of the 

most difficult economy since the Great Depression. Proposals such as the President's will only serve to 

increase the already-heavy economic burden on working families. 

Sincerely, 

Brian H. Moeck 

Chair 

*The Large Public Power Council represents 25 of the largest locally owned and operated not-for-profit electric systems in 

the nation. Members are located in 11 states and Puerto Rico. LPPC member utilities supply electricity to some of the largest 

communities in the country -- including Los Angeles, Seattle. New York, Omaha, Phoenix, Sacramento, jacksonville. San 

Antonio, Orlando and Austin. 
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300 North vVashington Street Suite 405, Alexandria, VA 22314 

cc: 

The Honorable Harry Reid, Majority Leader 

United States Senate 

Tbe Honorable Mitch McConnell, Minority Leader 

United States Senate 

The Honorable John Boehner, Speaker of the House 

United States House of Representatives 

The Honorable Nancy Pelosi, Democratic Minority Leader 

United States House of Representatives 

The Honorable Kent Conrad, Chairman 

Senate Budget Committee 

The Honorable Jeff Sessions, Ranking Member 

Senate Budget Committee 

The Honorable Dave Camp, Chairman 

House Ways and Means Committee 

The Honorable Sander Levin, Ranking Member 

House Ways and Means Committee 

The Honorable Paul Ryan, Chairman 

House Budget Committee 

The Honorable Chris Van Hollen, Ranking Member 

House Budget Committee 

ell 
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I.OI~I) 

The Honorable Max Baucus 

The Honorable Orrin Hatch 

April 23, 2012 

United States Senate Committee on Finance 

Attn. Editorial and Document Section 

Rm. SD-219 

Dirksen Senate Office Bldg. 

Washington, DC 20510-6200 

William O. Austin 

Director of Government Affairs 

LORO Corporation 

111 Lord Drive 

Cary. NC 27511 USA 

+1 9194685979. Ext. 6256 

+1 9192595205 Mobile 

Email: wlll.austin@lord.com 

Re: April 25 Hearing, "Tax Reform: What it Means for State and 

Local Tax and Fiscal Policy" 

Dear Chairman Baucus, Ranking Member Hatch and Members of the 

Committee: 

On behalf of LORD Corporation, I commend you for holding this hearing, and 

respectfully ask you to enact H.R. 1439, the Business Activity Tax Simplification 

Act ("BATSA"). 

LORD Corporation is a diversified technology and manufacturing company with a 

long history of developing breakthrough adhesive, coating and motion 

management technologies that significanlly improve the performance of our 

customers' products. LORD has provided innovative solutions to demanding 

aerospace, defense, automotive and industrial customer problems for more than 

85 years. We provide value to our customers through product design, process 

engineering as well as improved product performance. With world headquarters 

in Cary, NC. LORD has more than 2,800 employees in six U.S. states and 25 

countries, and operates fifteen manufacturing facilities and six R&D centers 

worldwide. In 2011, LORD generated $789 million in revenues. LORD is a 

privately-owned company, and annually invests ten percent of revenues in new 

R&D. 

The longstanding rule governing state taxation provides that state and local 

governments may impose taxes on an out-of-state company only if that company 

or its representative has a physical presence in the taxing state. In fact, although 

the U.S. Supreme Court has not ruled directly on the issue of the appropriate 
296 


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nexus standard for state assessment of corporate income taxes, it has never 

upheld any kind of state tax on an out-of-state company unless that company 

had a physical presence in the taxing state. 

This traditional physical presence nexus rule recognizes a practical compromise 

between state authority to tax and the need to protect an open, accessible and 

unfettered national market. Thus, the rule fosters the fundamental purposes of 

the Commerce Clause, preventing undue burdens on the free flow of interstate 

commerce and limiting the risk that the same income will be taxed multiple times. 

More recently, some state and local governments have aggressively sought to 

increase their tax revenues by asserting the power to tax the corporate income of 

out-of-state businesses that have no physical presence in the taxing state based 

on the taxpayer's "economic nexus" to the taxing jurisdiction. These states have 

adopted a variety of ill-defined alternative nexus standards through judicial, 

legislative and administrative action. Economic nexus theories eliminate virtually 

any limit on the states' authority to impose extraterritorial taxation. Thus, such 

theories conflict with Supreme Court interpretations of the states' taxing authority 

under the Commerce Clause and subject interstate commerce to severe 

burdens. 

Because out-of-state businesses provide an attractive target for state legislatures 

seeking to raise additional revenue, the economic nexus standard is spreading to 

other states. Political processes within the taxing state do not easily restrain the 

taxation of non-residents, and a state has every incentive to export its tax burden 

and interpret its laws aggressively to reach as many out-of-state taxpayers as 

possible. 

The U.S. Supreme Court has refused to review several cases that challenged the 

constitutionality of economic nexus. Congress must help businesses, such as 

ours, that are suffering as a result. 

The solution is enactment of BATSA. The bill, which has bipartisan support, was 

reported out of the House Judiciary Committee last year. BATSA would set a 

uniform standard for state assessment of business activity taxes. Pursuant to the 

bill, states would only be able to impose such taxes on companies that have 

employees in the state or that own or lease property there for more than fourteen 

days in a taxable year. 

Enactment of BATSA would ensure that companies are taxed fairly and treated 

uniformly. It would create a clear standard that provides businesses and states 

with adequate understanding of when and where companies will be subject to 

tax. As a result, the bill would encourage investment and job creation by freeing 

up profits otherwise wasted by unnecessary tax litigation and preparation. 

Additionally, enactment of BATSA would reduce lawsuits and guesswork about 
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when a company's income is taxed by the states, and free companies to conduct 

long-term strategic planning without fear of unexpected taxation. 

LORD Corporation, and all other companies that operate across state lines, not 

only would benefit from the provisions of BATSA, we need Congress to enact the 

bill to ensure greater investment in U.S. business growth and jobs. I thank you 

for the opportunity to present this testimony. 

William O. Austin 

Director of Government Affairs 
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Frank G. Julian 

Vice President 

Tax Counsel 

The Honorable Max Baucus 

United States Senate 

Washington, DC 20510 

*mocys 

May 7, 2012 

The Honorable Orrin Hatch 

United States Senate 

Washington, DC 20510 

Re: Hearing on Tax Reform 

Dear Chairman Baucus and Ranking Member Hatch: 

On behalf of Macy's, Inc., I would like to thank you for holding the April 25, 2012, Hearing on 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy. We were particularly 

pleased that one of the primary issues discussed at the hearing was remote sales tax collection, as 

embodied in S. 1832 (the Marketplace Fairness Act). 

Macy's has long supported Federal legislation that grants the states remote sales tax collection 

authority in a manner that provides simplification and uniformity in the tax collection process. 

We think it is important that Congress exercise its Commerce Clause powers to establish the 

parameters under which states are granted remote tax collection authority, and we think the April 

25,2012, Finance Committee hearing was an important step in achieving this goal. 

Macy's, Inc., with corporate offices in Cincinnati and New York, is one of the nation's premier 

retailers, with fiscal 2011 sales of $26.4 billion. The company operates about 840 department 

stores in 45 states, the District of Colwnbia, Guam and Puerto Rico under the names of Macy's 

and Bloomingdale's, as well as the macys.com and bloomingdales.com websites. The company 

also operates seven Bloomingdale's Outlet stores. 

Again, thank you for holding the hearing, and we look forward to working with you and your 

colleagues on this important matter. 

Very truly YQ.urS;· 

~/l 

, .... A~ _____ 

7 West Seventh Street, Cincinnati, OH 45202 

PHONE 513.579.7337 frank.julian@macys.com 
299 


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~ ~ 

MOTION PICTURE AsSOCIATION 

Honorable Max Baucus 

Honorable Orrin Hatch 

United States Senate 

Committee on Finance 

Attn: Editorial and Document Section 

219 Dirksen Senate Office Building 

Washington, D.C. 20510-6200 

011' AMERICA. INC. 

1600 EVE STRSE'l; NoRTHWBST 

WABHIl'fO'l"ON_ D.C. 20006 

(202) 298-1966 

May 9, 2012 

Re: Hearing on Tax Reform: What it means for State and Local Tax and Fiscal Policy 

OeaI Chairman Baucus and Ranking Membex Hatch and Committee Membexs: 

On behalf of the Motion Picture Association of America ("MP AA'') I I thank you for the 

opportunity to submit this statement for the record for the April 25, 2012 heaIing on Tax Reform: What 

it means for State and Local Tax and Fiscal Policy. 

I. Introduction 

From among the vBIious Federal bills introduced in the current Congress that deal with state 

taxes, the MP AA has a pBIticulaI interest in business activity tax nexus and thus specifically in H.R. 

1439 (the Business Activity Tax Simplification Act or BA TSA). H.R. 1439 was introduced in the House 

on April 8, 2011, and favorably reported to the full House by the House Judiciary Committee last 

summer. The MPAA strongly supports H.R. 1439 and respectfully urges Congress to enact the bill into 

law this YeaI. The MP AA believes that a bright-line physical presence standaId as provided in H.R. 

1439 is the appropriate jurisdictional standaId for state business activity tax purposes. In recent years, an 

increasing number of states have as$eTted that any economic presence in a state is sufficient to subject 

that out-of-state business to the state's direct business tax. Due to the lack of c1eaI judicial guidance on 

this issue, states are taking varying, inconsistent and often aggressive positions with respect to the 

pBIticulaI activities that may cause an out-of-state business to become subject to tax. This has created an 

environment of uncertainty and unpredictability for multistate businesses, especially businesses in the 

film, television and media-related industries when such businesses have no physical presence in the 

state. 

This issue is ofpBIticulaI concern to the MPAA because of the aggressive actions taken by states 

in recent YeaIS against film companies, and related entities, such as broadcasters. For example, states 

1 MPAA members companies include Paramount Pictures; Sony Pictures Entertainment Inc.; The Twentieth Century Fox 

Film Corporation; Universal City Studios LLLP; Wait Disney Studios Motion Pictures; Warner Bros. Entertainment Inc; and 

associate member CBS Corporation. 
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have asserted business activity taxes against film and broadcasting companies claiming "economic 

nexus" on the following: 

• Asserting that an out-of-state broadcaster should be subject to business activity tax in a 

state solely because the company's broadcast signals are viewed by residents in the state; 

• Asserting that the digital transmission of movies to in-state customers creates nexus for 

an out-of-state film company for business activity tax purposes; and 

• Asserting that an out-of-state film company should be subject to business activity tax if 

the company licenses brands, names, characters or other trademarks to unrelated third 

parties, who subsequently manufacture and sell merchandise bearing the licensed 

trademark into the state. 

These examples are illustrative and only represent a few of the many state tax jurisdictional 

issues currently faced by the film and broadcast industry due to inappropriate state actions. 

II. H.R. 1439 Provides the Appropriate Solntion 

Detailed below are some of the more aggressive positions taken by states that are aimed at taxing 

out-of-state film companies and broadcasters and the arguments advanced by states to support these 

positions. The MP AA believes that a physical presence nexus standard is the more appropriate 

jurisdictional standard for state business activity tax purposes. The provisions to modernize Public Law 

86-272 contained in H.R. 1439, including the physical presence nexus standard provisions, are both fair 

and necessary because they are consistent with notions of where income is earned, ensure that 

businesses are only paying tax to those states that have provided the businesses with meaningful 

benefits, and represent the application of existing federal law to modem day business transactions. 

Broadcast Programming. Some states have asserted that out-of-state national broadcasters 

should be subject to business activity taxes solely because these companies' broadcast signals are 

received by in-state viewers or listeners. States have tried to justify the taxation of these out-of-state 

broadcasters on the basis that the out-of-state broadcasters are exploiting the in-state market because the 

programming is seen and/or heard by individuals in the state. However, this rationale fails to recognize 

the basic business model employed by most national broadcasters. Specifically, broadcasters do not 

generate revenue from viewers or listeners. Rather, broadcasters receive revenue from advertisers that 

purchase air time and, in the case of cable programmers, from cable operators that carry the 

programming. The advertisers and cable operators are essentially the "customers" of the out-of-state 

broadcaster, not the in-state viewers or listeners who are the customers or potential customers of the 

advertisers and the cable operators. Thus, broadcasters are not "exploiting" the local market when 

programming is aired for individual viewers or listeners in a state. Further, broadcasters should only pay 

tax where they earn income, and, as discussed in more detail below, income is only earned where a 

business is physically located. 

Remarkably, the states' position is inconsistent with the U.S. federal income tax treatment of 

foreign broadcasters. In fact, the issue of whether the United States may impose federal income tax on a 

foreign broadcaster that has no physicai presence in this country has been litigated, and federal courts 
301 


80344.272

have held that the United States cannot impose such a tax. 2 This holding is reioforced by the 

"permanent establishment" standard that the United States, along with most other countries, has adopted 

in its bilateral tax treaties. The permanent establishment standard requires taxpayers to have a fixed 

place of business (i.e., a physical presence) through which the business of the enterprise is wholly or 

partly carried on in order for a foreign country to impose an income tax on the business's profits. If 

states continue to assert positions that contradict these well-established longstanding federal tax 

principles, it could be potentially disastrous for America's interstate and international economy. On the 

other hand, the physical presence standard in H.R 1439 is consistent with the standard used for the U.S. 

federal income tax treatment of foreign broadcasters, and would only tax out-of-state broadcasters that 

have a physical presence in the state. 

Use of Trademmlcs in State by Unrelated Third Parties. Several states have attempted to assert 

taxing jurisdiction over out-of-state film companies that license brands, names, characters or other 

trademarks to unrelated third parties who then manufacture and sell merchandise for their own account 

bearing the licensed trademarks, for instance, within the state. A recent survey of state tax departments 

revealed that more than 30 states take the position that the licensing of trademarks to either an affiliated 

or unrelated entities with a location in the state would create nexus for the licensor for corporation 

income tax porposes. 3 These states are overreaching and attempting to tax income that is earned outside 

of the states' borders. 

Film companies do not earn their income in the states where merchandise bearing their 

trademarks is sold by third parties; rather, they earn their income where they actually engage in business 

activities (i.e., where they have property and employees). The physical presence nexus standard 

contained in H.R. 1439 would ensure that income is only taxed in those states where the income is 

earned. 

Digital Transmission of Movies. Some states have asserted that out-of-state film companies 

should be subject to business activity tax if the out-of-state company sells digital films to in-state 

customers who download the films over the Internet. States assert that they are entitled to tax these outof-state sellers because the state has provided an in-state market for digital product. However, state 

governments maintain a "viable marketplace" for the benefit of their constituents, the in-state customers, 

and not for the benefit of out-of-state sellers. Further, the imposition of a business activity tax on an outof-state seller simply cannot be justified on the basis that the government has provided some nebulous 

and incidental benefit. Rather, the benefits and protections provided by a taxing jurisdiction must be 

meaningful to warrant the imposition of a business activity tax. Businesses only receive these 

meaningful benefits and protections (e.g., education, roads, police and fire protection, water and sewers) 

in the jurisdictions where they are actually located due to the presence of a labor force or property. 

Further, as previously discussed, businesses should also only pay tax to those states where income is 

earned, and income is simply not earned where a business's customers are located. Thus, businesses 

should only pay tax to those jurisdictions where they are physically present. H.R. 1439 would promote 

, See Commwioner o[ Internal Revenue v. Pie4ras Negras B. Co., 127 F. 2d 260 (51b Cir. 1942). 

'Special Report: 2008 Survey o[Slate Tax Departments, 15 Multistate Tax Rep't 4 at 8-28 (April 25, 2008). 
302 


80344.273

fuimess by ensuring that businesses are only taxed by those jurisdictions that have provided meaningful 

benefits and protections and in those jurisdictions where income was earned. 

In the context of digital downloads, we should also point out some of the peculiar results that can 

arise if Public Law 86-272 is not modernized for today's economy and modern technologies. For 

example, if an out-of-state film company conducts in-state solicitation activities aimed to promote the 

sale of DVDs (i.e., tangible personal property), the orders for which are accepted and shipped or 

delivered from outside the state, this in-state solicitation would be protected under current law by Public 

Law 86-272. On the other hand, if an out-of-state film company were to conduct the same in-state 

solicitation activities to promote digital downloads (i.e., intangible property) for the very same film, 

these solicitation activities would not be protected by Public Law 86-272. This example clearly 

demonstrates why the provisions of Public Law 86-272 must be modernized, as provided in H.R. 1439, 

to protect the solicitation of orders for services and intangible property. As our economy continues to 

shift towards intangibles and services, it is important that these sectors of the economy be afforded the 

important protections of Public Law 86-272. 

Finally, unlike prior versions ofH.R. 1439, the bill now includes a provision intended to prevent 

states from circumventing the intent of the legislation. Under that provision, states that require or permit 

a group of related or affiliated corporations to use a combined reporting tax return methodology to 

compute the tax liability of corporations within the combined group that are subject to a state's taxing 

jurisdiction under the tax nexus standards of H.R. 1439 may not indirectly impose tax on the group 

members that are not themselves subject to tax in that state under such tax nexus standards. Thus, H.R. 

1439 prohibits a state from taxing a corporation that is not otherwise subject to tax in the state by using 

the end-around run frequently referred to as the Finnigan method of combined reporting. The MP AA 

supports this critical element ofH.R. 1439. 

m. Conclusion 

The MP AA believes that it is necessary for Congress to provide clear guidance to the states in 

the area of state tax jurisdiction and put a stop to the aggressive actions being taken by the states. In the 

absence of Congressional action, these state actions will likely have a' chilling effect on interstate 

commerce. H.R. 1439 would provide a much needed bright-line physical presence standard that is both 

fair and reasonable, and would modernize Public Law 86-272 to account for the current state of our 

economy. As states continue to attempt to maximize revenues, they will likely become even more 

aggressive in their attempts to tax out-<>f-state businesses making the need for Congressional action all 

the more urgent. Therefore, the MP AA strongly urges your Committee to include the provisions of H.R. 

1439 in any package of legislation affecting state taxes that your Committee considers and approves. 

:;;;~:,£.-- Michael P. O'Leary 

Senior Executive Vice President Globarpolicy & External Affairs 

Motion Picture Association of America, Inc. 
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M ULTISTATE TAX COMMISSION 

Statement on the Topic of 

Tax Reform: What it means for State and Local Government Tax 

and Fiscal Policy 

Committee on Finance 

United States Senate 

Hearing of April 25, 2012 

For additional infonnation, contact: 

Joe Huddleston 

Executive Director 

Multistate Tax Commission 

444 North Capitol St., N.W., Suite 425 

Washington, DC 20001 

202-624-8699 
304 


80344.275

Introduction 

The Multistate Tax Commission presents its views for inclusion in the hearing record 

with respect to the Committee on Finance's hearing on Tax Reform: What it means for State and 

Local Government Tax and Fiscal Policy, held on April 25, 2012. 

The Commission is an intergovernmental state tax agency created in 1967 by interstate 

compact as an effort to protect state tax authority and a means to administer, equitably and 

efficiently, tax laws that apply to multi state and multinational enterprises. Forty-seven states and 

the District of Columbia participate in the Commission, and twenty of these jurisdictions have 

enacted the Multistate Tax Compact into their statutes. The Commission's focus on the 

preservation of state sovereignty usually means the Commission writes in opposition to federal 

legislation that encroaches on states' tax authority as established in our system of federalism. 

But we always seek to help Congress maintain the careful balance implicated by states' 

sovereignty and Congress's constitutional and federal responsibilities in a way that benefits 

taxpayers and government at all levels. 

Historically, there has been no more contentious issue among states and taxpayers than 

the issue of nexus: When does a taxpayer that is doing business in a state become subject to that 

state's tax laws? The proponents of a physical presence nexus standard for state income taxation 

attract people to their cause with talk of minor activities in states resulting in onerous corporate 

tax liabilities, but then actually promote a measure, H.R. 1439, the Business Activity Tax 

Simplification Act of 2011 (BATSA) that allows large, multi state businesses with millions of 

dollars of sales in a state to avoid paying the corporate taxes that are being paid by small, in-state 

businesses. A congressionally-imposed business activity tax nexus threshold as set forth in H.R. 

1439 would foster inequity between big and small businesses, and thus create an unbalanced 

market environment where giant multistate and multinational corporations could compete, 

without paying taxes, with local businesses. And it is predicated on the myth that "the historical 

[nexus) standard is that states may tax those physically present in the jurisdiction.,,1 As applied 

to the income tax, such a standard is not supported by applicable Supreme Court jurisprudence 

and is unsound as a matter of tax policy. 

Businesses Can Conduct Extensive Activity in a State without a Physical Presence 

A business entity does not have a "physical presence" of its own. A business entity-be 

it a corporation, a partnership, an LLC or other pass-through entity-is a legal instrument, 

created entirely by state law. As such, a business has no "physical presence" anywhere, even at 

its principal place of business. The Supreme Court explained that "the terms 'present' or 

'presence ' [when used with reference to a corporation) are used merely to symbolize those 

activities of the [corporation) within the state." Int'l Shoe Co. v. Washington, 326 US 310, 316 

1 Joseph Henchman, "The Proper Role of Congress in State taxation: Preventing Harm to the National Economy," 

Presented at the Hearing on "Tax Reform: What it Means for State and Local Fiscal Policy," Before the Committee 

on Finance, U.S. Senate, April 25, 2012, p. 5. 
305 


80344.276

(1945). Those activities can be symbolized through people that the business employs (either 

employees, contractors or other representatives), property that the business owns or leases, or 

other any other physical fonn by which the business carries out an activity. But a business, 

particularly in the Internet Age, can engage in the same market activities remotely, with little or 

no physical symbol in the market state. In the modem economy, predicating income tax nexus on 

a symbolic "physical presence" is not a helpful concept. Instead, grounding nexus on whether a 

business is purposefully engaged in market-enhancing activities in the taxing state, with or 

without a symbolic physical manifestation of those activities, accurately reflects both the purpose 

and nature of the activities in which the modem business routinely engages. 

The U.S. Supreme Court Has Not Required a Physical Presence 

Standard for State Income Taxation 

Under its Due Process Clause jurisprudence, the Supreme Court recognized that a state 

may tax a business on the value of, or income earned from, intangibles with a business situs in a 

state, even if the business does not have a physical presence in that state? The Court has said 

that, in regards to state taxation of intangibles or the income derived from intangibles, the 

presence of real or tangible personal property in the state is of no constitutional significance: 

Nor are we able to perceive any sound reason for holding that the 

owner must have real estate or tangible property within the state in 

order to subject its intangible property within the state to taxation. 

Virginia v. Imperial Coal Sales Co., 293 U.S. 15, 20 (1934), quoted in Wheeling Steel 

Corp. v. Fox, 298 U.S. 193,213 (1936). 

While the Supreme Court has not directly addressed the issue of what is the applicable 

Commerce Clause income tax nexus standard, it twice noted in the Quill case that it has never 

imposed a physical presence requirement for any tax other than for use tax collection. Quill 

Corporation v. North Dakota, 504 U.S. 298 at 314, 317 (1992). Indeed, Congress enacted 

P. L. 86-272 in 1959 precisely out of concerns that the Court was likely to find solicitation 

activities alone are sufficient to create nexus. But Congress did not enact a general statute 

requiring all businesses to have physical presence before a state could impose its income tax. 

Rather, Congress created a limited-and temporary-safe harbor from nexus for sellers of 

tangible personal property whose only activity in the taxing state is solicitation of orders. 

2 Wheeling Steel Corp. v. Fox, 298 U.S. 193 (1936) (finding West Virginia ad valorem property tax on accounts 

receivable and bank deposits of Delaware corporation did not violate Due Process Clause as West Virginia was the 

business situs of the intangibles); New York ex reI. Whitney v. Graves, 299 U.S. 366 (1937) (upholding the New 

York tax on income derived from sale by non-resident of membership in New York Stock Exchange as New York 

was the business situs of the license); First Bank Stock Corp. v. Minnesota, 301 U.S. 234 (1937) (Delaware 

corporation properly subject to Minnesota ad valorem property tax on value of stock in banks chartered in Montana 

and North Dakota as Minnesota was the business situs of the stock); Int'l Harvester Co. v. Wisc. Dep't of Taxation, 

322 U.S. 435 (1944) (Wisconsin Privilege Dividend Tax properly applied to dividends received by non-resident 

shi'lreholrler declared and naid out~ide of state bv foreiQ:n cornoration doin!? business in Wisconsin). 
306 


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Activities by sellers of tangible personal property that are unrelated to solicitation are not 

protected. Nor are businesses that provide services or deal in intangibles. 

Thus, the historical record is clear. The Supreme Court has long held that a business 

need not have physical presence to be subject to state income tax and Congress, with limited 

exceptions, has not seen fit to disturb that rule. 

States Have Adopted an Economic Presence Standard, 

Rather than a Physical Presence Standard, for Income Taxation 

The proponents of BA TSA also assert that without a federally imposed physical presence 

standard, states will adopt divergent nexus standards throughout the country, with resultant 

taxpayer confusion and undue administrative burdens for business. In fact, the overwhelming 

trend in state taxation-legislatively, administratively, and judicially-is towards adoption of an 

economic presence nexus standard for income tax. Courts have been virtually unanimous in 

fmding that a physical presence is not required for states to impose corporate income tax. 3 

Supported by this well-established legal authority, states have concluded that in today's modern 

economy, a physical presence is no longer a credible indicator of the degree of economic activity 

in a state, and only three states require it.4 H.R. 1439 would reverse the rule of law in all but 

those three states. 

The Commission agrees that a uniform nexus threshold would reduce compliance 

burdens, for the states as well as taxpayers. That uniform nexus threshold should be adopted by 

the states, however, and should apply to economic presence, not physical presence. The 

Commission advocates the state adoption of a factor presence nexus threshold. The factor 

presence standard simply takes into consideration a corporation's property, payroll, and sales in a 

state to determine if a business has a tax obligation there. Moreover, it uses de minimis 

'KFC v. Iowa Dep't. of Revenue, 792 N.W. 2d 308 (lowa 2010), cert. denied, 132 S. Ct. 97 (2011) ; Geoffrey, Inc. 

v. Comm'r of Revenue, 899 N.E. 2d 87 (2009.), cerl. denied, 129 S.Ct. 2853 (2009); Lanco, Inc. v. Dir., Div. of 

Taxation, 879 A.2d 1234 (App. Div. 2005), affd 188 N.J. 380 (2006), cert. denied, 127 S. Ct. 2974 (2007) ; 

Geoffrey, Inc. v. South Carolina Tax Comm'n, 437 S.E.2d 13 (1993), cert. denied, 114 S. ct. 550 (1993); A&F 

Trademark, Inc. v. Tolson, 605 S.E. 2d 187 (2004), cert. denied, 126 S.C!. 353 (2005); Tax Comm'r of State v. 

MBNA Am. Bank, N.A. 640 S.E. 2d 226 (2006), cert. denied, 127 S. C!. 2997 (2007); FIA Card Services, N.A. v. 

Tax Comm'r of W. Virginia, 127 S. Ct 2997 (2007); Capital One Bank & Capital One F.S.B. v. Comm'r of 

Revenue, 899 N.E.2d 76 (2009), cert. denied, 129 S. Ct. 2827 (2009); Comptroller of the Treasury v. SYL, Inc., 

825 A. 2d 399 (2003), cert. denied 124 S. Ct. 478 (2003); Sec'y, Dep't. of Revenue, State of La. v. GAP (Apparel), 

Inc., 886 So. 2d 459 (LA Ct. App. 2004); Bridges v. Geoffrey, Inc., 984 So. 2d 115 (LA Ct. App. 2008), writ denied 

sub nom. 978 So. 2d 370; Geoffrey, Inc. v. Oklahoma Tax Comm'n, 132 P. 3d 632 (2005). But see In the Matter of 

the Income Tax Protest of Scioto Insurance Co., Supreme Court of Oklahoma Case Number 108943 (May 1,2012) 

(no due process nexus with second-tier intellectual property holding company whose only contact with state was 

receipt of royalty payments from an Oklahoma taxpayer - the first-tier royalty recipient - under a contract not made 

in Oklahoma) and J.C. Penney Na!,1 Bank v. Johnson, 19 S.W. 3d 831 (Tenn. Ct. App. 1999) (court applies physical 

presence nexus rule without deciding whether Commerce Clause compelled such a standard). 

4 CCH ~ 10-075 (May, 2012) 
307 


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thresholds that would protect small businesses operating below a defined level. Nine states have 

adopted these types of de minimis thresholds in the last four years.s A factor presence standard 

provides the certainty that H.R. 1439 is supposedly striving for in a way that is consistent with 

modem business practices and that does not overturn well-established legal precedent, harm state 

revenues, or violate principles of federalism. A copy of the Commission's Factor Presence 

Nexus Standard is attached as an Exhibit. 

The Tax Foundation claims that basing nexus standards on a concept of physical 

presence represents good tax policy: 

Generally, the historical standard is that states may tax those 

physically present in the jurisdiction, and may not tax those not 

physically present. This is premised on a view known as the 

'benefit principle:' that taxes you pay should roughly approximate 

the services you consume. State spending overwhelmingly, if not 

completely, is meant to benefit the people who live and work in the 

jurisdiction. Education, health care, roads, police protection, 

broadband access, etc.: the primary beneficiaries are state 

residents. The 'benefit principle' thus means that residents should 

be paying taxes where they work and live, and jurisdictions should 

not tax those who don't work or live there. A physical presence 

standard for state taxation would be in line with this fundamental 

view oftaxation.6 

In this statement, Tax Foundation equates benefits received from public expenditures to 

physical presence. This argument is as fallacious today as it was in the days of sailing ships and 

caravans. The major benefits received by those engaging in inter-jurisdictional commerce are the 

protections offered by the courts and public safety personnel. Courts offer a peaceful and legal 

means of resolving disputes between the parties in commercial transactions and public safety 

personnel protect the lives of those transporting goods across boundaries as well as protecting the 

property being transported. It is also widely recognized that state and local government 

expenditures for health and education provide benefits that transcend their boundaries. State and 

local government expenditures for these services result in a more productive workforce which 

benefits the entire society, not just those who are the direct recipients of those expenditures. 

The benefit principle does not necessarily apply to state corporate income taxes. Public 

finance expert Peggy Musgrave classified the corporate income tax as an entitlement tax in that 

the jurisdictions in which the income is earned are entitled to tax a share of the corporate profits.7 

5 Id 

6 Henchman, op.cit, p. 5. 

7 Peggy B. Musgrave, "Principles in Dividing the State Corporate Tax Base." In The State Corporation Income Tax: 

Issues in Worldwide Unitary Combination, edited by Charles McLure, Jr. 228-45. Stanford, VA: Hoover Institution 

Press, 1984 
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Another noted public finance expert, Charles McLure,S explains that neither the federal nor the 

state corporate income tax reflects the benefits to, or the costs of, the public services provided to 

corporations: 

Benefits are provided to non-corporate entities 

Benefits are provided to unprofitable entities 

Benefits are not related to profitability. 

Furthermore, of all of Adam Smith's canons of taxation, the benefit principle of taxation 

is not the only or even the most important principle. In the estimation of many economists, other 

principles usually rank higher than the benefit principle. These are: neutrality, ability to pay, 

and administrative costs to tax authorities and taxpayers. Therefore, when all principles of 

taxation are considered, it would be a rarity that the benefits received from public expenditures, 

assuming they could be accurately measured, would approximate the taxes paid. 

"Nexus Uncertainty" not the Ominous Specter it's Made Out to be 

Proponents of a physical presence nexus standard raise the specter of "nexus uncertainty" 

because there are more than 9,600 jurisdictions with sales taxes.9 Citing the large number of 

jurisdictions imposing sales taxes is meant to give the impression that no business can possibly 

comply with the myriad definitions, rules, tax rates, tax bases, boundaries and boundary changes, 

etc. The focus of these comments on recent developments in the state sales tax appears to be a 

critique of the Streamlined Sales Tax Project (SSTP). But, regardless of the current state of the 

SSTP, Quill's establishment of a physical presence nexus standard for use tax collection remains 

the law of the land. It is therefore difficult to understand the relevance of these arguments. They 

appear to be arguing that there is a danger that Congress would enact the Main Street Fairness 

Act even if the SSTP failed to achieve its goal of simplifYing use tax collection for remote 

sellers. Given that simplification is precisely the quid pro quo for the Main Street Fairness Act 

to take effect, it is highly unlikely that Congress would enact the statute in the absence of such 

simplification. Whatever relevance the number of state and local sales tax jurisdictions in the 

United States prior to 1992, Quill addressed those concerns. 

In addition, the fact that there are a large number of local jurisdictions that currently 

impose, or have the option to impose sales taxes does not necessarily mean undue complexity. 

First, only a small number of business firms, if any, are subject to the laws of all 9,600-plus 

jurisdictions, and often those firms that are large enough to operate just about everywhere often 

eam a profit from collecting and remitting sales taxes. In addition, there are 12 states that have 

neither locally imposed sales taxes nor local option sales taxes (Connecticut, District of 

Columbia, Hawaii, Indiana, Kentucky, Maine, Massachusetts, Michigan, Mississippi, New 

, Charles McLure, "Implementing State Corporate Income Taxes in the Digital Age," National Tax Journal, LIII, 

No.4, Part 3, December 2000, pp. 1288-1289. 

, Henchman, op.cit, p. 8 
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Jersey, Rhode Island, and West Virginia). Moreover, in only 6 states (Alabama, Alaska, Arizona, 

Colorado, Idaho, and Louisiana) do local tax bases differ from the state tax base and from each 

other; and, each locality with a sales tax administers their own tax. It is in these states that 

complexity can become a significant burden, especially for small businesses. One of Tax 

Foundation's proposed solutions for the non-uniformity of state sales taxes is the discredited idea 

of origin-based taxation. The example provided is a multistate retailer-Amazon would collect 

Washington state sales taxes on all sales under the assumption that base state collection is a 

benefit tax because Amazon's Washington based employees benefit from Washington schools, 

roads, police and fire protection, etc. It is difficult to believe that there would be widespread 

public support for the idea that residents of states other than Washington should pay Washington 

sales taxes because the Washington base employees of Amazon enjoy the benefits of 

Washington public services. 

BATSA, the Largest Unfunded Mandate Yet 

Proponents of a physical presence nexus standard are urging Congress to pass uniform 

nexus laws on the states which, in the case of business activity taxes, imposes one of the largest 

unfunded mandates since the Congressional Budget Office has been tasked with measuring these 

costs. CBO estimates that the costs-in the form of forgone revenues--to state and local 

governments would be about $2 billion in the first full year after enactment and at least that 

amount in subsequent years.1O An earlier study by the National Governors' Association 

concluded that imposing physical presence nexus standards for all business activity taxes would 

result in revenue losses of approximately $6.6 billion in fiscal year 2007; and rising thereafter. I I 

On the other hand, claims regarding the economic benefits of this proposed Congressional action 

remain unsubstantiated. 

A Physical Presence Standard is an "Anti-Jobs" Standard 

A physical presence standard would create a disincentive for business to locate jobs or 

investment in the states. This is because, under the bill, businesses could avoid paying state 

taxes if they avoid creating physical presence-such as employees, an office, or a production or 

distribution facility-in a state. Passage of H.R. 1436 would amount to telling multistate and 

multinational businesses that they may continue to profit from your state's consumer market in 

competition with local businesses, but no longer have to pay your state taxes, as long as they 

make sure they do not create jobs or locate facilities in your state. Proponents of a physical 

presence standard say it would "encourage business growth and job creation" -maybe, but not 

in the United States. 

10 Congressional Budget Office Cost Estimate of H.R. 1439, Business Activity Tax Simplification Act of 2011, 

September 13,2011. 

II National Governors Association, "Impact of H.R. 1956, Business Activity Tax Simplification Act of 2005, on 

States," State Tax Notes, Tax Analysts, Inc. Falls Church, Virginia, November 7, 2005, p.560. 
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Conclusion 

In today's economic environment, an act which discourages job creation in the states, and 

so clearly benefits large multistate corporations over our struggling small local businesses, 

should not be considered. There is no need for federal preemption of this critical state issue. 

Therefore, we are asking Congress to refrain from passing legislation that would unduly interfere 

with the states' ability to raise sufficient revenue to finance their necessary public services. 

Thank you for the opportunity to present our views on the important implications of tax 

reform for state and local government tax and fiscal policy. 
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Factor Presence Nexus Standard 

for Business Activity Taxes 

Approved by the Multistate Tax Commission 

October 17, 2002 

The Commisison adopted the following unifonnity proposal as part of an amendment 

to MTC Policy Statement 02-02, Ensuring the Equity, Integrity and Viability o/State 

Income Tax Systems, approved on October 17,2002. A working group of states 

fonnulated the proposal over several months through public teleconferences and the 

Commission held four public hearings covering the technical, policy and constitutional 

aspects of the proposed provision. This factor presence nexus standard is intended to 

represent a simple, certain and equitable standard for the collection of state business 

activity taxes. Professor Charles McLure, Senior Fellow with the Hoover Institution at 

Stanford University, originated the idea of factor presence nexus and set forth an 

explanation of the concept in his December 2000 National Tax Journal article entitled, 

"Implementing State Corporate Income Taxes in the Digital Age." Professor McLure 

reiterated his concept during the Commission's July 2001 Federalism at Risk seminar. 

A. (1) Individuals who are residents or domiciliaries of this State and business entities 

that are organized or commercially domiciled in this State have substantial nexus with 

this State. 

(2) Nonresident individuals and business entities organized outside the State that are 

doing business in this State have substantial nexus and are subject to [list 

appropriate business activity taxes for the state, with statutory citations] when in 

any tax period the property, payroll or sales of the individual or business in the 

State, as they are defined below in Subsection C, exceeds the thresholds set forth 

in Subsection B. 

B. (1) Substantial nexus is established if any of the following thresholds is exceeded 

during the tax period: 

(a) a dollar amount of$50,000 of property; or 

(b) a dollar amount of $50,000 of payroll; or 

(c) a dollar amount of $500,000 of sales; or 

(d) twenty-five percent of total property, total payroll or total sales. 

(2) At the end of each year, the [tax administrator] shall review the cumulative 

percentage change in the consumer price index. The [tax administrator] shall adjust 

the thresholds set forth in paragraph (1) ifthe consumer price index has changed by 

Updated September 2003 
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Multistate Tax Commission 

5% or more since January 1,2003, or since the date that the thresholds were last 

adjusted under this subsection. The thresholds shall be adjusted to reflect that 

cumulative percentage change in the consumer price index. The adjusted thresholds 

shall be rounded to the nearest $1,000. As used in this subsection, "consumer price 

index" means the Consumer Price Index for All Urban Consumers (CPI-U) available 

from the Bureau of Labor Statistics of the United States Department of Labor. Any 

adjustment shall apply to tax periods that begin after the adjustment is made. 

C. Property, payroll and sales are defined as follows: 

(I) Property counting toward the threshold is the average value of the taxpayer's real 

property and tangible personal property owned or rented and used in this State during 

the tax period. Property owned by the taxpayer is valued at its original cost basis. 

Property rented by the taxpayer is valued at eight times the net annual rental rate. Net 

annual rental rate is the annual rental rate paid by the taxpayer less any annual rental 

rate received by the taxpayer from sub-rentals. The average value of property shall be 

determined by averaging the values at the beginning and ending of the tax period; but 

the tax administrator may require the averaging of monthly values during the tax 

period if reasonably required to reflect properly the average value of the taxpayer's 

property. 

(2) Payroll counting toward the threshold is the total amount paid by the taxpayer for 

compensation in this State during the tax period. Compensation means wages, 

salaries, commissions and any other form of remuneration paid to employees and 

defined as gross income under Internal Revenue Code § 61. Compensation is paid in 

this State if (a) the individual's service is performed entirely within the State; (b) the 

individual's service is performed both within and without the State, but the service 

performed without the State is incidental to the individual's service within the State; 

or (c) some of the service is performed in the State and (I) the base of operations or, 

if there is no base of operations, the place from which the service is directed or 

controlled is in the State, or (2) the base of operations or the place from which the 

service is directed or controlled is not in any State in which some part of the service is 

performed, but the individual's residence is in this State. 

(3) Sales counting toward the threshold include the total dollar value of the taxpayer's 

gross receipts, including receipts from entities that are part of a commonly owned 

enterprise as defined in D(l) of which the taxpayer is a member, from 

(a) the sale, lease or license of real property located in this State; 

(b) the lease or license of tangible personal property located in this State; 

(c) the sale of tangible personal property received in this State as indicated by 

receipt at a business location of the seller in this State or by instructions, 

known to the seller, for delivery or shipment to a purchaser (or to another at 

the direction of the purchaser) in this State; and 

Regulations, Statutes, and Guidelines 
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Factor Presence Nexus 

(d) The sale, lease or license of services, intangibles, and digital products for 

primary use by a purchaser known to the seller to be in this State. If the seller 

knows that a service, intangible, or digital product will be used in multiple 

States because of separate charges levied for, or measured by, the use at . 

different locations, because of other contractual provisions measuring use, or 

because of other information provided to the seller, the seller shall apportion 

the receipts according to usage in each State. 

(e) If the seller does not know where a service, intangible, or digital product will 

be used or where a tangible will be received, the receipts shall count toward 

the threshold of the State indicated by an address for the purchaser that is 

available from the business records of the seller maintained in the ordinary 

course of business when such use does not constitute bad faith. If that is not 

known, then the receipts shall count toward the threshold of the State 

indicated by an address for the purchaser that is obtained during the 

consummation of the sale, including the address ofthe purchaser's payment 

instrument, if no other address is available, when the use of this address does 

not constitute bad faith. 

(4) Notwithstanding the other provisions of this Subsection C, for a taxpayer subject 

to the special apportionment methods under [Multistate Tax Commission Regulations 

IV.I8.(d) through (j)], the property, payroll and sales for measuring against the nexus 

thresholds shall be defined as they are for apportionment purposes under those 

regulations. Financial institutions subject to an apportioned income or franchise tax 

shall determine property, payroll and sales for nexus threshold purposes the same as 

for apportionment purposes under the [MTC Recommended Formula for the 

Apportionment and Allocation of Net Income of Financial Institutions]. Pass-through 

entities, including, but not limited to, partnerships, limited liability companies, S 

corporations, and trusts, shall determine threshold amounts at the entity level. If 

property, payroll or sales of an entity in this State exceeds the nexus threshold, 

members, partners, owners, shareholders or beneficiaries of that pass-through entity 

are subject to tax on the portion of income earned in this State and passed through to 

them. 

D. (1) Entities that are part ofa commonly owned enterprise shall determine whether 

they meet the threshold for nexus as follows: 

(a) Commonly owned enterprises shall first aggregate the property, payroll 

and sales of their entities that have a minimum presence in this State of$5000 of 

combined property, payroll and sales, including those entities that independently 

exceed a threshold and separately have nexus. The aggregate number shall be 

reduced based on detailed disclosure of any intercompany transactions where 

inclusion would result in one State's double counting assets or revenue. If that 

aggregation of property, payroll and sales meets any threshold in Subsection B, 

Updated September 2003 
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Multistate Tax Commission 

the enterprise shall file a joint information return as specified by the [tax agency] 

separately listing the property, payroll and sales in this State of each entity. 

(b) Those entities of the commonly owned enterprise that are listed in the joint 

information return and that are also part of a unitary business grouping conducting 

business in this State shall then aggregate the property, payroll and sales of each 

such unitary business grouping on the joint information return. The aggregate 

number shall be reduced based on detailed disclosure of any intercompany 

transactions where inclusion would result in one State's double counting assets or 

revenue. The entities shall base the unitary business groupings on the unitary 

combined report filed in this State. If no unitary combined report is required in 

this State, then the taxpayer shall use the unitary business groupings the taxpayer 

most commonly reports in States that require combined returns. 

(c) If the aggregate property, payroll or sales in this State of the entities of any 

unitary business of the enterprise meets a threshold in Subsection B, then each 

entity that is part of that unitary business is deemed to have nexus and shall file 

and pay income or franchise tax as required by law. 

(2) "Commonly owned enterprise" means a group of entities under common control 

either through a common parent that owns, or constructively owns, more than 50 

percent of the voting power of the outstanding stock or ownership interests or through 

five or fewer individuals (individuals, estates or trusts) that own, or constructively 

own, more than 50 percent of the voting power of the outstanding stock or ownership 

interests taking into account the ownership interest of each such person only to the 

extent such ownership is identical with respect to each such entity. 

E. A State without jurisdiction to impose tax on or measured by net income on a 

particular taxpayer because that taxpayer comes within the protection of Public Law 

86-272 (15 U.S.C. § 381) does not gain jurisdiction to impose such a tax even if the 

taxpayer's property, payroll or sales in the State exceeds a threshold in Subsection B. 

Public Law 86-272 preempts the state's authority to tax and will therefore cause sales 

of each protected taxpayer to customers in the State to be thrown back to those 

sending States that require throwback. If Congress repeals the application of Public 

Law 86-272 to this State, an out-of-state business shall not have substantial nexus in 

this State unless its property, payroll or sales exceeds a threshold in this provision. 

Regulations, Statutes, and Guidelines 
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TAX REFORM: WHAT IT MEANS FOR STATE AND 

LOCAL TAX AND FISCAL POLICY 

STATEMENT FOR THE RECORD 

OF THE 

NATIONAL ASSOCIATION 

FOR 

THE SPECIALTY FOOD TRADE, INC. 

totbe 

UNITED STATES SENATE COMMITTEE ON FINANCE 

April 25, 2012 

The National Association for the Specialty Food Trade, Inc. (NASFT) 

welcomes this opportunity to present to the Senate Committee on Finance its 

views about the collection of business activity taxes by several states in 

contravention ofthe intent of the interstate commerce clause. Any tax 

NASFT on Tax Reform & State Tax Nexus 
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reform should clarifY that an out of state seller must have a physical 

presence (nexus) in the state before a business activity tax may be imposed. 

Congress can, and should, clarifY a uniform meaning of nexus based on 

physical presence. The failure of the United States Supreme Court to do so 

has created uncertainty for businesses and multiple state interpretations of 

the nexus requirement. The varying state interpretations and enforcement of 

nexus are a significant hindrance to the ability and willingness of small 

businesses to sell in interstate commerce. The economic nexus tests used by 

some states are so costly that many successful small food companies forego 

their right to conduct interstate commerce in some states in order to avoid 

the possibility of unfair tax assessments. 

Several NASFT members - small businesses - have paid thousands of dollars 

in assessments and back taxes rather than fight claims for the payment of 

state business activity taxes, although they had no presence in the taxing 

jurisdiction and acted only through brokers or other independent contractors. 

Most small food companies cannot afford a physical presence in states other 

than their home jurisdiction. When the business grows so that it is 

reasonable to sell outside the home territory, a small food company often 

reaches into the interstate market through the mail or through a broker in the 

other state. The broker is an independent contractor - another independent 

small business - which sells the product lines of several companies and 

earns commissions. If the food manufacturer is successful, it pays income 

taxes to its own state authorities - in return for the safety, educational and 

other services that it receives. And the broker pays taxes on its commissions 

to its state authorities again in return for local services. Each taxing 

jurisdiction receives revenue from those with nexus to the jurisdiction, in 

keeping with a constitutional scheme that protects interstate commerce and 

the businesses that sell in the national marketplace. Both pay federal and 

other taxes, as required. The aggressive state collection of business activity 

taxes from out of state sellers upsets the constitutional scheme. 

The NationalAssociation for the Specialty Food Trade, Inc., based in New 

York City, is the trade association for all segments of the specialty food 

industry. Specialty foods are high-value, high-quality, innovative processed 

foods, such as chocolates, cheeses, snack foods, specialty meats, honey, 

cider and other beverages. NASFT has a national membership of 

approximately 2,900 companies located throughout the United States and 

has affiliate members overseas. The membership includes manufacturers and 
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processors, brokers, distributors and retailers. Most NASFT members are 

small businesses (well below $1 million in annual sales). Out of state sales 

are a means to grow the businesses. As small businesses with limited 

financial resources, few staff and usually no full-time professional advisers 

(e.g., legal and accounting), they are particularly affected by unexpected and 

unfair taxes imposed outside their home jurisdiction. 

In conclusion, the Senate Committee on Finance and the Congress, in 

reforming the federal tax laws, should clarify that an out of state seller must 

have a physical presence (nexus) in a state before a business activity tax may 

be imposed. 

Thank you for this opportunity to present the views of the small businesses 

that are members of the NASFT. 
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I€MA 

April 23, 2012 

The Honorable Max Baucus 

Chairman, Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Baucus and Senator Hatch: 

NATIONAL I LEAGUE 

ofClTIES ~ 

The Honorable Orrin Hatch 

Ranking Member, Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

On behalf ofthe organizations listed above representing our nation's cities, towns and counties, we 

appreciate the opportunity to submit the following comments to the Senate Finance Committee as you 

discuss what federal tax reform could mean for state and local fiscal and tax policy. Our comments 

today highlight three specific areas: (I) maintaining the federal tax exemption on municipal bonds to 

promote job creation and improving the nation's infrastructure; (2) ensuring that state and local 

governments retain the authority to set their own tax policy; and (3) opposing federal preemptions that 

would grant preferential tax treatment to certain industries and threaten the fiscal health of state and 

local governments. 

Our organizations share a long-standing opposition to any preemption by Congress oflocal taxing 

authority. How to levy taxes fairly, how to ensure there is no discrimination among companies that 

provide different forms of the same service, and how to protect local government revenues are all 

matters that should be resolved at the state and local level. 

Local governments exercise their taxing authority to the extent provided by state law. As a result, local 

taxing authority and practices differ from state to state, and from county to county and city to city within 

a state. This means that every local government tailors its tax policy by taking into account the sources 

of revenue available and the needs and desires of its residents. More importantly, local officials making 

these decisions are accountable to the voters and taxpayers in their communities for the expenditure of 

funds on public services. Our citizens already have the power to change locally imposed taxes and do 

not need to be subjected to a one-size-fits all federal tax policy. 

In today's difficult economic times, when local governments are facing the fifth straight year of declines 

in revenue with further declines projected for 2012, local taxing autonomy is crucial in helping to ensure 

that the needs of local citizens are met. The ability to make tax and other fiscal policy decisions at the 

local level, without federal interference, enables local officials to provide the quality services our shared 

citizens expect. In considering any changes to the federal tax code, we simply ask that you respect local 

authority and that you act to promote the intergovernmental partnership by authorizing the collection of 

local taxes already owed on Internet and mail-order sales. Accordingly, we call on Congress to 

immediately pass the Market Place Fairness Act (S. 1832). 
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80344.290

We also think it is important to maintain the long-standing partnership between the federal government, 

and states and local governments through the federal tax exemption ofinterest earned on municipal 

bonds. Tax-exempt bonds help finance the construction and maintenance of three-quarters of the public 

infrastructure throughout the United States. This long-standing federal tax policy allows local 

governments to save approximately two-percentage points on their borrowing costs to finance the vast 

majority of all public infrastructures in our nation, which translates into savings to local taxpayers. 

The following is a more detailed discussion of our policies related to these issues. 

Maintaining the Federal Exemption on Municipal Bonds 

State and local governments access the tax-exempt bond market to provide essential infrastructure and 

services to their citizens. Without access to this type of financing, the cost to taxpayers for providing 

schools, libraries, public buildings and hospitals, roads and bridges and sewers and waterways would be 

much greater. Tax-exempt bonds are not just a useful means to provide this important public service; 

they also are a well-established product for investors. More than 75% of municipal bonds are owned by 

individuals, from an array of income brackets. 

Tax- exempt financing has a solid investor base and established legal infrastructure that allows a variety 

of communities, both small and large, to effectively serve the needs of diverse constituencies. There are 

over $2.9 trillion in outstanding tax-exempt bonds, issued by 50,000 separate government units. 

The federal tax exemption of municipal bond interest is long standing. It is neither a loophole nor a 

special interest tagalong provision. In fact, Congress has exempted municipal bond interest since the 

income tax code was promulgated in 1913 and has continued to do so for 99 years. 

The role tax-exempt bonds play is a great example ofthe federal, state and local partnership. State and 

local governments are responsible for building and maintaining 75% of our country's infrastructure, 

with a majority of these projects financed through tax-exempt bonds. The yield an investor receives for 

tax-exempt bond purchases is usually 200 basis points lower than what they would receive on taxable 

bond purchases. However, because ofthe tax benefit, municipal bonds become a comparable 

investment, and one known to be among the safest in the world. This allows governments to borrow at a 

lower rate, saving billions of taxpayer dollars. The cost to the federal government of not taxing these 

investments is insignificant compared to the overall benefit that tax-exempt bonds provide for each 

community. In fact, tax-exempt bonds are the best way to integrate the needs of each community 

effectively, as the decision to issue bonds for various projects is determined and approved by either the 

citizens themselves or their elected legislative bodies. 

The only logical way for the federal government to be a partner in infrastructure funding is by 

supporting the tax-exemption of municipal securities. 

Congress and national leaders often discuss the need for shoring up our country's infrastructure. The 

American Society of Civil Engineers reports that it will cost state and local governments $2.2 trillion 

over the next five years to meet physical infrastructure needs. At this time, when infrastructure demands 

are great, yet direct federal assistance to state and local governments is shrinking, the ability of states 

and localities to issue tax-exempt bonds becomes more significant. Without these bonds, state and local 
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governments and taxpayers will struggle with increased borrowing costs, and financing for infrastructure 

construction and maintenance will stagnate. Businesses and communities that depend on infrastructure 

for commerce, public safety, job creation and the development of an educated workforce will suffer, no 

doubt jeopardizing the country's already fragile economic recovery. 

Unfortunately, there are several tax proposals circulating that would dampen the effectiveness ofthe 

bond market, creating higher borrowing costs for state and local governments, less investment in 

infrastructure, and fewer jobs. This comes at a time when state and local governments are still 

struggling to recover from the Great Recession. Many local governments are facing budget shortfalls 

that continue to force them to make deeper cuts in critical public services and delay infrastructure 

investments. 

One ofthe tax proposals circulating would cap certain tax deductions and exclusions for high income 

taxpayers, including tax-exempt interest on municipal securities. This cap would effectively amount to a 

tax on tax-exempt bonds - for both new issuances and bonds that are outstanding. Such a retroactive 

policy shift has never occurred before in this market, and would have the detrimental effect on investor's 

appetite for tax-exempt bonds. This would drive up the borrowing costs of state and local governments. 

Similarly, the proposal to place an additional sliding cap on the benefits of deductions and exclusions, 

including tax-exempt bonds, would also be detrimental to local governments. This sliding cap would 

change from year to year and would be especially troubling for tax-exempt bonds, since it would be 

virtually impossible for investors to predict the tax rate for their municipal bond interest income over the 

life of their investments and would create a strong disincentive to buy tax-exempt municipal bonds. 

Other proposals to replace tax-exempt bonds with tax credit bonds or direct subsidy bonds also would 

raise costs for state and local governments and their citizens. These programs work best as a 

complement to -- not a replacement of -- tax-exempt bonds. Congress should carefully look at how 

various tax credit bond programs have worked in practice versus in theory, when reviewing their role in 

the marketplace. 

Simply, the tax-exempt bond market is a smart, cost-effective investment for state and local 

governments, investors and the federal government. No amount of appropriations or other financing 

tools match their effectiveness for financing infrastructure needs that serve individual communities and 

the country at large. 

Ensuring that State and Local Governments Retain the Authority to Set Their Own Tax Policy 

Based on the Needs of Their Constituents 

Federal Deduction of State and Local Taxes 

We oppose the elimination or reduction, phased or otherwise, of state and local tax deductions. The 

deductibility of personal state and local income, property and sales taxes on federal tax returns 

recognizes the historic relationship of the federal, state, and local governments and the fact that all levels 

of government provide vital services. The elimination or reduction of state and local tax deductions 

would only increase state and local taxes for citizens. 
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Since the federal income tax was adopted in the early 20th century, there has been recognition that 

independent state and local government tax structures should be respected. State and local tax 

deductibility has contributed to the stability of tax revenues that are reliable and flexible. As state and 

local governments must balance their budgets, any change that disrupts the stability of their tax structure 

could only harm their ability to provide essential services, especially during recessions. The 

deductibility of state and local taxes supports their efforts to set tax rates at levels that efficiently match 

the service demands of their residents across a range of incomes and needs. Deductibility of these taxes 

also minimizes unhealthy market swings during times of economic change. 

One key example of the importance of state-local tax deductibility is housing. Housing is a highly 

valued asset for residents and communities. Should deductibility of property taxes be eliminated or 

reduced, more volatility would be introduced into the housing sector, and could well reduce property tax 

revenues if such a change further curbed housing sales and prices. Historically, the deductibility ofthe 

property tax has often been a positive element in stabilizing housing values and markets. The recent 

economic downturn and the related housing crises are important reminders that property tax 

deductibility can support a housing recovery and, in time, restore government property tax revenues. 

Encourage State and Local Sales Tax Collection 

As the increasing strength of electronic commerce creates exciting new marketplaces, it has also put 

traditional retail outlets at an unfair disadvantage because of outdated and inequitable tax and regulatory 

environments. The Supreme Court's decision in Quill Corp. v. North Dalwta, 504 U.S. 298 (1992) left 

state and local governments unable to adequately enforce their existing sales tax laws on sales by out-ofstate catalog and online sellers. But Congress, with its clear constitutional authority to regulate 

interstate commerce, can give states and local governments the option to require sellers who do not have 

a physical presence in their jurisdiction to charge and collect sales taxes from their customers. 

We urge support for the bipartisan Enzi-Durbin-Alexander Market Place Fairness Act (S. 1832), which 

would give state and local governments the option to collect the sales taxes they are already owed under 

current law from out-of-state businesses, rather than rely on customers to pay those taxes to the states. 

While brick-and-mortar retailers collect sales taxes from customers who make purchases in their stores, 

many online and catalog retailers do not collect these same taxes. This puts main street retailers at a five 

to ten percent competitive disadvantage to remote sellers. It is significant to note that customers are 

already required to pay taxes when they make online purchases, just like when they make purchases in a 

store; however, most taxpayers are not aware of this responsibility, and states and localities do not 

currently have the resources to enforce the payment ofthe tax. The Market Place Fairness Act does not 

impose a new tax, but would provide states and localities with a mechanism to require the collection of 

sales and use taxes on Internet and mail-order sales. This would help to level the playing field for brick 

and mortar stores on main street. 

At a time when local governments are still facing tough choices to close budget gaps projected for fiscal 

years 2012 and 2013, collecting an estimated $23 billion owed in sales taxes a year would mean more 

money for investment in local infrastructure and basic services, just what the economy needs to generate 

more jobs. Although we have pushed for collection of remote sales taxes for over a decade, there is no 

time better than now for Congress to enact the Market Place Fairness Act, S.1832, into law. 
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Oppose federal initiatives that would grant certain industries preferential tax treatment and threaten 

the fIScal health of states and local governments 

State and local governments continue to witness a growing parade of various industries actively urging 

Congress to preempt state and local government taxing authority of their particular industry. From the 

wireless industry, to the rental car industry, to online travel companies, these businesses are asking 

Congress for preferential tax treatment at the expense of local communities, individuals and families. 

The state and local government community strongly opposes any federal preemption of its taxing 

authority. If Congress were to grant anyone industry's request for federally mandated tax favoritism it 

would open the door for other industries to request similar special exemptions or protections from state 

and local taxing authority. Such actions by Congress would cause great damage to the entire existence 

of independent state and local taxation authority in our system of federalism, as well as to the fiscal 

health of state and local governments - all while purporting to solve a host of problems that simply do 

not exist. 

These preemption measures, particularly when taken together, would set an unprecedented and 

dangerous new standard for federal intervention into state and local government tax classifications. 

While they purport to address only' discriminatory' taxation, their standard for federal intervention 

becomes that every industry sector and every service has to be taxed at the same rate. Such a standard 

for 'discriminatory' state and local taxes would mean, contrary to long-established precedent, that the 

federal government has the power to preempt all state and local tax classifications and to impose a 

federally-mandated state and local tax code of only a single rate for all business. This would result in 

the end of state and local tax classification authority; significantly undermining the ability of state and 

local governments to balance their budgets, and redistributing the tax burden among those taxpayers 

least able to bear the burden. The power of the federal government to preempt state and local taxes is 

ultimately the power to destroy state and local governments - a power that cannot be reconciled with our 

basic system of federalism. 

Some examples of proposals that have been introduced that would preempt state and local taxes are as 

follows. 

The Wireless Tax Fairness Act of2011 would ban new state and local taxes on wireless communications 

for a period of 5 years. As justification for this special tax treatment, proponents of the measure use data 

that consistently inflates state and local tax burdens relative to other businesses by unfairly mixing taxes 

with user fees and failing to disclose that the industry pays virtually no corporate income taxes. 

Moreover, the wireless industry has yet to present any data indicating that state and local wireless taxes 

have had any adverse effect on wireless service subscribership, revenue or investment. Quite the 

contrary, the wireless industry has experienced 100% growth between 2006 and 2011, even as the 

industry complains about its state and local tax burden. 

Furthermore, provider claims that state and local taxes hinder activities such as broadband deployment 

are completely without merit. In reality, provider decisions to deploy a network are purely economic; 

providers will only target areas of deployment where they will reap the greatest return on investment. 
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The End Discriminatory State Taxes/or Automobile Renters Act 0/2011 would preempt state and local 

governments' ability to impose 'discriminatory' taxes on automobile rentals and property related to 

renting automobiles. Yet, once again, the determination that a tax is 'discriminatory' is made without 

any reference to the factors that state and local policymakers use to evaluate local needs and the best 

manner to distribute the local tax burden, including offsetting exemptions that may be favorable to the 

rental car industry. Finally, the fundamental principle offederalism vests states and localities with the 

responsibility of providing services and raising funds to pay for those services. Fees may be placed on 

cars rented from airport locations that are used for capital improvements and tourism campaigns that 

directly benefit the rental car companies themselves. Rental car taxes are also imposed throughout the 

United States by cities, counties and states, with the proceeds used to pay for a variety of government 

services and programs. 

Online Travel Companies (OTC) such as Expedia and Travelocity continue their behind the scenes 

efforts to have legislation favorable to their industry introduced at the federal level, at the expense of 

state and local taxpayers and the hotel industry. Such legislation would provide the aTe's with a tax 

loophole by allowing them to pay state and local taxes based on the lower, wholesale rate they pay 

hotels for room rentals, rather than on the higher, retail rate these companies charge customers, putting 

in-state hotels that remit taxes on the retail rate at a competitive disadvantage. It is estimated that state 

and local governments are losing $275 million to $400 million in revenue each year because aTe's fail 

to collect and remit to states and localities the appropriate amount of tax on hotel room bookings. 

The Digital Goods and Services Tax Fairness Act 0/2011 would regulate state and local governments' 

taxation of downloaded music, movies and online services. The bill would seek to ban 'multiple' and 

'discriminatory' taxes on digital goods and services, even though there is no concrete evidence of this 

practice by state and local governments; another bill with a solution in search of a problem. Moreover, 

the measure could potentially disrupt fundamental features of state and local sales taxation and open up 

major tax-avoidance opportunities for some large multi state corporations. Furthermore, the Internet Tax 

Freedom Act enacted in 1998 already bans such mUltiple and discriminatory taxation of electronic 

commerce, including digital goods and services. 

The Business Activity Tax SimplijicationAct 0/2011 would redefine what constitutes physical presence 

to limit a state's ability to impose various taxes on businesses conducting activity within the state. 

Groups such as the National Governors Association have spoken out against the bill, characterizing it as 

an unwarranted intrusion into state affairs that will harm their ability to manage their finances during a 

critical and delicate time of economic recovery. The bill is estimated to cost states and localities $3 

billion annuany in revenue. 

CONCLUSION 

In summary, our several organizations understand the need for tax reform to address the rising federal 

deficit and to promote jobs and economic growth. As you discuss various tax reform proposals, we 

would strongly urge you to consider the impact any changes will have on critical infrastructure that 

residents in all local communities have come to depend on-- schools, transit systems, water and sewer 

systems, hospitals and roads and bridges. Local governments have been able to finance infrastructure 

projects at a reasonable interest rate through issuing tax-exempt municipal bonds. Without this type of 

financing, the cost to taxpayers would be significantly higher; and it would, in many cases, force local 
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governments to delay the financing of essential projects that create jobs and economic growth. We 

therefore strongly urge you to continue to maintain the federal income tax exemption for municipal 

bonds. 

It is also important to adopt reforms that will allow local governments to retain authority over their own 

tax policy. We urge that you maintain the deductibility of personal state and local property, sales, and 

income taxes on federal tax returns. This recognizes the historic partnership that exists between federal 

state and local governments. The elimination or reduction ofthese deductions would only increase the 

cost of state and local taxes for citizens. We would also strongly urge you to immediately pass the 

Market Place Fairness Act, S. 1832, a bipartisan bill that would assist state and local governments 

collect $23 billion that is already owed to them on internet and mail-order sales. This would help state 

and local governments make needed investments in infrastructure improvements and other critical areas. 

Finally, we would strongly urge you to oppose federal initiatives that would preempt state and local 

taxing authority and grant certain industries preferential tax treatment at the expense of other taxpayers. 

By granting anyone industry's request for federally mandated favorable tax treatment, Congress would 

open the floodgate to many other similar requests, which would further erode state and local revenues 

and undermine their tax policy. 

We appreciate the opportunity to submit this testimony on behalf of this country's counties, cities, and 

towns. If you have questions, please feel free to contact any of our association's legislative 

representatives. 

Sincerely, 

National Association of Counties - Michael Belarmino, 202-942-4254 

National League of Cities - Lars Etzkorn, 202-626-3173 

The United States Conference of Mayors - Larry Jones, 202-861-6709 

International City/County Management Association - Joshua Franzel, 202-682-6104 

Government Finance Officers Association - Susan Gaffney or Barrie Tahin Berger, 202-393-8020 
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I 

lIii\ 

111111 

NATIONAL CONFERENCE of STATE LECISLATUIUS 

The Forum for Amuica's Ideas 

STATEMENT OF 

SENATOR PAMELA ALTHOFF, ILLINOIS 

DELEGATE SHEILA HIXSON, MARYLAND 

SENATOR DEB PETERS, SOUTH DAKOTA 

SENATOR CURT BRAMBLE, UTAH 

NATIONAL CONFERENCE OF STATE LEGISLATURES' 

EXECUTIVE COMMITTEE TASK FORCE ON STATE AND LOCAL TAXATION OF 

COMMUNICATIONS & ELECTRONIC COMMERCE 

ON BEHAlf OF THE 

NATIONAL CONFERENCE OF STATE LEGISLATURES 

REGARDING 

"Tax Reform: What It Means for State and local Tax 

and Fiscal PolicyJl 

BEFORE THE 

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

10:00 AM 

APRIL 25, 2012 
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COMMITTEE ON FINANCE 

UNITED STATES SENATE 

APRIL 25, 2012 

STATEMENT 

OF 

SENATOR PAMELA ALTHOFF, ILLINOIS 

DELEGATE SHEILA HIXSON, MARYLAND 

SENATOR DEB PETERS, SOUTH DAKOTA 

SENATOR CURT BRAMBLE, UTAH 

EXECUTIVE COMMITTEE TASK FORCE ON STATE & LOCAL 

TAXATION OF COMMUNICATIONS AND ELECTRONIC CoMMERCE 

NATIONAL CONFERENCE OF STATE LEGISLATURES 

ChalrmanBaucus, Ranking Member Hatch and members of the Finance Committee, we 

are pleased to submit this statement on behalf of the National Conference of State 

legislatures (NCSl) and respectfully request that you submit it for the record. NCSl is 

the bipartisan national organization representing every state legislator from all of our 

nation's states, commonwealths, territories, possessions and the District of Columbia. 

We are pleased to have the opportunity to Inform you of the concerns state legislators 

have regarding state and local taxation In the new economy, specifically, the ability of 

state and local governments to collect the sales and use tax presently owed on 

transactions with out of state sellers, which ever Increasingly Is through electronic 

commerce. 

NCSL Supports the Marketplace Fairness Act 

We want to express our unconditional support for the Marketplace Fairness Act, S. 

1832, as introduced by Senators Mike Enzi of Wyoming, Richard Durbin of Illinois, lamar 

Alexander of Tennessee and 10 other of your colleagues from both parties. The 

Marketplace Fairness Act will provide those states that comply with the simplification 

I 

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Ullll National Conference of State legislatures 
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requirements outlined in the legislation, the authority to require remote sellers to 

collect those states' sales taxes. 

Let us make this very clear, state legislators are not advocating any new or 

discriminatory taxes on electronic commerce. We desire, however, to establish a 

simplified sales and use tax collection system that allows sellers, regardless of where 

they are located, to collect and remit the legally owed sales and use taxes. 

The new economy or if you prefer, electronic commerce, is not bound by state and local 

borders. This makes it critfeal to simplify the collection of state and local taxes to ensure 

a level playing field for all sellers in the marketplace, enhance economic development, 

and avoid discrimination based upon how a sale may be transacted. Government can 

not allow a tax system that was designed for an economy that was established almost 

80 years ago, to be the deciding factor as to where our constituents make a transaction. 

State legislators and governors have been seeking the ability to collect sales taxes on 

out of state transactions for many years. With the growth of electronic commerce, the 

current financial and economic situation, and the current effort to reduce the federal 

deficit, the urgency to act Is even more immediate. 

Current State Fiscal Challenges 

As you know, the recent recession has had a debilitating impact on state budgets. 

Because states have a constitutional or statutory requirement to adopt balanced 

budgets on annual or biennial basis, between FY2008-FY2012, states closed a 

cumulative $527.7 billion budget gap, primarily through program reductions. While 

some states have begun to show an Increase in revenues, other states are still facing 

budget deficits and sluggish revenues. In FY 2012, states had to close over $72 billion in 

budget deficits. 

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With the enactment of the federal Budget Control Act and the resulting sequestration, 

states are preparing for additional reductions in funding for many state federal 

programs. Our colleagues across the country will likely have to address $400 billion -

$500 billion in reductions in federal assistance for many Jointly administered and 

funded programs but we will do so having already reduced state budgets by over $500 

billion during the recession. This will mean that states have $1 trillion less for many 

essential programs than states had only five years ago. Sequestration holds states to 

the same federal mandates, maintenance of efforts requirements and obligations as If 

there were no reductions In federal funds. for states, It Is the worst of all possible 

outcomes. Raising taxes In a sluggish economy is not a viable option for most states; 

however, closing the loophole on sales tax collection could provide states with some 

additional revenue without having to raise new taxes. 

According to the Center for Business and Economic Research at the University of 

Tennessee, in 2003, the estimated combIned state and local revenue loss due to remote 

sales was between $15.5 billion and $16.1 billion. For electronic commerce sales alone, 

the estimated revenue loss was between $8.2 billion and $8.5 billion. The report from 

the University of Tennessee further estimates that the revenue Joss will grow and that 

this year, 2012, the revenue loss for state and local governments could be as high as 

$23.3 billion, of which It Is estimated that $11.4 billion would be from sales over the 

Internet. (See Table 1) 

Table 1 

Combined State & Local Revenue Losses 

from E·Commerce and All Remote Commerce - 2012 

Source: Dr. Donald Bruce & Dr. William Fox, Center jar Business & Economic Research 

University oj Tennessee 

Total Total 

All Out of State All Out of State 

Electronic Sales Sales 

Alabama 170,400,000 347,734,399 

Alaska 1,500,000 3,035,981 

Arizona 369,800,000 708,628,254 

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80344.300

Arkansas 113,900,000 236,311,930 

California 1,904,500,000 4,159,667,947 

Colorado 172,700,000 352,563,574 

Connecticut 63,800,000 152,367,405 

District of Columbia 35,500,000 72,517,182 

Florida 803,800,000 1,483,690,010 

Georgia 410,300,000 837,610,389 

Hawaii 60,000,000 122,514,495 

Idaho 46,400,000 103,120,482 

Illinois 506,800,000 1,058,849,588 

Indiana 195,300,000 398,817,708 

Iowa 88,700,000 181,012,560 

Kansas 142,900,000 279,224,028 

Kentucky 109,900,000 224,484,309 

louisiana 395,900,000 808,311,357 

Maine 32,100,000 65,430,824 

Maryland 184,100,000 375,944,240 

Massachusetts 131,300,000 268,002,460 

Michigan 141,500,000 288,954,339 

Minnesota 235,300,000 455,219,250 

Mississippi 134,900,000 303,286,360 

Missouri 210,700,000 430,191,928 

Nebraska 61,300,000 118,052,068 

Nevada 168,900,000 344,923,618 

New Jersey 202,500,000 413,390,425 

New Medco 120,500,000 245,989,786 

New York 865,500,000 1,766,968,251 

North Carolina 213,800,000 436,517,492 

Norto Dakota 15,300,000 31,274,219 

Ohio 307,900,000 628,613,189 

Oklahoma 140,800,000 296,348,658 

Pennsylvania 345;900,000 706,241,542 

Rhode Island 29,000,000 70,436,458 

South Carolina 124,500,000 254,290,538 

South Dakota 29,800,000 60,826,849 

Tennessee 410,800,000 748,480,889 

Texas 870,400,000 1,777,090,593 

Utah 88,500,000 180,658,961 

Vermont 25,100,000 44,759,329 

Virginia 207,000,000 422,651,971 

Washington 281,900,000 540,968,704 

West Virginia 50,600,000 103,284,206 

Wisconsin 142,100,000 289,006,114 

Wyoming 28,600,000 61,744,705 

Total 11,392,700,000 23,260,009,564 

(States In bofd have members on the Senate FInance CommIttee) 

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80344.301

We believe that the Marketplace Fairness Act would allow the states to close this 

significant and growing loophole in our sales tax revenue and level the playing field for 

all sellers regardless of the medium used to conduct a transaction. S. 1832 also removes 

the burden from taxpayers In remitting their legally owed sales taxes on out of state 

sales. While the $23.3 billion In uncollected sales taxes will not match funding 

reductions from the federal government, It will provide states with some fiscal relief. In 

the words of Senator Roy Blunt of Missouri, a sponsor of this legislation, It is "fiscal relief 

for the states that does not cost the federal government a single dime." 

Streamlined Sales and Use Tax Agreement 

Over the past twelve years, state legislators, governors and sellers worked to develop a 

simplified and more uniform system of administering and collecting sales taxes, the 

Streamlined Sales and Use Tax Agreement (Agreement) that modernizes the current 80+ 

year old sales tax system. Twenty-four states have enacted legislation to comply with 

the Agreement and as of today, 21 of those states are full member and 3 states are 

associate members of the streamlined sales tax system. 

I 

"'\\ 

Arkansas 

Georgia 

Indiana 

Iowa 

Kansas 

Kentucky 

Michigan 

Minnesota 

Nebraska 

Nevada 

New Jersey 

Full Member States 

Will National Conference of State Legislatures 

North Carolina 

North Dakota 

Oklahoma 

Rhode Island 

South Dakota 

Vermont 

Washington 

West Virginia 

Wisconsin 

Wyoming 
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80344.302

Associate Member States 

Ohio 

Tennessee 

Utah 

(States In bold have members on the Senate FJnance Committee) 

S. 1832 would allow the 21 full member states listed above and all other states 

(including the 3 associate member states) that fully comply with the Agreement the 

authority to require all sellers not meeting the small business exemption to begin 

collecting these states sales and use taxes within 90 days of the enactment of this 

legislation. Ncst supports this provision and urges that Congress not require the states 

that have complied with the Agreement to have to enact any further requirements as 

they have already surpassed the other simplifications requirements In the legislation for 

all other states. 

The Marketplace Fairness Act would also allow states that do not desire to participate In 

the streamlined sales tax system to enact certain minimum simplifications tnat would 

grant them collection authority six months after S.1832's enactment. 

We also ask the members of this Committee from the 24 states listed above to respect 

and honor the decision made by your state legislatures and governors to join the 

streamlined sales tax system. We urge you to join Senators Enzi, Durbin and Alexander 

as sponsors and supporters of this legislation. 

Small Business Exception 

State legislators are concerned about the burden of government regulations and 

requirements on business. It is not our desire In requiring the collection of sales taxes 

for out of state sales to burden our constituents cleaning out their attics or sellers from 

placing their items up for sale on one of the many online auction sites. Those sales are 

I ,,"\ Ullll National Conference of State legislatures 
332 


80344.303

already exempt from sales taxes under existing so called "garage or yard sale" state 

provisions. We also value the smalltlmom and pOpll type stores or new startup sellers 

that may have occasional sales across state borders and we do not want to stifle their 

efforts. 

We support the small business exception in S. 1832, that Is, no seller would be required 

to collect sales taxes for out of state transactions unless the seller has over $500,000 In 

out of state sales In a calendar year. The $500,000 level would not include sales in the 

state In which the seffer has physical presence. We would urge cautIon In increasing the 

small business exception. Going above the $500,000 level would place many small main 

street merchants at a competitive disadvantage. 

S. 1832 would also reduce the burden on all sellers by removing the liability for 

businesses collecting sales taxes, ensuring they are held harmless for calculations and 

collections under the Information and certified technology provided by the states under 

the provisions of the Marketplace Fairness Act. 

Myth - Requiring Out of State Sellers to Collect and Remit Is a New Tax 

Some have argued that requiring out of state merchants to collect sales taxes from out 

of state buyers Is a new tax. A study released by Jupiter Research In January 2003, 

"Sales Tax AvoIdance Is Imperative to Few Online Retailers and Ultimately Futile for AII/' 

found most people are unaware that they are not paying sales taxes when they make a 

purchase over the Internet In the same study by Jupiter, only 4 percent of online 

buyers said that the collection of sales and use taxes would always affect their decision 

to buy online. 

Online sellers already collect sales taxes where they have physical presence. The 

Marketplace Fairness Act does not require states to levy a sales tax on any product or 

I 

bib llllli National Conference of State legislatures 
333 


80344.304

means of buying a product. The act merely corrects a growing tax avoidance problem 

and removes an Inherent discrimination In our current tax laws. If Congress fails to pass 

the Marketplace Fairness Act in this session, states still reeling from the recession and 

faCing another $500 billion In revenue reductions may have no alternatives but to seek 

to put in place new or higher taxes on Income, property or businesses to fund essential 

services like public safety, education and highways. 

other State TalC legislation 

it Is our understanding that the Committee will also hear testimony on other state tax 

issues such as the Business Acllvlty Tax Simplification Act, the Mobile Workforce State 

Income Tax Fairness Act, the Wireless Tax Fairness Act and the Digital Goods and 

Services Tax Fairness Act. We believe the issues raised in these bills are worthy for 

discussion and NCSL has been working with the various industry representatives who 

support these bills to craft state solutions to the concerns these pieces of legislation 

seek to address. Unfortunately, the solution to all of these concerns requires either a 

reduction of existing revenues or reassignment of funds to different states or 

Jurisdictions. Under the states' current fiscal predicament, It Is difficult for our 

colleagues to find solutions to these Issues without having to further reduce essential 

services. 

While these Issues should be addressed In state legislatures, we can understand the 

desire of industry representatives to seek a federal resolution. However, as these bills 

will affect state revenues and In some cases actually preempt state tax statutes, we 

respectfully request that any decisions on these state tax bills be held until the 

Marketplace Fairness Act has been enacted. NCSL is prepared to work with this 

Committee on these other state tax issues while our Conference continues to work with 

Industry representatives to develop state solutions. NCSL Is committed to ensuring 

fairness for aU taxpayers. 

I 

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U1ill National Conference of State Legislatures 
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80344.305

Conclusion 

Enactment of the Marketplace Fairness Act is a priority for the National Conference of 

State Legislatures and for our colleagues across the county. We call upon the members 

of Congress to support the efforts of their elected state pollcymakers, state legislators 

and governors, to collect safes and use taxes on out of state transactions legally owed by 

their state residents. Congress, as Senator Blunt has said, can provide fiscal relief, $23 

billion in 2012, without having to find one offset or take any funds from the federal 

Treasury. We respectfully ask that you report the Marketplace Fairness Act to the full 

Senate. 

For additional information or questions, please contact NCSL staff, Neal Osten, 

neal.osten@ncsl.org - 202-624-8660 or Max Behlke, max.behlke@ncsl.org - 202-624-

3586. 

Thank you. 

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, 

111111 "'i\ 

NATIONAL CONFEIUNCE of STATE LEGISLATUltES 

The Forum for America's Ideas 

STATEMENT OF 

REPRESENTATIVE DAN FLYNN, TEXAS 

REPRESENTATIVE JAY KAUFMAN, MASSACHUSETTS 

CO-CHAIRS, BUDGETS AND REVENUE COMMITTEE 

ON BEHALF OFTHE 

NATIONAL CONFERENCE OF STATE LEGISLATURES 

REGARDING 

"Tax reform: What It means for State and Local Tax 

and Fiscal Policy" 

TOTHt' 

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

MAY 9, 2012 
336 


80344.307

Chairman Baucus, Ranking Member Hatch and members of the Finance Committee, we submit 

the following statement on tax exempt financing on behalf of the National Conference of State 

Legislatures and respectfully request that you submit it for the official record. This statement is 

in addition to an April 25, 2012, submission by four of our colleagues on the Marketplace 

Fairness Act (5. 1832) also on behalf of NCSL. 

We are pleased to have this opportunity to inform you of the concerns state legislators have 

regarding our experience with and the future of tax-exempt financing. As you undertake to 

reform the federal tax code either as a singular activity or in concert with deficit reduction 

efforts, we urge you to carefully consider the effect any changes you propose would have on 

state revenue authority and the states' ability to fund a wide array of public works' activities. 

The federal tax code provides several preferential tax treatments for bonds issued by state and 

local governments for capital project purposes primarily. Among these treatments is the 

interest deduction for tax-exempt bonds, a provision that dates to the inception of the federal 

tax code. Among all of the tax treatments available for state and local government 

infrastructure projects, the interest deduction is the most beneficial and most productive 

mechanism for providing, maintaining and protecting investments in essential facilities. It 

provides the federal government significant leverage over vital infrastructure and capital 

facilities that we believe is not matched by other funding or revenue means. 

State experience with preferential treatment of interest on municipal bonds offers many 

additional positive factors that should be considered in future deliberations. The overwhelming 

proportion of use of municipal bonds is infrastructure investment, not operating or other 

expenses. Most of these investments are carried out with electorate approval. They meet 

identified public needs. They produce debt service obligations that states meet readily. 

Municipal bonds are exceptional economic development and job creating/maintaining tools. 

They help to address what many reports have identified as pressing and unmet infrastructure 

and capital investment gaps. 

We are well aware of other tools available for infrastructure development, notably private 

activity bonds, tax credit/direct subsidy bonds and federal grants in limited instances. None of 

these individually or collectively serves as an effective substitute for tax-exempt bonds. All of 

them can serve complementary purposes to tax-exempt finanCing depending upon 

circumstances. 

NCSL believes that comprehensive, broad federal deficit reduction is needed. We believe that 

states should contribute proportionately to any deficit reduction strategy as long as the federal 

deficit is not exported to states through new mandates, cost shifts or unbalanced modifications 

to entitlement and mandatory programs. We also believe there are compelling reasons for 
337 


80344.308

protecting low-income programs from deficit reduction efforts and for subsidizing vigorous 

economic investments, particularly public works projects carried out through tax-exempt 

financing. 

The linkages between federal and state tax systems and related policies are many. They are 

often overlooked or ignored. For example, we have reviewed numerous deficit reduction 

reports, the bulk of which virtually fail to recognize or to pinpoint these linkages. The actions 

you take will have consequences for states and state authority. We are hopeful these actions 

will have positive consequences. We are pleased you have conducted this hearing and look 

forward to participating directly in a collaborative effort to reform the federal tax code and to 

provide effective tools for building and maintaining infrastructure. 
338 


80344.309

NATIONAL 

EDUCATION 

ASSOCIATION I 

Great Public Schools jor Every Student 

Testimony Submitted for the Record 

United States Senate 

Committee on Finance 

Hearing on 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

April 25, 2012 

Submitted by: 

The National Education Association 

120116th Street, NW 

Washington, DC 20036 

Chairman Baucus and Members ofthe Finance Committee. On behalf of the 3.2 million 

members of the National Education Association (NEA), we thank you for the opportunity to 

submit these comments in support of the Marketplace Fairness Act for the record in 

conjunction with the hearing on "Tax Reform: What It Means for State and Local Tax and 

Fiscal Policy." 

NEA strongly supports the Marketplace Fairness Act This bipartisan legislation would 

remedy a long-standing inequity and finally allow states and local governments to collect 

sales tax from remote sellers. In so doing, it would help states stop the erosion of their tax 

base and provide needed resources for education and other critical priorities. 

States face an unprecedented fiscal crisis worsened because they have limited authority to 

collect taxes on sales into their states. As a result, schools, police, firefighters, health care, 

emergency responders, roads, public transportation, and parks are being deprived of 

critical revenues. These uncollected revenues could help offset growing budget gaps in 

almost every state - over $27 billion in much needed revenues is not being collected. 

In most states, brick and mortar stores are placed at a competitive disadvantage because 

they must collect sales taxes while sellers located outside their states do not. The U.S. 

Supreme Court (Quill Corp. v. North Dakota) said that Congress has the authority to allow 

states to require remote sellers (a retailer that does not have a physical presence in a state) 

to collect taxes. Small businesses have historically always been one of the main engines of 

job creation. In fact, during the past decade, small businesses created more than 60 

percent of net private-sector jobs. We need to ensure that they not only survive, but thrive 

and help rebuild the economy. 

The Marketplace Fairness Act will also help provide an alternate source of local revenue to 

counter dramatic losses from the housing crisis. Local property tax revenues, which 

account for 40 percent of public education funding, continue to suffer from the foreclosure 
339 


80344.310

crisis. Combined with federal and state spending cuts, these losses have resulted in 

substantial reductions in core education programs and services. The Marketplace Fairness 

Act will help offset these losses. 

The bill will not impact the Internet Tax Freedom Act, nor will it create new taxes or 

increase existing taxes. It does not require any state to collect sales and use tax. 

Consumers are required under existing state laws to pay sales and use taxes on the goods 

they purchase. Consumers can be audited and charged with penalties for failing to pay 

sales and use taxes, but too often states are unable to enforce this requirement. 

The Marketplace Fairness Act will allow the forty-four states and the District of Columbia 

that collect sales tax to better address fiscal shortfalls. The bill will help ensure desperately 

needed resources for education. We encourage your support for this important legislation. 

Thank you for your consideration of these comments. 
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NATIONAL FOREIGN TRADE COUNCIL, INC. 

1625 K STREET, NW, WASHINGTON, DC 20006-1604 

TEL: (202) 887-0278 FAX: (202) 452-8160 

Comments of the National Foreign Trade Council 

On the Business Activity Tax Simplification Act 

Before the Senate Finance hearing titled: "Tax Reform: What it Means for State and Local Tax 

and Fiscal Policy." 

Held on April 25, 2012 

The National Foreign Trade Council (NFTC), organized in 1914, is an association of 

some 250 U.S. business enterprises engaged in all aspects of international trade and 

investment. Our membership covers the full spectrum of industrial, commercial, financial, and service 

activities, and the NFTC therefore seeks to foster an environment in which U.S. businesses can be 

dynamic and effective competitors in the domestic an international business arena. The NFTC 

appreciates the Senate Finance Committee holding a hearing on state and local fiscal policy and 

strongly supports the Business Activity Tax Simplification Act of 2011, ("BATSA"), and respectfully asks 

that you consider the BATSA as you move forward in the tax reform discussion. 

A bill has been introduced in the House by Representatives Bob Goodlatte (R-VA) and Bobby Scott (OVA), (H.R. 1439) that has strong bipartisan support among members of the House Judiciary Committee. 

The bill would clarify the constitutional nexus standard governing state assessment of corporate income 

taxes and other direct taxes on a business (it would have no impact on sales and use or other nonincome-based taxes). Specifically, the bill articulates a bright-line physical presence standard that would 

ensure that both states and businesses understand the tax rules under which they are operating, Which 

is particularly important for businesses with customers in many states that all have separate business 

tax regimes and standards. 

The NFTC has a particular interest in supporting the BATSA bill, as the state's actions in 

pursuing taxes where there is a lack of physical presence of the taxpayer has, and will, 

cause uncertainty and widespread litigation, so much so that it has, and will, create a 

chilling effect on not only inter-state but also international commerce. The physical 

presence standard is articulated as a "permanent establishment standard" in our bi-Iateral tax treaties 

and under OECD guidelines. In other words, physical presence is the 

international norm. Adoption of a more nebulous standard by the States undermines 

these international treaties. Moreover, a violation of the international norms by the 

imposition of business activity taxes undermines the United States' negotiating position 

with foreign nations. A new tax structure is likely to invite reciprocal, aggressive tactics 

by foreign taxing authorities, seriously compromiSing the competitive leadership of U.S. 

businesses. Under the foreign tax credit system that has long been a cornerstone of our 

income tax system, this would in effect force the United States to cede to other nations' 

tax jurisdiction over U.S. activities that have no physical presence abroad. 

BATSA would ensure fairness, minimize costly litigation and create the kind of legally 

certain and stable environment that encourages businesses to make investments, expand interstate 

commerce and create new jobs. At the same time, the bill would ensure that businesses continue to pay 

business activity taxes to states that provide them with direct benefits and protections. 

Thank you once again for holding this hearing ... We look forward to working with 

you, your staff and all members of the Senate Finance Committee on the Business Activity Tax 

Simplification Act 

Adv:.mcing Global Commerce for Over 9D Years 

www.nftc.org 
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Hearing Statement of the 

National Governors Association 

Committee on Finance 

United States Senate 

"Tax Reform: What It Means for State and Local 

Tax and Fiscal Policy" 

April 25, 2012 
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Chainnan Baucus, Ranking Member Hatch, and members of the committee, the nation's 

governors appreciate your interest in considering how federal legislation may impact state 

taxation. For governors, the core principle Congress should adhere to regarding state taxation is 

simple: decisions about state revenue systems and state taxation should be made by elected 

officials in the states, not the federal government. 

This principle is particularly important as states continue to emerge from the recession. Unlike 

the federal government, states must balance their budgets. This requires states to make up for lost 

or decreased revenues by cutting spending and services or raising revenues. 

As this committee, and Congress as a whole, considers legislation to spur the economy, create 

jobs, promote competitiveness or refonn taxes, it should do so with an eye towards the critical 

role states play in promoting recovery. Specifically, any federal legislation that would impact 

state taxes or taxing authority should follow the guidelines of do no hann, preserve flexibility, be 

clear and respect state sovereignty. 

Fiscal Condition of States 

As Congress examines the possible effects of federal tax refonn on state governments, it is 

important to review the current fiscal condition of states. Since the depth of the recession, the 

overal1 fiscal condition of states has improved, but states continue to face fiscal pressures that are 

slowing their recovery. In fact, for many states, aggregate state revenues and spending remain 

below those recorded in 2008. Since that time, states have filled more than $325 billion in budget 

gaps through cuts to spending and services and revenue increases and yet still face another $30 

billion in gaps for fiscal year 2013. 

Part of states' fiscal challenges come from programs such as Medicaid. Although revenues and 

expenditures are growing slowly, Medicaid spending is outpacing revenue growth. This growth 

is fueled by increased emollments, the end of federal funds associated with the enhanced 

matching rate of state costs from the Recovery Act, and higher per capita health care costs in 

general. In many states, Medicaid has overtaken K-12 education as the largest single expense 

item in state budgets. 

States also face a fiscal "squeeze" from both federal and local governments. Widely anticipated 

declines in federal support will certainly have an impact on resources available to states, as will 

strong pressure from local governments to increase aid while restoring previous cuts. Although 

not every state reduced the amount of aid provided to local governments, overall, states redirected 

previously allocated aid to local governments to the general fund to help satisfY the increasing 

demand for state services in the face of slowly rising revenues. 

What this means for Congress is that any tax changes at the federal level must be measured 

against their fiscal impact at the state level. Federal policies that interfere with states' authority to 

manage their fiscal systems risk weakening states' fiscal condition and further prolonging their 

economic recovery. 
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Guidelines for federal legislation related to state taxation 

Governors believe federal action should favor the preservation of state sovereignty when 

legislating or regulating activity in the states. This is particularly true when it comes to actions 

that affect the ability of states to manage their revenue systems. The independent ability of states 

to develop and manage their own revenue systems is a basic tenet of our federal system. 

Therefore, the federal government should avoid legislation and regulations that would serve to 

preempt or prohibit, either directly or indirectly, sources of state revenues or state taxation 

methods that are otherwise constitutional. 

Since adoption of the U.S. Constitution, Congress has generally respected state sovereignty with 

regard to state taxes. Unfortunately, that trend has begun to change over the last few years as 

Congress has increasingly restricted the rights of states to determine their own tax structure. 

As this committee considers whether to take up legislation related to state taxation, governors 

encourage the committee to review all proposals in light of the following guidelines: 

• Do no harm: Legislation dealing with state taxing authority should not 

disproportionately reduce existing state revenues. This principle is especially important 

at a time when states are cutting core services to meet balanced budget requirements. 

Federal unfunded mandates or limits on state authority will only exacerbate the fiscal 

problems states currently face. 

• Preserve flexibility: The recession forced all governors and states to ask fundamental 

questions about the role of government. These questions have led to changes at the state 

level that could have long-term, positive effects on the delivery of services, modernizing 

revenue systems and holding government accountable. States should not be hindered in 

their pursuit ofthese reforms by federal legislation that restricts a state's authority to act. 

• Be clear: Federal legislation, especially in the context of state taxation, should be clear to 

limit ambiguity or the need for expensive and time-consuming litigation. 

• Respect state sovereignty: The independent ability of states to develop their own 

revenue systems is a basic tenet of self-government and our federalist system. The federal 

government should not enact any legislation that would preempt, either directly or 

indirectly, sources of state revenues, state tax bases, or state taxation methods without the 

input and support of states. 

Marketplace Fairness: 

The National Governors Association (NGA) urges Congress to honor these guidelines and level 

the playing field between out-of-state and in-state retailers by authorizing states to require remote 

vendors to collect state sales taxes. 

Specifically, governors a,e encouraged by the introduction of the "Marketplace Fairness Act" (S. 

1832), and the "Marketplace Equity Act," (H.R. 3179). Although the two bills are not identical, 

each bill would authorize states to require the collection of sales taxes in return for the 

implementation of tax simplifications that can help all businesses and create fairer competition. 
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For states, each bill represents the opportl)nity to collect more than $22 billion in sales taxes that 

are currently owed states. The ability of consumers to avoid paying appropriate state sales taxes 

was permitted by U.S. Supreme Court rulings in Bellas Hess v. Illinois and Quill Corp. v. North 

Dakota that say a state may not require a seller that does not have a physical presence in the state 

to collect tax on sales into the state. Consequently, the requirement to pay taxes on remote sales 

falls not to sellers but to consumers in the fonn of "Use" taxes, which are filed with year-end tax 

returns when they are filed at all. 

This problem is compounded by the explosive growth of the 

Internet, which allows remote businesses to compete with local 

brick and mortar stores for local customers. During the recent 

recession, as sales in brick and mortar stores retreated, Internet 

sales continued to grow at a double digit rate with recent 

figures showing sales of more than $308 billion this past year. 

As such, the Internet facilitates tax avoidance; the lack of an 

effective system to collect sales taxes at the time of purchase 

causes many Americans to incur - but not pay - the taxes they 

legally owe. 

NGA calls on Congress to examine the different proposals 

12-month retail sales 

NT!:RNE.1 ;'~ND 

\t~1,~K. OROEr! 

pending before it and move ahead with legislation that will .,.y .• ",,", 

help states modernize their sales tax systems and bring them 

into the 21't century. Specifically, NGA recommends that the legislation include a specific and 

clear grant of authority to states to require remote vendors to collect sales taxes; provide a small 

business exception that exempts genuinely small businesses from collection requirements; avoid 

impinging on states' authority to establish or remove a tax or set rates it finds appropriate; and not 

limit state authority over other forms of state taxation. 

Background: 

The Streamlined Sales and Use Tax Project (Project) was initiated by NGA and the National 

Conference of State Legislatures in the fall of 1999. The goal of the Project was to find solutions 

for the complexity in state sales tax systems that resulted in the U.S. Supreme Court holding that 

a state may not require a remote seller without a physical presence in the state to collect tax on 

sales into the state. 

As a result ofthe Supreme Court decisions, local brick-and-mortar stores operate at a competitive 

disadvantage with remote sellers who do not collect sales taxes. Local stores find themselves 

serving as showrooms for Internet and catalog sellers. Prospective customers check out the 

merchandise locally then buy the product online or through a catalog to avoid paying sales tax. 

To address this problem. the Project generated the Streamlined Sales and Use Tax Agreement 

(SSTA). a cooperative effort of 44 states, the District of Columbia, local governments and the 

business community to simplifY sales and use tax collection and administration by retailers and 

states. The SST A minimizes costs and administrative burdens on retailers that collect sales tax, 

particularly retailers operating in multiple states. It also encourages "remote sellers" selling over 
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the Internet and by mail order to voluntarily collect tax on sales to customers living in states that 

comply with the SST A. 

To date 1,736 retailers have volunteered to collect sales tax in streamlined states and have 

remitted more than $1 billion in sales taxes that would previously have gone uncollected. This 

amount, however, pales in comparison to what could be collected under a nationwide system 

authorized by Congress through federal legislation. 

Federal Legislation: 

NGA has supported several different bills over the years to grant states collection authority over 

remote vendors. As stated above, NGNs support for legislation is not tied to specific legislation, 

but to core elements that governors believe should be part of any federal grant of authority to 

states. 

First, federal legislation must specifically grant authority to states to require remote vendors to 

collect sales and use taxes on sales of taxable products and services delivered into their 

jurisdiction. More importantly, since the grant of authority is tied to meeting certain 

simplifications, the legislation should recognize the efforts of states which are compliant with the 

SSTA by granting them the authority to collect immediately. If an alternate path is offered for 

non-SST A states, the requirements must be clear so as to avoid litigation when the state makes 

changes to gain collection authority. 

Second, the legislation should include a small business exception that exempts genuinely small 

sellers from the collection requirements. While governors have never specified a level for the 

small business exception, the size of the exception should be sufficient to relieve the smallest 

businesses from collection authority, but small enough to ensure the exception does not swallow 

the rule. Compliance with the law will be made easier by software made available to small 

businesses to aid compliance. Any exception will preserve a portion of the tax collection gap 

states are working to close. NGA encourages Congress to set a low small business exception 

while allowing states to increase the exception as appropriate. 

Third, the legislation should not dictate rates or mandate the existence or removal of a sales tax. 

The ability of a state to manage its own fiscal system is at the core of state sovereignty and our 

federal system. States should be given maximum flexibility to determine the structure and level 

of taxation while meeting certain simplifications that promote efficiency and enhance the ability 

of sellers to collect and remit sales taxes. 

Additional tax legislation: 

NGA does not favor combining federal legislation like the Marketplace Fairness Act with bills 

that would restrict state authority or that fail to meet governors' recommended guidelines. 

A clear example of the type of legislation NGA opposes is the Business Activity Tax 

Simplification Act (H.R. 1439); a House bill that would mandate a physical presence nexus 

standard for all business activity taxes. Not only would the bill harm states by significantly 

reducing revenues, its exemptions would also lead to endless litigation, eliminate state authority 
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to tax companies earning profits in their states and favor businesses profitable enough to afford 

aggressive tax planning over smaller, local businesses. 

Likewise, bills that limit or prohibit states' ability to tax are blunt instruments that directly 

interfere with state sovereignty. Even bills that purport to establish uniform rules for taxation 

must be carefully crafted so as not to unwittingly interfere with state authority. Bi11s such as S. 

971, the Digital Goods and Services Tax Fairness Act claim to establish clear rules for sourcing 

transactions of digital goods, but they fail to adequately define the types of taxation subject to the 

bill and could have unintended consequences for states. This is the type of bill where Congress 

should insist that industry and states to work together to find common ground and craft workable 

legislation that has the support of industry, states and consumers. 

Tax treatment of interest on municipal bonds and other public finance matters: 

In addition to legislation that could affect states' authority to tax, Congress shOUld carefully 

consider the impact of changes to federal tax provisions that benefit states. For example, given 

the post-recession inventory of unmet infrastructure needs, proposals to adjust the current interest 

deduction for tax-exempt bonds would threaten the primary mechanism for funding the nation's 

public works. 

Through the tax exemption, the federal government provides critical support for the development 

and maintenance of essential facilities and services, which it cannot reasonably deliver by any 

other means. Unlike corporate bonds, the default rate in the approximately $2.8 trillion municipal 

bond market remains well below one percent. Long-term municipal bonds generally fund 

infrastructure investments, not operating expenses. Aggregate interest payments on state and 

local debt account for less than five percent of CUTTent expenditures, and aggregate state debt load 

as a share of GDP, while rising somewhat during the recession, remains within its historical range 

(12-18 percent). 

No effective substitute for tax-exempt bonds exists. Investor demand for alternatives like tax 

credit bonds is insufficient, at best. Taxable direct subsidy bonds permitted for issue during 2009 

and 2010 only complemented tax-exempt bonds, but only when the taxable bonds provided a 

subsidy far greater than the benefit to investors from interest deductibility. 

If municipal bond interest were taxable, or if the federal tax-exempt status on state and local 

bonds were capped or lifted, the cost of borrowing, and therefore of financing infrastructure 

would rise for states. Ultimately, this cost would be borne by taxpayers through reduced 

infrastructure spending, higher taxes, or both. 

Governors should be at the negotiating table and the impact of federal tax decisions on states 

given the highest consideration as federal policymakers consider federal tax reform. Shifting the 

federal system of income taxation to something else like a sales or consumption tax could damage 

administrative viability and limit state control of their tax systems because of federal 

encroachment into the traditional tax base of states. Corporate and individual income tax reform 

could also have consequences for state collections since state taxes are often linked to federal 

definitions. Finally, ending certain federal tax deductions for state and local income, property or 

sales taxes must be carefully considered to avoid unintended consequences. 
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Conclusion: 

Congress, through its authority under the Commerce Clause of the U.S. Constitution, has broad 

authority that can impact state taxation. The key question is when and how should that authority 

be used. The Marketplace Fairness Act represents the type of collaborative solution that is 

possible when states, industry and Congress work together to address difficult tax issues that 

require federal action. 

Governors believe that the ability of states to develop and manage their fiscal systems is a core 

element of sovereignty - one that should not be interfered with unless absolutely necessary to 

preserve interstate commerce. Governors urge Congress to support bills like the Marketplace 

Fairness Act and to encourage all stakeholders to work together to find mutually beneficial 

solutions to issues that could affect state and local taxation. 
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Testimony of Thomas J. Damrnrich, President 

National Marine Manufacturers Association 

Chicago,IL 

Submitted to the United States Senate Finance Committee 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April 25, 2012 

Mr. Chairman, Ranking Member Hatch, Members of the Senate Finance Committee. We 

appreciate the opportunity to submit this testimony to you as you consider the proper relationship 

between manufacturers and States that seek to assess income and similar taxes on nonresident 

companies, what is commonly referred to as the "Business Activity Tax Nexus" issue. The 

National Marine Manufacturers Association (NMMA) is the largest trade association 

representing manufacturers in the recreational boating industry. If you have heard of a 

recreational boat brand, we probably represent it. If you have heard of a marine engine brand, we 

probably represent it. If you have heard of a trailer or boating accessory manufacturer, we 

probably represent them. Our businesses generated over $30 billion in sales and services in 2010 

and contributed over $70 billion to the US economy that year. In 20 II recreational boating 

supported 353,000 Americanjobs. In 2010 our manufacturers provided a positive balance of 

trade for the United States, exporting over $573 million more in boats and marine engines than 

were imported. In short, the recreational marine industry is a powerful part of the US economy, 

providing good-paying jobs for hard-working Americans and offering untold opportunities for 

middle-class Americans to get outdoors and enjoy this great country of ours. 

Manufacturers in the recreational boating community, whether they make boats or engines or 

trailers or accessories, are more than willing to pay their fair share of taxes, providing those taxes 

are equitably levied by the jurisdictions in which they manufacture their products or in which 

they have some type of physical presence. What they and many other American businesses 

object to is States that believe they have a right to tax a manufacturer who has only the most 

tangential connection to the taxing State. We understand that any State faces the great temptation 

of raising funds from those who do not vote in its elections, but this "tax nexus" business has 

become completely absurd. Massachusetts, for example, claims that a business has established 

the necessary "nexus" for corporate income tax purposes if that business has vehicles that travel 

through Massachusetts more than twelve times in one year, even if it has no employee, office, or 

inventory in Massachusetts. Massachusetts does not require that the vehicles make deliveries or 

pick-ups in Massachusetts, only that they travel through the State on their way to somewhere 

else. Presumably the company or contract carriers pay the proper Massachusetts fuel taxes, so 

this is not about road building and maintenance. It is about a tax grab, pure and simple, in a State 

where revolutionaries proudly dumped tea into a harbor in 1773 because they objected to what 

they thought was unfair taxation. Does the Massachusetts transit-based tax make sense to anyone 

on this committee? I think not. 
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It is not the Commonwealth of Massachusetts, however, but the State of New Jersey, that 

regularly stops trucks moving along its highways and demands that payment of business activity 

taxes--based on a field survey--be wired to it before it will release the truck and cargo. As Joan 

C. Maxwell, President of Regulator Marine of Edenton, NC, stated in her testimony before a 

House committee this past year, "There is one state I am aware of that has a reputation (in the 

marine industry) for stopping loads and holding them until the Nexus taxes are paid. As a small 

company, Regulator cannot afford to risk boats not reaching their destination in a timely manner. 

Small businesses like Regulator literally operate off of cash flow. To mitigate some of the risk of 

stopped loads, Regulator ships on contract carriers in this state when use of its own equipment 

would be less expensive." What this means, Mr. Chairman, Ranking Member Hatch, and 

Members of the committee, is that this US boat manufacturer has been forced to make a business 

decision that costs it money based not on sound business practices, but on the uncertainty that 

results from a particular State's penchant for grabbing out-of-state boat shipments and holding 

them for ransom. And that, I think, is simply wrong and represents a problem that needs to be 

fixed. 

Michigan does not grab boats along the roadways. It simply sends tax bills through the US mail. 

Michigan claims that actively soliciting business in the State triggers the nexus required for the 

Michigan gross receipts tax to kick in. Monterey Boats of Williston, FL, discovered last year that 

Michigan will sometimes go after a manufacturer even when it has not actively solicited business 

in Michigan. Michigan apparently secured a copy of Monterey's federal tax return and slapped 

them with a "gross receipts tax" in the amount of $376,000--far more than the total worth ofthe 

boats that Monterey sold in Michigan that year. Monterey Boats, it should be pointed out, has no 

property in Michigan, no sales offices in Michigan, no agents in Michigan, and no employees in 

Michigan. Mark Duchanne of Monterey Boats told the St. Petersburg Times newspaper that, 

"The company's sales in the state in question [Michigan] for the year in question were $100,000 

less than the surprise tax assessment." Let me repeat that statement: "The company's sales in the 

state in question for the year in question were $100,000 less than the surprise tax assessment." 

Now, how could any reasonable person maintain that taxing a business more than the total value 

of business transacted in that State is anything but totally unfair and completely indefensible? 

It should be easy for the Members of this committee to see the possibilities here: a business 

could literally be taxed to death by States that are hungry for revenue from any and all sources if 

each State where the business has a customer decided to tax the gross receipts of the company in 

question. The fact that Michigan is so far the only State that is going after Monterey Boats in this 

fashion does not mean that other States where Monterey Boats has made a few sales could not 

also come after them and assert a right to tax its income. Other States couId cast covetous eyes 

on the amount of tax that Michigan is claiming from this small company and decide to do 

likewise. Monterey will undoubtedly contest this tax bill, and it might secure full or partial 

abatement of it, but Monterey will lose, regardless of the outcome, as it will have run up 

significant legal fees fighting the State of Michigan. This very large tax bill was not part of 

Monterey's budget planning for the year 2012, and it may well hinder this manufacturer as they 

attempt to survive in a super-competitive environment and keep their 250 employees working 

steadily and producing more of their fine boats. 

I could go on with other examples where States have claimed a dubious nexus as they sought to 

collect taxes on out-of-state businesses, but I am confident that you understand my point. Unless 
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the Congress steps in to clarifY that the U.S. Constitution requires physical presence nexus and 

sets forth a clear bright-line test for what constitutes physical presence, then we will continue to 

have a jumble of impossible-to-plan-for laws, regulations and enforcement actions that vary 

across the fifty States. And that, Mr. Chairman, Ranking Member Hatch, and other Members of 

this committee, is what needs to be fixed by the Congress. 

We are not asking you to develop this legislation out of nowhere. There is, in fact, legislation 

that has been reported favorably by the House Judiciary Committee that we believe would solve 

the problem. This legislation, the "Business Activity Tax Simplification Act," or "BATSA," was 

introduced on a bipartisan basis by Reps. Goodlatte (R-VA) and Scott (D-VA), and it now has 

eleven co-sponsors in the House. This bill, H.R. 1439, is a good place to start the deliberations, 

as it provides that a business must have some type of physical presence in a given State--

excluding a de minimis presence of less than 14 days during a taxable year-before a State 

would be permitted to impose a tax on the business. We believe this is a reasonable standard that 

businesses can use to plan for their tax liabilities so that they are not hit unexpectedly with large 

tax bills from States in which they have no physical presence. 

BATSA, or such version of it as you develop, would end the confusion that exists as a result of 

contradictory State court decisions and the refusal of the U.S. Supreme Court to decide the issue. 

It would apply to business activity taxes, including income and franchise taxes, but it would not 

apply to transaction taxes such as sales taxes. We believe it is fair for a State to tax in-state 

businesses and those that regularly conduct business there, but we believe it is grossly unfair for 

any State to reach out as the ones mentioned above have done and assert that simply passing 

through the State or selling a few products in the State allows a tax based on total, country-wide 

revenue. 

Article I, Section 8 of the U.S. Constitution provides Congress with the power "to regulate 

Commerce ... among the several States," and it is that power which we call upon the Congress 

to exercise. What we have seen is that the U.S. Supreme Court has been quite reluctant to 

involve itself in setting the parameters of State interference with interstate commerce. As 

recently as last fall the Supreme Court declined to hear a case involving Kentucky Fried Chicken 

(KFC) and the State ofIowa. Iowa had claimed that KFC, which owned no restaurants in Iowa 

and directly employed no persons in that State, could be forced to pay income taxes on royalties 

it received from Iowa franchisees. Because the U.S. Supreme Court refused to hear the case, 

KFC was left with an Iowa Supreme Court decision holding that the fried chicken-seller would 

owe $250,000 in back-taxes to the State. What we as manufacturers need is for the Congress to 

step forward, assert its primacy in the area of interstate commerce-which this most certainly 

is---and clarifY when a State can tax a business with little or no physical presence in that State. 

This is certainly not a partisan issue. It is a basic fairness issue, and we understand that a 

previous iteration of the bill has been scored as federal revenue-positive by the Congressional 

Budget Office. There is no reason to delay any longer, Mr. Chairman, Ranking Member Hatch, 

Members of this committee. The time is right to end unfair business taxation and to make it clear 

that taxing out-of-state entities can only be done within certain well-defined limits. American 

businesses are not asking for a hand-out from the Congress, only a fair and level playing field, 

free from the unexpected tax surprises that I have described to you today. Thank you for your 

time. 
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)National Retail Federation ® 

The Voice of Retail Worldwide 

Submission of the National Retail Federation 

to the 

Senate Committee on Finance 

Hearing on Tax Reform: What It Means for State and Local 

Tax and Fiscal Policy 

Liberty Place 

325 7th Street NW, Suite 1100 

Washington, DC 20004 

800.NRF.HOW2 (800.673.4692) 

202.783.7971 fax 202.737.2849 

www.nrf.com 

April 25, 2012 

David French 

Senior Vice President, Government Relations 

National Retail Federation 

3257'" Street, N.W. 

Suite lIDO 

Washington, D.C. 20004 

(202) 783-7971 

frenchd@nrf.com 
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80344.323

As the world's largest retail trade association and the voice of retail worldwide, NRF 

represents retailers of all types and sizes, including chain restaurants and industry partners, from 

the United States and more than 45 countries abroad. Retailers operate more than 3.6 million 

U.S. establishments that support one in four U.S. jobs - 42 million working Americans. 

Contributing $2.5 trillion to annual GDP, retail is a daily barometer for the nation's economy. 

NRF's Retail Means Jobs campaign emphasizes the economic importance of retail and 

encourages policymakers to support a Jobs, Innovation and Consumer Value Agenda aimed at 

boosting economic growth and job creation. www.l1lf.com 

Summary of Comments 

Members of the National Retail Federation believe that Congress must resolve the 

Constitutional questions posed by the Quill decision in a fashion which promotes a level playing 

field among retail competitors. As retailing evolves and Internet sales become a more prominent 

portion of total retail sales, it is critical that Congress address the sales tax collection discrimination 

that exists between brick -and-mortar and remote retailers. 

Brick-and-mortar retailers compete vigorously with each other and with remote retailers for 

market share. Different retailers have different strategies for going to market, but one feature is 

beyond a retailer's control: only some competitors collect sales taxes. This disadvantage is not 

created by the marketplace, but rather it is imposed by the current state of the law following the Quill 

decision, stifling retailers across the country. 

In addition to the pricing disadvantage caused by sales tax being included in the cost of the 

purchase from the brick-and-mortar store, local stores also bear a significant compliance burden for 

collecting the tax. Compliance costs for small retailers are extremely high, placing them at more 

of a competitive disadvantage.! The national average annual state and local retail compliance 

cost in 2003 was 3 percent of sales tax collected for all retailers: 13.47 percent for small retailers, 

5.20 percent for medium retailers, and 2.17 percent for large retailers.2 

Brick-and-mortar retailers are major contributors to the health of local communities and 

should not be placed at a disadvantage compared to remote sellers that have no local presence. 

Brick-and-mortar sellers employ people in the community, pay state and local income taxes, as well 

as property taxes. They sponsor local causes like the Little League, soccer, and Booster Clubs. 

Simplification is a key component for reform ofthe sales tax collection system for both 

brick-and-mortar sellers and remote sellers who voluntarily collect sales tax. Many members of 

the NRF voluntarily collect sales tax on remote sales into states where they do not have a 

physical presence. In many instances, the retailers that voluntarily collect sales tax do so only 

from states that have adopted the Streamlined Sales and Use Tax Agreement ("SSUTA") 

because of the Agreement's simplified collection requirements. 

I PricewaterhouseCoopers LLP, Retail Sales Tax Compliance Costs: A National Estimate Volume One: Main 

Report, April 2006. That study defined "small retailers" as having less than $1 million in annual retail sales. 

1 Jd. That study defined "medium retailers" has having over $1 million and up to $10 million in annual retail sales, 

and "large retailers" as having over $10 million in annual retail sales. 
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Granting states the authority to collect sales tax from remote sellers will add significant 

resources to state budgets to support essential local services including teachers, police officers, 

firefighters and ambulance crews. Remote sales include e-commerce, mail order sales, telephone 

orders, and deliveries made across state lines. By 2012, total e-commerce sales are estimated to 

reach $4 trillion dollars. 3 Annual national state and local sales tax losses on e-commerce alone 

are conservatively expected to grow to $1 1.4 billion by 2012 for a six-year total loss of $52 

bilIion.4 

NRF is encouraged by this Committee's interest in this issue as well as the several 

legislative proposals that have been introduced this Congress to address sales tax fairness, 

especially the Marketplace Fairness Act, S. 1832, introduced by Senator Enzi, Senator Durbin, 

Senator Alexander, and Senator Johnson. NRF supports Congress granting states remote 

collection authority with simpl ifications that ensure retailers are not unduly burdened by 

collecting and remitting sales taxes. Congress needs to pass S. 1832 this year. 

Background 

Consumption taxes are imposed on the sale or use of goods and some services that are 

subject to tax. It is a tax on the consumer and is imposed where the consumption takes place. So 

all sales in a given state are subject to the sales tax, regardless of whether the sale occurs in a 

store in the state or in the home of a resident ofthe state through their computer or telephone. If 

Congress permits the state to only collect the sales tax on sales that occur in stores in that state 

and not sales that occur over the computer in that state, than Congress would be discouraging 

intra-state commerce because retailers that sell goods within the state are at a competitive 

disadvantage vis-a-vis remote sellers. 

In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that "remote sellers" - a 

category that includes mail-order, telephone and Internet merchants cannot be required to 

collect sales tax from customers in states where the merchant does not have a physical presence 

or "nexus." The court reasoned that the sales tax system was too complex for a merchant to know 

what sales tax to charge an out-of-state customer 45 states and 7,600 local jurisdictions collect 

sales tax, each with its own rates, lists oftaxable items and definitions of taxable items. But the 

justices suggested that sales tax collection could be required if the system were simplified and 

Congress authorized the collection authority because remote sellers are "purposely availing" 

themselves to ajurisdiction's authority by engaging in commerce. 

In late 1999, in response to the Supreme Court ruling, states and the business community, 

including NRF, began the Streamlined Sales Tax Project, with an aim toward significant 

simplification of state sales tax systems. Since then, a baseline multi-state agreement, the 

SSUTA, which includes common definitions, uniform processes and procedures, and 

significantly simplified administrative features has been passed by 24 states (21 full member 

states and 3 associate member states), establishing the necessary groundwork for action by 

Congress. The 21 full member states with voting rights include: Arkansas, Iowa, Indiana, 

Georgia, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North 

3 Donald Bruce, William F. Fox, and LeAnn Luna, State and Local Government Sales Tax Revenue Lossesfrom 

Electronic Commerce, University of Tennessee, April 2009, available at http://cber.utk.eduiecommlecom0409.pdf. 

4 [d. 
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Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West 

Virginia, Wisconsin and Wyoming. Three associate member states with negotiating authority but 

delayed voting rights are Ohio, Tennessee and Utah. Delegates from the 24 states administer the 

SSUT A through the Streamlined Sales Tax Governing Board. 

As electronic commerce continues to grow, so will the losses to state and local revenues.5 

In fiscal year 2012, it is conservatively estimated that state and local governments stand to lose at 

least $23.2 billion in uncollected sales and use taxes from remote transactions, with over $11.4 

billion uncollected from e-commerce transactions.6 General sales taxes make up roughly one 

third of state tax revenue.7 

The Effect of Simplification on Retailers 

Through adoption of the SSUTA, 24 states have already implemented significant 

simplification of their sales tax laws. This simplification has incentivized collection of sales tax 

by many remote sellers that currently are not required to collect sales taxes. For example, a large 

regional retailer with a significant national business through their Internet channel has even made 

the decision to collect sales tax on remote sales but only in states that have adopted the SSUTA. 

Many remote sellers recognize that collecting sales taxes may be a more efficient 

approach to dealing with the realities oftheir constantly evolving business model. Nonetheless, 

their good faith effort to collect sales tax would be undermined by collection authority that did 

not include significant simplification steps. 

While NRF believes that a modest small seller exemption for remote sales is appropriate, 

raising the level too high will only exacerbate the potential for inequity between a small remote 

retailer that does not have to collect any taxes and a local small retail competitor who must 

collect sales taxes on the first dollar of sales. Congress should resist the temptation to envision 

that a small seller exemption is the easy answer to meaningful small business regulatory relief. 

Current Sales Tax Fairness Legislation before Congress 

The two leading bills introduced this Congress to address the issue of sales tax fairness 

are the Marketplace Fairness Act and the Marketplace Equity Act. 

5 Jd. 

6 !d. 

(I) Marketplace Fairness Act of 20 II, S.1832, sponsored by Senators Enzi, Durbin, 

Alexander and Tim Johnson provides a path for states to collect sales tax that 

incorporates a combination of either nine simplification steps or adoption of the 

SSUTA. The Marketplace Fairness Act exempts remote sellers with less than 

$500,000 in remote U.S. sales, requires a single audit by states and localities within a 

state, requires a single state tax rate based on the destination of the sale, states must 

establish certification procedures for software and service providers (to calculate 

7 Lucy Dadayan and Robert B. Ward, Slate Revenue Report, The Nelson A. Rockefeller Institute of Government, 

Oct. 2011, No. 85, available at htlp:llwww.rockinst.orglpdf/government_finance/state_revenueJeport/2011-10-26-

SRR_85.pdf. 
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rates), and gives remote sellers liability protection for relying on incorrect 

information supplied by service providers. 

(2) Marketplace Equity Act of2011, H.R. 3179, sponsored by Representatives Womack 

and Speier allows states to collect sales taxes from remote sellers if they meet three 

minimum simplification requirements. These three simplification requirements may 

be met in an interstate agreement, presumably including the SSUT A. Sellers with 

less than $1 million in remote U.S. sales or $100,000 in remote sales into a particular 

state are exempted. The three simplification steps are: (I) a single revenue authority 

within a state for submission of a return; (2) a single tax base set by the state; and (3) 

the state must choose a single tax rate from three choices: a blended rate of state and 

locality rates, the maximum state rate, or the destination rate. 

Each bill grants states the authority to require remote sellers to collect sales tax on 

transactions into their respective state if simplification steps are adopted. The varying 

simplification requirements include tax base, tax rate, and collection software requirements. We 

generally prefer the "hybrid" structure of the Marketplace Fairness Act, which will allow states 

to choose between a state-based solution like the SSUT A or a set of federally mandated 

minimum simplification steps before gaining collection authority on remote sales. 

Conclusion 

The National Retail Federation has long supported sales tax fairness legislation, and we 

are encouraged by the momentum that is building toward a solution. We look forward to 

working with the Committee on legislation to ensure effective and fair sales tax collection while 

relieving burdens placed on a growing sector of the economy. 
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IVTU 

National Taxpayers Union # 

April 25, 2012 

An Open Letter to the Senate Committee on Finance: Avoid Encouraging 

Predatory State Tax Policies, Embrace Taxpayer Protection Legislation! 

Dear Chainnan Baucus, Ranking Member Hatch, and Members of the Committee: 

The 362,000 members of National Taxpayers Union (NTU) commend you for holding a hearing 

today on "Tax Refonn: What It Means for State and Local Tax and Fiscal Policy," Throughout our 40-

plus-year history, NTU and its members have actively engaged in the debate over fiscal federalism issues 

and their impact on the economy. As you explore this topic, we urge you to consider the benefits of 

several House and Senate bills that could protect taxpayers from unwise state and local tax policies - and, 

to beware ofthe serious drawbacks behind other pieces oflegislation purporting to establish "tax 

fairness." Specifically, we commend your attention to the following proposals: 

Oppose S. 1452, the Main Street Fairness Act, S. 1832, the Marketplace Fairness Act, and 

H.R. 3179, the Marketplace Equity Act. All of these bills contain the words "Fairness" or "Equity"; yet, 

by giving the federal government's blessing to state tax collection powers on "remote sales" beyond their 

borders, these pieces oflegislation would achieve precisely the opposite outcomes that their titles express. 

Although supporters of the bills claim that they intend to level the playing field between "brick-andmortar" retailers and online sellers, the result would be decidedly tilted. Traditional stores with physical 

outlets would not be forced to quiz their customers about place of residence and remit sales taxes to farflung jurisdictions, but online and mail-order businesses would be saddled with such requirements. The 

tax compliance costs - especially to small sellers - would be considerable, and, as with income taxes, 

would not magically vanish with the existence of tracking software. 

Furthennore, whether by compelling states' entry into the Streamlined Sales and Use Tax regime 

or by encouraging them to take similar steps voluntarily, this legislation would severely harm one of the 

most dynamic aspects of the federal system: tax policy competition. The reality is that brick-and-mortar as 

well as online sellers must contend with tax and regulatory regimes that fall in various ways upon their 

modes of commerce. Both can face profit and property taxes that are often punitive, especially for sole 

proprietorships or "Mom and Pop" establishments. "E-tailers," being heavily reliant on 

telecommunications and shipping infrastructure, bear a heavier tax load resulting from these necessary 

activities. Stores have greater sales tax collection and remittance obligations, but they have the business 

advantage of a physical location customers can visit. Both entities collect taxes on transactions where the 

buyer and seller are present in the same jurisdiction. We would contend that tax competition can make the 

commercial environment more hospitable for all sorts of business structures. 

Finally, the concept of substantial physical presence, or nexus, has long provided a safeguard 

against many kinds of overaggressive state and local tax collection tactics. Throwing away this 
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established constitutional doctrine would have adverse consequences not only for sales tax collection 

standards, but for other types of taxes as well. 

Rather than rushing to adopt legislation that We • undermine key taxpayer protections, Members 

of Congress should give thought to other reforms that: 

I) Preserve tax competition among states; 

2) Protect businesses from onerous compliance burdens; 

3) Recognize the federal role in facilitating fair and equitable interstate commerce; and 

4) Limit the intrusiveness of governments at all levels in everyday economic activities. 

One concept worth exploring is origin-based sourcing, which would treat all transactions -

including remote ones the same, by subjecting them to just one point of taxation (the jurisdiction within 

which the business is sited). Clearly, any approach designed along these lines would need to include 

assurances that any revenues resulting from its implementation would be used for across-the-board 

reductions in tax rates. 

Support S. 543, the Wireless Tax Fairness Act. The four tenets of reform expressed above are 

applicable to many fiscal matters, none more appropriately than to telecommunications taxation. The 

typical combined federal, state, and local tax bite on a wireless bill is 16 percent, roughly twice as painful 

as the average bite on other goods and services. Just as it acted nearly 15 years ago to prevent multiple 

and discriminatory taxes on Internet access, Congress must now work to place limits on multiple and 

discriminatory layers of state and local taxation on wireless consumers. Such a move would also send the 

right message to providers, who would be better able to make innovative contributions toward a more 

robust economic recovery. 

Support H.R. 1804, the State Video Tax Fairness Act. By failing to recognize the difference in 

business models between terrestrial television providers (who themselves are often overtaxed) and 

satellite providers, some state and local officials have sought to slap satellite customers with higher 

impositions on video service. Congress should counteract the impulse to impose higher burdens on one 

provider due to the excessive burdens faced by another. H.R. 1804 would prohibit inequitable net taxes 

that are dependent on the mode of programming delivery - a worthy idea that Senators should embrace 

with their own legislation as well. 

Support S. 971, the Digital Goods and Services Tax Fairness Act. The dizzying rise of music 

downloads, mobile-phone apps, and other digital products has left some state and local tax officials giddy 

over the prospects of higher revenues. Given that consumers can now be charged taxes from several 

jurisdictions on the same purchase (e.g., from the state where the seller's server is located, from the state 

where the customer's phone bill is sent, from the location where the consumer downloads the item), it is 

perfectly legitimate for Congress to establish boundaries for these practices. S. 971 prudently prevents 

states from piling on repetitive download taxes, and requires an affirmative legislative act by a state (as 

opposed to an administrative edict) in order to tax digital goods. As NTU, Americans for Tax Reform, 

and other citizen groups stated in a letter delivered separately to you: 

Internet and digital commerce is a highly dynamic and rapidly growing sector of the American 

economy. The Digital Goods and Services Tax Fairness Act will help to eliminate any tax-related 

burdens on interstate commerce that could stifle the vital online market. 
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Support H.R. 1864, the Mobile Workforce State Income Tax Simplification Act. In today's 

economy, millions of Americans accept temporary assignments outside their state of residence or 

traditional workplace location. Yet, some state and local tax laws are horrendously out of touch with this 

fact, causing unnecessary compliance headaches for workers and employers alike. H.R. 1864 would set 

federal guidelines for the way states and localities can impose earnings taxes on most nonresidents, 

including a minimum threshold of time spent in-state (more than 30 days) before compliance 

requirements are triggered. All other tax obligations in the worker's or employer's home state would 

remain unchanged. NTU urges Members ofthe Committee to consider authoring a Senate companion to 

H.R. 1864. 

Other legislation introduced in this Congress could simplify and clarify state and local tax policy 

to improve America's competitiveness. This would include the Business Activity Tax Simplification Act 

(H.R. 1439) and S. Res. 309, which affirms that Congress will not give states "the authority to impose any 

new burdensome or unfair tax collecting requirements on small online businesses." 

As Members of the Committee review these and other legislative proposals, NTU would remind 

you of the fundamental contradictions between bills that would act to expand state tax collection powers 

in new and destructive directions versus those that establish sensible curbs on such powers. In our view, 

all Members of Congress who consider themselves taxpayer advocates should recognize these differences 

and vote accordingly. It is inconsistent to work toward enactment oflegislation such as S. 1452 and S. 

1832, which directly clashes with the salutary precepts behind legislation such as S. 971 and H.R. 1864. 

As you and your colleagues consider next steps, NTU and its members look forward to charting with you 

a legislative course that avoids obstacles to prosperity and leads to a brighter economic future. Toward 

this end, we hope you will find our recommendations helpful. 

Pete Sepp 

Executive Vice President 

108 North Alfred Street * Alexandria. Virginia 21314 * Phone: (703) 683-5700 * Fax: (703) 683-5722 *Web: www.ntu.org 
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80344330.eps

JEFF NESSEl DISTRICT 7 NE:L PeRU':- CUUNTY 

Thursday, April 26, 2012 

House of Representatives 

State of Idaho 

Comments for inclusion in the hearing record for: 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

Held before the Un~ed States Senate Committee on Finance 

Wednesday, April 25, 2012,10:00 AM 

Submitted by: 

Representative Jeff Nesset 

1517 Paddock Avenue 

Lewiston, ID 83501 

Representative Leon Smith 

1381 Galena Drive 

Twin Falls, ID 83301 

Unites States Senate Finance Committee, Chairman Baucu8, Ranking Member Hatch, 

Idaho Senior Senator, Mike Crapo and Members of the Senate Finance Committee: 

Idaho State Legislators have been working on an e-fairness commerce bill for several years. 

Many of us. along with Idaho Governor Otter, realize how vital this is to the Idaho economy. After 

a summers work. a 79 page e-fairness state bill that would put Idaho in conformance with the 

Streamlined Sales Tax Agreement was introduced but defeated by a close vote in the House 

Revenue and Taxation Comm~tee. 

So we come to you for help. 

Idaho needs to facilitate collection of sales tax from remote online-sales. We believe that Idaho 

alone is losing out on approximately $35 million per year of uncollected revenue from the sales 

tax online-sales should bring in. To say that again. it is roughly 35 million dollars of sales tax that 

our state is missing out on: $35 million that we could use to possibly lower the overall tax burden 

on Idaho citizens. 

But what is really unfair is that the hard working citizens of our state. who build shops and invest 

in main street stores. all have to pay our Idaho state sales tax. Yet. their ever-present. evergrowing. main competitors. the online-retailers. do not have to pay a penny In sales tax to Idaho. 

Why not? Well. it is because of Supreme Court decisions (Quill Corp vs. North Dakota and Bellas 

Hess VS. Illinois) that inadvertently created a tax loophole for the online retailers. The problem is 

that this tax loophole still eXists and Congress. seems to be the only entity that can lift this for all 

states collecting sales tax. 
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Idaho really is a strong Free Enterprise state and we are quite proud of that. But we find 

ourselves stuck with a set of unfair rules that our shop owners in Idaho have to live by. So, you 

can see why we need you as a Legislative body to free up this shackle of business favoritism 

towards online sellers, which impairs our competitive edge and creates an unlevel playing field. 

Senators, we are asking that you "grant"states the right to collect online-retail sales tax. 

We encourage the US Congress to successfully pass the Marketplace Fairness Bill because 

Idaho is ready with a 79 page bill that we could pass and be ready for the Federal Act. 

We, Representative Jeff Nesset, State House Seat 7 A and Representative Leon Smith, State 

House Seat 24A, thank you for your time and encourage the Senate body to support the Marketplace Fairness Act, giving states' rights back to the individual states. 

Representative Jeff Nesset 

1517 Paddock Avenue 

Lewiston. 10 83501 

Representative Leon Smith 

1381 Galena Drive 

Twin Falls. 10 83301 
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Statement of 

Steve DelBianco 

Executive Director 

NetCh Ii\! Ie 

Testimony before the 

United States Senate Committee on Finance 

Tax Refonn: What It Means for State and Local Tax and Fiscal Policy 

April 25, 2012 
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Chairman Baucus, Ranking Member Hatch, and members of the committee: thank you 

for holding this hearing on federal tax reform and its impact on state and local governments. My 

name is Steve DelBianco, and I serve as Executive Director of NetChoice, a coalition of leading 

e-commerce and online companies promoting the value, convenience, and choice of Internet 

business models. NetChoice members include industry leaders such as eBay, Expedia, 

Facebook, LivingSocial, NewsCorp, VeriSign, and Yahoo, plus several thousand small online 

businesses. 

In this testimony we are addressing just the portion of this hearing that examines the 

impact of current Senate legislation that would authorize states to impose sales tax obligations 

on out-of-state businesses (S.1832 and S.1452). 

Why don't online retailers pay sales tax to every state? 

Last November, the editors of the Wall Street Journal asked NetChoice whether all online 

retailers should have to pay sales tax to every state. My published essay began with this: 

Should online retailers have to collect sales tax? Yes, and they already do. 

Just like all retailers, online stores must collect sales tax for every state where 

they have a physical presence. That's why Amazon.com adds sales tax to 

orders from customers in the 5 states where it has facilities. But Amazon and 

online retailers aren't required to collect tax for other states, leaving those 

customers to pay a "use tax" that states rarely enforce against individual 

taxpayers. This framework frustrates state tax collectors and businesses that 

compete with online retailers. But when we learn how this physical presence 

requirement evolved, it becomes clear why we should retain this standard for 

imposing new tax collection burdens on online retailers. 1 

As members of this committee know, today's physical presence standard is based on Article 

One of the United States Constitution, created 225 years ago to stop states from impeding 

interstate commerce. The so-called Commerce Clause was a necessary condition to unite the 

independent colonies, since they had a legacy of imposing customs duties and trade barriers to 

favor in-state businesses over out-of-state competitors. 

1 Steve DelBianco, Should States Require Online Retailers To Collect Sales Tax?, Wall Street Journal (Nov. 14, 

2011) (emphasis added). 
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Fast-forward to the 1960s, when state tax collectors wanted catalog retailers to collect their 

sales taxes, even where those catalogs had no operations in the state, The US Supreme Court 

relied on the Commerce Clause in deciding that states could not impose tax collection 

requirements on catalogs "whose only connection with customers in the State is by common 

carrier or the United States maiL,,2 

In 1992, the Supreme Court took another look at tax collection by an office products catalog 

company by the name of Quill, Seeing a patchwork of rates and rules for several thousand 

sales tax jurisdictions, the Court again held that requiring out-of-state companies to collect and 

remit taxes was so complicated that it presented an unreasonable burden on interstate 

commerce, 

Moreover, the Supreme Court was not moved by the state's argument that computer technology 

created the necessary simplification, Instead, the Supreme Court acknowledged the lower 

court's finding that advances in computer technology had eased the burdens of tax collection, 

but still found the requirement of tax collection unduly burdensome, 3 

And Quill was not about "fairness," While some argued fairness as justification for the collection 

requirement, "[i]n contrast, the Commerce Clause and its nexus requirement are informed not 

so much by concerns about fairness for the individual [state] as by structural concerns about the 

effects of state regulation on the national economy. ,,4 

Quill is the law of the land today, protecting American businesses from sales tax imposition by 

states where that business has no physical presence, Quill also made it clear that states could 

simplify their sales tax systems and come back to the Supreme Court and show that they have 

truly eliminated the unreasonable burden on interstate commerce, 

But instead, a handful of states chose to skip the harsh judgment of the Court and go directly to 

Congress to request the power to impose these burdens on out-of-state businesses, Their 

efforts began a decade ago with the Streamlined Sales Tax Project (SSTP), 

2 Nat'l Bellas Hess, Inc. v, Dept. of Rev. of III" 386 U, S, 753 at 758 (1967). 

3 See Quill Corp. v, North Dakota, 504 U,S, 298 at 313 FN 6 (1992), 

4 Id. at 312 (emphasis added), 
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Despite a decade of effort, the actual simplification achieved by the SSTP is not nearly sufficient 

to justify having Congress abandon its role in protecting interstate commerce. Rather, the 

SSTP has shown that simplification has become just a slogan - not a standard. 

Most critics cite the fact that SSTP originally promised just one tax rate per state, but now 

accommodates over 9,600 local jurisdictions,s each with its own tax rate and sales tax holidays. 

Moreover, consider these examples of how the simplification campaign has come unraveled: 

SSTP abandoned a destination-sourcing scheme to accommodate both origin and 

destination based taxes at the same time. 

One foundational principle of simplification was to use the delivery destination of any 

shipment to determine which state's rates and rules should apply. But that was deemed 

too troublesome for states that base their sales tax on where shipments originate, not 

where they are delivered. To help those origin-based states join the SSTP, the 

Governing Board now lets states use origin-based rules for intrastate shipments while 

requiring out-of-state sellers to collect sales tax based on the destination jurisdiction. 

States are systematically undermining their promise to simplify definitions and rules. 

Member states have already strayed from the library of definitions in their Agreement 

and have allowed states to retain non-conforming definitions by calling them something 

other than a sales tax. Moreover, states now want to allow tax thresholds on individual 

sale transactions, which was one of the major complexities that SSTP was designed to 

eliminate. 

Despite these concessions, less than half of eligible states have joined SSTP (only 21 full 

member states in SSTP out of 46 states that have sales and use tax). 

Why was SSTP losing momentum among states that were told they would receive billions of 

dollars in new tax revenue? Possibly because non-member states are reluctant to let unelected 

tax administrators make decisions about tax rules and determine compliance. More likely, 

SSTP was losing momentum because states began to see the revenue estimates as wildly 

5 See Scott Drenkard, State & Local Sales Taxes in 2012, Tax Foundation Fiscal Fact No. 291, Feb. 14,2012, at 

http:ltwww.taxfoundation.orglnews/show/27967.html. 
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inflated. According to a study by economists Robert Litan and Jeffrey Eisenach, uncollected 

sales tax on e-commerce in 2012 is about $3 billion nationwide, which is only 1/3 of one percent 

of total state and local tax revenue.s 

Recently, despite flagging momentum and 

diminishing revenue estimates, members of this 

committee have surely noticed increased lobbying 

efforts to overturn Quill's physical presence test and 

authorize states to collect from remote retailers. 

Aside from the usual tax proponents in state 

government, the renewed push is coming from bigbox retailers. 

Big-bOX retail chains are pushing hard for federal 

legislation for a simple and predictable reason: it 

serves their interests. Even a little simplification 

helps a big-box retailer who must already collect tax 

for most states. Big-bOX retailers now have 

expansive web-stores of their own and give 

customers the convenience of doing pickups and 

returns at their local stores. These chains use plenty 

of local public services wherever they have stores, 

so they must collect sales tax in all their states - as 

required under current law. The Eisenach study 

described above looked at sales collection practices 

for the top 500 e-retailers, and found that 17 of the 

top 20 already collect in at least 38 states. 

Top 20 e-Retailers with their 

Collection and Remittance of Taxes 

Company States 

Amazon.com 5 

Staples 44 

Dell 46 

Office Depot 46 

Apple 46 

OfficeMax 46 

Sears 46 

COW 46 

Newegg 3 

Best Buy 46 

QVC 46 

SonYStyle.com 46 

Walmart.com 46 

Costco Wholesale 38 

J.e. Penney 46 

HP Office 46 

Circuit City Stores 29 

Victoria's Secret 4S 

Target 46 

Systemax 5 

Another way that overturning Quill would also help big-box retailers is that it would force tax 

collection costs on their biggest online competitor, Amazon. Big-box retailers have aggressively 

gone after Amazon in the states, lobbying for new "Amazon Tax" laws declaring that Amazon 

already has physical presence by virtue of its advertising affiliates, distribution centers, or other 

6 Eisenach & Utan, Uncollected Sales Taxes On Electronic Commerce: A Reality Check, Empiris LLC (Feb. 2010), 

available at hHp:llbit.ly/EisenStudy. 
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subsidiaries in the state. The big-box retailers also lobbied for a new tax reporting law in 

Colorado, which was recently overturned by federal court as a violation of the Commerce 

Clause. 7 

Despite the setback in Colorado and pending court challenges of the "Amazon Tax' in New York 

and illinois, this aggressive and expensive state lobbying campaign has succeeded in creating 

well-publicized tax compliance problems for Amazon. Those problems have helped to drive 

Amazon to support federal legislation such as 5.1832 and 5.1452. 

But there's another reason for Amazon's about-face: the company is changing its business 

model by adding distribution centers in new states, placing drop-boxes in convenience stores, 

and offering coupons for local merchants. As a result, Amazon will have physical presence in 

eleven states by 20148 - requiring Amazon to collect sales tax for more than a third of all 

Americans. Like the big-box stores, Amazon will soon see a benefit to overturning Quill in 

return for a bit of simplification and for burdening its smaller online-only competitors with new 

tax collection costs. 

To impose expensive collection burdens on small sellers would be grossly unfair, which brings 

us to the aspect of "fairness" in the debate over new Internet sales taxes. 

Is this debate really about "fairness"? 

The Constitution's Commerce clause has nothing to do with fairness. As explained above, it 

was all about preventing unreasonable barriers to interstate commerce, such as the customs 

duties imposed by the independent states before they united. In fact, Quill explicitly dismissed 

the fairness argument, saying the "Commerce Clause and its nexus requirement are informed 

not so much by concerns about fairness" but rather "the effects of state regulation on the 

national economy."g 

7 See Order of Ct., The Direct Marketing Ass'n v. Huber (U.S. Dist. ct. Colo. Mar. 30, 2012 ), and see 1 Colo. Code 

Regs. § 201-1:39-21-112.3.5 (2010). 

B By 2014 Amazon will collect and remit sales taxes in the following states California, Indiana, Kansas, Kentucky, 

North Dakota, New York, Pennsylvania, South Carolina, Tennessee, Virginia, and Vermont. 

9 Quill, 504 U.S. at 312. 
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"Fairness" is what you get when everyone plays by the same rules. And today, with Quill in 

place, all online and offline businesses play by exactly the same rule: all retailers collect sales 

tax for every state where they choose to have a physical presence. 

Ironically, in many states the fairness argument cuts the other way. A retail store on main street 

collects sales tax for just the one jurisdiction where it's located. But an online retailer operating 

right upstairs must collect and remit for each of the local towns and counties whenever it ships 

within the state. In some states that means collecting for several hundred local tax jurisdictions, 

each with its own rates and rules. Yet when customers from surrounding towns walk in the 

door, the store collects and files only in the local jurisdiction. 

Again, all retailers collect sales tax for every state where they choose to have a physical 

presence. I say, "choose" because it is the business that chooses whether to be just an online 

retailer or to operate physically in multiple states. When a business chooses to open stores or 

put sales reps in another state, it accepts the obligation to collect that state's sales tax. 

There's actually little evidence that retailers who do collect sales tax are losing significant sales 

to online retailers who aren't required to collect sales tax. That makes sense, since sales tax 

and shipping costs aren't added until a consumer's online shopping cart goes to checkout. So 

comparison shoppers are usually comparing prices before adding any tax and shipping charges. 

Moreover, online shoppers usually pay shipping and handling charges that offset any tax that's 

not collected on most commodities. Small and expensive electronics are a notable exception; 

however, SSTP proponents have shown us no studies indicating that significant numbers of 

electronics shoppers deliberately choose out-of-state online retailers just so they can avoid 

paying sales tax. 

e-Commerce is the best hope for Main Street to compete with Big-Box Stores 

Those who make the fairness claim about online versus offline are missing the far greater 

fairness concern of small retailers competing against big-box chain stores. 

For decades, "main street" retailers have been getting battered by Walmart and other national 

chains. To survive, many main street retailers have gone online with their own web stores or 

with e-commerce platforms to serve repeat customers and to find new customers across the 

country. For example, the specialty retailer SilverGallery.com has a warehouse and storelocated on Main Street-in Waynesboro, Virginia. SilverGaliery, which was featured in a Wall 
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Street Journal article last year, does some walk-in trade, but most sales come from their web 

store and other online channels. 10 Online sales growth enabled SilverGallery to buy their 

building and increase employment, right there on Main Street. 

The last decade has seen another body blow delivered by big-box chains, who integrated their 

website operation with their stores in every city and town. Customers love the savings of dOing 

in-store pickups to avoid shipping charges. And they love the convenience of returning online 

purchases to stores for exchange or credit - instead of packaging returns and standing in line at 

the post office. But small sellers like SilverGaliery can't afford to open stores in every state. It's 

yet another advantage that big retailers have over small businesses with websites. The big 

chains also negotiate much lower rates for advertising, shipping costs, and health insurance, 

too. 

Next comes the knockout punch for small retailers. Overturning Quill may be good news for bigbox retailers with websites, since they already have to collect in nearly all states. But 

overturning Quill will definitely raise costs and prices for small businesses that compete - and 

survive - via their web and catalog sales. 

What is the impact on small businesses if they are required to pay sales tax to 46 states? 

What costs would a small business face if Congress forced them to pay sales tax to all 46 

states? The SST Cost of Collection 11 study found that a small business (under $1 M in annual 

sales) spends 17 cents for every tax dollar it collects for states. And even if SST software works 

as promised, that only helps with 2 cents of the 17 cents in costs per dollar collected. That 

leaves small businesses with a 15% cost burden on every dollar they collect, for things such as: 

Paying computer consultants to integrate SST software into home-grown or customized 

software; 

Training customer support and back-office staff; 

Answering customer questions about the taxability of items, or sales tax holidays in 

remote jurisdictions; 

Handling audit questions from 46 states; and 

Paying accountants and computer consultants to answer all these questions. 

10 See Angus Liten, Sa/es-Tax Measures Yo Cost Us Big', Wall. SI. Jo. (Dec. 1,2011). 

11 Available at htlp:IIWWW.netchoice.orglWp-contentiuploads/cost-of-coliection-study-sstp.pdf. 
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These collection burdens will be a big problem for small catalog and online businesses that 

collect only their home-state sales tax today. Ask any small business, on Main Street or online, 

and you'll learn it's hard enough to collect sales tax for one state, let alone all 45 states with 

sales tax laws of their own. 

With a full picture of what small online businesses would face from SST, it's easy to see why 

Senator Wyden and five co-sponsors introduced Resolution 309 to protect our nation's Internet 

entrepreneurs. S. Res 309 is titled "Supporting the Preservation of Internet Entrepreneurs and 

Small Businesses." Its main point is this simple pledge: 

Congress should not enact any legislation that would grant State 

govemments the authority to impose any new burdensome or unfair tax 

col/ecting requirements on smal/ online businesses and entrepreneurs, which 

would ultimately hurt the economy and consumers in the United States. 12 

The bottom line on "fairness" is that big-box retailers have wielded that term for their own benefit 

to the detriment of any small retailers they haven't already extinguished. 

Is it a new tax? Yes. 

State sales tax laws put obligations on both buyers and sellers in order to maximize revenue 

collection. States levy a sales tax on sellers within their jurisdiction, and it's up to the seller 

whether to pass that tax along to buyers. Most sellers do pass the tax along to buyers, whether 

at the cash register, online, or over the phone. But after an audit, a seller is liable for any sales 

tax they were obliged to collect but failed to do so, even when the seller can't recover the tax 

from those previous customers. This demonstrates how sales tax is due from sellers whose 

activities or locations create enough of a physical presence for a state to impose collection 

obligations. 

If Congress overturns the Quill physical presence standard, retail businesses would be forced to 

pay a new tax to states where they have no physical presence. Most of those businesses would 

pass the tax along to their customers, but, make no mistake about it, the states will demand that 

businesses pay the new tax - whether or not their customers were charged. 

12 S. Res. 309, 112th Congo (2011) (emphasis added). 
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Congress can take the time to require real simplification 

In truth, the actual simplification required in S.1452 and S .1832 is not nearly sufficient to 

convince Congress that it should abandon its Constitutional role in protecting interstate 

commerce. 

Fortunately, Congress can afford to take the time to design legislation that requires real 

simplification and makes states accountable to these requirements. As noted above, the 

uncollected taxes are far lower than tax advocates have claimed: uncollected sales tax on 

consumer e-commerce is only 1/3 of one percent of all state and local taxes, as explained 

above. And the uncollected amounts are not growing as fast as tax advocates have claimed, 

since the fastest growth in e-commerce is among multi-channel retailers who already collect for 

all states where they have stores. In fact, 17 of the top 20 e-retailers already collect for at least 

38 of the 46 sales tax states.'3 

However, if Congress is determined to overturn Constitutional protections for interstate 

commerce, it must exempt small businesses, require states to adopt minimum simplification 

requirements, and create fair procedures to resolve sales tax disputes between states and 

taxpayers. 

Below are minimum simplifications that should be part of any federal legislation that overturns 

the Quill standard of physical presence for states to impose sales tax on remote businesses. 

Minimum Simplification Requirements 

A robust exception for small sellers. Bills currently in Congress include small seller 

thresholds that are simply too low to be considered realistic. Previous Congresses 

pegged the small seller exception at $5 million in annual remote sales, a figure that 

should be the bare minimum in any federal legislation. In fact, the small seller 

threshold should be higher than $5 million, given that states are continuing to add 

new tax jurisdictions at the rate of 400 per year. 

There should be a single sales tax rate for remote sales made into each state, as 

was the original goal of the SSTP. State lawmakers would, of course, be able to 

allocate sales tax proceeds among local jurisdictions. 

States should compensate businesses for the reasonable cost of collecting sales 

taxes. This too was part of earlier federal legislation. 

A single set of definitions for taxable and exempt products for m! states. 

13 Eisenach & Utan, Uncollected Sales Taxes On Electronic Commerce: A Reality Check. Empiris LLC (Feb. 2010), 

available at http://bit.lyIEisenStudy. 
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A single audit conducted by retailer's home state on behalf of ~ states. 

All states should accept a single sales tax return filed with a business' home state. 

The home state revenue department would be responsible for distributing funds to 

remote states. 

A single national rule for sourcing sales. The SSTP originally maintained destination 

sourcing for all sales tax transactions. But to accommodate origin-based states, 

SSTP's Governing Board voted to allow origin sourcing for in-state sales while 

requiring destination sourcing for remote sales. Such "dual sourcing" should not be 

permitted in federal legislation . 

Eliminate sales tax holidays or adopt a single uniform national sales tax holiday with 

uniform date and product exemptions. 

States must provide certified software for collection, filing, and remittance. Users of 

the software would be immune from civil liability for errors in taxes collected. 

Exclude businesses based in states that have no sales tax of their own (New 

Hampshire, Delaware, Montana, Oregon, and Alaska) 

Furthermore, if Congress grants states the authority to impose sales tax on remote sellers, there 

is a critical need for mechanisms to hold states accountable to the minimum simplification 

requirements above. Under the Tax Injunction Act (28 USC§1341), taxpayers are forced to use 

state courts to litigate disputes with state tax collection authorities, even on questions of whether 

a state is following federal law. Out-of-state businesses should be able to challenge state tax 

assessments that violate federal statutes or the U.S. Constitution in federal court - not in state 

courts. 

Conclusion: Congress could consider a multi-state compact- Not a national mandate. 

Finally, Congress must maintain some form of market discipline to stop states from expanding 

the complexity of their sales tax systems and skirting the minimum simplification requirements. 

Fortunately. Congress has a simple way to enforce "tax competition" as part of any legislation 

that overturns the physical presence standard: Congress could authorize remote collections 

through a multi-state compact instead of a national mandate on all businesses. 

Tax advocates seldom acknowledge that S.1452 and S.1832 would impose collection burdens 

on businesses in all 50 states - including those in states that don't join SSTP and those in 

states that don't even have a sales tax. To the contrary, pro-tax advocates reassure legislators 

that they would retain their state sovereignty, telling them, "you don't have to join SSTP" and 

"you can drop out any time you wan!." 
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But if Congress overturned Quill's physical presence standard, lawmakers in all 50 states would 

lose the sovereign right to protect their citizens and businesses from tax burdens imposed by 

other states, 

If these new collection burdens are hurting businesses in a state, their legislators won't be able 

to rescue those businesses if Congress makes collection mandatory for all, 

This comes as a surprise to many lawmakers who are just getting their arms around the SSTP 

and its accompanying Congressional mandate, And it will come as a complete shock to 

businesses all around the country if they have to start collecting for over 9,600 tax jurisdictions, 

Contrast the national mandate with a multi-state compact. An optional compact would allow 

states to opt-in to the collection compact if they believed the new tax revenue justified the 

burdens on in-state business who would have to collect for remote states in the compact. By 

the same token, states could opt-out of the compact to protect their state businesses if remote 

state tax burdens become excessive, States that opt-out would forego their authority to force 

remote sellers to collect their own state's sales tax, but at least states would preserve their 

Constitutional right to protect their businesses from unreasonable burdens on interstate 

commerce, 
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April 17, 2012 

Senate Committee on Finance 

Attn. Editorial and Document Section 

Rm. S0-219 

Dirksen Senate Office Bldg. 

Washington, DC 20510-6200 

Re: Hearing on Tax Reform: What It Means for State and local Tax and Fiscal Policy 

Dear Chairman Baucus, Ranking Member Hatch and Members of the Committee: 

I am Rebecca Boenigk, CEO and Chairman of Neutral Posture. Thank you forthe opportunity to 

submit this written testimony in support of a federal legislative solution to the business activity 

tax nexus issue, as is set forth in H.R. 1439, the Business Activity Tax Simplification Act of 2011 

("BATSA"). I respectfully urge quick enactment of this important piece of legislation. 

I founded Neutral Posture in 1989 with my mother, Jaye Congleton. Our company manufactures 

ergonomic seating products and accessories for the office, lab and manufacturing areas. Neutral 

Posture is the only woman-owned seating manufacturer in the United States and is a certified 

women's business enterprise (WBE). The company is one of the top diversity suppliers forthe 

United States government and Fortune 500 companies worldwide. Currently, we employ 75 

people in Texas and fIVe in Canada. 

Although Neutral Posture is physically present only in Bryan, Texas and Chicago, Illinois, we have 

been assessed income-based taxes by California, Florida, Georgia, Indiana, Minnesota, Ohio, 

Pennsylvania and Washington, based on sales we have made to customers located in those 

states. While we do make use of the services of independent sales representatives in every state 

in which we have customers, those individuals are not employees of Neutral Posture, and they 

service many companies besides ours. 

Of course, our sales representatives located in other states do pay income taxes on their own 

business profits in their own states, just as we pay income taxes in Texas and Illinois. We do not 

object to paying taxes in states where we have a presence and receive government services. We 

do object to paying business activity taxes to states where we have no physical presence. 

It is impossible to run a business not knowing what jurisdiction next will send us an assessment 

for income-based taxes. Nor does a smaller business, like ours, have the means to fight such 

unfair assessments through costly and protracted litigation. When forced to pay business 

activity taxes to a state where we have no physical presence, we are forced to make a choice 

between passing such costs on to our customers and taking a hit to our bottom line. 
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BATSA codifies the traditional physical presence nexus standard, meaning that a state or locality 

cannot impose a business activity tax on a business unless that business has a physical presence 

(such as employees, an office or real property) in the state for more than fourteen days in a 

taxable year. The bill establishes a bright-line standard that will eliminate confusion for both 

state tax administrators and businesses, resulting in less litigation, fewer nexus audits, less tax 

compliance guesswork and, thus, greater investment in business growth and jobs. Enactment of 

the bill is crucial to our company. 

Thank you again for your attention to this very important issue. 

Sincerely, 

Rebecca Boenigk 

CEO & Chairman 

Neutral Posture 
375 


80344.346

With New Jersey Banks, New Jersey Prospers 

411 North Avenue East • Cranford • New Jersey • 07016-2436 • 908-272-8500 • Fax 908-272-6626 

Statement of the New Jersey Bankers Association 

Submitted to the United States Senate Committee on Finance 

April 25, 2012 

Hearing on "Tax Reform: What It Means for State and Local Tax and Fiscal 

Policy" 

The New Jersey Bankers Association ("NJBankers") appreciates the opportunity to submit this statement 

for the record of the Senate Finance Committee hearing on Tax Reform: What it Means for State and 

Local Tax and Fiscal Policy. NJBankers strongly urges the Committee to support a federal legislative 

solution to the business activity tax nexus issue, as set forth in H.R. 1439, the Business Activity Tax 

Simplification Act ("BATSA"). That bill would clarify and modernize the rules governing a state's 

ability to impose income-based and similar taxes on non-resident companies that have no physical 

presence in the taxing state. 

NJBankers represents 118 financial institutions in New Jersey. Our members employ thousands of New 

Jersey residents and contribute greatly to the New Jersey economy. 

Many states and localities are attempting to impose business activity taxes on businesses that merely 

have customers in the taxing jurisdiction, but which do not receive any significant benefits or protections 

(such as fire protection, police protection, sewers, etc.) from the jurisdiction. In the financial services 

industry, such attempts have focused on taxing non-resident banks that (a) issue credit cards to 

consumers who reside in the taxing state, (b) receive interest income from loans secured by tangible 

personal or real property located in the taxing state, or (c) take title to commodities when engaged in 

trading. Such aggressive "economic nexus" approach violates the Constirution's Commerce Clause, has 

a chilling effect on the economy and produces incredible compliance burdens for businesses operating in 

interstate commerce. Furthermore, the practice amounts to a clear burden on interstate commerce and 

falls squarely within the jurisdiction of Congress to correct. 

BATSA would codify the traditional physical presence nexus standard, meaning that a state or locality 

cannot impose a business activity tax on a business unless that bnsiness has a physical presence (snch as 

employees, an office or real property) in the state for more than fourteen days in a taxable year. BATSA 

applies to all direct taxes (business activity taxes). This includes taxes such as an income tax, a gross 

Frank-A. Kissel 

Chairman 

Chairman/CEO 

Peapack·Gladstone Hank 

Bedminster, NJ 

Kevin Cummings 

First Vice Chairman 

President/CEO 

Investors B,mk 

Short Hills, NJ 

Robert H. King 

Second Vice Chairman 

Senior Vice President 

RomaBank 

Robbinsville, NJ 

John E. McWeeney~ Jr. 

President/CEO 

New Jersey Bankers Association 

Cranford,NJ 
376 


80344.347

receipts tax, a gross profits tax, single business taxes, franchise taxes, capital stock taxes, and business 

and occupation taxes. It does not apply to transaction taxes based on gross receipts, such as sales and use 

taxes, or gross premium charges on insurance companies. Thus, under BATSA, states and localities 

would be allowed to impose business activity taxes on businesses within their jurisdiction that have 

employees in the state, or property that is either leased or owned in the state, for more than a de minimis 

number of days in a year. The bill protects businesses from business activity taxation if the company 

merely solicits sales in the state or enters the state just to purchase goods or property. 

BA TSA would not allow businesses that operate in interstate commerce to unlawfully avoid state taxes. 

All businesses would continue to pay tax to states in which they have a physical presence. In addition, 

the bill explicitly ensures that the states retain all tools they currently (and successfully) use to combat 

tax avoidance. 

The physical presence standard set forth in BATSA is the most appropriate standard for business activity 

taxation because it is a fair, bright-line standard that may be predictably understood and applied and 

because it reflects how income is earned. NJBankers urges Congress to enact this important legislation 

Michael Affuso 

Senior Vice President and Director of Goverrnnent Relations 
377 


80344.348

April 30, 2012 

Committee on Finance 

United States Senate 

Attn: Editorial and Document Section 

Room SD-219 

Dirksen Senate Office Building 

Washington, DC 20510-6200 

f\(.W York Bankr-rs :\S!;oeiatioll 

qq Park .\wllm' 

lll:'lmilJ!@uyhn.com 

'fit-had P. Smith 

Pr('~idf'llt and CEO 

RE: Tax Reform: What it Means for State and Local Tax and Fiscal Policy 

To the Committee: 

The Business Activity Tax Simplification Act is designed to address the current 

imbalance between the needs of states for additional revenue and the needs of 

businesses for clarity in the state taxes to which they are subject by restricting 

state taxation to businesses with a physical presence in the taxing jurisdiction. It 

is important to note that the bill will not create a system in which business profits 

escape state taxation. States in which a business maintain their headquarters, 

production or distribution facilities, and service locations will continue to tax the 

full profits of those businesses wherever earned. This bill will simply prevent 

other states in which businesses have chosen not to locate any operations from 

siphoning off those tax dollars. 

Attached is a statement on the bill that the New York Bankers Association would 

like considered as part of the record of the Finance Committee's hearing on Tax 

Reform: What it Means for State and Local Tax and Fiscal Policy. We appreciate 

the Committee's consideration of this statement. 

7t~ Michael P. Smith ~ cc: The Honorable Charles E. Schumer 

Attachment 
378 


80344.349

New York Bankers Association 

99 Park Avenue, 4th Floor 

New York, NY 10016-1502 

(212) 297-1600/www.nyba.com 

STATEMENT OF THE NEW YORK BANKERS ASSOCIATION 

BEFORE THE SENATE COMMITTEE ON FINANCE 

ON TAX REFORM: WHAT IT MEANS FOR STATE AND LOCAL 

TAX AND FISCAL POLICY 

April 25, 2012 

The New York Bankers Association appreciates the opportunity to submit this statement 

for the record of the hearing of the Finance Committee's review of the meaning of tax 

reform for state and local tax and fiscal policy. We would like to draw the Committee's 

attention to the Business Activity Tax Simplification Act, a House-introduced version of 

which is attached. The New York Bankers Association strongly supports legislation that 

would clarify and modernize the rules governing a state's ability to impose income taxes 

on companies that have no physical presence in the state. Our Association is comprised 

of the community, regional and money center commercial banks and savings institutions 

doing business in the State of New York. Our members hold aggregate assets in excess 

of$lO trillion and employ more than 200,000 New Yorkers. 

This legislation will clarify that states may not tax out-of-state intangible property or 

services. Current law clearly precludes state taxation of out-of-state tangible personal 

property and real estate. The bill will also require that an entity have a physical presence 

in a state in order to subject the entity to the state's taxing jurisdiction. The bill sets forth 

criteria for determining whether a physical presence exists. 

This legislation will clarify situations in which a state can constitutionally tax out-of-state 

corporations. It is particularly important for a State like New York that sells vast 

amounts of financial services in other states. The physical presence standard contained in 

the bill is one that the United States Supreme Court has recognized as an appropriate 

nexus for state taxation. 

In recent years, an increasing number of states have enacted legislation taxing business 

activities that occur outside their physical jurisdiction and that bear only a remote 

relationship to the taxing states. In the financial services arena, these enactments have 

largely focused on taxing loan and investment relationships entered into by residents of 

the taxing states with non-resident business entities whose only relationship with the 

taxing state is the use of instruments of interstate commerce, such as the Internet, the 

United States Postal Service and the telephone to transact business with their customers. 
379 


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These states have been characterized as "market states," because they attempt to tax the 

market for goods and services, rather than the physical entity that provides the goods or 

services. 

This system of taxation is clearly a burden on interstate commerce and falls squarely 

within the jurisdiction of Congress to address. The home states of companies being taxed 

by market states already tax the profits of these companies, resulting either in double 

taxation or in a reduction in revenue for home states. With the increased reliance by 

customers on the Internet, the taxation of out-of-state residents and businesses will 

clearly become a more and more attractive means to enhance a state's revenue. It can 

therefore be expected that, without Congressional oversight, attempts to tax companies 

without a physical presence in a state will continue to increase. 

The Business Activity Tax Simplification Act draws a clear distinction between 

allowable and impennissible taxation by a state of the intangible activities of out-of-state 

residents and businesses. We strongly urge that the legislation be enacted. 
380 


80344.351

~NAFEM® North American Association of 

food Equipment Manufacturers 

Statement of David Rolston, President and CEO of Hatco Corporation 

on bebalf of tbe Nortb American Association of Food Equipment Manufacturers 

161 Nortb Clark Street, Suite 2020, Cbicago, IL 60601 

Submitted to tbe Senate Finance Committee bearing April 25, 2012 on 

"Tax Reform: Wbat It Means for State and Local Tax and Fiscal Policy" 

The North American Association of Food Equipment Manufacturers, representing more than 600 

US companies that manufacture commercial food preparation, cooking, storage and table service 

equipment used in restaurants, cafeterias, and other food service establishments, strongly urges 

the Senate Finance Committee to consider the impact of state-specific "business activity taxes" 

on commerce. 

Several states are now asserting "business activity taxes" on sales of firms that have no physical 

presence or other "nexus" in their states. These practices are inconsistent among states, 

discriminatory in application, and disruptive to commerce across state lines. They interfere with 

intelligent business planning and therefore to the economic growth and economic health of firms 

that do business across state lines. The House Judiciary Committee has recently reported out, 

with strong bipartisan support, legislation --HR 1439, The Business Activity Tax Simplification 

Act-- that would correct this situation before further harm is done. We urge the Senate to 

consider similar legislation. 

Allow me to elaborate from the experience of my own firm. I am David Rolston. President and 

CEO of Hatco Corporation., a manufacturer of commercial food warming equipment, toasters, 

and water heaters headquartered in Milwaukee, Wisconsin. We have 375 employees, and the 

company is 100 percent employee-owned. 

I also am chair of the Government Relations Committee of the North American Association of 

Food Equipment Manufacturers. 

This is a surprisingly large industry. Total domestic sales are over $8 billion -- and it is an 

industry composed predominantly of small businesses. Sixty-six percent of the members have 

sales less than $10 million a year with fewer than 100 employees. We have membcrs from 46 

states of the union. Typical products are freezers, refrigerators, stoves, ovens and broilers. food 

warmers, display tables, serving trays, cutlery-- virtually everything you would see in a 

commercial restaurant kitchen or food service area. Most, like Hatco. are single-state 

companies, and have no physical presence outside their home states. 

Efficiency and predictability are essential to a small business. The practice of some states to 

assess "business activity" taxes on firms that have no physical presence in the taxing jurisdiction 
381 


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is a significant administrative cost, adding an unnecessary layer of inefficiency. and limiting our 

ability to grow. 

Hatco, like most NAFEM members, sells through independent manufacturers' representatives 

who represent 10-15 companies. We also use independent service agents to complete warranty 

repairs on our equipment. Again, these are independent companies that service the equipment of 

many different manufacturers. We have no employees or other physical presence outside of 

Wisconsin. Nonetheless, we are now being forced to pay business activity taxes in four states 

where we have customers but no physical presence. Justification given by the states for these 

taxes is the existence of the representatives or service agents. 

Of course, our manufacturers' representatives and service agents in these states do pay income 

taxes on their own business profiL~ in their own states, just as we pay income taxes in Wisconsin. 

That is as it should be. We should be paying taxes in states where we have presence and receive 

government services. For us, that is Wisconsin. We should not be paying business activity taxes 

which are a form of income tax - where we have no physical presence. (These are not, of 

course, sales taxes - a clarification I am sure is not needed in this committee; these business 

activity taxes are quite different from and on top of sales taxes.) 

We don't know what other states will come at us next. These lax bills catch us by surprise. 

When states first contact us. they sometimes come on hard. One state originally demanded that 

we pay eight years of back taxes. This would have been significant. Others have threatened 

penalties. Litigation, of course, is impractical for a small firm. We try to negotiate but often 

end up making an economic decision. We can't pass the costs on, so both the tax payments and. 

even worse, the administrative costs, are off our bottom line. 

One example: we were SUbjected to an audit by the State of Washington Department of Revenue, 

one of the 4 states in which we already pay a Business Activity Tax. They audited the excise tax 

returns filed by Hatco for the period 1/1/06 to 6/30/09 related to business and occupation (13&0) 

tax. 

The 8&0 tax in the state of Washington is a business "privilege" tax assessed on the value of 

shipments made by Hatco into the State of Washington. Hatco has no physical presence in the 

state of Washington but is still required to periodically report and pay the 8&0 tax .. 

The state of Washington originally notified Hatco in 2005 that we owed the 8&0 tax. This 

resulted in Washington's initial audit of Hatco and a very lengthy and costly audit and appeal 

process in 2005 and 2006. That audit covered the period 111/98 - 9130/05. Hatco begrudgingly 

settled the audit on 7/26/06 after much cost and time was spent contesting the 8&0 laxation. 

The auditor in charge of the recent audit initially was not even aware of the prior audit; yet after 

Hatco informed her of the prior audit and shc located the files in the State of Washington's 

archives, she nonetheless contended that she needed to perform an audit for the period 1/1/06-

6/30/09. 
382 


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Please be aware that our quarterly 8&0 taxes are approximately $1,OOO ... there is simply not 

much at stakc hcrc. 

Nonetheless we had to go thru the audit. The audit included an introductory on-site meeting on 

8/25/09, numerous email and telephone exchanges, preparation of data files and copies of 

various documents as requested by the Washington auditor, and consultation with our CPA tax 

advisors. 

Ultimately Hatco received a letter dated 12/1/2009 from the State of Washington Department of 

Revenue indicating "no tax adjustments were made since no errors were found ... ". 

Hatco's accounting and information services personnel incurred approximately 40 hours of time 

in order to comply with the various requests from the Washington state auditor. Hatco also 

incurred some outside professional fees from its CPA tax advisors. 

What are the consequences? Think about where this is going. Facing business activity taxes 

assessed by four states where we have no presence is bad enough, but 20 states? 30 states? We 

would have to add staff just to attempt to keep track of these unforeseeable obligations, file the 

returns, and stay clear of penalties and demands for back taxes. These would, of course. be 

unproductive cmployees a hit to our efficiency. And bear in mind that we are a 100 percent 

employee-owned company. Any added costs hurt every employee. 

And what about the overall impact on the economy? The taxes we pay to states where we have 

no physical presence come otT our net profits. So do the administrative costs. As our net income 

after expenses is reduced, the taxes we owe to Wisconsin and to the federal government also are 

reduced. After you factor in both the added taxes and the added administrati ve costs, both to us 

and to the states. I doubt that anyone is coming out ahead. 

Certainly if other states jump on this bandwagon, we will just be spreading the taxes around. 

with little. if any, net benefit to anyone. 

As a small manufacturer in the US, we face many threats from competitors outside our borders. 

We continue to be successful by staying lean and smart. Adding unnecessary headcount to 

administer programs like activity taxes makes us less competitive with overseas companies. 

For many years, it has been the presumption that businesses pay taxes only in states where they 

have physical presence and receive government services. We believe the Congress should act to 

preserve this standard. 
383 


80344.354

~OMA 

~Municipal 

~League 

Champions For Effective local Government 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

United States Senate Committee on Finance 

Wednesday, April25, 2012, 10:00 AM 

215 Dirksen Senate Office Building 

Washington, D.C. 

Submitted by: 

Homer Nicholson, OML President and Mayor, Ponca City, OK 

and 

Carolyn Stager, Executive Director 

Oklahoma Municipal League 

201 N.E. 23rd Street 

Oklahoma City, OK 73105 

(405) 528-7515 or (405) 514-6712 
384 


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The Oklahoma Municipal League (OML) is an association of cities and towns representing 462 

municipalities throughout the state of Oklahoma. 

OML very much appreciates the opportunity to provide written testimony to the United States 

Senate Committee on Finance regarding S. 1832, The Marketplace Fairness Act. 

A high priority for the OML is supporting the Marketplace Fairness Act that will allow states and 

local governments to collect taxes on sales made through e-commerce. This has been a 

consistent and long-standing position for our association that dates back to the catalogue sales. 

With the changing environment and more and more shopping occurring on-line, this continues to 

create a major unfair disadvantage to our main street, brick and mortar businesses. Unlike 

arguments in the past, technology is now readily available to determine the appropriate tax rates 

without undue administrative or costly burdens on retailers. 

Cyber Monday 2011 was the largest online shopping day in history with $1.25 Billion spent. 

While that may not sound bad for our national economy, it has a huge negative impact on the 

businesses and municipalities in Oklahoma. 

Businesses are the driving force behind the Oklahoma economy. Oklahoma businesses are 

required to collect sales tax from their customers and remit to the state where it is distributed to 

the municipalities. Unlike these businesses, many out-of-state online companies have been 

exploiting a tax loophole and do not charge sales taxes at the time of purchase. There is 

currently a voluntary compliance by several out-of-state businesses 'if they have nexus or a 

presence in the state. Under the Streamline Sales Tax (SST) Volunteers, the State of Oklahoma 

and local governments received $17.6 Million in fiscal year 201 1. However, this is just a drop in 

the bucket compared to the estimated loss of $ I 85 to $225 Million per year. 

Local businesses also incur a great percentage of overhead costs --- paying employees, utility 

and facility costs --- than their online only competitors. Main Street businesses are the backbone 

of our local economy and employ our neighbors, sponsor our children's little league teams and 

are involved in civic and community organizations. Local retailers in Oklahoma have expressed 

concern about customers coming into their stores and testing products, only to leave and later 

purchase the item online. They understand that it's not always possible or convenient to buy 

locally, but they do want to compete fairly. 

This burden is likely felt more heavily in Oklahoma than any other state in that we are the only 

state where municipalities do not receive ad valorem taxes for general operations. In Oklahoma 

ad valorem revenue is dedicated primarily to schools and counties. While none of us likes to 

hear the word "taxes', especially at this time of year, it is important to remember that Oklahoma 

cities and towns are overly dependent on local sales tax to fund all their basic services: police, 

fire, roads, parks, libraries, road maintenance and much more. 
385 


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Inconsistent or non-growth sales tax revenue makes it difficult for municipalities to offer 

consistent services year-to-year. Bipartisan legislation currently pending in congress S. 1832 

"Marketplace Fairness Act", if passed, will solve the problem of having internet sales 

increasingly affect the collection of local and state sales tax. It is important to remember this is 

not a new tax. These are taxes already owed, but have simply gone uncollected. 

The Oklahoma Municipal League respectfully request our Oklahoma Senator, Dr. Coburn, and 

this Committee to assist in moving S. 1832 out of the Finance Committee. Your support of this 

bill will go far in closing this loophole. A level playing field will ensure that competition 

between local businesses and their online competitors is fair. 

The OML extends our sincere thanks & appreciation to Senators Enzi, Durbin & Alexander and 

their staffs: Randi, Eric, Corey, Beth, Allison & Michael for their tenacity and persevering in 

advancing this legislation. 
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~ OppenheimerFunds· ~ Rochester 

350 Lmden Oaks 

Rochester. NY 14625~2807 

1€-1800552.1149 Fax 585.38181$7 

w'hwoppenhelmerfunds.com 

OPPENHEIMERFUNDS, INC., STATEMENT 

FOR INCLUSION IN THE RECORD OF THE APRIL 25, 2012, HEARING: 

'TAX REFORM: WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY" 

May 8, 2012 

The Honorable Max Baucus 

Chairman, Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

Dear Chairman Baucus and Senator Hatch: 

The Honorable Orrin G. Hatch 

Ranking Member, Committee on Finance 

United States Senate 

219 Dirksen Senate Office Building 

Washington, D.C. 20510 

For more than 115 years, the U.S. Government has recognized that tax exemption, as one industry 

expert put it, is the "bedrock" on which the municipal bond market operates. 

This is as true today as it was in 1895, when the U.S. Supreme Court ruled that any interest earned on a 

state bond was immune from federal taxation (Pollack v. Farmers' Loan and Trust Company). The 

Court's ruling remained intact through the ratification of the Sixteenth Amendment, which enacted the 

first Internal Revenue Code, and the passage of the Revenue Act of 1913. 

Significantly, the tax exemption has even held steady since 1988, when the U.S. Supreme Court decided 

that Congress could authorize the taxation of municipal bond securities. That Congress has repeatedly 

and wisely chosen to leave intact the tax exempt status of these securities suggests the overriding truth 

expressed in the concurring opinion offered in 1988 by Justice John Paul Stevens: the Court's decision, 

he wrote, "expresses no opinion about the wisdom of taxing the interest on bonds issued by state or 

local governments," 

In this time of difficult economic conditions, it is understandable that Congress would consider a variety 

of measures to help resolve the country's growing deficit. However, the tax exempt status of the 

income generated by municipal bonds should not be among the solutions that this Committee endorses 

or that Congress pursues. It is imperative that this Committee recognize and consider the negative and 

unintended consequences that would develop were Congress to alter the tax status of municipal bonds, 

including consequences to individuals, to the state and local governments that issue bonds, to the 

communities in those municipalities, and to the U.S. economy, the health of which is integrally tied to 

the health ofthe country's credit and equity markets. 

We feel strongly that the potential costs to U.s. society of any change in the tax exemption on municipal 

investment income is far greater than the potential tax revenues that could be collected if the tax 
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exemption were to be eliminated, With interest on tax-exempt municipal bonds totaling approximately 

$50 billion per annum, federal tax collections could be $7,5 billion higher were all of this income to be 

taxed at the current rate for capital gains and dividend income, However appealing this increase might 

be, it pales in comparison to the damage that could result from such a decision, 

We expect that a change in the tax-exempt status of the income generated by municipal securities 

would: 

Cause the aggregate market value of existing bonds to decline by $200 billion, according to one 

industry expert, destabilizing a $3,74 trillion market that serves millions of individual investors 

and tens of thousands of municipal issuers, 

Exacerbate the lingering and troubling effects of the Great Recession and potentially interfere 

with our nation's ability to achieve robust economic growth, 

Introduce new uncertainties into a population that is already highly concerned about job 

security, future saving rates, the value oftheir homes, the European debt crisis, future tax rates, 

and the hesitance of u.s, industry to deploy capital despite record low interest rates, 

Raise the true borrowing costs borne by state and local governments that seek to collect 

sufficient revenues to pay for the essential services their constituents require and for the 

immediate and longer-term infrastructure needs of their communities, These state and local 

governments have already been sorely tested by the economic downturn of the past few years, 

Create immediate economic hardship for the millions of fixed-income investors whose budgets 

and lifestyles depend on the interest income from their municipal bond investments and the tax 

benefit the exemption provides, 

The Rochester, N,Y,-based municipal bond team of OppenheimerFunds, Inc., a leader in the municipal 

market industry with more than $32 billion in assets under management as of April 30, 2012, 

respectfully asks this Committee to recognize the magnitude of the difficulties that would emerge were 

it to alter the long-standing tax-exempt status of municipal investment income, In doing so, we believe, 

the Committee will agree that the consequences of any such decision or recommendation would be 

harmful to the marketplace, the economy, the state and local governments that rely on public financing, 

and the individual investors whose dollars enable continued and necessary improvements to the 

nation's infrastructure, 

AN OVERVIEW OF THE U,S, MUNICIPAL BOND MARKET 

The large and stable municipal bond market is dominated by individuals seeking competitive levels of 

income, Ofthe $3,74 trillion in outstanding municipal debt (as of 12/31/2011), about 80 percent (or $3 

trillion) is exempt from taxation at the federal level and in the states and local municipalities where it 

was issued, 

The market includes tens of thousands of issuers - from small towns to large metropolises, These 

issuers rely on public financing to support a wide range of civic projects: renovating a community's 

firehouse, rebuilding at Ground Zero, creating world-class hospitals, expanding the facilities at 

established universities, building new bridges and repairing roadways, and providing adult living facilities 

for America's aging population, to name a few of the myriad uses for municipal financing, 
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Millions of individual Americans have invested in the municipal market, attracted by the tax exemptions 

that apply to municipal investment income and by the wide range of investment opportunities, which 

include individual bonds, municipal bond mutual funds, separately managed accounts (SMAs) and 

exchange-traded funds (ETFs). Mutual funds with lower initial investment requirements, for example, 

have enabled individuals with fewer assets to invest and benefit from the yields that municipal bonds 

offer and from the expertise of professional portfolio managers and credit analysts. The ability to buy 

and sell fund shares at will has also attracted individual investors to these types of investments. 

By allowing the tax exemption for municipal bond interest income, the federal government has 

encouraged investors to participate in this market. This practice is consistent with other tax advantages 

that the government has tacitly endorsed, including the provisions related to individual retirement 

accounts, health savings accounts and 529 plans, all of which serve to encourage individuals to invest for 

their future well-being. 

While the municipal market holds special appeal for high-net-worth individuals and senior citizens, in 

recent years it has become increasingly attractive to a broad range of taxpayers, according to the Joint 

Committee on Taxation (JCT). According to that committee's April 24, 2012, report, a growing number 

of Americans now qualify for the federal tax benefits associated with municipal bond investing. 

Specifically, any taxpayer with a 2011 marginal income tax rate of more than 7.5 percent would benefit 

more from an investment in a high-grade municipal security than from an investment in a AAA-rated 

corporate bond. In the period from 2008 through 2010, the federal tax benefit on municipal income 

only reached taxpayers with marginal rates ranging from 13 to 16 percent. In the two decades prior to 

2008, the average was 21 percent, with annual figures ranging from 17 to 27%. 

The American Recovery and Reinvestment Act of 2009 has made it easier for commercial banks to invest 

in municipal securities. Collectively, banks now represent the fifth largest holder of municipal debt, 

according to new Federal Reserve Board data. They see municipal bonds as a means to collect levels of 

investment income that exceed the interest they pay to depositors. Additionally, high levels of income 

have attracted "cross-over borrowers," including foreign investors who do not qualify for the federal tax 

exemption. 

Short-term initiatives, such as the establishment of federal tax rebates for municipalities that issued 

taxable Build America Bonds ("BABs") in 2009 and 2010, demonstrated the potential to improve the 

fiscal conditions at the state and local level but were attractive to these municipalities only to the 

degree that they lowered the municipalities' debt obligations. Investors liked the taxable BABs for the 

same reason they like tax-exempt municipal securities: both enable investors to collect higher levels of 

income than other investments offered. However, were the federal tax exemption on municipal 

securities to disappear, the appeal of municipal bonds would fall, lowering bond prices and leading to 

higher debt obligations - and more economic hardships - for the states and municipalities that need 

public financing. The consequences for local entities and taxpayers - which could include increases in 

sales, income and property taxes as well as reductions in essential services - would likely be harsh. 

The overall fundamentals of the municipal bond market have remained remarkably stable in recent 

years. The municipal bond market was not among the perpetrators or originators of the 2007-2008 

credit crisis. That period, which certainly created significant market turmoil and volatility, including in 

the municipal markets, was in large part the result of collateralized mortgage obligations and other 

derivative products built on the faulty premise that housing prices would continue to rise and would 

only fall in geographically isolated markets rather than a broad, coast-to-coast collapse. When housing 

prices began to fall across the nation, the errant premise came to light - with harsh ramifications for 
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investors worldwide. On the tails of these difficult years, investors began to hear frequent reports about 

distressed municipal bonds. Lost in those reports are the facts: that the historical default rates among 

municipal bonds have been extremely low - both as a percentage of total debt outstanding and in 

comparison to default rates on bonds issued in the corporate sector. Few reports mention that the 

recovery rates on the relatively few bonds that had monetary defaults were significantly better than the 

recovery rates on defaulted corporate securities. 

Further, the situations that have captured significant media attention in recent years - Harrisburg, 

Pennsylvania; Vallejo, California; Jefferson County, Alabama, among others - represent a very small slice 

of the overall muni market. These are anomalies based on very specific and localized issues that elected 

officials failed to address with an appropriate sense of urgency. Had the officials acted responsibly, we 

believe, these situations could have been avoided. 

The strength and breadth of this market - which is vital to the fiscal well-being of millions of investors 

and thousands of communities - would be damaged by any change in the tax-exempt status of 

municipal bond investment income. The immediate impact to the aggregate market value of existing 

bonds has been estimated by a notable industry expert at $200 billion. The long-term impact is likely 

immeasurable. 

ECONOMIC RAMIFICATIONS AND UNCERTAINTY 

Changes to the tax status of municipal investment income would have an adverse effect on the market 

for municipal securities and this, in turn, would harm the fledgling U.S. economy. The concerns over the 

near- and long-term health of the economy must continue to be a top priority for Congressional leaders. 

In addition, the country continues to be plagued by stubbornly high unemployment levels. The situation 

of late has been made worse by the growing need of older Americans to remain in the job market as a 

means to maintain their standard of living, pay their mortgage and build assets toward a delayed 

retirement. A new study by the University of Michigan Institute for Social Research shows that 40 

percent of older Americans have postponed retirement, hoping to recover some of the wealth their 

households lost between the summers of 2008 and 2009. Other research indicates that middle-income 

employees, often among the hardest hit during recessionary periods, experienced sharp declines in the 

Great Recession. This time, however, the rebound in this cohort has not yet materialized. Additionally, 

it is already clear that many of this season's newly minted crop of college graduates will struggle to find 

meaningful and financially rewarding employment - as did last season's graduates. 

The national housing crisis has proven far more persistent than was expected at its onset. The notion of 

having an "under water mortgage" has become part ofthe vernacular, as millions of homeowners are 

discovering that the amount they owe on their loan vastly exceeds the declining value of their property. 

Others are choosing to abandon their homes or have simply stopped making payments, hopeful that the 

backlog of foreclosures will buy them some time. Meanwhile, as construction of new homes has stalled, 

the nation's developers, contractors, builders and suppliers are feeling an immediate impact. 

Additionally, the spending that would have occurred near construction sites has not materialized. 

The situation has also been difficult for people who believed they were ready to enter the housing 

market. In many communities, prices reached significantly more affordable levels but were unattainable 

because of tighter lending guidelines at many financial institutions. The guidelines seemed prudent 

relative to the go-go years of jumbo mortgages and mortgage brokers offering adjustable-rate loans 

with low "teaser" rates, but the reins on credit effectively narrowed the pool of potential buyers. 
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Ironically, this tightening has occurred even as the Federal Reserve continues to seek to spur the 

economy through a historically low Fed Funds target rate, which effectively determines short-term 

interest rates. 

Despite the Fed's encouragement, individuals, small businesses and corporations have been hesitant to 

borrow or to invest their capital. Concerns about the tepid growth of the economy have created 

widespread reluctance among many to add debt or reduce capital levels. The predominant thinking, it 

seems, is to wait until robust growth is an economic norm. 

This uncertainty about creating new debt obligations or investing hard-earned capita! has had a 

detrimental effect on the U.S. job market. Job creation has been weak and, for many, job security 

fleeting. Additionally, many Americans remain uncertain about the degree to which their income and 

savings will align with future financial needs. The loss of assets that occurred primarily between 2007 

and 2009 is still a fresh memory, and a lingering skittishness imbues the spending decisions of many. 

Several potential changes at the federalleve! serve to aggravate the uncertainty. Individuals may be 

facing new costs related to the Affordable Care Act of 2010, the legality of which will be decided by the 

u.s. Supreme Court. The future of the tax rate changes of 2001 and 2003, the so-called Bush-era Tax 

Cuts, will once again be debated in Washington, as it was at the end of 2010. A significant number of 

investors are now facing uncertainty about their tax status, including those who mayor may not be 

subject to the alternative minimum tax, those who may find themselves in a higher tax bracket based on 

legislated decisions, and those who worry that the ded uction for mortgage interest may be short lived. 

Compounding these concerns are the fears that the economic troubles in the European Union will either 

spread to the United States and/or continue to depress economic conditions worldwide, with negative 

consequences on U.s. trade. It seems likely that the Euro debt crisis has the potential to further derail 

or delay the spending decisions that America's chief executive officers might otherwise make. 

Finally and perhaps obviously, the pending 2012 presidential and Congressional elections create further 

uncertainty, as unknown outcomes often do. Clearly, the election results could lead to changes in many 

areas of American life and have a wide impact on federal, state and local economies. 

THE MUNICIPAL MARKET'S IMPORTANCE TO STATE AND LOCAL GOVERNMENTS 

In his hearing statement, Senator Baucus encourages this Committee to "ask what else we can be doing 

to efficiently help state and local governments maintain sustainable budgets." We concur with the 

conclusion he has reached: "Let US improve the tax code to create growth and make the U.S. more 

competitive. And let us do this in a way that improves federal, state and local budgets." However, we 

are extremely concerned that any move to reduce or eliminate the federal tax-exemption would be 

detrimental to this stated goal. The Committee should be equally concerned. 

The ability of elected officials at the state and local level to govern effectively depends, in part, on their 

ability to borrow at interest rates that their municipalities can afford. It is essential to manage a 

municipality's debt obligations, and the need to maintain unfettered access to the credit markets has led 

many an elected official to make the tough decisions that ensure that general obligation debt 

obligations are paid on time and in full. 

State and local governments are active issuers of tax-exempt municipal debt, offering in the average 

year $384 billion in tax-exempt bonds, based on data from 2002 to 2011. Additionally, as the testimony 

by a consortium of civic groups points out, these governments oversee three-quarters of the nation's 
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infrastructure spending. Were Congress to eliminate or reduce the tax exemption on municipal bond 

issuance, borrowing costs would rise, creating a strong deterrent to municipal borrowing. As the civic 

groups accurately states, "Without access to this type of financing, th~ cost to taxpayers for providing 

schools, libraries, public buildings and hospitals, roads and bridges and sewers and waterways would be 

much greater." 

Without the exemption, municipalities would become less willing to make the required investments in 

their infrastructure and/or less able to provide essential services to their constituents. The deterioration 

in communities - as infrastructure maintenance is put off and as Americans lose the services on which 

so many depend - would have negative repercussions throughout our country. (Similarly, as Senator 

Hatch observes, the administration's proposal to limit the federal tax exemption to 28 percent "would 

raise borrowing costs for state and local governments.") 

The existence of the federal tax exemption on municipal bond interest income provides clarity about 

borrowing costs, enabling local government leaders to establish realistic budgets that reflect anticipated 

revenues as well as their own municipality's needs for services. Changes to this federal tax exemption 

would likely cause borrowing costs to increase and funding for important civic initiatives - for example, 

K-12 education - to be lowered. 

As the Congressional Budget Office explains, "The lower the rate of interest that state and local 

governments must pay on their debt, the more funds they have available to provide government 

operations and the greater the amount of debt they can service and, therefore, the greater the amount 

of investment they can make." Conversely, if the tax exemption were to be reduced or eliminated, 

taxpayers would have less motivation to invest in municipal projects and, as a result, municipalities 

would have to offer higher yields to entice them. Projects would either create higher debt obligations or 

they would be downsized as a means to lower overall borrowing. Neither option is in the best interest 

of a municipality or its taxpayers. 

The tax exemption provided on municipal income has several other benefits, among them: 

Enabling elected officials to be responsive to their own constituents by accessing lower cost 

public financing to enhance areas of local importance, e.g., education initiatives, transportation 

projects and utility upgrades. 

Ensuring local accountability for the success and cost-efficiency of infrastructure projects. 

Preventing delays that would likely develop if it became necessary for the federal government to 

provide funds that municipalities could no longer afford to raise 

Avoiding the bureaucratic red tape and eliminating the uncertainty that typically accompanies 

federal financing, grants and subsidies of infrastructure projects. These initiatives often have 

short durations and may spark lengthy debates. Only true emergencies - e.g., bridge collapses 

and the like -lead to an immediate access to funding. 

The Committee has indicated that alternatives to the tax exemption fer municipal bond income may 

resolve what some see as an unnecessary loss of federal tax receipts. We concur with the testimony 

offered by the National Governors Association: "No effective substitute for tax-exempt bonds exists. 

Investor demand for alternatives ... is insufficient at best. Taxable direct subsidy bonds permitted for 

issued during 2009 and 2010 [Build America Bonds] only complemented tax-exempt bonds, but only 

when the taxable bonds provided a subsidy far greater than the benefit to investors from interest 
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deductibility. If municipal bond interest were taxable, or if the federal tax-exempt status on state and 

local bonds were capped or lifted, the cost of borrowing, and therefore of financing infrastructure, 

would rise for states. Ultimately, this cost would be borne by taxpayers through reduced infrastructure 

spending, higher taxes or both." 

State and local governments have only just begun to find their footing again, after struggling for many 

years to create balanced budgets. The hardships created as elected officials were forced by declining 

revenues to cut essential services have had significant impact in their communities. Only recently have 

they begun to restore some ofthese services. However, with sales, income and property tax levels still 

at depressed levels, the ability to lessen their debt-service obligations is paramount. The appropriate 

course is to maintain the tax exemption on municipal income that enables them to do so. 

THE MUNICIPAL MARKET'S IMPORTANCE TO INVESTORS 

Individual investors own 74.8 percent of municipal debt and are thus the largest stakeholders in the 

municipal bond market. (According to the Federal Reserve Board's data for 2011, 50.2 percent of 

municipal bonds is held by individual households; 14.5 percent is held in their mutual fund investments, 

7.9 percent is held in their money market fund investments and 2.2 percent is held in their closed-end 

fund investments.) Municipal investments attract these individuals because the interest income that is 

generated can be put to use immediately-to supplement their budgets, enhance their lifestyles or 

reinvest in the U.S. economy. 

In recent years, municipal investments of all maturities have provided higher levels of income than has 

been available through banks and other financial institutions. These higher rates motivate Americans to 

invest and help them create financial cushions for their families and prepare for their later years. 

Additionally, the mutual fund industry now offers a wide range of products, designed to give investors 

convenient choices that can be aligned to their own risk tolerance and financial objectives. Many of 

these have relatively low barriers to entry compared to other investment products. 

As short-term interest rates have become negligible and sometimes negative for short-term Treasuries 

- many investors have shifted their assets to the municipal bond market. The attraction has been 

twofold: the abnormally higher nominal yields and the after-tax benefits created by the federal tax 

exemption on interest income. To alter the terms of these investments retroactively would be a 

disservice to the American investor. Further, it would undermine the government's efforts to retain the 

trust and respect of its citizenry. As the municipal bond research director at a leading U.S. investment 

firm told The Bond Buyer in February 2012, "Once the trust between the federal government and the 

bondholder is breached through this process, people are going to assume that the government can 

revisit this at any time." 

The current tax code features a graduated tax rate scale: individuals with higher income levels are 

initially placed in tax brackets with higher rates. Consistent with this approach is the notion that 

individuals who pay a higher income tax rate should also benefit from a tax exemption that is larger (in 

dollars) than the tax exemption for individuals who pay at lower rates. Implementing a uniform subsidy 

for bondholders, as Senator Baucus believes should be considered, runs counter to basic tenets of the 

U.S. tax code. Unless and until tax reform addresses differentiated income tax brackets and 

differentiated rates on capital gains and dividend income, the application of a uniform subsidy on 

investment income should be off the table. 
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In addition to the benefits that accrue to individuals because of the tax exemption, investors benefit 

from their involvement in their community's priority developments. Helping to finance local projects 

that create local jobs gives individuals a new sense of civic pride and strengthens their ties to their 

communities. Even the process of placing bond authorization initiatives on the ballot can inspire 

individuals to participate in civic proceedings. 

To foster greater understanding of the benefits associated with municipal bond investing, industry 

groups, financial institutions, investment firms and Nationally Recognized Statistical Rating 

Organizations (NRSROs) have created and continue to disseminate a wealth of information. 

Additionally, national newspapers, business journals and magazines devote considerable resources to 

covering the variety of investing opportunities that are available to individuals seeking tax-advantaged 

income. 

Given the important role that municipal investing already plays in helping individual investors meet their 

financial objectives, it would be a mistake to alter the federal tax exemption on municipal interest 

income. 

CONCLUSION 

Recommending any change to the federal tax exemption on municipal interest income would have 

detrimental effects on the economic growth, the fiscal health of state and local governments, and the 

ability of individual investors to stabilize their own finances. 

As an industry leader in the municipal bond market, OppenheimerFunds believes it is well positioned to 

speak to the important role that municipal bonds play in this country. They allow states and local 

governments to secure more affordable public financing for infrastructure projects that serve their 

constituents, and they help individual investors supplement their budgets, prepare for their later years, 

enhance their lifestyles and/or reinvest in the U.s. economy. While the media has reported on the 

impact of a few troubled municipalities, the $3.74 trillion municipal market is fundamentally strong. 

Headlines about current developments in the market have wrongly played to Americans' worst fearsthat another market crisis is around the corner and that their assets may once again face considerable 

risk. 

Like other fund managers, OppenheimerFunds devotes considerable resources to analyzing the 

creditworthiness of individual bond offerings and creating portfolios designed to mitigate risk: interestrate risk, idiosyncratic risk, geographic risk and headline risk. The interests of our shareholders come 

first, and it is their interests that lead us to advocate in favor of retaining the federal tax exemption on 

municipal bond interest income. 

In his testimony before this Committee, Professor Walter Hellerstein refers to the Hippocratic Oath-

"first, do no harm." Senator Hatch also mentions this oath in his member statement. A change to the 

tax exemption of municipal bond interest income would certainly harm the economy, create turmoil in 

the marketplace, undermine the ability of state and local governments to address their own 

communities' infrastructure needs and adversely affect individual taxpayers. The issue should be 

tabled. 
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A ON 

May 9, 2012 

Honorable Max Chairman 

Honorable Orrin Hatch, Ranking Member 

United Senate, Committee on Finance 

Attn: and Document Section 

Room SD-2!O 

Dirksen Senate OtTice Building 

DC 205l 0-6Z00 

Re: April 25 Senate Finance Committee Hearing TiLl" RcjiJrm: Whut It 

AIeansiilf' Siale and Local 

Dear Bancns, Ranking Member Hatch and Members Committee: 

The Organization tor Internationallnvestmcnt ("OFlI") is pleased to submit comments the 

recent hearing entitled, "Tax Reform: What ivleans for State and Tax 

OFll believes the Committee has an important the 

to address growing coneem for global investors this country: attempt by certain states to 

exert economic nexus authority over companies with no physical presence in the United 

States simply based upon the activities companies, such royalty payments from 

a U.s. subsidiary to its foreign parent company, 

risks disputes with key trading 

palinel's, and damages the ofthc United States as an investment location. To 

address OF!! urges the Senate to consider H.R, 1439. the Business Activity Tax Simplification 

Act ("13A TSA"), This legislation would synchronizc nexus standards across all 50 

states and help provide and celiainty lor imemational companies attempting do 

business America. 

Attached it written statement on BATSA submitted the House Judiciary Committee, which 

held a hearing in April of 20 1 examine the merits ofthe legislation, The committee 

BATSA by voice vote July 01'201 Jfsigned into OFH believes 

make the United States a more attractive inward foreign direct 

investment 

Sincerely, 

L McLernol1 

President & CEO 

Organization for intemationa! Investment 
395 


80344.366

T 

Administrative 

increase their share of the 

their fiscal outside the 

nexus U,S, states threaten to 

companies make 

invest and create jobs, Thc exterritorial taxation '~uU""U'" 

inconsistent with U.s, federal incomc intemationai norms of taxation and 

violates the spirit of U.s, double taxation treaties. Such 

unfair risks harmful and unnecessary 

OFII represents the U.s, op<:ral:lOn 

which 

fair and 

I. COIUj:lanies in tbe United States 

and facts below, 

.. 4,7 per,~ent oftotal U.S, 
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• U.S. subsidiaries support an annual payroll of $408.5 billion with average 

compensation per worker of $73,023, about one-third higher than 

compensation at all U.S. companies; 

• U.S. subsidiaries heavily invest in the American manufacturing sector; with 

nearly 38 percent of jobs at U.S. subsidiaries are in manufacturing industries, 

accounting for about 16 percent of total American manufacturing jobs; 

• U.S. subsidiaries manufacture in America to export goods around the world 

- accounting for more than 18 percent of all U.S. exports, or $232.4 billion; 

• U.S. subsidiaries pay nearly 17 percent of total U.S. corporate tax payments, 

according to the IRS, a larger share than their relative size in the U.S. 

economy; 

• U.S. subsidiaries have a larger percentage of workers covered by a union 

collective-bargaining agreement than other U.S. companies - 12.4 percent of 

employees at U.S. subsidiaries compared to just 8.2 percent at other U.S. 

firms. 

II. Extraterritorial State Taxation Risks Economic Benefits 

The significant contributions insourcing companies bring to the U.S. economy are 

a direct result of the U.S.'s open investment environment, which treats these companies 

and the Americans they employ on a level playing field with their domestic competitors. 

The growing trend of U.S. states moving to extraterritorial taxation of non-U.S. 

companies undermines these contributions. 

• U.S. states' aggressive fiscal behavior: (1) can deter foreign investment in the 

U.S. due to increased uncertainty for double taxation; (2) disrupts the 

international tax treaty network; (3) could encourage retaliatory foreign 

legislation; and (4) creates uncertainty, complexity, inadministrability and 

substantial costs. 

• It is important that the U.S. government maintain its ability to speak with one 

voice on international fiscal matters and not be undennined by the efforts of 

individual states. 

• States have other tools to combat perceived fiscal abuse. Current state actions are 

inappropriately sweeping in legitimate business transactions. 

• When U.S. states have taken extraterritorial tax actions in the past, many U.S. 

treaty partners have issued strong objections and even adopted blocking statutes 

and laws mirroring this inappropriate tax treatment for U.S. multinationals. 

U.S. states are expanding their fiscal reach in two different ways: (1) "economic 

nexus"; and, (2) expanded "water's edge" provisions. 
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1) Economic Nexus 

U.S. double taxation treaties require a physical presence (usually defined as 

property, employees, etc.) in Country A before Country A can levy an income tax on a 

company incorporated in Country B. However, since U.S. states are NOT bound by U.S. 

tax treaties, some have adopted "economic nexus" provisions that impact foreign parents 

and affiliates incorporated in other countries. 

Specifically, approximately 25 U.S. states have already adopted an expansive 

"economic nexus" theory, which does NOT require physical presence to assert taxing 

authority (see attached map). 

For instance, a company incorporated in the U.K., with no physical presence or 

employees in the U.S., may find itself subject to tax in a particular U.S. state. 

Example: Recently, New Jersey has sent tax assessments directly to certain foreign 

parents of u.s. subsidiaries under an "economic nexus" theory. New Jersey 

authorities claim they have a right to tax these foreign companies merely because 

they have received royalty payments from u.s. affiliates doing business in New 

Jersey. The foreign parent companies have NO physical presence in New Jersey. The 

international business community has been extremely active infighting this effort. 

There has been no resolution to date. 

"Economic nexus" provisions were originally developed to deter U.S. companies 

from directing intangible revenue to domestic affiliates located in states that do not tax 

this income, thus reducing their overall tax burden. However, U.S. states have other 

provisions to effectively combat such abuses and the use of a broad "economic nexus" 

theory unfortunately sweeps in legitimate business transactions. 

2) Expanded "Water's Edge" 

Some U.S. states have taken the position that aU foreign affiliates of a company 

doing business in a state should be included in a "combined return," regardless of 

whether such foreign affiliates have physical presence or nexus in that state. However, 

most states with "combined reporting" allow companies with affiliates in other countries 

to make a "water's edge" election. Under a "water's edge" election, the combined group 

- i.e., the companies that are taxable in the state - is comprised only of those affiliated 

corporations within the "water's edge" of the United States (the 50 states and the District 

of Columbia). 

Various U.S. states are now expanding the definition of "water's edge" beyond the 

Atlantic and Pacific Oceans. Specifically, foreign affiliates that earn a certain percentage 

of income from U.S. sources are being deemed part of a state's "combined group" for tax 

purposes - even if the U.S. federal government does not subject such foreign affiliate to 

income taxes. 
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Example: Effective beginning 2009, West Virginia enacted a Combined Reporting 

Statute that includes an expanded definition of a "water's edge" election. 

Specifically, the "water's edge" group would include foreign companies that 

receive more than 20% of their income from certain U.S. sources. Importantly, 

these foreign companies have no physical presence or nexus in the U.S. Therefore, 

foreign companies that are already su~ject to tax in their home country and that are 

not subject to federal income taxes would be required to file a West Virginia tax 

return and pay tax in West Virginia. The international business community is 

currently embroiled in an effort to change the law, with no resolution to date. 

Acting on an expanded "water's edge" approach in the I 990s, California attempted 

to bring foreign affiliates of U.S. companies into its tax base even though they had no 

physical presence in the U.S and were subject to tax in their home countries. This 

proposal drew strong objections from U.S subsidiaries of foreign companies and from 

U.S. treaty partners who rightly viewed California's proposal as a revenue grab, and an 

erosion of treaty protections for its corporate citizens. Many countries raised serious 

concerns about California's efforts and the U.K enacted retaliatory legislation against 

California-based companies. As a result, California dropped its extraterritorial 

aspirations and adopted a "water's edge" election whereby a U.S. combined group could 

elect to limit such group to affiliates with physical presence or nexus in the U.S. 

CONCLUSION 

As stated above, a growing number of U.S. states have adopted aggressive 

"economic nexus" theories and expanded "water's edge" statutes that increase the risk 

factor of double taxation for foreign parents and affiliates of U.S. subsidiaries. Although 

U.S. double taxation treaties are meant to offset these risks, U.S. states are NOT bound 

by the treaties. As a result, foreign companies that have no U.S. physical presence and are 

not subject to federal income taxes may find themselves subject to double taxation by 

their home country and U.S. states. This creates an unlevel playing field since nearly all 

U.S. double taxation treaties bind the non-U.S. treaty partners' sub-national governments, 

such as cantons, provinces and states. 

Moreover, this approach enables states to conduct their own individual foreign 

fiscal policies at the detriment of investment flows into the U.S., endangering and 

disrupting the treaty network, and violating the international norms respecting national 

fiscal jurisdictions. There is no U.S. Constitutional prohibition that would prevent the 

U.S. federal government from including the states in the treaties, only a potential political 

issue. It is important that the U.S. government maintain its ability to speak with one 

voice and not be undermined by the efforts of individual states. 

The potential for damage from this aggressive approach is significant. Current 

economic conditions are provoking U.S. states to expand their fiscal jurisdictions beyond 

U.S. borders with overly broad legislation. It is extremely important for the U.S. 

Congress to address this aggressive behavior. 
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80344.370

R 

ASB Inc> 

ACE INA Holdings> Inc> 

AEGON USA 

Ahold USA Inc> 

Airbus North America Ho!dings 

Akzo Nobel Inc> 

Alcatel-lucent 

Alia lavallne> 

AWanz: of North America 

AlSTOM 

AMEC 

APG 

APL limited 

AREVA, inc> 

Holdings Inc 

Pharma US, Inc. 

of North America 

BASF Corporation 

bioMerieux, 

BMW of North America 

BNP Paribas 

BOSCH 

BP 

8T 

Bunge Ltd. 

!ngelheim Corp, 

inc. 

Case New Holland 

Cobham 

CovidJen 

Credit Suisse Securities {USA) 

Daiichl Sankyo, Inc. 

Dalmier 

Oassault Falcon 

Deutsche Post World 

Deutsche Te!ekom 

Inc, 

EMD Serono Inc. 

Ericsson 

Evonik Oegussa Corporation 

Exper!an 

Finmeccanica North America 

Flextronlcs International 

Food LLC 

France North America 

FUJIFllM Holdings America 

Garmin lnc, 

GDF SUEZ Energy America, !nc. 

General! USA 

GKN America Corp. 

GlaxoSmitht<:line 

Hanson North AmerJca 

Heineken USA 

Holclm Inc, 

Honda 

HSBC North America Holdings 

Huhtamaki 

Motor America 

Renewables 

ING America Insurance Holdings 

InterContinental Hotels Group 

JBS USA 

Macqu3rie Aircraft Leas!ng Services 

Maersk Inc 

Magna International 

Marvel! Semiconductor 

McCain Foods USA 

Mlchelin North America, Inc, 

Mi1!er Company 

Nahonal 

Nestle USA, Inc> 

Nissan 

Nokia, Inc. 

Nomura Holding America, Inc. 

Novartis 

Novo 

Oldcast!e, Inc, 

Panasonic Corp. of North America 

Pearson Inc, 

Pernod Ricard USA 

E!ectronjcs North America 

limerlcas 

Randstad North America 

Reed E!sevier Inc. 

U.S. subsidiaries 

state and federal 

Research in Motion 

Rexam Inc 

Rio Tinto America 

Roche Financial USA, Inc< 

Rolls-Royce North Amerlca lnc, 

Bank of Canada 

Innovative Plastics 

Sanof1 US 

SAP America 

Sc.hneider USA 

Schott North America 

Shell Oil 

Siemens 

Smith 8.. Inc. 

Societe Genera!e 

Sodexo, Inc. 

Teva ",nam1aceutJCalS 

Thales USA, Inc, 

The Tata 

Thomson 

ThyssenKrupp USA, Inc> 

Tim Hortons 

Toa Reinsurance Company of America 

Tomkins Industries. Inc. 

TOTAL USA, Inc> 

Toyota America 

International (US), lne, 

Connectivity 

UBS 

Umicore USA 

Uni!ever 

Zurich Insurance Group 
400 


80344.371

OUTDOOR 

LIVING 

B~S 

April 20, 2012 

Honorable Max Baucus, Chairman 

Honorable Orrin Hatch, Ranking Member 

United Slates Senate, Committee on Finance 

Attn: Editorial and Document Section 

Room SD-210 

Dirksen Senate Office Building 

Washington, DC 20510-6200 

Re: April 25 Senate Finance Committee Hearing on Tax Reform: Mlat It 

Means for State and Local Tax and Fiscal Policy 

Dear Chairman Baucus, Ranking Member Hatch and Members of the Committee: 

Thank you for holding a hearing on Tax Reform: What It Means for Slate and Local Tax and Fiscal 

Policy. In that context, I would urge you to consider the issue of business activity tax nexus. I testified 

on the issue before the House Judiciary Committee last year, and I am attaching a copy of that testimony 

for inclusion in the hearing record. 

As discussed in my testimony, many states, desperate for revenue, regularly assess millions of dollars a 

year in corporate income and similar taxes simply because companies have what they call an "economic 

presence" there. This includes customers with credit cards, software or intangibles, such as trademarks, 

trade names, and advertising or, like us, franchise agreements. 

The U.S. Supreme Court has suggested more than once that a physical presence, not merely an economic 

presence, is needed in order for a state to assess such taxes. But Congress has not yet clarified that nexus 

standard. 

I respectfully urge Congress to act now to enact H.R. 1439, the Business Activity Tax Simplification Act 

("BATSA"). The bill, which has strong bipartisan support, would establish a single, uniform nexus 

standard for all states, so that businesses like mine will no longer have to wonder about their tax liability, 

nor would they have to wrestle with unjustified and unexpected tax assessments from states where they do 

not have a single employee, piece of inventory or even an office. BATSA would clarify what the U.S. 

Supreme Court decided two decades ago in the sales tax arena: that a state can only tax out-of-state 

companies if they have a substantial connection with that state. H signed into law, BATSA would 

encourage business development and job growth and put a stop to decades of unnecessary and expensive 

compliance costs and litigation. 

Sincerely, 

Corey Schroeder, CFA 

Outdoor Uvmg Brands, lno./ Telephone (804) 353·69991 (800) 722-4668/ Fax (804) 351>-1878 

2924 Emerywood Parkway, Suite 101 I Richmond, VA 232941 www.ouldoortivingbrands.com 
401 


80344.372

Statement of Corey Schroeder 

Vice President & CFO, Outdoor Living Brands, Inc. 

United States House of Representatives 

Subcommittee on Courts, Commercial and Administrative Law 

April 13, 2011 

Good afternoon Chainnan Coble, Ranking Member Cohen, and members of the 

subcommittee. My name is Corey Schroeder, and I am grateful for the opportunity to speak 

today in support of the Business Activity Tax Simplification Act 0/2011, or "BATSA," and the 

specific impact the current state income tax reporting environment has on my company, Outdoor 

Living Brands and on franchise businesses in general. 

I am the Vice President and Chief Financial Officer of Outdoor Living Brands, Inc., 

which is located in Richmond, Virginia and was fonned in 2008 to acquire franchise businesses 

in the outdoor living category. We currently operate three brands representing 181 franchise 

locations in 34 states. Despite this reach, we are a small business with $4.6 million in revenue 

and only 28 employees. 

During my remarks today, I will highlight why small businesses require a federal solution 

to bring greater certainty to compliance with state tax laws. I will share with you the experience 

of our company in navigating the unpredictable nature of state nexus decisions across multiple 

jurisdictions. Finally, I will provide insight into how the uncertainty of these nexus decisions 

impact the hundreds of thousands of franchise businesses in the United States. 

Our franchise system is an active member of the International Franchise Association 

(IF A). As the largest and oldest franchising trade group, the IFA's mission is to safeguard the 

business environment for franchising worldwide. The IF A represents more than 90 industries, 
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80344.373

including more than 11,000 franchisee, 1,100 franchisor, and 575 supplier members nationwide. 

According to a study conducted by PwC for the IF A Educational Foundation, there are over 

825,000 franchise businesses across 300 different business lines providing for nearly 18 million 

American jobs and generating over $2.1 trillion to the U.S. economy. 

Franchised businesses play an important role in the economic health of the U.S. 

economy, and they are poised to help lead the economy on the path to recovery. The IF A 

Educational Foundation report shows that the franchise industry consistently outperforms the 

non-franchised business sector, creating more jobs and economic activity in local communities 

across the country. Franchising grew at a faster pace than many other sectors ofthe economy 

from 2001 to 2005, expanding by more than 18 percent. During this time, franchise business 

output increased 40 percent, compared to 26 percent for all businesses. 

The franchise model allows companies like Outdoor Living Brands to grow our business 

concepts in communities across the country by partnering with local entrepreneurs that invest in 

and operate their own small businesses. As the franchisor we provide a business concept and 

operating plan, a brand, licensing of intellectual property in the form oftrademarks and copy 

writes, as well as ongoing training and operational support to our franchisees. Our objective is to 

serve each local community with our services and help our franchisees build successful small 

businesses that create jobs. 

Outdoor Living Brands an Illustration 

This legislation would address a significant issue within the franchising community 

related to state income tax reporting. The primary issue facing franchisors are the confusing and 

ever changing rules governing the establishment of tax nexus based on business activities in each 

state. 
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When nexus is determined to exist, a franchisor is required to file state corporate income 

taxes based on the apportioned earnings derived from franchisees in that state. Creating a 

consistent definition of what constitutes nexus would greatly simplify tax reporting obligations 

for franchise companies and reduce a significant area of confusion, uncertainty and 

administrative cost. 

While Outdoor Living Brands and franchise companies like ours have franchise locations 

in many states we do not have operations in those states. Outdoor Living Brands is a company 

incorporated in the Commonwealth of Virginia. Our physical presence, the development of our 

brand, the development and training of new franchisees, the support of existing franchisees -

everything that makes us a franchisor - takes place in Virginia. The only assets we have in the 

various states are our franchise agreements, the contract that governs the terms of the 

relationship between us and our franchisees. 

Certain states through legislation or recent court rulings have begun to recognize the 

mere existence of these franchise agreements and the use of our intellectual property or even the 

physical existence of our training manuals in their states as establishing nexus. I understand the 

desire of state tax agencies to generate revenue from out of state businesses from the royalty and 

licensing revenue derived from those states, especially in the current fiscal environment. 

However, the logical outcome of this view is for a small company such as Outdoor Living 

Brands, which conducts materially all of its business in the state of Virginia, would pay less than 

10% of our state corporate income taxes to Virginia. Add to this the administrative and cost 

burden of filing 34 state tax returns and more as we expand to new states. 

As a franchise business we are already a highly regulated business. Our franchise 

offering is prepared in accordance with the rules set by the Federal Trade Commission. Further, 
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80344.375

we must comply with additional rules set in certain states. We currently file a franchise tax 

return in Texas and we have to report on our franchisees' sales tax activity to the State of New 

York (a recent development). Finally, due to nexus rules we must file state income tax returns in 

Virginia, Ohio, North Carolina, Arizona, South Carolina, and Minnesota. The filing fees and 

expenses for audit, legal, and tax services approaches $100,000 per year. That does not include 

any allocation of my time or the time of our staff to prepare these various filings each year. 

Without reform such as that provided by the Business Activity Tax Simplification Act the 

financial and administrative burden associated with tax compliance will continue to grow. This 

issue diverts resources vital to our business' ability to grow and support our franchisees. 

Outdoor Living Brands provides an illustration of how this issue has grown in complexity 

in recent years. Our business has growth through the acquisition of our three brands. Through 

those transactions we acquired operations in Virginia, North Carolina, and Ohio. We have since 

ceased operations in North Carolina and Ohio but our nexus in those states remains for some 

reason. 

Nexus with Arizona, Minnesota, and South Carolina is established purely through the 

existence of our franchise locations in those states. Most recently South Carolina in 2007 and 

Minnesota in 2008 established nexus with us through a questionnaire process. Revenue 

departments from those states sent Outdoor Living Brands a lengthy business activity 

questionnaire. After checking 'No' to almost every business activity described in the 

questionnaire it was determined that the existence of our franchisees was sufficient to establish 

nexus. We were required to file several years of past due tax returns. Ifwe complied within a 

specified period oftime we could have penalties and interest reduced. The South Carolina 

questionnaire was driven by a then recent court decision, prior to which our company did not 
405 


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have nexus. I never had any awareness of the nexus with Minnesota until the questionnaire 

process. 

Hopefully, you can see the uncertainty facing franchise businesses surrounding this issue. 

We do not know with which states we have nexus or why. Further, we have no effective way of 

determining when those rules change or Why. 

As a franchise executive I have several ways to manage this issue. The first is to allocate 

even more of my scarce financial and management resources to proactively determine nexus 

status with each state. Likely, I would hire a tax consultant to research the remaining twentyseven states where we have franchisees to explore if our business activity establishes nexus. 

expect the states would err on the side of establishing nexus and I will then hire that tax 

consultant to file tax returns in those states. As you can imagine this is not an attractive 

approach for a small business like ours. Alternatively, I can take a passive approach and wait 

until the next business activity questionnaire arrives and start the process with that state, likely 

adding them to my roster of state income tax filings. The last option which some small business 

owners have suggested is to ignore the questionnaires and hope that the states are busy enough 

with larger companies (or those that responded) to overlook them for a couple of years. 

Impact on Larger Franchising Business Community 

While the United States Supreme Court, through its ruling in Quill Corp. v. North 

Dakota, justified the prohibition of states forcing out-of-state corporations to collect certain taxes 

unless it had established a physical presence in the taxing state, states have in recent years 

ignored the ruling and begun establishing an economic nexus standard for taxation. This has 

created tremendous hardships and confusion for all businesses that use the franchise business 

model to expand their brand. 
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Most franchisors own no property in the state in which their franchisees operate, do not 

maintain offices there, and employ no residents of those states. A franchisor's employees may 

make occasional visits to its franchisee's place of business to assist the franchisee in opening his 

or her business and to inspect the franchisee's perfonnance and furnish training advice and 

guidance, but the duration of such visits nonnally is limited to a few hours or days. The services 

that a franchisor furnishes to its franchisees, and communication among a franchisor and its 

franchisees, are implemented almost entirely at the franchisor's principal offices and through 

interstate communications media. 

Most franchisors do not rely on the states of their franchisees' domicile for any services 

and impose no costs on those states. Meanwhile, like any other enterprise domiciled in a state, a 

franchisee operating there would pay taxes, be involved in supporting community activities, and 

create economic opportunities for employees and suppliers who would directly benefit from the 

existence of the enterprise. 

Enactment of BATSA is important to the franchise business community because of the 

business relationship between a franchisor and its franchisees. Central to that relationship is a 

shared trade identity. That shared trade identity is established and maintained by the franchisor's 

license of its trademark, trade dress, and other intellectual property to each of its franchisees. 

Thus, each of the hundreds of thousands of franchise relationships that cxist in the U.S. involves 

a license of intangible property. The great majority of those licenses cross state lines. 

Franchise brands exist across a multitude of political boundaries in most franchise 

systems, but the franchisor is often a single entity with a clearly defined corporate residence. 

Some state revenue officials and, increasingly, legislators view the presence of a franchised 

outlet of a national or regional brand in their state as sufficient for the establishment of an 
407 


80344.378

economic, rather than a physical, nexus of the out-of-state franchisor. It has been incorrectly 

argued that the mere presence of intangible property in their jurisdiction satisfies the "substantial 

nexus" requirement under the Commerce Clause for the imposition of state income and related 

business activity taxes. 

In December, the Iowa Supreme Court issued a troubling ruling in the case ofKFC 

Corporation v. Iowa Department of Revenue. The ruling held that the U.S. Supreme Court 

would likely find that the intangibles that KFC licensed to its Iowa franchisees "would be 

regarded as having a sufficient connection to Iowa to amount to the functional equivalent of 

'physical presence.'" This functional-equivalency test goes beyond related case law and is of 

questionable basis. The physical-presence test is a bright-line test that cannot be met through the 

"presence" of intangible property in a state. It is difficult to reconcile the Iowa Supreme Court's 

holding with this test, adding another layer of confusion for companies that are trying to properly 

assess their tax exposure. Such actions at the state level radically expand the classes of persons, 

relationships, and transactions potentially subject to state income taxation, and threaten the 

livelihoods of hundreds of thousands of entrepreneurs who have chosen franchising as the route 

to small business ownership. 

The issue has enormous implications for the businesses engaged in franchising. If 

permitted, such assessments would subject licensors of intangible property in interstate 

commerce to income taxation by every state in which goods or services exploiting the licensed 

intangible property are sold. If a tax return is not filed, no statute oflirnitations will limit the 

period for which taxes, interest, and penalties may be due. Such a result would represent a 

radical departure from the historical understanding of the reach of taxing authority and a 
408 


80344.379

significant increase in the tax liability and burden of compliance of thousands of American small 

businesses. 

If every state where a franchisor has granted franchises may tax its income attributable to 

that state, non-resident franchisors will be subject to costly compliance burdens and everescalating taxes. Under these circumstances, there is no doubt that franchisors will be forced to 

consider passing this cost of business on to their franchisees by increasing the royalty fees. 

Under this scenario the party most harmed is the resident franchisee. Thus, enactment of 

BA TSA is critical for thousands of businesses, including franchising companies, their 

franchisees and other licensors and licensees of intangible property across state lines. 

Conclusion 

Earlier in my career, as an investment banker, I provided professional services to dozens 

of small businesses in as many industries with far broader business activities compared to 

Outdoor Living Brands. Few other businesses face the unique complexity in state tax obligations 

as faced by franchise businesses due to the current nexus environment. The total cost of 

complying with the current state income tax environment is burdensome. The rules change 

frequently creating a great deal of uncertainty. The reforms provided by the proposed legislation 

would greatly improve these conditions for the franchise industry. 

I want to thank the members of the Subcommittee on Courts, Commercial and 

Administrative Law for the opportunity to participate in today's important hearing on the 

Business Activity Tax Simplification Act. It is my hope that we can work together to pass this 

legislation to address the unnecessary hardship that thousands of franchise businesses face across 

this country when it comes to compliance with state tax laws. 

Thank you and I look forward to answering any questions you may have. 
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80344.380

Plaza New York. NY 10004 -14 7£) 

F 212 344 3344 www.p!nyc.org 

Partnership tor New York City 

TESTIMONY SUBMITTED TO THE SENATE COMMITTEE ON FINANCE 

HEARING ON "TAX REFORM: WHAT IT MEANS FOR STATE 

AND LOCAL TAX AND FISCAL POLICY 

Wednesday, April 25, 2012 

KATHRYN WYLDE 

PRESIDENT & CEO 

PARlNERSHIP FOR NEW YORK CITY 

Thank you, Chairman Baucus, Ranking Member Hatch and Members of the Committee 

for the opportunity to submit written testimony. 

The Partnership for New York City is a nonprofit organization of international and 

regional business leaders who partner with government and other sectors to promote 

job creation, economic growth and public education. We strongly support H.R.1439, the 

Business Activity Tax Simplification Act of 2011 ("BAlSA"), which was favorably 

reported out of the House Judiciary Committee last summer, and respectfully urge 

Congress to enact the bill into law this year. 

Passage of BAlSA has become urgent, as increasing numbers of states are facing fiscal 

crises and seeking to reach beyond their borders to extract revenues from the economies 

of other jurisdictions. BAlSA would ensure that companies are subject to state business 

taxes only in those states where they have a physical presence and from which their 

business operations and employees derive benefits. It would stop the practice of taxing 

corporations based on where their customers, rather than their businesses, are located. 

This practice has resulted in significant new impositions on companies, in terms of both 

tax payments and compliance costs associated with responding to widely varying and 

constantly changing taxing schemes adopted by various jurisdictions. With approaches 

to taxable nexus varying from state to state, clarifying the physical presence 

requirement to articulate the bright-line nexus standard included in H.R. 1439 would 
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80344.381

alleviate the burden that many interstate businesses face and help promote economic 

growth across the country. 

New York City is a major hub for interstate commerce and many New Yorkheadquartered companies transact business in all fifty states and around the world. 

New York City and State supply the infrastructure and services necessary to 

accommodate these companies, and tax the business community accordingly. 

Traditional practice in the U.S. has been that states levy business activity taxes only on 

those businesses that have some type of physical presence (i.e., labor force or property) 

in the state. We support this tradition, which is based on the premise that a business 

should pay tax only to those jurisdictions that have provided it with meaningful 

benefits and protections (e.g., public schools, roads, police and fire protection, water 

and sewers). Businesses receive these benefits only from the jurisdictions where they 

are actually located. Businesses should only pay tax where they actually earn income, 

and economists agree that income is earned where a business employs its labor and 

capital. 

BA TSA would provide the clarity and discipline required to maintain a rational and 

hospitable business environment in the United States. It will also protect the tax base of 

America's major commercial centers that are absorbing the costs associated with the 

demands of major commercial operations. 

Thank you for your consideration. 
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80344382.eps

ome Performance Marketing 

Association, Inc. 

I 

Why Congress Needs to Enact Federal Sales Tax Legislation: The 

Devastating Impact of State-by-State "Affiliate Nexus Tax" Laws on 

70,000 Small Businesses 

By Rebecca Madigan 

Executive Director, Performance Marketing Association 

US Senate Finance Committee Hearing on: Tax Reform: What It Means for State and Local Tax and 

Fiscal Policy 

April 25, 2012 

Chairman Baucus, Ranking Member Hatch, and distinguished members of the Senate Finance 

Committee, thank you for the opportunity to provide testimony for your hearing examining how tax 

reform will impact state and local tax and fiscal policy. While the scope of this hearing is broad and the 

topics of debate are plentiful, on behalf of the Performance Marketing Association, I will focus my 

remarks on the need for Congress to enact federal sales tax legislation-specifically, S. 1832, "The 

Marketplace Fairness Act." 

By way of background, the Perfonnance Marketing Association (PMA) is a not-far-profit trade 

association founded in 2008 by the leaders of the perfonnance marketing industry, to connect, infonn and 

advocate on behalf of this rapidly growing field. PMA strives to raise the profile of performance 

marketing by demonstrating the value of this multi-biJlion marketing channel, which comprises more than 

200,000 businesses and individuals. Continued growth of the performance marketing space is expected as 

advertisers, facing small budgets and big expectations, increasingly look to perfonnance-based marketing 

initiatives to expand their business. 

However, our industry has been seriously hanned in recent years by the efforts of several states that have 

passed "affiliate nexus tax laws." Indeed, state-by-state piecemeal attempts have already devastated 

70,000 online-based businesses-yet yielded states $0 in new sales tax revenue and, in fact, reduced 

income tax revenue. A federal solution will lay to rest these desperate and futile attempts states pursue to 

solve their budget shortfalls. 

Over the past three years, 9 states have passed 'Affiliate Nexus Tax' laws, unconstitutional attempts to 

compel out-of-state retailers to collect their sales tax. These Affiliate Nexus Tax (aka' Amazon tax') laws 

claim out-of-state retailers have 'nexus' or physical presence, if they advertise on websites owned by 

businesses (known as 'Affiliate Marketers') in states where these laws have passed, thereby requiring 

them to collect sales tax. 

79 Daily Dr. ~1 06, Camarillo, CA 93010, t: 805.445.9700 

www.performC}ncemC}rketlngassociation.com 

Share Ideas Shape the future 
412 


80344.383

These laws have been failures to the states and the impact on Affiliate Marketers has been catastrophic: 

out-of-state retailers simply sever their advertising agreements with Affiliate Marketers in order to avoid 

collecting sales tax. These affiliate marketing businesses lose a devastating portion of their income, 

causing them to move out-of-state, layoff employees, or shut their doors. 

Real Devastation to Small Businesses 

70,000 affiliate businesses in 8 states have been devastated by the passage of Affiliate Nexus 

Taxes. 

On average, these businesses lose 25% - 35% of their income when these laws pass. Imagine 

what losing a third of your income would mean to you. 

An estimated 800-900 online retailers terminate their advertising agreements when these state 

laws pass. 

In California, where there were 25,000 affiliate businesses, 35% lost over half their incomes 

when the law passed there. And 32% moved out of state. 

States don't gain any new sales tax revenue, and lose income tax revenue especially when these 

businesses move out-of-state and take all their income with them. 

Performance marketing was a $22 billion industry in 20 11, the fastest growing type of advertising and 

one of the fastest growing technology sectors. This industry is made up of entrepreneurs, is growing and 

creating a lot of jobs, except in states where the affiliate nexus tox passed. 

State-by-State Impact 

Below is detail about each state where an Affiliate Nexus Tax law passed: the number of Affiliate 

Marketers in the states before the laws passed, their earnings and contributing state income tax revenue: 

New York 

Affiliate Nexus Tax passed in 2008 

15,000 affiliate marketers 

In 2007, they earned $746 million and paid an estimated $51 million in state income tax 

North Carolina 

Affiliate Nexus Tax passed in 2009 

6,000 affiliate marketers 

In 2008, they earned $416 million and paid an estimated $32 million in state income tax 

Rhode Island 

Affiliate Nexus Tax passed in 2009 

800 affiliate marketers 

In 2008, they earned $57 million and paid an estimated $4 million in state income tax 

Illinois 

Affiliate Nexus Tax passed in 2011 

9,500 affiliate marketers 

In 2010, they earned $744 million and paid an estimated $22 million in state income tax 

Connecticut 

Affiliate Nexus Tax passed in 2011 

3,000 affiliate marketers 

In 20 I 0, they earned $236 million and paid an estimated $7 million in state income tax 
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80344.384

Arkansas 

Affiliate Nexus Tax passed in 2011 

2,000 affiliate marketers 

In 2010, they earned $157 million and paid an estimated $11 million in state income tax 

California 

Affiliate Nexus Tax passed in 201 1 

25,000 affiliate marketers 

In 2010, they earned $1.9 billion and paid an estimated $152 million in state income tax 

Pennsylvania 

Affiliate Nexus Tax announced (reinterpreting existing statute) December 1,2011 

9,000 affiliate marketers 

In 2010, they earned $700 million and paid an estimated $22 million in state income tax 

Georgia 

Affiliate Nexus Tax passed in March, 2012, goes into effect July, 2012 

6,400 affiliate marketers 

In 2011, they earned over $600 million and paid an estimated $36 million in state income tax 

Congress Can Help 

Congress has the power to change current sales tax law, and on behalf of the more than 200,000 small 

businesses we represent, Affiliate Marketers, we ask the Committee to recommend legislation that will 

allow states to collect sales tax from out-of-state retailers, without the nexus requirement. Without the 

nexus requirement, the Affiliate Nexus Tax laws are moot; out-of-state retailers can reinstate their in-state 

advertising partnerships. 

The PMA supports S. 1832 because it includes the 'No Nexus' concept, which preserves Federalism and 

states' unique sales tax policies - and allows Affiliate Marketers to get back in business! 

In Conclusion 

The PMA and our industry made up of over 200,000 small businesses nationwide, urge Committee 

members to recommend S. 1832. 

The Performance Marketing Association (PMA) is a not-for-profit trade association founded in 2008 to 

connect, inform and advocate on behalf of performance marketing, a multi-billion-dollar marketing 

channel, which comprises more than 200,000 businesses and individuals. Continued growth of the 

performance marketing space is expected as advertisers, facing small budgets and big expectations, 

increasingly look to performance-based marketing initiatives to expand their business. Additional 

information is available at: http://www.performancemarketingassociation.com 
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WRITTEN STATEMENT OF 

CAREY J. (BO) HORNE 

PAST PRESIDENT 

and 

KATHERINE S. HORNE 

PAST VICE PRESIDENT 

PROHELP SYSTEMS, INC. 

418 East Waterside Drive 

Seneca, SC 29672 

on 

"Tax Reform: What It Means for 

State and Local Tax and Fiscal Policy" 

before the 

UNITED STATES SENATE COMMITTEE ON FINANCE 

April 25, 2012 

Room 215, Dirksen Senate Office Building 

Small Businesses Face an Impossible Situation 

Small businesses have always faced great challenges. Today, we confront the greatest ever. 

Caught in the middle of an enormous struggle between large businesses and greedy states over 

highly complicated tax nexus issues, small businesses are left in an impossible position. The 

ability of our smallest businesses to participate in Interstate Commerce, on any basis, is literally 

at stake. 

Highly aggressive, quickly expanding, and even abusive tax nexus claims made by many states 

amount to nothing short of legalized extortion. Except such claims are of dubious 

Constitutionality. The Supreme Court has said de minimis activity is insufficient for creating 

nexus. But, because such activity has not been adequately quantified into Federal law by 

Congress or by the Courts, the states are using every contrivance possible to defy past decisions, 

which are very clear to the average citizen. 
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The result is now leading our Nation quickly toward the very scenario which compelled our 

Founders to include the Commerce Clause in our Constitution. Just as occurred under the 

Articles of Confederation, greedy, revenue-hungry states are today seriously harming our 

Nation's economy. Our own personal experience clearly illustrates how real the problem is and 

how terribly extreme state nexus laws have become. No entrepreneur who sufficiently 

understands the nexus risks facing the smallest businesses today will m! contemplate launching 

a new business that depends on making interstate sales of any type or size. 

The Supreme Court has declined to become further involved in this issue. Only strong action by 

the Congress can now prevent major damage to our fragile economy and avert the complete 

closure of interstate markets to our Nation's smallest businesses. We are not the only small 

business which has experienced this issue. We are not even the only South Carolina small 

business which has been horribly burdened by it. 

Our Nation's smallest businesses carmot possibly cope with the widely varying, ever changing, 

and often poorly articulated nexus laws of 50 States and more than 12,000 local taxing 

authorities. It is unbelievable, but true, that it is today safer for small businesses to accept orders 

from customers in Canada than it is to accept orders from customers in other States. 

We urgently ask for your support and quick enactment of a legislative solution as set forth in 

H.R.l439, The Business Activity Tax Simplification Act of2011 ("BATSA"), before the 

problem grows even worse, more small businesses attempting to participate in Interstate 

Commerce are harmed, and further damage is inflicted upon our fragile economy. 

The Problem is Very Severe: 

In 1997, our tiny home-based* business, with armual sales of under $100,000, made a one-time 

sale of our proprietary software to a customer in New Jersey for $695. When it became aware of 

this single sale in 2003, the State of New Jersey demanded that we pay approximately $15,000 in 

back taxes, fees, interest, and penalties. The State further demanded that we also pay $600 in 

taxes and fees, every year thereafter as long as our customer used the software, even in 

years when no sales are made in New Jersey, and regardless of any profit. Since then, New 

Jersey has become even more punitive against businesses located elsewhere, and numerous other 

states have launched similar programs to export their local tax burdens . 

• Located in Georgia in 1997, rewlocatcd to Sooth Carolina in 2001, 

The abuses are not limited to software. New Jersey and other states defy protections of the 

Interstate Income Tax Act of 1959 (Public Law 86-272), which prevent any state from imposing 

an income tax for interstate activities where no physical presence exists. Today, if one of your 

constituents ships a box of paper clips to a customer in New Jersey, he is exposed to similar 

claims. 

Only after more than two years of intense effort that should have gone toward growing our 

business, after great legal expense had been incurred, and after our case had brought massive 

negative pUblicity to the State, did New Jersey ultimately drop its claim against our company. 

We received no apology or compensation for the abusive claims; and we are still precluded from 
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making sales from our home in South Carolina to customers in New Jersey without exposing 

ourselves to the same ordeal, again. 

When I testified to the House Judiciary Subcommittee on Commercial and Administrative law in 

2005, Congressman Delahunt immediately understood what the future holds for small 

businesses: 

"The case presented by Mr. Horne, I think, is an egregious 

example. We support you, Mr. Horne, and it's got to be 

addressed." 

The nightmares being reported are certain to escalate. New Jersey increased its minimum tax 

150% in 2002. Such taxes are effectively borne only by the smallest participants in Interstate 

Commerce. The victims are generally not capable of fighting, they capitulate to reduce the risk 

of larger penalties, and they have absolutely no representation in the matter except right here in 

the Congress. 

Without clear protections such as "BATSA" provides, aggressive states will always seek to 

stretch the limits and to impose their own creative definitions to justifY taxation most citizens 

would consider unjust. Similar business activity taxes have already spread to Michigan, Ohio, 

Texas, and many other states. Can anyone believe they will not soon be implemented by all 

states? Every state, even those who understand the damage being done, will be forced to 

implement similar taxes for retaliatory reasons. Each state will be forced to recoup its own 

legitimate tax revenues siphoned off by the more aggressive states acting before them. The 

inevitable result will be the complete closure of interstate markets to our Nation's smallest 

businesses, and further damage to our National economy. 

The Impossible Situation: 

As documented by numerous large businesses, including Smithfield Foods during the 2004 

"BATSA" hearing in the House Judiciary Committee, the burden of complying with so many 

widely varying tax laws is enormous. Smail businesses find actual compliance to be impossible 

and even the expectation of compliance to be completely unreasonable. For these reasons, the 

Supreme Court has declared such claims against small businesses to be unconstitutional, in 

multiple major decisions such as Complete Auto Transit. 

As indicated earlier, though, the states simply ignore the total impossibility for any small 

business to: 

• Become familiar with the widely varying and ever changing nexus and tax laws of 50 States, let 

alone comply with them. How will mom and pop businesses ever be able to comply? 

• Deal with the staggering burden of 12,000 differing nexus laws and business activity taxes 

authorized by the states for their localities. How can any small business handle such magnitude? 
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• Cope with the staggering variety of minor yet very common business activities that subject 

them to abusive assertions of interstate nexus. 

• Devote the administrative resources necessary to keep business activity records for 50 states 

and 12,000 localities. Why should we even have to try? 

• Find funding for the preparation of totally different tax returns for up to 50 states and 12,000 

localities. How could any government unit even expect us to attempt this? 

• Pay $30,000 per year, or even more, every year, forever, in minimum business activity taxes 

and fees, even ifno sales are made anywhere. This will be the result for every small business, 

regardless of sales or profits, when all 50 states adopt New Jersey's Corporate Business Tax and 

a single de minimis sale has been made, in some prior year, in every state. It will be even worse 

when localities are included. Much history, past and current, has proven such abusive claims 

against our Nation's small businesses will occur unless Congress acts decisively to protect us. 

• Once confronted with an abusive claim, find an affordable attorney who is knowledgeable 

about interstate nexus issues. When faced with the issue in 2003, calls to every attorney in 

Atlanta and throughout South Carolina specializing in tax or computer law led to no one familiar 

with our problem. Of course, we did not call the largest downtown finns, because we knew we 

could not afford them. Ultimately, the South Carolina Department of Revenue led us to perhaps 

the only attorney in South Carolina familiar with interstate nexus issues. He told us, up front, 

that we could not afford him, but thankfully gave us a lot of very useful advice, pro bono. 

• Meet strictly enforced time limits imposed by states for contesting aggressive and even 

unconstitutional claims. The logistics of finding adequate and affordable representation for a 

highly complicated issue in a state far away are insurmountable for most small businesses. 

• Defend itself against an aggressive, far away state. Many of the claims made against small 

businesses are clearly unconstitutional, on multiple grounds. States are now regularly asserting 

claims for only de minimis activity in the state. They continue to pursue aggressively even the 

weakest cases because they know it is virtually impossible for small businesses to fight back. 

• Finance the defense of an egregious claim all the way to the Supreme Court. The states are 

taking maximum advantage of a system that requires all tax cases, including those where 

substantial constitutional issues are involved, to exhaust all legal remedies within the state first. 

At that point, the only recourse is to the United States Supreme Court. Few, if any, small 

businesses will find this arduous route anything but utterly impossible. 

Our Experience is Not an Isolated Case: 

Our many conversations with people across the country show that abuses are far more common 

than generally recognized. At the time of my testimony before the House Judiciary Committee 

in 2005, we were already personally aware of approximately fifteen small business victims 

located in multiple states. 
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We did not search for these victims. Desperate for help, they found us, from testimony we 

submitted for the 2004 hearing or from numerous magazine and newspaper articles written about 

our case. Since the 2005 House Judiciary Committee hearing, approximately fifteen more 

businesses have sought us out, also desperate for any help they can find for dealing with their 

crisis. One of the calls was from a small trade organization representing seafood processors; 

approximately twenty of their members in the Delmarva area had been trapped. When a tiny, 

home-based business learns of almost fifty small companies across the country faced with nexus 

nightmares, the true extent of the problem must be enormous. 

We are completely flabbergasted that almost a dozen attorneys from across the country also have 

called us, trying desperately to learn as much as they can as quickly as they can, in order to 

provide adequate representation for their local clients fighting battles with far away states. 

Each of the Finance Committee members should clearly understand that small businesses in your 

own States are already being wrongly burdened by greedy states, because we lack the vital 

protections every small business assumes already exist. 

The Solution: 

Some small businesses are not yet vocal with their support for a federal legislative solution, like 

"BATSA". They are generally totally unaware that numerous far away states are now taxing 

sales they implicitly assume are protected. Most are unaware that states are also now regularly 

ignoring or circumventing the basic protections granted by the Interstate Income Tax Act of 1959 

(PL 86-272). 

Most have no idea what nexus is, and don't really want to know. They just want to grow 

their businesses and help expand the Nation's economy. They have no idea that the sales they 

are regularly making across state lines, through a physical presence in their home state only, are 

exposing them to the same nexus nightmares many other small businesses have already 

encountered. 

As the states employ more powerful and more pervasive systems to track the smallest sale made 

anywhere, small businesses will be regularly trapped like a deer in headlights, totally defenseless 

against what will soon occur, unless Congress uses its broad authority to protect the right of 

every small business to participate in Interstate Commerce on a reasonably unfettered basis. 

Our personal experience, plus those of other small businessmen testifying to the House Small 

Business Committee on February 14, 2008, clearly show what happens when the standard leaves 

the smallest avenue open to abuse by greedy States. Without strong Federal legislation, small 

businesses will soon be unable to participate in Interstate Commerce, on any basis. 

The arguments about state sovereignty and how we must change our tax systems to 

accommodate the Internet economy are not reasonable for this debate. Small businesses have 

their backs to the wall. They now face the very situation that caused the Founders to give you, 

the Congress, the power to regulate Interstate Commerce. You must now use that power to 

protect our small businesses and even the entire National economy. 
419 


80344.390

Only a strong restatement of the fundamental principles of physical presence will resolve the 

tragic and impossible consequences small businesses are facing. These principles worked so 

well for more than 200 years that they were simply "understood" and not even codified into law 

until the Congress did so with the Interstate Income Tax Act of 1959. 

It is now urgent that this Congress modernize that Act quickly to protect our small businesses 

and our National economy. The Act must be expanded to cover all types of sales, both products 

and services, and it must prohibit all types of business activity taxes which are so harmful to the 

smallest of businesses. 

Having faced this issue, up close and personal, for almost eight years, we know the Business 

Activity Tax Simplification Act is exactly what small businesses need. We urge the Senate 

Finance Committee to use its full resources to insure prompt enactment of such legislation. Only 

then can our Nation's small businesses safely redirect their full energies to growing our economy 

instead of defending themselves against egregious claims of nexus made by a rapidly growing 

number of states. 

Many of the points made in this document also apply to every bill now being considered for 

setting National standards for the collection of State sales taxes. We urge the Finance 

Committee to insure, in any bill moved forward, the Nation's smallest businesses receive 

absolute protections from tbe inevitable administrative burdens which will be created. 

Our economy is in great peril. Our Nation cannot afford to allow nexus abuses to damage it 

further. 

Carey 1. Horne 

Past President 

Katherine S. Home 

Past Vice President 

ProHelp Systems, Inc. * 

* ProHelp Systems, Inc. was a Georgia Corporation, chartered in 1984. It was dissolved in 2007 because of our 

inability to deal with the complexity of the interstate tax and nexus issues we faced. 
420 


80344.391

TESTIMONY OF PuLTEGROUP, INC. 

100 BLOOMFIELD IIn.L9 PKwv. 

SUITEJOO 

BLOOMFIELD HILLs, M1483204 

BEFORE THE 

UNITED STATES SENATE COMMlTI'EE ON FINANCE 

APRIL 25, 2012 

Chairman Baucus, Ranking Member Hatch and Members of the Committee, thank you 

for holding a hearing on Tea Reform: What It Means for State and Local Tax and Fiscal 

Policy. PulteGroup, Inc. would like to direct your attention to a state tax issue of great 

importance to our company and thousands of other businesses that operate in interstate 

commerce: business activity tax nexus. The issue relates to the circumstances in which a 

state properly may assess income and similar taxes against non-resident companies. To 

resolve the issue, we urge immediate enactment of federal legislation, as set forth in H.R. 

1439, the Business Activity Tax Simplification Act ("BATSA"). 

PulteGroup, a Michigan corpomtion, is one of the largest homebuilders in the United 

States. While our Company primarily engages in the homebuilding business, we also 

have mortgage banking opemtioDS and title operations. Our core business includes the 

acquisition and development of land primarily for residential purposes within the United 

States and the construction of housing on such land. We conduct our opemtioDS in 

approximately 61 markets located throughout 29 states. Over our history, we have 

delivered nearly 600,000 homes. 

Business activity tax nexus is the most important issue affecting interstate commerce and 

the growth of the U.S. economy. Resolution of the problem by enactment of federal 

legislation is a priority for PulteGroup; indeed it is a requirement for the company's 

future growth and success. 

Tmditionally, the states and the courts accepted the historic principle that a business must 

have a ''physical presence" in a state before that state may assess income and similar 

taxes. More recently, some states have abandoned the traditional physical presence nexus 

standard and have attempted to assert a right to tax non-resident businesses based on 

"economic nexus," or the mere presence of customers, absent any physical presence in 

the taxing jurisdiction. Our Company has been subjected to such attempts by states to 

expand their right to tax based on "economic nexus" increasing our cost of doing 

business during a time when we can least afford it. Further, the continued expansion of 

these attempts by more states creates great uncertainty for Companies such as ours as we 

consider possible expansion of our business. 
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Such efforts by states to unconstitutionally expand their taxing authority have led to 

unfairness and uncertainty, increased compliance costs, hindered business expansion and 

put companies at risk of duplicative over-taxation. 

BATSA, which was reported out of the House Judiciary Committee by voice vote last 

year and which enjoys bipartisan support, would prevent unlawful impediments to the 

free flow of commerce among the states by clarifying that no state may impose a business 

activity tax on any entity that lacks a physical presence in the taxing jurisdiction. The bill 

would provide a bright-line definition of physical presence. In addition, the Act would 

modernize current law (Pub. L. 86-272) relating to state authority to impose net income 

taxes on certain income derived from interstate commerce, to cover services and 

intangible property. Thus, businesses would continue to pay business activity taxes to 

those jurisdictions that provide them with meaningful benefits and protections. To be 

clear. we at PulteGroup do not seek to pay less tax in states where we have a physical 

presence. we simply desire clarity and consistency as we serve customers on a multi-state 

basis. 

The enactment of BA TSA would contribute to the type of stable business climate that 

encourages increased business investment, expanded interstate commerce and a healthy 

American economy. 

Thank you for your time and attention to this important issue. 
422 


80344.393

Statement for the Record 

Senate Finance Committee 

"Tax Reform: What It Means for State and Local Tax and Fiscal Policy" 

April 25, 2012 

215 Dirksen Senate Office Building 

Katherine Lugar 

Executive Vice President of Public Affairs 

Retail Industry Leaders Association 

1700 N. Moore St. Suite 2250 

Arlington, VA 22209 
423 


80344.394

RETAIL 

~RILA INDUSlltY LEADERS ASSOCIATION 

Educate-lnnovate.Advocate. 

E-Fairness: 

1700 NORTH MOORE STREET 

SUITE22S0 

ARLINGTON, VA 22209 

T (703) 841-2300 F (703) 841-1184 

It's al/ about Equal Treatment, Jobs and States' Rights 

On behalf of the Retail Industry Leaders Association (RILA), thank you for holding this 

hearing entitled "Tax Reform: What It Means for State and Local Tax and Fiscal Policy," 

and for providing your colleagues and the public with the opportunity to discuss tax 

reform issues related to state and local finances. State and local govemments are 

closely studying what implications tax reform will have for them, as is the retail industry, 

but one issue that does not have to wait for comprehensive tax reform is the fair 

treatment of all retailers with respect to sales tax collection. 

By way of background, RILA is the trade association of the world's largest and most 

innovative retail companies. RILA promotes ccnsumer choice and economic freedom 

through public policy and industry operational excellence. Its members include more 

than 200 retailers, product manufacturers, and service suppliers, which together 

account for more than $1.5 trillion in annual sales, millions of American jobs and more 

than 100,000 stores, manufacturing facilities and distribution centers domestically and 

abroad. 

A sale is a sale is a sale. Whether it takes place online or ata local business, the same 

rules should apply online as they do on Main Street. Common sense would dictate that 

if a product is purchased online, the retailer should collect and remit sales tax, just as is 

the case when a customer goes to the store in person. 

Due to a decades-old loophole that pre-dates the intemet (the result of the 1992 Quill 

Supreme Court decision), online-only companies can achieve as much as a 10 percent 

price advantage over brick and mortar retailers by refusing to collect and remit the state 

and local sales tax owed on purchases made online. This special treatment has the 

effect of the govemment picking winners and losers in the marketplace, and local 

businesses simply cannot ccmpete over the long-term with online giants that exploit this 

govemment-sponsored loophole. 

For RILA, as well as millions of Main Street brick and mortar businesses, the top priority 

for the industry is to level the playing field on the collection of sales taxes between brick 

and mortar retailers and remote sellers. A wide spectrum of states - Califomia, Texas, 

Illinois, Pennsylvania, Virginia, Georgia, Tennessee, Indiana, and just this week Nevada 

- have already either passed state legislation or taken administrative action to partially 

level the playing field. But Congress must still act. 

Because of the ccnstitutional issues in the Quill decision associated with the Commerce 

Clause, states cannot completely level the playing field on their own: federal legislation 
424 


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is required. In fact, in its decision in Quill, the Supreme Court invited Congress to 

exercise its authority to solve this problem and let the states enforce their laws to level 

the playing field. Writing for the majority, Justice John Paul Stevens wrote, "This aspect 

of our decision is made easier by the fact that the underlying issue is not only one that 

Congress may be better qualified to resolve, but also one that Congress has the 

ultimate power to resolve. No matter how we evaluate the burdens that use taxes 

impose on interstate commerce, Congress remains free to disagree with our 

conclusions." 

On November 30, 2011, the House Judiciary Committee held an oversight hearing 

entitled "Constitutional Limitations on States' Authority to Collect Sales Taxes in ECommerce" where the National Governors Association endorsed bipartisan federal 

legislation, such as S. 1832 (The Marketplace Fairness Act), introduced by Senators 

Mike Enzi, Richard Durbin, and Lamar Alexander, to remedy this inequity. S. 1832, and 

a similar House bill (H.R. 3179, The Marketplace Equity Act), provide states with the 

tools to apply equal treatment of the collection of sales taxes on remote sellers, while 

minimizing administrative burdens and costs for remote sellers to collect and comply. 

Unless the current system is corrected, local retailers - big and small - will increasingly 

be forced to close their doors, taking with them the millions of retail jobs they provide, as 

these businesses are punished by the government for following the law, while their 

online competitors are exempt. From local booksellers and jewelers to national chains, 

the tilted playing field has already cost thousands of local jobs and more are threatened 

the longer this disparity continues. These businesses provide crucially needed jobs, 

pay local property taxes and make critical civic investments in our communities. 

Punishing local businesses in favor of out of state business runs counter to the 

government's efforts to building local communities that are vibrant and healthy. 

Further, this is a matter of states' rights. A state should be able to enforce their laws 

regardless of whether a product or service is purchased from an in-state or out-of-state 

vendor. Congress should allow the state to enforce their own laws, taking the 

government out of business of picking winners and losers. 

States can also choose to lower other taxes with e-fairness collections. At a time when 

nearly every state is facing significant budget shortfalls, states are considering 

increasing sales and property taxes to close these gaps, which have the effect of further 

widening the disparity between brick and mortar stores and remote vendors. According 

to the National Conference of State Legislatures, over $23 billion dollars in sales taxes 

will go uncollected this year alone even though consumers still owe a corresponding 

use tax. As the Internet continues growing as a retail platform, this collection gap will 

only grow larger. 

It should be noted that closing this loophole cannot be construed as a new tax. Just 

because some online-sellers don't currently collect the tax doesn't mean the state's 

sales tax is not still due. In fact, today online-only establishments are leaving individuals 

who purchase items on their Web sites exposed since these consumers are still legally 

responsible for paying the tax directly to the state. In addition, advances in tax software, 
425 


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already available, as well as the simplification requirements in S. 1832 - a small seller 

exemption, uniform rates and tax base in a states, and centralized filing and remittance 

- allow Congress to address this issue without burdening interstate commerce. 

In closing, RILA appreciates the opportunity to submit this written testimony for the 

record. Congress can and should immediately pass e-fairness legislation in order to 

ensure a level playing field that protects jobs on Main Street, and reduces budgetary 

pressure on states to further increase sales and property taxes. A comprehensive 

federal approach should allow the state, individually or through an interstate compact, to 

simplify their sales tax laws. This solution would simply provide self-help for the states, 

and it would do so without adding a penny to the federal deficit. Bipartisan bills such as, 

S. 1832, in the Senate, and H.R. 3179, in the House, can solve this problem and put 

home town businesses on a level playing field with online only sellers, and there is no 

reason why we should wait until tax reform to move forward with these common-sense 

solutions. 
426 


80344.397

Written Testimony by 

Sears Holdings Corporation 

3333 Beverly Road 

Hoffman Estates, IL 60179 

Committee on Finance 

United States Senate 

Hearing on ((Tax Reform: What It Means for State 

and Local Tax and Fiscal Policy" 

April 25, 2012 
427 


80344.398

On behalf of the 264,000 employees of Sears Holdings Corporation, we thank the Committee for holding 

this important hearing on tax reform as it relates to state and local governments and most specifically, 

the "Marketplace Fairness Act" (S. 1832). Sears Holdings strongly supports this bipartisan legislation 

that aims to cure a long-standing inequity between brick and mortar and online-only retailers by giving 

the states the ability to enforce existing laws and require remote sellers to collect and remit sales taxes 

on purchases to its residents. 

Sears Holdings Corporation (Sears Holdings) is the parent company of Sears, Roebuck and Co., Kmart, 

and lands' End. We are one ofthe nation's largest broadline retailers with approximately 3,500 fulHine 

and specialty retail stores in the United States. 

This legislation, and similar legislation in the House (the "Marketplace Equity Act" H.R. 3179), will 

restore balance and fairness to the system by enabling states, if they so choose, to enforce the 

collection of taxes that are already owed by every customer making a purchase, whether the purchase is 

online or in a retail store. 

Over the years, some have - intentionally and unintentionally - misrepresented the issue as a "new 

tax". This is not a new tax, although, unfortunately, most customers don't realize that they have the 

obligation to pay these taxes if they are not collected by the merchant. This legislation simply eliminates 

the need for customers to file and pay use taxes or to calculate and include the tax owed on their 

income tax return. Instead, states will be allowed to require online-only sellers to collect the tax at the 

point of sale just as they do with retailers who have a physical presence in the state. State sovereignty is 

a key tenet in taxation matters and it is important to point out that this legislation would in no way 

mandate the states do anything. Each state has the right to choose to enforce its laws. 

Many states are grappling with unprecedented budget deficits and they too are passing various versions 

of bipartisan legislation to close this loophole that has given a significant competitive advantage to a 

handful of online-only retailers, while hurting those that create jobs and invest in local communities. 

Ultimately, only Congress has the authority, and we would argue - a duty, to act on this important 

interstate commerce issue. In fact, the 1992 Quill Corp. V5. North Dakota decision made this very clear. 

Sears Holdings urges Congress to act quickly and pass this bipartisan legislation this session to address 

an issue that has resulted in over a decade of unfair competition between retailers who collect the sales 

tax and those who refuse to do so. The Marketplace Fairness Act levels the playing field between brick 

and mortar and online-only retailers, helps state and local governments, and does this all without 

costing the federal government a dime. 

We thank the Committee for examining this important issue. 
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~sifma Invested in America 

Statement of the Securities Industry and Financial Markets Association 

Submitted to tbe United States Senate Committee on Finance 

Full Committee Hearing 

"Tax Reform: Wbat It Means for State and Local Tax and Fiscal Policy" 

April 25, 2012 

The Securities Industry and Financial Markets Association! supports the Business Activity Tax 

Simplification Act (BATSA) co-sponsored on a bipartisan basis by two members of this Committee in the 

JlOth Congress and now pending in the House. This important legislation would establish clear rules for 

determining state tax jurisdiction. It would not reduce the revenue pie, nor would it necessarily reduce 

the amount of tax paid, but it would assure that our members' income is taxed solely in the states where 

they do business. It would do so by establishing an easily administered and understood physical presence 

threshold for business activity taxation. This simple exercise of Congress's power under the Commerce 

Clause would reduce costly state tax litigation, uncertainty, and the prospect of multiple taxation. 

In 1992, the U.S. Supreme Court ruled in Quill Corp. v. North Dakota that a state could not require an 

out-of-state business to collect sales and use tax unless that business has a physical presence within the 

taxing state. At that time, the Supreme Court declined to specifY the threshold that would trigger business 

activity taxes. Many tax experts argued that the physical presence standard should apply here as well. 

Unfortunately, over time, certain states have devised creative new legal theories on business tax nexus to 

claim an ever expanding share of interstate income, leading to costly litigation and uncertainty for 

business taxpayers and stimulating an unhealthy competition among the states to claim revenue share. 

BA TSA would sharply diminish confusion and the potential for multiple taxation that exists now because 

of absence of clear rules on business activity tax nexus. This is particularly important to the financial 

services industry, because some jurisdictions have sought to impose business activity taxes on companies 

that have no physical presence in the state but that increasingly serve customers remotely through mail 

and the internet. 

It would not be unprecedented for Congress to act to protect interstate commerce by mediating a 

difference among states about how to divide the taxable income of multi state businesses. In 1959, when a 

Democratic majority of the U.S. House and Senate sent P.L. 86-272 to the desk of President Eisenhower, 

Congress was motivated by the same desire to establish clear and administrable rules to allow the 

expansion of interstate commerce. Senator Harry F. Byrd of Virginia, then Chairman of this Committee 

1 The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of 

hundreds of securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, 

investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in 

the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the 

Global Financial Markets Association (GFMA). For more information, visit http://www.sifina.org. 

Washington New York 

1101 New York Avenue. 8th Floor i Washington, DC 20005-4269 t P: 202.962.7300 i F: 202,962.7305 

WW\II.sifma,org 1 lNNIN.investedinamerica.org 
429 


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~sifma Invested in America 

and a fonner governor himself, worried that states would "further encroach upon interstate commerce" if 

Congress failed to act. 

Far from devastating state revenues as today's critics claim, the enactment ofP.L. 86-272 paved the way 

for an historic expansion ofinterstate sales of goods that benefited the states collectively and individually. 

Consumers have benefited greatly as well from the creation of a national market for the sale of goods. 

Static models of state revenue of the type generated by the Congressional Budget Office are incapable of 

capturing the demonstrable benefits of a stable tax and legal environment for interstate commerce, and, 

unfortunately, the benefits of the 1959 law have waned as our economy has shifted from a goods to a 

service economy. BATSA wisely expands this foundational law to cover non-physical products. 

By establishing clear and consistent bright-line standards, BATSA will help to create jobs and revive our 

economy by providing certainty in interstate commerce to both businesses and to state and local 

governments. SIFMA urges the Senate Finance Committee to act on this important legislation. 

Washington ! New York 

1101 New York Avenue. 8th Floor i Washington. DC 20005-4269 P: 202.962.7300 I F: 202.962.7305 

www.sifma.org 1 \oVIMV.investedinameric8.org 
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80344.401

Testimony 

by 

Vernon T. Turner 

Vice President, Corporate Tax 

Smithfield Foods, Inc. 

200 Commerce Street 

Smithfield, Virginia 23430 

Hearing on Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

Before the United States Senate Committee on Finance 

The Honorable Max Baucus, Chairman 

April 25, 2012 

Mr. Chainnan and Members of the Committee, 

On behalf of Smithfield Foods, Inc, I respectfully submit the below testimony for the 

record. My name is Vernon T. Turner, and I am Vice President, Corporate Tax for 

Smithfield Foods, Inc. I last testified before the Committee on the Judiciary, 

Subcommittee on Courts, Commercial and Administrative Law, in 2004. In my 

testimony, I stated that current state interpretation of the business activity tax was doing a 

substantial amount of damage to the American business community and to companies 

like Smithfield Foods. Since that time, the state tax landscape has gotten significantly 

more complex, and the various state tax authorities are far more aggressive. It is our 

hope that the Business Activity Tax Simplification Act of2011 can ameliorate this 

situation. 

I. Introduction 

• Background on Smithfield Foods 

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

headquartered in Smithfield, Virginia. We have worldwide sales of over $12.2 biIlion, 

and are a "Fortune 500" company. Our company has experienced remarkable growth 

from its early origins as a small pork processor. Today, we are a worldwide company, 

with sales in all fifty states. Our various subsidiaries have physical operations in 

approximately thirty-five states. 

• Why Smithfield is Testifying 

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

required to file 1, 100 state income tax returns, 400 sales and use tax returns, 2,600 state 

payroll tax returns and 1,100 real and personal property tax returns. This results in 
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various state payments of approximately $140 million. In spite of our efforts to comply 

with laws with all the states, we continue to find state interpretation of the business 

activity tax to be difficult and troublesome. 

II. The Problem - Bureaucratic Arbitrariness 

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

companies that have no physical presence in a state with "business activity taxes." 

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

Constitution requires a bright line physical presence rule for the imposition of use tax 

collection responsibility. Many scholars and state tax experts believe that the Quill 

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

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

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

only in-state activity is the solicitation of sales of tangible personal property. 

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

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

imposed gross receipts taxes, net worth taxes and fixed dollar minimum taxes on out of 

state companies under the theory that Public Law 86-272 bars imposition of only net 

income tax. States have argued too, that Quill applies only to use tax. As a result, 

businesses struggle with multi state tax compliance in the face of conflicting and 

confusing guidance. This situation needs to be clarified, and BATSA seeks to do that and 

not more. 

III.BATSA 

Interstate sales are today more the rule than the exception, not only for large corporations 

like Smithfield, but small and medium sized enterprises as well. The current state of 

confusing and arbitrary taxation of multi-state companies that are selling product across 

state lines only serves to chill interstate commerce. BATSA will eliminate confusion and 

the need for companies to engage in protracted and costly litigation as the way of 

ameliorating discrepancies in tax enforcement. BATSA does not diminish the ability of 

states to collect tax revenue. It rationalizes and makes more predictable the process of 

doing so. 

IV. A Smithfield Experience with State Tax Law 

We experienced a prime example of the arbitrary and confusing application of state 

income tax laws. This example is not a gross exception. In fact, it is just a metaphor of a 

larger problem. A collection agent with the New Jersey Department of Taxation stopped 

one of our trucks, loaded with refrigerated product, on the New Jersey turnpike. The 

agent held the truck and its driver for several hours, and demanded that, in order to 

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

contents because we had failed to properly file New Jersey tax returns. 

I informed the Jersey agent that his claim was unfounded. I explained that Public Law 86-

272 protected our subsidiary from New Jersey income taxation since it only engaged in 

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

refused to accept this explanation. However, he finally agreed to release the truck and its 

driver in return for $8,000. 

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

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

have no physical presence in the State and are not subject to New Jersey income tax. 

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

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

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

much less obtain ultimate recourse from aggressive states. We believe that BATSA will 

clarify the physical presence standard embodied in Public Law 86-272 and the Quill 

decision. This is sound public policy and we urge its passage. 
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To: Senate Committee on Finance 

Attn. Editorial and Document Section 

Rm. Sd-219 

Dirksen Senate Office Bldg. 

Washington, DC 20510-6200 

From: The Soccer Dealers Association 

Attn. Jonathan Hayden 

PO Box 556 

Kenwood, CA 95452 

RE: Internet Sales Tax Legislation 

Cc: 

Cc: 

April 29, 2012 

Mr. David Grogan 

Senior Public Policy Analyst 

American Booksellers Association 

200 White Plains Road 

Tarrytown, NY 10591 

Mr. Scott Peterson 

Executive Director 

Streamlined Sales Tax Governing Board 

4205 Hillsboro Pike, Suite 305 

Nashville, TN 37215 

The Soccer Dealers Association (SDA) was founded in 2010 to organize, represent and serve the interests 

of the independent soccer dealers of North America. Independent soccer dealers are not only retailers 

but also team dealers. Many also have active Internet websites for reselling product. 

The SDA supports the efforts and legislation both nationally and locally (state based) to enact a sales tax 

obligation on any Internet sale coming into our marketplace. Main Street businesses such as ours are 

critical to ensuring the long term economic stability of the local marketplace and communities. 

Obviously all retailers are negatively impacted by the current lack of taxation on Internet sales. What 

differentiates the soccer dealer from most retailers is the team sales aspect of our business. We sell 

small to large clubs. Many of these youth organizations are "for profit" and therefore are subject to 

sales tax if they purchase their requirements locally. Unfortunately many ofthese clubs have chosen not 

to source their needs locally because of the sales tax cost to do so. In the state of Illinois for example, if a 

"for profit" club purchases product locally they may be subject to as much as a 10% sales tax rate. It is 

not unusual for club purchases to exceed $100,000 annually. Given this scenario the club would have to 

pay the retailer $10,000; and the state, community and business all benefit. The reality is that this club is 

often times buying from outside the state to avoid the sales tax obligation. Now who benefits? Not the 

state, community or business. This occurrence is happening all too often and costing everyone much 

needed revenue. 

Companies like Amazon and Overstock are mentioned regularly in the ongoing dialog of taxation 

because their impact affects a diverse set of industries and brick and mortar businesses,large and small. 

The "Amazon" in our industry is Sports Endeavors (sportsendeavors.com) DBA Euro Sport (soccer.com). 

This company resides in Hillsborough, North Carolina, but has no physical locations outside of its 

corporate location. Euro Sport does not charge nor do they collect taxes in 49 states. This Internet based 

business negatively impacts every soccer specialty business in the country, not because they are price 

aggressively, but because they do not charge sales tax, except in North Carolina. 
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Euro Sport is a well run business, but so too are the soccer specialty dealers throughout the United 

States. Why is Euro Sport, or any Internet operator, given an unfair competitive advantage versus local 

business, in a country where every state has severe financial issues? Was this the intent of the ruling 

created in the Internet Tax Freedom Act of 1998? Is a ruling which originated 14 years ago, still relevant 

today? The SDA believes the answer is a resounding no! 

Please level the playing field for all brick and mortar - Main Street businesses and vote in favor of the 

Marketplace Fairness Act. Give the states the right to tax and collect the much needed revenue on 

Internet sales and at the same time allow local businesses to survive and contribute to their state and 

local communities. 
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80344.406

Software Finance & Tax Executives Council 

www,softwarefinance,org 

BEFORE THE COMMITTEE ON FINANCE 

UNITED STATES SENATE 

HEARING ON TAX REFORM: 

WHAT IT MEANS FOR STATE AND LOCAL TAX AND FISCAL POLICY 

APRIL 25, 2012 

STATEMENT FOR THE RECORD 

P.O. Box 66141 

Washington, DC 20035 

(202) 331-9533 
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The Software Finance and Tax Executives Council (SoFTEC) thanks the Chairman and 

Ranking Member for the opportunity to submit this statement for the record on the Committee's 

hearing on "Tax Reform: What [t Means for State and Local Tax and Fiscal Policy." SoFTEC is 

a trade association providing software industry focused public policy advocacy in the areas of 

tax, finance and accounting. 

SoFTEC's members are primarily interested in three issues that come within the scope of 

the Committee's hearing: 

(I) Simplification of state sales and use taxes as a prerequisite to mandatory collection of 

such taxes by interstate sellers, 

(2) Codification of a physical presence "nexus" standard for state business activity taxes 

and 

(3) Standardization of state sales and use tax rules applicable to sales of electronically 

delivered products and services. 

Many SoFTEC members provide their products and services to customers in multiple states. 

Many states, for state income and other business activity taxes purposes, use the Internal 

Revenue Code definition taxable income as the starting point for determining the amount ofthe 

state taxes on net income. Changes to the tax base for federal income tax purposes as a result of 

tax reform are likely to cause changes to the tax base for state tax purposes which, in tum, likely 

will trigger state examination of all of their sources of revenue, including sales and use taxes. 

Thus, SoFTEC has an interest in providing the Committee with its perspective on the impact 

federal tax reform might have on the three state tax issues outlined above. We will discuss each 

in tum. 

1. Simplification of State Sales and Use Taxes as a Prerequisite to Mandatory Collection of 

Such Taxes by Interstate Sellers. 

Current rules require that an out-of-state seller have "nexus" with a state before that state 

can require the seller to collect and remit taxes imposed on the sale of goods and services to 

customers in the state. 

"Nexus" generally is the jurisdictional predicate that must exist before a state is permitted 

to exert its taxing power over a nonresident taxpayer and is of constitutional dimension, finding 

its roots in the Due Process and Commerce Clauses. The Supreme Court, in its most recent 

"nexus" decision described Due Process "nexus" as follows: 

The Due Process Clause "requires some definite link, some minimum connection, 

between a state and the person, property or transaction it seeks to tax." Quill v. North 

Dakota, 504 U.S. 298, 306 (1992), quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 

344-345 (1954). 
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The Court in Quill, in discussing the Commerce Clause aspect of "nexus," went on to note that 

the Commerce Clause requires "a substantial nexus and a relationship between the tax and State 

provided services," which "limit the reach of State taxing authority so as to ensure that State 

taxation does not unduly burden interstate commerce." Id at 313. 

Thus, in order for a state to assert its taxing authority over an out-of-state taxpayer, such 

taxpayer must have a "substantial nexus" with the taxing state. This is where the clarity ends and 

the uncertainty begins, since the question of when and whether a taxpayer's "nexus" or 

connection with the taxing state is "substantial" is almost always a question that turns on the 

facts and circumstances of each individual case. 

In the case of sales and use taxes, we know that the "substantial nexus" requirement is 

met when the taxpayer has a "physical presence" in the taxing state. See Quill, supra. However, 

there are disputes between taxpayers and tax administrators over whether a taxpayer's physical 

presence is de minimis and not sufficient to trigger a tax compliance obligation, or substantial 

enough to require the collection of sales and use taxes from customers. See e.g., A mazon. com 

LLC v. New York State Dept. of Taxation and Finance, 2010 NY Slip Op 07823 (81 AD3d \83) 

(Nov. 4, 2010). 

There is no question that Congress has a role to play in bringing clarity to the definition 

of "nexus." First, the Supreme Court has noted that Congress is best suited to resolve these 

issues: 

This aspect of our decision is made easier by the fact that the underlying issue is not only 

one that Congress may be better qualified to resolve, [n.l 0] but also one that Congress 

has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes 

impose on interstate commerce, Congress remains free to disagree with our conclusions. 

Jd at 318. 

The Supreme Court thus has made it clear that Congress, pursuant to its power under the 

Commerce Clause, is the ultimate arbiter when it comes to defining the contours of the interstate 

taxing powers of the states. Indeed, the above quote from the Quill decision seems almost an 

invitation for Congress to exercise such power. The fact that the Court has not spoken on the 

issue of "nexus" in the 20 years since it issued the Quill decision suggests that the Court is 

disinclined to offer much needed guidance with respect to these issues. 

In deciding to retain the "physical presence" "nexus" standard, the Supreme Court in 

Quill noted with significance the burdens that would be visited on interstate seller by the 

obligations of collecting and remitting sales and use taxes for 6,000 taxing jurisdictions with 

their associated many variations in rates of tax, in allowable exemptions and administrative and 

record keeping requirements. Not much has changed in the sales and use tax complexity 

landscape in the 20 years since Quill was decided. While some progress has been made in the 

area of simplifying administrative and record keeping requirements, nothing has been done with 

regard to the proliferation of tax rates. As the witness from the Tax Foundation testified, the 
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number of taxing jurisdictions is up to 9,600, with 400 new taxing jurisdictions added in the last 

year alone. 

There are proposals pending in the Senate that would overturn the physical presence 

standard of Quill and permit states to require that sellers with no physical presence in the state 

collect and remit taxes on sales to customers in their state. See Main Street Fairness Act, S. 

1542, Marketplace Fairness Act, S. 1832. SoFTEC believes that, before it lifts the physical 

presence nexus standard of Quill, Congress should require the states to undertake "radical" 

simplification of their sales and use taxes. SoFTEC further believes that the simplification 

required of the two bills pending in the Senate is not the sort of "radical" simplification that 

would justify lifting the physical presence standard and for this reason does not support them. 

By "radical" simplification, we mean something must be done to make sure remote 

sellers are not exposed to the burden that would be visited on them by having to keep track of the 

9,600 (and rising) taxing jurisdictions. We have a proposal: one rate per state for all remote 

sales (both interstate and intrastate). Under our proposal, the number of taxing jurisdictions 

remote sellers would be exposed to would be reduced from 9,600 to 46 (including DC, 5 states 

have no sales tax). In addition, states would be permitted to retain all of their 9,600 taxing 

jurisdictions for local, over the counter, sales. We believe this proposal would represent the sort 

of "radical" simplification that would justify lifting the physical presence nexus standard. 

SoFTEC also believes any legislation lifting the physical presence nexus standard for 

sales and use tax collection purposes should include provisions codifying it for purposes of state 

taxes on income and other business activity, an issue we address below. 

2. Codification of a Physical Presence "N exus" Standard for State Business Activity Taxes. 

Whether the physical presence "nexus" standard applied by the Court in Quill to sales 

and use tax collection obligations extends to other types oftaxes, such as income or other 

business activity taxes, is the subject of much litigation. See, e.g., Geoffrey v. South Carolina 

Tax Commission, 313 S.C. 15 (1993) (physical presence test of Quill does not apply to state 

income taxes); J,c. Penney Nat'/ Bank v, Johnson, 19 S.W.3d 83 I (Tenn. Ct. App, 1999) 

(physical presence required for imposition of corporate net income taxes). 

Thus, depending on the state, physical presence mayor may not be the nexus standard for 

determining when an out of state taxpayer has an obligation to pay a state's business activity tax. 

Since the Court's 1992 decision in Quill, the Court has not clarified the "nexus" requirement for 

imposition' of state taxes on interstate commerce; the Court declined to take any of the several 

petitions for certiorari that raised the issue. 

Additionally, attempts by some states to impose a business activity tax on a non-resident 

business that has no physical presence is out-of-step with international tax treaty norms that even 

permit foreign firms a limited amount of physical presence before they will subject it to local 

taxes. See Model Tax Convention on Income and Capital, Organization for Economic CoOperation and Development. Thus, a foreign firm with no physical presence in a state could be 

subject to state taxes but, because the federal government has a tax treaty with the firm's host 
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country having a different jurisdictional standard, the firm would not be subject to federal 

income taxes. There is no sound policy basis for this disconnect and no reason why the states 

should be allowed to be so out-of-step with international tax norms. 

Additionally, the Congress previously used its power under the Commerce Clause to 

provide some guidance for interstate taxpayers. In 1959, in response to the Supreme Court's 

decision in Northwestern States Portland Cement Co. v. Minnesota, 358 U. S. 450 (1959), 

Congress enacted P.L. 86-272 prohibiting states from imposing net income taxes on out-of-state 

taxpayers whose only contacts with a state were the solicitation by employees or representatives 

of a seller of orders for sales of tangible personal property where the orders were sent out of the 

state for acceptance and were fulfilled by shipment or delivery from a point outside the state. 

See 15 U.S.C. Sec. 381. 

The problem with P.L. 86-272 is its 1959 vintage. P.L. 86-272 does not encompass the 

myriad interstate business practices which have grown up since the enactment. Because it is 

limited to sales of tangible personal property, P.L. 86-272 may not apply to licenses of software 

nor sales of electronically delivered services, business models that did not exist in 1959. Nor 

does P.L. 86-272 encompass other types of state taxes, such as gross receipts taxes, which were 

not in favor at the time of its enactment and which states have since imposed in order to 

circumvent P.L. 86-272's protections. 

States are becoming increasing aggressive in pursuing out-of-state companies with no 

physical presence in the taxing state for state income or other business activity taxes. These 

companies with no physical presence consume no state resources for which they ought to 

compensate. These states seek to export their tax burden to taxpayers who play no role in the 

political life of the state. 

3. Standardization of State Sales and Use Tax Rules Applicable To Sales of Electronically 

Delivered Products and Services. 

Another set of problems Congress is uniquely situated to address are those associated 

with state and local sales taxes imposed on sales of electronically delivered products and 

services. Examples of electronically delivered products include downloaded movies, music, 

books and software. Examples of electronically delivered services include internet based data 

storage services, tax return preparation services, and internet access to websites offering software 

functionality as a service. 

One problem associated with application of the sales and use tax rules to electronically 

delivered products and services is determining whether a state has the power to tax the sale. As 

noted above: 

The Due Process Clause "requires some definite link, some minimum connection, 

between a state and the person, property or transaction it seeks to tax." Quill v. North 

Dakota, 504 U.S. 298, 306 (1992), quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 

344-345 (1954). 
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The question here is whether there is sufficient connection between the state and the transaction 

it seeks to tax. The Supreme Court, in a case involving sales and use taxation of interstate 

telephone calls (which are similar to the electronic delivery of digital products and services), 

held the only two states that have a nexus substantial enough to tax interstate phone calls are the 

states in (I) which the call either originates or terminates and (2) which has either the service 

address or the billing location. See Goldberg v. Sweet, 488 U.S. 252, 263 (1989). 

Applying the rationale of Goldberg to sales of electronically delivered products and 

services, it is not clear any state has sufficient connection to such sales to impose a sales or use 

tax. Seldom does the seller have any information regarding the customer's location at the time 

the download or access is performed. Thus, the "termination" location is unknown or if known, 

might be in a state other than the state with the customer's service address or billing location. In 

addition, information regarding the location of the Internet server from which the delivery was 

made or the service provided might not be known or in a state other than the state of the 

customers services address or billing location. 

An associated problem is many state sourcing rules require the seller to source the sale to 

the state of destination, i.e., the state where the customer is located at the time the product is 

delivered. Given the nature of electronic deliveries and the proliferation of portable devices 

allowing digital downloads from most anywhere, the seller often does not know where the 

customer is located. Frequently, the only information the seller has about the customer is the 

credit card billing address the customer provided either at the time of sale or at the time the 

customer set up an account with the seller. However, as noted above, unless the digital sale 

either originated or terminated in the state of the billing address, the state of the billing address 

will lack the constitutional power to tax the sale. What is the seller to do? 

In addition, many state sales and use tax imposition statutes are geared to sales of 

tangible personal property and certain enumerated service and were last considered by the 

legislature at the time they were passed, usually in the 1930s and 1940s, prior to the advent of 

products that, arguably, are neither fish nor fowl. Yet, we see many state tax administration 

departments construing these decades-old statutes as applying to sales of digital products and 

services. Sellers, who are required to collect the tax from the customer at the time of the sale 

may not be on notice the sale is taxable and they have a collection requirement. During an audit 

they are surprised to learn the tax department considered such sales taxable and they are liable 

for not collecting the tax from their customers. 

Last, some states specifically impose their sales and use tax on sales of prewritten 

computer software but do not specifically impose tax on sales of services delivered 

electronically, such as through the cloud. Once again, we are seeing state tax administrators 

construing their imposition on sales of prewritten computer software as extending to 

electronically provided services, where no copy ofthe prewritten computer software is ever 

delivered to the customer. Sellers are surprised to learn during an audit that such services are, in 

the opinion of the tax administrator, subject to sales tax. At this point, the seller likely has lost 

the opportunity to collect the tax from the purchaser and must pay it out of its own pocket. 
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There is legislation pending in the Senate that would solve these problems, the Digital 

Goods and Services Tax Fairness Act, S. 971. This bill would pinpoint the customer's credit 

card billing address as the proper location to source sales of digital goods and services and would 

confirm that the state of the billing address has the power to tax such sales. In addition, the bill 

would require state legislatures to specifically consider whether sales of digital products and 

services are taxable in their state, relieving sellers of uncertainty over whether such sales are 

taxable or not. Last, the bill could clearly differentiate between sales of digital goods and digital 

services, ending the ability of state revenue department to extend a tax on sales of prewritten 

computer software to electronically deliver service in the absence of specific statutory authority 

from the legislature. 

SoFTEC supports S. 971, the Digital Goods and Services Tax Fairness Act. 

Conclusion: 

Before exercising its constitutional authority under the Commerce Clause to lift the 

"physical presence" "nexus" standard for imposing tax collection requirements on remote sellers, 

Congress first should require states to radically simplifY their sales and use tax systems. Our 

one-rate-per-state for remote sales proposal, outlined above, accomplishes radical simplification. 

No repeal of the "physical presence" "nexus" standard for sales and use tax collection should 

occur unless, at the same time, such a standard is codified for state income and other business 

activity taxes. Last, Congress should pass S. 971, the Digital Goods and Services Tax Fairness 

Act. 

SoFTEC thanks the Chairman and ranking member ofthe Committee for holding this 

important hearing and for the opportunity to submit these remarks and ask that they be made a 

part of the record of the hearing. 
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May 7, 2012 

Hand Delivered 

The Honorable Max Baucus 

Chairman 

The Honorable Orrin O. Hatch 

Ranking Member 

United States Senate Committee on Finance 

215 Dirksen Senate Office Building 

Washington, DC 20510-6200 

Re: SEMA Testimony: April 25, 2012 Hearing: "Tax Reform: What It Means for 

State and Local Tax and Fiscal Policy" 

Dear Chairman Baucus and Ranking Member Hatch: 

The Specialty Equipment Market Association (SEMA) is pleased to provide comments to 

the Senate Finance Committee in support of the Business Activity Tax Simplification 

Act (BATSA), legislation to require a meaningful physical presence before a state can 

impose corporate income taxes on a U.S. business. SEMA is a member of the Coalition 

for Interstate Tax Fairness and Job Growth, which supports the bipartisan legislation as a 

way to clarify rules governing interstate commerce and spur economic growth and job 

creation. 

SEMA represents the $30 billion specialty automotive industry of nearly 6,400 membercompanies. The industry provides jobs to more than one million Americans in small 

businesses located across the country. It offers custom accessories that enhance a 

vehicle's appearance, performance, comfort, convenience and safety. Products include 

custom tires/wheels, turbochargers, lighting equipment, exhaust systems, suspensions, 

truck caps, grille guards, leather seating, mobile electronics and sunroofs. 

Many SEMA members have received dunning letters from states in which that company 

has no physical presence. In some instances, these states are claiming up to five years 

worth of uncollected "business activity taxes" (BAT) and providing a narrow window of 

time for payment in lieu oflega] proceedings. 

It is an easy issue to understand. Cash-strapped states have removed the physical 

presence requirement from their definition of "'nexus" in a desperate search for revenues, 

If you have sold a certain amount of product within the state, you have then created a 

Specialty Equipment Market Association (SEMA) 

13] 7 F Street, NW; Suite 500; Washington, DC 20004 

Telephone: 2021783-6007; Fax: 2021783-6024 
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taxable economic presence according to the state. It is a reckless move which defies 

logic and fairness. Beyond that, each state can define a different monetary threshold 

since there is no uniform approach, and that threshold can be subsequently changed. 

The states have never been able to agree on a single bright-line test for "nexus" and 

the patchwork approach to economic nexus has compounded the burdens placed on 

businesses. The states are imposing tax burdens on non-residents who do not benefit 

from state or local services rather than raising revenues from individuals and companies 

located within the state border. 

At a time when American companies are seeking to emerge from a difficult economy, 

some states are undermining that effort with punitive taxes. As American companies 

are asking politicians to reform the tax structure at the federal, state and local levels in 

order to be competitive in the global market, certain states are imposing regressive BAT 

taxes. 

A company establishes a business plan which forecasts future sales and inventory. 

The company takes out loans, buys machinery, hires workers, makes products and 

establishes a distribution system based on that business model. For most companies, 

the model does not include paying BAT taxes, fines and penalties to a state in which it 

has no physical presence. This may also require hiring a lawyer and accountant to 

review the issue and it will require tracking of future sales in order to pay even more 

taxes. What happens when dozens of other states pursue the same approach? The 

company may go bankrupt. 

SEMA contends that "economic nexus" standards are an unfair intrusion on interstate 

commerce. They undermine a company's financial well-being and, consequently, the 

economic well-being for those states in which the company is domiciled and duly pays 

taxes. The company may postpone expanding and hiring new workers. It may even 

contract in size. In fact, if the company has to increase the cost of its product in order to 

pay unanticipated taxes, it may lose market share and become globally uncompetitive. 

Economic-based BAT taxes are an especially unfair burden on small businesses. The 

company has already limited resources when it is complying with a variety of other 

federal, state and local laws and taxes. For SEMA member companies, of which an 

estimated 92% are small businesses, this includes compliance with regulations issued by 

the U.S. Environmental Protection Agency, National Highway Traffic and Safety 

Administration, Federal Trade Commission, Department of Labor, Immigration and 

Customs Enforcement, Internal Revenue Service, Consumer Product and Safety 

Commission and Small Business Administration, to name a few. These companies 

must also track the laws and regulations for all 50 states along with scores oflocal 

jurisdictions. Taxes that have no legitimate basis should be removed from all of the 

other obligations and challenges faced by small businesses. 

The U.S. Congress has a simple solution for rectifying the situation: enact H.R. 1439, 

the "Business Activity Tax Simplification Act." The legislation creates a reasonable 
444 


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definition of "physical presence" that allows companies to focus on sales and growth. 

It permits the company to continue paying BAT taxes to states in which it has a physical 

presence and thereby contribute toward and benefit from state government services. It 

is one vital building block towards a predictable tax system. 

SEMA urges quick consideration and passage ofH.R. 1439 into law. The bill has been 

approved by the House Judiciary Committee last summer and awaits a House floor vote. 

Thank you for this opportunity to share our views. Please feel free to contact me if you 

have any questions. 

Sincerely, 

Stephen B. McDonald 

Vice President, Government Affairs 
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WRrn1!N S'rATEMENTOF LoRI laNG 

CHIEF OPERATING OF'FlCER 

Sl'oHEWAU.. Km:HEN LLC 

HEARING ON TAX RI!:FoRM: WHAT IT ME.A.HS FOR S'rATE AND l..ocAL 

TAX AND F1scAL PoLICY 

20t2 
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Written Statement of Lori Kina 

Chief Operating Officer 

Stonewall Kitchen u..c 

Before the United States Senate Committee on Finance 

Hearing on Tax Reform: What it Means for State and Local Tax and Fiscal Policy 

Apn118.2012 

Senator Snowe and Members of the Subcommittee. on behalf of Stonewall 

Kitchen u..c. thank you for the opportunity to submit written testimony concerning 

state taxation nexus issues. 

Stonewall Kitchen LLC. is a manufacturer of specialty foods located in York. 

Maine. We sell our products through wholesale channels. the internet and our catalog 

business. We also currently have 9 retail locations. including a Cooking School and a 

Cafl!. which are located in Maine. New Hampshire. Connecticut and Maryland. 

As Stonewall Kitchen works towards reaching more and more customers and 

growing our business we are becoming more concerned with the costs associated with 

this desire to grow. as states across the country are charging businesses like ours 

income and franchise taxes even though there are no brick-n-mortar locations or 

employees in their state. The reason these states are able to impose these types of 

taxes is because of what they call a Mphysical presence". such as in our case is due to 

an independent sales broker. 

It is becoming increasingly difficult for small businesses to expand and reach 

into new markets when the burden for such taxes is placed on the business. Not only 

are businesses responsibility for paying these additional costs. many business must 

seek the assistance of a third party to assist in the filing and remitting of these returns 

and payments due to the many tax laws that surround this tax practice by these states. 

which no business alone can handle regardless of how big or small. This will only 
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continue to hinder future growth for businesses which will also affect the ability to hire 

additional employees which could help the economy as a whole. 

This is why we are asking for your support to see that Congress will step in and 

work to ensure that this unfair taxation is stopped. Stonewall Kitchen LLC strongly 

supports H.R. 1439. the Business Activity Tax Simplification Act of 2011. which will 

provide relief to the businesses that must endure this additional taxation. not to 

mention it will once and for all provide a clear decision that states can no longer tax 

businesses that do not have a true physical location. 

We appreciate your time in reviewing this statement and strongly urge you 

support the Business Activity Tax Simplification Act of 2011. Thank you and I look 

forward to answering any questions you may have. 

Respectfully Yours, 

R~~ Lori King b 

Chief Operating Officer 
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To Whom It May Concern, 

Please submit the following statement for the record for the hearing titled, "Tax Reform: What it 

Means for State and Local Tax and Fiscal Policy" that occurred on 4/25/12. 

Tom Pallow 

Third Way Progressives 

22 Orchid Court 

Bellingham WA, 98229-0000 

How Obama and Democrats are Not Going Far Enough Regarding Tax 

Policy and American Job Growth 

By Tom Pallow of Third Way Progressives: (202) 903-1133 or tompallow@msn.com 

This paper is not at all about what one would commonly imagine upon reading its title. It is not at all 

about Obama and Democrats not being "progressive" or "liberal" enough. It is about them not going far 

enough into the radical center, not adopting enough Endogenous Growth poliCies, or what we call 

qualityist policies. As of early 2012 Obama and Democrats are certainly not doing these things enough 

to turn the economy around or to inspire the electorate to vote for him and Democrats this fall. 

We are in a unique position in US and world history. The most important change in our lifetimes has 

been the effective 12 fold increase in global trade that has accompanied the weakening and fall of 

communism, along with new technologies that make outsourcing across state and national borders as 

easy and fast as the movement of light. With the fall of communism, every multinational employer in 

the developed world no longer needed to worry that an investment in an underdeveloped nation might 

become nationalized by an emerging communist government. This suddenly very different reality 

opened up a new cheap labor market of 4 billion people. No major nation in the future is ever going to 

champion socialism or communism, so the old world order is never going to return. Therefore, all 

successful tax and spending regimes in the future will need to be structured around the realities of this 

highly competitive global economy. Not only will this new regime make our economy more competitive, 

but it will make it more egalitarian and more environmentally sustainable than it ever has been. 

Regarding tax policy, a good first step in the right direction is the recent plan by Senators McCaskill and 

Collins to cut the employer payroll tax rate as a way of carving out, or exempting, US employers from 

any tax increase on the wealthy. Given that about 65% of US employers are taxed at the personal 

income tax rate, and given that these businesses are generally responsible for creating as much as 90% 

of America's new jobs, raising taxes on these job providers is never a good idea in a global economy and 

especially when the economy is weak. US employers are always a very small percentage of tax payers. 

For example, the McCaskill-Collins carve out would only cost about 13% of their tax increase on those 
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who make over $1 million that was proposed by them in December to pay for this year's employee 

payroll tax cut. 

There are several reasons why a US employer exemption, or carve out, is very important policy. For 

one, it is very cheap while it accomplishes much. This is because, with a US employer carve out, the 

math always works for us. Very little of the earnings of the wealthy, as well as all others, actually 

comes from the profits of the active ownership of a business that employs in the US. The high mark for 

this number is about 20%. This comes as incomes reach about $350,000 a year or at about what 

demarcates the top 1% of US income earners. As incomes go higher and lower from this point this 

percentage drops quickly. Again, the McCaskill-Collins carve out for those earning over $1 million a year 

would only cost 13% of the total tax increase. If this new tax incentive to employ in the US were to 

motivate more of the wealthy to employ in the US so that this percentage were to increase, then great, 

more Americas would be employed and the increased demand for labor would increase real incomes 

and tax revenues. 

Reason two, when raising income taxes on the wealthy without a US employer carve out, raising taxes 

on wealthy growing businesses has the effect of slowing the economy to some degree because capital is 

taken away quarterly from growing businesses who would otherwise use that capital to invest in new US 

jobs. This is especially true coming out of a recession when about 90% of all new jobs are typically 

created by businesses that are taxed as personal income, and most of these are within the top income 

tax brackets. 

Thirdly, without a carve out, US employing businesses have an incentive to close up shop in the US and 

outsource to foreign countries in order to avoid the higher tax. This is especially true within the US when 

states that raise their income taxes will often see employer flight to US states that are not raising their 

income tax or do not have a state income tax. This is a big problem right now with our cash strapped 

states. The current problems in Illinois are just the most recent example, and their example will deter 

others states from raising their income tax. These states, along with Illinois, will continue their cash flow 

problems, but a state employer carve out with a state income tax increase would solve this problem. 

There is more concerning this problem below. 

Reason four is one of the most important reasons. The greater the carve out is made, that is, the larger 

the difference in effective tax rates are made between the US employing wealthy and the non- US 

employing wealthy, the greater will become the tax incentive for the non-US employing wealthy, or 

others who want to become wealthy in the future, to find ways to stay wealthy or become wealthy by 

employing fellow Americans. This tax incentive will greatly increase economic growth and the demand 

for labor in the US. It is only increases in productivity along with increases in the demand for labor 

primarily in the private sector that has the effect of raising real wages for the poor and middle class. 

Reason five is as important as reason four. Because American voters will soon realize that a US 

employer carve out tax strategy will not slow down the economy but actually increase private sector 

jobs, our federal and state governments will be able to raise income taxes far above where Americans 

would otherwise let them go. As this occurs, the above reason four will only become more pronounced, 

thus creating a virtuous cycle of increasing private sector job growth that will also be accompanied with 

increasing government revenues! 

Reason six is as important as reasons four and five. These increased tax revenues will allow our 

governments to fully fund new industrial policy projects that will further grow the US private sector 
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while allowing us to fully fund current government programs. Fully funded governments, along with a 

robust private sector that is aided by new industrial policy projects will increase the demand for labor in 

the US so high as to increase real wages in the US for the first time since 1967 when the global economy 

really began with the end of the Kennedy GAIT trade rounds that signaled the weakening and eventual 

fall of communism! 

Reason seven, our federal deficit and debt problems, along with those of our states, that have the 

effect of creating economic uncertainty and trepidation that then slows the economy, will be no more! 

In his American Jobs Act President Obama proposed an employer payroll tax reduction that holds the 

possibility of working much like the McCaskill-Collins US employer carve out. The problem is that Obama 

proposed that this tax cut only exist for one year when it needs to be permanent. We can only hope that 

if this part ofthe American Jobs Act were ever passed, a part of this tax cut would be made permanent, 

along with the Bush tax cuts expiring on the top two income tax brackets, thus creating an income tax 

increase with a permanent US employer carve out. 

If President Obama does not aggressively sell such an idea by the general election season he will lose 

reelection. Under current proposals, it will not take long before the Republicans will be able to explain 

that all of Obama's proposed tax increases will only cover about 10% of our federal deficit. Obama's 

proposed expiration oftax rates on the top two brackets, his Buffet Rule which is essentially a capital 

gains tax increase on those earning over $1 million, his taxing carried interest at the ordinary income 

rate, his valuing itemized deductions at 28% for those earning over $250,000, and his elimination of oil 

tax preferences and corporate jet depreciation will altogether only raise about $150 billion a year while 

our deficit in 2011 was over $1.5 trillion. Therefore, the president will be asking to raise all ofthese 

taxes on a still slow and probably even slowing economy just to cover 10% of our deficit! 

I know that Democrats like to point to polls that show that most Americans favor many of these tax 

increases. But very importantly, if you study the actual wording of the questions in these polls you will 

see that most of these polls make it appear as though these tax increases would create an equal trade 

off with spending cuts in order to cover our full deficit. These questions read as though these tax 

increases would cover 50% of the deficit with spending cuts covering the other 50%. However, given 

that they would only cover about 10% while likely slowing the economy, the Republicans will easily be 

able to argue that we have a spending problem not a revenue problem and that Democrats will destroy 

any economic growth we have. However, with US employer carve outs this problem will be eliminated. 

In fact, due to reason number four above, we will be able to argue for and enact even larger tax 

increases. So hopefully President Obama will push for a permanent employer payroll tax cut and sell it 

as a US employer carve out that would accompany a tax increase on the wealthy. 

Better yet, the President and all others looking to create an employer carve out when increasing 

income taxes should look to institute an Employee Tax Credit along with an employer payroll tax cut. 

Regarding employer carve outs for income tax increases, while an employer payroll tax cut has some 

advantages over a US Employee Tax Credit, a US ETC has more advantages, but a combination of the two 

is optimum. An ETC is a credit against a final income tax bill that has a flour cap at a particular effective 

rate. For more on US ETCs see our website, ThirdWayProgressives.org. 

An employer payroll tax cut does have the advantage that the tax cut is awarded immediately with the 

first employment of an individual, while with an ETC the tax cut is awarded latter, after a profit is made. 

The immediacy of the payroll tax cut makes the cost of capital for the employment of new hires lower 
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than it would be with an ETC. Further, it is important in the global economy to make employing fellow 

citizens as easy as possible and an employer payroll tax cut helps in this regard. However, Social Security 

and Medicare must be paid for, and employer payroll taxes cover about 18% of our total federal 

revenues, so only so much can be cut. For these and another very important reason our tax plan 

proposes an employer payroll tax cut for new hires while relying primarily on a US ETC to achieve most 

of the carve out. 

The most important advantage of a US ETC is that it will allow our 31 states that do have income taxes 

to enact state employer carve outs, while with an employer payroll or with holdings tax cut this would 

not be possible. Given that the economic competition for employment between our states is even more 

intense than it is between us and other nations, employer carve outs are a must for our states! 

Employer payroll tax cuts as carve outs are impossible for our states because most of these tax rates are 

already very low in places, too low to create carve outs. More importantly, these payroll taxes, that 

usually come in the form of unemployment and disability insurance taxes, are generally structured as to 

create very valuable tax incentives, with those businesses and industries that have high rates of 

unemployment and injures paying higher tax rates and those without them paying lower to often 

extremely low tax rates. 

It is very important that these tax incentives are maintained. Therefore, in order to create carve outs, 

state ETCs will need to be enacted. Further, given that most tax policing is done by the IRS and that 

states have much less resources in this regard, it would be very inefficient for each individual state to 

have to do all of its policing for its ETC. For this reason, and the fact that we can only cut federal payroll 

taxes so far, the federal government should enact a US ECT as part of an employer carve out strategy. 

Hopefully we are concerned as much about the welfare of our state governments as we are the federal 

govern me nt. 

Another very positive feature of December 2011's McCaskill-Collins Bill is its "technology company," 

venture capital investment tax credit or possible carve out. However, this tax credit's shortcoming is that 

it is only for investments in technology companies that are expanding in the US, while it should be for 

investments in all companies that are expanding in the US. Also, many problems will arise be trying to 

define what a "technology company" is. 

Our qualityist capital gains tax plan would raise to 25% today's top capital gains tax rate from 15%. 

However, it would carve out, and slightly lower from where the rates are today, capital gains tax rates 

on four basic investments that would all need to have a minimum of jobs created in the US. These for 

fundamental investments are: first issue bonds, stocks bought at IPO, venture capital investments, and 

the underwriting of any of the latter three investments. More on our capital gains tax plan can be found 

at ThirdWayProgressives.org. These four investments are the primary products of the financial market 

that allow it to raise capital for growing businesses in America. Generally in order to expand, small 

businesses raise venture capital, medium sized businesses launch IPOs, and large corporations float 

bonds. With our qualifications for increased employment in the US in order to achieve the lower tax 

rate, the financial markets will be generating jobs in the US like never before! 

The virtues and math in our capital gains tax plan are nearly identical to that of a US employer carve 

out with an income tax increase. Generally, only about 5% to 12% of all gains in the financial markets 

come from the above four fundamental investments. However, these four investments are responsible 

for nearly all of the job growth that is facilitated by the financial markets. It is not that the other 

products in the financial markets are not important to the economy. It is just that a higher capital gains 
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tax on them would have little to no effect on American job growth. Except for first issue mortgage 

backed securities that could also receive a lower tax rate with little cost, virtually all of the rest of the 

financial products sold are preexisting stocks and bond, and options and derivatives. This other, typically 

90% or more, of the financial markets, even with a much higher capital gains tax rate, would retain 

enough liquidity in their market as to not present any adverse effect on the businesses that rely upon 

them. However, the more investment we have in the four fundamental financial vehicles, the lower will 

be the cost of capital for American businesses that are expanding in the US. The greater the difference in 

tax rate between these four investments and all the other financial vehicles that are generally 

speculative paper trades, the more American economic growth will occur through financial markets via 

this tax incentive and the more tax revenues will be raised. Therefore, our capital gains tax regime will 

allow the federal government and our state governments to be able to raise capital gains tax rates far 

above were they Jre today while actually improving the economic efficiency of our financial markets! 

Our overall qualityist tax plan also has a C Corporation tax plan that uses ETCs to incentivize job growth 

in the US along with further rewarding and incentivizing compensation above the US norm for US 

employees. Our overall plan also contains tax policies designed to create a more environmentally 

sustainable and safe economy. All of these plans can be found at ThirdWayProgressives.org. 

But tax policy is not the only area where we need to adapt government policies to the realities of our 

highly competitive global economy. Qualityism resides in the world of the New Growth, or Endogenous 

Growth, Economics School, a school that is only a few decades old and not completely defined. Like 

most Endogenous Growthers, qualityism believes that economies are affected positively by three 

primary factors. Like the Keynesians, qualityists believe that it is important that governments take an 

active role in keeping consumer demand high. Yet like classical, neoclassical, or supply-side economists, 

qualityists believe that it is very important to keep the cost of capital low for the private sector by 

keeping taxes low on businesses and capital formation. The above qualityist tax policies and others that 

can be found at ThirdWayProgressives.org destroy the policy catch 22 that we have been in for the last 

100 years regarding this unfortunate tradeoff between Keynesian and supply-side economics. Our new 

global economy is too competitive, complex, and demanding to put up with this catch 22 any longer! But 

qualityists also believe that there exists a third primary engine of economic prosperity that is at least as 

important as the other two. This engine is the emergence of new technologies and methods of 

production. 

Like New Growth or Endogenous Growth economists, and like those on the right who call 

themselves Real Business Cycle theorists, qualityists see economic growth and the business cycle as 

being dominated by the arrival of new technologies, products, and methods of production that will be 

bought and invested in even if consumer demand is low or the cost of capital is high. When one 

examines historically how relatively small portions of the economy can be responsible for very large 

portions of the growth of an economy the reality for this perspective becomes extremely evident. Some 

studies have shown that as much as 60% to 90% of the economic growth in an expansion occurs in what 

begins that expansion as only 2% to 3% of GDP. For eXJmple, housing, healthcare, and cell phones were 

responsible for an extremely large percentage of economic growth in the US between 2002 and 2008. 

Between 1992 and 2000 it was personal computers and the internet that drove growth. Between 1982 

and 1990 it was commercial real-estate and computers for businesses. In the 1970's it was gasoline and 

inflation. In the 1960's it was aerospace and war. in the 50's it was TVs and other consumer electronics. 

in the 40's it was war, in the 30's government, in the roaring 20's cars, trucks, and radios, and in the 10's 

cars and war. Before 1913 there took place shorter economic cycles that were most effected by railroad 

expansions. 
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Vet unlike Real Business Cycle theorists who believe that the best policy is for governments to simply 

not get involved and let this real cycle play out, Endogenous Growthers and qualityists believe that the 

government should, and has in the past but never optimally or efficiently done 50, facilitate and add to 

new technological development. When one recognizes that the private sector alone has never been able 

to produce at close to peak potential scientific and technological outputs, and given our need for more 

environmentally sustainable technologies among others, it is easy to realize that the government should 

be doing much more in this area. It has been said by those who study the subject that the free market 

alone only generates about half of the R&D that the economy could efficiently produce. 

A majority of the most impressive achievements of mankind were financed and designed with 

government funding, from the pyramids in Egypt, to the ships that were designed via Prince Henry the 

Navigator of Portugal and then financed by the royalty of Spain that discovered the New World, to the 

moon landing, satellites, and the internet. Moreover, war financing has generated much technological 

improvement, from arguable everything but the pyramids above, to many improvements in the 

combustible engine and most improvements in aerospace. Given our technological needs as a growing 

species with only one planet, we should not rely on the inefficiencies of war as the catalyst for needed 

technological improvements! 

It is wealth and better technologies that allow societies to preserve their environments while acquiring 

what they need and desire, not economic constraints and poverty. The poorest and least politically and 

economically free nations of the world are all its least environmentally preserved. Therefore, it is the 

free market in accordance with predictable, transparent, and robust government R&D support, along 

with tax incentives both on the purchasing and profit end, which will preserve our environment. But it is 

also the free market with such government support that will best allow us to fulfill our economic needs, 

wants, and dreams that are not hampered in any major way by environmental concerns. The people of 

the world are made better off if a favorite play toy of many that the private sector alone would have 

taken 50 years to develop is there to enjoy 25 years earlier because a government helped in the 

development of that product and production. Further, when structured properly, workers are able to 

engage in jobs that produce higher rates and qualities of output while enjoying a larger share ofthis 

output. 

For all ofthese reasons an important feature of qualityism is structuring the most fair and economically 

efficient way for the government to assist the private sector in increasing the economies overall 

scientific and technological output. As importantly, qualityism is structured 50 that the people of a 

nation who pay for their government's successful R&D support receive just compensation for these 

expenses while their workers are able to benefit from an increased demand for their employment. For 

this to be done in a way that is predictable, transparent, and not swayed by political influence is of 

utmost importance. Fortunately, such a method is also one that would be most economically efficient 

and without waist. 

In the last several years our federal government under programs like the Energy Policy Act of 2005 and 

the assistance of General Motors has began to move in this proper direction. However, many of these 

programs have provided assistance at points of production that create waist and can be adversely 

altered by political influence. It is very important to remember that the point of production where 

government can assist the private sector with the least amount of waist and adverse political influence 

is during the basic and applied research and development stage. 
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President Obama's newly proposed National Network for Manufacturing Innovation at first glance 

looks to be the right step in the right direction, as has long been the Brookings Institute's Energy 

Discovery - Innovation Institutes. However, with only $500 million to $1 billion to be spent over four 

years with the new NNMI, this is a baby step when an Olympic long jump is needed. Nonetheless, if 

structured properly it will take relatively little time before it is found that this program more than pays 

for itself. I don't mean "pays for itself" using typical squishy Washington DC accounting, so the monies 

earned through the program could be ploughed back into it. However for now, at the very least and with 

this year's election, a real commitment to this program needs to be made! 

What is suspected that the NNMI would do because it is reported to be molded after Germany's 

Fraunhofer Institute is to invite as many private business participants as possible to come together along 

with the government to brainstorm over what possible technological developments they would like to 

collaborate in developing that they would all find benefit in using once developed. Those ideas that 

attract the most private sector R&D investment commitments would then also receive government R&D 

funds and other basic science support. With the right government incentives the intellectual property 

developed would then be produced and used in the US. 

At present there is a debate within the administration as to whether the NNMI should be structured 

with incentives for businesses to manufacture in the US those products that arise using the NNMI 

government funds. Unless China and India offer to pay, and I don't mean lend, the NNMI funding, the 

answer to this question should be yes. More specifically what should happen is that as federal, state, 

and local funds begin to rise on a particular project, so too must correspondingly rise the percentage of 

payroll that a business has in each jurisdiction relative to its global payroll in order for it to have a right 

to the intellectual property developed. Failure to do so would mandate very high royalties and fees in 

order to use the intellectual property. Further, the best way to calculate payroll increases would be to 

measure them through the amount Employee Tax Credits earned. Given that our ETCs as part of our 

personal income and corporate tax plans allow for ever greater ETC rewards that can be given to 

businesses that compensate their employees at ever greater amounts above the norm, the NNMI would 

then maintain, create, and attract higher paying jobs in the US. Germany's Fraunhofer Institute provides 

70% of its funding via its own internal profits, with only 30% of its funding coming from German 

governments. With· the right incentives and tax structure the NNMI would more than pay for itself! 

Such institutes in the US will need to expand far beyond what is being proposed above. A very 

extensive NNMI along with robust state involvement and connected institutes through business 

incubators and our universities will be a must. One of the missions of our universities should now be to 

be their own business incubators with manufacturing institutes. Large patent pools and networks should 

be formed within and among them. Students, private groups, and perhaps even non-affiliated 

individuals would give up exclusive intellectual property rights in exchange for a predetermined 

percentage of royalties. The exclusivity of each patent pools would be determined by the university and 

each program coordinator. Private investors, existing businesses, and those within the business 

incubators would then be able to license any such patents with similar payroll, ETC, and/or royalty 

commitments as would exist above with the NNMI. Further, universities should stop using not always 

relevant math courses as "weeder" courses into many science and engineering degrees. Albert Einstein, 

perhaps the greatest physicist of all time, was a well below average mathematician. It is safe to say that 

many of the futures greatest inventors and scientists may be the same. 

All of this will be part of a transformation of our universities that is typical for a time period that has 

experienced an even more profound economic transformation, our rapid movement into the global 
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economy. After the Civil War and around the turn of the last century the mission of America's 

universities was greatly broadened. Prior to the Civil War American college students could typically only 

receive degrees in one of five subjects: law, medicine, theology, philosophy, or science. But as our 

economy was rapidly transformed from agricultural to industrial during this period, within our colleges 

and universities the subjects of philosophy and science splintered and became specialized eventually 

into what we know them to be today. During this period higher education became much more relevant 

to the needs of society. A similar revolution is now upon us, and reluctant schools will only suffer. 

Given this reform to higher education along with the NNMI it would not take long until the economies 

scientific and technological output would be taken to a more desired level. Along with various 

environmental tax incentives and programs, the possibility of maintaining a pristine and safe 

environment for the US and the rest of the world would greatly increase. On the purchasing end, the 

federal, state, and even local governments could enact an Environmental Fair Tax. For states and local 

governments this would simply mean that they would structure their sales taxes such that products with 

a great environmental rating would receive a very low to no sales tax, while products with low 

environmental ratings would make up for this cost by having much higher sales tax rates. This tax would 

be revenue neutral. A federal Environmental Fair Tax would piggy back on the state and local sales tax 

system, lowering sales taxes even further for products with great environmental ratings while raising 

sales taxes even further on those with poor ratings. 

Our other environmental tax proposal would reword tax credits for the production of products using 

best practices. Just like with an Environmental Fair Tax on the federal level, the EPA could designate, and 

then Congress and the president could OK, best, standard, and poor practices, and then award a lower 

income tax rate via this designation. Also just like with an EFT, these practices could be judged for what 

is generated for the production of a product, when a product is in use, and when a product is discarded. 

Another very positive proposal for the environment is to have the federal government announce that 

the first some odd amount of the production of a certain best practice could be produced tax free. All of 

these tax incentives would slowly but inevitably create a cleaner environment as new best practices are 

invented and old best practices becomes standard practices and so on. With these tax policies 

understood as being permanent, given potential technologies being even close to equal, engineers will 

always default to employing the more environmentally friendly technology. Furthermore, given that the 

overall output of environmentally friendly technologies will increase under qualityism, if the free market 

with these tax incentives alone is not enough for a given sector to move away from certain less 

environmentally friendly products and procedures, it will then be easier for governments to mandate 

the use of cleaner technologies without adversely affecting the economy. 

But what qualityism would best achieve over time is a more egalitarian society! Our tax plan would 

raise far more government revenues than any other currently proposed tax plan. Much of these new 

revenues could be used to improve education. Greater educational opportunities are liberating for both 

individuals and the overall economy. Until the last few years, greater educational outputs have been 

virtually the only policy initiatives of Endogenous Growth Economists. A more highly educated work 

force will entice capital and job growth, along with raising productivity and incomes. Meanwhile the tax 

incentives in qualityism also increase the demand for labor in the jurisdiction of the government that 

employs them. In the end, given that government can never be larger than the private sector that 

creates it and keeps it alive, it is only the demand for labor in the private sector and increases in 

productivity that can overtime raise real incomes for workers. These tax incentives, along with the NNMI 

and our proposed incentives for their associates to employ domestically, would ensure that the demand 
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for labor in the domestic private sector is at its optimum, along with ensuring that desired scientific and 

technological outputs are at their optimum. 

With a greatly increased demand for labor and better technologies that will increase productivity, clean 

the environment, and deliver better products, workers will be able to demand more of better products, 

and/or more time off and vacations if they so chose. A great demand for labor will put workers in 

greater control. Moreover, free market entrepreneurs will have more opportunities than ever before to 

rise and become wealthy, while everyone will have a more prosperous life even if they chose to do less, 

all while creating a more environmentally sustainable economy. The economy will be of a higher quality, 

and this will give all individuals more of an opportunity to do what they dream. Such is the essence of 

anything that is liberating. 

Qualityism liberates us from the failed philosophies of both Keynesianism and neoclassical economics. 

Keynesians, especially in a competitive global economy, adversely constrain and shun the private sector 

while far too often they spend through the government in ways where economic efficiency is 

inadequately measured. Meanwhile, neoclassical economists or supply-siders fail to live in the real 

industrial economy where, without government or union intervention, consumer demand by the masses 

is never able to keep pace with the rest of the economy, leading to an ever slower and less prosperous 

economy. Unfortunately today in our global economy, the only redeeming value of either economic 

philosophy, and therefore most of the beliefs either political party, is that their advocates block the 

other party from completely running, and therefore completely destroying, our economy! 

Unfortunately for Democrats in our global economy, it would take Keynesians less time to destroy our 

economic prosperity than it would for supply-siders to do so. Certain destruction would come with 

supply-side policies, but a slower certain destruction. The American people sense this, and this is why 

since the global economy really began with the end of the Kennedy GATT trade round in 1967 

Democrats have only had one two term president while the RepUblicans have had three. Further, every 

exit poll showed that that without Ross Perot running Bill Clinton never would have won in 1992, so the 

Republicans would have had a fourth two term president and the Democrats zero. In order to win in 

1996 Clinton had to "triangulate" and become a "New Democrat." Without Watergate, the financial 

crash in the fall of 2008, and Ross Perot, it could have been a complete wipeout for Democrats since 

1967. No president has ever been reelected with such a poor approval rating this close to an election as 

President Obama now has. Democrats can pretend this is not a problem and continue to lose, as the 

American people continue to lose. Or they can face reality and adopt Endogenous Growth, qualityist 

policies, thereby improving their lot and more importantly the lot of the American people. 

Exactly 100 years ago, as the most developed economies of the world experienced an equally 

pronounced and profound economic transformation as our sudden movement into a global economy, 

the Democratic Party took up the mantel of the progressive income tax a nd other progressive legislation 

as a way of adapting to the sudden movement from a primarily agricultural economy to a primarily 

industrial economy. This economic transformation was primarily due to their recent development of 

electricity, mechanized farm equipment, and railroad expansion. In an agricultural economy, during a 

recession people can remain or move back to family farms and live off of them. In an industrial economy 

this is much less so. Plus, industrial economies have to deal with non-reinvested profits that disallow 

workers to be able to keep their consumer spending at pace with the rest of the economy, thereby 

helping to bring on recessions. Only progressive income and capital gains taxes can increase consumer 

spending by the poor and middle class because all other forms of taxation are regressive so they cannot 

increase moneys to the poor and middle class. These are the reasons why between 1910 and 1915 
457 


80344.428

virtually all of the economically developed nations of the world enacted for the first time, with a few 

short exceptions in Britain and the US in order to pay for 19" century wars, progressive income taxes, 

along with other progressive legislation. All of these nations, and soon after most of the nations of the 

world, have had progressive income taxes ever since. 

Today we still live in an industrial economy and hopefully with vigor want to remain in one. Therefore, 

we still must redistribute income in order to keep consumer demand up, and we must do it through 

progressive income taxes. However, given our now highly competitive and employment mobile global 

economy we must counter our progressive income and capital gains taxes in a much more sophisticated 

manor that does not damage domestic job growth but actually incentivizes it. Income and capital gains 

taxes make up about 55% of our federal revenues and the top 5% of income earners pay about 70% of 

these taxes. The top 5% or higher of income earners is where the money is, and this is where we must 

acquire it. However, and very importantly, our quality;st income and capital gains tax plans increase 

taxes only on the moneys in the economy that are LEAST responsible for domestic economic growth 

while incentivizing domestic economic growth! 

No major nation of the world in going to champion communism or socialism and take this world back 

to the pre-global economy days. The lesson that has been learned by effectively all the world that came 

out of the grand struggle of communism and socialism against the free market is that a private economy 

with a profit margin is much more efficient and liberating then is a government controlled economy 

without a profit margin. Communism and socialism have been permanently discredited and there is no 

going back. The global, industrial, free market economy is here to stay, until sometime long after we are 

dead it transforms into something different. If the US were to now champion qualityism, it would not 

take long until the rest of the world had more democratic, free market, qualityist governments which 

would therefore have higher labor and environmental standards. This would in turn allow the US and 

the other economically developed nations of the world to have ever higher labor and environmental 

standards. Our governments much better fiscal position under qualityism, along with similar 

governments and fiscal positions in Europe and Japan, would also give these democratic nations much 

greater influence upon the world and upon all undemocratic nations both large and small. 

Just like with what was done 100 years ago, the Democratic Party must lead the way in applying new 

policies to a new economic reality. Being the "conservative" party, or in other words the "slow to little 

change" party, we cannot rely On the Republicans to champion these new policies. The Democratic Party 

also led the way during its inception during the Second Great Awakening of the early 1800's by 

championing very important democratic reforms that made our democracy much more representative. 

The early part of each century, following a cycle of four roughly 25 year long generations, or a cycle of 

roughly every 100 years, has always experienced a profound and very substantial redefinition of what 

people considered to be politically and socially liberating. This occurred during the Progressive Era of the 

early 1900's, the Second Great Awakening of the early 1800's, the Great Awakening ofthe early 1700's, 

the Puritan Awakening of the early 1600's, and the Protestant Reformation of the early 1500's. This 100 

year cycle in this manifestation appears to have begun with the great period of nation building in Europe 

in the late 1400's that was primarily a result of the invention of the canon and the printing press during 

that century. However, a paralleling sequenced 100 year cycle of new and profound societal changing 

ideas appears to have followed this same pattern as far back as into the ancient world. But most 

importantly for us, an Awakening of more modern magnitUde is, and must, now be upon us. The sooner 

we accomplish what past generation have and rise to the challenge of history, the better off we and all 

future generations will be! 
458 


80344.429

Wednesday, April 25, 2012 

Comments for inclusion in the hearing record for: 

Tax Reform: What It Means for State and Local Tax and Fiscal Policy 

Held before the United States Senate Committee on Finance 

Wednesday, April 25, 2012,10:00 AM 

Submitted by: 

Shawn Barigar 

President I CEO 

Twin Falls Area Chamber of Commerce 

858 Blu.e Lakes Blvd. N. 

Twin Falls, ID 83301 

Distinguished Members of the United States Senate Committee on Finance: 

Thank you for the opportunity to share my views and those of the individuals businesses which I 

represent as the President I CEO of the Twin Falls Area Chamber of Commerce and also as 

Chairman of the Idaho Chamber Alliance, an alliance of chambers of commerce from across the 

state committed to making an impact on the issues that affect our businesses, our economies, and 

our communities. There is a very serious issue that is fi.Jeatening local retailers and the 

communities they serve, both in Idaho and across the country. 

The issue is fairness when it comes to collection of Sales and Use Taxes for bricks-and-mortar 

Main Street businesses versus online marketplaces with no physical presence in our state. 

You've had information presented in the past related to this issue under several different names 

including the Main Street Fairness Act and the Marketplace Fairness Act - designed to level the 

playing field for these two types of important business entities in our nation ... but which follow 

different - and unfair - sets of rules when it comes to collecting these taxes. 

In Idaho, we have worked for the past several years to pursue legislation to include Idaho in the 

Streamlined Sales Tax consortium. Unfortunately, the issue has met resistance from our 

lawmakers. During this past Legislative session, the issue once again failed to gain support and 

the bill to join the Streamlined Sales Tax effort and make the changes to Idaho Code to comply 

did not pass out of committee. 

One of the issues raised by our Legislators was that there needs to be a nation-wide guidance on 

this issue as it has implications in every state and needs to be implemented uniformly and fairly 

across the United States. 

858 Blue Lakes Blvd. North • Twin Falls, Idaho 83301 • (208)733-3974 • Fax (208)733-9216 

e-mail: info@twinfallschamber.com • www.twinfallschamber.com 
459 


80344.430

To put it simply, Main Street businesses across the country will continue to suffer, shed jobs and 

economic input, and close up shop altogether unless Congress acts to implement e-fairness 

legislation. 

Right now, as you probably know, local Idaho retailers are unfairly disadvantaged by a loophole 

in our nation's sales tax laws that allows online-only retailers to avoid collecting and remitting 

state sales and use taxes. This puts bricks-and-mortar businesses in Idaho at an automatic price 

disadvantage of six percent in my state. These local businesses are already faced with additional 

taxes and fees and a shaky economy as it is-this sort of tax inequity makes staying competitive 

in today's increasingly challenging economy nearly impossible. 

Brick-and-mortar, Main Street businesses are the lifeblood of our local communities. They 

supply much-needed jobs, provide economic input, and support the cities, towns, and 

neighborhoods in which they are embedded. They should not be burdened with an unfair sales 

tax structure that punishes their customers for doing their part to support local communities. 

As technology continues to advance at an exponential rate and our consumer marketplace 

environment changes, Congress should address these inequities between bricks-and-mortar 

retailers and those conducting business online. 

When government policy favors one class of business over another, as is the case here, that isn't 

a free market. That is an unlevel playing field. It's time for Congress to restore fairness to the 

marketplace by standing behind legislation like the Marketplace Fairness Act or the Main Street 

Fairness Act. 

Many of our Idaho legislators, our Idaho Governor C.L. "Butch" Otter, our chambers of 

commerce, and - most importantly - our citizens and our businesses leaders are calling for a 

solution for this problem. We're asking you - our Members of Congress - to stand together to 

support legislation to help preserve Main Street businesses and the communities they serve, in 

Idaho and across the country. 

Thank you for your time and consideration. 

Sincerely, 

~A'~(' Shawn Barigar 

President I CEO 
460 


80344.431

_,iiiiiiWi3•IMMhUChair 

Francisco Uribe Nome-Depo( 

Chair 

Governmental Affairs 

Kevin Groff Sci[~:.'{l;1 SWn;~ 

Chair 

Small Business Committee 

Lowell Gordon The (rc<'r!Ni,Olfl(f' 

Chair 

Human Resources 

I(evin Groff 

.'Xlfeiid;,S1CJf('$ 

Chair 

Retrospec.tive Ratings Program 

Chariie Extine rvor(h\~'es! fJ{r- Dealer, ASSO(klllf]i1 

inciUWMiTn'·. !'1( 

Director-At large 

G!en flachman 

Bf'/lI:'.'Hf;SqllGlC" 

President/CEO 

Rick O'Connor 

SUPl'1 (lJio! Phoro 

Perry Saueressig Bf'IlBudg('/i."::c>iN> 

Jennifer Spall 1).1,,1;\;,)1' 

Ap ril 30, 2012 

Senate Committee on Finance 

Attn. Editorial and Document Section 

Rm.SD-219 

Dirksen Senate Office Bldg. 

Washington, DC 20510-6200 

Re: Supplementing the Record for the April 25, 2012 

Hearing on "Tax Reform: What it Means for State and Local Tax and 

Fiscal Policy" 

Dear Committee Staff: 

On behalf ofthe Washington Retail Association, our 

members and a collection of Washington State business interests, 

we request that the attached letter be included in the official record 

of the above hearing. The letter was sent last week to members of 

Washington's congressional delegation urging them to support 

legislation that closes the so-called Internet tax loophole. Since last 

week's hearing touched on that issue, we feel the letter is relevant 

to the Finance Committee's deliberations as well. Thank you, and 

do not hesitate to contact me if you have any questions. 

Sincerely 

Washington Retail Association 

PO Box 2227· Olympia Wit. 98507. Toll Free 1.800.752.9552. Loc?!l; }60.943.9198. fo:!.t"iI<1ssocintion.ofg 
461 


80344.432

April 27, 2012 

(updated from April 24, 2012) 

Dear Members of the Washington State Congressional Delegation: 

We are writing to urge you to support legislation that addresses the current competitive imbalance caused by the 

so-called Internet tax loophole. The undersigned companies and associations represent a diverse set of business 

interests from across the state, but we are united in our goal of creating a level playing field between online-only 

and traditional retailers. With the rapid growth of shopping at home, by smartphone and by tablet, all retailers 

are motivated to respond even more quickly than ever to consumer demands. But when federal law is tilted to 

advantage one type of seller over another, the long-term competttive foundation is weakened. Upstanding 

businesses that comply with in-state requirements, and that every day work to meet consumers' needs, see sales 

lost and business eroded merely as a result of an imbalance in federal law that Congress can fix. 

In the Senate, a bipartisan group of senior Senators is co-sponsoring the Marketplace Fairness Act (S. 1832), and in 

the House, the Marketplace Equity Act (H.R. 3179) is co-sponsored by a bipartisan collection of over 30 Members. 

While not identical, both of these bills would empower state legislatures to require remote sellers to collect and 

remit sales taxes to the location where an online or catalogue sale is being completed. Importantly, no state 

could impose this obligation unless it adopted a simplified process for remote sellers, as well as an exemption for 

companies that conduct a limited amount of business online. 

Last December, the Washington state legislature passed Joint Memorial 8009, noting that today's status quo puts 

Washington state sellers at a competitive disadvantage and that the situation destabilizes an important revenue 

source for both state and local governments. In February, Governor GregOire included this issue among her top 

priorities in her letter to you. The Washington Department of Revenue has projected that closing the Internet tax 

loophole would yield an estimated $170 million in the current biennium and over $480 million in the next 

biennium - not in new taxes, but merely by assuring that taxes already due are collected. 

Washington is home to a wide range of large and small retailers that operate locally and sell their goods to 

customers from across the country, employing thousands of people and supporting economic growth. The 

National Retail Federation estimates that the retail sector is directly responsible for over 600,000 jobs in our state 

and that the total employment impact (including a multiplier effect) is over 880,000 jobs -- nearly one in four jobs 

in the state of Washington. The current imbalance in tax collection and remittance obligations puts many of those 

workers and their employers at an unfair disadvantage. 

We urge your support in rectifying this situation, and we thank you for advancing federal policies that ensure 

economic competitiveness and job creation for Washington businesses. 

Sincerely, 

Association of Washington Business 

Ben Bridge Jeweler 

Economic Alliance of Snohomish County 

ExOfficio 

Greater Vancouver Chamber of Commerce 

Kittitas County Chamber of Commerce 

Nordstrom, Inc. 

Outdoor Research 

Recreational Equipment, Inc. (REI) 

Sur La Table 

Washington Automotive Wholesalers Association 

Washington State Veterinary Medical Association 

Bellevue Chamber of Commerce 

Cascade Designs, Inc. 

Eddie Bauer LlC 

Fred Meyer Stores 

Kemper Development Company 

Les Schwab Tire Centers 

Northwest Tire Dealers Association 

Pacific Northwest Booksellers Association 

Seattle Metropolitan Chamber of Commerce 

Tri-City Regional Chamber of Commerce 

Washington Retail Association 

ZumiezJ Inc. 
462 

Æ 


80344433.eps

WATERMARxt 

BOOKS" CAFE . ------1b~--

Senate Committee on FiIl!l!lCe 

Attn. Bditorial and Document Sectjo~ 

Rm. SD-219 

Dirksen Senate Office Building 

Washington, OC20S I0-62OQ 

Tax Reform: What It Means for State and toea! Tax Rnd Fiscal Policy 

April 25 .... 201 2 

CC: S~tor Robens 

As the O\\"Ilcr(,fWalennan. Books & Cart in Withita, KS. and as I member of the American 

Bookseller's Association, 1 would like to Slroogly lIf'gC your direo.::l involvement in the internet 

sales tax issue by supporting the Marketplace Fairness Act (S.1832) legislation. This Act would 

put an end \0 online companies dodging our stale $Illes \aX and thai of other states. With lhls 

federallegis\al.ioo in place, online-sales tax in <:"\'CI)' state will be mllllllg(:able and enforceable. 

II!Id weneed your support 10 make it happen. 

Nm only is the gUJTent Sides \aX system unfair 10 brick.iind-molW" businesses in our 

oommunities, but il is also unfair to those individuals who pay the state sales tax as an honest 

citizen. TlIe Individuals who clloose nol to pay our Stale sales tax are still benefinioll from those 

ofus who do pay. Bottom liM. we need the 541es II1l! system 10 be one. universal system thai will 

keep the pl8ying field leveled bctwt:en all staleS. 

II is e51.imated thai each year states lose out on 523 billion in sales tax. Imagine all ofthc 

improvemellu our state CQuld mnke with that 1000ItIOney - llOt 10 mention what it oouJd do for 

our budgel shortf8l.1 in Kans!Is. TlIe RIODey lilat goes unoo llcclcd by slatcs cach year is growing, 

and we need 10 do sormthing about iL We need 10 hnld online busitoe3Se5 accountable across the 

country and this is thc only way 10 do iL 

I hope yoo will join 1M in supporting the Mllrketplace Fairness Act (S.1 832). 

Thank you for your time and oonsideratlon. 

Sincerely. 

Sarah Bagby, Owner 

WalermlU'k Books&: C 

Wichita, KS