States quickly modify apportionment provisions in reaction to changes in financial institutions industry.

• Author: Boucher, Karen J.

In November 1994, the Multistate Tax Commission (MTC) adopted the "Uniform Method for Allocation and Apportionment of Net Income from Financial Institutions." With the enactment in September 1994 of the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the Act), in retrospect, the adoption by the MTC of this regulation could not have been more timely.

This is primarily due to the fact that the Act and the changes it made in the banking laws have had a significant impact on the financial institutions industry. In general, with the passage of the Act, banks and bank holding companies can expand their U.S. interstate activities on a multistate basis. More specifically, the Act authorized adequately capitalized and adequately managed banks and bank holding companies to engage in interstate mergers, acquisitions and de novo banking (full interstate banking and branching was recently authorized by the Act). Finally, the Act also gave banks the ability to participate in interstate mergers under the 30-mile rule of the National Bank Act of 1864.

As a result of these changes, the number of financial organizations conducting business in a multistate arena has grown exponentially. Coupled with a simultaneous loosening of various regulatory restrictions, banks and other financial organizations are significantly expanding the services they offer. Not only are such organizations engaging in traditional banking services within a multistate arena, but they are also engaging in new businesses and expanding the delivery of existing products and services (e.g., use of the Internet, personal banking software and electronic bill payment processing). This rapidly changing environment has caused several states to review the manner in which financial institutions are taxed. Particular attention has been directed to how the income of multistate institutions is being apportioned among the states in which they conduct business.

Definitional and Apportionment Provisions

The overall state tax liability of an affiliated group of financial institutions, each operating solely within a given state, could change substantially if one or more of the entities are merged and therefore need to apportion the aggregated income among several states. Thus, in addition to the practical business considerations that normally accompany any merger or expansion of operations (such as expanding markets and reducing or eliminating duplicative costs), it is critical that the...