revenue will be in the millions of dollars each year, money which it can ilk afford to lose. The enactment of legislation now will eliminate this possible loss. RECOMMENDATIONS I therefore strongly recommend the enactment of legislation at this session of Congress, which establishes some ascertainable minimum activities standard that a company must meet before a State may tax its net income derived from interstate sales. The standard, I would suggest, should be maintenance of an office or warehouse within the taxing State. The temporary standard set forth in Senate Joint Resolution 113, section 101, although helpful, is too broad. The wording in lines 8, 9, and 10 on page 2, "or has had an officer, agent or representative who has maintained an office or other place of business in such State," is misleading and will cause endless litigation. If such language is to be included, then some definition of "agent or representative" is required for clarification. Our associations do not believe that it is warranted at this time to establish a Commission on State Taxation of Interstate Commerce as recommended in title II of said Senate Joint Resolution 113. This will only cause additional delay. The issue is obvious, and requires action rather than additional study other than being given by this committee. Already three States have enacted legislation in this area. It is imperative that Congress act now. The problem is here. Action should be taken before the States move into this field of taxing interstate commerce. Solution of this problem now will not only preserve interstate business; it will prevent States from relying upon this source for its revenues. LEGAL BRIEF: TAXATION OF INTERSTATE COMMERCE I. THE CONSTITUTION OF THE UNITED STATES VESTS EXCLUSIVE CONTROL OF INTERSTATE COMMERCE IN THE CONGRESS The problem An urgent need exists to clarify the present confusion of the constitutional right of the States of the Nation to tax interstate commerce. The judicial application of constitutional principles to State statutes has caused much misunderstanding. The Congress has not specifically regulated the taxation of interstate commerce, and thus the States have endeavored to act in this area. One of the cardinal principles of taxation by a government is that it must be fair and clearly understood by those who are to pay the tax. Therefore, in view of this present situation, it is logical to start a discussion of the taxation of interstate commerce at the source of the authority to tax. Constitutional authority The Constitution of the United States gives this power to the Congress in article I, section 8, clause 3, when it says, "The Congress shall have Power * * * to regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes ***" This is very precise and clear. There should be little doubt that for a State to tax a business, there must be some real intrastate activity. Gibbon v. Ogden One hundred and thirty-five years ago, Chief Justice Marshall in speaking of the power of Congress to regulate interstate commerce said: "It is the power to regulate; that is, to prescribe the rule by which commerce is to be governed. This power, like all others vested in Congress, is complete in itself, may be exercised to its utmost extent, and acknowledges no limitations other than are prescribed in the Constitution" (Gibbon v. Ogden, 22 U.S. 1 (1824)). This case stands for the principle that the Congress has exclusive control over interstate commerce, and when a State law and a Federal law come into conflict, then the Federal law is supreme. The facts of the case reveal that the laws of the State of New York granted to two persons the exclusive right to navigate all the waters within the jurisdiction of the State of New York. The Supreme Court held that such laws were inoperative as against the laws of the United States regulating the coastal trade, and cannot restrain vessels licensed to carry on the coastal trade under the laws of the United States from navigating those waters. Case law Through the years, the rule of law and the express understanding of most American tax lawyers was that for a State to tax a company doing business within its borders, there must be some real intrastate business activity. This was held to mean an office, warehouse, stock, bank accounts, etc. The right to tax interstate commerce was delegated to the Federal Government exclusively. There were no State barriers to be surmounted in order to send goods to customers or make products available to citizens in another State. For example, in the case of Leloup v. Port of Mobile (127 U.S. 640, 648), the Supreme Court said: "No State has the right to levy a tax on interstate commerce in any form ***. The reason is that such taxation is a burden on that commerce, and amounts to a regulation of it, which belongs solely to Congress." The Supreme Court in specific reference to the commerce clause said that clause "by its own force created an area of trade free from interference by the States" (Freeman v. Hewit, 329 U.S. 249, 252). A case which expressed the law on taxation of interstate commerce by a State was Sprout v. South Bend (277 U.S. 163, 171). Justice Brandeis said, "in order that a (State) fee or tax shall be valid, it must appear that it is imposed solely on account of the intrastate business; that the amount exacted is not increased because of the interstate business done; that one engaged exclusively in interstate commerce would not be subject to the imposition; and that the person taxed could discontinue the intrastate business without withdrawing also from the interstate business." This case was followed in East Ohio Gas Co. v. Tax Commissioner (283 U.S. 465, 470), and Cooney v. Mountain States Tel. Co. (294 U.S. 384). Taxation which constitutes an attempted regulation of interstate commerce by imposing a burden on such commerce has been held invalid. In the case of Gwin, White and Prince, Inc. v. Henneford (305 U.S. 434), the Supreme Court said: “*** under the commerce clause, in the absence of congressional action, State taxation, whatever its form, is precluded if it discriminates against interstate commerce." State taxes on exclusive interstate commerce are illegal The following cases held State taxes on businesses which were exclusively interstate to be illegal: Cheney Brothers Co. v. Massachusetts (246 U.S. 147); Ozark Pipeline Corp. v. Monier (266 U.S. 555); Apha Portland Cement Co. v. Massachusetts (268 U.S. 203); Spector Motor Service v. O'Connor (340 U.S. 602). Therefore, the Supreme Court's opinions when properly analyzed and categorized reveal that a State may not tax a company's exclusive interstate commerce. Tax on privilege of doing business A recent case by the Supreme Court stated: "This Court heretofore has struck down, under the commerce clause, State taxes upon the privilege of carrying on a business that was exclusively interstate in character. The constitutional infirmity of such a tax persists no matter how fairly it is apportioned to business done within the State. "Our conclusion is not in conflict with the principle that where a taxpayer is engaged both in intrastate and interstate commerce, a State may tax the privilege of carrying on intrastate business and, within reasonable limits, may compute the amount of the charge by applying the tax rate to a fair proportion of the taxpayer's business done within the State ***" (Spector Motor Service v. O'Connor, 340 U.S. 692, 609-10). The change of the law Until February 24, 1959, it was well understood from the cases as shown above that the Congress has the exclusive power to regulate exclusively interstate commerce. On that date, the Supreme Court handed down the Northwestern and Stockham Valves cases. These cases held that the net income from the interstate operations of a foreign corporation may be subject to State taxation provided the levy is not discriminatory and properly apportioned. State statutes held constitutional The following statutes were held not to be in violation of the commerce clause: The Minnesota statute states: "An annual tax for each taxable year, computed in the manner and at the rates hereinafter provided, is hereby imposed upon the taxable net income for such year of the following classes of taxpayer (1) Domestic and foreign corporations *** whose business within this State during the taxable year consists exclusively of * * * interstate commerce." The Georgia statute was comparable: "Corporations, allocation and apportionment of income. The tax imposed by this law shall apply to the entire net income *** received by every corporation, foreign or domestic, owning property or doing business in this State. Every such corporation shall be deemed to be doing business within this State if it engaged within this State in any activities or transactions for the purpose of financial profit or gain *** whether or not any such activity or transaction is connected with interstate or foreign commerce." The Supreme Court of Georgia said it found that "(W)ithout dispute (Stockham) was engaged exclusively in interstate commerce insofar as its activities in Georgia are concerned." Yet despite this, the U.S. Supreme Court held that the State could still tax the company's business, which was exclusively interstate. By holding these statutes constitutional, it is very possible that all of the other States of the Union will enact comparable legislation. The end result will be the complete taxation by the States of a company's exclusive interstate commerce. On March 2, 1959, the Supreme Court refused review of the International Shoe and Brown Forman cases. It upheld the Louisiana court's decision that a State can tax a foreign corporation's net income derived from within the State even though the company's business is exclusively interstate business. In fact, in the Brown case, the company was not qualified to do local business in Louisiana, and in neither case did the company have an office in the State. Two weeks ago, on July 2, the Supreme Court's rule in the NorthwesternStockham, that a State may levy a fairly apportioned nondiscriminatory tax upon income derived wholly from interstate commerce, was held applicable to the Wisconsin income tax by the Dane County circuit court. The court ruled that an interstate motor carrier, not licensed to do any intrastate business in Wisconsin, is subject to tax because of rather extensive local activities around its freight terminals which they felt was sufficient to justify taxing. CONCLUSION The Constitution of the United States vests power in the Congress to regulate interstate commerce. Although the Supreme Court has reversed all prior decisions which prevented the States from taxing purely interstate commerce, the Congress is yet invested with the power to control the States in their taxation of such interstate commerce. Unless Congress acts businesses will have to comply with 49 different taxing laws. The cost of compliance and the cost of the tax will discourage remaining in business or tax the business out of existence. The Congress must act now to preserve our economy and our free and independent way of life by establishing limitation of the States' power of taxation over purely interstate commerce. HAROLD HALFPENNY, Halfpenny & Hahn, Chicago, Ill. Mr. HALFPENNY. In closing, I did want to call your attention, on behalf of the National Wholesalers, Mr. Chairman, that the automotive service industry sent a survey out to their members, and they had replies from a great number, and in analyzing those it showed that out of 79 wholesalers of automotive parts and supplies in the country, 55 of them stated that they did business in more than one State, 44 of them in only three States, and practically all of them stated that if it became necessary to pay taxes in those States, they would abandon that type of business in other States. We have those, if the committee would be desirous of seeing any of those replies. The CHAIRMAN. Would you care to suggest any amendments to any of the three bills before the committee? Mr. HALFPENNY. Yes, we would desire that opportunity, if the chairman would see fit to grant it. The CHAIRMAN. We would be pleased to have you do it. (The following letter was subsequently received for the record :) LAW OFFICES, HALFPENNY & HAHN, Chicago, July 27, 1959. Re taxation of interstate commerce. Senate Office Building, Washington, D.C. MY DEAR SENATOR BYRD: I want to thank you for the kind courtesy you showed to both Colonel Roberts and myself last week when we appeared before your committee to testify regarding the taxation of exclusive interstate business by the States. Many members of your committee showed that they felt the language of the pending bills were not sufficiently detailed to meet all situations. At that time you requested we submit our recommendations in regard to the language in the bills. Careful examination of all seven pending bills would indicate Senator Saltonstall's language, S. 2281, is preferred. However, we enclose our suggestions as follows: 1. Section (a), lines 1 through 7: No changes. 2. Section (b) is changed to read as follows: "(b) For purposes of subsection (b), a person is not carrying on a trade or business in a State solely by reason of one or more sales of tangible personal property in the State (whether title to such property passes in or outside of the State), if such person does not have or maintain an office, plant, store, or warehouse in the State, and does not have an officer, agent, or representative in the State who has a permanent place of business in the State. For purposes of the preceding sentence, the terms "agent" and "representative" do not include the registered agent or representative that a corporation must list to do business within a State, and it does not include an independent broker or contractor who is engaged independently in soliciting orders in the State." The reason we eliminated "or other place of business" in lines 3 and 5, page 2, is because the language is too broad and inclusive, and is without definite meaning. The words "plant" and "store" were added to line 3, page 2, because it is better to be specific and not leave it to interpretation. We defined an "agent" or "representative" as not to include a person who is the registered agent or representative that a corporation must list to do business within a State as every State requires such registration and that in many cases it is merely the lawyer who files the articles of the company to do business in the State. We eliminated "for more than one seller" in line 9, page 2, as it is too ambiguous, and members should not be the basis, but rather status. Section 2, page 2: There should be a separability clause inserted here as this section may be unconstitutional. Section 3, page 2: No changes. I hope that this will be of help to you. If there is anything further I can do, please feel free to call upon me. Very truly yours, HAROLD HALFPENNY. The CHAIRMAN. The chairman has been tremendously impressed with the importance of this legislation, but he is also impressed with the fact that the wording of it must be very carefully considered, because it is possible to pass a bill here which may not help things but make them worse. So we would like to get all the information we can. I think this is one of the most important bills that has been before our committee in my service of 26 years. I hope the committee can take prompt action, but take action which will effectively remedy the situation. Senator Williams. Senator WILLIAMS. No questions. The CHAIRMAN. The next witness is the Honorable Leverett Saltonstall, senator from the State of Massachusetts. Please proceed, Senator. STATEMENT BY HON. LEVERETT SALTONSTALL, U.S. SENATOR FROM THE STATE OF MASSACHUSETTS Senator SALTONSTALL. I appreciate the opportunity to appear before you and testify in support of legislation which would define and limit the scope of power of the States to tax income derived from interstate business. Judging by the volume of correspondence which I have received on this subject, much of it in the form of copies of letters addressed to the chairman. I am confident that you are all well aware of the tremendous interest in this legislation. Knowing that you will be hearing in detail from many well qualified witnesses about the importance and urgent need of prompt action by Congress on such legislation, I will not take the time for an elaborate statement on these points. Rather, I would like simply to call your attention to the report of the Select Committee on Small Business entitled "State Taxation on Interstate Commerce" (S. Rept. 453) which contains what I believe is a rather complete and helpful discussion of the subject. In addition, I offer for insertion in the record of these hearings, following my statement a copy of my remarks made on June 25, 1959, on the floor of the Senate when I introduced S. 2281 and an explanation of S. 2281. These are appended to my statement. Also I offer for insertion in the Record an excellent statement on the problem of State taxation of interstate commerce income and the importance and need for prompt congressional action. The statement was prepared by John Dane, Jr., a Boston tax attorney and former State tax commissioner of Massachusetts. Finally, I commend to your consideration the special July 7, 1959, issue of State Tax Review published by Commerce Clearing House, Inc. This issue deals exclusively with State income taxation and contains at pages 16-21 a report of 1959 State legislative action and official State comment on the Supreme Court decisions in the Stockham Valves and Fittings and Northwestern States Portland Cement cases. As the author of S. 2281 and a cosponsor of Senate Joint Resolution 113 and having presided over Small Business Committee hearings on this subject in Boston on May 1, 1959, I am completely convinced that Congress has full power to act and that it should act at this session. Congress should adopt a permanent law defining the scope of the States power to tax income from interstate commerce. As I have sought to provide in S. 2281, the limitation should be such as to provide that only businesses having a substantial permanent physical presence in a State should be subject to such State's income taxing power. S. 2281 would limit taxation to firms which have an office, warehouse, or other place of business in the taxing State or an officer, agent, or representative who maintains an office or other place of business. The foregoing standard which is provided in section 1 of S. 2281 is patterned after section 47-1551c(h) of the District of Columbia Code. The scope of permissible State taxation under S. 2281 is in one respect somewhat narrower than that provided in S. 2213 and Senate Joint Resolution 113, both of which would permit taxation of a firm which maintains a stock of goods within a State even through the |