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39–917 PDF 2008

FULL COMMITTEE HEARING ON

BUSINESS ACTIVITY TAXES AND

THEIR IMPACT ON SMALL

BUSINESSES

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

FEBRUARY 14, 2008

Serial Number 110-71

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Urban and Rural Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

VACANT, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

WITNESSES

Rolston, David, Hatco .............................................................................................. 4

Godwin, J. Barry, Stingray Boat Company ........................................................... 6

Joost, Steven, Firehouse Subs ................................................................................ 8

Petricone, Michael, Consumer Electronics Association ........................................ 11

Johnson, Peter, Direct Marketing Association ...................................................... 13

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 25

Chabot, Hon. Steve .................................................................................................. 27

Altmire, Hon. Jason ................................................................................................. 29

Rolston, David, Hatco .............................................................................................. 30

Godwin, J. Barry, Stingray Boat Company ........................................................... 32

Joost, Steven, Firehouse Subs ................................................................................ 42

Petricone, Michael, Consumer Electronics Association ........................................ 46

Johnson, Peter, Direct Marketing Association ...................................................... 50

Statements for the Record: 

American Bankers Association ............................................................................... 66

Federation of Tax Administrators .......................................................................... 69

National Association of Manufacturers .................................................................. 89

The American Homeowners Grassroots Alliance .................................................. 93

American Federation of State, County, and Municipal Employees ..................... 98

Hope Trucking, Inc. ................................................................................................. 100

(V) 

(1)

FULL COMMITTEE HEARING ON 

BUSINESS ACTIVITY TAXES AND 

THEIR IMPACT IN SMALL 

BUSINESSES 

Thursday, February 14, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 11:30 a.m., in Room 

2360 Rayburn House Office Building, Hon. Nydia Vela ́zquez [chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Cuellar, Moore, Clarke, Higgins, Chabot, Akin, Davis, and Buchanan. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Chairwoman VELA ́ ZQUEZ. I now call this hearing to order on the 

business activity taxes and their impact on small businesses. In recent years, the American economy has changed dramatically, shifting away from the manufacture of goods to the delivery of services 

and intangibles. As a result, many states have sought to strengthen their eroding tax base by levying taxes on businesses that are 

not located within their jurisdiction. Today’s hearing will focus on 

the potential problems many small businesses face when engaging 

in interstate commerce and the impact business activity taxes have 

on their firms. 

As the name implies, business activity taxes, are just that: taxes 

imposed by a state for merely conducting business, rather than 

being physically located within a state’s borders. While there are 

clearly circumstances when this is reasonable, the question becomes whether states are going too far. 

This is not the first time this issue has come before Congress. In 

1959, Congress enacted the federal interstate income tax law to address the matter of a state’s ability to effect interstate commerce 

through taxation. Still in effect today, this law prohibits states 

from taxing the income of businesses whose only activities are the 

solicitation of orders for the sale of tangible personal property within that state. There is concern that this law needs to be clarified 

to prevent small firms from being unfairly burdened. 

Typically business activity taxes are levied on corporate income 

generated within the taxing jurisdiction. However, some states 

have imposed a business and occupation tax based on gross sales. 

And others have imposed taxes in the form of fees or licenses for 

products sold within their borders. This means that a small busiVerDate 0ct 09 2002 16:47 Apr 30, 2008 Jkt 033615 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\39917.TXT LEANN
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ness software developer may be subject to licensing and use fees in 

states just for making sales via mail order. 

If each state charged a $400 licensing fee to that small business 

owner, it is not hard to imagine the chilling effect this would have 

on a small company. Having to pay unpredictable taxes inhibits the 

growth potential for small businesses and our economy at large. 

Congress is currently considering whether to provide clarity in 

this area by setting standards about when a state may invoke its 

taxing power. And for many small businesses, tax certainty is a 

primary concern. 

Today’s hearing will help provide perspective on the scope of the 

problem. The issue of the BAT is something that has gone under 

the radar but has an enormous effect on our economy. 

The hearing will also provide insight on how any changes to federal law would affect a states’ ability to tax legitimate economic activity. Limiting the ability of states is something that must be considered carefully. 

Many of these revenues are used to provide vital services such 

as police, fire, and education, to their citizens. The witnesses here 

today will discuss how the BAT affects their industries. 

As with most taxes, it impacts small and mid-sized companies to 

a greater extent than larger entities. Many small firms are completely unaware that they are even subject to these taxes until they 

receive a bill from a state taxing authority. 

Smaller businesses also often lack the resources or capability to 

comply with the multitude of state and local tax laws that are triggered by business activity taxes. Further, the prospect of challenging an incorrect assessment is costly and time-consuming. 

The issue becomes, how do we ensure clarity for these businesses 

while also ensuring that states are not going too far? While the 

issue is a complex one, it is important for thousands of businesses 

across this country. 

I look forward to today’s discussion. And I appreciate the witnesses coming here to discuss this important matter. I now will 

yield to the ranking member, Mr. Chabot, for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr. CHABOT. Thank you. Good morning, Madam Chairwoman. 

Thank you for holding this hearing examining one of the many tax 

burdens faced by small businesses. I’m looking forward to hearing 

from our distinguished panel of witnesses this morning. I know we 

all are. 

There is no doubt that technological advancements have fundamentally changed the landscape for America’s small businesses. 

No longer are small businesses confined to a regional customer 

base or disadvantaged by their inability to compete with larger 

companies because they lack the technological sophistication. In 

fact, advancements in technology have allowed small businesses to 

thrive in a global economy, now largely depend on global communications, just-in-time deliveries, and streamlined operations, all of 

which enable companies to decrease costs, increase capital investments, and provide new job opportunities. 

3

Despite these efficiencies, technology has also brought uncertainty, particularly as it relates to the excessive tax burdens faced 

by our nation’s small businesses. Benjamin Franklin once said that 

nothing in this world is certain but death and taxes. Well, as usual, 

Ben was right. And in this case, state revenue collectors are taxing 

America’s small businesses to death through the business activity 

tax. 

In 1959, Congress passed and President Eisenhower signed into 

law the Interstate Income Tax Act, which remains in effect today. 

This legislation prohibits states from imposing a tax on businesses 

whose only contact with a state involves solicitation of orders for 

tangible goods. Yet, nearly 50 years later, e-commerce and the 

Internet have greatly expanded the breadth of goods and services 

available to increasingly sophisticated consumers. 

Unfortunately, these new avenues of commerce have also become 

favorite targets of overly eager tax assessors, who from state to 

state spin a tangled web of rules, regulations, and guidelines, guaranteeing countless headaches for American small business owners. 

For example, some states believe that trucks nearly passing 

through the state only a couple of times a year without picking up 

or delivering goods even have sufficient connections with a state to 

justify imposing business activity taxes. Horror stories have surfaced describing state tax collectors’ actually impounding trucks at 

weigh stations and demanding that companies pay unwarranted 

business activity taxes on the spot—simply for passing through the 

state. 

While they’re at it, perhaps the state tax collectors’ offices should 

tax themselves for wasting taxpayers’ money. It makes just about 

as much sense. 

These accounts demonstrate the need for legislation that will 

lower the tax burden and provide greater clarity to small businesses trying to compete in an increasingly global marketplace. 

Last week Congressman Boucher and Congressman Goodlatte introduced H.R. 5267, the Business Activity Tax Simplification Act of 

2008. This legislation will go a long way toward accomplishing 

these objectives by establishing a physical presence nexus standard. It would eliminate the guesswork for small businesses in determining their tax liabilities by setting specific guidelines for 

states as they seek to tax businesses that actually conduct business 

within the state. 

My home state of Ohio has the regrettable honor of being consistently ranked as one of the worst climates for small business in the 

entire country. This climate is largely determined by the state’s 

propensity to tax: individual income taxes, sales taxes, unemployment insurance taxes, property taxes, goes on and on. Ohio has 

even begun to impose a gross receipts tax on businesses. 

These excessive taxes are not the answer to turning the economy 

around in Ohio or anywhere else. Instead, we should be supporting 

legislation like the Business Activity Tax Simplification Act, which 

tells entrepreneurs and small business owners that it’s okay to invest in our state or in other states around the country. 

I thank Mr. Boucher and Mr. Goodlatte for introducing this important legislation. And, Madam Chairwoman, I commend you for 

4

holding this important hearing today. And I look forward to hearing from our witnesses. 

I yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Thank you. And now I yield to Ms. 

Moore for the purpose of introducing our first witness. 

Mr. MOORE. Thank you so much, Madam Chair Vela ́zquez and 

Ranking Member Chabot. 

I am so very pleased today to introduce Mr. David Rolston, our 

first witness. Mr. Rolston is the President and CEO of Hatco Corporation, an employee-owned manufacturer of food equipment 

headquartered in Milwaukee, Wisconsin. 

For the past 58 years, Hatco has been a company dedicated to 

exceptional customer service and quality engineered equipment. 

Hatco has consistently been a leader of innovative ideas for the 

food service industry, such as being the first to recognize the need 

to sanitize dish wear at 180 degrees Fahrenheit, food warmers for 

food security and food safety, while at the same time with their flavor saver devices so that it still tastes good after it has been sitting 

around. And, in fact, our own Longworth cafeteria uses Hatco 

equipment. 

I am so proud to have Mr. Rolston here today representing my 

district. Mr. Rolston is here to testify on behalf of the North American Association of Food Equipment Manufacturers, of which Hatco 

is a member. 

The North American Association of Food Equipment Manufacturers represents more than 600 firms which manufacture the equipment used for food preparation and service in the nation’s restaurants, cafeterias, and other food service establishments. Most 

members of the Association are small businesses. Sixty-six percent, 

or two-thirds, of their members have fewer than 100 employees. 

I so appreciate Mr. Rolston being here today to discuss the important issue of the business activity tax on small businesses. And, 

with that, Madam Chair, I yield back. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Rolston and all the witnesses, welcome. You have five minutes. In front of you, there is a timer with a green light. You start. 

And then the red light means that your time has expired. 

STATEMENT OF DAVID ROLSTON, PRESIDENT, HATCO, ON BEHALF OF THE NORTH AMERICAN ASSOCIATION OF FOOD 

EQUIPMENT MANUFACTURERS 

Mr. ROLSTON. Thank you for a very glowing introduction. 

Mr. ROLSTON. Madam Chairman, Committee members, I am 

Dave Rolston, President and CEO of Hatco Corporation, a manufacturer of commercial food-warming, toasters, and water-heating 

equipment in Milwaukee, Wisconsin. We have 375 employees, all in 

Wisconsin. And the company is 100 percent employee-owned, or an 

ESOP. 

I am also Chair of the Government Relations Committee of the 

North American Association of Food Equipment Manufacturers, for 

which I speak today. NAFEM represents more than 600 U.S. manufacturers, all in manufacturing commercial food preparation, cooking, storage, table service equipment, and supplies used in resVerDate 0ct 09 2002 16:47 Apr 30, 2008 Jkt 033615 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\39917.TXT LEANN
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taurants, cafeteria, institutional kitchens, and other commercial 

food service establishments. 

Typical products are freezers, refrigerators, stoves, ovens, broilers, food warmers, table displays, and serving equipment, cutlery, 

virtually everything you would find in a commercial food service establishment. And I am proud to say that much of this equipment 

is still manufactured in the U.S. 

This is a surprisingly large industry. Total domestic sales were over $8 billion. And it is an industry composed predominantly of 

small businesses. Sixty-six percent of our members have less than 

$10 million in sales per year and fewer than 100 employees. 

We have members from 46 states of the union. Most, like Hatco, 

are single-state companies with no physical presence outside of 

their home states. 

Efficiency and predictability are essential to a small business. 

The growing practice of states to assess business activity taxes on 

firms that have no physical presence in the taxiing jurisdiction has 

come as an unpleasant and shocking surprise. If left unchecked, 

these taxes will become a nightmare for small businesses, increasing our administrative costs, adding an unnecessary layer of inefficiency, and limiting our ability to grow. 

Let me give you our example. Hatco, like most NAFEM members, sells through independent manufacturer’s representatives 

who represent 10 to 15 different companies. Hatco also uses independent service agents to complete warranty repairs on our equipment. Again, these independent companies service the equipment 

of many different manufacturers. 

Neither of these companies causes Hatco to have any physical 

presence in any state 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 these states for these taxes is the existence 

of the representatives and/or the state service agents. Of course, 

our manufacturer’s representatives and service agents in these 

states do pay income taxes on their own business profits. This 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. 

We don’t know what other states will come at us next. These tax 

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, and then we pay up. We can’t pass the costs on. So both 

the tax payments and, even worse, the administrative costs come 

off our bottom line. 

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 consider 20, 30, or even all 

states assessing these taxes. We would have to add significant staff 

in an attempt to keep track of all of these unforeseeable obligations, file the returns, and stay clear of all penalties and demands 

6

for back taxes. These would, of course, be unproductive employees, 

a hit to our efficiency. 

Bear in mind that we are a 100 percent employee-owned company. So any additional costs affect our employees directly. And 

what about the overall impact to the economy? The taxes we pay 

to states where we have no physical presence comes off our net 

profits. So do the administrative costs, which are an even larger 

burden. 

As our net income after expenses is reduced, the taxes we owe 

to Wisconsin are reduced. After you factor in both the added taxes 

and the added administrative costs, both to us and the states, I 

doubt that anyone is coming out ahead on what the economists 

would call a macroeconomic level. Certainly if other states jump on 

this bandwagon, we will just be spreading the taxes around with 

little or any net benefit to anyone. 

As a small manufacturer in the U.S., we face many threats from 

competitors outside our borders. We continue to be successful by 

staying lean and smart. Adding unnecessary head counts to administer programs like activity taxes makes us less competitive, not 

only here but overseas. 

For many years, it has been the presumption that businesses pay 

taxes only in the states where they have physical presence and receive government services. We believe that Congress should act to 

preserve this standard. 

Thank you. 

[The prepared statement of Mr. Rolston may be found in the Appendix on page 30.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Rolston. 

Our next witness is Mr. Barry Godwin, who is the Controller of 

Stingray Boat Company. Stingray Boat Company is located in 

Hartsville, South Carolina and has been in business since 1979 and 

employs 240 people. 

Mr. Godwin is testifying on behalf of the National Marine Manufacturers Association. The association represents 1,400 companies 

that produce products used by recreational boaters. 

Thank you for being here and welcome. 

STATEMENT OF J. BARRY GODWIN, CONTROLLER, STINGRAY 

BOAT COMPANY, ON BEHALF OF THE NATIONAL MARINE 

MANUFACTURERS ASSOCIATION 

Mr. GODWIN. Madam Chairman and members of the Committee, 

thank you for inviting me to express my views concerning the business activities tax, the tax burdens felt by small businesses engaged in interstate commerce, and the issues it addresses. 

I am the Controller at Stingray Boat Company. Like most small 

business managers, I have multiple responsibilities and perform 

various tasks. 

Stingray Boat Company was founded by Al Fink in 1979, where 

Al remains the president of the company. Al Fink remains keenly 

involved in the company, from its roots to the top. Stingray Boats, 

located in Hartsville, South Carolina, employs 240 individuals fulltime. 

7

We are, by all standards, the epitome of the American dream and 

a small business proudly dedicated to our employees and their families. Stingray builds fiberglass boats from 18 to 25 feet in length. 

We ship to almost every state within the U.S., Canada, Europe, 

and Australia. 

In my testimony, I will relate three differing experiences that I 

had with three different states. I am seeking clarification of P.L. 

86-272, as each state is interpreting how tax nexus has occurred 

between us and them. 

The burden placed upon Stingray is to incur legal fees, accounting fees and time to address each state as they seek to attach an 

economic nexus to Stingray’S business activities. This is another 

tax in addition to the sales tax incurred by the independent dealer 

in the jurisdiction of that state. 

Until three years ago, we were unaware of nexus implications as 

it relates to taxes. In 2005, we began to hear more about nexus. 

We became aware of a situation in which the State of New Jersey 

had stopped another boat manufacturer’s boat load due to nexus 

issues. We researched what nexus meant to us. Our activities within all states are the same. 

We operate according to P.L. 86-272. Our boats are sold to independent dealers. All orders are taken within the State of South 

Carolina via the telephone or Internet. Boats are paid for before 

their delivery is taken by the dealer. 

Sales representatives from Stingray may travel to see a dealer 

from time to time but do not operate a Stingray office within that 

state. Dealers visit Stingray each year to review new products and 

test drive the boats. The boats may be delivered to the dealer on 

our trucks or by a contract carrier. We reimburse the dealer for 

warranty work performed by them on our boats. We believe we are 

operating within the law. 

The State of Maine versus Stingray, in 2006, a revenue agent 

from the State of Maine sent a letter to us regarding our actions 

with that state. I responded to Mr. Flynn, representing the State 

of Maine, that we believed that we were operating within the confines of the law. After I had completed a nexus questionnaire, Mr. 

Flynn told us that we had created a nexus by paying the independent dealer for warranty work performed on one of our boats. 

I assume that the dealer paid tax to Maine on the amounts received from us as payment for the work done in Maine. Stingray 

did not perform the work, but because we had paid the dealer, 

Maine claimed that our action created a nexus. 

I objected to the revenue agent, but we decided it would be less 

costly to pay the retroactive taxes and fines than to pursue the 

matter in the courts. The State of Maine agreed to require us to 

file tax returns and payments covering the years 2003 through 

2005 and to abate any penalties during this period. 

The State of New Jersey versus Stingray, on July the 23rd, 2007, 

I received a call transferred over from our truck fleet dispatcher at 

10:15. The person on the other end was Ms. Kostak, a revenue 

agent from the State of New Jersey. I was immediately told that 

our truck had been pulled over at the weigh station on the interstate highway and could not move until we paid New Jersey for 

jeopardy assessment taxes. 

8

I asked Ms. Kostak why they were doing this. I was told that we 

had a dealer in the State of New Jersey. This incident was becoming unbelievable. So I asked her to fax me proof that she was who 

she said she was. 

I asked what I could do to let the driver go, and I was told to 

pay the New Jersey Division of Revenue money. I asked how much, 

and I was told it depended upon our sales into the State of New 

Jersey. 

I looked up the sales for the past seven years as requested, and Ms. Kostak quoted me a price of $46,200 to release the truck. I 

then told her I would need to discuss the issue with our company 

president. 

Ms. Kostak told me I had until 1:00 p.m. that day to get them 

the money or the truck would be impounded and we would need 

to make arrangements to retrieve the driver. I asked her, ‘‘Can I 

not send you a check or work something out to let the truck pass 

through New Jersey?’’ I was told to wire them the money. 

I first talked to the truck driver and asked him what had happened. Our driver was passing through the State of New Jersey 

carrying a load of boats for delivery into Massachusetts. Our driver 

told me that the agent pulled his rig over at the weigh station and 

asked him if we had a boat dealer in New Jersey. The driver had 

never delivered into New Jersey and told the agent, Ms. Kostak, 

that he did not know. 

Because he did not know whether we have a New Jersey dealer, 

he gave Ms. Kostak our home office number and the dispatcher’s 

name. Ms. Kostak called our dispatcher and found out we had a 

dealer in New Jersey, and more probing questions were asked and 

then passed over to me. 

After talking to Ms. Kostak, I discussed the situation with our 

company president. He decided to call another boat manufacturer 

that this had happened to. In summing this up, Madam Chairman, 

I felt that we were the victim of extortion by the State of New Jersey. And the only way that we could let our boats pass through to 

Massachusetts was to pay the fees before they were turned free. 

And I ask that the Committee please consider clarification of 86-

272. It is very important to us, a small business. And I appreciate 

your time. 

[The prepared statement of Mr. Godwin may be found in the Appendix on page 32.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Godwin. 

Our next witness, Mr. Steven Joost, is the Chief Financial Officer 

for Firehouse Subs, headquartered in Jacksonville, Florida. Firehouse Subs has been in business for 13 years and operates over 

300 restaurants across 14 states. 

Mr. Joost is testifying on behalf of the International Franchise 

Association. IFA represents franchisors, franchisees, and suppliers 

throughout the world. 

Welcome, sir. You have five minutes. 

STATEMENT OF STEVEN JOOST, FIREHOUSE SUBS, ON 

BEHALF OF THE INTERNATIONAL FRANCHISE ASSOCIATION 

Mr. JOOST. Thank you. 

9

Mr. JOOST. Thank you, members of Congress, ladies and gentlemen, for allowing me to testify before your Committee today. 

Again, my name is Steven Joost. I am the Chief Financial Officer 

and principal in Firehouse Subs. I am also a Florida C.P.A. and a 

member of the city council in Jacksonville, Florida. 

We have 312 restaurants operating from Las Vegas, Nevada to 

right here in Washington, D.C. We started in Jacksonville, Florida 

13 years ago. Through our franchising efforts we employ over 5,000 

people and have achieved the national sales level of over $200 million. Firehouse has helped numerous employees, franchisees, and 

area representatives achieve their American dream. And yes, some 

have become very wealthy. 

On the national level, franchising also has made a tremendous 

impact on the economy and the entrepreneurial spirit of Americans. According to a 2008 International Franchise Association Educational Foundation study conducted by PricewaterhouseCoopers, 

there are over 900,000 franchised businesses currently operating in 

the United States, employing over 21 million workers. This is responsible for $2.3 trillion in annual economic output. 

During that time, over the last 13 years, we have come across 

various impediments to our growth. There are the usual ones: products, competing for real estate, competing for employees. These are 

all natural impediments that every business competes for. And we 

work very hard to outwork our competitors. 

However, there have been many artificial barriers, complexities, 

and tax traps that have been created by government that have 

hurt my business over the years that have led to unwarranted expenses and wasted money. I am here today to help explain what 

myself and my company have been through and to add suggestions 

as to how you may be able to help. 

One of the more perplexing problems facing a growing business 

is that of interstate commerce. Of course, as you are well-aware, 

with our federal system of government, each state is allowed to 

make its own laws. This has led to the implementation of many different laws with many different standards. 

Examples are differing disclosure requirements for our disclosure 

documents, differing sales tax methods and rates, differing income 

tax laws and application thereof, just to name just a few. These differing laws and standards upon which they are applied have necessitated my company to hire a plethora of tax accountants and lawyers to help us comply with the regulations, file the various tax returns and documents that each state requires. We have to employ 

various strategies to help limit our liabilities. And sometimes, quite 

frankly, I wonder what business I am in. 

One of the more disturbing problems created by governments is 

that of state income taxes and franchise taxes. As economic growth 

has slowed, so has state revenue growth. According to Allison 

Grinnell of the Rockefeller Institute, when adjusted for inflation, 

state revenue actually dropped .6 of a percent. So, therefore, the 

squeeze is on for the states to find more money to help them fund 

their budgets. 

One of the ways they do this is through nexus. Very simply, 

nexus is a connection. It means connection. Certain activities, as 

insignificant as they may seem, may establish a nexus. 

10

A company may have unknowingly had nexus with a state for 

many years. It might even be responsible for back sales tax, franchise tax and/or income taxes, penalty and interest for past years. 

Examples of creating nexus that an ordinary person would never 

think of are having a sales representative just solicit business, 

traveling for a meeting within a state, traveling to inspect a store, 

or even the mere just asking for somebody for their business in a 

state can trigger nexus. It depends which state you’re in and which 

50 rule is being applied to you. 

And then, worse yet, the nexus standards between states vary 

widely and wildly. Furthermore, the nexus standards within a 

state within different years can change depending on who the latest administration comes in and who is interpreting the law. 

For example the nexus standards for franchise taxes are much 

broader than they are for income taxes. This means a company 

that could be exempt from paying income taxes in a certain state 

and think they’re home free, all of a sudden, gets a bill for paying 

a franchise tax liability if they do business in that state depending 

on how nexus is defined. 

Each state has its own department of revenue and interpretations on how the laws are applied change. Once a nexus is established, then the states get into the game of apportionment. Apportionment is the formula to figure out how much income is attributable to a specific state’s income tax. Apportionment rules are 

often changed by the individual states to help them garner advantage over other states. 

Currently, my view on the subject matter is the way states are 

imposing burdensome rules and changing them every year is an 

unfair tax on intellectual property rights. And, secondly, it has created a subsidy for lawyers and accountants. 

I believe the fact that the whole Firehouse concept was created 

in Jacksonville, Florida—okay? And in its very essence, royalty is 

paid for our trademarks and the fact that our property is in Jacksonville. I helped create it. I spent 13 years creating it. You know, 

our business model, our trademarks, our marketing all is created 

in Jacksonville. And, in essence, a royalty is rent for these trademarks. 

So if I own a piece of property in Jacksonville, Florida, why, in 

essence, am I paying property taxes in all of these other states? It’s 

beyond me. 

So I believe these rules have created an unintended attack on the 

franchise business. While I am not and my company is not opposed 

to paying taxes, what we are opposed to is spending hundreds of 

thousands of dollars to figure out how to do it because we have to 

hire an army of accountants and lawyers to do so. 

What is needed and what I would recommend is either to get rid 

of nexus or at least apply a single set of rules defining what constitutes nexus and how it will be applied in a uniform manner in 

all 50 states so when I go into a mine field I at least know where 

the mines are. 

Chairwoman VELA ́ ZQUEZ. Mr. Joost, your time is up. 

Mr. JOOST. Okay. 

Chairwoman VELA ́ ZQUEZ. Okay? So during the question and answer period, you will be able to expand on how you feel we can—

11

Mr. JOOST. Thank you for hearing me out today. I appreciate it. 

[The prepared statement of Mr. Joost may be found in the Appendix on page 42.]

Chairwoman VELA ́ ZQUEZ. —clarify this issue. And thank you 

very much for your testimony. 

Our next witness is Mr. Michael Petricone. He is the Senior Vice 

President of Government Affairs at the Consumer Electronics Association. Mr. Petricone is responsible for developing and implementing the public policy priorities. 

CEA is a frequent public speaker on issues impacting the consumer electronics industry. CEA represents more than 1,000 U.S. 

manufacturers of audio, video accessories, mobile electronics, communication information, and multimedia products that are sold 

through consumer channels. 

Welcome, sir. 

STATEMENT OF MICHAEL PETRICONE, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS, CONSUMER ELECTRONICS 

ASSOCIATION 

Mr. PETRICONE. Good morning, Madam Chairman and Committee members. Many of you know the Consumer Electronics Association as the representative of America’s most innovative companies, but the fact is 80 percent of our members are small businesses. In reality, CEA is a small business association. 

Also, I grew up in a small business family. So I am delighted to 

be here talking about this issue. 

No taxation without representation is America’s first governing 

principle. Having established our nation under that cry, our founders went further. They created a single national economy and imposed constitutional safeguards to ensure that the states cannot 

impede interstate commerce. 

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

As you heard today, about a dozen state and local governments are 

imposing income taxes on businesses with no physical presence in 

the taxing state. The states have adopted a variety of ill-defined socalled economic nexus theories to justify these levies. 

The problems caused by this growing patchwork of taxation are 

obvious. And they fall disproportionately on our members. This 

Committee knows that small businesses run close to the bone. To 

thrive, they need reasonable taxation and a settled, predictable 

business climate, but increasingly they face significant costs of determining their state tax liabilities. They must meet multiple filing 

requirements, keep multiple records, and deal with multiple sets of 

regulators. And it is becoming difficult for them to make any reasonable estimate of their projected tax burden. You can imagine 

the challenges of long-term business planning in such an environment. 

Of course, small firms also have few resources that challenge 

questionable assessments in faraway states. As a practical matter, 

when faced with these levies, many of our members have little 

choice but to bite the bullet and write the check. As a technology 

association, we are especially concerned with the burdens the situation places on electronic commerce. 

12

At the very moment that the Internet grants every small business access to a national marketplace, a crazy quilt of local tax obligations throws a roadblock across the electronic highway. Small 

businesses will avoid sales to the various states. And consumers, 

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

get the goods they need, This situation will not resolve itself. In 

fact, it will likely get worse. 

Our-of-state businesses present tempting targets to legislators 

trying to raise revenue. Naturally states have every political incentive to export their tax burdens as aggressively as possible. 

Meanwhile, state courts have made conflicting decisions. And the 

Supreme Court has declined to address this issue. The Supreme 

Court recently refused to hear two cases challenging the constitutionality of the economic nexus approach. States see the Supreme 

Court decision or of non-decision as a green light to press forward 

with more economic nexus legislation. 

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

for you to act. There is ample precedent here. A few examples. You 

have moved to prevent multiple state taxes on electronic commerce. 

You have ensured that states cannot impose fly-over taxes on airlines. And you have restricted taxation of mobile communication 

services by the state where the service is primarily used. 

Specifically, we urge you to support H.R. 5267, the Business Activity Tax Simplification Act. This bill provides that pursuant to 

the commerce clause, a state may not impose business activity 

taxes on a business that has no physical presence in the state. It 

contains protections to ensure that businesses cannot restructure 

their activities to avoid paying legitimate taxes. 

This bill’s physical presence will instantly clarify as the state 

taxation landscape. It is easy to understand. It is easy to enforce. 

Its bright line standard ensures that small businesses know with 

certainty when and where they will be taxed. For an owner, this 

means fewer resources spent on tax compliance litigation and more 

invested in building her business. 

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

is a party, the universal requirement for imposing income taxes on 

non-residents is a physical presence in the taxing jurisdiction. 

Our members are good corporate citizens. We do not object to 

paying our fair share of taxes. We simply believe that the states 

that provide meaningful benefits to a business, water, roads, fire, 

police protection, should properly receive a state’s business taxes, 

rather than a distant state that provides no benefit. 

The Constitution is clear. The right to regulate beyond individual 

states’ borders lies not with the states but with Congress. A bright 

line physical presence eliminates ambiguity, stimulates investment, 

and promotes interstate commerce. It is good for small business. It 

is good for the economy. 

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

Tax Simplification Act. Madam Chairman and members of the 

Committee, I commend you for holding this hearing, and I look forward to answering your questions. 

[The prepared statement of Mr. Petricone may be found in the 

Appendix on page 46.]

13

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Petricone. 

Our next witness, Dr. Peter A. Johnson, is a senior economist 

and Vice President for Research Strategy and Platforms with the 

Direct Marketing Association. At the DMA, Dr. Johnson’s research 

focuses on economic and policy issues pertaining to direct and 

interactive marketing. 

The Direct Marketing Association is the leading global trade association of businesses and nonprofit organizations using and supporting multi-channel direct marketing tools and techniques. 

Welcome, sir. 

Mr. JOHNSON. Thank you, Madam Chairman. Thank you, ranking member. And thank you, other members of the Committee. 

STATEMENT OF PETER A. JOHNSON, Ph.D., VICE PRESIDENT/

SENIOR ECONOMIST, DIRECT MARKETING ASSOCIATION 

Mr. JOHNSON. On behalf of the Direct Marketing Association, it 

is my pleasure to be here and making my inaugural appearance before any congressional committee. 

It is and has been the longstanding position of the Direct Marketing Association and its members that a clear physical presence 

test, such as found in the current legislation and its predecessors, 

is consistent with the Constitution and the overall stricture of our 

federal system. 

My colleagues George Isaacson and Mark Micali, who is with me 

here today, have spoken before this House Committee, these various House committees, to this effect emphasizing the legal perspective. 

What I hope to do is to bring the economist newspaper because 

in a sense, my association represents everybody along this table. 

Direct marketing is not any one particular industry. Direct marketing is basically a way of bringing end-users and primary sellers 

together. 

There have always been two kinds of marketing across the 

states. In fact, anybody who checks their pantry in their kitchen 

knows that almost everything in the household or on a business 

today at some point crosses state boundaries. The question is how. 

What I want to propose to you today, members of the Committee, 

is an essentially economic framework within which I believe you 

should understand not only the current version of the bill but what 

happens as it goes through your various future deliberations because I think that the route here is fundamental misunderstanding 

of what is involved in the latest form of interstate commerce. 

Essentially what is going on here is that there have always been 

two kinds of interstate commerce, one that’s focused on mass marketing. And you all know mostly what it looks like. It’s big physical 

structures, like, you know, the big box retailers or your local 

branch or store. 

Mass marketing worked across interstate boundaries because 

there were efficiencies of scale that allowed bringing bulk products 

to big, bulky markets and concentrated areas. 

But although it wasn’t often seen during the heyday of broadcast 

television and radio, there was always another kind of marketing 

that crossed state boundaries. And that was direct marketing or 

14

what is now often called interactive marketing. It was originally 

the post office set up by Ben Franklin. 

And what is different about this is that it uses economies of 

scope to bring not the product to the customer but fundamentally 

to bring the customer to the seller or the product. 

Now, it may not be apparent that this is what is going on. But 

for anyone who has really thought about what is at stake at the 

Internet, that is really what is occurring is that in investing in information, whether it was direct mail solicitations and the statistics that underlie that—and I explain this in probably lugubrious 

detail in my written testimony—or it’s now the Internet and investment in search ads. 

The basic logic is, bring the customer to the seller or the product, 

as opposed to bringing the sell or the product to the end customer. 

Why does this matter for business activity? For all of the different 

industries and different kinds of products and services available 

through my members and so on and everybody here. 

Essentially there are much lower start-up costs and much lower 

overhead investments that make this kind of marketing unusually 

attractive to small businesses. And business activity taxes discriminate against this way of bringing the end customer to the primary 

seller in a way that I don’t think the states really fully understand 

the underlying logic. 

To put it most simply, at the end of the day—and this is going 

to sound like a paradox. I would be happy to offer a pedantic statistics tutorial to explain why this is. In direct or interactive marketing, the smaller the business, the more likely it is that their end 

customers will be disbursed across multiple jurisdictions. In mass 

marketing, the more likely it is, the smaller the business or the 

more concentrated or, in other words, the fewer the jurisdictions to 

which they will be exposed. 

Now, our state/federal tax system was set up on the assumption 

that almost all interstate commerce fell along the lines of mass 

marketing. Now, because of the increased efficiencies of statistical 

analysis and the Internet itself, transacting across boundaries by 

bringing the customer to the primary seller is making, a, the small 

business opportunity increasingly valuable to the small business so 

that we see in retail, non-store retail, for example, the number of 

small firms has increased far faster than the number of large 

firms. 

In fact, the number of large traditional store retailers has been 

decreasing over the Internet decade while the number of non-store 

retailers has been increasing dramatically, the efficiency has been 

increasing dramatically. The bottom line is—and that is just retail—it’s similar. Is it manufacturing, finance, insurance? 

This way of bringing customers to the primary seller, using interstate carriers and interstate communications media, which are not 

directly owned by the customer or the seller, offer unusually low 

barriers to entry and increased inefficiencies in terms of promoting 

overall growth. 

Thus, given the fact that for statistical and financial investment 

reasons the smaller the company the more jurisdictions, the business activity tax levied potentially across all 50 states and all of 

the thousands of sub-state jurisdictions to which a small business 

15

who is marketing directly is exposed, obviously inherently the more 

exposed they are to this tax and the resulting burdens. 

The bottom line, as I said, is, unlike other forms of marketing, 

the basic fundamental logic requires small businesses to run this 

risk to incur more exposure to more state and sub-state jurisdictions. 

We looked at what is currently being lost as a result—

Chairwoman VELA ́ ZQUEZ. Dr. Johnson, the time is up. 

Mr. JOHNSON. All right. 

Chairwoman VELA ́ ZQUEZ. We will continue having this conversation—

Mr. JOHNSON. Thank you, Madam Chairman. 

[prepared statement of Mr. Johnson may be found in the Appendix on page 50.]

Chairwoman VELA ́ ZQUEZ. —in the question and answer period. 

Thank you. 

Mr. Joost, I would like to address my first question to you. 

Mr. JOOST. Sure. 

Chairwoman VELA ́ ZQUEZ. You mentioned that certain states have 

been especially aggressive in attempting to collect business activity 

taxes from your firm. Have you scaled back operations in these 

states? And how has this affected the economics of your business? 

Mr. JOOST. To answer your first question, yes. Specifically I’m 

not trying to point fingers, but the State of South Carolina comes 

to mind. Just the fact that we have stepped foot in that state creates what they call a nexus. And now they want part of our income 

tax, state income tax. 

While it has not scaled back our activity per se, it does cost us 

money and, therefore, lowers our profit margins. At the end of the 

day, you just look at it. And it’s the cost of doing business. 

And what happens, what we have done in our company since we 

started our company 13 years ago, we did not take a dividend for 

ten years. We put every dollar and dime we made back into our 

business. 

So theoretically answering your question because now we don’t 

have as much money to put back into our business and grow it, 

that effect, yes, has stopped/slowed growth. 

Chairwoman VELA ́ ZQUEZ. Do you believe it is possible to establish a clear standard that would allow businesses to know that if 

they do X, Y, or Z in a state, that that will be subject to that state’s 

taxing regime? 

Mr. JOOST. Absolutely. And I think the Committee right here is 

going to do it. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Petricone, those in favor of business activity taxes argue that 

these taxes broaden the tax base and allow for lower taxes for locally owned businesses. What is your reaction to the criticism that 

a clear jurisdictional standard will limit the tax base to only those 

in state companies? How would you respond to those who argued 

that this could lead to higher taxes for local small businesses? 

Mr. PETRICONE. Thank you, Madam Chairman. 

First of all, I would take issue with any notion that this approach would lead to an aggregate lowering of taxes on businesses 

16

because the businesses will still be paying the taxes in the state 

where they are domiciled. 

Beyond that, I think certainly there in any way range of factors 

that affects any given state’s tax revenues at any given time. But 

I do keep coming back to what I believe is a basic principle of fairness that if a company is not domiciled in a state and does not 

have a presence in that state, that state should not be subject to 

the state’s taxes. 

And some of the stories you hear from Mr. Godwin, for example, 

of trucks being seized as they go across state borders I think are 

exactly the sorts of situations envisioned by the founders when 

they drafted the commerce clause. 

Chairwoman VELA ́ ZQUEZ. Mr. Godwin, you mentioned that you 

canceled your membership with the Northwest Marine Trade Association to prevent any potential nexus with the State of Washington. And you also stated that Maine asserted a nexus was established due to the fact that you paid an independent service dealer 

to perform warranty work on one of your boats. 

Is it possible for you to take the same approach you did with the 

State of Washington to prevent any nexus or does your business 

model require this type of relationship with local service dealers? 

Mr. GODWIN. Madam Chairman, every independent dealer we do 

ask them to service the boats if there is a problem that needs to 

be corrected and a consumer brings it in. And we reimburse them 

for their work that they do. 

So we operate the same way in every state. And our business 

model does require that we do that. It’s basically the way the industry works. 

Chairwoman VELA ́ ZQUEZ. Mr. Rolston, you stated that one of the 

greatest challenges for small businesses is that they are completely 

unaware that they are even subject to these taxes. Many only find 

out after they receive a tax bill from a state. Can you discuss your 

experience when you receive a notice or notices about potential 

business activity, tax liability? And was there any documentation 

as to what type of activity on your part triggered taxation? 

Mr. ROLSTON. Yes. We are currently paying taxes in Michigan, 

Washington State, Iowa, and Ohio. And in every case, they cited 

either the presence of an independent manufacturer’s rep, who represents our equipment and those of many other companies—so they 

are independent business people—and/or the independent service 

agents. Much as the boat dealer situation we have service agents 

that are separate from our dealers, but they are service agents who 

service the equipment on our behalf. They service many other people’s equipment also. So yes, in both cases, it was the presence of 

an independent businessman. 

Chairwoman VELA ́ ZQUEZ. Okay. Thank you. 

Dr. Johnson, in the past, the issue of business activity taxes has 

mostly been a concern for large corporations doing businesses 

across the country. However, we have seen some dramatic changes 

to our economy shifting away from one focused on manufacturing 

to a more service-based economy. 

Given that dynamic, why are business activity taxes now more 

of a problem or issue for small businesses than in the past? 

Mr. JOHNSON. Well, thank you. 

17

You are absolutely right about why are they more, because essentially on both the end seller side and the middle men; that is 

to say, the firms that create economic passageway connections between end sellers and markets, both of those are affected by business activity taxes. And, unfortunately, both the end sellers and 

the intermediaries, whether it be the common carriers or the communication networks, have particularly low barriers to entries for 

small firms. 

And so given that interactive marketing, direct marketing, is 

drawing more and more business activity, business overall is growing faster in this area and the firms are getting smaller, the net 

balance now as states introduce more business activity taxes is falling increasingly on the small firms who are wanting to use these 

indirect connections to bring customers to them. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Now I recognize Mr. Chabot. 

Mr. CHABOT. Thank you very much, Madam Chair. 

I think you described the onslaught that you faced in many of 

these examples that you had when the states were coming after 

you. 

I think, Mr. Rolston, you said you negotiated but then ultimately 

paid up. Mr. Godwin, I think you referred to it as extortion, which 

was the word that I had floating around in my head when you were 

describing your situation. 

It was either you, Mr. Joost, or Mr. Petricone. I’m not sure. One 

of you said you ultimately bit the bullet and cut the check. I guess 

that was you. 

The three of you, could you describe what sort of thought process 

went on, the conclusion that you ultimately reached when you 

came to the decision that you had to surrender and pay, even 

though I think to your core you felt this was not a fair situation 

that you were facing? And maybe I’ll begin with you, Mr. Rolston, 

if that’s okay. 

Mr. ROLSTON. Well, it is like a lot of situations where you are 

faced with a potential litigation. You choose which is more or least 

expensive. In this case, specifically they wanted the eight years’ 

payment in the past. We were able to negotiate that down to a 

more reasonable number, something that we considered acceptable. 

And then we paid it, as opposed to litigating, because litigating 

would have been much more expensive and, from what I understand, not very successful. 

So in each case, that was our situation. It came down to a strictly economic decision. 

Mr. CHABOT. Mr. Godwin? 

Mr. GODWIN. For us, New Jersey, we didn’t have a choice. Our 

boats were stranded on the interstate. And the only way they could 

get to the dealership in Massachusetts was for us to wire the 

money to the State of New Jersey within this time frame they specified. And if we didn’t do that, our boats were being impounded and 

we were told that it was left up to us to take care of our driver. 

So I didn’t have a choice. I mean, it was ‘‘Show me the money, and 

we’ll let you go or you’re stuck.’’

But, then, during that time frame, we also talked to a fellow 

boat-builder who had been through a similar situation. They had 

18

incurred over $100,000 in legal fees. And so we decided that we 

would rather go ahead, pay this, and deal with the New Jersey tax 

courts possibly at a later time and file the tax returns as they requested so that we could in the future also continue to ship boats 

through their state because we were told that if we didn’t do what 

they were asking, the next time we showed up through the state, 

that we would be going through the same situation. 

Mr. CHABOT. I will yield. 

Chairwoman VELA ́ ZQUEZ. Will you yield? 

Mr. CHABOT. Yes. 

Chairwoman VELA ́ ZQUEZ. Mr. Godwin, have you been forced to 

curtail operations? 

Mr. GODWIN. We haven’t yet. We are basically taking this as 

each state comes at us and dealing with that situation. It’s just this 

particular situation, we didn’t have a lot of time to react or deal 

with it in a business manner. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. CHABOT. Reclaiming my time, Mr. Petricone? 

Mr. PETRICONE. Thank you. 

In my position, I regularly get anguished calls from members 

who received a significant tax bill they didn’t expect and don’t understand. Often the state approach is very aggressive, involving 

threats of seizure of inventory, you know, back taxes going back 

multiple years. 

As far as the advice I give them, it is not very helpful. I ask 

them if they have the resources to devote to litigating and contesting the issue. For the vast majority of small businesses, the answer is clearly no, in which case I advise them to comply. 

What makes it worse is there is a Pandora’s box effect, where if 

a big business complies in one case, they soon find other states 

coming after them. So, unfortunately, there are no good answers. 

Mr. CHABOT. Thank you. 

Mr. Joost, obviously you are trying to grow your business to the 

extent you are able to. What impact does this have on a business 

owner like yourself who is trying to grow businesses and, most importantly, create jobs, which is obviously important to the overall 

economy? 

Mr. JOOST. Thank you for asking that question. 

Going back to the Madam Chairwoman’s question, while you 

can’t say there is necessarily a direct correlation because you have 

incurred these higher costs, intuitively you know there is an opportunity cost. 

Like for my company, for example, going back to the fact that we 

did not pay dividends for the first ten years of our existence, we 

constantly put the money back in our company, growing company 

stores, hiring people to build the foundation so we could start our 

franchising operation. 

So, just intuitively, if you know the fact that you don’t have as 

much money to reinvest in your company, you can’t go out and hire 

more people. You can’t go out and get more franchisees. And you 

can’t go out and create more jobs. So there are opportunity costs 

there. Whenever you impose higher costs on these companies, the 

opportunity is gone to invest that money to create more jobs and 

create an economic multiplier. 

19

Mr. CHABOT. Thank you. 

Dr. Johnson, those states that are most aggressive in pursuing 

these types of taxes, do you have an opinion as to whether the ultimate business activity in that state would, in all likelihood, be suppressed in some manner? In other words, those states that are taxing higher, do businesses take their business elsewhere or avoid 

those states, if possible? Any comments that you would have on 

that? 

Mr. JOHNSON. I do. I think that cumulatively—and I emphasize 

cumulatively—as one of my colleagues said, the Pandora’s box effect is that, in fact, you get—to draw a different analogy, a kind 

of tragedy of the commons, similar to where in medieval England, 

there would be a town with a central pasture that all of the local 

farmers would graze their sheep on. Well, the first farmer to graze 

the sheep on that pasture, his sleep flourished. But by the time the 

50th sheep farmer shows up with his sheep, the pasture is completely denuded. 

So yes, I believe that as more and more states become aggressive, the cumulative effect will be negative. And, in fact, let me tell 

you that I believe because the tax falls both on the small business 

intermediaries and the small business marketers who use those 

intermediaries, we did some preliminary calculations. Our estimate is that there are approximately $755 million, at 

least, of sales to these small businesses, who are the intermediaries 

that are being lost across the states that are doing this and that 

the opportunity cost, the lost revenue, amounts to about $8.9 billion, or 44,000 jobs, across the economy as a result of the states 

doing this. 

Mr. CHABOT. Could you repeat that one more time, the numbers? 

Mr. JOHNSON. Sure. So assuming that the CBO is essentially correct in some earlier versions of this bill in adjusting downward for 

the new version of the bill that’s currently before your Committee, 

we estimate that there are some $755 million that are not currently being spent on the small business intermediaries who are 

helping to bring customers to original sellers and that the opportunity cost; in other words, the lost sales that marketers are not 

receiving from those customers as a result, amounts nationwide to 

$8.9 billion, which if that $8.9 billion could be restored in 2008 to 

the American economy through the passage of this, the physical 

presence test, de minimis provisions, would result incrementally in 

44,000 jobs. That’s 44,000 jobs that BAT taxes we believe are currently preventing the U.S. economy from producing. 

Mr. CHABOT. Thank you very much. I yield back the balance of 

my time. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Petricone, the legislation being considered will clarify physical presence as the standard for establishing nexus as the basis for 

taxation. Using this nexus test, would it be possible for the company to have employees in a state and solicit sales from residents 

in the state yet not be subject to any business activity taxes? 

Mr. PETRICONE. Madam Chairwoman, we believe not. And we believe that the existing legislation, BATSA, is put together in such 

a way as to prevent companies from gaining system, in effect. It 

is a 14-day period. And after the 14 days, you are considered to 

20

have a nexus in the state. So we think that is a bright line and 

easy to understand and easy to enforce. 

Chairwoman VELA ́ ZQUEZ. Okay. Mr. Akin, let me ask just one 

more question. I didn’t see you. I’m sorry. 

How would you respond to critics who suggest that this standard 

may deny states the right to tax businesses that are using the services of that state? Mr. Petricone? 

Mr. PETRICONE. Right. The state will still be able to tax the instate. To the extent there is an in-state representative that is domiciled in that state, then they will still be susceptible to taxes. If 

there is somebody in state A who is manufacturing a machine and 

then that machine is sent to state B and sold by somebody in state 

B, then the seller in state B will be taxable by state B. And included in the tax will be the value of the machine made in state 

A. 

So, again, the aggregate pie remains the same. And then the 

state gets the benefit. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Akin? 

Mr. AKIN. Thank you, Madam Chair. 

This is my eighth year of being here. And I have sat in some 

very, very interesting Committee hearings. But I have never sat in 

a Committee hearing on highway robbery before. And so I would 

really like to compliment you on your choice of a topic. I mean, this 

is really something new and innovative. 

I don’t know if any of you are really trained in terms of monetary 

theory, but my sense is that we just passed a thing called an economic stimulus package. I don’t know how much stimulating it is 

really going to do but maybe some small amount. 

If I were going to choose an economic stimulus package, I would 

think stamping this practice out would be at the head of my list 

just in terms of common sense because the place where we really 

get the economy going is small business because they can react 

rapidly and they can invest in different equipment or procedures, 

which allow companies to grow and create a lot of jobs. 

It seems like this is a tremendously destructive practice. And if 

one state starts it and it starts cascading—I don’t know if anybody 

wants to comment on that. 

As I said, I haven’t ever sat in a Committee on highway robbery. 

Thank you, Madam Chairwoman, for this wonderful and interesting twist of things, the dumb things that government can do. 

Mr. ROLSTON. Yes. I will comment. I mean, that is the primary 

reason I am here. Right now the four states that we’re paying to 

are a burden, but it’s not a huge burden. My fear is that when it 

gets to 50 states, that it will be a huge burden and we will have 

5 or 6 people on our staff just to deal with the technicalities. 

Mr. JOOST. I would also like to comment. I am not so much 

against the taxes. It is literally we have paid accountants and lawyers hundreds of thousands of dollars to figure out how to comply 

with the laws. I don’t mind paying taxes. I just hate paying an 

army of people to figure out how to do it. If I could just simplify 

it even, it would save us a ton of money just from a compliance 

level. 

Mr. AKIN. Thank you, Madam Chair. 

21

Chairwoman VELA ́ ZQUEZ. Mr. Chabot, do you have any questions. 

Mr. CHABOT. No. Thank you. 

Chairwoman VELA ́ ZQUEZ. I have two questions. Dr. Johnson, one 

of the concerns related to a potential qualification of physical 

presences, that it would lead to tax avoidance or tax sheltering by 

corporations. For instance, a business located in one state could diversify its operation and have entities operating in another state, 

thus creating a tax shelter. 

Would enactment of a physical presence standard or any other 

standard lead to another round of tax planning and tax avoidance, 

causing states’ revenue streams to erode further? 

Mr. JOHNSON. I don’t believe so, no. In fact, on the contrary, I 

believe that, as one of my colleagues to my right has said, a clear 

physical presence de minimis standard clarifies, establishes a 

bright line relationship. 

So that not only would tax avoidance be minimized, but all of the 

business activity by small businesses that is currently not occurring could now be adequately planned for and budgeted. 

So there is no question in my mind whatsoever that a clear 

boundary is to everyone’s benefit, including, obviously, the states, 

who would then be able to tax properly the resulting revenue from 

increased activity by small businesses. 

Chairwoman VELA ́ ZQUEZ. Mr. Davis? 

Mr. DAVIS. No questions. 

Chairwoman VELA ́ ZQUEZ. No questions? Okay. 

Yes. I would like to ask this question. Anyone in the panel could 

answer. We have always talked about having a fair and balanced 

tax system. In terms of progressivity and regressivity, on a scale 

of one to ten, with one being very regressive and ten being progressive, where would business activity taxes fall on that scale? Dr. 

Johnson? 

Mr. JOHNSON. Madam Chairman, which end is which? 

[Laughter.] 

Mr. JOHNSON. Which was the progressive number? Which was 

the regressive number? 

Chairwoman VELA ́ ZQUEZ. One regressive. 

Mr. JOHNSON. One regressive? 

Chairwoman VELA ́ ZQUEZ. Yes. 

Mr. JOHNSON. I would say probably a three or a four. 

Chairwoman VELA ́ ZQUEZ. Three or four? 

Mr. JOHNSON. In terms of business activity tax—

Chairwoman VELA ́ ZQUEZ. Yes. 

Mr. JOHNSON. —in terms of total regressivity? 

Chairwoman VELA ́ ZQUEZ. Yes. 

Mr. JOHNSON. I would say about a three. 

Chairwoman VELA ́ ZQUEZ. Any other person? Yes, Mr. Petricone? 

Mr. PETRICONE. Well, it’s not outright confiscation. So I guess I 

can’t give it a one. I guess I will go with two or three. Again, you 

know, as you are so aware, small businesses operate so close to the 

margin. And what they need is a fair tax environment and also 

some elements of predictability. And this is unfair, and it’s entirely 

random. So it’s very troublesome. 

Chairwoman VELA ́ ZQUEZ. Mr. Davis, do you have any? 

Mr. DAVIS. Thank you, Madam Chairman. 

22

Mr. Rolston, I understand you do business in more than one 

state. Can you tell me what effect this has on your business? 

Mr. ROLSTON. Well, we do business in almost every state. And 

at this point, I would say this is more of an annoyance than it is 

a hindrance. We have not stopped business in any state because of 

this. We have not minimized business in any state. But we have 

had to increase our effort to deal with these issues in the four 

states that we currently are addressing these issues with. So if it 

continues to grow, it will become a larger burden. 

We will deal with it. We are a reasonably large company. There 

are many companies in the North American Association of Food 

Equipment Manufacturers that are very small and will have to either use outside counsel at a very high price or hire people to deal 

with it. You know, adding three people to my payroll is not going 

to put me out of business, but a company that has ten people, adding three is a much more significant burden. 

Mr. DAVIS. So when you say increased efforts to deal with it, it 

actually is more people? 

Mr. ROLSTON. Oh, yes, without a doubt, because we have to deal 

with paying local taxes in all of these different states. So we need 

people just to administer that. 

Mr. DAVIS. And what effect does that have on your business, actually the business that you’re really in? Would it be better to go 

out and hire three more people to sell more product or make more 

product? 

Mr. ROLSTON. Oh, absolutely. I would much rather hire three 

more salesmen than three more accountants. 

Mr. DAVIS. Thank you. 

Chairwoman VELA ́ ZQUEZ. Mr. Petricone, you would like to comment? 

Mr. PETRICONE. If I could just add? I guess the one thing that 

I would like to notice, this isn’t a static issue. You know, right now 

we’re dealing with a dozen states. 

But, you know, every state understandably has every incentive 

to export its tax burden. So if we end up in a situation we’re talking about 20, 30, 50 states and thousands of local jurisdiction, you 

know, the current situation could get exponentially worse. 

Mr. JOHNSON. And, Madam Chair, if I could emphasize, again, 

from an economic modeling point of view, it may be true that on 

a case-by-case basis, no particular company will say, ‘‘Oh, I’m not 

going to operate in state X because of the business activity tax.’’

What will happen, however, is that the intermediaries that make 

interactive direct marketing possible will have their costs grow 

imperceptively but enough across the entire economy as a result of 

these taxes such that businesses who at the margin might have 

used them will not. 

And that is in a sense the dog that doesn’t bark, the old Sherlock 

Holmes principle. What should have happened? The dog should 

have barked. In this case, there should have been business activity. 

Why does it not happen? Because intermediaries are being inappropriately taxed, both in terms of the compliance costs and the direct burden. Costs go up. Businesses choose not to sue them to get 

to out-of-state markets. 

Chairwoman VELA ́ ZQUEZ. Sure. 

23

Mr. DAVIS. As those costs go up, they’re doing business in more 

and more states. I’ve never really known a business that has control of paying the taxes. That is usually passed on to a consumer. 

And what effect does it have on the consumer in the economy as 

we go into this economic down turn that we’re looking at right 

now? 

Mr. JOHNSON. Well, again, if I may be the first to speak to that, 

you know, that $8.9 billion that I mentioned before, that is $8.9 billion of incremental spending, spending that would not otherwise 

have existed, whether it is spent by the end customer as a consumer or end customer as a small business, it ultimately really 

does not matter. 

And you’re right. At the DMA, we just did our quarterly survey 

of our members’ projected economic performance. And, you know, 

essentially the number of firms in our association who are concerned about recession has essentially doubled just in the last 

quarter. 

I think $8.9 billion in these circumstances in additional sales and 

the 44,000 jobs, which would be necessary to support that additional demand, is something everybody should be taking very, very 

seriously in this period. 

Mr. DAVIS. Anyone else want to speak to that? 

Mr. JOOST. In our business, in each city, we have seven pricing 

tiers. For example, in Orlando, which is more expensive to do business, say, than Jacksonville or some of our other cities because of 

economic factors and one of them is local taxation, the people in 

Orlando pay a dollar more for the same product than they do in 

Jacksonville because the cost of business is higher. Any time you 

make the cost of business higher, at some point you’ve got to pass 

it on to the consumer. 

So to break it down in my world, I can see directly because of 

all of the different pricing tiers we have to have, where it costs 

more to do business, people pay more. 

Mr. DAVIS. Anyone else? Mr. Godwin? 

Mr. GODWIN. I would like to say that right now the boating industry in America is down. It is already soft. So we can’t really 

pass along additional costs to our dealership network because boats 

are a luxury, a pleasure item. And so, you know, we can’t pass that 

cost. The boating industry is down. 

In looking forward, you know, we want to keep people having the 

ability to come in and buy these boats. And if we continue to shift 

the cost down to them, they’re not going to be able to get into boating. 

So thank you. 

Mr. DAVIS. Just to follow up on that, then, on the other side, if 

you can’t increase the cost to the consumer, you’re probably going 

to have to put it on your employees. And you potentially have a 

loss of jobs. Is that—

Mr. GODWIN. That is very true, very true. 

Mr. JOOST. Or stop paying their health care. 

Mr. ROLSTON. Yes. We are in the same situation. We have a nationwide pricing. So we can’t pass it on to the consumer in a particular market because that market is more expensive for us. So 

24

any abnormalities we have to eat. And then that affects our profitability and essentially our employment. 

Mr. DAVIS. Well, my time is up. I would just say I have always 

believed that you can’t tax and regulate yourself into prosperity. 

And I think that is what I hear you saying. 

I yield back. Thank you. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

I want to thank all of the witnesses. Clearly this is a complex 

and important issue for small businesses when it comes to interstate commerce and BAT. What I intend to do is to send a letter 

to the Judiciary Committee commenting on this issue so that they 

could keep the small business perspective of this issue when they 

consider the legislation that has been introduced. 

I ask unanimous consent that members will have five days to 

submit a statement and supporting materials for the record. Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 12:50 p.m., the foregoing matter was concluded.]

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