On July 30, the Multistate Tax Commission (MTC) approved amendments to the Multistate Tax Compact’s (1) definition of nonbusiness income, (2) definition of “sales,” (3) factor-weighting, (4) alternative apportionment, and (5) sourcing of service and intangible revenue. With the approval, the amendments officially become a model act of the MTC, and taxpayers should expect legislation to be introduced in several states when their legislatures convene for next year’s sessions.
The most significant amendment adopted was the change to Section 17 of the Compact, which is identical to the Uniform Division of Income for Tax Purposes Act (UDITPA). Section 17 applies to the sourcing of sales, other than the sale of tangible personal property. The amendment switches the sourcing methodology from the traditional costs-of-performance method to a market-based sourcing method for services and intangibles.
As to the factor-weighting amendment, the current version of Section 9 of the Compact provides for an equally weighted apportionment formula consisting of the sum of a taxpayer’s property, payroll and sales factors divided by three. The amendment provides that member states are able to define their own factor weighting fraction. However, a double-weighted sales factor is “recommended.”
The amendment to Section 1(a) of the Compact replaces the concept of business income with the phrase “apportionable income.” The phrase essentially applies a constitutional standard with additional guidance. The definition—among other revisions—exchanges the language “constitute integral parts of” for “is or was related to the operation of,” and also removes the word “regular” in describing what income arises from tangible and intangible property in the taxpayer’s trade or business.
The Section 1(g) amendment narrows the definition of what constitutes “sales” for purposes of the sales factor. The amendment expressly excludes treasury and hedging activities from the sales factor.
Lastly, the MTC amended Section 18, which contains the MTC’s alternative apportionment provision. The amendment allows for an administrator to adopt regulations under Section 18 that must be applied to all similar taxpayers. Arguably, the amendment broadens a state’s current authority, which usually results in regulations targeted at unique industries. The amendment provides the administrator the authority to draft regulations to target a “particular transaction or activity.”
The adoption of these amendments marks the end of a Compact revision process that started in August 2007. While the amendments are now officially part of the MTC’s uniform law collection, many of the changes will require regulations to be enacted before they can be applied. The question now is whether states will move to enact the new amendments, or perhaps defer enactment until the MTC pulls together effective regulations.