United States: Multistate Tax Commission Finalizes Compact Provision Amendments

On July 30, at its annual meeting, the Multistate Tax Commission (MTC) approved amendments to key provisions of Article IV of the Multistate Tax Compact.1 Article IV concerns the division of income and incorporates the provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA). These amendments address such topics as apportionment factor weighting, the definition of business income, the adoption of market-based sourcing, the definition of sales, and alternative apportionment. Furthermore, on July 31, the MTC's Executive Committee approved separate proposed amendments concerning the use of alternative apportionment that are being sent to the member states for consideration.


In 1957, the Uniform Law Commission (ULC) promulgated UDITPA to provide uniform laws that states could adopt to assign the taxable income of multistate corporations among the states in which they do business. The MTC created the Compact in 1967 and included the UDITPA provisions as Article IV. Due to the significant changes in the U.S. economy during this time, some of the important uniform provisions were thought by some to be outdated and many states have enacted legislation that departs from these provisions. As a result, the MTC recommended in 2006 that the ULC start a project to revise UDITPA. After public hearings and comments, the ULC decided to discontinue its work on revising UDITPA in 2009.

The MTC started to consider its own revisions to Article IV and its Uniformity Committee completed its work in March 2012. The MTC's Executive Committee approved the proposed model for public hearing in 2012. In October 2013, Professor Richard Pomp released a detailed document, termed the Report of the Hearing Officer, which analyzed the proposals and made recommendations for amending key provisions of Article IV.2 In March 2014, the MTC's Uniformity Committee decided to recommend to the MTC's Executive Committee that its original draft language be retained. However, in May 2014, the MTC's Executive Committee accepted some of Professor Pomp's recommendations and sent a survey to the member states to determine if each state would adopt the proposed draft language.

Apportionment Factor Weighting

Prior to amendment, the Compact provided for a three-factor apportionment formula consisting of equally-weighted property, payroll and sales factors.3 The amended Compact allows a state to define its own factor weighting fraction, but recommends a double-weighted sales factor.4

Business (Apportionable) Income

The Compact previously defined "business income" as "income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations."5 Also, "non-business income" was "all income other than business income."6

The amendment changes the term "business income" to "apportionable income" and revises the definition to "all income that is apportionable under the Constitution of the United States and is not allocated under the laws of this state, including: (A) income arising from transactions and activity in the regular course of the taxpayer's trade or business, and (B) income arising from tangible and intangible property if the acquisition, management, employment, development, or disposition of the property is or was related to the operation of the taxpayer's trade or business."7 Similarly, the term "non-business income" is changed to "non-apportionable income" and defined as "all income other than apportionable income."8

Market-Based Sourcing

Under the previous version of the Compact, sales, other than sales of tangible personal property, were sourced to a state (on an all-or-nothing basis) if: (i) the income-producing activity is performed in the state; or (ii) the income-producing activity is performed both in and outside the state and a greater proportion of the income-producing activity is performed in the state than in any other state, based on costs of performance (COP).9

This provision was completely revised to replace the COP standard with a market-based sourcing approach intended to reflect the destination principle used to source sales of tangible personal property.10 Specifically, sales of other than tangible personal property are sourced to a state if, and to the extent, the taxpayer's market for the sales is in the state. The sale of a service is sourced to a state if, and to the extent, the service is delivered to a location in the state. In addition, the provision includes a series of sub-rules that describes the sourcing for different types of transactions, including transactions involving intangible property.11 If the taxpayer is not taxable in a state to which a sale is assigned or if the state of assignment cannot be determined or reasonably approximated, the sale is excluded from the denominator of the sales factor (this is commonly termed a "throwout rule").12

Sales (Receipts) Factor

Prior to amendment, the Compact defined "sales" as all of a taxpayer's gross receipts that are not allocated.13 The amendment replaces the term "sales" with "receipts." The amended provision defines "receipts" as the gross receipts of the taxpayer that are not allocated and that are received from transactions and activity in the regular course of the taxpayer's trade or business.14 However, the definition excludes receipts from hedging transactions and from treasury functions such as the maturity, redemption, sale, exchange, loan or other disposition of cash or securities.15

Alternative Apportionment

Under the Compact, if the general allocation and apportionment provisions do not fairly represent the extent of the taxpayer's business activity in the state, the taxpayer may petition for or the tax administrator may require an alternative apportionment method.16

Final Amendment

The amendment would add a new paragraph which provides that if the allocation and apportionment provisions do not fairly represent the extent of business activity of taxpayers engaged in a particular industry, transaction or activity, the tax administrator may establish regulations for determining alternative allocation and apportionment methods.17 This regulation must be applied uniformly, except that the taxpayer may petition for or the tax administrator may require an adjustment to fairly represent the extent of the taxpayer's business activity in the state.18

Proposed Amendments

On July 31, the MTC's Executive Committee approved proposed amendments concerning alternative apportionment and will send a survey to affected member states.19 The first proposed amendment concerns the burden of proof necessary to support alternative apportionment. Specifically, the taxpayer petitioning for, or the tax administrator requiring, the use of an alternative allocation or apportionment method must prove: (i) that the standard allocation and apportionment provisions do not fairly represent the extent of the taxpayer's activity in the state; and (ii) that the alternative to such provisions is reasonable.20 States are allowed to determine their own burden of proof, but the same burden of proof must apply whether the taxpayer is petitioning for, or the tax administrator is requiring, the use of an alternative apportionment method. If the tax administrator can show that in any two of the prior five tax years, the taxpayer had used an allocation or apportionment method different from the method used for such other tax years, the tax administrator will not bear the burden of proof in imposing a different apportionment method.21

The second proposed amendment provides that if the tax administrator requires an alternative apportionment method, the tax administrator cannot impose any civil or criminal penalty with reference to the tax due that is attributable to the taxpayer's reasonable reliance solely on the standard apportionment provisions.22

Under the final proposed amendment, a taxpayer that has received written permission from the tax administrator to use a reasonable alternative apportionment method may not have the permission revoked for transactions and activities that have already occurred unless there has been a material change in, or a material misrepresentation of, the facts provided by the taxpayer upon which the tax administrator reasonably relied.23


The amendments to the key provisions in Article IV of the Compact reflect the substantial efforts by the MTC to revise these provisions for many years. The MTC's decision to adopt these amendments was widely expected, particularly after the MTC's Executive Committee approved the amendments and they were supported by the results of the state survey.

The final amendments make five major changes that will have different levels of impact. The factor weighting recommendation of double-weighted sales may not have a significant effect because states have shown that they want complete autonomy in determining their apportionment formula. Many states have already deviated from the prior and the newly recommended apportionment formula in the Compact by adopting a single sales apportionment factor. Similarly, the expansion of the business (apportionable) income definition to encompass all amounts that can be classified as such under the U.S. Constitution is not likely to have a major effect, as many states consistently challenge most taxpayers' attempts to classify income as non-business income. The changes to the definition of sales (receipts) may be important to certain taxpayers, particularly those that have substantial treasury functions and engage in significant hedging and other securities transactions. The new alternative apportionment provision allowing tax administrators to promulgate regulations for certain industries may have some impact, but it remains to be seen whether tax administrators will decide to adopt these rules.

The most significant final amendment concerns the change to market-based sourcing for sales other than sales of tangible personal property. During the past several years, market-based sourcing of sales has become a popular departure from the UDITPA COP method. Under market-based sourcing, states generally require that receipts from the sale of services are sourced based on the location of the service provider's customers, or on the location where the customer received the benefit from the service provided, rather than the location where the service provider performed the services. The nuances of market-based sourcing vary substantially among states.24 For states that still use the COP method, the Compact may provide a template if they decide to adopt market-based sourcing. However, states that already have enacted market-based sourcing statutes that differ from the Compact may be reluctant to amend their statutes.

The proposed amendment addressing the burden of proof when alternative apportionment is sought also is significant. This issue was addressed in a high-profile and controversial Mississippi Supreme Court decision25 last year that resulted in the enactment of Mississippi legislation clarifying the burden of proof.26 The proposed amendment would clarify that the burden of proof is on the party invoking the alternative apportionment method. State tax authorities may argue that the burden of proof should always be on the taxpayer because there is a general presumption of correctness for assessments issued by the state. In contrast, there is a strong equitable argument that the burden of proof should be the same for either the tax administrator or the taxpayer. Also, there is some controversy surrounding the proposed exception that the tax administrator does not have the burden of proof if the taxpayer used a different allocation or apportionment method in any two of the prior five tax years.27 This exception is based on the taxpayer's filing history rather than on whether the taxpayer had previously received permission to use an alternative apportionment method.

The final amendments to the Compact are significant to member states28 to the extent they change their laws in response, as well as to non-member states that may be considering changes in line with the policy changes made in the Compact. Because these major changes to the Compact are unprecedented, it will be interesting to see how the Compact member states respond. For example, Compact member states will need to decide whether to enact legislation adopting these amendments. Also, it is unclear if Compact member states that fail to adopt these amendments will lose their member status after a period of time because their statutes are no longer in compliance with the Compact. Furthermore, it is uncertain as to how soon the MTC will be able to complete and release for comment regulations that explain the amendments to the Compact. With these open questions, the upcoming state legislative sessions and the MTC's ongoing efforts in this area will be closely watched.


1 Multistate Tax Commission's Annual Conference, July 28-31, 2014. For additional information, see the Commission's Web site at http://www.mtc.gov.

2 Report of the Hearing Officer, Multistate Tax Compact Article IV (UDITPA) Proposed Amendments, Oct. 25, 2013. For further discussion of this report, see GT SALT Alert: Report Released on Proposed Amendments to Multistate Tax Compact's Division of Income Provisions.

3 Prior Multistate Tax Compact Art IV.9.

4 Multistate Tax Compact Art IV.9.

5 Prior Multistate Tax Compact Art IV.1(a).

6 Prior Multistate Tax Compact Art IV.1(e).

7 The definition also includes "any income that would be allocable to this state under the Constitution of the United States, but that is apportioned rather than allocated pursuant to the laws of this state." Multistate Tax Compact Art IV.1(a).

8 Multistate Tax Compact Art IV.1(e).

9 Prior Multistate Tax Compact Art IV.17.

10 Multistate Tax Compact Art IV.17. 11 These sub-rules include provisions for sourcing such items as real property, tangible personal property, services and intangible property. Multistate Tax Compact Art IV.17(a). 12 Multistate Tax Compact Art IV.17(c).

13 Prior Multistate Tax Compact Art IV.1(g).

14 Multistate Tax Compact Art IV.1(g).

15 Id.

16 Specifically, the Compact provides for: (i) separate accounting; (ii) the exclusion of one or more of the factors; (iii) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in the state; or (iv) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income. Multistate Tax Compact Art. IV.18(a).

17 Multistate Tax Compact Art. IV.18(b)(1).

18 Multistate Tax Compact Art. IV.18(b)(2).

19 Many of these proposed amendments are based on the issues raised in Professor Pomp's recommendations. 20 Proposed Multistate Tax Compact Art. IV.18(c).

21 Id.

22 Proposed Multistate Tax Compact Art. IV.18(d).

23 Proposed Multistate Tax Compact Art. IV.18(e). 24 For example, states such as California, Illinois and Michigan use a "benefit received" approach, but states such as Massachusetts and Pennsylvania use a location of delivery approach.

25 In Equifax, Inc. v. Department of Revenue, 125 So. 3d 36 (Miss. 2013), cert. denied, June 30, 2014, the taxpayer used the standard method of apportionment for service companies, but the Department of Revenue used an alternative method consisting of market-based sourcing. The Mississippi Supreme Court held that the taxpayer had the burden of proof because the party petitioning the court for relief bears the burden of proving its claim by a preponderance of the evidence or a higher standard. For further discussion of this case, see GT SALT Alert: Mississippi Supreme Court Upholds Use of Alternative Apportionment Method.

26 H.B. 799, Laws 2014. Under this legislation, which is effective January 1, 2015, the party requesting alternative apportionment bears the burden of proof by a preponderance of the evidence to show two elements: (i) the statutory or regulatory method does not fairly represent the taxpayer's Mississippi business activity; and (ii) the proposed method more fairly represents the activity than any other reasonable method. For further information on this legislation, see GT SALT Alert: Mississippi Enacts Legislation Addressing Equifax Decision.

27 Note that this provision was recently added and was not part of Professor Pomp's specific recommendations. 28 The Compact members are Alabama, Alaska, Arkansas, Colorado, District of Columbia, Hawaii, Idaho, Kansas, Michigan, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah and Washington.

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