On April 26, the Multistate Tax Commission (MTC) Income & Franchise Tax Uniformity Subcommittee (Subcommittee) held the first of three scheduled meetings to revise corporate income tax apportionment. Specifically, the MTC is seeking to limit the definition of “sales” under Article IV.1(g) of the Uniform Division of Income for Tax Purposes Act (UDITPA) for purposes of calculating the sales apportionment factor.1 The effect of the proposed limitation will lead to reducing the sales factor denominator in certain situations – and increasing state apportionable income.

Background

The Subcommittee reached a consensus that the revised definition of “sales” should reflect a substantially narrower meaning than under the current version of UDITPA, which broadly defines “sales” as “all gross receipts of the taxpayer” not specifically allocated.2 In the April 26 meeting, Subcommittee members repeatedly described the proposed definition as including only those receipts that would meet UDITPA’s transactional test (and not UDITPA’s functional test) for purposes of determining what constitutes business income.

The proposal to limit the definition of “sales” reads as follows:

1(g) “Sales” means amounts that give rise to apportionable income and that are received by

the taxpayer from:

(1) transactions and activity in the regular course of its trade or business for:

(A) the sale, rental, lease, or licensing to a customer of goods, products or other property which would properly be included in the inventory of the taxpayer if on hand at the close of the tax period; or

(B) the sale of services to a customer, or from

(2) tangible or intangible property that is:

(A) a contract right, government license, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area;

(B) [Other?]3

Thus, the limitation contained in the proposal would result in excluding from the sales factor many types of receipts associated with apportionable business income – a concerning disconnect between apportionable income and the apportionment formula.