Originally published January 8, 2008

The Multistate Tax Commission ("MTC") kicked off the New Year with its Executive Committee Meetings in San Diego, California on January 3rd and 4th. The MTC’s working group on revising the Uniform Division for Income Tax Purposes Act ("UDITPA") generated the most vivid discussion. The working group clearly indicated that the MTC is determined to forge efforts to review UDITPA. In addition, the MTC’s agenda contained discussions on several items from its uniformity projects: telecommunications apportionment regulation; REIT statute; and uniform statistical sampling statute and accompanying regulation. While the REIT and statistical sampling statutes were approved for Bylaw VII surveys (surveys of the states’ willingness to consider adopting the proposal), the telecommunications regulation generated a fiery response from state representatives that industry has failed to acknowledge such a regulation is needed.

MTC Creates "Working Group" to Conduct "Parallel Review" of UDITPA

Charlie Trost, National Conference of Commissioners on Uniform State Tax Laws ("NCCUSL") Commissioner for Tennessee and Chair of NCCUSL’s Drafting Committee on the Revised UDITPA, and Dan Robbins, Motion Picture Association of America, NCCUSL Commissioner for California, and a member of the UDITPA Drafting Committee, presented an overview of the NCCUSL process. It is not expected that NCCUSL will have a first draft ready for full Commission discussion until 2009 or 2010. Robbins cautioned that problems have come up in past acts where the right stakeholders have not been contacted early enough and the act(s), while adopted by NCCUSL, were not passed by the individual states. Dan Bucks, Director, Montana Department of Revenue, stated that the success UDITPA has attained is the result of having had a trustee watching over it – the MTC. The MTC has also formed its own process — a "parallel process"— to ensure that it is providing input to the NCCUSL Drafting Committee and also working toward amending the MTC Compact. The MTC will put together a letter of issues that it would like to see NCCUSL address in its review of UDITPA – which the MTC specifically stated may include items beyond the current scope of UDITPA, like combined reporting.

For more in-depth information on the NCCUSL and UDITPA discussions at the MTC meeting, please see Sutherland’s 01/08/08 Legal Alert: "MTC Executive Committee - Part 1 NCCUSL’s Review of UDITPA and the MTC’s Anticipated Role."

Uniformity Projects

Model Uniform Telecommunications Regulation. MTC Hearing Officer Sheldon Laskin indicated that a Hearing Officer’s Report was being prepared and the regulation could be ready for the full committee by July. Dan Bucks directed Laskin to include examples of inconsistent apportionment methods used by telecommunications companies garnered from MTC and other audits, and stated that the Hearing Officer’s Report must contain good evidence of how the current apportionment regime is broken.

Sutherland Observation: Bucks’ comments regarding lack of support from the telecommunications industry for the model telecommunication regulation were very surprising considering the industry’s long-standing and active participation and input regarding the regulation. The telecommunications industry has consistently offered support for the MTC’s investigation into the technical and business aspects of the provision of telecommunications services – including offering facility tours, providing extensive documentation regarding the types of services involved, providing extensive constructive comments at every stage of the drafting process regarding the technical feasibility of MTC proposals, and maintaining an open dialog with MTC staff and member representatives.

Furthermore, Bucks’ directive that the MTC disclose and discuss apportionment practices of individual taxpayers that have not previously been discussed as part of the project, and in fact are likely confidential, in the Hearing Officer’s Report is problematic. Publishing this type of information, which is obtained from audits, is a violation of state laws requiring nondisclosure of taxpayer confidential information.

Model Real Estate Investment Trust (REIT) Statute. After approval of a change suggested by the National Association of REITS to distinguish between a REIT that trades one share on a single occasion and those that trade regularly, the Model REIT Statute was approved by the Executive Committee and sent to the full Commission for final approval. The proposed model statute is limited to the taxation of captive REITs and is designed to eliminate the dividends paid deduction.

Model Uniform Statistical Sampling. Despite several concerns with the model statistical sampling statute raised by Todd Lard, Council on State Taxation ("COST"), the MTC approved the model statute for a Bylaw VII survey (survey of state interest). Lard requested that language providing that statistical sampling techniques only be conducted when "reasonable" be added back to the statute along with the indicia of what constitutes reasonable. Lard also recommended a procedure be developed that would allow taxpayers to challenge (appeal) or disagree with the sampling method. The MTC was unsympathetic to these requests, and indicated that it would be inappropriate to include such an appeal process in the statute.

Isle Of What? Isle Of Man Request To Change Model Combined Reporting Statute

The Isle of Man has asked the MTC to review and revise its reference to the Organization for Economic Co-operation and Development ("OECD") list of designated tax havens in the MTC's combined reporting statute because the Isle of Man proclaims that this list does not reflect current facts. The MTC’s model regulation for combined reporting provides for worldwide combined reporting as the default filing methodology. However, taxpayers can make an election to file on a "water's-edge" basis. While the election limits the affiliated entities that would be included in the combined report to domestic and certain other corporations, it does not exclude corporations that are doing business in tax havens. "Tax haven" is defined as a jurisdiction identified by the OECD as a tax haven or as having a harmful or preferential tax regime. However, the OECD tax haven list is not regularly updated, and is based on measurement at a certain point. In fact, the list has not been updated for the past five years.

The MTC acknowledged in its discussions that the lack of current updated information in the OECD was problematic. They also indicated that the only state to adopt the MTC's combined reporting statute verbatim was West Virginia – implying that this was not a wide-spread problem. However, without any real proposed solutions concerning how to designate what constitutes a "tax haven," the MTC agreed that they will consider how best to address the Isle of Man's points and then possibly have some follow-up discussion in May.

Sutherland Observation: The constitutional undercurrent to this request by an alleged "tax haven" country to be removed from the MTC’s statutory enumeration of such countries renders this situation more than a mere "tempest in a teapot." When the MTC promulgates a statute that permits states to designate their own list of "tax havens," without regard to federal or international standards and designations, there is an inherent risk of Foreign Commerce Clause violations. Furthermore, the goal of uniformity is stymied by the wide discretion afforded to each state to add countries to a list (or, if the Isle of Man succeeds in its well-founded request, to remove countries) that has the effect of expanding the members of the filing group beyond "water’s edge."

Revamping The MTC Audit Process – Can It Be Taxpayer-Friendly?

The MTC has been considering ways to improve its audit process to make it more "taxpayer-friendly." Greg Matson, MTC Deputy Director, indicated that the MTC is reviewing the COST survey of its members about their MTC audit experiences to understand exactly where improvements are needed. The COST survey addressed such items as time to complete audit; number of states per audit; timing of audit (near end of statute of limitations) and MTC policy agendas in auditing. Matson indicated that the MTC may propose a list of recommended changes later this year.

Sutherland Observation: For years taxpayers have complained about the MTC’s audit process. Acknowledgement by the MTC that improvements in the process are warranted is definitely a first step in the right direction. The COST survey highlights pertinent taxpayer concerns with the MTC’s audit process that will hopefully be considered and incorporated by the MTC into its audit process.

© 2008 Sutherland Asbill & Brennan LLP. All Rights Reserved.

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