United States: MTC Annual Meeting Update: Market-Sourcing Regulations Presented To Executive Committee

Today, July 28, the Multistate Tax Commission ("MTC") held its Executive Committee Meeting. The Executive Committee voted to accept the Uniformity Committee's recommendations for a taxpayer's prospective change in its method of approximation. The Executive Committee also decided not to include hedging activities within the definition of "receipts" under the MTC Compact's UDITPA provisions.

Background In 2006, the MTC formally asked the Uniform Law Commission ("ULC") to modernize its apportionment rules. The ULC then began a wholesale overhaul of the Uniform Division for Income Tax Purpose Act ("UDITPA"). However, the ULC ultimately halted its efforts in 2009 because of public opposition. Thereafter, the MTC tasked its Uniformity Committee with revising section IV of the MTC Compact—the MTC's UDITPA provisions. In 2014, the MTC approved amended regulations concerning factor weighting, business income, and equitable apportionment. But, to this date, the Uniformity Committee had not finished its work on either the definitions for "sales" and receipts" or its market-based sourcing regulations.

Today's Meeting At today's meeting, the MTC Executive Committee made several key decisions, including:

  • Adopting the Uniformity Committee's proposal imposing a notice requirement on taxpayers making a prospective change in sourcing methods.1
  • Adopting the Uniformity Committee's recommendation not to include receipts from hedging activities in the definition of "receipts."
  • Deciding to allow the Uniformity Committee more time to refine language that would allow a taxpayer to petition for nonbinding mediation in situations in which a taxpayer is subjected to different sourcing methods for intangibles or services by multiple state taxing agencies. (The MTC hopes to resolve disagreement regarding this language in October.)

The focus of today's Executive Committee meeting concerned the Uniformity Committee's work on draft market-sourcing regulations. Leading up to the meeting, industry commentators had expressed concern over the Uniformity Committee's decision not to include receipts from securities and hedging activities in the Compact's definition of "receipts." In particular, industry commentators noted that excluding securities and hedging activities from the Compact's definition of "receipts" was inconsistent with the intent of underlying definition. Commentators took the position that the drafter's intent was to represent a taxpayer's activities in the normal course of its business. For example, broker-dealers and financial institutions would not be able to represent the activities of their business if they could not include securities and hedging activities in the definition of "receipts." As a consequence, taxpayers in these industries would need to utilize alternative apportionment to accurately reflect how their income was earned if such activities were excluded from the "receipts" definition.

Commentators had also expressed concern regarding the Uniformity Committee's decision to largely follow the Massachusetts model in drafting its market-sourcing regulations. Under the Massachusetts rules—and the Uniformity Committee's draft regulations—a taxpayer that uses a reasonable method of approximation to source receipts on its original return cannot later file an amended return that changes its method of approximation, unless it can demonstrate that the new method is more accurate than the one utilized in preparing the original return.

These concerns delayed the adoption of the Uniformity Committee's regulations. After the Executive Committee's public hearing on these regulations in March, the hearing officer issued a report recommending that the Executive Committee not adopt some of the Uniformity Committee's regulations in light of these industry concerns. Because of that report, the Executive Committee asked the Uniformity Committee to meet weekly before the MTC's Annual Conference with the hope that the Uniformity Committee could resolve some of these industry concerns. Ultimately, however, the Uniformity Committee chose to save these concerns for another day. The Committee felt that the MTC's alternative apportionment workgroup could address these industry concerns through model alternative apportionment regulations.

The takeaway from this meeting is that after critical industry comments and additional meetings on these draft regulations, the Executive Committee decided to adopt the Uniformity Committee's draft market-sourcing amendments largely as originally proposed. As originally proposed by the Uniformity Committee, the proposed amendments included accuracy, notice, and documentation requirements that had to be satisfied in any situation in which a taxpayer wanted to change its method of assigning receipts from one year to the next. Hearing Officer Brian Hamer had recommended the removal of these requirements. Ultimately, the Uniformity Committee chose to retain only the notice requirement. As a consequence, taxpayers in states that adopt the model regulations, including the new market-sourcing amendments, will be required to notify the state of any changes to their method of assigning receipts.

In addition, the Executive Committee adopted the Uniformity Committee's proposed definition of "receipts." This definition does not include "hedging" receipts. The Model Regulation does not include a special apportionment rule for taxpayers engaged in hedging activities. As a consequence, taxpayers primarily involved in hedging activities—financial institutions and broker-dealers—will need to seek alternative apportionment. The MTC's section 18 workgroup on alternative apportionment has not yet addressed hedging receipts.

Footnote

1 The Uniformity Committee's draft amendment included the following notice requirement: "A taxpayer that seeks to change its method of assigning its receipts must disclose, in the original return filed for the year of the change, the fact that it has made the change." While the substance of the provision remained unchanged, the Executive Committee amended that language to cross reference Reg. IV.17 after the phrase "assigning its receipts."

This article is presented for informational purposes only and is not intended to constitute legal advice.

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