Updates from the MTC’s Summer Meetings

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLPThe Multistate Tax Commission (MTC) held its 55th Annual Meeting in Anchorage, Alaska from August 1st through the 4th. During the four-day event, the Audit, Litigation and Nexus Committees met on Monday, the Uniformity Committee met all day Tuesday, the Commission held its annual business meeting and seminar on Wednesday, and the event wrapped up on Thursday with a very short meeting of the Executive Committee.

Some of the reoccurring themes discussed during the meeting included taxation of cryptocurrency, the recently updated MTC statement on P.L. 86-272, the factor presence nexus standard, and taxation of digital goods and products. Below are some of the additional highlights from the meeting:

The Nexus Committee Meeting featured a discussion of cryptocurrency by Richard Cram (MTC). Norm Hannahwa of Chainanalysis also discussed the benefits provided by technology tools during cryptocurrency tax audits. Separately, Clinton Singletary of the Alaska Municipal League provided an overview of the Alaska Remote Sellers Sales Tax Commission. Alaska localities impose sales and use taxes and the Commission is providing a comprehensive process to simplify reporting and audits.

During the Uniformity Committee Meeting, various working groups provided updates on their projects, the ever-popular state roundtable took place, and three Eversheds Sutherland attorneys presented various “new business” topics to the Committee.

  • Taxation of Digital Products and Goods Working Group: MTC staff presented its recently released whitepaper, which outlines topics the newly-formed working group will begin to address. It also announced that Gil Brewer of the Washington Department of Revenue will chair this working group. State representatives uniformly supported the MTC’s digital products efforts. Jeff Friedman of Eversheds Sutherland, however, provided feedback, noting that there is some confusion—at least in his mind—regarding the integration of the Streamlined Sales Tax Project’s (SSTP) work on digital products, and the MTC’s effort to do the same. Jeff also cautioned MTC staff that there will be concerns—if not outright opposition—to the MTC’s efforts to define digital products (which will likely broaden states’ tax bases). The SSTP has included several digital product definitions (and sub-definitions) in its Streamlined Sales and Use Tax Agreement. Such definitions are the product of substantial collaboration between the business community and the states. The MTC’s work on digital products may not allow for the same level of business community collaboration. For instance, the business community has some concerns with the outcome of the MTC’s recent work to “update” P.L. 86-272 (see further discussion below). Jeff also advised the states to consider exempting business inputs, and to avoid including intangible property in its proposed definitions. Stay tuned!
  • Partnership Working Group: MTC staff and members of the working group provided a general update, echoing much of what was discussed at the last working group meeting. Comments from the ABA and the AICPA to the model rules drafted for investment partnerships remain pending. MTC staff is also going to begin developing examples to facilitate the upcoming discussions of the working group. The working group expects to resume regular calls later this summer. More updates on the partnership project can be viewed here.
  • Standing Subcommittee: Laurie McElhaton, of the California Franchise Tax Board (FTB) and Chair of the Standing Subcommittee, reported on the Subcommittee’s review of the MTC model sourcing regulations. The Subcommittee has been reviewing the sales/receipts sourcing rules in the MTC model general allocation and apportionment regulations (including the market-based sourcing model), as well as the special industry regulations and comments raised by MTC staff. The Uniformity Committee approved the creation of a new working group to (1) review MTC staff comments to these regulations, and (2) to determine whether the model rules should be updated. Significantly, a suggestion was made during the meeting that the working group start with an analysis of the alternative apportionment provision contained in Section 18 of the Uniform Division of Income for Tax Purposes Act (UDITPA). As an aside, UDITPA was not drafted by the MTC. While the MTC cannot amend UDITPA, it has created its own model regulations that go beyond UDITPA. Because many states have moved away from the UDITPA three-factor apportionment formula, a question has been raised as to whether Section 18 continues to be compatible in a single-sales factor state. Considering that the working group is likely to focus on this provision as a first step, it is important that the business community is actively engaged in these efforts. With respect to Section 18, the MTC may be considering an approach that replaces the equitable apportionment standard contained in UDITPA’s Section 18 (e.g., fair reflection of a taxpayer’s in-state business activities) with a standard that is disconnected from a taxpayer’s business activities. This raises Commerce Clause concerns. For those taxpayers who are subject to a special industry regulation (e.g., airlines, railroads, publishing, telecommunications, etc.) the focus is whether the special industry rule comports with the market sourcing rules and/or should be updated for other reasons. While no specific changes are being proposed at this time, this will be an important working group to follow as they begin to dive into the rules and comments.
  • Uniform POA: Eversheds Sutherland’s Nikki Dobay—along with industry stakeholders—presented a newly-created universal power of attorney form to the Committee. The group presented a new draft form and addendum, as well as an instructional video explaining both forms. The draft forms were well-received, producing constructive feedback from the states as well as MTC staff. Business, state and MTC representatives all commented on their interest to further the work on this project. As next steps, the MTC intends to facilitate interested party meetings to gather feedback from the states, practitioners, and industry on the draft forms. The group intends to present an updated form to the Uniformity Committee at the Fall meeting for approval.
  • Marketplace Implementation Issues: To close the day, Eversheds Sutherland’s Jeff Friedman and Michele Borens provided the Uniformity Committee with an overview of several marketplace facilitator issues that have started to emerge during audits, which have only recently begun. Every state imposing a sales and use tax has recently enacted a marketplace statute that requires (or authorizes) marketplaces to collect sales or use tax on behalf of third-party sellers that sell on the marketplace. Our marketplace clients are experiencing their first audits, and are reviewing their application of marketplace statutes. Specifically, Michele and Jeff highlighted the following scenarios:
  1. situations in which two or more marketplaces are engaging in a transaction with a customer, and potential confusion arises regarding which of the marketplaces is required to collect and remit the tax. Michele and Jeff noted that some states will allow the marketplaces to contractually designate the liability;
  2. the existence of double taxation in transactions where a marketplace seller charges tax even though a marketplace is liable for the tax;
  3. the burdens that marketplace facilitators face when required to obtain seller information and exemption certificates; and
  4. the need for a deduction or credit for sales taxes paid previously by third-party sellers.
  • State Roundtable: The states provided updates on significant legislative and regulatory issues. Of note was California’s update, which highlighted that the FTB issued Legal Ruling 2022-02 to provide income tax guidance on the sale of a partnership interest. A Washington representative noted that legal challenge to the recently-passed capital gains excise tax will be review directly by the Washington Supreme Court, after a trial court’s concluded it was unconstitutional. The representative for Texas noted that they are in the process of codifying certain amendments to its sourcing rules as a result of Sirius XM’s recent Texas Supreme Court win (woo-hoo)! New Jersey’s representative affirmed that it has new transfer pricing initiative in the works. Additionally, several states noted that: (1) their states had passed or continued to update their SALT cap workaround rules (e.g., Missouri, Colorado); (2) they have adopted or are looking to adopt the MTC’s updated P.L. 86-272 statement (e.g., California, New York, New Jersey, Oregon); and (3) state legislation has been passed that will decrease tax rates (e.g., Utah, Arkansas, Iowa).

During the Business Meeting, the MTC adopted Resolution No. 2022A, which recommends that states that adopted the MTC’s updated statement on P.L. 86-272 also adopt the MTC’s model factor presence nexus standard for business activity taxes (i.e., income/franchise/gross receipts tax nexus is established if a nonresident taxpayer produces a dollar amount that exceeds (1) $50,000 of property, or (2) $50,000 of payroll, or (3) $500,000 of sales, or (4) twenty-five percent of total property, payroll or sales). MTC staff has advocated this position throughout the P.L. 86-272 project, and has been described as a method to protect certain small businesses. A state choosing to apply the MTC’s factor presence nexus standard, however, will be applying such thresholds to all taxpayers, large or small. This could result in an expansion of a state’s tax system.

Eversheds Sutherland attorneys will continue to attend all meetings and provide timely updates.

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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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