A transcript of the two recent teleconferences in which Multistate Tax Commission (MTC) representatives considered revisions to UDITPA § 17 would rival the dialogue in a Lewis Carroll book. As Miss Alice said: “It would be so nice if something would make sense for a change.” The MTC Income and Franchise Tax Subcommittee recently discussed the possible options for changing the current § 17 rule to a “market” based standard. The problem is that defining “market” and the words that could be used to define “market” is akin to grabbing Jell-O. The Subcommittee’s conversation twisted around concepts such as where the benefit is received; where the customer is located; whether the customer received the service where the benefit of the service is received; whether the place of use of a trademark is where the ultimate consumer buys a trademarked good – even when the trademark owner has licensed the mark to a third party and may not even know the end consumer; and what the definition of “is” is. (Okay, we made that last one up.) To give the participants credit, defining “market” for purposes of sourcing services and intangibles has befuddled people for decades – the international tax community is struggling with the same issue and the issue for sales tax purposes contributed to the demise of Florida’s attempt to broaden its tax base. The MTC subcommittee intends to have another teleconference to discuss the § 17 amendment alternatives on February 17th at 2:00 p.m. Eastern time.
The risk to taxpayers is that the MTC (and state legislatures) will use vague terms such as “use,” “benefit received” and “location of the taxpayer” without actually defining what those terms mean. Without real, meaningful definitions, the stakeholders will think everyone is talking about the same thing, but the actual geographical source envisioned will always be in the eye of the beholder (or more precisely, the enforcer).
What this confusion surely teaches us is that sometimes simplicity is more than worth the cost of perfection. The current incomeproducing activity rules and costs of performance standard can surely be more easily defined than “market” through reference to existing accounting and financial standards. And, even if the state legislatures determine that a switch to a market concept is necessary in today’s economy, a simple set of rules based on records the taxpayer already keeps in the regular course of business – such as customer billing address – may be the best solution. Returning to another Lewis Carroll character: “What is the use of repeating all that stuff, if you don’t explain it as you go on? It’s by far the most confusing thing I ever heard!” (The Mock Turtle – which, appropriately, is a character based on a British soup made up of animal parts usually thrown away.)