Continuing efforts to amend the multistate tax compact.

• Author: Yesnowitz, Jamie

In recent months, the Multistate Tax Commission (MTC) has intensified its efforts to adopt significant changes to Article IV of the Multistate Tax Compact incorporating the Uniform Division of Income for Tax Purposes Act (UDITPA). These changes, designed in large part as an "update" to UDITPA, would alter the model allocation and apportionment statute followed by many states for purposes of their corporation income tax laws.

Background

In 1957, the Uniform Law Commission (ULC) promulgated UDITPA to provide uniform laws that states could adopt to assign the taxable income of multistate corporations among the states in which they do business. The MTC was created pursuant to the Compact in 1967 and included the UDITPA provisions as Article IV of the Compact. Due to the significant changes in the U.S. economy since the creation of UDITPA, some of the important uniform provisions were thought by some to be outdated, and many states have enacted legislation that departs from these provisions. As a result, the MTC recommended in 2006 that the ULC start a project to revise UDITPA. After public hearings and comments, the ULC decided to discontinue its work on revising UDITPA in 2009.

The MTC soon started to consider its own revisions to Article IV, and its Uniformity Committee completed its work in March 2012, proposing five significant changes to UDITPA in the areas of (1) apportionment factor weighting; (2) equitable apportionment; (3) business income; (4) market-based sourcing; and (5) redefining the sales factor as a "receipts factor." The MTC's Executive Committee in December 2012 approved the proposed model for a public hearing, which was held in March 2013.

Apportionment factor weighting: The Compact currently provides for a three-factor apportionment formula consisting of equally weighted property, payroll, and sales factors. However, many states have moved away from this standard formula and require that multistate taxpayers apportion income using a single sales factor or a three-factor formula with a double-weighted sales factor. The MTC's Uniformity Committee recommended that the Compact be amended to recommend a double-weighted sales factor to Compact states but ultimately to allow these states to define their own factor weighting fraction.

Equitable apportionment: Under the Compact, if the general allocation and apportionment provisions do not fairly represent the extent of the taxpayer's business activity in the state, the taxpayer may petition for or the tax administrator may require, an alternative apportionment methodology. The Uniformity Committee recommended adding a new paragraph providing that if the allocation and apportionment provisions do not fairly represent the extent of business activity of taxpayers engaged in a particular industry, transaction, or activity, the tax administrator may establish rules or regulations, to be applied uniformly, for determining alternative allocation and apportionment methods for such taxpayers.

Business income: The Compact currently defines "business income" as...