Editor’s note: The following is the testimony recently given by David Rolston, president and chief executive officer of Hatco Corp., in Milwaukee, , on behalf of the North American Association of Food Manufacturers to the Commercial and Administrative Law Subcommittee of the U.S. House Judiciary Committee in Washington, D.C. Rolston testified in support of H.R. 1083, the Business Activity Tax Simplification Act.
The North American Association of Food Equipment Manufacturers, representing more than 600 U.S. companies that manufacture commercial food preparation, cooking, storage and table service equipment used in restaurants, cafeterias, and other food service establishments, strongly urges the Subcommittee to report out H.R. 1083, The Business Activity Tax Simplification Act.
The current practices of some states to assert “business activity taxes” on sales of firms that have no physical presence or other “nexus” in their states is disruptive to commerce across state lines.
These practices are inconsistent among states and discriminatory in application. They interfere with intelligent business planning and therefore to the economic growth and economic health of firms that do business across state lines. H.R. 1083, introduced with strong bipartisan support, would correct this situation before further harm is done.
Allow me to elaborate from the experience of my own firm. I am David Rolston, president and CEO of Hatco Corp.., a manufacturer of commercial food warming equipment, toasters, and water heaters headquartered in Milwaukee, Wis. We have 375 employees, and the company is 100 percent employee-owned.
I also am chair of the Government Relations Committee of the North American Association of Food Equipment Manufacturers.
This is a surprisingly large industry. Total domestic sales are over $8 billion – and it is an industry composed predominantly of small businesses. Sixty-six percent of the members have sales less than $10 million a year with fewer than 100 employees. We have members from 46 states of the union. Typical products are freezers, refrigerators, stoves, ovens and broilers, food warmers, display tables, serving trays, cutlery – virtually everything you would see in a commercial restaurant kitchen or food service area.
Most, like Hatco, are single-state companies, and have no physical presence outside their home states.
Efficiency and predictability are essential to a small business. The practice of some states to assess “business activity” taxes on firms that have no physical presence in the taxing jurisdiction is a significant administrative cost, adding an unnecessary layer of inefficiency, and limiting our ability to grow.
Hatco, like most NAFEM members, sells through independent manufacturers’ representatives who represent 10 to 15 companies. We also use independent service agents to complete warranty repairs on our equipment. Again, these are independent companies that service the equipment of many different manufacturers. We have no employees or other physical presence outside of Wisconsin.
Nonetheless, we are now being forced to pay business activity taxes in four states where we have customers but no physical presence.
Justification given by the states for these taxes is the existence of the representatives or service agents.
Of course, our manufacturers’ representatives and service agents in these states do pay income taxes on their own business profits in their own states, just as we pay income taxes in Wisconsin. That is as it should be. We should be paying taxes in states where we have presence and receive government services. For us, that is Wisconsin. We should not be paying business activity taxes – which are a form of income tax – where we have no physical presence. (These are not, of course, sales taxes – a clarification I am sure is not needed in this committee; these business activity taxes are quite different from and on top of sales taxes.)
We don’t know what other states will come at us next. These tax bills catch us by surprise. When states first contact us, they sometimes come on hard. One state originally demanded that we pay eight years of back taxes.
This would have been significant. Others have threatened penalties. Litigation, of course, is impractical for a small firm. We try to negotiate, and then we pay up. We can’t pass the costs on, so both the tax payments and, even worse, the administrative costs, are off our bottom line.
One example: very recently, we were subjected to an audit by the State of Washington Department of Revenue, one of the four states in which we already pay a Business Activity Tax. They audited the excise tax returns filed by Hatco for the period 1/1/06 to 6/30/09 related to business and occupation (B&O) tax.
The B&O tax in the state of Washington is a business "privilege" tax assessed on the value of shipments made by Hatco into the State of Washington. Hatco has no physical presence in the state of Washington but is still required to periodically report and pay the B&O tax.
The state of Washington originally notified Hatco in 2005 that we owed the B&O tax. This resulted in Washington’s initial audit of Hatco and a very lengthy and costly audit and appeal process in 2005 and 2006. That audit covered the period 1/1/98 – 9/30/05. Hatco begrudgingly settled the audit on 7/26/06 after much cost and time was spent contesting the B&O taxation.
The auditor in charge of the recent audit initially was not even aware of the prior audit; yet after Hatco informed her of the prior audit and she located the files in the State of Washington’s archives, she nonetheless contended that she needed to perform an audit for the period 1/1/06 – 6/30/09.
Please be aware that our quarterly B&O taxes are approximately $1,000 … there is simply not much at stake here.
Nonetheless we had to go thru the audit. The audit included an introductory on-site meeting on 8/25/09, numerous email and telephone exchanges, preparation of data files and copies of various documents as requested by the Washington auditor, and consultation with our CPA tax advisors.
Ultimately Hatco received a letter dated 12/1/2009 from the State of Washington Department of Revenue indicating "no tax adjustments were made since no errors were found…".
Hatco’s accounting and information services personnel incurred approximately 40 hours of time in order to comply with the various requests from the Washington state auditor. Hatco also incurred some outside professional fees from its CPA tax advisors.
What are the consequences? Think about where this is going. Facing business activity taxes assessed by four states where we have no presence is bad enough, but 20 states? Thirty states? We would have to add staff just to attempt to keep track of these unforeseeable obligations, file the returns, and stay clear of penalties and demands for back taxes. These would, of course, be unproductive employees – a hit to our efficiency. And bear in mind that we are a 100-percent employee-owned company. Any added costs hurt every employee.
And what about the overall impact on the economy? The taxes we pay to states where we have no physical presence come off our net profits. So do the administrative costs. As our net income after expenses is reduced, the taxes we owe to Wisconsin and to the federal government also are reduced. After you factor in both the added taxes and the added administrative costs, both to us and to the states, I doubt that anyone is coming out ahead.
Certainly if other states jump on this bandwagon, we will just be spreading the taxes around, with little, if any, net benefit to anyone.
As a small manufacturer in the U.S., we face many threats from competitors outside our borders. We continue to be successful by staying lean and smart. Adding unnecessary headcount to administer programs like activity taxes makes us less competitive with overseas companies.
For many years, it has been the presumption that businesses pay taxes only in states where they have physical presence and receive government services. We believe the Congress should act to preserve this standard. H.R. 1083 would serve this purpose.
David Rolston is president and chief executive officer of Hatco Corp. in Milwaukee.
