On June 15, 2021, the Multistate Tax Commission (“MTC”) held its first meeting to discuss the “Project on State Taxation of Partnerships.” The work group intends to focus on the “underdeveloped” state partnership tax rules and provide guidance and structure in the state partnership taxation realm.

During the first meeting, the work group focused on an issue outline drafted by MTC staff that contemplates areas where state partnership taxation rules either differ from one another or lack specificity. Based on feedback received from the states and the MTC Standing Subcommittee, the issue outline is divided into three general categories: (1) issues related to taxing partnership income, (2) issues related to gain or loss on the sale of a partnership interest, and (3) administration and other issues.

  1. Issues Related to Taxing Partnership Income. The issues outline discusses the states’ conflicting jurisdictional rules that affect administrative obligations imposed on partnerships. Similarly, it discusses the confusion regarding nexus rules for nonresident and corporate partners as well as how the factor presence nexus standard might apply. In addition, the outline notes that the states have distinct sourcing and apportionment rules, exceptions and exemptions, transfer pricing statues and state income adjustments that should be contemplated in pursuit of uniformity, and the working group’s discussion seemed to hone in on the need for guidance in the transfer pricing area.
  2. Issues Related to Gain or Loss on Sale of a Partnership Interest. The issue outline discusses that nexus is considered when determining whether a state can tax gain or loss on the sale of a partnership interest. Likewise, the outline notes that sourcing and reporting rules regarding the sale of partnership interest could be harmonized.
  1. Administration and other Issues. The issue outline concludes that the states’ rules lack guidance on the application of tax credits for partnership income, centralized audits and the functionality of the state and local tax deduction cap.

The MTC will hold meetings every two weeks to discuss continue their work on this issue. As a result of the work group’s ongoing discussions, it is likely that the states will start paying increased attention to rules and regulations dealing with the taxation of partnership income.