U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

65–745 PDF 2011

BUSINESS ACTIVITY TAX SIMPLIFICATION ACT 

OF 2011 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COURTS, COMMERCIAL 

AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON

H.R. 1439 

APRIL 13, 2011 

Serial No. 112–41 

Printed for the use of the Committee on the Judiciary 

( 

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

(II) 

COMMITTEE ON THE JUDICIARY 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

[Vacant] 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

SEAN MCLAUGHLIN, Majority Chief of Staff and General Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON COURTS, COMMERCIAL AND ADMINISTRATIVE LAW

HOWARD COBLE, North Carolina, Chairman 

TREY GOWDY, South Carolina, Vice-Chairman 

ELTON GALLEGLY, California 

TRENT FRANKS, Arizona 

DENNIS ROSS, Florida 

[Vacant] 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

MELVIN L. WATT, North Carolina 

MIKE QUIGLEY, Illinois 

DANIEL FLORES, Chief Counsel 

JAMES PARK, Minority Counsel 

(III) 

C O N T E N T S 

APRIL 13, 2011 

Page 

THE BILL 

H.R. 1439, the ‘‘Business Activity Tax Simplification Act of 2011’’ ..................... 13 

OPENING STATEMENTS 

The Honorable Howard Coble, a Representative in Congress from the State 

of North Carolina, and Chairman, Subcommittee on Courts, Commercial 

and Administrative Law ...................................................................................... 11 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Ranking Member, Subcommittee on Courts, Commercial 

and Administrative Law ...................................................................................... 23 

The Honorable John Conyers, Jr., a Representative in Congress from the 

State of Michigan, and Ranking Member, Committee on the Judiciary ......... 24 

WITNESSES 

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

of Virginia 

Oral Testimony ..................................................................................................... 1 

Prepared Statement ............................................................................................. 4 

The Honorable Robert C. ‘‘Bobby’’ Scott, a Representative in Congress from 

the State of Virginia 

Oral Testimony ..................................................................................................... 6 

Prepared Statement ............................................................................................. 7 

Corey Schroeder, Vice President and CFO, Outdoor Living Brands, Inc. (Richmond, VA), on behalf of the International Franchise Association 

Oral Testimony ..................................................................................................... 26 

Prepared Statement ............................................................................................. 28 

R. Bruce Johnson, Chairman, Utah State Tax Commission (Salt Lake City, 

UT), on behalf of the Federation of Tax Administrators 

Oral Testimony ..................................................................................................... 37 

Prepared Statement ............................................................................................. 39 

Joseph Henchman, Tax Counsel and Director of State Projects, The Tax 

Foundation (Washington, DC) 

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

Prepared Statement ............................................................................................. 52 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the American Bankers Association ................................. 68 

Letter from Bill Himpler, Executive Vice President, American Financial Services Association (AFSA) ....................................................................................... 72 

Prepared Statement of the American Homeowners Grassroots Alliance ............ 73 

Letter from Senator Jim Buck, Indiana, Public Sector Chairman, Tax and 

Fiscal Policy Task Force, and Jonathan Williams, Director, Tax and Fiscal 

Policy Task Force, American Legislative Exchange Council ............................ 76 

Prepared Statement of the American Trucking Association ................................ 77 

Page

IV 

Prepared Statement of Mark Louchheim, President, Bobrick Washroom 

Equipment, Inc., North Hollywood, CA, on behalf of the National Association of Manufacturers .......................................................................................... 83 

Letter from Arthur R. Rosen, McDermott Will & Emergy LLP, Counsel, 

the Coalition for Rational and Fair Taxation .................................................... 88 

Prepared Statement of the Computing Technology Industry Association 

(CompTIA) ............................................................................................................ 105 

Prepared Statement of Michael Petricone, Senior Vice President, Government 

Affairs, Consumer Electronics Association ........................................................ 113 

Letter from Joseph R. Crosby, COO & Senior Director, Policy, Council On 

State Taxation (COST) ........................................................................................ 115 

Letter of Support from Mark B. Wieser, Founder and Chairman, Fischer 

& Wieser Specialty Foods, Inc. ........................................................................... 119 

Prepared Statement of David Rolston, President and CEO, Hatco Corporation, 

on behalf of the North American Association of Food Equipment Manufacturers (NAFEM) ................................................................................................... 127 

Prepared Statement of Ivan Petric, Vice-President, Hope Trucking, Inc. .......... 130 

Prepared Statement of the National Association for the Specialty Food Trade, 

Inc. (NASFT) ........................................................................................................ 134 

Prepared Statement of the National Foreign Trade Council, Inc. (NFTC) ......... 137 

Letter from Rebecca Boenigk, CEO & Chairman, Neutral Posture .................... 139 

Prepared Statement of the New York Bankers Association (NYBA) .................. 141 

Prepared Statement of the Organization for International Investment (OFII) . 143 

Prepared Statement of Kathryn Wylde, President & CEO, Partnership for 

New York City ...................................................................................................... 148 

Letter and Article from Marjorie B. Gell, Associate Professor, The Thomas 

Cooley Law School ............................................................................................... 150 

Prepared Statement of Carey J. (Bo) Horne, Past President, and Katherine 

S. Horne, Past Vice President, ProHelp Systems, Inc. ..................................... 154 

Letter from Joan Maxwell, President, Regular Marine, Inc. ............................... 168 

Prepared Statement of the Securities Industry and Financial Markets Association (SIFMA) .................................................................................................... 170 

Prepared Statement of Vernon T. Turner, Vice President, Corporate Tax, 

Smithfield Foods, Inc. .......................................................................................... 171 

Prepared Statement of the Software Finance & Tax Executives Council 

(SoFTEC) .............................................................................................................. 174 

Material from Carley A. Roberts, Chair, Taxation Section, The State Bar 

of California .......................................................................................................... 178 

Letter from Scott George, Chief Executive Officer, Tennessee Commercial 

Warehouse (TCW) ................................................................................................ 198 

Letter from Rebecca J. Paulsen, Vice President, State Tax, U.S. Bancorp ........ 199 

Prepared Statement of the United States Council for International Business 

(USCIB) ................................................................................................................. 203 

(1) 

BUSINESS ACTIVITY TAX SIMPLIFICATION 

ACT OF 2011 

WEDNESDAY, APRIL 13, 2011 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COURTS, COMMERCIAL AND ADMINISTRATIVE LAW, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Subcommittee met, pursuant to call, at 1:34 p.m., in room 

2141, Rayburn Office Building, the Honorable Howard Coble 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Coble, Gowdy, Gallegly, Franks, Cohen, 

Watt, Quigley and Conyers. 

Staff present: (Majority) Travis Norton, Counsel; John Hilton, 

Counsel; John Mautz, Counsel; Allison Rose, Professional Staff 

Member; Ashley Lewis, Clerk; (Minority) James Park, Subcommittee Chief Counsel; Norberto Salinas, Counsel; and Ann 

Woods Hawks, Professional Staff Member. 

Mr. COBLE. The Subcommittee will come to order. 

We have two panels today. The first includes two long time 

friends from the—from my neighbor to the north, Virginia, Representative Bob Goodlatte who represents the Roanoke area, and 

the Valley, I presume, Bob. And Representative Bobby Scott who 

represents the Tidewater area, primarily. Good to have both of you 

here. 

I know Mr. Goodlatte—good to see you, Mr. Cohen. 

Mr. COHEN. Good to be seen. 

Mr. COBLE. Mr. Goodlatte I know has embraced this along with 

Representative Boucher when he was here, and now Mr. Scott has 

taken up the case so we have two formidable allies before us. We 

will be glad to recognize each one of you for 5 minutes, if possible. 

Mr. Goodlatte, we’ll start with you. 

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

Mr. GOODLATTE. Mr. Chairman, thank you very much and Ranking Member Cohen and Members of the Subcommittee. I appreciate 

being invited to testify today about the ‘‘Business Activity Tax Simplification Act’’ which I introduced with my friend and Virginia colleague, Representative Scott. 

This legislation will provide a ‘‘bright line’’ test to clarify state 

and local authority to collect business activity taxes from out of 

state entities. Many states and some local governments levy corVerDate Aug 31 2005 16:47 Jul 21, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\041311\65745.000 HJUD1 PsN: DOUGA
2 

porate income, franchise and other taxes on out-of-state companies 

that conduct business activities within their jurisdictions. While 

providing revenue for states, these taxes also serve to pay for the 

privilege of doing business in a state. 

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

interstate business-to-business and business-to-consumer transactions raise questions over where multistate companies should be 

required to pay corporate income and other business activity taxes. 

Over the past several years a growing number of jurisdictions 

have sought to collect business activity taxes from businesses located in other states, even though those businesses received no appreciable benefits from the taxing jurisdiction. This has led to unfairness and uncertainty, generated contentious, widespread litigation and hindered business expansion as businesses shy away from 

expanding their presence in other states for fear of exposure to unfair tax burdens. 

We need a basic, fair, bright line rule in this area. Previous actions by the Supreme Court and Congress have laid the groundwork for such a bright line rule. In the landmark case of Quill Corporation versus North Dakota, the Supreme Court declared that a 

state cannot impose a tax on an out-of-state business unless that 

business has a ‘‘substantial nexus’’ with the taxing state. However, 

the Court did not define what constituted a ‘‘substantial nexus’’ for 

purposes of imposing business activity taxes. 

In addition, over 50 years ago Congress passed Public Law 86272 

which set clear, uniform standards for when states could and could 

not impose certain taxes on out-of-state businesses when the businesses activities in the state were nominal and only involved the 

solicitation of orders for sales of tangible property. However, the 

scope of Public Law 86272 only extended to activities related to 

tangible personal property. Our Nation’s economy has changed dramatically over the last 50 years and this outdated statute needs to 

be modernized. 

The Business Activity Tax Simplification Act updates the protections of Public Law 86272 to reflect the changing nature of our 

economy by expanding the scope of those protections from just tangible property to include intangible property and services. 

In addition, our legislation establishes a clear, uniform physical 

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

income taxes and other types of business activity taxes on that 

company. 

In our current challenging economic times, it is especially important to eliminate artificial government-imposed barriers to small 

businesses. Small businesses are crucial to our economy and account for a significant majority of new product ideas and innovation. Small businesses are also central to the American dream of 

self-improvement and individual achievement which is why it is so 

vital that Congress enact legislation that reduces the excessive and 

often duplicative tax burdens that hinder small businesses and ultimately overall economic growth and job creation. 

3 

Unfortunately small businesses are often the hardest hit when 

aggressive states and localities impose excessive tax burdens on 

out-of-state companies. These businesses do not have the resources 

to hire the teams of lawyers that many large corporations devote 

to tax compliance and they are more likely to halt expansion to 

avoid uncertain tax obligations and litigation expenses. 

The clarity that the Business Activity Tax Simplification Act will 

bring will ensure fairness, immunize litigation and create the kind 

of—minimize litigation and create the kind of legally certain and 

stable business climate that frees up funds for businesses of all 

sizes to make investments, expand interstate commerce, grow the 

economy and create new jobs. 

At the same time, and it’s important to emphasize, this legislation will protect the ability of states to ensure that they are fairly 

compensated when they provide services to businesses that do have 

physical presences in the state. In addition, the legislation expressly protects the ability of states to use all tools at their disposal to aggressively combat illegal activities, sham transactions 

and other abuses. 

Thank you again for the opportunity to speak to the Committee 

today. 

[The prepared statement of Mr. Goodlatte follows:] 

4 


BG-1.eps
5 

Mr. COBLE. Thank you, Mr. Goodlatte. 

And Mr. Scott, if you will suspend just a moment. The Chair 

wants to recognize the presence of Dan Freeman who served a long 

time as parliamentarian for the House Judiciary Committee. Good 

to have you with us, Dan. 

And now I’m pleased to recognize the distinguished—the other 

distinguished gentleman from Virginia, Mr. Bobby Scott. 


BG-2.eps
6 

TESTIMONY OF THE HONORABLE ROBERT C. ‘‘BOBBY’’ SCOTT, 

A REPRESENTATIVE IN CONGRESS FROM THE STATE OF 

VIRGINIA 

Mr. SCOTT. Thank you, Chairman Coble, Ranking Member 

Cohen, Chairman—former Chairman Conyers and other Members 

of the Committee. 

I appreciate your holding today’s hearing on the Business Activity Tax Simplification Act introduced by my colleague from Virginia, Bob Goodlatte and for providing me the opportunity to testify 

in support of the legislation. 

Business Activity Simplification Act or BATSA has attracted 

strong bipartisan support over the last several Congresses and I 

expect this version to attract the same amount of support. 

BATSA seeks to update a 50-year-old Federal statute that determines when states can impose state income taxes on the sale of 

tangible personal good in the state—over the years states have 

adopted a series of business activity taxes that are proxies for state 

income tax, including gross receipts taxes, licensing arrangements 

and other changes—and other charges that states frequently seek 

to impose on out-of-state companies. 

Some states have enacted overly aggressive and often unfair 

business activity taxes. Businesses in my state have been acutely 

affected by these aggressive business activity taxes. Smithfield 

Foods, located in Congressman Forbes’ district, has had its trucks 

threatened with confiscation by New Jersey tax revenue agents 

simply for driving down the New Jersey Turnpike. Virginia based 

Capital One has joined other financial institutions in becoming 

easy prey for other states and localities seeking to increase their 

tax revenues by targeting out-of-state businesses. Other sectors of 

the Virginia economy, such as manufacturing, information technology, franchising, media industries all have been targeted with 

overly aggressive business activity taxes in other states. 

There is an urgent need to modernize this decades-old law. 

BATSA would clarify the standard governing state assessment of 

corporate income taxes and comparable taxes on businesses. Specifically, the bill will articulate a ‘‘bright line’’ physical presence 

nexus standard that includes either owning or leasing real or tangible property in the state or assigning one or more employees to 

perform certain activities in the state for more than 15 days in a 

taxable year. 

No one is arguing that the business should not be responsible for 

paying taxes where they do business. However, BATSA would ensure fairness, minimize costly litigation for both state governments 

and taxpayers, reduce the likelihood of a business being double 

taxed on the same income, and create the kind of legal certainty 

and stability for business environment that encourages businesses 

to make investments, expand interstate commerce and create new 

jobs. 

More importantly, the bill would unsure that businesses continue 

to pay business activity taxes to states that provide them with direct benefits and protections. 

I appreciate the Subcommittee’s focus on this timely matter and 

look forward to working with you as we pass this important legislation, hopefully during this session of Congress. 

7 

[The prepared statement of Mr. Scott follows:] 


Scott-1.eps
8 


Scott-2.eps
9 


Scott-3.eps
10 

Mr. COBLE. I thank each of you for being with us. We normally 

don’t examine Members, so I assume does anyone have questions 

for the Members? We usually—gentleman from Illinois? 

Mr. QUIGLEY. Just for a point of clarification, how would you two 

gentlemen distinguish most of the taxes you’re talking about that, 

as you say, could be very burdensome just for driving down the 

New Jersey Turnpike, for example, and the much more controverVerDate Aug 31 2005 16:47 Jul 21, 2011 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\041311\65745.000 HJUD1 PsN: DOUGA

Scott-4.eps
11 

sial aspect of the transaction tax dealing with the Internet and how 

some states and local governments are reacting to the fact that 

their retailers are closing down because so much more of those 

sales are taking place on the Internet and the shortfall that it is 

creating? 

Mr. GOODLATTE. Well, if the gentleman would allow? This legislation is neutral as between bricks and mortar entities and online 

entities. You’ll find pretty much widespread business support from 

both groups. 

As you know, with relation to sales taxes online, there’s a great 

division there between those who do business within an individual 

state and required by state law, because they do have that nexus 

with the state, and entities that operate from a greater distance. 

This does not address that issue in any way, shape or form. It 

would not limit the ability of the Congress to change the—as you 

know, right now the Congress has never provided the necessary 

finding of nexus to allow a state to require a company in another 

state to collect sales taxes. They’re left with having to try to collect 

that from the individual who owes the tax and that of course is a 

too burdensome way to collect it. 

Some of us have suggested that the states should work together 

to come up with a single definition of what is taxable and perhaps 

even a single interstate sales tax so that if you’re a small business 

doing business online, you’re not talking about having to know the 

tax in not just 50 states but thousands of sub-jurisdictions that 

have add on sales taxes. So that is a separate, complicated issue 

and is not addressed here. 

Mr. QUIGLEY. Thank you. I yield back. 

Mr. COBLE. Any other questions for the Members? 

Mr. Cohen? 

Mr. COHEN. Since we have two fine gentlemen from the Commonwealth, I’d like to ask you what you think Mr. Jefferson would 

think of this bill and why. 

Mr. SCOTT. He would think—I think he would like the bill. It’s 

a fine piece—— [Laughter.] 

Mr. COHEN. Great answer. 

Mr. COBLE. Mr. Cohen, you asked for that one. 

Gentlemen, good to have both of you with us. 

Trey, did you have any questions? 

Mr. GOWDY. No, sir, Mr. Chairman. 

Mr. COBLE. You’re excused, gentlemen. Good to be—good to have 

you with us. 

I’ll give my opening statement and then I’ll recognize Mr. Cohen 

and Mr. Conyers after that and then we’ll proceed with our other 

panel. 

Benjamin Franklin once remarked that nothing is certain in this 

world except death and taxes. But while taxes are necessary to 

fund the essential government operations, they should not be imposed arbitrarily or unfairly, especially on America’s small businesses which create the majority of jobs in this country. 

The Dormant Commerce Clause prohibits states from imposing 

taxes on entities that lack a substantial nexus to the taxing state. 

In the 1922—strike that. In the 1992 Quill decision, the Supreme 

Court held that a state could not impose a sales or use tax on a 

12 

business that was not physically present in the taxing state. Since 

then some courts have held that the physical presence standard 

does not apply to the imposition of net income or other business activity taxes. 

As a result, each state’s standard for what constitutes substantial nexus for net income taxes varies. Some states like Texas and 

Tennessee hold that the physical presence standard applies, but 

the majority of states allow taxation of net income if there is merely an economic nexus between the state and the taxpayer. 

Some businesses are thus faced with a lose/lose situation. They 

may hire expensive accountants and tax attorneys to decipher the 

tax laws of the states in which they transact business to determine 

whether they have tax liability, but most small businesses lack the 

resources to do this. Those that do find such resources pass the cost 

on to the consumers in the form of higher priced goods and services. Our small businesses can reasonably conclude that they are 

not liable to pay taxes in a state because they transact only very 

limited business there, but under this approach, if a state later 

concludes that taxes should have been paid, the business will 

owe—likely will owe penalties in addition to back taxes. 

In my opinion, there’s a substantial need for a clear rule for what 

a state may impose in net income or other business activity tax. 

H.R. 1439, the Business Activity Tax Simplification Act of 2011, 

does just that. It clarifies that a state may not impose such a tax 

on a business that lacks physical presence in the state. 

BATSA also updates a law Congress passed in 1959 which prohibits states from taxing businesses merely because they employ 

salesmen who travel to the states selling tangible goods. That was 

52 years ago. In the modern American economy services and intangible goods play a significant and larger role than they did in 1959. 

There’s no good reason, it seems to me, to discriminate between 

tangible and intangible goods in this regard, so we ought to update 

that law. 

It is important to note that BATSA does not require states or localities to reduce their taxes, rather it gives small businesses some 

certainty about their tax liability so they can adequately budget 

their resources, and to the extent possible, create more jobs. 

This is not the first time this Committee has considered BATSA, 

but state taxation is an important issue and I am pleased to take 

it up once again. 

Again, we thank Mr. Goodlatte and Mr. Scott for having been 

with us. And I am now pleased to recognize the distinguished gentleman from Tennessee, Mr. Steve Cohen, the Ranking Member. 

[The bill, H.R. 1439, follows:] 

13 


HR1439-1.eps
14 


HR1439-2.eps
15 


HR1439-3.eps
16 


HR1439-4.eps
17 


HR1439-5.eps
18 


HR1439-6.eps
19 


HR1439-7.eps
20 


HR1439-8.eps
21 


HR1439-9.eps
22 


HR1439-10.eps
23 

Mr. COHEN. Thank you, Mr. Chairman. Three years ago the subcommittee on Commercial and Administrative law held a hearing 

on legislation substantially similar to this bill, H.R. 1439, the 

‘‘Business Activity Tax Simplification Act of 2011.’’ At that time I 

noted the issues that BATSA was trying to address were complex 

ones. What should be the proper scope of a state’s authority to impose a corporate income tax or other similar tax on a particular 

company based on the company’s business activity in that state? 

What role should Congress play in defining that scope? And those 

were the primary issues. 

The constitution requires a sufficient nexus to exist between a 

state and a business’ in-state activity in order for that state to be 

able to tax that business. The Supreme Court, however, has been 

ambiguous as to what that nexus is in the business activity tax 

context. 

In 2008 I heard what I thought were some valid concerns expressed about the adoption of a physical presence standard as the 

only determinative of whether a given business had sufficient 

nexus with a state for business activity tax purposes. I also called 

upon interested stakeholders to use the bill’s introduction as an opportunity to reach a consensus on a clear and uniform national 

standard for state taxation of business activity. Unfortunately that 

does not seem to be what has occurred in the intervening time. So 

here we are. 

I agree with proponents of H.R. 1439 that a uniform national 

standard that determines when a state can tax business activity 

will provide useful clarity and reduce the cost of doing business. 

But by expanding the limitations on taxable business activity 

under Federal law, and by once again adopting physical presence 

in a state as the sole basis for what a state tax business activity, 

I am concerned that H.R. 1439, if enacted would cost states to potentially lose billions of dollars in tax revenue that they should be 

entitled to. This revenue loss in turn threatens to undermine critical state and local government services and adversely impact employees. 

The physical presence standard concerns me, because it appears 

to be too restrictive, does not fully capture business activity that 

a state legitimately, constantly should be able to tax. Adoption of 

the physical presence standard threatens to prohibit taxation of activities that currently states can tax. 

The standard limits the scope of a state’s authority to impose a 

corporate income tax or other business activity in one of three situations. Where business is physically present in the state or is assigned one or more employees in the state. Secondly, where the 

business uses the service of an agent to establish or maintain the 

market in a state. Or, the business leases or owns tangible personal or real property in the state during the relevant tax year. 

I fear that this narrowly crafted standard allows businesses simply to game the system, by for example, making all employees independent contractors or allowing banks to conduct online businesses 

in all states while avoiding taxes on such activity, because they 

lack tangible property in most states. 

I feel like a TV show with background action. It’s very difficult. 

24 

Worse yet, according to a Congressional Budget Office cost estimate prepared in 2006 for an earlier, but substantially similar 

version of BATSA, the act would concentrate 70 percent of revenue 

losses in just ten states. One of those states would be Michigan, 

home of the Wolverines. Another would be Texas. Whatever. And 

the other is Tennessee, that matters. 

I noted that at least one alternative to physical presence as a 

uniform standard has been proposed by the Multistate Tax Commission. I do not take a view on the merits of that alternative proposal. I simply note that—and reiterate my point from 3 years ago, 

which is that while uniform standard of business activity taxes and 

the clarity and certainty it provides are valuable, that uniform 

standard must be one that is fair to all who would be impacted. 

H.R. 1439 does not appear to meet that goal. 

With that, I yield back the remainder of my time. 

Mr. COBLE. And I apologize to you, Mr. Cohen, for having talked 

behind your back. We had to get some preliminaries out of the way. 

Mr. COHEN. It was the physical dance I had to do which was 

more difficult—— [Laughter.] 

But there was the challenge, and I appreciate rising to their—— 

Mr. GOWDY. Physical presence. 

Mr. COHEN [continuing]. Right, it was physical presence. 

Mr. COBLE. The distinguished gentleman from South Carolina 

has no opening statement. 

Mr. Conyers, the distinguished gentleman from Michigan is recognized for 5 minutes. 

Mr. CONYERS. Thank you, Chairman Coble. 

Ladies and gentleman, imposing a physical presence standard 

would drastically alter the taxing landscape as we know it. With 

respect to past legislation similar to this, surveys have estimated 

that lost state tax revenues might be as high as $8 billion in the 

first year following enactment, and that was an estimate from several years ago. The impact might be even more damaging now. 

If this legislation has a similar negative impact on the states I 

wonder how any of us can support it. The states are already getting Federal budget cuts all over the place and now we want to 

make sure that we increase the stress and the dire circumstances 

that they find themselves in. This is legislation that might possibly 

eviscerate some state revenues. We would, in effect, be turning our 

back once again on state governments. We would be forcing state 

governments to eliminate valuable governmental programs and 

services and furlough dedicated government workers, some are already doing it. We should shudder at the impact of a potential loss 

of $8 billion on top of the lost tax revenue base the states have suffered in the last few years. 

I don’t know if there is support enough to pass a legislative 

measure which would undercut states’ abilities to tax activity within its borders. In this case, Congress should not step in and impose 

a damaging physical presence standard for activities which a state 

may have the constitutional right already to tax. 

An $8 billion loss to the states which have already suffered extensively during this economic downturn, would further hamper 

economic—the economic rebound that people keep looking and hoping and praying will occur. And when you consider the Federal cuts 

25 

to state and local assistance, which the Ryan budget will obviously 

lead to, our state and local governments would be suffering, in my 

view unnecessarily, for years to come. 

So while Congress must ensure that the states do not burden 

interstate commerce through their taxing authority, the authority 

of states to tax activity within their borders must be respected. 

Why not? And unfortunately the proposal that we are examining 

does not seem to balance these competing interests. 

And with that, Chairman Coble, I return any unused time. 

Mr. COBLE. I thank the gentleman. 

I am told that there will be an imminent vote on the floor in a 

matter of minutes, but we will go ahead and start. 

I will invite the witnesses, if they will assume their seated position at the table and I will introduce the witnesses. 

We have a very favorable group of three panelists who will be us 

today. 

Mr. Corey L. Schroeder is vice president and chief financial officer of Outdoor Living Brands, a multi-brand franchise company 

dedicated to products and services within the outdoor living market. As VP and CFO of Outdoor Living Brands, Mr. Schroeder is 

responsible for the financial reporting and management of the business overseeing franchise compliance matters and working to support the strategic direction of the company. 

Prior to the formation of Outdoor Living Brands, Mr. Schroeder 

served as vice president and CFO of U.S. Structures, Inc., also a 

franchise company. 

Mr. Schroeder holds a bachelors degree in business administration with a concentration in finance from the University of Richmond and a masters degree in accounting from the College of William and Mary. He also holds a designation of chartered financial 

analyst. 

Our second witness is Mr. Bruce Johnson who is the Utah governor—in 2009 Utah Governor Gary Herbert appointed Bruce 

Johnson to serve as chairman of the Utah State Tax Commission. 

He has been a commissioner since 1998. The Tax Commission has 

the constitutional duties to administer all—and supervise all the 

tax laws of the state, including property tax, income tax, franchise 

tax, sales tax and all miscellaneous taxes. 

Prior to his appointment, Mr. Johnson litigated numerous tax 

disputes as a private attorney and as a trial attorney for the Tax 

Division of the United States Department of Justice. 

He’s a CPA and holds a degree in accounting from the University 

of Utah. Mr. Johnson also served on numerous boards and testified 

before legislative bodies. He was, as well, the founding national cochair of the Streamlined Sales Tax Project. 

Our final witness today, Mr. Joseph Henchman. Mr. Henchman 

is a tax counsel and director of state projects at the Tax Foundation a nonprofit organization dedicated to educating taxpayers 

about all aspects of tax policy. He joined the Tax Foundation in 

2005. 

Mr. Henchman’s analysis of fiscal trends, constitutional issues 

and tax law developments has been featured in numerous print 

and electronic media, including The New York Times, The Wall 

Street Journal, CNN and Fortune magazine. 

26 

Of particular relevance to this hearing, in 2007 Mr. Henchman 

published an article in a popular state sales periodical entitled, 

‘‘Why the Quill Physical Presence Standard Should Not Go Away— 

Should Not Go the Way of Personal Jurisdiction.’’ 

Mr. Henchman was graduated from the University of California 

at Berkley with a degree in political science and a law degree from 

the George Washington University. 

Gentlemen, good to have you with us. We operate on a 5-minute 

rule, gentlemen. The panel before you, the green light will expire 

at the conclusion of 4 minutes. And you will see an amber light 

then which is your notice to—if you can start wrapping up at that 

time we would be appreciative. And we try to apply that 5 minute 

rule to us as well on this side of the podium. 

Mr. Schroeder, why don’t you start us off? 

TESTIMONY OF COREY SCHROEDER, VICE PRESIDENT AND 

CFO, OUTDOOR LIVING BRANDS, INC. (RICHMOND, VA), ON 

BEHALF OF THE INTERNATIONAL FRANCHISE ASSOCIATION 

Mr. COBLE. Mr. Schroeder, I know either your mic is not on or 

is not close to you. 

Mr. SCHROEDER. How is that? 

Mr. COBLE. That’s better. 

Mr. SCHROEDER. Thank you. Thank you again for providing me 

the opportunity to voice my support for the Business Activity Tax 

Simplification Act of 2011. And thank you also to Congressmen 

Scott and Goodlatte, from my home state of Virginia, for introducing the bill. 

I’m speaking today on behalf of Outdoor Living Brands located 

in Richmond, Virginia. We currently operate three franchise brands 

with 181 locations in 34 states and have 28 employees. 

I’m also here today on behalf of the International Franchise Association, the largest and oldest franchising trade group representing more than 90 industries, more than 13,000 members nationwide. And according to a study done for the IFA by Price 

Waterhouse Coopers, there are over 825,000 franchise businesses 

across 300 different business lines providing nearly 18 million 

American jobs and generating over $2.1 trillion for the American 

economy. 

The Business Activity Simplification Act of 2011 addresses a significant issue within the franchise community relating to state income tax reporting. Franchise businesses face a very confusing and 

ever changing set of rules regarding the obligation to file state corporate income taxes. The primary issue is the different and changing definitions of nexus to establish—established with various 

states for our business activities. 

Once nexus is established we must begin filing state corporate 

income tax returns for that portion of our revenue that we generate 

from that state. Like Outdoor Living Brands, most franchisors do 

not own any real property in the states which our—in which our 

franchisees operate. We only have, in my case, a physical presence 

in the State of Virginia. 

However, central to the concept of our business in franchising is 

the relationship with our franchisees and primarily our shared 

trade identity of our brand. We license that trade identity and that 

27 

intellectual property and business plan to local entrepreneurs, as 

well as support them in growing and building their business and 

providing jobs in their local markets and their various states. 

Many states, however, now are concluding that the very existence of our brand and our intellectual property or even the physical 

existence of our training manuals in their states is establishing 

nexus. And I understand the desire for states, in this fiscal environment, to need to generate and want to generate revenue from 

out-of-state businesses, however, the local outcome of this view on 

nexus, for a company like Outdoor Living Brands, is that we would 

file 34 different state tax returns and less than 10 percent of our 

revenue would be taxed in the state of Virginia where we operate. 

Franchising is already a very heavily regulated business model and my small firm spends close to $100,000 a year in legal, accounting and tax advisory fees. It does not—that does not include 

the time of myself or the folks on my team, and these are precious 

resources that we would like to be using to help grow our 

franchisees and our businesses. 

Currently my firm files income taxes in six states. With various 

nexus and standard enforcement practices changing I expect the 

costs and administrative burden of this particular issue to continue 

to grow. My most recent experiences with it was with the State of 

South Carolina and Minnesota who both sent me business activity 

questionnaires. These lengthy questionnaires, to which I answered 

no to almost every activity described, were in the end determined 

that it was simply the existence of my franchise agreement and the 

royalty revenue derived in that state that required nexus and I had 

to file several years of past returns. 

One state in particular, South Carolina, a South Carolina revenue agent described for me how he found our business by creating 

a mass mailing list of franchise companies like mine, using a marketing website service that the franchising industry it commonly 

uses to sell franchises. 

As a franchisor I have very little visibility on what the nexus 

rules are in each state and when they change and why they 

change. And South Carolina’s activity was based on a court case 

that happened in that state. 

Iowa just recently announced a similar change due to a court 

case. And I expect I will be getting a questionnaire from them and 

I will deal with them in—as the questionnaire comes up. 

And this raises the issue of managing this issue. For a small 

business like mine, managing this issue is rife with uncertainty 

created by this environment. I could proactively engage another tax 

advisor and have them go seek out all the 34 states where I have 

franchisees and determine which ones would have nexus with me. 

I am sure that the states would gladly agree that I have nexus. 

And then I could pay that tax advisor even more to continue to fill 

out more and more tax returns in the various states. 

I could be passive, which is what I think most franchisors in my 

situation do, where we wait for the next franchise activity questionnaire to come in and we respond to it accordingly. 

To sum up, earlier in my career I worked in investment banking 

and I advised a number of private businesses in a lot of different 

industries with far broader business activities in different states 

28 

than what we experience in franchising. And franchising is the 

only business I have come across where we face this level of complexity and this burden of state tax compliance. 

So, I hope this testimony has been helpful in illustrating the difficulty that franchise businesses face across the country related to 

this. And I hope we can work together to pass the Business Activity Simplification Act. 

Thank you. 

[The prepared statement of Mr. Schroeder follows:] 


CS-1.eps
29 


CS-2.eps
30 


CS-3.eps
31 


CS-4.eps
32 


CS-5.eps
33 


CS-6.eps
34 


CS-7.eps
35 


CS-8.eps
36 

Mr. COBLE. Thank you, Mr. Schroeder. 

Mr. Johnson? 


CS-9.eps
37 

TESTIMONY OF R. BRUCE JOHNSON, CHAIRMAN, UTAH STATE 

TAX COMMISSION (SALT LAKE CITY, UT), ON BEHALF OF THE 

FEDERATION OF TAX ADMINISTRATORS 

Mr. JOHNSON. Chairman Coble, Vice Chairman Gowdy, Ranking 

Member Cohen and Members of the Committee, thank you for the 

opportunity to address this issue today. I am Bruce Johnson, chair 

of the Utah State Tax Commission. Today I am testifying on behalf 

of the Federation of Tax Administrators which is an association of 

tax administration agencies in each of the 50 states, the District 

of Columbia and New York City. 

This is not a greedy states versus poor taxpayer bill. This is a 

bill about large multistate businesses versus small local businesses 

and how a state can allocate its tax base and its tax burden among 

the entities doing business in the state. That is what it is about. 

It is also a bill about Federal preemption of state sovereignty and 

when it is appropriate for the Federal Government to limit a state’s 

sovereign power to raise its revenue as it sees fit through its local 

elected officials. 

We have already heard some discussion about the estimated revenue impact of this bill. The Congressional Budget Office said it 

would result in a $3 billion annual revenue loss, that’s the 2005 

predecessor of this bill. The NGA has substantially larger estimates. But that is not revenue that is going to go away, that is revenue that is going to be shifted if we can’t tax the fair share of 

interstate businesses that do business in our state. That tax is 

going to be shifted to our local businesses and our local taxpayers. 

It is going to have a devastating impact on small business. 

The U.S. Supreme Court has held that a company meets the jurisdictional standard of substantial—or sufficient contacts if it is 

doing business in the state or otherwise engaged in establishing 

and maintaining a market in the state. This bill purports to establish a physical presence standard which has never been the law for 

income taxes or business activity taxes. But I suggest it is not even 

a physical presence standard. If you look at Public Law 86–272, 

which the proponents of the bill seek to expand, 86–272 allows a 

business to have permanent employees in a state, driving company 

cars on state roads, and as long as they are not engaged in activities other than the solicitation of sales, that physical presence has 

to be ignored and the state can’t tax that business even though it 

clearly has physical presence there. 

This bill would seek to extend that preemption not only to the 

solicitation of sales of tangible personal property, but to the solicitation of services, to the solicitation of sales of intangible property, 

to the gathering of information in a state, to the furnishing of information to customers in the state. It would say that 15 days in 

the state is not physical presence. That may be a reasonable de 

minimis test for many taxpayers, but it also says if the activity of 

the business, the physical presence is for a limited or transient 

business purpose, it can be longer than 15 days. 

Now I don’t know what a limited or transient business purpose 

is. And I don’t see how that provides clarity to our taxpayers. In 

a multi-level company that manufacturers, distributes and retails, 

is a warehouse in the state just a limited purpose? It may well be 

under this law. 

38 

Moreover, activities of subsidiaries can easily be ignored with a 

little bit of structuring. I had the privilege of representing taxpayers for over 17 years and I can tell you that under the provisions of this bill I could substantially reduce the tax obligations of 

many taxpayers in Utah that have a physical presence through 

the—merely by setting up a subsidiary, a toy company could—that 

has a 5-percent profit margin in the state could set up an intangible holding company in Delaware, charge a 2-percent royalty and 

cut its taxes in Utah by 40 percent even though it continued to 

have a store in Utah. It could set up a 3-percent royalty and cut 

its taxes by 60 percent, even though it continued to have physical 

presence in Utah. 

I acknowledge the need for more clarity. This bill unfortunately 

is fatally flawed in many ways and I urge you to oppose the bill. 

Thank you. 

[The prepared statement of Mr. Johnson follows:] 

39 


RBJ-1.eps
40 


RBJ-2.eps
41 


RBJ-3.eps
42 


RBJ-4.eps
43 


RBJ-5.eps
44 


RBJ-6.eps
45 


RBJ-7.eps
46 


RBJ-8.eps
47 


RBJ-9.eps
48 


RBJ-10.eps
49 


RBJ-11.eps
50 

Mr. COBLE. Thank you, Mr. Johnson. 

Mr. COBLE. Mr. Henchman? 

TESTIMONY OF JOSEPH HENCHMAN, TAX COUNSEL AND DIRECTOR OF STATE PROJECTS, THE TAX FOUNDATION 

(WASHINGTON, DC) 

Mr. HENCHMAN. Thank you. Mr. Chairman, Ranking Member 

Cohen, Ranking Member Conyers and Members of the Subcommittee. I appreciate the opportunity to testify today on legislation pending before you on state tax actions that impact interstate 

commerce. 

Let’s say you have a retired congressman, he hires a research assistant, he decides to write his memoirs. So he rents a little office 

in a business park in Virginia. He hires a research assistant, a Virginian. He buys some computers and some printers from a Virginia 

company. And every day for a year he sits in that Virginia office 

writing his memoirs. And at the end of the year he sells the finished manuscript to a New York publisher. 

Where did he earn that income? An economist will tell you that 

the congressman earned the income where he invested his capital 

and his labor, which is, in this case, Virginia. This is what is 

known as the ‘‘benefit principle,’’ the idea that the taxes people pay 

are linked to the government services they receive. In other words, 

individuals and businesses should pay taxes where they work and 

live and jurisdictions should not tax those who don’t work and live 

there. 

While a physical presence rule for taxation is the norm in the 

international context and is the historical norm 

for state taxation here in the United States, we at the Tax Foundation have been monitoring increasingly aggressive state efforts to 

reject this rule so as to shift tax burdens away from residents toward non-residents. 

This is not entirely new. States have always had this incentive, 

to the detriment of the national economy. In fact in the time of the 

founding the use of tolls and taxes by states in this regard were 

a primary reason why we had the Constitutional Convention in the 

first place. And out of that convention it was decided that the free 

flow of goods and services is so important and it matters more than 

letting states tax certain types of transactions, that you, the Congress, have been empowered to preempt some state actions in that 

regard, for restraining the states from enacting laws that disrupt 

the national economy by discriminating against interstate commerce. 

It is not a power to use lightly, but it rests with you because 

states have no incentive to get together and resolve this on it own. 

On the contrary, each state thinks it can get a bigger share of the 

national tax pie by adopting an aggressive nexus standard. But 

these—this leaves us all poorer because all businesses, large and 

small, must deal with complex tax regulations, uncertainty about 

what activities create tax obligations in different states, lack of uniformity between different states in tax rules and formulas and generally wasting significant amounts of time, wealth and brain power 

navigating tax compliance rather than doing more productive 

things. 

51 

These state actions deter new investment by domestic and foreign businesses who want no part of this quagmire and take their 

dollars and their jobs overseas. State spending overwhelming, if not 

exclusively, exists to benefit the people who live and work in the 

state. Education, health care, roads, police protection, the reasons 

states do these things is to benefit the residents. Residents should 

be willing to pay for these services that they demand. Instead, 

what we see are many states offering tax credits and waivers to select residents, businesses and individuals, while insisting on going 

off out-of-state corporations that engage in sales in the state. This 

is backwards and it is a violation of good tax policy. A physical 

presence standard for business activity taxes would correct this 

and be in line with the benefit principle which is a fundamental 

view of taxation. 

As a country we have gone from the artisan to Amazon.com. But 

this sophistication of technological progress does not change the 

fact that state services are still based on physical geographic borders, so the tax system should be too. 

And state fiscal pain does not justify overruling timeless constitutional principles, such as the idea that states shouldn’t be allowed to burden interstate commerce and impose uncertainty in the 

national economy. 

Sometimes small businesses call up my office, as I am sure they 

call up the other members of the panel, asking if I engage in activities in a state, what would create nexus. And the only reason answer I have for them is to send them this. This is BNA’s annual 

survey of state tax actions. It is the questionnaire that Mr. Schroeder talked about where they ask I think it is over 100 questions 

of, would this activity create nexus, would this activity create 

nexus. This is—this should not be how we do our system. There 

has to be a better way. 

Thank you. 

[The prepared statement of Mr. Henchman follows:] 

52 


JH-1.eps
53 


JH-2.eps
54 


JH-3.eps
55 


JH-4.eps
56 


JH-5.eps
57 


JH-6.eps
58 


JH-7.eps
59 


JH-8.eps
60 

Mr. COBLE. Thank you, gentlemen for your testimony. We appreciate you being with us. We will now examine the witnesses. 

Mr. Schroeder, how has the uncertainty and lack of predictability 

concerning different states’ nexus requirements affected your small 

business? 

Mr. SCHROEDER. Yeah. In my case it is simply a matter of management time and attention and as well as the cost and expense 

of trying to comply. We spend, as I mentioned, you know, over— 

almost a $100,000 a year in our already highly regulated business, 

and that is dollars and time and attention that is not spent on 

growing our business, launching new franchisees or developing new 


JH-9.eps
61 

business concepts. And it is simply a matter of I don’t know what 

the rules are, I probably could benefit from that and it would take 

even more of my time to figure out which of the 34 states I operate 

in I should be filing state tax returns in. 

Mr. COBLE. Thank you, sir. 

Mr. Johnson, is it your position that states should be entitled to 

discriminate against a company based on whether it sells tangible 

goods or intangible goods and services? 

Mr. JOHNSON. That is certainly not my position, Mr. Chair. In 

fact that is imposed on us by Public Law 86–272. And again—— 

Mr. COBLE. Now we—Mr. Johnson, would you oppose modernizing Public Law 86–272? 

Mr. JOHNSON. Well, if a physical presence is what is sought, and 

I don’t believe a physical presence test is appropriate, I don’t believe we should go back to the way the last—business was conducted in the last century to impose taxes in the new century, but 

if you want a physical presence standard, you have to repeal 86– 

272, because 86–272 allows a physical presence and protects it 

from taxation, as long as the activities are limited to the solicitation of sales of tangible personal property. 

So if a physical presence is sought, then repeal of 86–272 is required. 

Mr. COBLE. Well I thank you, sir. 

Now Mr. Henchman, speaking of physical presence, why do you 

believe that a physical presence standard for net income and other 

business activity taxes is consistent with the holding of Quill? If 

you do believe that. 

Mr. HENCHMAN. I do believe that. The Quill decision, of course, 

by its own terms was restricted to sales taxes. And as Congressman Goodlatte’s answer to Representative Quigley earlier indicated, this bill does not address sales taxes one way or the other, 

because I know different people have different views on that. It just 

deals with business activity taxes and the view that the physical 

presence—and for me it just comes down to the basic economics as 

I said in my testimony. The residents of a state benefit from the 

services provided by a state. And to the extent a state is providing 

benefits to nonresidents, maybe they ought to be voted out of office 

because the reason you get elected to office is to provide benefits 

to your residents that vote for you. And those are the people that 

should be paying taxes to support those services. 

Mr. COBLE. I thank you, gentlemen. 

The Chair recognizes the distinguished gentleman from Michigan. I yield back my time, by the way. Mr. Conyers is recognized 

for 5 minutes. 

Mr. CONYERS. Thank you, Chairman Coble. 

Mr. Johnson, is—are there any tax avoidance opportunities that 

we ought to frankly talk about here? It has been said that we 

might create tax planning opportunities to eliminate tax—state 

taxation revenues that are earned in a state. Can you amplify? 

Mr. JOHNSON. Yes. Thank you, Congressman. 

As I indicated, I practiced for 17 years representing businesses, 

many of them large businesses. And if this bill were passed in its 

current form it would be malpractice for me not to recommend a 

number of structuring techniques. 

62 

One of the simplest would be to take the issue of a toy store, 

Toys R Us, for example. And I use that example because it is the 

subject of some well known litigation. For any retailer—— 

Mr. CONYERS. Does some of that litigation—— 

Mr. JOHNSON [continuing]. Doing business in the state—— 

Mr. CONYERS. Does some of that litigation involve tax avoidance? 

Mr. JOHNSON. Yes, it does. By creating an intangible holding 

company and charging a royalty, then a company can essentially 

eliminate its profits in a state or reduce them dramatically by paying a royalty to a holding company in Delaware or offshore and deducting the royalty which can completely eliminate its profit margin in the state. That would be a simple example. 

Another example would be creating a—if I had a business that 

was selling software for payroll and software for accounts receivable, for example, and part of my business model was to be able 

to repair and install that software and say I got a third of my revenue from each of those things, I would simply create three different subsidiaries. The repair subsidiary would then become subject to Utah tax. I could structure the sales of the payroll subsidiary and the sales of the accounting subsidiary to be exempt 

from Utah tax. I could cut my Utah tax in—by two-thirds by the 

simple expedient of creating three separate subsidiaries. 

Mr. CONYERS. Any Federal tax opportunities involved? 

Mr. JOHNSON. Well, the Federal tax—this same kind of planning 

goes on at the Federal level. 

Mr. CONYERS. It could be local or Federal taxes? 

Mr. JOHNSON. Yes. 

Mr. CONYERS. Okay. 

Mr. JOHNSON. But this would provide a blueprint for legitimized—and tax planning is something we recognize is legitimate. 

Mr. CONYERS. Well—— 

Mr. JOHNSON. A company has no moral obligation—— 

Mr. CONYERS [continuing]. Look, we just left the Wall Street debacle and there were some tax organizations that didn’t do very 

well in those investigations. 

Mr. JOHNSON. There is definitely a line that can be crossed. But 

this would authorize many of these techniques. 

Mr. CONYERS. Well, you have sufficiently disturbed me with this 

information. 

Thanks, Chairman. 

Mr. COBLE. Thank you, Mr. Conyers. 

I say to my Members, we are going to have a vote here soon. I 

think we can probably wrap this up. 

I am now recognizing the distinguished gentleman from South 

Carolina. 

Mr. GOWDY. Thank you, Mr. Chairman. 

Mr. COBLE. I almost demoted you, Trey. 

Mr. GOWDY. And California would never allow me to set foot in 

that state, Mr. Chairman, I don’t think. I am sure I have warrants 

pending. 

Mr. Henchman, the substantial nexus test, how—what are the 

elements of it, how is it applied today? 

Mr. HENCHMAN. It is laid out in the—for—in this case it is laid 

out in the bill and essentially—it is essentially property and payVerDate Aug 31 2005 16:47 Jul 21, 2011 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\041311\65745.000 HJUD1 PsN: DOUGA
63 

roll. And I do want to indicate that it is a substantial nexus test, 

not the sufficient context test used for personal jurisdiction, as Mr. 

Johnson indicated, that is a completely less—that is a lower standard that the Supreme Court has never held to be the case for tax 

purposes. 

Mr. GOWDY. Are there limits to Congress’ ability to regulate state 

tax structures? 

Mr. HENCHMAN. This bill does not address that, so—— 

Mr. GOWDY. In your judgment, are there limits to what we can 

do with respect to state tax structures? 

Mr. HENCHMAN. Well, the Constitution permits the Congress to 

regulate commerce as it sees fit. 

Mr. GOWDY. Yeah, but that is a very amorphous, increasing elastic—— 

Mr. HENCHMAN. It is. 

Mr. GOWDY [continuing]. Term. 

Mr. HENCHMAN. It is. And in terms of preempting certain state 

activities, I think even a limited reading of the Commerce Clause 

finds that power existing with Congress. There are—— 

Mr. GOWDY. Mr. Johnson, you—— 

Mr. HENCHMAN [continuing]. Probably a lot of things you 

could—— 

Mr. GOWDY. Let me ask, Mr. Johnson. What are the limits as you 

see them? Because I didn’t write the note down and at my age my 

memory slips, but you questioned, perhaps or maybe I misunderstood you, whether Congress would have the authority to do certain 

things with respect to state tax structures or perhaps—I don’t want 

to put words in your mouth. What do you think about it? 

Mr. JOHNSON. I think there are certainly—I think there are certainly steps that Congress could take that would be so extreme 

that they could be struck down as unconstitutional. P.L. 86272 has 

not been challenged, to my knowledge, so I don’t—our position is 

not that this bill would be unconstitutional, our position is that just 

because the Federal Government may have the authority to impose 

this bill doesn’t mean it is a good idea. 

Mr. GOWDY. What remedy would you propose? 

Mr. JOHNSON. I would echo the comments of Congressman 

Cohen. I would like to see the businesses get together with the 

states and have a brighter line standard. I think it should include 

sales, but I think there should be some clear de minimis standards. 

I tried to propose something in Utah and I didn’t get much support from anyone, either on the business side or from my legislators on it. But I—as someone who, again, has represented taxpayers, I do think more certainty in the area would be appropriate. 

And I would encourage states to adopt brighter line standards. But 

I think the states should be able to do so based on their own elected legislators. And I would encourage the business community to 

work with the states in accomplishing that. 

Mr. GOWDY. Mr. Henchman, what would be your perspective on 

that remedy? 

Mr. HENCHMAN. Well, I would say there is no incentive the 

states will ever do that. And on the contrary, the incentive is to 

move away from apportionment—away from uniformity. And we 

have seen that in apportionment, where back in the ’50’s Congress 

64 

and through the Willis Commission threatened, look, this is a mess 

in apportionment, and so you guys just need to adopt a standard 

otherwise we are going to do it for you. And it took until a bill 

nearly being passed by Congress for the states to get together and 

adopt a uniform standard. 

And since Congress has moved to other matters, the states have 

now wandered off and now we have all these different apportionment standards. That is the way states go on these things. It is 

going to take Congress or the courts to impose uniformity, the 

states are not going to do it on its own. 

Mr. GOWDY. Mr. Schroeder, I am from South Carolina and if I 

can help you navigate that form, I will be happy to try and help, 

but thank you for doing business in South Carolina. 

And with that I would yield back the remainder of my time, Mr. 

Chair. 

Mr. COBLE. I thank the gentleman from South Carolina. 

The gentleman from Tennessee, Mr. Cohen is recognized. 

Mr. COHEN. Thank you, sir. 

Are all of you all familiar with the Section 4 of this H.R. 1439? 

Mr. Johnson, you are? 

Mr. JOHNSON. Pardon me? 

Mr. COHEN. Section 4, the new section in H.R. 1439? 

Mr. HENCHMAN. The Joyce Finnigan Provision I think? 

Mr. JOHNSON. Yes. 

Mr. COHEN. You’re familiar with it then. What do you think 

about it, sir? It was not in the prior Business Activities Simplification Act. 

Mr. JOHNSON. Well—— 

Mr. COHEN. How does that impact state governments? 

Mr. JOHNSON. To—a simple example would be the—under the 

prior versions of the bill the technique I talked about where you 

would set up an intangible holding company for trademarks, that 

would not have worked in Utah, because we are a combined state. 

We would have taken the position that both the trademark holding 

company and the retailer are a single business entity as long as 

one of them has nexus in the state, the other one wouldn’t. So that 

technique would not have worked under prior bills. 

Under this bill it will work because we are required to consider 

each individual member of the combined group, individually, for 

purposes of determining whether or not it has nexus under this 

provision. So this is a dramatic expansion of the preemption. 

Mr. COHEN. So you are against it? 

Mr. JOHNSON. I am very much against it. 

Mr. COHEN. Yeah, I would think so. 

Mr. Henchman, where are you on this? 

Mr. HENCHMAN. The—what is at issue here is basically two different interpretations of how you calculate nexus for different 

states, it is known as the Joyce standard and the Finnigan standard. The Joyce standard brings in—does not bring in entities for 

which the state doesn’t have nexus, the Finnigan standard does. 

We view the Finnigan standard as the more aggressive one and 

the Joyce one as not. And this statute would enshrine the Joyce 

standard which limits state taxation to those entities that are actually have nexus with the state. 

65 

Mr. COHEN. Mr. Schroeder, are you familiar with this? 

Mr. SCHROEDER. I am sorry, I didn’t hear. 

Mr. COHEN. Are you familiar with this section of the law? 

Mr. SCHROEDER. I am not in detail, but judging from what I am 

hearing is, you know, what we are looking for as a small business 

is simply a bright line test that helps us establish where do we 

have nexus and understanding why, because we want to make sure 

we spend as much of our resources as possible helping our 

franchisees grow and to grow their business and we need some 

clarity and reduction of uncertainty to be able to do that. 

Mr. COHEN. Now you are a franchisor. 

Mr. SCHROEDER. Right. 

Mr. COHEN. And you are here because you are a member of the 

franchise association, but you don’t necessarily representative the 

franchise association. Is that correct? 

Mr. SCHROEDER. Correct. 

Mr. COHEN. All right. So you do not know the—but the franchise 

association is 100 percent consistent with your position? 

Mr. SCHROEDER. Yes. 

Mr. COHEN. Okay. I got you. 

I yield back the remainder of my time. Thank you. 

Mr. COBLE. Thank you. 

Trent, if you can keep it fairly brief I think we can get out of 

here, if you will do that. 

Mr. FRANKS. I will move it, Mr. Chairman. 

Mr. COBLE. The distinguished gentleman from Arizona, Mr. 

Franks. 

Mr. FRANKS. All right. Mr. Johnson, what is your response to the 

stories from companies such as Outdoor Brands that small businesses facing this kind of Hobson’s Choice of either hiring expensive accountants to decipher the various state laws or the state 

nexus rules or roll the dice and just make the best conclusion they 

can and sometimes end up having a major tax liability. I mean 

isn’t that sort of a textbook example of kind of taxation without— 

that is unduly burdens to interstate commerce? 

Mr. JOHNSON. Well, as I stated, Congressman Franks, I have 

some sympathy for that position and I think the states have been 

somewhat derelict in not providing clearer standards. And I think 

a clear standard, for example, might include a de minimis amount 

of sales. If you don’t have more than $250,000 worth of sales into 

the state, for example, that might be a good bright line. 

But with regard to franchises, franchise—the whole idea of a 

franchise is that when I am driving through Colorado or Wyoming 

or South Carolina and I see a franchise that I am familiar with 

from Utah, I am more likely to go to that business. I am more likely to participate there, patronize that business because it has built 

up good will in the state. So to say that a franchisor doesn’t benefit 

from the market created in Utah, I think frankly is not correct. 

Mr. FRANKS. Well, Mr. Henchman let me just ask you one question here sort of a combination question. 

I know that some states are already using the physical presence 

standard for net income and business activity taxes, even though 

I don’t think the Supreme Court has ever required it. So touch on 

that. 

66 

And then also the recent Iowa Supreme Court decision held that 

Kentucky—a Kentucky franchiser had a physical presence in Iowa 

because the franchisee was using the franchisor’s intellectual property to, you know, pursuant to a franchisor contract arrangement. 

And that is—boy, that is something that is very hard for a business 

to—you know, I came from a small business background—— 

Mr. HENCHMAN. Right. 

Mr. FRANKS [continuing]. And sometimes businesses don’t know 

whether to jump or go blind. And tell me, what do you think about 

that and what is the answer to it. 

Mr. HENCHMAN. Sure. I mean Mr. Johnson and I think some of 

the members have talked about tax planning. There is also issues 

of this is just how they have designed the business. I mean if somebody is structuring their business with the intent of avoiding taxes 

they owe, then Mr. Johnson and his fellow tax commissioners have 

the legal power to go after them. I mean you can do (inaudible) reporting, you can do unitary, you do a whole bunch of other—and 

you can prosecute them. 

If it is just made up to avoid taxes you can go after them and 

nothing in this bill stops that. But with people who legitimately 

structured their business in that way, they face a lot of problems 

the way the system is set up now. 

Mr. FRANKS. Yeah. Well Mr. Chairman, I will just make a comment and I am through. It seems to me, you know, the IRS and 

tax agencies are always saying that businesses and individuals 

have every right to pay as little taxes as they can, within the clear 

confines of the law. But when the confines of the law are just completely murky it is not fair to businesses or individuals and it is 

the responsible of Government to make those lines clear. And of 

course, in my judgment, also to somehow find ourselves somewhere 

in the vicinity of the Constitution at the same time. 

So with that I yield back. 

Mr. COBLE. I thank the gentleman. 

Good news for the witnesses, we won’t keep you here all the rest 

of the afternoon waiting for us to return. I thank you all for your 

testimony. Your written statements will be made part of the record. 

We appreciate those in the audience for your presence today as 

well. 

Without objection all Members will have 5 legislative days to 

submit to the Chair additional written questions for the witnesses 

which we will forward and ask the witnesses to respond as promptly as they can do so with their answers that may also be made a 

part of the record. Without objection all Members will have 5 legislative days to submit any additional materials for inclusion in the 

record. 

And this hearing stands adjourned. 

[Whereupon, at 2:35 p.m., the Subcommittee was adjourned.] 

(67) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

68 


65745A-1.eps
69 


65745A-2.eps
70 


65745A-3.eps
71 

f 


65745A-4.eps
72 

f 


65745B.eps
73 


65745C-1.eps
74 


65745C-2.eps
75 

f 


65745C-3.eps
76 

f 


65745D.eps
77 


65745E-1.eps
78 


65745E-2.eps
79 


65745E-3.eps
80 


65745E-4.eps
81 


65745E-5.eps
82 

f 


65745E-6.eps
83 


65745F-1.eps
84 


65745F-2.eps
85 


65745F-3.eps
86 


65745F-4.eps
87 

f 


65745F-5.eps
88 


65745G-1.eps
89 


65745G-2.eps
90 


65745G-3.eps
91 


65745G-4.eps
92 


65745G-5.eps
93 


65745G-6.eps
94 


65745G-7.eps
95 


65745G-8.eps
96 


65745G-9.eps
97 


65745G-10.eps
98 


65745G-11.eps
99 


65745G-12.eps
100 


65745G-13.eps
101 


65745G-14.eps
102 


65745G-15.eps
103 


65745G-16.eps
104 

f 


65745G-17.eps
105 


65745H-1.eps
106 


65745H-2.eps
107 


65745H-3.eps
108 


65745H-4.eps
109 


65745H-5.eps
110 


65745H-6.eps
111 


65745H-7.eps
112 

f 


65745H-8.eps
113 


65745I-1.eps
114 

f 


65745I-2.eps
115 


65745J-1.eps
116 


65745J-2.eps
117 


65745J-3.eps
118 

f 


65745J-4.eps
119 


65745K-1.eps
120 


65745K-2.eps
121 


65745K-3.eps
122 


65745K-4.eps
123 


65745K-5.eps
124 


65745K-6.eps
125 


65745K-7.eps
126 

f 


65745K-8.eps
127 


65745L-1.eps
128 


65745L-2.eps
129 

f 


65745L-3.eps
130 


65745M-1.eps
131 


65745M-2.eps
132 


65745M-3.eps
133 

f 


65745M-4.eps
134 


65745N-1.eps
135 


65745N-2.eps
136 

f 


65745N-3.eps
137 


65745O-1.eps
138 

f 


65745O-2.eps
139 


65745P-1.eps
140 

f 


65745P-2.eps
141 


65745Q-1.eps
142 

f 


65745Q-2.eps
143 


65745R-1.eps
144 


65745R-2.eps
145 


65745R-3.eps
146 


65745R-4.eps
147 

f 


65745R-5.eps
148 


65745S-1.eps
149 

f 


65745S-2.eps
150 


65745T-1.eps
151 


65745T-2.eps
152 


65745T-3.eps
153 

f 


65745T-4.eps
154 


65745U-1.eps
155 


65745U-2.eps
156 


65745U-3.eps
157 


65745U-4.eps
158 


65745U-5.eps
159 


65745U-6.eps
160 


65745U-7.eps
161 


65745U-8.eps
162 


65745U-9.eps
163 


65745U-10.eps
164 


65745U-11.eps
165 


65745U-12.eps
166 


65745U-13.eps
167 

f 


65745U-14.eps
168 


65745V-1.eps
169 

f 


65745V-2.eps
170 

f 


65745W.eps
171 


65745X-1.eps
172 


65745X-2.eps
173 

f 


65745X-3.eps
174 


65745Y-1.eps
175 


65745Y-2.eps
176 


65745Y-3.eps
177 

f 


65745Y-4.eps
178 


65745Z-1.eps
179 


65745Z-2.eps
180 


65745Z-3.eps
181 


65745Z-4.eps
182 


65745Z-5.eps
183 


65745Z-6.eps
184 


65745Z-7.eps
185 


65745Z-8.eps
186 


65745Z-9.eps
187 


65745Z-10.eps
188 


65745Z-11.eps
189 


65745Z-12.eps
190 


65745Z-13.eps
191 


65745Z-14.eps
192 


65745Z-15.eps
193 


65745Z-16.eps
194 


65745Z-17.eps
195 


65745Z-18.eps
196 


65745Z-19.eps
197 

f 


65745Z-20.eps
198 

f 


65745AA.eps
199 


65745BB-1.eps
200 


65745BB-2.eps
201 


65745BB-3.eps
202 

f 


65745BB-4.eps
203 


65745CC-1.eps
204 

Æ 


65745CC-2.eps