The Multistate Tax Commission (MTC) concluded its Winter Meetings with two significant developments – draft amendments to sourcing of other than tangible personal property, and a new project to adopt a model affiliate nexus statute for online retailers.
Sourcing of Service and Intangible Receipts
Section 17 of the Uniform Division of Income for Tax Purposes Act (UDITPA) requires that receipts from sales other than sales of tangible personal property are sourced based on costs-of-performance (COP). Several state departments of revenue have argued that COP is not the best method to source these receipts and have undertaken an effort to replace COP with a market-based method. The MTC has taken on this cause and has recommended drafting a revision to section 17.
The MTC’s current draft section 17 sources services to a state “to the extent the service is delivered to a customer location in [a] state” and sources intangibles “to the extent the intangible property is used by the payor in [a] state.” The proposal also contains a “throwout” rule, which the business community rejects as a flawed apportionment method. Further, the current draft statute fails to define key terms, leaving unanswered questions such as: What do “delivered to,” “customer,” “customer location,” and “use” mean? How are consulting services provided by multistate companies to multistate companies sourced?
Ultimately the MTC made some changes to the draft to allow for proportional sourcing and to address “drop shipment” issues. In addition, the MTC agreed to ask the drafting group to define “use” for intangibles.
Sales and Use Tax Nexus
The MTC decided to undertake a project to draft a model affiliate nexus statute that is a combination of New York’s click-through nexus law and Colorado’s newly enacted disclosure regime for non-nexus sellers (see article in this issue of Shaker).
The National Conference of State Legislatures has expressed concerns about this MTC project, in part due to concerns that this type of legislation undermines the efforts to implement the Streamlined Sales and Use Tax Agreement and federal legislation. Further, the constitutionality of these expansive state statutes is being challenged in court and further litigation is expected.