MTC Uniformity Committee Prepares for UDITPA Regulations

by Eversheds Sutherland (US) LLP
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On July 28, the Multistate Tax Commission (MTC) Uniformity Committee tabled two projects to free up resources to work on apportionment regulations in anticipation of the full Commission vote later this week that could amend several key UDITPA sourcing rules.

Income and Franchise Tax Developments

The Income and Franchise Tax Subcommittee considered whether to launch three new projects when they met. One project looked at how cloud computing receipts are sourced for income tax purposes. The second project examined the sourcing of electricity. The final possible new project was to look at the use of trusts for state tax avoidance. Only the trusts project will advance. The Subcommittee organized a workgroup to make recommendations as how to that project should proceed.

The electricity and cloud computing sourcing projects were tabled for the time being, largely because the Subcommittee wanted to free up resources to work on apportionment regulations. On Wednesday, the full Commission will vote on the following changes to the current sourcing rules, most of which will require further regulations be drafted and adopted for the rules to be effectively applied by taxpayers:

  • Definition of “sales”
  • Sourcing of sales of intangibles and services
  • Factor weighting
  • Definition of nonbusiness income
  • One change to Section 18 that will expressly allow for regulations

In addition to the Section 18 proposal going before the full Commission on Wednesday, the MTC is still considering additional changes to Section 18. The MTC’s Executive Committee recently considered proposed amendments and returned several provisions back to the MTC’s Uniformity Committee for further revision. Yesterday, the Uniformity Committee made certain changes to those proposals, which can be accessed here, and voted to advance Section 18, as revised, to the Executive Committee for further consideration later this week.

The committee amended subparagraph (c) to incorporate a provision that shifts the burden of proof to the taxpayer if the tax administrator can show that in any two of the five prior tax years the taxpayer used an allocation or apportionment method that varied with its allocation or apportionment method or methods used for such other tax years.

Subparagraph (d) was amended to clarify that, in the event the tax administrator requires the use of an alternative method of allocation or apportionment, the tax administrator cannot impose civil or criminal penalties with respect to the tax due that is attributable to the taxpayer’s reasonable reliance on the default allocation and apportionment provisions under state law.

The amendment to subparagraph (e) clarified that a taxpayer must receive written permission to use an alternative method of allocation or apportionment from the tax administrator before the tax administrator will be precluded from revoking such permission with respect to transactions that have already occurred (assuming no material change in, or a material misrepresentation of, the facts provided by the taxpayer upon which the tax administrator reasonably relied).

Sales and Use Tax Developments

As previously reported by Sutherland here, on July 21, 2014, the Uniformity Committee and the Sales and Use Tax Subcommittee voted to send to the Executive Committee a draft resolution recommending that the MTC endorse a model transaction tax act that, if enacted, by the states, would limit frivolous lawsuits seeking to extract sales taxes from retailers and others. The Uniformity Committee, however, left open the possibility that the vote could be reconsidered at the MTC’s annual conference when more MTC member states were present.

The Sales and Use Tax Subcommittee reconsidered its vote yesterday after deciding that technical changes to the draft resolution were necessary. The Subcommittee determined that the MTC does not “endorse” legislation but that it can “encourage” states to enact legislation, and it amended the draft resolution accordingly. The Subcommittee voted to advance the draft resolution, as revised, to the Uniformity Committee, which voted to advance the draft resolution to the Executive Committee for further consideration later this week. A copy of the latest draft resolution is available here. The Chair of the Sales and Use Tax Subcommittee also noted that the workgroup would continue to consider model legislation that would limit or prohibit qui tam and False Claims Act lawsuits in the area of taxation.

The Sales and Use Tax Subcommittee also discussed its draft sales and use tax nexus model statute, a project it green lighted at the MTC’s annual conference last year. The Subcommittee received numerous comments from MTC member states and the public, some of which called for substantive changes, and voted to refer the model statute back to the workgroup for further revisions. A copy of the model statute is available here.

Upcoming Meetings

The full Commission and the Executive Committee are scheduled to meet later this week in Albuquerque, New Mexico. Stay tuned for further coverage of MTC-related developments.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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