Eversheds Sutherland (US) LLP

This week, the Multistate Tax Commission (MTC) held its Fall Executive Committee and Uniformity Committee Meetings (in person) in Alexandria, Virginia. During the Executive Committee Meeting, MTC staff approved California’s participation as a sovereignty member. The Uniformity Committee Meeting focused on discussing the status of its current projects, held its state roundtable, and proposed a study of its special industry apportionment regulations.

Executive Committee Meeting update—California’s return to the MTC

The Executive Committee Meeting proved eventful, considering the announcement that California will be rejoining the MTC as a sovereign state member, giving California the right to vote and comment on important state and local tax matters. California had previously been a full compact member, but dropped out in 2012 after California repealed the MTC Compact.

California’s membership will increase MTC revenue, and the MTC plans to use the additional funds to fill at least two additional positions. California state representatives have been participating in MTC projects for the past few years, and Laurie McElhatton (California Franchise Tax Board) was elected the new Vice President of the Uniformity Committee. Laurie has also been chairing the MTC’s State Taxation of Partnership Project and worked on the MTC’s Public Law 86-272 project that wrapped up earlier in the year.

Uniformity Committee Meeting update

Project status update – State Taxation of Partnerships and Sales Tax on Digital Products

The MTC’s Uniformity Committee has two current projects on issues of significant importance: the Project on State Taxation of Partnerships and the Project on Sales Tax on Digital Products.

Project on State Taxation of Partnerships

The Project on State Taxation of Partnerships focuses on the following four areas of state partnership taxation: (1) sourcing of partnership operating income and partnership items for state tax purposes; (2) sourcing and taxation of gains and losses from the sale of partnership interests; (3) entity level taxation issues including transfer pricing or combined filing issues; and (4) other administrative and enforcement issues including information reporting and withholding.

During the meeting, MTC staff presented a general overview of the project’s history, analyzed the issues outline, discussed the project’s survey results, and proposed a project roadmap and next steps.

Eversheds Sutherland attorneys have followed this project since its inception. You can read more about it here.

Project on Sales Tax on Digital Products

The Project on Sales Tax on Digital Products analyzes state sales and use taxation of digital products. MTC staff has been working with Washington state representatives to review existing state laws on the subject, and consider changes that could achieve greater uniformity among the states.

During the meeting, project representatives highlighted the importance of definitions in determining a product’s taxability. The panelists confirmed that they have spoken with several taxpayer and business representatives as part of their initial information-gathering phase. Research has shown there are two conflicting approaches: some individuals prefer general definitions that allow flexibility of interpretation, while others prefer to define each term in detail to avoid potential confusion.

Finally, the panelists emphasized that they welcome participation (including anonymous participation) from anyone who wants to share their comments or concerns. You can read more details on the Project on Sales Tax on Digital Products here.

State roundtable

One of the main events of the MTC’s Uniformity Committee meetings is the state roundtable—an opportunity for the states to provide legislative and litigation updates. Almost every state representative in attendance noted their state had implemented (or is currently in the process of implementing) a version of the pass-through entity tax. Many of those states are currently working on creating or updating the reporting forms to provide for the administration of pass-through entity taxes.

Some other notable state developments are set forth below.

  • New Jersey announced that the state was engaging in a study of state tax laws related to digital economy. The study’s goal is to determine which of their laws are underdeveloped. The New Jersey representative confirmed that a report will be presented once the study is finalized; however, a specific date was not provided.
  • Iowa confirmed that they are looking to make the entity composite return mandatory going forward. They reported that the surplus received during the last year will result in additional tax cuts in the near future.
  • Louisiana voters will decide whether to back two constitutional amendments that would heavily rewrite state sales tax laws to more closely match the collection regimes in other states.
  • The representative for Michigan state confirmed they expect to pass an elective pass through entity tax, providing a one hundred percent credit to the taxpayers. A taxpayer’s election lasts three years and the pass-through entity tax is triggered by the federal state and local tax cap.
  • The representative for Alabama communicated that the state will likely adopt the MTC’s partnership audit model.

Industry panel update

The Uniformity Committee also heard from an industry panel moderated by Eversheds-Sutherland partner Nikki Dobay. The panel included representatives from Expedia and TaxJar, a Stripe Company. The panel discussed post-Wayfair compliance implementation challenges. Specifically, the panel highlighted several challenges tax filers face at the state-level, including insufficient capacity of some state tax systems to handle return filing, lack of a uniform Power of Attorney and issues with third-party account access. In addition, the panel discussed the proliferation of locally administered occupancy taxes, as well as potential constitutional issues that could potentially arise when the significant compliance burden is considered. The panel was well received by the Committee and resulted in several follow-up conversations.

Review of special industry rules

During the last segment of the meeting, MTC staff sought feedback regarding the review of the MTC’s special industry apportionment rules. Specifically, MTC staff asked whether there was any reason for staff not to review these rules to determine whether updates were required—the attendees did not oppose the proposition. Thus, the MTC staff will undertake a review of its special industry and report back in the future. During this discussion, MTC staff acknowledged that may issues were arising related to the interplay with the general sourcing rules and special industry rules. The concern raised led MTC staff to suggest a study (as opposed to an official project) of this issue as well.

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