These typical communications reflect the general concern over the situation. This has already been expressed very fully in the hearings before the Senate Select Committee on Small Business in April 1959. It seems inevitable that the Supreme Court decisions will result in a somewhat chaotic application of varying tax formulas to interstate commerce. As noted by Mr. Justice Frankfurter, in his dissenting opinion, every State which has not already done so will be stimulated, if not compelled, to devise a formula of apportionment to tax the income of enterprises carrying on exclusively interstate commerce. There would appear to be no doubt that Congress has the power to establish legislative guidelines delimiting the State power to tax interstate commerce. This is acknowledged by implication in the majority opinion of the Supreme Court. In the words of Mr. Justice Clark: "Commerce between the States having grown up like Topsy, the Congress meanwhile not having undertaken to regulate taxation of it, and the States having understandably persisted in their efforts to get some return for the substantial benefits they have afforded it, there is little wonder that there has been no end of cases testing out State tax levies." This point was considered by the Senate Select Committee on Small Business, and part 2 of the committee report contains the following statement: "Therefore, your committee concludes that there is no serious question about the ability of Congress to act in the area of State taxation of income derived from interstate commerce and that a constitutional amendment is not required as some observers have suggested." It should be noted also that the American Law Division of the Library of Congress also reached the same conclusion, stating: "There can be no denying that the proposed legislation would be a permissible exercise by Congress of its power to regulate interstate commerce." We believe that this is an urgent situation and that confusion will be compounded by failure to promptly enact stabilizing measures at this time. We respectfully submit that delay will make the situation more difficult to handle as times passes and the various States crystallize plans for implementation of the Supreme Court decision. We concur with the Senate Select Committee on Small Business that probably the best alternative to meet this problem is the enactment of a legal definition as to what constitutes "doing business" for purposes of establishing the basis of authority to tax out-of-State business. This is the approach of the several bills before this committee. It might be noted that such a provision was added to the District of Columbia Code by Public Law 509, passed during the 2d session of the 80th Congress.* This provision of the District of Columbia Code, enacted over 10 years ago, is a clear precedent for establishment of a legislative definition of the conditions under which the operations of a business establishment within the District become subject to the District of Columbia income tax. There may be need for further study of the various facets of this problem, but we believe that the establishment now of a practical "doing business" definition will effectively deal with the more urgent aspects of the situation and at the same time offer no impediment to such further study and action as may be required. We greatly appreciate the opportunity to appear before this distinguished committee. The CHAIRMAN. The committee will adjourn. (By direction of the chairman, the following is made a part of the record:) THE W. T. RAWLEIGH CO., Re legislation to limit taxing power of States with respect to income taxes on receipts from interstate commerce. Senator HARRY FLOOD BYRD, Senate Office Building, Washington, D.C. DEAR SENATOR BYRD: Although our company has its main office and factory in Freeport, Ill., we are taking the liberty of expressing to you our views re the above subject matter in view of the fact that a branch of our company is located in Richmond, Va., and we know that you will be interested in our problems. 4 D.C. Code, sec. 47-1551c(h) (1). We would appreciate your reviewing the information contained herein with fellow Senators on the Senate Finance Commtitee, which we understand to be currently considering legislation re this matter. We respectfully submit that taxation of foreign corporations should not be permitted where there is very little, if any, "tie" or "link," commonly referred to as "nexus," with the taxing State. Accordingly, we wish to advise you that we favor provision prohibiting States from imposing new income tax on income derived exclusively from interstate commerce where no stock of goods, plant, office, warehouse, or other place of business is maintained within the State. We respectfully submit that the present situation makes possible taxation of more than 100 percent of income and that compliance by companies with multistate operations will increasingly become a terrific burden, both from the standpoint of payment of taxes and from the standpoint of cost of bookkeeping, accounting, and auditing procedures made necessary by recent developments. We further submit that payments to the States, being deductible from Federal income taxes, will deprive the Federal Government of necessary revenue to support the Federal Government, which eventually will, no doubt, lead to increased Federal taxation of corporations, when the tax burden is already considerable. We further submit that although the United States has to this point constituted one market, it now develops, because of recent conditions, there will ensue instead of one market a clutter of markets within the United States, which we believe has never been intended by our forefathers. We would appreciate your serious consideration, as well as the serious consideration of your colleagues on the subcommittee of the Senate Finance Committee, of our thoughts re this legislation. Very truly yours, J. A. RESH, Secretary. STATE OF NEW HAMPSHIRE, Hon. HARRY F. BYRD, Chairman, Senate Committee on Finance, DEAR SENATOR BYRD: It is my understanding that Senate bills 2213 and 2281 are presently under consideration as measures which would correct certain injustices likely to result from recent Supreme Court decisions which would seem to confer upon State governments the ability to levy taxes upon foreign corporations, and specifically upon the income of these corporations derived from interstate commerce. We are much aware of the injustices heaped upon the citizenry of our State by the imposition of nonresident income taxes by jurisdictions like Massachusetts and Vermont. We are much aware also of the serious difficulties presently faced in our effort toward industrial expansion. As Governor of New Hampshire, I wish to express the sentiment of our State against taxation of nonresident corporations and express the hope that legislation to correct the potential injustices of the Supreme Court decisions will be accomplished at this session of the Congress. A copy of this communication is going forward to each member of the New Hampshire delegation, and it is my respectful request that one of the communications be included in the official records of the committee on this issue. With best wishes. Sincerely yours, WESLEY POWELL, Governor. STATEMENT OF JOHN M. SNOW, EXECUTIVE VICE PRESIDENT, NATIONAL AssoCIATION OF FURNITURE MANUFACTURERS On behalf of a majority of the 3,000 and more household furniture manufacturers throughout America we wish to go on record in support of proposed legislation which would limit and define the powers of the individual States in the matter of taxing interstate commerce. The furniture manufacturing industry produced over $2,300 million worth of goods in 1958 according to an estimate of the National Association of Furniture Manufacturers. It ranks second among the Nation's durable consumer goods industries with automobile manufacturing ranked as first. Retail value of 1958 furniture production was estimated to be in excess of $4 billion. That the average furniture manufacturer is a typical small businessman is shown by the Department of Commerce-Facts for Industry series-which, according to its latest available report, 546 manufacturers did an annual business of $1 million or more, with almost 2,500 manufacturers doing less than $400,000 per year, and about 1,500 of these doing less than $200,000 per year. 1 Source: "Household Furnishings and Bedding Products"-Facts for Industry, Department of Commerce, 1953. In 1954, 1,721 manufacturers employed over 21 workers per company and approximately 1,300 companies employed less than 21 workers per company. The furniture industry is recognized as a widely dispersed group of relatively small manufacturers usually located in small towns or cities. Following is a geographic breakdown of the 5,202 household furniture establishments in 1954. Establishments are separate manufacturing units regardless of company affiliation. Number of actual companies in household furniture industry is estimated by NAFM at approximately 3,000. This data is contained in Census of Manufacturers' Statistics published by the Department of Commerce. Source: Census of Manufacturers and Facts for Industry. All areas of the country look to the furniture industry for employment and the development of business stability. 1 Geographic data available for major items only. Represents 80 percent of total production. We feel that the furniture manufacturers' narrow margin of profit (2.8 percent in 1958) and limited number of employees and relatively low volume of business show convincingly that the problem of numerous and varied State taxes on interstate commerce would work an undue hardship on him, a hardship that would involve costly, complex, and extensive recordkeeping in order to keep up to date and comply with the laws. In addition, the taxes would serve to throttle his capacity to complete and distribute over a reasonably wide area. In the Supreme Court decision (Stockham Valves and Northwest States Portland Cement cases) they ruled that a State has the power to tax interstate commerce. They also noted, however, that this was due to a gap in existing law and that it was clearly within the responsibility of Congress to enact legislation which would prevent this situation from creating complete chaos. Action is needed now during the present session so as to clarify the picture before numerous other States start to initiate new tax laws. In developing the urgently needed legislation there are several phases of activity in the furniture industry that are worthy of special consideration. 1. The retroactive aspects developed in the Northwestern Cement case, where taxes were collected for all the back years of its present income tax law, could very seriously jeopardize the future of quite a large number of the smaller furniture manufacturers. They have neither the reserves nor the profit possibilities to absorb such a burden. We strongly urge that all phases of the retroactivity problem be studied and recommended the provisions contained in S. 2281.. 2. Due to the bulky nature of the product, the high cost of railroad transportation and the susceptibility to damage, many manufacturers have been forced to deliver a sizable part of the furniture they produce on their own trucks. We recommend that the final legislation clearly exempt the method of delivery as one of the qualifying aspects of State taxation of interstate commerce. All of the same processes of selling are followed by manufacturers in this category and it would place them at a competitive disadvantage if their method of delivery was the only added factor that made them liable for taxation. The same is true of certain manufacturers who place a supply of furniture in a rented warehouse in order to provide better service to the dealer and consumer. This should not serve as a qualifying aspect for taxation. 3. Furniture markets and market showrooms are a unique and specialized phase of this industry's business and should be specifically exempted from the qualifying areas of taxation. Market showrooms are rented and do not serve the function of a regional sales office in any usual sense of the term. They are primarily a display burden brought about by the bulky nature of the product and the inability of the salesmen to carry and show samples of the new designs. The market showroom serves fundamentally as a display adjunct for the manufacturers' salesmen, and it is used for a very limited period of time each year. To a very large degree the sales are finally developed when the salesman actually visits the store, checks the inventory, and the formal order is written up and sent to the manufacturer for his acceptance based on credit, availability of product, and the distribution policy of the company. These are all a part of the inherited traditions of our industry's method of dis-tribution. We recommend that the proposed legislation be expanded to allow for their continuance without the burden of additional State taxes. We wholeheartedly approve the broad concepts of the bills now under consid-eration by your committee with the modifications or improvements outlined above. Hon. HARRY F. BYRD, MACHINERY AND ALLIED PRODUCTS INSTITUTE, Chairman, Committee on Finance, U.S. Senate, Washington, D.C'. DEAR SENATOR BYRD: We appreciate this opportunity to present our views to be incorporated in the record of hearings on proposed legislation before the Committee on Finance to establish certain standards with respect to State taxation of business activity conducted in interstate commerce. The Machinery and Allied Products Institute and its affiliate, the Council for Technological Advancement, represent the capital goods and allied product industries. The majority of our member companies fall in the categories of medium-sized or small business. These companies in particular have expressed serious concern over problems raised by the recent U.S. Supreme Court decision upholding the constitutionality of State taxes levied on the net income of a foreign corporation, even though such income is derived from business conducted in interstate commerce. We wish to commend the Senate Finance Committee for giving prompt attention to this vitally important matter and to offer certain observations with. respect to those measures now before your committee for consideration, namely, Senate Joint Resolution 113, S. 2213, and S. 2281. Through the facilities of the institute we are conducting certain staff studies which may develop additional information and suggestions. The dangers inherent for business in the Supreme Court's decision-multiplicity of taxation, the cost and the difficulties of compliance with a wide variety of State apportionment statutes, and the consquent threat to the competitive position of many businesses-have been amply documented by others who have testified before this committee and in hearings before the Senate Small Business Committee. In fact, they were forcefully and succinctly put forth in minority opinions in the Supreme Court decision on February 24, 1959, excerpts from Justice Frankfurter's opinion being attached to this letter. We would add but one point as to impact. It is well recognized that high levels of productivity are essential to maintain and increase the standard of living. But it frequently is overlooked that a further necessary condition is a mass market, for many of the techniques U.S. industry has developed are suitable only for a large market. It seems incongruous that at a time when Western Europe has not only recognized but is implementing this fact of life-first, through the Common Market, and second, the "little free trade area"-the United States would open the floodgates to the potential inundation of commerce by regional and patternless taxation with its inevitable concomitant of restricted trade. Beyond this we do not wish to burden the committee with a repetition of evidence, but propose to address ourselves briefly to two major points which we hope the committee will consider: 1. The need for a standard definite enough to determine what income is in fact subject to State taxation; and 2. The need for immediate legislation to create minimum standards. The need for a standard.-First, the Supreme Court decision has produced vast uncertainty with respect to the taxability of net income earned within a State by a corporation located in another State. In other words, the decision, having eliminated the distinction between interstate and intrastate commerce as a standard for determining State taxability, fails to provide an alternative standard. In addition to the serious handicaps noted above, the hardships resulting from such uncertainty for all businesses, and particularly the smaller ones, are obvious. Companies with extensive interstate operations, many of which have emerged from the recent business recession with expansion programs or are still fighting their way out of the recession, have been hampered in the making of normal management decisions with respect to out-of-State business locations because of the uncertainties involving their State tax liabilities. While the proposals before the Finance Committee differ in certain respects, all of them contain a similar provision designed to exclude from State taxation that income earned solely through the solicitation of orders within a State by a foreign corporation, which does not maintain a stock of goods, plant, office, warehouse or other place of business within the taxing State. Based on our consideration of the matter within the time available, the institute regards this proposed standard as both logical and workable and believes that it would restore minimum certainty to an area where virtually none now exists. There may be a more workable standard but the need for a standard is clear and, as we point out below, some action toward creating a guideline is crucial. The need for legislation.-Secondly, it has been suggested by several witnesses before this committee that no action should be taken by Congress until the whole complex problem of State taxation has been carefully studied, either by a congressional committee or by a Presidential commission of the sort proposed by S.J. Res. 113. The institute recognizes the complexity of the problems connected with State taxation and agrees that a full-scale study of issues related to the one now before this committee would no doubt be profitable. We are convinced, however, of the urgent need for immediate legislation which would prohibit State taxation of income derived from that kind of activity hitherto regarded as exempted from such taxation by reason of the interstate commerce clause of the Constitution. At least limited action should be taken now. It is true that a few States are presently taxing income generated by mere solicitation of orders within the State. However, the great majority of those States which levy any net income tax on corporations have not yet proceeded 43695-59-18 |