Those firms which are able to survive the impact of such additional expenses will, of course, be permitted to deduct the clerical, legal and other costs involved before arriving at their income taxable by the Federal Government. Furthermore, presumably many States which do not have all-inclusive income tax laws at the present time, will adopt one in order to capture their portion of the tax on income derived within their borders by foreign concerns. Thus, there develops another form of Federal tax deduction. What impact these elements will have upon Federal tax receipts is perhaps beyond all comprehension. If it proves to be substantial, it very well could mean an increase in Federal income taxes also. In conclusion, we again request that you help small business by supporting S. 2281. Very truly yours, JOHN H. DRAPER, Jr., President. STATEMENT BY ELTON KILE, PRESIDENT, NATIONAL ASSOCIATED BUSINESSMEN, INC., WASHINGTON, D.C. National Associated Businessmen, Inc., is concerned mainly with the preservation of the free-enterprise system through the elimination of unfair competition by Government's competitive business enterprises, and through the imposition of fair and equitable taxes at all levels of the economy. We are disturbed at this time by recent decisions of the Supreme Court which would apparently make it possible for State governments to level income taxes upon the earnings of companies that do business in States where they have neither factories, nor offices, nor warehouses, nor stocks of goods. Heretofore, it has been generally recognized that a corporation, a partnership, or an individual businessman would be taxed in the State in which he concentrated his business activities in a major way, but that he would not be taxed in States where his salesmen developed incidental business, or where such business was developed by mail. We believe that the tax system should remain as it has been in the past. These are unscrupulously predaceous times in the field of taxation. Practically every level of government is in financial trouble. Practically every level of government is rapaciously looking for new victims whom it may plunder to pay the bills for its own extravagances. The Supreme Court's decisions have opened a new avenue of attack, especially on little companies, and unless Congress acts promptly, these smaller enterprises, many of them now in their growth period, are likely to be struck down by such a burden of multiple taxes at the State level as will leave few of them able to fulfill the happy destiny that now lies before them. We ask you, very simply, to write out of the various good bills that are before you a measure that will prohibit any State from taxing the income of a corporation, a partnership or an individual proprietor that is doing business within its borders, unless such a company has an office, a warehouse, or other place where it actually does business in the taxing State. STATEMENT ON THE IMPACT OF MULTI-STATE TAXATION ON THE APPAREL INDUSTRY, PRESENTED IN BEHALF OF THE APPAREL INDUSTRY BY SIDNEY S. KORZENIK The 35 trade associations subscribing to this statement represent the diversified apparel industry of the Nation. They have joined in presenting this statement to your honorable committee to express the concern felt throughout the apparel industry over the consequences of the recent decisions of the U.S. Supreme Court upholding the power of the States to tax the net income of out-ofState corporations for business activities conducted within the taxing State when those activities are exclusively in furtherance of interstate commerce. respectfully urge congressional action in the present session to alleviate some of the consequences of those rulings. We The apparel and apparel-accessory industry is characterized by a multitude of small enterprises. The industry as a whole is large: it provides a livelihood for approximately 14 million men and women, furnishing an annual payroll of over $32 billion and producing an essential commodity whose value at the wholesale level is estimated at over $13 billion a year. It is estimated that there are about 34,500 employers in this field of enterprise and that the average establishment employs less than 40 persons. Significant for the purpose of your committee's present study is the fact that the apparel manufacturer, small though he is, typically distributes his products throughout a large number of States. It is not uncommon for a company with no more than $1 or $2 million of annual sales to sell to customers in nearly all of the States. Orders are solicited usually by means of traveling salesmen and sometimes by local agents. To illustrate the impact of the tax decisions referred to above upon the apparel and apparel-accessory industry, we made a brief survey preparatory to our appearance before the Senate Small Business Committee. The survey covered 122 firms drawn from various branches of the industry and doing a total annual business outside of their home States of approximately $260 million, or an average of about $2 million each. In all cases, sales are made on the basis of orders solicited by traveling or resident salesmen and in few cases were any offices or any establishments maintained outside of the home State. The number of States in which the firms covered by this sample study distributed their goods appears in the following table: Grouping of 122 apparel firms by the number of States in which goods are sold NOTE. The firms in this sample were picked at random, except that out of 124 firms whose data were received, 2 were excluded from this summary because their sales were exceptionally large for the apparel industry. One had sales of approximately $25,000.000, the other $20,000,000; and they solicit orders in 48 and 50 States, respectively. The firms covered in this cross-section appear to be somewhat larger than average for the industry, the average sales of the group being about $2,500,000 yearly and sales outside of the home State being a little more than $2,000,000, as shown above. But their widespread distribution is typical. What makes the burden particularly grievous is the fact that this industry is highly competitive and operates on a very thin margin of profit. The ratio of profit to sales in apparel manufacture, according to the most recent "Quarterly Financial Report for Manufacturing Corporations," issued by the Federal Trade Commission and the Securities Exchange Commission, ranged, after taxes, from a low of 0.3 percent in the second quarter of 1958 to a high of 1.7 percent in the third quarter of 1958. The profit on sales in the first quarter of 1959 is reported as 1.6 percent. Assuming a typical apparel producer with sales of approximately $1.5 million outside of his home State and with a profit within the range shown in the quarterly report referred to above, it is apparent that if he were obliged to file tax returns in 30-odd States at a legal and accounting cost of, say, $300 per return, the filing requirements alone would consume a substantial portion if not all of the profits, to say nothing of the taxes involved. These facts clearly answer the question of whether such multiple State taxation constitutes a burden on interstate commerce. This and other material was presented by us to the U.S. Senate Small Business Committee. Rather than repeat that entire statement here, we submit a copy of it herewith. We respectfully urge immediate action by Congress, declaring it a burden upon interstate commerce for States to tax foreign corporations whose activities within the taxing jurisdiction are confined to the solicitation of orders and which have no place of business therein. Specifically, we advocate the minimum standard set forth in title I of the proposed Senate resolution on this subject introduced by Senator Sparkman (S. 2213) and others as favorably reported upon by the Select Committee on Small Business of the U.S. Senate, though the temporary character of that standard will in our opinion create unnecessary uncertainty. In any case, we ask that the standard be not limited in its application to taxable years which end after December 31, 1958, as its terms presently provide, but that it cover taxable years prior thereto. We feel that such limitation as the bill contains on this point is likely to sanction inequities in an area already troubled with considerable confusion. This brief is filed in behalf of the 35 trade associations listed below with the name of the chief executive in each case: Affiliated Dress Manufacturers, Abraham Katz, Allied Underwear Association, Jacob P. Rosenbaum. Associated Corset and Brassiere Association, Jed Sylbert. Associated Fur Manufacturers, J. George Greenberg. Boys' Apparel & Accessories Manufacturers Association, Leon M. Singer. Corset & Brassiere Association of America, John C. Conover. Covered Button Association of New York City, Abraham Edelman. Eastern Women's Headwear Association, Louis Levitas. Fashion Originators Guild of America, Leonard W. Gendler. House Dress Institute, Max Milstein. Industrial Council of Cloak, Suit & Skirt Manufacturers, Bertram Reinitz. International Association of Garment Manufacturers, Jules Goldstein. Manufacturers of Snowsuits, Novelty Wear & Infants' Coats, Inc., Joseph Rubin. Naational Association of Blouse Manufacturers, Leonard Hammer. National Association of House & Daytime Dress Manufacturers, Erwin Feldman. National Authority for the Ladies' Handbag Industry, Max Berkowitz. National Outerwear & Sportswear Association, Jules Goldstein. National Skirt & Sportswear Manufacturers Association, David Eichen. New York Clothing Manufacturers Exchange, Aaron D. Endler. Southern Garment Manufacturers Association, Gordon McKelvey. Tubular Piping Association, Sam Scholnick. Underwear Institute, Robert D. McCabe. United Infants' & Children's Wear Association, Max H. Zuckerman. STATEMENT PRESENTED TO THE U.S. SENATE COMMITTEE ON SMALL BUSINESS IN BEHALF OF THE APPAREL INDUSTRY BY SIDNEY S. KORZENIK The consequences of the Supreme Court decisions in the Stockham Valves and Northwestern States Portland Cement cases, construed as they have been by the subsequent denial of certiorari in the Louisiana State taxholdings, have spread concern through the apparel industry. This statement seeks to set forth the special grounds for our concern and to offer a few suggestions toward relief. It is presented in behalf of 35 trade associations in this highly diversified field of garment manufacture they are listed below-and reflects the interests of apparel producers throughout the country. The special impact of these recent tax decisions upon apparel producers lies in the fact that although the apparel industry as a whole is large and represents an appreciable segment of our economy, it is made up of numerous small enterprises. The average company in the apparel and finished textile product field has less than 40 employees. Yet the typical apparel firm distributes its products throughout a large number of States. It is not uncommon for a company with no more than one or two million dollars of sales annually to sell its product to customers within all or nearly all of the 49 continental States, if not the 50th as well; and orders are solicited usually by means of traveling salesmen and sometimes by local agents. To illustrate the facts more concretely, we arranged in the limited time available before this hearing for some of the trade associations joining in this statement to obtain data on approximately 10 firms in each of their respective industries, showing the total sales volume, the amount of business done annually outside of their home States, and the number of States in which they distribute their merchandise. In this manner, figures were obtained on 122 firms doing a total annual volume outside of their home States of approximately $260 million, or an average of about $2 million each. In virtually all cases sales are made on the basis of orders solicited by traveling or resident salesmen. The number of States in which their goods are sold is set forth in the following table: Grouping of 122 apparel firms by the number of States in which goods are sold NOTE. The firms in this sample were picked at random, except that out of 124 firms whose data were received, 2 were excluded from this summary because their sales were exceptionally large for the apparel industry. One had sales of approximately $25,000,000, the other $20,000,000; and they solicit orders in 48 and 50 States, respectively. The firms covered in this cross section appear to be somewhat larger than average for the industry, the average sales of the group being about $2,500,000 yearly and sales outside of the home State being a little more than $2,000,000, as shown above. But their widespread distribution is typical. The burden of filing tax returns in 36 States, to say nothing of others that are likely to follow, is obvious. But that burden is the more grievous in apparel when one considers that this highly competitive industry operates on a very thin margin of profit. The ratio of profit to sales in apparel manufacture is shown by the financial report issued by the Federal Trade Commission and the Securities and Exchange Commission to have ranged between 0.03 percent and 1.8 percent for the last four quarters reported. If the typical apparel producer with sales of approximately $2 million outside of his home State and with a profit computed on the basis of some such slight percentage were obliged to file tax returns in 30-odd States at a cost of, say, $300 per return-a figure selected here only because it has been previously mentioned as a likely one in the course of these hearings-the filing requirements alone would consume a substatnial portion if not all of the profits. The facts unequivocally answer the question whether such multiple-State taxation constitutes a burden on interstate commerce. It seems to us that Congress would derive the power to regulate and bring some semblance of order into this area of State taxation from sheer necessity as spelled out by the facts, if from no other principle. Congressional power over commerce among the States has been judged broad enough to warrant enactments concerning kidnapers, polygamists' brides, the labeling of goods sold at retail and fleeing witnesses. Even boxing has been held subject to the Federal antitrust laws. It is untenable that any serious impediment should exist on the constitutional capacity of Congress to act for the relief under these circumstances of an industry like ours, which provides a livelihood to approximately 11⁄4 million men and women with an annual payroll of over $32 billion annually, producing an essential commodity valued at the wholesale level at over $13 billion a year-as well as in aid of other industries similarly affected. The major problem, as we see it, is not whether congressional power exists, but how it should be exercised and what form legislation should take. The difficulties arise from the fact that the area in which Congress must now make its initial entry has become covered with an overgrowth of State action and court sanctions during the 48 years since Wisconsin first undertook to impose such taxes. The aim then should be to provide the most effective relief consistent with the minimum violence to State revenue expectations, and, having once entered the field, to lead the States toward a more uniform and constructive solution of State revenue problems than has thus far proved possible through individual State action. Being aware of the difficulties involved, we suggest the following approach: No Supreme Court decision exists directly maintaining that the mere solicitation of orders by an out-of-State corporation within the taxing State in the absence of any office, property, warehouse, or other facilities comes within the reach of the State's taxing power. No case presenting such facts has yet been passed upon by the Court. The assertion by State tax administrators of their right to collect a tax in such circumstances is based on inference. The denial of certiorari in the Louisiana cases may not be construed as direct authority to that effect. Hence Federal legislation holding State taxation in such cases to be a burden on interstate commerce would not be contradictory of any holding by the highest Court of the land. We suggest immediate Federal legislation, therefore, preempting this narrow area from intrusion by State taxes. As for the taxability of the out-of-State corporation which solicits orders and does no more than maintain an office for this purpose in the taxing State (the situation before the Supreme Court in the Stockham and Northwestern States Portland Cement cases), relief can be granted without contradicting those decisions by providing in such circumstances for tax exemption for out-of-State concerns whose sales within the taxing State amount to less than, say, $100,000 in the tax year or some other reasonable limit. The amount should be fixed at least at a level above which the tax yield would be somewhat higher than the likely cost of preparing a tax return. Such a de minimis rule not only has numerous parallels in the law of taxation, but in all likelihood would be administratively desirable for the States themselves. Otherwise, the attempt to obtain proper returns and effect collection of taxes in every instance of relatively small amounts would be not only a business burden but would probably be beyond the reasonable capacity of an efficient tax administration. Besides, the establishment of a minimum sales limit would not deny theoretical State taxing power in the absence of further Federal restraints: it would be merely regulatory of the degree of burdensomeness deemed tolerable in interstate commerce. The minimum sales exemption would, of course, apply only where out-of-State corporations do no more than solicit or encourage business and maintain offices solely for this purpose. The complete exemption should apply to firms which have no offices in the taxing State and only solicit orders there that are accepted and shipped at a point outside. There remains to be considered a third point: The development of a uniform profit allocation formula. This, too, may have to be undertaken, and we believe it to be within the Federal scope, particularly since uniform action on the part of the various States seems remote and most unlikely. But it involves difficulties that will require more time and study than would be possible if legislation is to be enacted in the present session. We therefore urge that the first two points be treated immediately to prevent the inequities and burdens that will result from the further spread of the State tax collection efforts into new areas in the wake of the recent Supreme Court decisions. Ultimately, if not immediately, some harmony between the diverse State taxing formulas may have to be undertaken by Congress for the avoidance of the existing conflicts between State tax laws. But even such an enactment by Congress, instead of being regarded as involving a redefinition and extension of Federal authority, should be recognized as central to the earliest conception of congressional power. It is worth recalling that the Constitutional Convention in 1787 twice passed resolutions based on Randolph's Virginia plan, which— "Resolved, That the National Legislature ought to possess the legislative rights *** to legislate in all cases *** to which the States are separately incompetent, or in which the harmony of the United States may be interrupted by the exercise of individual legislation." This brief is filed in behalf of the 35 trade associations listed below with the name of the chief executive in each case: Affiliated Dress Manufacturers, Abraham Katz. Allied Underwear Association, Jacob P. Rosenbaum. American Knit Glove Association, Harry A. Moss. Associated Corset and Brassiere Association, Jed Sylbert. Associated Fur Manufacturers, J. George Greenberg. Boys' Apparel & Accessories Manufacturers Association, Leon M. Singer. Corset & Brassiere Association of America, John C. Conover. Covered Button Association of New York City, Abraham Edelman. Eastern Women's Headwear Association, Louis Levitas. Fashion Originators Guild of America, Leonard W. Gendler. House Dress Institute, Max Milstein. Industrial Council of Cloak, Suit & Skirt Manufacturers, Bertram Reinitz. Infants' & Children's Coat Association, Joseph L. Rubin. International Association of Garment Manufacturers, Jules Goldstein. Lingerie Manufacturers Association of New York, Jack Gross. Manufacturers of Snowsuits, Novelty Wear and Infants' Coats, Inc., Joseph Rubin. 43695-59- --8 |