"Originally published "June 2, 2008"
"All talk, no substance" aptly describes the first meeting to revise the Uniform Division of Income for Tax Purposes Act ("UDITPA"). On Friday, May 30th and Saturday, May 31st in Chicago, the National Conference of Commissioners on Uniform State Laws ("NCCUSL") convened a meeting to consider revisions to UDITPA over the objections of a unified business community and concerns raised by state legislators. As a result, the meeting was largely a discussion between state tax administrators and NCCUSL "reporters" (the individuals responsible for creating proposed drafts or edits of UDITPA). The business community's remarks largely were limited to questioning the propriety of this project and its goals and scope, and the concerns of state legislators were essentially ignored.
Background: Where's the Beef?
Drafted in 1957, UDITPA is a model state income tax act that several states have adopted in varying degrees as a basis to tax corporate income. Uniformity was largely maintained until 1978, when the U.S. Supreme Court made it clear in the Moorman case that the states were free to craft apportionment regimes that departed from the standard embodied in UDITPA. Since 1978, given the desire by state legislators, state tax administrators, and state taxpayers to tailor a given state's taxing regime for various specific circumstances (e.g., economic climate, presence of specific industries, etc.), nearly every state has significantly departed from UDITPA. In response to a request by the Multistate Tax Commission (an organization representing state government tax authorities, as distinguished from elected state representatives), NCCUSL agreed to convene a drafting project to revamp UDITPA. The NCCUSL drafting committee contains several members of NCCUSL (most of whom do not consider themselves tax experts) and two co-reporters (Professor Rick Pomp and Prentiss Willson).
Several business groups, including the Council On State Taxation ("COST"), the Tax Executives Institute, and a group represented by Sutherland, have requested that NCCUSL cease its review of UDITPA unless and until NCCUSL establishes that uniformity is practical and achievable, a precondition for establishing a drafting project under NCCUSL's own rules. COST also submitted a letter requesting that NCCUSL cease the effort which was signed by 34 chambers of commerce and individual businesses. Further, organizations of state legislators (the National Conference of State Legislators and the American Legislative Exchange Council) have either raised "serious questions" or asked NCCUSL to cease its effort. The meeting proceeded over these objections (or without regard to them).
The NCCUSL Issues List: Cart Before the Horse?
The meeting agenda focused on reviewing a previously distributed "issues list" – a list prepared by the co-reporters identifying issues relating to nearly every aspect of UDITPA. Rather than beginning the meeting with a discussion of the propriety of the effort, the co-reporters alternately addressed the identified issues in the order in which they appear in UDITPA. Further, the critical "foundational" issues of UDITPA were also not addressed first. For instance, several states have eliminated two of the three apportionment factors (e.g., property factor and payroll factor) as a means of apportioning income. A discussion of this nonconformity would seem to be a threshold issue in considering changes to UDITPA. If NCCUSL determined that these factors should be eliminated, a discussion of the calculation of these factors would be superfluous.
Putting a Steak (sic) in the Ground: Prioritizing the Issues List
Perhaps a discussion of these foundational issues was deemed to be too controversial for this initial meeting. Or, NCCUSL may be reluctant to attempt to resolve these issues. In fact, providing further evidence that a uniformly adopted revised UDITPA is remote at best, NCCUSL drafting committee members and reporters indicated a willingness to forego creating a revised uniform act; providing, instead, "options" for states to consider. Doing so, of course, is an acknowledgement that uniformity of state corporate income tax is not achievable via model legislation. Or perhaps the drafting committee should rename the statute as NUDITPA, the Nonuniform Division of Income for Tax Purposes Act.
State Tax Administrators' Beef with Existing UDITPA
Two state tax administrators, Shirley Sicilian, General Counsel to the Multistate Tax Commission, and Ben Miller, a California Franchise Tax Board lawyer, actively engaged the NCCUSL drafting committee. Not surprisingly, Ms. Sicilian and Mr. Miller expressed interest in tax provisions designed to achieve "full apportionment" (i.e., sourcing all income to jurisdictions that will tax the income) but did not address instances in which a taxpayer is taxed more than once on the same income. Further, they expressed concern with the method in which income from services and intangible property is apportioned – known as costs of performance ("COP"). Michael Mazerov, senior fellow with the Center on Budget and Policy Priority's State Fiscal Project, also appeared to support the review of UDITPA. Mr. Mazerov's comments focused on how the business community was responsible for the lack of uniformity and should not be heard to complain given their role in advocating for legislative changes.
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Sutherland Observation: COP has been criticized as outdated or not producing "fair" apportionment results. Several states have replaced COP with other apportionment methods and Ms. Sicilian and Mr. Miller requested that a uniform method be developed as a replacement for COP. Interestingly, those states that have already replaced COP have not shown any interest in employing a method that other states have adopted. Several states have replaced COP with "market" approaches which seek to assign service and intangible income based on where customers are located but these states each have ignored prior work done by other states and have gone their own way in designing a "market" approach. If NCCUSL continues with its project to revise UDITPA, the states should be asked to demonstrate why COP is unfair and, just as importantly, why a market approach reflects an improvement. |
Riding Herd Over Rewriting UDITPA
Martha Lee Walters, NCCUSL President, attended a portion of the meeting and engaged in a brief discussion with attendees concerning the propriety of this project. She asked several questions concerning whether UDITPA is outdated and whether NCCUSL is the appropriate body to redraft it. The Council On State Taxation, the Tax Executives Institute, and Sutherland each repeated comments contained in prior submissions that NCCUSL cease the redrafting effort.
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Sutherland Observation: While uniformity may be a worthwhile theoretical goal, uniformity has been all but abandoned in state taxation. Focusing on whether uniformity is desirable is the wrong focus as it is not achievable via model state tax legislation. Federal legislation could create uniformity but state government officials are opposed to that approach. |
The business community representatives provided some comments prior to the close of the meeting. One representative requested that the drafting committee more clearly define whether NCCUSL is interested in reviewing or revising UDITPA, and what criteria it would apply to determining whether to adopt any particular proposed change. Sutherland requested that if NCCUSL moves forward with this project, that the drafting committee consider replacing UDITPA's formulary apportionment method with other methods. One possible alternative to formulary apportionment is separate geographic accounting whereby businesses determine income earned in a specific state via accounting methods and transfer pricing techniques.
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Sutherland Observation: While state tax administrators seem eager to further UDITPA's formulary apportionment method (despite an apparent acknowledgement that states will not agree on the composition of the formula), states remain the only taxing authorities to employ formulary apportionment. Many governments use some form of separate accounting, including the U.S. government (e.g., taxing companies not domiciled in the U.S. based on income effectively connected to a permanent establishment). States should consider alternatives to formulary apportionment if this project continues. |
Holy Cow: Meeting Concludes with an Unclear Future
Some members of the drafting committee seemed surprised by the lack of business engagement on the substantive issues list. The co-reporters were directed to begin drafting revisions to UDITPA. It is not at all clear what criteria the co-reporters are to apply in their drafting effort. This direction was remarkable considering the very little substantive discussion and commentary during the meeting. However, the drafting committee did request substantive written comments before the next meeting, which is scheduled for December 2008.
Charles Trost, chair of the drafting committee, announced that the future of the project will be discussed at the NCCUSL annual meeting in Big Sky, Montana scheduled from July 18-25. People interested in urging NCCUSL to discontinue the project are encouraged to attend this meeting.
© 2008 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.
