AICPA on MTC's reporting-options proposal.

• Author: Naghavi, Faranak
• Position: Multistate Tax Commission

One of the functions of the AICPA'S State and Local Tax Technical Resource Panel (TRP) is to monitor and comment on the activities and proposals of state organizations, including those of the Multistate Tax Commission (MTC), which represents states' interests on multistate matters, particularly on uniformity issues.

Over the past few months, the MTC has been considering a proposal ("Uniformity Proposal Concerning Reporting Options for Non-Resident Members of Pass-Through Entities") which, according to the TRP's understanding, intends to:

1. Reduce the cost of collecting tax on nonresident individuals by relieving the administrative burden on both taxpayers and state taxing authorities through a composite-filing process;

2. Respond to tax practitioners' requests to pursue composite-filing uniformity among the states; and

3. Eliminate a perceived loss of state revenue, based on anecdotal information that taxpayers are engaging in one-time transactions using flow-through entities that allow nonresidents to avoid state taxes on the transaction's profits or distributions.

   While the proposal's title may imply a simple approach for improving uniformity in state composite-return filing, the draft's actual scope is much broader. After reviewing comments on, and opposition to, the first draft, the MTC concluded that mandatory withholding on cash distributions would address the three concerns stated above; thus, it issued a revised proposal, which essentially provides for composite filing for flowthrough entities. To the extent that nonresident members of flowthrough entities do not participate in the composite filing, the proposal provides for mandatory withholding at the flowthrough-entity level.

   TRP's Comments

   The TRP has submitted comments on the revised proposal and is awaiting the MTC's next draft. It raised several key issues that deserve separate consideration. First, the MTC has already reviewed and developed model statutory language on voluntary uniform-filing requirements in its Model S Corporation Income Tax Act (MoSCITA), to which the AICPA and other interested parties have previously provided input. If the proposal's objectives are administrative ease and uniformity, it makes sense to develop the composite-filing process beginning with the MoSCITA.

   Second, withholding at the entity level will impose taxes on many nonresident members who have neither nexus nor a net tax liability with the state due to credits, deductions or losses from other...