this far. Considering the pressing needs of the States for increased revenue, it is reasonable to expect more States in the near future to adopt the course implicit in the Supreme Court's decision. If legislation is postponed until the completion of a study, remedial legislation at that time may be more difficult because of the development of a pattern of State tax action which would defy retroactive correction. Moreover, the normal process of commercial decisions affecting interstate business might proceed without the present uncertainty and confusion. On the other hand, enactment of legislation now will do little more than preserve the status quo, for the most part. Any unforeseen difficulties which might arise as a result of such legislation could be handled by corrective amendments. In the meantime the proposed study group can proceed with its work, without the pressure of a definite reporting date, until the entire subject has been thoroughly canvassed and an equitable overall solution reached. In conclusion, we should like to emphasize that the views expressed herein are not intended to reflect in any sense a negative attitude with respect to the transfer of Federal responsibilities to the States. On the contrary, the institute has consistently encouraged proposals looking toward assumption by the States of many functions now assigned to the Federal Government and financed through Federal taxes. We are fully aware that the success of these proposals will require the States to look for new sources of income. Our interest in the issue now before the committee is dictated solely by our conviction that prolonged confusion in this area of State tax liability will in the long run benefit neither industry, the States, nor the Federal Government. Respectfully, CHARLES W. STEWART, President. NORTHWESTERN STATES PORTLAND CEMENT Co. V. MINNESOTA; WILLIAMS V. STOCKHAM VALVES AND FITTINGS, INC., 358 U.S. 450, FEBRUARY 24, 1959 (Excerpt from Justice Frankfurter's dissenting opinion) I think that interstate commerce will not be merely argumentatively but actively burdened for two reasons: First. It will not, I believe, be gainsaid that there are thousands of relatively small or moderate size corporations doing exclusively interstate business spread over several States. To subject these corporations to a separate income tax in each of these States means that they will have to keep books, make returns, store records, and engage legal counsel, all to meet the divers and variegated tax laws of 49 States, with their different times for filing returns, different tax structures, different modes for determining "net income," and, different, often conflicting, formulas of apportionment. This will involve large increases in bookkeeping, accounting, and legal paraphernalia to meet these new demands.. The cost of such a farflung scheme for complying with the taxing requirements of the different States may well exceed the burden of the taxes themselves, especially in the case of small companies doing a small volume of business in several States. Second. The extensive litigation in this Court which has challenged formulas of apportionment in the case of railroads and express companies-challenges addressed to the natural temptation of the States to absorb more than their fair share of interstate revenue will be multiplied many times when such formulas are applied to the infinitely larger number of other businesses which are engaged in exclusively interstate commerce. The division in this Court on these railroad apportionment cases is a good index of what might reasonably be expected when cases involving the more numerous nontransportation industries come before the Court *** the necessity for litigation based on these elusive and essentially nonlegal questions casts a burden on businesses, and consequently on interstate commerce itself, which should not be imposed. WHITE STAG MANUFACTURING CO., Senator WAYNE MORSE, Washington, D.C. DEAR SENATOR MORSE: A State income tax situation in the various States of the Union has arisen in recent months the potentialities of which open up some alarming possibilities that, if prudent action is not taken, a ridiculous financial burden could be placed on all firms in interstate commerce, regardless of where their home State is. Our company, and every other company in interstate commerce, is legally subject to State income taxes in many different States, even though our sales representatives merely solicit orders there and even though we maintain no office or warehouse there. That's the effect of recent decisions of the U.S. Supreme Court, upholding the power of the States to tax out-of-State corporations for the business activity they conduct in the taxing State, despite that such activity may be exclusively interstate commerce. If this situation is left unchanged, the consequences will be punitive for most firms in the country, large or small. On February 24, 1959, the Supreme Court ruled in two cases that the power to regulate interstate commerce granted by the Constitution to the Federal Government does not preclude the States from taxing the net income which an out-of-State corporation derives from sales within the taxing State, even though such transactions are exclusively interstate commerce. One case involved taxes imposed by Georgia, and another was an appeal by the corporate taxpayer from a similar Minnesota tax law. In both cases the firms' activities were devoted solely to the solicitation of orders which were sent by mail outside the State to their home office for acceptance. In both cases the taxes were levied on the portion of net income of the corporation presumed under a statutory formula to have been derived from activities in the taxing State. In Georgia, the words of the statute are worth noting for their breadth of coverage: "Every such corporation shall be deemed to be doing business within this State if it engages within this State in any activities * * * for the purpose of financial profit * * * whether or not it maintains an office * * * within this State and whether or not such activity *** is connected with interstate *** commerce." (the cases are T. W. Williams v. Stockham Vales & Fittings, Inc. and Northwestern States Portland Cement Company v. Minnesota.) When Louisiana, which has a similar statute, insisted on collecting taxes from Brown-Forman Distilling Co., which maintained no office in Louisiana and whose sales representatives in that State merely promoted and encouraged the purchase of the company's products without actually soliciting orders, the company appealed to the Supreme Court. In March, following the Stockham and Northwestern State cases, the Supreme Court refused to consider this Louisiana case, thus leaving the State court decision against the taxpayer undisturbed. Refusal of the Supreme Court to review a lower court holding need not necessarily be construed as complete agreement in all respects with the decision of the court below. Nevertheless, the practical consequences of these denials as they now stand have been to strengthen immeasurably the hand of the State tax collector and encourage an extension of his reach. Tax proceedings have already been commenced against firms whose activities within the taxing State consist of no more than the solicitation of orders by a traveling salesman or local sales representative. Under present circumstances, thousands of companies which have never considered themselves subject to such State taxes will now be under an indeterminable burden. Not only will they be expected to file returns and pay taxes in numerous States, but having failed to do so up to now, they also face the danger of being charged with tax arrears for previous years plus interest and penalties. I understand that the U.S. Senate Committee on Small Business will hold hearings on the subject. What form relief should take is not altogether clear. Some legal doubt has been voiced as to whether Congress has the constitutional right to step into this field and limit the tax power of the States, particularly after the Supreme Court has declared these States constitutionally unrestricted in imposing such levies. Several bills have been introduced which would have the effect of relieving firms from liability for such State taxes where their only activity within the taxing State consists of sales solicitation and where the taxpayer maintains no office, or warehouse, and where no stock of goods is carried. One such bill has been introduced by Senator Sparkman (S.J. Res. 113) in which he has been joined by Senators Humphrey, Saltonstall, Williams, and others. Other such measures have been introduced into the House by Congressmen McCulloch of Ohio (H.R. 7757), Miller of New York (H.J. Res. 431). On behalf of our company, an Oregon corporation, we are asking that immediate action be taken against these "multi-State taxes." Sincerely yours, HAROLD S. HIRSCH, President. P.S.-The State of Oregon could possibly lose more income than it would gain because of our small consumption of outside goods. Let's not forget that if White Stag, for example, an Oregon corporation, pays income taxes to other States, this would clearly be an offset against the taxes it pays to its home State.. We sell goods in every State in the Union, and some in greater volume than our sales in Oregon. With such huge deductions from our Oregon State income. tax, Oregon would receive very little from us and other States in the Union more, and I doubt if Oregon's small consumption will enable it to tax out-ofState manufacturers for enough to make up for losses in tax income it now gets from Oregon manufacturers in interstate commerce. H. S. H. Hon. HARRY F. BYRD, NATIONAL FOOD BROKERS ASSOCIATION, Chairman, Senate Finance Committee, Washington, D.C. The seriousness of the situation is particularly apparent to the members of the National Food Brokers Association as they handle a large part of the sales of processed food and grocery products in this country. Local sales agents, our members have long facilitated the flow of food and grocery products to the stores in their own local areas. The threat to a free flow of interstate commerce which was raised by recent Supreme Court decisions is of great concern to the manufacturers our members represent. Unless the situation is promptly corrected, there is a great danger that many manufacturers will greatly reduce their areas of distribution, rather than subject themselves to burdensome State income taxes. These manufacturers do not maintain a place of business in these States. They achieve their distribution through sales made by their independent resident sales representatives, the food brokers. The result would be felt by the American consumer in several ways. First, their present large freedom of choice would be seriously curtailed. There would be fewer products on their grocery store shelves from which to pick. Many of their favorite brands would disappear from many areas. Second, the American consumer would lose because there would be a lessening of competition in such areas. Strong competition has always been one of the great strengths of our industry. With competing brands out of the market the remaining products may cease to try to be competitive. The American processor would likewise feel this loss. Much of his volume is made up of widespread distribution consisting of small orders in many States.. In many of these States the volume is not sufficient to warrant extra tax burdens and the extra bookkeeping and recordkeeping that would be called for. Instead of paying these taxes and losing money on such sales, they will cease selling in such areas. It would necessitate the reduction of production facilities for many. Our members, too, would suffer. Many of the products they now sell would be kept out of their local market. As they operate in their own areas, it would mean that the variety of products which they can handle would be reduced. Of the bills now under consideration by your committee, S. 2281 is in our opinion the one that should be recommended by your committee. This bill effects a solution that would insure fair and equitable treatment for manufacturers who now sell in interstate commerce and would insure the maintenance of a free flow of products to every State in the Nation. S. 2281 is in line with the legislation which Congress itself passed in the Revenue Code for the District of Columbia. This legislation has proven to be effective in the many years since it has been enacted. We feel that the bill, S. 2281, more than any of the other measures you are considering, will correct the problem now facing us. We sincerely urge your prompt and favorable reporting of S. 2281 to insure a continuation of a free, unimpeded flow of the wealth of the Nation's food and grocery products to every State in the Nation. Sincerely yours, WATSON ROGERS, President. PHARMACEUTICAL MANUFACTURERS ASSOCIATION, Senator HARRY F. BYRD, Chairman, Senate Committee on Finance, Senate Office Building, DEAR SENATOR BYRD: We understand that hearings commenced yesterday before your committee concerning the number of bills previously introduced and relating to the problem of State taxation of interstate commerce. The Pharmaceutical Manufacturers Association is a nonprofit membership association incorporated under the laws of the State of Delaware, with its principal office in the city of Washington, D.C. This association is the result of a combination accomplished in 1958 of the American Drug Manufacturers Association and the American Pharmaceutical Manufacturers' Association. At the present time there are about 140 member companies in the Pharmaceutical Manufacturers Association, which comprises practically all companies engaged in the manufacture of ethical pharmaceuticals and prescription drug products, and the great majority of which may be characterized as small- or moderate-sized businesses. As you know, the proposed legislation and the problems to be solved therefor have arisen as a result of the decision of the U.S. Supreme Court in the cases of Northwestern States Portland Cement Company v. Minnesota and Williams v. Stockham Valves and Fittings, Inc. (358 U.S. 450, Feb. 24, 1959). The plight of small business is described by Justice Frankfurter in his dissenting opinion in those cases as follows: "It will not, I believe, be gainsaid that there are thousands of relatively small- or moderate-size corporations doing exclusively interstate business spread over several States. To subject these corporations to a separate income tax in each of these States means that they will have to keep books, make returns, store records, and engage legal counsel, all to meet the diverse and variegated tax laws of 49 States, with their different times for filing returns, different tax structures, different modes for determining net income, and, different, often conflicting, formulas of apportionment. This will involve large increases in bookkeeping, accounting, and legal paraphernalia to meet these new demands. The cost of such a farflung scheme for complying with the taxing requirements of the different States may well exceed the burden of the taxes themselves, especially in the case of small companies doing a small volume of business in several States." Small- and moderate-size business firms have already been put to considerable expense in endeavoring to determine their tax liabilities in the more than onehalf of the States that already have taxes adequate to take advantage of this decision, but many of which States have not been enforcing them due to prior uncertainty as to their authority. The economic impact and cumulative burdens imposed by States on interstate commerce activities in taxing the earnings derived from such business should also be of concern to the Federal Treasury. In addition to the State income taxes themselves, all of these items of administrative cost and overhead, which may far exceed the amount of the taxes paid in some instances, will become proper deductions for Federal income tax purposes. The States likewise have become interested in this phase of the problem, as the following statement of Commissioner Joseph H. Murphy, commissioner of taxation, State of New York, in his presentation to the Senate Select Committee on Small Business indicates: "How much justice have we achieved for the business community in general if the taxpayer's costs of complying with the tax law (maintaining detailed accounting records, legal expense of preparing returns, etc.) far exceed the amount of tax liability? Furthermore, from the public standpoint we would be saddling the State government with additional administrative expenses to collect a pittance from the overwhelming majority of these new taxpayers." Another point is practically overlooked, i.e., the multiple administrative and tax burdens for the small- and moderate-size business firms tend to make them less competitive with large national firms who are already forced to maintain warehouses and offices throughout the country. These large businesses can obtain legal assistance and administer their respective taxes more economically than the small firm. The several bills pending before your committee will clarify the jurisdiction of States to tax. They would exclude from taxation by a State or political subdivision thereof those earnings derived from interstate commerce sales where there is no business establishment in the State. On the other hand, the States would not be deprived of needed revenues in that there is a recognition of a right to tax certain local activities that produce income and yet there is an acknowledgement of an area of unhampered trade among the several States and the removal of undue burdens on interstate commerce. We acknowledge that interstate businesses, large or small, should pay a fair and nondiscriminatory share of the cost of government in the States in which they do business; but the cost of compliance should not itself constitute such a burden on interstate business that it interferes with the free development of a national economy. We earnestly believe that legislation of the type now being considered by this committee should be enacted by the Congress of the United States at this session. Respectfully yours, JOHN K. WORLEY, NATIONAL WOODEN BOX ASSOCIATION, Senator HARRY F. BYRD, Chairman, Senate Finance Committee, DEAR SENATOR BYRD: With your permission, I would like to amplify somewhat the statement made by letter dated July 20 to your committee outlining the position of this industry on the matter of State taxation of income from interstate commerce, and on the proposed legislation on which your committee held hearings on July 21 and 22, including Senate Joint Resolution 113, S. 2213, and S. -2281. In their testimony on July 22, Mr. R. L. Roland and Mr. F. L. Cox, describing the laws of Louisiana and Georgia, clearly outlined the situation which is so disturbing to business. In each case, the State laws provide for taxation of corporate income where there is any activity within the State resulting in profit to the corporation. By regulation, the tax is levied only when this activity is on a regular and systematic basis. Neither State representative could describe exactly what is considered to be a "regular and systematic" activity within his own jurisdiction. Mr. Cox, particularly, indicated that the normal procedure would be for the State taxing authorities to write to a foreign corporation believed to have engaged in a taxable activity, informing that business of its obligation to file a tax return. Evidently, until receipt of this letter, the organization has no definite rule by which it can determine when its occasional or isolated (and nontaxable) activity becomes "regular and systematic," thereby rendering that corporation subject to Georgia's tax laws. In view of Mr. Cox's inability to clearly define the point at which this obligation would arise, it is easy to understand how any foreign corporation shipping into Georgia might be highly concerned about the possible liability for taxes for both current and past years, together with penalties and interest. Mr. Roland estimated that there are approximately 100 foreign corporations now paying taxes in the State of Louisiana who would be relieved of this obligation by the adoption of the legislation under consideration. There are obviously hundreds of foreign corporations soliciting business in Louisiana, many of them on a "regular and systematic" basis, who are not included in this group. This is because present tax liability does not warrant the cost to the State of Louisiana of attempting to make a collection in these cases. Many of these firms are undoubtedly unaware of any possible obligation to file Louisiana returns, and others undoubtedly find it impossible to determine whether or not this obligation exists in view of the lack of definition. If these corporations progressively develop their Louisiana business they may become vulnerable to a crippling levy for taxes and penalties when the State finally decides that the possible tax obligation is great enough to warrant the effort to collect. Both Mr. Cox and Mr. Roland pleaded for congressional study before the enactment of any limiting legislation. Their reasoning was that the States |