Multistate tax compact amendments may have major effect on states.

• Author: Yesnowitz, Jamine C.

The Multistate Tax Commission (MTC) approved amendments to key provisions of Article IV of the Multistate Tax Compact at its annual meeting on July 30, Article IV concerns the division of income and incorporates the provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA). These amendments address such topics as apportionment factor weighting, the definition of business income, the adoption of market-based sourcing, the definition of sales, and alternative apportionment. Furthermore, on July 31, the MTC's Executive Committee approved separate proposed amendments concerning the use of alternative apportionment that were sent to the member states for consideration in September 2014. As discussed below, these amendments address significant issues and may result in statutory amendments in some states.

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 created the compact in 1967 and included the UDITPA provisions as Article IV. Significant changes in the U.S. economy during this time led some to think that a number of the important uniform provisions were outdated, and many states have enacted legislation that departs from these provisions.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 then started to consider its own revisions to Article IV, and its Uniformity Committee completed its work in March 2012. The Executive Committee approved the proposed model for public hearing in 2012. In October 2013, Prof. Richard Pomp released a detailed document, termed the Report of the Hearing Officer, which analyzed the proposals and made recommendations for amending key provisions of Article IV. In March 2014, the Uniformity Committee decided to recommend to the Executive Committee that its original draft language be retained.

However, in May 2014, the Executive Committee accepted some of Pomp's recommendations and sent a survey to the member states to determine whether each state would adopt the proposed draft language.

Apportionment Factor Weighting

Before amendment, the compact provided for a three-factor apportionment formula consisting of equally weighted property, payroll, and sales factors. The amended compact allows a state to define its own factor-weighting fraction, but it recommends a double-weighted sales factor (Multistate Tax Compact, Art. IV.9).

Business (Apportionable) Income

The compact previously defined "business income" as "income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." Also...