alone of $3.3 million, and that the tax for such year of approximately $229,000 was due. The board achieved this result by using the combined report to compute the tax with reference to the profitable operations of its foreign affiliates that operate totally outside the United States, most having no operational connections with Alcan Aluminum Corp. whatsoever, much less with California. It seems clear that such a tax is levied on income earned not only outside California, but outside the United States as well.

Section 303 addresses this unfair result by generally permitting combined or consolidated reports but limiting their use in order to avoid the unfair and burdensome taxes that result when corporations with little or no U.S. source income are included in a combined report. For example, if section 303 were adopted it would prevent a situation such as Alcan's experience for 1969 from arising because Alcan's California tax would be based only on the earnings of it and its subsidiaries and not on the earnings of its foreign affiliates doing no business in the United States, much less California.

Section 303 is a fair and reasonable compromise to an issue that has generated considerable controversy and litigation over the years and we believe that there are several reasons why it should be adopted as part of Senate bill 2173. If adopted, section 303 would preclude a proliferation of the combined reporting method which could well adversely affect future investments in the United States because of the fear that affiliates in multi-national companies would incur substantial State taxes far in excess of the benefits conferred by the States on their affiliates doing business therein. We believe that if section 303 were adopted, foreign investment in U.S. industry would be encouraged rather than deterred and this would mean more jobs and income for U.S. workers. Foreign direct investors would not have to avoid otherwise acceptable States because of adverse State taxes. For instance, Alcan Aluminum Corp. obviously must consider the fact that combined reporting is an impediment to any increased investment in California. Indeed it operates as an incentive to locate operations elsewhere. In that connection Alcan Aluminum Corp. recently closed a major plant in Riverside, Calif. While California taxes were not the only factor involved in that decision, in any business decision there are always numerous factors involved and no one factor is perhaps determinative, but California tax savings, however, were one of the factors considered. The effect of that closing can be seen in the trend of Alcan's California employment. The company's California employment peaked in 1969 with 1,300 employees and has steadily declined since then to about 400 employees. Other subsidiaries of multi-national corporations would certainly have to consider carefully similar experiences before investing in a State where their tax is measured by earnings of affiliates generated elsewhere in the world. Section 303 would provide long needed standards to help taxpayers comply with combined reporting requirements which offer little guidance as to how to prepare combined report with respect to foreign affiliates subject to different tax and accounting rules. Combined reporting in California is especially perplexing since taxpayers are instructed to begin with Federal taxable income in preparing the combined report, thus requiring the conversion of income reported

in foreign financial and tax statements into Federal concepts and figures, even though when such foreign income is so converted, that income may well not be taxable under Federal principles. We believe that by referring to rules in the Internal Revenue Code, section 303 of the bill affords an objective and uniform approach by which to determine the use of combined reports according to established legal principles. While we support the new income tax treaty with the United Kingdom which limits the combined reporting as to affiliates of United Kingdom enterprises, we believe Senate bill 2173 is a better solution to problems that are broader than the interest of any one taxpayer or State and should be resolved generally rather than through bilateral treaties.

Last, and perhaps most importantly, we believe that section 303 is a fair and reasonable attempt to permit combined reporting in general while avoiding the serious constitutional questions that are now being litigated in the California courts in cases such as Alcan's. In conclusion, Mr. Chairman, we believe that Senate bill 2173 is a reasonable and fair Federal solution to serious problems that is long overdue. Accordingly, we strongly support the principles of Senate bill 2173 and section 303 in particular and respectfully urge that the bill be adopted.

Mr. Chairman, we appreciate the opportunity to present these remarks. I thank you for your attention.

Senator MATHIAS. I thank all the members of this panel for the firsthand evidence which is more valuable than any other kind.

Let me ask you this question in your testimony today. I'm not sure it was testimony; I believe it was my own statement, that the number of taxes have proliferated perhaps 250 percent since Congress first began to consider this problem. I believe some of the members of the panel commented on the failure of the compact approach, that we were losing ground rather than gaining ground with the compact. I have a sense that there's a feeling that computer technology is going to affect this situation one way or another. Do you feel that this is a more urgent situation than it was 5 years ago or 10 years ago?

Mr. BETHUNE. If I may answer that question, Senator. I believe a uniformity would be of great value to use when we come to a computer age, because by having that uniform fraction it's very simple to program the computer. I'm not a programer so I don't know exactly how computers work but it would seem to me that if you have a uniform apportionable base and a uniform fraction, it would be much easier to compute those taxes with a computer.

Mr. TVETER. Perhaps I should reply also to that. A computer is a magical box but we in industry have learned that it's only as good as the thinking that goes into it and earlier I stated that at the time we programed our sales tax rates for our billing, we had to actually go out and get help as to where that destination sale was going. Your question is well taken that there has to be a conscious effort to update the information at all times, but it can really answer the question if the people will direct themselves to it.

Senator MATHIAS. While I have you, Mr. Tveter, I understand that your company is having some particular difficulties in West Virginia and Indiana. Is that right, with gross receipts taxes?

Mr. TVETER. Yes. The Indiana income tax law is somewhat unique and to short circuit the dissident effects, to determine your tax liability, what you do is you compute your liability on a gross receipts basis and also on the so-called apportionable net income basis and pay the higher of the two. Now the in-State gross receipts tax, however, should only be based on sales from in-State to in-State customers. We find out the State of Indiana under audit is going beyond statutes and are assigning shipments from out-of-State to in-State customers within the tax base for computation for gross receipts tax and we feel this is taxing wrong. We are experiencing this.

I might just elaborate if I will on the comment you had regarding the single-factor formula. Iowa is the only State that apportions by the single-factor formula. There's a case now to be heard before the Supreme Court on this matter and in all wisdom had Congress enacted your bill, we wouldn't be wasting our time.

Senator MATHIAS. Mr. Kapraly, you, I believe, are the only witness who has been before us who represents a subsidiary of a foreign parent corporation. Let me put a hypothetical case to you. Let's say that another subsidiary of your parent corporation were to mine bauxite in some foreign country, Jamaica or India or somewhere, and would smelt it and fabricate an aluminum product in that foreign country or in some other jurisdiction outside the United States and sell it in Europe, say. Would there be an attempt by California to tax those operations as a part of the whole unit?

Mr. KAPRALY. The answer is yes, Senator. Alcan Aluminum, Ltd., which is our parent corporation, would have the income of any subsidiaries somewhere to the examples you cited included in its consolidated financial statements. The beginning point for the determination of the tax due in California, as far as Álcan is concerned, is the corporation's annual report. In other words, they used financial income as the starting point rather than what they should be using as Federal taxable income as defined in their rules. Now

Senator MATHIAS. So this doesn't conform to the Federal income tax?

Mr. KAPRALY. No, it doesn't. Since they start with financial income. and they do not convert financial income to either Federal standards or concepts and figures, they're not following their own rules. Senator MATHIAS. Even State rules?

Mr. KAPRALY. And even State rules.

Senator MATHIAS. What is the source of the information?

Mr. KAPRALY. The source of the information again would be the annual report and any additional information that we might have to furnish them for the computation of the apportionment factor. For example, they cannot obtain the payroll data from the annual report. There is a good bit of information that we have to obtain separately to enable them to compute the tax and the apportionment factor.

Senator MATHIAS. Suppose the parent company simply refused to provide that information? Provide it in a form which was satisfactory to the State taxing authorities?

Mr. KAPRALY. If they refused to provide it? The State would probably make an arbitrary assessment. They would determine the tax on the best information available, and since annual reports are public doc

uments, a good bit of the information that they need to make the assessment could be obtained from that document.

Senator MATHIAS. It would be a little bit like the fellow who's on a turnpike that loses the entry ticket. He gets assessed for the whole mileage to where he got off.

Gentlemen, you've all been extremely helpful. Your statements are great additions to this hearing and we appreciate very much your being here.

PANEL OF BUSINESSMEN :

STATEMENT OF JOHN MAHONEY, REPRESENTING JOHNS-MANVILLE CORP.; WILLIAM J. PARK, GEORGE W. PARK SEED CO., AND DAVID STUMP, PRESIDENT, JACKSON AND PERKINS CO. Our final panel of the afternoon is John Mahoney of Johns-Manville, William J. Park with the George W. Park Seed Co. and David Stump, president of Jackson and Perkins Co.

[The prepared statements of Messrs. Mahoney, Park and Stump follow :]

PREPARED STATEMENT OF JOHN J. MAHONEY

My remarks will be confined to the state income tax portion of Bill S2173. To illustrate the need for a consistent uniform approach by all states to the concept of allocated or apportioned income (whether it be done through this proposed Bill S2173 or some other instrument), I would like to present an experience of Johns-Manville Products Corporation (J-M) in allocating and apportioning its income under the current various state laws.

J-M is a multistate corporation. In 1946 it acquired about 36,000 acres of timberland in Mississippi. J-M added more acreage at various times in the ensuing years, until its holdings reached about 55,000 acres. This land provided a strand of timber which was used as a raw material in the production of insulating board at J-M's manufacturing plant at Natchez, Mississippi. In 1966 the insulating board process was converted to a mineral board operation and J-M discontinued the wood fiberboard production in Mississippi and disposed of all the equipment used in that operation which could not be utilized in the mineral board process. J-M continued to hold the land as an investment. In December, 1971, the land was sold, resulting in a gain of about $16 million. All of the gain was directly allocated to the state of Mississippi, per the law, and J-M paid a tax of about $650,000.

The gain was reported to the various other states in which J-M filed income tax returns, but it deducted the gain from the taxable income base of these states (as this gain was entirely allocated to Mississippi). Several states agreed with our approach, notably Michigan, Illinois, Louisiana, and Oregon. Other states, however, took exception to our treatment of the gain, notably New Hampshire, New Jersey, New York, California, Georgia, Colorado, and Pennsylvania. These latter states returned the $16 million gain to their taxable income bases and taxed J-M accordingly. The additional tax plus interest in these six states will be about one-half million dollars. J-M contested the tax treatment in New Hamp shire Supreme Court and lost. It appealed the New Hampshire decision to the U.S. Supreme Court. The latter ruled that the case lacked a substantial federal question and the appeal was denied.

In the case of New Hampshire, New Jersey, and New York, their income tax laws do not provide for direct allocation of income. All income. after certain state adjustments, is apportionable. The laws of California, Georgia, and Colorado do provide for direct allocation of income, but usually only if the income is "non-business" in nature. These states, however, adhere to the concept that most income is "business" in nature and so classified the land gain, which made it apportionable income.

When we spoke with the Mississippi auditors, they indicated that J-M handled the direct allocation to Mississippi correctly and our problem was with the

other states. When we discussed the situation with the other states, their representatives stated that J-M owed a tax per their state laws and our problem really was with Mississippi. The result was that J-M was whipsawed tax-wise between the various state taxing jurisdictions.

From the foregoing experience, where a piece of income is treated as allocable by one taxing jurisdiction and apportionable by another, inconsistency results in tax inequity. For this reason a consistent, uniform approach in the multistate income tax area is needed to insure tax equity.

I would like to close with a statement of Johns-Manville's policy toward state and local income taxation. It can be set forth simply. It should be equitable and it should be simple to administer. It would not bother us if our total tax bill was increased in the state and local income tax area as a result of uniform legislation.

PREPARED STATEMENT OF WILLIAM PARK

My name is William John Park. I am President of the Geo. W. Park Seed Co., a family owned and operated business that had its humble beginnings in Fannettsburg, Pennsylvania, almost one hundred ten years ago, in 1868. Today, we operate out of Greenwood, South Carolina, serving America's gardeners strictly by mail, with the widest selection of flower and vegetable seeds in the nation, plus many unusual bulbs and accessories unavailable elsewhere. We feel we are providing a real service to our nation, as evidenced by the longevity of the company. In the last few years we have received numerous requests from other states in the union trying to collect sales or use taxes for merchandise shipped into that area. We have only one facility and that is located in Greenwood, South Carolina. We have ignored these, because should we ever honor this type request, "Pandora's Box" would not hold all of the problems that would ensue for small concerns such as ours.

In the first place, our accounting department has grown tremendously in recent years, simply because of the additional forms required by the many Federal Agencies. This includes not only the IRS, to which we are all obligated, but Labor Department forms, Commerce Department forms, Agriculture Department forms, not counting those which come from our own state. To add the collection of taxes for a potential of all fifty states, and subsequently all of the many cities which have sales taxes, not only would be prohibitive, but completely impossible. We feel the proposed Mathias Bill S. 2173 should be passed, and that it would certainly be a step in the right direction. It would ease our minds. It is unrealistic to make tax collectors for all political subdivisions out of any firm, particularly small firms like Park Seed Company that has only one base of operations. As already mentioned, the bookkeeping required not only would be horrendous, but impossible, since the average order for 1976 was $13.06. We do collect sales taxes for South Carolina, as this is our home base, though even now many customers do not send the tax, and it costs us more to collect the additional tax than the tax itself. In general the tax would amount to the net profits we hope to make annually, some 4 or 5 percent. Collection and record keeping would easily cost more than the tax itself making us unprofitable, when multiplied by fifty states and the other potential taxing agencies. I'm sure you can see exactly where our problem would lie.

For other states, municipalities, and political subdivisions to have the power to tax us would violate one of the cardinal principles on which this country was founded, and that is, "taxation without representation." I know this does occur today, and it seems that those of us who are in this unenviable position are fair game to the local politicians when they are searching diligently to find new sources of revenue. As a non-resident, we would have no legitimate input which would carry any weight. In my judgment, it is imperative that this bill be passed, so that we would not be forced out of business, causing the loss of some 350 permanent jobs in our own company, not counting the some 600 employees we have during peak seasons, as we are so highly seasonal in nature.

I understand that the House has passed a bill very similar to this twice and that the Senate did not have an opportunity to take it up. I am delighted to see this positive action taken by your committee, and appreciate greatly the opportunity to appear before you at this hearing. It is heartening for some of us in the boondocks to realize that you are concerned with the plight of small com