Multistate Tax Commission to Explore Model Entity-Level Tax on Partnerships

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP

Wednesday, March 8, 2017, marked day one of the Multistate Tax Commission’s (MTC’s) 2017 March Committee Meetings, which are being held in San Diego, California. The Uniformity Committee convened March 8, 2017, in an all-day session open to the public. On Thursday, March 9, 2017, the Nexus and Litigation Committees broke off for separate meetings in the morning, each with partial sessions open to the public as well. Attorney representatives from Eversheds Sutherland’s SALT group attended all of these public sessions. Several interesting topics were discussed during this round of meetings, including: (1) taxation of partnerships at the entity level; (2) revamping the use tax information reporting model; (3) the Section 18 Work Group’s model apportionment regulation progress for taxpayers lacking “receipts”; and (4) the prospective effects of federal reform on states and state taxpayers.

Model Entity-Level Tax on Partnerships, LLCs and Similar Business Entities

A little more than a month ago, the MTC Partnership Work Group commenced weekly telephonic meetings to analyze and discuss whether and how states should amend their tax statutory structures to audit and trace partnership income in response to the passing of the federal Bipartisan Budget Act of 2015, which altered the way the IRS audits partnerships. Although the group has just started its discussions, New Mexico asked the group to explore a model statute that would allow states to tax partnerships, LLCs and other pass-through entities. The model would be independent of the current partnership audit project and would be a fundamental departure from the conventional state pass-through tax treatment that conforms to the Internal Revenue Code (IRC). The model would allow for a credit to the partners for taxes paid by the partnership. The Partnership Work Group will be assessing options for partnership taxation as it moves forward.

Use Tax Information Reporting Model

Back from a five-year hiatus, the Uniformity Committee discussed the proposed use tax information reporting model. The MTC’s Executive Committee put the MTC Use Tax Notice and Reporting project on hold in 2012, pending a decision in the Direct Marketing Association case. Now that the 10th Circuit—which held that Colorado’s notice and reporting requirements imposed on non-collecting retailers did not violate the Dormant Commerce Clause—has sustained the constitutionality of Colorado’s statute, the Uniformity Committee believes the previously drafted model might be adoptable with minor modifications. Committee members reported on the proposed model statute as well as the status of litigation and legislation. To date, three states (Oklahoma, South Dakota and Vermont) have use tax notice statutes. Pennsylvania, Kansas, Arkansas and Washington all have bills currently pending that would, in some way, require non-collecting retailers to provide reports or notice to each purchaser that they may owe use tax.

The Uniformity Committee passed without opposition a motion to re-form a working group to ready the model for Executive Committee consideration. One issue the new group will be addressing is whether a provision should be added to the model to clarify the circumstances in which a non-collecting retailer should make the required reports if it is unclear where the purchased property will be used. 

Section 18 Regulatory Project

The Section 18 Work Group reported to the Uniformity Committee regarding its continued efforts to draft a proposed model regulation for apportioning the income of entities that lack “receipts” derived from transactions and activities in the regular course of business. The Section 18 Work Group has been conducting meetings since July 2016, and was created in response to 2014 and 2014 MTC amendments to UDITPA changing to the definition of “apportionable” (“business”) income, “receipts” and the rules for sourcing receipts other than receipts from sales of tangible personal property. The Work Group’s goals are to: (1) provide a predictable means of apportionment; (2) use market-based sourcing concepts where possible; (3) avoid “nowhere assignment” or double assignment of receipts; and (4) retain flexibility for unanticipated circumstances. 

The Work Group presented its current draft of the model regulation, as well as a series of 13 corresponding examples. The Work Group reported to the Uniformity Committee on its continued difficulties in attempting to incorporate a “throw-out” rule into the proposed model regulation. Notwithstanding such difficulties, the Work Group believes the draft is nearing completion, and is hoping to send the proposed draft to the Executive Committee for consideration at the MTC’s 50th Annual Conference in July. The Work Group hinted that the next draft model regulation it will likely tackle will be a special industry regulation for securities brokers.

State Tax Implications of Federal Tax Reform

On Thursday, March 9, 2017, the Litigation Committee received a presentation on the impact of federal reform on state tax infrastructures by KPMG representatives. The presentation began with a comparison of President Trump’s tax plan and the House Republican Blueprint (House Blueprint). The major takeaway was that the extent to which a state’s tax revenues could be impacted by federal reform depends on whether a state’s revenue laws or rules conform to the Internal Revenue Code. If a state were to conform to all federal changes, the resulting state tax base, for both personal and corporate income taxes, would likely be broader than current law. For example, both plans would allow business entities to immediately expense certain assets. Because this would change an entity’s federal taxable income, it would affect the computation of state taxable income unless the state decoupled. 

The Litigation Committee also discussed the House Blueprint’s destination-based cash flow tax. This tax structure would move the United States away from a net income tax to a destination-based cash-flow tax, or consumption tax. The proposed destination-based cash flow tax mirrors, in large part, the Texas Margin Tax, with the exception of the “border tax adjustment” (BTA). 

Other Items

On Wednesday, the Uniformity Committee also discussed a proposal to revise the MTC’s Revenue Agent’s Report (RAR) model statute and corresponding regulations, received a presentation from Airbnb’s Global Tax Director regarding Airbnb’s tax collection agreements with states and localities, and discussed, received comments and voted without opposition to create a working group tasked with revising the MTC model for collection and remittance of lodging taxes by accommodations intermediaries. 

On Thursday, the Litigation Committee also deliberated and voted to both adopt a proposed Litigation Committee Charter and create a subcommittee on amicus briefing that will coordinate more closely with the National Association of Attorneys General (NAAG). The Nexus Committee public session included a presentation by former MTC executive director Dan Bucks on the Airbnb tax collection agreements and summarized reports on survey responses regarding both electronic voluntary disclosure agreement payments and net operating losses claimed with voluntary disclosures. The Audit Committee met in the afternoon, primarily to confer during a closed session.

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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