Senator LONG. Here is the point I have in mind. Here is a State like Kentucky, where they have most of the distillers, let us say, where most of the profits of the whisky companies is actually earned. Their manufacturing process occurs in Kentucky in most instances. Virginia has a few, Tennessee some, but most of it is in Kentucky. Certainly the sale of their product is a substantial portion of their overall operation, and if they are deriving income from all the other 48 States, you would feel that unless they actually have offices and warehouses in those States, their operations should be subject to income tax by Kentucky alone?

Mr. SCHREYER. That is right, sir, and actually that has been the situation, with one or two exceptions. Louisiana is one. Louisiana is a State which has tried as hard as it could to enforce taxes against out-of-State sellers with only salesmen in Louisiana.

But, as I say, among our own membership I have personal knowledge of the fact that they have resisted this thing. Brown-Forman is one of

Senator LONG. Of course, your proposal would somewhat favor a manufacturing State over an agricultural State, would it not? There would be some favoring of a manufacturing State in some instances. Mr. SCHREYER. Of course, if you had

Senator LONG. Because a manufacturing State would have an opportunity to tax that income, whereas much of the revenue is actually derived from the agricultural State.

Mr. SCHREYER. That is right. However, if there is an office in the agricultural State, there will be no favoring. You see, it is the question of minimum activity. Should Congress in its wisdom decide that the States can go thus far and no farther in setting up trade barriers, is what it actually amounts to, in interstate commerce, actually unless something is done about it, as this situation gets worse our smaller manufacturers, if they feel the tax bite hard enough, will have to restrict their activities to a more narrow level, rather than to branch out and sell in any State in which they can find a

customer.

So it has the tendency of interfering with interstate commerce by compartmentalizing the activities of the smaller businessman to the States in which he can afford to file tax returns.

Senator LONG. Of course, as you know, in most instances like in Louisiana, if you are a small company and you have one salesman or two salesmen, maybe one salesman or two salesmen operating, the odds are you do not pay any taxes, just as you said. The odds are that some day you might get a letter saying, "Look, we think you owe us some money. Would you please file a return?" If you do not file it, the chances are you will not get sued if all you have is one person there. Mr. SCHREYER. That is right.

One of the witnesses, the gentleman from Louisiana-I have forgotten his name, I am sorry to say-was asked a question about one salesman, and he said, "Well, not if the salesman came sporadically."

Well now, any salesman, whether he is one or a hundred, when he comes in and comes around sporadically would not remain a saleman very long. In other words, any salesman engages in a systematic course of conduct, whether it is 1 or 15.

So the fact remains, if something is not done here, you are going to have the actual situation which was suggested by the witness from Louisiana, namely, that the State will go as far as it can after the big fellow, and the smaller fellows that it cannot reach will not feel the impact. So that it is an unfair and inequitable situation that you are forcing them into.

Senator LONG. Let me ask you this: Do you feel that sooner or later there should be some definite formula arrived at, a consistent formula? You referred to the so-called Massachusetts formula. I take it that is the same formula in effect in Louisiana; that once having effected taxing jurisdiction or power over your income, the State fixes onethird of it based on the amount of property in the State, one-third based on our payroll, and one-third based on your sales, and then divides by 3.

Do you think that is a fair way to do it?

Mr. SCHREYER. Yes, sir. Let me put it this way: I think it sounds like a fair way, and it might be the fairest way as a matter of compromise.

However, I think this thing breaks down into two different propositions: One, I agree wholeheartedly with the preceding witnesses that the States have hammered at this problem of getting a uniform apportionment formula for so many years we can say confidently, all of us, they are never going to reach a solution at State level. Each State has too much of a stake, financial stake, in maintaining its own type of formula for them to reach an agreement.

Therefore, I think that a uniform formula is ultimately the only thing that will be fair to business, to prevent this multiple and overlapping taxation of business income.

The only answer I can see, therefore, is congressional action. But that is a problem as distinguished from this present problem which calls for a full-scale study of the different factors. That is a difficult problem.

The CHAIRMAN. That would require an amendment to the Constitution, would it not? You would have to have an amendment to the Constitution; is that not right?

Mr. SCHREYER. Perhaps so.

The CHAIRMAN. Certainly the Federal Government cannot force all States to have uniform taxation. They are trying to do everything else to the State, but not that.

Senator LONG. It occurs to me, Senator Byrd, that the Federal Government, with its power over interstate commerce, could say "You shall not tax interstate commerce unless you do it on a uniform basis." In other words, I think it might be one of the things

The CHAIRMAN. It certainly would be a violation of our form of government.

Mr. SCHREYER. It might well be, sir. All I am pointing out, sir, is that remedy can be made, and Congress has the power to do it. That is something which should ultimately be done.

But I do not think that this simple little question we have before us today requires any long-range study. I think you can study this case as long as you want to, and these facts will hit you in the face: First, there is no question about this proposed legislation raising trade barriers on interstate commerce; and secondly, I do not think,

from the witnesses you have heard so far, you can conclude anything but that as far as the small business corporation is concerned, making it file a tax return in every State of the Union is going to cause a tremendous amount of difficulty, financial difficulty, for it. And it is not the amount of the tax; it is the problem of setting up his books, of employing personnel, and so forth.

In that line, the company I referred to before as doing business in Oregon and Louisiana, they tell me they estimated that it takes about 3 days for a good, well-paid man to draw off from the books the information necessary and to calculate the formula and file the tax return. In direct costs, that costs this particular company about $250. Compare that with the amount of tax they pay, $32 in the case of Oregon and $16 in the case of Louisiana. And that is not an unusual situation.

For these reasons, gentlemen, I sincerely hope that your committee will seriously consider the reporting out of a bill along the lines of either that introduced by Senator Bush or by Senator Saltonstall.

One final remark. With respect to the Saltonstall bill, since it contains an additional provision which makes the bill retroactive in some respects, I would suggest if you are considering reporting that type of bill out, that the usual severability clause be included. Thank you very much.

The CHAIRMAN. Thank you very much indeed.

The next witness is Mr. George Newman, Iowa Manufacturers Association.

STATEMENT OF GEORGE F. NEWMAN, THE IOWA MANUFACTURERS ASSOCIATION

Mr. NEWMAN. Mr. Chairman, my name is George F. Newman. I am treasurer and counsel of Viking Pump Co., Cedar Falls, Iowa. Our company manufactures and sells internal gear rotary pumps, industrial products as distinguished from consumer products. I would classify our company as a medium-sized company. We employ about 520 people, the great majority of them in our main plant and foundries at Cedar Falls, Iowa, and have sales outlets in the principal cities of the United States. We sell in practically every State in the Union, and have some export business as well.

I appear before you today on behalf of the Iowa Manufacturers Association, of which our company is a member. The Iowa Manufacturers Association has a membership of nearly 600 manufacturing companies and over 400 of them employ less than 100 people.

Mr. Chairman, I have prepared a formal statement, and I ask that it be included in the record.

The CHAIRMAN. It will be received.

Mr. NEWMAN. It seems to me the problem before us is one of drawing a line. We have on the one side a company clearly subject to State income taxation because it is domiciled within the taxing State, and at the other end of the line a company who does nothing more than ship goods into a foreign State.

Now somewhere between those two extremes a line must be drawn. Whether that line should be drawn by the Court or whether it should be drawn by the Congress or whether it should be drawn by concerted action of the States is one of the problems.

The gentleman from Louisiana has drawn a line that I find difficult to comprehend. I have always thought that taxes should be uniform in their application: they should have a definite basis upon which you can apply a tax. And I do not think that that basis is present there. The basis of the line in the Saltonstall bill is one that appeals to me personally.

We do not reverse the Supreme Court, in effect, as much as some of us might like to. It is a definite line, one that the tax administrator and the taxpayer can understand and live up to, and one which recognizes the facts of life.

If you draw further down the line, toward the end, when mere shipment into a State constitutes a taxable transaction, sooner or later you are going to run into a place where the total cost of administration on behalf of the States, and the preparation of returns and multitudinous recordkeeping of the companies on the other hand, is going to be greater than the tax realized.

It is a question of degree all the way through, and it seems to me that the Saltonstall bill and, to a lesser extent, the Bush bill, draw the proper line.

A further observation: This is a problem which is inherently a problem confronting small- and medium-sized businesses. The large national corporations have lived with this thing for years. They have the legal staff and the accounting staff to cope with the problems.

On the question of a uniform formula, I have talked with a number of those people and they do not seem to think it advisable. They have apparently been able to work out with the various State taxing authorities something with which they can live.

So it seems to me, Mr. Chairman, that this is a field in which Congress should act rather than wait for a compact among the States, or the courts to act, before insurmountable burdens are placed upon small business in keeping records and making returns and before large staffs are being put to work in the revenue departments of most States.

Thank you for your courtesy.

The CHAIRMAN. I thoroughly agree with you as to a uniform standard for all States. I was the Governor of a State, and I think it would be impossible without a constitutional amendment.

Mr. NEWMAN. Yes; I agree with you.

The CHAIRMAN. Because the States have different conditions and they are not going to set out a standard by dotting every "i" and crossing every "t."

Mr. NEWMAN. Well, you have divergent interests in virtually all States, manufacturing States against consuming States.

The CHAIRMAN. If we have to wait for that, the relief will take a long time.

Mr. NEWMAN. That is right.

The CHAIRMAN. Thank you, sir.

(Mr. Newman's prepared statement follows:)

STATEMENT OF GEORGE F. NEWMAN ON BEHALF OF THE IOWA MANUFACTURERS

ASSOCIATION

My name is George F. Newman. I am treasurer and counsel of Viking Pump Co., Cedar Falls, Iowa. Our company manufacturers and sells internal gear rotary pumps, industrial products as distinguished from consumer products.

43695-59-17

I would classify our company as a medium-sized company. We employ about 520 people, the great majority of them in our main plant and foundries at Cedar Falls, Iowa, and have sales outlets in the principal cities of the United States. We sell in practically every State in the Union and have some export business as well.

I appear before you today on behalf of the Iowa Manufacturers Association of which our company is a member. The Iowa Manufacturers Association has a membership of nearly 600 manufacturing companies and over 400 of them employ less than 100 people. While Iowa is predominantly an agricultural State, its industrial activity is steadily expanding and has become a major factor in the State's economy. We think that we have a favorable business climate for manufacturing enterprises and much hard work has been done throughout the State to attract new industry to Iowa.

In my statement today I want to use my own company as an example, firstly, because I am intimately familiar with its operations and, secondly, because I think it is typical of the manner in which thousands of small- and mediumsized manufacturing companies operate-not only in Iowa but throughout the United States.

There was some difference of opinion in the Supreme Court over the basis for the decision in the Stockham Valves Company and Northwestern States Portland Cement Company cases. The majority of the Court felt that this was merely an extension of existing doctrine. The dissenters, and particularly Mr. Justice Frankfurter, felt that new ground had been broken by these decisions. Whether the majority or the minority were correct in their analysis is not now particularly important. It is important, however, that the great majority of American businessmen believe with Mr. Justice Frankfurter that new ground has been broken and that the Court has departed from established precedent. Our company maintains warehouses in two States other than Iowa. Sales personnel work out of these warehouses, and in both of these States we are qualified as a foreign corporation and are clearly subject to the jurisdiction of their taxing authorities. In four States we have district sales offices manned by our own employees. In each of these States we maintain no stock of goods and our sales representatives are not authorized to enter into contracts but merely to solicit orders for acceptance or rejection at the home office. They are not authorized to pass on credit or make adjustments. In several States we are represented by manufacturer's agents. These people are independent contractors, not employees, and maintain no stock of goods within the State, nor does our company. Most of their orders are sent to the home office and factory to be filled from there and occasionally they may order from one of our major distributors. We have major stocking distributors throughout the United States. These people buy from us for their own account and resell to the ultimate

consumer.

We have engineers and sales people operating out of the home office in Cedar Falls, Iowa, calling upon distributors and customers. From my observation, I think our operation is handled in a typical manner and is duplicated by many, many manufacturers in the United States. We had assumed, and operated upon the premise, that, except for the States in which we maintain warehouses and are qualified, our method of operation resulted solely in interstate commerce and that we were not subject to the State taxing laws.

The Stockham Valves Company and Northwestern States Portland Cement Company cases settled one question for us-in those States in which we maintain sales offices, we are liable for a fairly apportioned, nondiscriminatory income tax upon sales in that jurisdiction; but the cases opened up many, many new questions to which we now have no answers. The Court held that net income from the interstate operation 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. What, we ask, is the meaning of "Properly apportioned to local activities within the taxing State, forming sufficient nexus to support the same?" What is our position if we have only a resident sales representative in the taxing State? Suppose we have no employee but a manufacturer's agent-an independent contractor? Is our advertising in the trade journals "local activity” sufficient to sustain the tax? What about direct mail solicitation? What is our position when we attend trade shows in a foreign State with displays of our product and sales activity? What is our position when our people go into the plant of a prospective customer in a foreign State for the purpose of soliciting