In a rare special meeting on February 24, 2017, the Multistate Tax Commission (MTC) adopted amendments to the MTC’s Model General Allocation and Apportionment Regulations (Model Regulations) that it has worked on since 2014. The 94-page Model Regulations include a new section related to market-based sourcing of receipts from the sale of services and intangibles. The Model Regulations also clarify the definition of “apportionable income” (previously business income), narrow the definition of “receipts” (previously sales) and remove the requirement for equal weighting of the three-factor apportionment formula.


Since November 5, 2014, a working group with representatives from several states has met weekly to discuss and draft a model market-based sourcing regulation to provide necessary detail to supplement the MTC’s dramatic change of the model statutory sourcing rules for sales other than sales of tangible property under Article IV, Section 17 of the Multistate Tax Compact (Section 17). The working group used the Massachusetts market-based sourcing regulation (830 CMR 63.38.1) as a starting point for draft language and discussion points. The MTC working group presented draft Model Regulations at the MTC Annual Conference and Committee Meeting in July 2015 (see Eversheds Sutherland’s summary of those meetings). The approval of the Model Regulations on February 24 is the final step in the Section 17 working group’s process.

Section 17 Model Regulation

The previous version of the Section 17 regulation followed the original MTC Compact approach of sourcing all receipts from sales other than sales of tangible person property under a “costs of performance” methodology that sourced the receipts to the one state with a preponderance of income-producing activity. In contrast, the new Section 17 regulation tracks the 2014 MTC Compact changes that employ a market-based sourcing approach.

According to the Drafter’s Notes included with the Model Regulations, Section 17 “set[s] out different categories with specific rules for sourcing receipts.” The Section 17 regulation includes the following subsections, the first three of which the Drafter’s Notes refer to as the “significant substantive subsections”:

Significant Substantive Subsections

  1. Sale of a Service: Section 17(d) provides that if a service is delivered at a location in the state, then the corresponding receipts from that service are also in the state. Section 17(d) is further divided into three primary categories: (1) in-person services (17(d)(2)); (2) services delivered to the customer or on behalf of the customer or delivered electronically through the customer (17(d)(3)); and (3) professional services (17(d)(4)). According to the Drafter’s Notes, “the first and third categories are fairly straight-forward in terms of their scope [and] [t]he second category may be viewed as the ‘catchall’ category.”
  2. Lease or License of Intangible Personal Property: Section 17(e) provides that if an intangible is “used” in the state, then the corresponding receipts are also in the state. The term “use” refers to the location of the taxpayer’s market. There are also specific rules for marketing intangibles, production intangibles, mixed intangibles and intangibles resembling a sale of goods or services.
  3. Sale of Intangible Property: Section 17(f) assigns receipts from intangible property depending on the nature of the intangible property (e.g., receipts from contract rights or government rights that authorize business activity in a specific geographic area are assigned to a state to the extent the intangible is proportionally or exclusively used or authorized to be used within that state). In addition to contract rights and government licenses, Section 17(f) also provides specific rules for sales that resemble a license, sales that resemble a sale of goods and services, and excluded receipts.

Other Subsections

  1. General Rules: Section 17(a) provides general principles, including rules for reasonable approximation, which apply if the state or states of assignment cannot be determined. This subsection also provides relevant definitions including a definition of “population” that is limited to the most recent population data maintained by the U.S. Census Bureau. According to the Drafter’s Notes, the working group debated how to reasonably estimate the marketplace based on population data. Ultimately, the working group opted to use the U.S. Census Bureau’s population data because “of administrative ease and convenience, outweighing the benefits of using other data sources.”
  2. Sale, Rental, Lease or License of Real Property: Section 17(b) provides in full: “In the case of a sale, rental, lease or license of real property, the receipts from the sale are in [state] if and to the extent that the property is in [state].”
  3. Rental, Lease or License of Tangible Personal Property: Section 17(c) provides a general rule that if the subject tangible personal property is in the state, then the corresponding receipts earned from that property are also in the state. This subsection also provides rules applicable to mobile property.
  4. Special Rules: Section 17(g) contains special rules for sourcing receipts from software transactions and sales or licenses of digital goods or services. According to the Drafter’s Notes, these receipts are generally “sourced based on the rules for the category that most closely fits the nature of the transaction, but a sale of pre-written software is always a sale of tangible personal property.”
  5. Mediation: Section 17(h) allows states to participate in mediation to resolve multistate sourcing issues.

Section 18 Model Regulation

The MTC’s Uniformity Committee is working on amendments to Section 18 related to alternative apportionment. However, the adopted Model Regulations eliminated the portion of Section 18 related to the receipts factor along with the corresponding examples. As explained in the Drafter’s Notes and Prefatory Notes to the Model Regulations, the Uniformity Committee’s Section 18 amendment efforts will facilitate conformity with the changes in the Model Regulations including those in Section 17.

Eversheds’ Observations

The MTC’s Model Regulations will continue to be just that––Model Regulations. The MTC cannot compel any state to adopt these regulations, but the Model Regulations are part of the continuing trend of moving toward market-based sourcing models and away from costs of performance. However, at least three states (Maryland, Rhode Island and Tennessee) that have statutorily switched from costs of performance sourcing to market-based sourcing have adopted regulations that are substantially similar to draft versions of the MTC’s new Model Regulations. The District of Columbia has also expressed a desire to adopt the regulations. These regulations are controversial. For instance, applying U.S. population data as a proxy for an apportionment method reflecting the taxpayer’s actual in-state business activities (which is the goal of an apportionment formula) will almost certainly lead to litigation.