Proposed amendments would change apportionment rules

The Multistate Tax Commission is considering significant changes to the rules that govern how multistate businesses are taxed. The goal of the proposed amendments is to modernize the Multistate Tax Compact so it conforms to shifting tax policy preferences and changes in the world economy. All but three states (Delaware, Nevada, and Virginia) are members of the Multistate Tax Commission.

The Compact’s current framework for multistate taxation assigns the total taxable income of a multistate corporation among the various states in which it does business. In an effort to keep this system uniform and up-to-date, the commission has come up with five proposed amendments.

1. Change how states decide which income is apportioned or allocated. Currently, items that qualify as “business income” are apportioned using a three-factor formula that considers the percentage of property, payroll, and sales a multistate corporation has within a state. The first amendment would replace “business income” with a more expansively defined “apportionable income.”

2. Replace the equally weighted apportionment formula with a double-weighted sales-factor formula. Many states no longer require the equally weighted three-factor formula. In its place, there has been a trend to more heavily weight the sales factor. In an effort to promote uniformity, the commission considered five options and decided that double-weighting sales in the apportionment formula achieved this goal.

3. Replace the cost-of-performance sourcing rule with market-based sourcing rules. Under the current framework for sales-factor numerator sourcing, receipts from the sale of services and intangibles are evaluated using the cost-of-performance rules. The proposed amendment moves from cost-of-performance to a market-based sourcing approach. The proposed amendment will also allow for the proportional sourcing of receipts “to the extent” the market is in the state.

4. Replace the definition of “sales.” This proposed amendment replaces the definition of “sales” with a definition for “receipts.” The “receipt” definition includes the transactional test limitation already present in the commission’s regulations.

5. Explicitly authorize industrywide or issuewide alternative apportionment rules. For taxpayers engaged in an industry in which the current allocation and apportionment provisions do not fairly represent the extent of their business activity, the final proposed amendment expands the tax administrator’s authority to adopt an appropriate apportionment and allocation method for those taxpayers. This treatment also applies to taxpayers engaged in a particular transaction or activity not fairly accounted for under the primary framework for allocation and apportionment.

The proposed amendments are being evaluated by the Multistate Tax Commission’s Executive Committee. Before adopting the amendments, the commission plans to open debate on the amendments to a wider audience.

For a detailed discussion of the issues in this area, see “Proposed Amendments to Article IV of the Multistate Tax Compact,” by Jason Peart, Esq., in the November 2012 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief
The Tax Adviser

Also look for articles on the following topics in the November 2012 issue of The Tax Adviser:

• A look at apportionment using market-based sourcing rules.
• An examination of recent developments in employee benefits.
• A discussion on advising nonresidents on estate tax issues.