On Saturday, March 28, 2009, a group organized by National Conference of Commissioners on Uniform State Laws (NCCUSL) met to discuss whether a rewrite of the Uniform Division of Income for Tax Purposes Act (UDITPA) should take place. Participants of this “Study Committee” discussed topics that would likely be addressed in a rewritten UDITPA and whether uniformity was desirable and achievable. While the Study Committee has not yet developed its recommendation on whether this effort should proceed, a number of significant developments occurred.
NCCUSL had formed a Drafting Committee to redraft UDITPA. The Drafting Committee was redesigned as a Study Committee last July after three state legislators appeared at NCCUSL’s Annual Meeting to voice concern and objections to the project. In response to these concerns, the Executive Committee invited three legislative organizations—National Conference of State Legislatures (NCSL), American Legislative Exchange Council (ALEC), and The Council of State Governments (CSG)—to participate in a Study Committee charged with reevaluating the viability of the project under NCCUSL’s own criteria. The Study Committee is expected to forward its recommendations to NCCUSL leadership in July 2009.
The Chair of the Study Committee, Charles Trost, a state tax lawyer from Nashville, Tenn., resigned at the outset of the meeting citing a client conflict that would prevent him from continuing in that role. Trost was replaced by NCCUSL Commissioner Dale Higer from Idaho. Higer had, along with Trost, previously served on the Drafting Committee, which had begun work to revise UDITPA last spring.
The Study Committee heard comments and testimony in Chicago and will conduct one more meeting telephonically in the next four to six weeks when it will deliberate and develop its recommendation. During its inaugural meeting, the Study Committee focused first on whether uniformity was desirable and achievable. Sutherland’s presentation to the Study Committee noted that other state uniformity efforts (in particular projects endorsed by the Multistate Tax Commission (MTC)) have failed to produce any meaningful uniformity. The Council On State Taxation discussed the concern that a rewrite of UDITPA would demand significant resources and would ultimately fail to produce uniformity.
Several state legislators participated in the discussion. State Assemblywoman Fiona Ma (D-CA) seemed open to the project moving forward and was particularly interested in the rewrite of definitions in UDITPA. State Senator Curt Bramble (R-UT) focused on two main concerns: (1) that the project was being considered based on a request by the MTC and not at the behest of elected policymakers, and (2) that the project would politicize NCCUSL in a manner that would fundamentally alter the perception of the organization. State Representative Robert Damron (D-KY) cautioned that if the project moves forward, any written product must be tested with state legislative organizations before becoming final, and he voiced concern that the topic under consideration was critical to state economic development and therefore politically sensitive. State Senator Pam Althoff (R-IL) and former Illinois State Senator Steve Rauschenberger expressed concern that the project would lead to the polarization of NCCUSL as an organization. All of the legislators were concerned that the project would hamper state tax competition.
No Time for Studying – A Substantive Discussion of UDITPA
Despite the Study Committee’s failure to reach a determination as to whether the project should proceed, the Study Committee engaged in a discussion of a potential UDITPA rewrite. The Study Committee’s two Reporters, Prentiss Wilson and Professor Rick Pomp of University of Connecticut, led a discussion of the substantive portions of UDITPA. The Reporters engaged in dialogue with Professor Michael McIntyre of Wayne State University, a Consultant to the Study Committee, and Ben Miller of the California Franchise Tax Board, an Observer. This discussion was interpreted by several observers as a theoretical discussion that did not take into account the practical barriers to uniformity. However, the Reporters and Professor McIntyre ultimately acknowledged that any rewrite of UDITPA likely would require that multiple options be allowed on many of the provisions rewritten.
Not surprisingly, the sections that resulted in the lengthiest discussions were UDITPA § 17 (sourcing of sales of other than tangible personal property) and § 18 (equitable apportionment methods). Routine and oft-cited questions regarding the scope of § 17 were revisited—such as whether a market standard should be adopted and whether a proportionate (rather than an all-or-nothing) rule should be utilized. Very few of the observers participated. Opponents to the project suggested that even if a hypothetical drafting committee could agree that, for instance, market-based sourcing should be incorporated into a revised UDITPA, the different market approaches recently enacted in states such as Illinois, Utah and California provide strong evidence that uniformity is illusory.
The reporters and advisors to the project did provide some interesting comments that may surprise some state tax administrators. For example, Professor Pomp noted that the current “all or nothing” sourcing approach contained in existing UDITPA § 17 sourcing does make administrative sense and a proportionate rule could be very difficult to manage. Further, Mr. Wilson noted that applying the Costs-of-Performance method on a transaction-by-transaction basis (as some states have advocated) is inconsistent with the unitary business principal. Professor Charles McClure of Florida State University, a Consultant to the Study Committee, suggested that the throwback rule contained in UDITPA § 16 should be excised. [MTC representatives vigorously opposed this idea, stating that a secondary goal of UDITPA was full-apportionment of income.]
SUTHERLAND OBSERVATION: The Study Committee will hold a telephone conference call in the next four to six weeks to hear final public comment on the project and to deliberate on its recommendation regarding whether the rewrite should proceed. It is possible that NCCUSL will decide not to proceed with a rewrite of UDITPA. Given that the Study Committee discussion routinely recognized that uniformity was not going to be attained, the Study Committee may conclude that the project does not meet NCCUSL’s own criteria: (1) whether uniformity is desirable, and (2) whether uniformity is achievable.