It's non-(of your) business: an open letter.

• Author: Wulf, David E.

Dear State Tax Auditor:

This is in response to your request for copies of returns we have filed with other States. Your statement that my company is accountable for its allocation of non-business income to another state is incorrect. Such a statement assumes that all States have tax laws exactly like those of your state. While we wish that was true, unfortunately it is not.

Your State is a member of the Multistate Tax Commission (MTC) and has adopted both UDITPA and the MTC's Regulations. Yet about only 23 States have completely adopted UDITPA, and about only 32 States are members of the MTC. These facts alone suggest that there are probably differences between your State and those States that have not adopted UDITPA or are not MTC members. In point of fact, however, there are even significant differences between your State and your fellow MTC member States as well as between your State and States that have adopted UDITPA.

Let me give you some examples of differences between your State and other States:

1. Oklahoma has not adopted UDITPA and does not have the concept of business and non-business income. Those terms are not used anywhere in the Oklahoma statute or the Oklahoma Tax Commission's Rules. Instead, the Oklahoma statute contains a list of specific items of income which must be allocated. 68 O.S. [sections] 2358A(4) & (5).

2. Kansas -- a fellow member of the MTC that has adopted UDITPA -- does have the concept of business and non-business income, but does not use the functional test to distinguish between the two, as your State does. The Kansas Supreme Court made this clear in the In re Chief Industries, Inc., 875 P.2d 278 (Kan. 1994), and Western Natural Gas Co. v. McDonald, 202 Kan. 98, 446 P.2d 781 (1968) cases. Furthermore, Kansas allows taxpayers to elect to treat all income as apportionable. KSA [sections] 79-3271(a).

3. Missouri -- also a fellow member of the MTC, but one in which UDITPA is optional for taxpayers -- does not allow the filing of consolidated or combined returns by unitary groups, let alone require such filings as your State does. [sections] 143.431.3, RSMo 1986. The Missouri Supreme Court made this clear in The Williams Companies, Inc., v. Director of Revenue, 799 S.W.2d 607 (Mo. 1990).

4. Tennessee -- also a fellow member of the MTC that has adopted UDITPA -- did not have a functional test during some of the years under audit. The Tennessee Supreme Court confirmed this in General Care Corp. v. Olsen, 705 S.W.2d...