The Multistate Tax Commission’s (MTC) Annual Conference and Committee Meetings are being held on July 27-30, 2015, in Spokane, Washington. On Tuesday, July 28, 2015, at approximately 1:00 pm PDT (exact time subject to change), an MTC working group will present this model market-based sourcing regulation working draft to the MTC’s Uniformity Committee. Many on the working group consider the working draft to be close to the regulation’s final form.

Background

Since November 5, 2014, a working group with representatives from across the nation has met weekly to discuss and draft a model market-based sourcing regulation to implement changes to the sourcing of sales other than sales of tangible property under Article IV, Section 17 of the Multistate Tax Compact. The working group used the recently-finalized Massachusetts market-based sourcing regulation (830 CMR 63.38.1) as a starting point for draft language and discussion points. Michael Fatale of the Massachusetts Department of Revenue is a member of the MTC working group and leads the weekly calls.

The Model Regulation

The model regulation is organized into the following sections:

  1. General Rules (including definitions, general principles of application and rules)
  2. Sale, Rental, Lease or License of Real Property
  3. Rental, Lease or License of Tangible Personal Property (including a general rule that if the subject tangible personal property is in the state then the corresponding receipts are also in the state, and rules applicable to mobile property)
  4. Sale of a Service (including a general rule that if a service is delivered at a location in the state then the corresponding receipts are also in the state, definition of delivered to refer to location of taxpayer’s market, and specific rules for in-person services, professional services and services delivered to, on behalf of, or electronically through the customer)
  5. License or Lease of Intangible Personal Property (including a general rule that if the intangible is used in the state then the corresponding receipts are also in the state, definition of use to refer to location of the taxpayer’s market, and specific rules for marketing intangibles, production intangibles, mixed intangibles and intangibles resembling a sale of goods or services)
  6. Sale of Intangible Property (including a general rule that assignment of receipts of intangible property depends upon the nature of the intangible property, and specific rules for contract rights and government licenses, sales that resemble a license, sales that resemble a sale of goods and services, and excluded receipts)
  7. Special Rules (including specific rules for software transactions and sales or licenses of digital goods or services)

The MTC working group is also focused on providing informative examples within the model regulation for each section that highlights the application of a given rule on a provided set of facts.

Comparison to California’s Market-Based Sourcing Regulation

There are some notable differences between the MTC’s draft regulation and California’s market-based sourcing regulation, California Code of Regulations § 25136-2, regarding sales from services:

  • California’s market-based sourcing approach assigns sales from services to the location where the benefit from the service is received, whereas the MTC’s approach assigns such sales to the location where the service is delivered;
  • For business customers, California’s approach looks first to the contract or taxpayer’s books and records to identify the location where the benefit is received, whereas the MTC’s approach looks first to the location where the contract is principally managed by the customer;
  • The MTC’s approach affirmatively obligates taxpayers to identify the location where a contract is principally managed by the customer to the extent that more than 5% of the taxpayer’s sales are to that customer; and
  • The MTC’s approach, but not California’s approach, adopts a “throwout rule” for sales other than sales of tangible personal property, excluding sales from both the numerator and denominator of the sales factor when the sales are either in a state where the taxpayer is not taxable, or if the location of the sale cannot be determined or reasonably approximated.

Uniformity Committee Meeting

Specific topics the working group plans to address with the Uniformity Committee on Tuesday include:

  1. How the draft regulation should incorporate the corresponding examples into its body, if at all;
  2. Potential issues regarding the interplay between UDITPA Section 17 and Sections 1 and/or 18 (the working group has repeatedly discussed the extent to which the Section 17 model regulation should include references to Section 1 (definitions) and/or Section 18 (alternative apportionment) – for example, the working group has questioned whether a reference to Section 18’s model regulation controlling over any potential conflicts between the regulations for Sections 17 and 18 should also include specific examples of where sourcing under Section 17 would lead to inappropriate results. The working group has expressed concern that insufficient guidance exists for how current special industry regulations might interact with Section 17, and the application of Section 17 rules when a state has not adopted a model special industry rule);
  3. How to address the definition of “subject to tax” where foreign jurisdictions are involved; and
  4. Two practitioner-proposed edits, including the potential clarification of the definition of professional services to expressly include credit card processing services, and the potential inclusion of a de minimis rule to exclude market determination requirements for incidental receipts.

Subject to the degree and nature of feedback the Uniformity Committee provides to the MTC working group on Tuesday, the working group anticipates that it should be able to finalize its model draft by the end of 2015.