At its 47th Annual Conference and Committee Meetings (July 28-31, 2014), the Multistate Tax Commission (MTC) moved forward on several important proposed amendments to the Multistate Tax Compact’s Uniform Division of Income for Tax Purposes Act (UDITPA) provisions. For example, on July 30, the full MTC voted to approve the following Compact amendments:
- Art. IV.1(a), Definition of Business Income. The definition of "business income" is replaced with a more expansive definition of "apportionable income" (includes “all income that is apportionable under the Constitution of the United States and is not allocated under the laws of” the enacting state). Conversely, the definition of "nonbusiness income" is replaced with a definition of "nonapportionable income."
- Art. IV.9, Factor Weighting. The Compact’s current equally-weighted three-factor apportionment formula is replaced with the adopting state’s apportionment formula (although the MTC recommends using a double-weighted sales factor formula).
- Art. IV.1(g), Definition of "Sales." The definition of “sales” is replaced by the definition of “receipts,” which is limited to receipts from transactions and activity in the regular course of the taxpayer’s trade or business. Receipts from hedging transactions and from the disposition of cash or securities (i.e., treasury functions) are specifically excluded from the definition.
- Art. IV.17, Sales Factor Sourcing for Services and Intangibles. The current cost-of-performance sourcing rule for receipts from sales of intangible property and services is replaced with market-based sourcing rules. The “reasonable approximation” of an assignment is permitted if the market state cannot be determined using the provided guidelines. In addition, a “throwout rule” applies if the taxpayer is not taxable in the state to which a sale is assigned or if the market state cannot be reasonably approximated.
- Art. IV.18(b), Distortion Relief. A state’s tax administrator may establish rules or regulations for determining alternative allocation and apportionment if the standard allocation and apportionment provisions do not fairly represent the extent of business activity in the state of taxpayers engaged in a particular industry or in a particular transaction or activity. Any regulation adopted must be applied uniformly (subject to adjustment for affected taxpayers).
Corresponding changes to the MTC’s model allocation and apportionment regulations are expected to follow.
In addition, on July 31, the MTC Executive Committee approved a separate set of amendments to the Compact’s UDITPA provisions that would establish the burden of proof where an alternative method of apportionment is proposed (Art. IV.18(c)). Under the proposed amendments, the taxpayer petitioning for, or the tax administrator requiring, the use of an alternative method must prove (1) that the standard allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s activity in the state; and (2) that the alternative method is reasonable. The standard of proof is left to the state to decide. Other, non-substantive changes to the alternative apportionment provisions regarding penalties and agreements with the state were also approved. These proposed changes now move forward to the MTC’s state survey process where they are circulated to the MTC members to determine if the affected members will consider adoption of the recommendations within their respective jurisdictions.
Other corporate income tax-related developments during the MTC meetings included:
- Hearing officer’s report on proposed amendments to financial institution allocation and apportionment provisions was approved and moved to the member survey stage (July 31, Executive Committee);
- Proposed project on the use of trusts for state tax avoidance was allowed to proceed (July 28, Uniformity Subcommittee on Income and Franchise Tax);
- Proposed projects on sourcing of cloud computing services and sourcing of electricity were tabled for now to save resources for revisions to the MTC’s model allocation and apportionment regulations expected following adoption of the UDITPA changes described above (July 28, Uniformity Subcommittee on Income and Franchise Tax); and
- MTC Policy Statement 2009-01, which urges Native American tribes and states to resolve tribal-state tax issues through negotiated agreements rather than through the courts, was renewed (July 30, full MTC).