State Taxation of Interstate Commerce

Senator SPARKMAN. Thank you.

The CHAIRMAN. Are there any further questions?

Senator CARLSON. Mr. Chairman, I just arrived, a little late; I am sorry, I want to apologize; I have been to another committee this morning.

I have a letter from the director of revenue, Mr. J. E. Kirchner of the department of revenue of the State of Kansas, on this very problem. I received this letter yesterday, and I want to read one or two paragraphs from it:

In view of these decisions

and he has reference to the Supreme Court decisions, and I would like to have the entire letter placed in the record-he writes this:

In view of these decisions it would appear that in administering the Kansas Income Tax Act we should attempt to enforce income tax reporting of all business transacted in Kansas by out-of-State firms, including isolated or occasional transactions. If this were the case, we would require each firm doing business in Kansas to file a return with this department showing the business done in Kansas in proportion to the total business of the firm, and to pay Kansas income tax accordingly. This would apply even if only one action transpired in Kansas.

Such a procedure would be virtually impossible to enforce and would seem impractical administratively.

Conversely, should S. 2213 or action similar thereto become effective, it would have the effect of permitting many out-of-State firms to do a tremendous volume of business in Kansas without being liable for any Kansas tax. Or a firm could locate in Nebraska, which has no income tax, do business in every State of the Union, and escape income tax in each State.

I think it is best that I continue for just a minute.

It seems that either extreme described above would be undesirable in Kansas, but that some solution should be prescribed. For that reason we wish to endorse and call to your attention the resolution passed at the annual meeting of the National Association of Tax Administrators, Buffalo, N.Y., July 8-11, 1959.

I have the resolution here, which I will make a part of the record. As I understand it, they want a little time to study this before any action is taken. Is that your position?

Senator SPARKMAN. Well, in part.

There are two things-I explained this earlier in the statement. Senator CARLSON. I am sorry I was not here.

Senator SPARKMAN. First, we seek more or less to freeze the situation as it is now, to prevent many of those things happening that he describes.

We set it on a 2-year basis, during which time the Commission would make its study and come out with its report.

We do not seek to write in a permanent solution here, but just an expedient to hold things more or less as they are. Senator CARLSON. Thank you so much.

(The document referred to follows:)

Hon. FRANK CARLSON,

Senator, Senate Office Building, Washington, D.C.

STATE OF KANSAS, DEPARTMENT OF REVENUE, Topeka, Kans., July 17, 1959.

DEAR SENATOR CARLSON: It has come to our attention that the Committee on Finance of the U.S. Senate will hold hearings on July 21, on several resolutions which would restrict State taxation of income derived exclusively from business in interstate commerce.

We understand that one of the resolutions is S. 2213, by Mr. Bush which provides that no State shall have the power to impose a net income tax on income derived exclusively from interstate commerce solely by reason of the solicitation of orders within the State if the taxpayer maintains no stock of goods, plant, office, warehouse, or other place of business within the State.

We also understand that S. 2281 by Mr. Saltonstall is to the same general effect.

It appears that the interest in this matter was brought about primarily by recent Supreme Court decisions in the case of Northwestern States Portland Cement Co. v. State of Minnesota, and Williams v. Stockham Valves and Fittings, Inc., decided February 24, 1959, and other cases which virtually removed restrictions on taxing, for income tax purposes, income derived from interstate commerce.

transpired in Kansas.

Such a procedure would be virtually impossible to enforce and would seem impractical administratively.

"Whereas various States are confronted with problems of taxation of net income of corporations engaged in interstate commerce: Now therefore, be it

Resolved, That the National Association of Tax Administrators urge the appropriate committee of the Congress of the United States to recommend deferral of congressional legislative attention in the matter of State taxation of net income of corporations engaged in interstate commerce until a study commission set up by the Congress and including appropriate State officials has had opportunity to examine the impact of the recent Supreme Court decisions with regard to State income taxation of interstate commerce."

We will appreciate your consideration of the above problem and wish to offer you any possible assistance in your deliberation.

Sincerely yours,

J. E. KIRCHNER, Director of Revenue.

Senator COTTON. Mr. Chairman, could I ask one quick question? The CHAIRMAN. Senator Cotton.

Senator COTTON. This Commission that your bill contemplates, Senator, would its studies be confined to the matter of the taxation of corporations or would it extend to other facets of this problem of State taxation as between States?

What I have in mind, is that we often have the problem of the taxation of income of individuals-for example, a pilot on a plane that flies over one State but lives in another, and the State comes in and wants to tax a portion of his income.

We have that problem in other bills before this Congress.

Would your Commission confine itself, did you contemplate, only to corporation taxes?

Senator SPARKMAN. Only to business taxes. It applies, however, to individuals as well as corporations.

Senator COTTON. You would study this matter of the taxation of personal incomes?

Senator SPARKMAN. No.

The multiple taxation of businesses deriving income from business done in a number of States is what we would study.

I recognize the importance of the question that Senator Cotton has raised, and I do hope sometime there may be made a full and adequate study of all of the complex problems of taxation involving the Federal Government and the States.

I believe eventually something like that must be done, but that is not contemplated here. This is for one purpose, and one purpose only: to study those problems that arise as a result primarily of these recent decisions of the Supreme Court.

The CHAIRMAN. Thank you very much, Senator Sparkman.
Senator TALMADGE. Mr. Chairman?

The CHAIRMAN. Senator Talmadge.

Senator TALMADGE. Mr. Chairman, may I ask Senator Sparkman a question or two so that I may get very clearly in my mind what the Supreme Court held in these two cases.

Let us take a hypothetical situation of a wholesale lumber dealer in Georgia. Say he is in business in McRae, Ga. He saws lumber and sells it over the telephone, as is frequently the practice. Maybe he does business in half a dozen or more States.

Suppose he sells some lumber in Montgomery, Ala., over the telephone. Under these decisions would he have to file an income tax return in the State of Alabama and pay his proportionate share of tax on his earnings from the sales in Alabama?

Senator SPARKMAN. If Alabama had a law requiring the payment of income tax based upon the destination of the goods, it would be my opinion he would have to file an income tax in Alabama.

Senator TALMADGE. That would be true even though he had no stock of goods, office, warehouse, place of business, officer, agent, or representative?

Senator SPARKMAN. The Supreme Court did not rule on that, and that is the point I tried to make here, what we are doing is to try to freeze the situation at the present holding of the Supreme Court.

It just happens that under the facts in the two cases decided by the Supreme Court, one of them which involves an Alabama business doing business in Georgia, and another one which involves an Iowa concern doing business in Minnesota, in both of those instances the company had a place of business within the definition of the law in the States in which they were taxed.

Now there are States, and I think undoubtedly the practice would grow, of having States levy taxes on firms doing business without maintaining any place of business, stock of goods, or office location in that particular State.

That was contained in the letter read by Senator Carlson with reference to Kansas, for instance.

Senator TALMADGE. Let us take it one step further then.

Suppose a Georgia farmer produces pecans, and in an effort to get the highest profit possible from his pecans, he develops a specialty mail-order business and sends Christmas gifts of his pecans throughout the country, and he sells in all of the 49 States.

Would he have to file an income tax return in all the 49 States where he sold pecans through the mail?

Senator SPARKMAN. Well, of course, you are getting pretty far away from the Supreme Court cases, and I would say that there is nothing in these cases that would cause him to have to pay that.

But, again, if those States enact income tax laws based upon the destination of the product, it would be my opinion that he would be required to file, certainly he might be required to file, income tax returns in each of those States.

Senator TALMADGE. Where is the line of demarcation and what court has drawn it? Does it unfetter the gates completely to any occasional odd sale in any State?

Senator SPARKMAN. I would not say so, because in those two particular cases there was a place of business being maintained in the State and, therefore, I do not think it would be fair to say that the Supreme Court went beyond that.

Senator TALMADGE. Under the terms of the act then, could they tax any sales on any business or corporation that did not maintain an office, or commodities or warehouse or an agent in the State?

Senator SPARKMAN. Under those two particular Supreme Court decisions I do not think you could say that it has been held that they could be levied unless it had. It did not say that the States could not. It simply said the States could tax interstate income in those two instances.

Senator TALMADGE. Could what?

Senator SPARKMAN. Could levy a tax where the firm doing business maintained a place of business in the State, as was true in the facts of these two cases.

Senator TALMADGE. Did the decisions define what the place of business would be?

Senator SPARKMAN. I do not believe so, but it was a place of business in compliance with the State laws.

Senator TALMADGE. Suppose a Georgia processor of poultry sells his wares in Chicago. Would we have to file an income tax form in the State of Illinois?

Senator SPARKMAN. I would not say under those decisions he would have to. But my own opinion is this is an open question and should cases be presented to the Supreme Court involving such a question, and Illinois had an income tax law providing for an income tax payment on the termination of business deals, he would have to file. Senator TALMADGE. Then, you are saying

Senator SPARKMAN. Certainly in the hearings before us the fear was expressed by every business representative who appeared that such would be true. By the way, there is one thing I have not mentioned here.

In at least one of these cases the Supreme Court held that not only did the taxpayer have to pay this year but required him to go back

to 1933.

Senator KERR. Would the Senator yield?

Senator TALMADGE. I would be delighted to yield to my friend from Oklahoma.

Senator KERR. The language of the decision in what I presume to be the syllabus of decision, the final two sentences read as follows:

It is contended that each of the State statutes

Senator TALMADGE. What page is the Senator reading from? Senator KERR. I am reading from page 82 of the hearings before the Select Committee on Small Business, at the top of the page:

Although the cases were separately briefed, argued, and submitted, we have, because of the similarity of the tax in each case, consolidated them for the purpose of decision. It is contended that each of the State statutes, as applied, violates both the due process and commerce clauses of the U.S. Constitution. This is the pertinent sentence:

We conclude that net income from the interstate operations of a foreign corporation may be subjected to State taxation provided the levy is not discriminatory and is properly apportioned to local activities within the taxing State forming sufficient nexus to support the same.

Now, it would seem to me that that is a broader holding than the interpretation which may be found later in the decision or which Senator Sparkman has given, which was that the effect of the decision is only that the State within which a branch of a business is located would be taxed, because the Court says:

I do not know what "nexus" is. That may be

Senator TALMADGE. That is apparently the point. The Senator does not know what "nexus" would be.

Can the Senator throw any light or supply any information on that?

Senator SPARKMAN. Nothing more than what I have said, and I agree with what Senator Kerr has said, that if you take that alone, it certainly seems to open the gates because it

Senator KERR. It seems to me it opens the gates so that any State could tax any corporation on that part of its business done in that State.

Now, unless this nexus does something to that interpretation-I have got a dictionary here and I am going to find out. [Laughter.] Senator BUTLER. Will the Senator yield?

Senator SPARKMAN. Let me say this, and I will say this again: Remember the facts of the case before us that these concerns actually maintained a place of business.

Senator KERR. I understand.
Senator SPARKMAN. Yes.

Senator KERR. But this conclusion

Senator SPARKMAN. Taking that alone

Senator KERR. This conclusion by the Court was not limited to that kind of situation, if I understand it.

Senator SPARKMAN. If you take that statement alone, that is correct.

Senator BUTLER. Will the Senator yield?

Senator TALMADGE. I yield, unless the Senator from Oklohama wants to pursue this "nexus" situation.

Senator KERR. Here it is. You just take this Webster and he is the most amazing guy, and he has been dead nearly a hundred years. Nexus, connection or interconnection; tie or link.

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