The Multistate Tax Commission (“MTC”) held its Fall Committee Meetings last week in San Antonio, Texas. The MTC did not undertake any new projects, but did continue to push forward with several existing projects of importance to multistate business taxpayers.
As has been reported ad nauseam, the Uniform Law Commission (“ULC”) (formerly known as National Conference of Commissioners on Uniform State Laws) may undertake a project to review and revise UDITPA. The relevancy and practicality of this project has been questioned by many members of the business community. The ULC recently retrenched its efforts in this regard, by tasking a Study Committee to determine whether the UDITPA revision should be undertaken. The MTC is, however, adamant that this project proceed. Joe Huddleston, MTC Executive Director, has provided state tax administrators a list of influential ULC Commissioners to contact, in order to communicate their state’s interest in the UDITPA project. While the ULC Study Committee has not scheduled its next meeting, the MTC reported that this meeting would occur early in the first quarter of 2009.
In the interim, an MTC drafting committee is busy revising the UDITPA sections that are of particular interest to the Commission—Section 17 (sourcing of sales other than tangible personal property), which defines the terms “business income” and “gross receipts,” and Section 18 (alternative apportionment). No drafts of that work are publicly available yet. The MTC intends to present these revisions to the ULC.
Revision to Section 18 Regulation
Perhaps the project that has the potential to generate the most controversy is the MTC’s Income and Franchise Tax Uniformity Subcommittee’s project to revise the MTC’s Model Regulation interpreting UDITPA Section 18 (alternative apportionment). The MTC staff had conducted a survey of MTC members regarding members’ interest in various reform possibilities and solutions for the model regulation. The most significant result of the survey is that the members believe that the Regulation is too restrictive—in other words, as currently drafted, the Section 18 Regulation places too many limits on a state’s ability to require an alternative apportionment method for a particular taxpayer.
During discussion of this issue at the MTC meeting, some states (notably, California) were resolute that the taxpayer always bears the burden in an alternative apportionment case—even when the alternative apportionment method was imposed by the state tax authority. California’s position appeared to be that in any type of tax case, it is the taxpayer that bears the burden to prove the state tax administrator’s position wrong. California’s position that taxpayers should bear the burden of proving that use of the statutory formula did “fairly represent the extent of the taxpayer’s business activity in the state,” and that the administrator’s alternative formula did not fairly represent this business activity, would seem to have been indisputably rejected by the California Supreme Court in the recent Microsoft decision. Apparently, California is concerned that taxpayers are challenging the imposition of regulations issued under Section 18 and such taxpayers are arguing that the Franchise Tax Board (“FTB”) (or its equivalent in other states) bears the burden of proving that application of the special apportionment regulation, rather than the statutory rule, is warranted on a case-by-case basis.
Committee members also discussed the possibility of adding a provision that Section 18 cannot be used to avoid application of the throwback rule. Members stated their belief that throwback is a “sourcing” rule and not an “apportionment” issue; hence, throwback should not be subject to adjustment/elimination when designing a Section 18 alternative apportionment method. Finally, MTC staff will draft proposed language regarding when a taxpayer can request Section 18 relief. The consensus appeared to be that a taxpayer was required to specifically request permission from the state tax authority on either the initial return or on an amended return (and provide sufficient support for the request). The MTC committee members are not in favor of permitting a taxpayer to request Section 18 relief as part of an audit.
Sutherland Observation: Interestingly, it appears that the MTC members generally support the idea that Section 18 relief requires a lower burden of proof (preponderance of the evidence or, more likely, clear and convincing evidence that the statutory method unfairly represents the taxpayer’s in-state business activity) than the evidentiary standard applied to fair apportionment challenges under the Due Process or Commerce Clause (i.e., taxpayer must demonstrate gross distortion—“out of all appropriate proportion”—results under the statutory apportionment method). Some states have case law to the contrary, but to the extent that alternative apportionment for individual taxpayers is beneficial, recognition of a lower standard would certainly be useful. What is neither useful nor appropriate is the idea that a taxpayer should always have the burden of proof in a Section 18 application, even when the state is the entity varying the standard formula. If a taxpayer follows the statutory rule, it seems extremely unfair to require the taxpayer to prove that the statute is correct in order to avoid imposition of an alternative apportionment method by the taxing state. Moreover, it was not clear why there was any focus on using Section 18 to overcome throwback (for instance, the MTC members did not provide concrete examples of where this has occurred). But, any attempt to distinguish “sourcing” from “apportionment” in the context of Section 18 seems doomed to confusion, because apportionment entails sourcing and in turn, apportionment functions as a proxy for transaction-specific and/or entity-specific sourcing at the state level.
Participation of Local Governments in Future MTC Initiatives?
Several current MTC projects, such as the Telecommunications Transaction Tax Project and the Hotel Intermediary Project, involve taxes that are frequently collected at a local level. Ted Spangler, of Idaho, suggested that the MTC consider reaching out to local government organizations, such as the National League of Cities, the United States Conference of Mayors, and the National Association of Counties, so as to involve those organizations in initiatives that are perceived as having a direct impact (positive or negative) on local jurisdictions’ rights and obligations. Joe Huddleston has agreed to undertake this outreach, so there is a possibility that local government may become more active at the MTC.
The next MTC meeting is the “Winter Executive Committee Meeting,” which will take place January 8-9, 2009, in San Diego.