Proposed Amendments to Article IV of the Multistate Tax Compact

By Jason Peart, Esq., LL.M., Irvine, Calif.

Editor: Mark G. Cook, CPA, MBA

State & Local Taxes

The Multistate Tax Commission is considering significant changes to the rules that govern how multistate businesses are taxed (see Multistate Tax Commission, Multistate Tax Compact Article IV Recommended Amendments (May 3, 2012)). The goal of the proposed amendments is to modernize the model law so it conforms to shifting tax policy preferences and changes in the world economy.

The current framework for multistate taxation assigns the total taxable income of a multistate corporation among the various states in which it does business. This framework, proposed initially in the Uniform Division of Income for Tax Purposes Act (UDITPA), has been codified by the commission in Article IV of the Multistate Tax Compact. In an effort to keep this system uniform and up to date, the commission has identified five provisions in need of review. It referred the five provisions to its Uniformity Committee, which worked with a drafting group to compose amendments to those key areas. The proposed amendments are discussed further below.

Change How States Decide Which Income Is Apportioned or Allocated

Currently, items that qualify as “business income” are apportioned using a three-factor formula that considers the percentage of property, payroll, and sales a multistate corporation has within a state. “Nonbusiness income” is allocated to the state in which the property is located. The first amendment would change this distinction in two ways. It replaces “business income” in Article IV(1)(a) with a more expansively defined “apportionable income.” It also replaces “nonbusiness income” in Article IV(1)(e) with the more limited “nonapportionable income.” The purpose of this change is twofold. First, the expanded definition of “apportionable income” signals the committee’s intent to include gains from the liquidation of a unitary business. This includes a liquidation characterized under Sec. 338(h)(10) as a deemed sale of assets, without regard to how the gains are used.

Second, the expanded definition brings more clarity to the type of activities that fall under the functional test. Under both the existing rules and the proposed rules, income subject to apportionment (currently called “business income”) includes transactional income and functional income. The definition of transactional income would be unchanged, but “functional income” would be defined differently. Functional income is currently described as “income from tangible and intangible property if acquisition, management and disposition of property constitute integral parts of the taxpayer’s regular trade or business operations.” The commission proposes changing the definition to “income arising from tangible and intangible property if the acquisition, management, employment, development, or disposition of the property is or was related to the operation of the taxpayer’s trade or business.”

By altering these definitions, along with other relevant language, the committee sought to more clearly define which items of income should be apportioned and allocated.

Replace Equally Weighted Apportionment Formula With Double-Weighted Sales-Factor Formula

Many states no longer require the equally weighted three-factor formula. In its place, there has been a trend to more heavily weight the sales factor. In an effort to promote uniformity, the committee considered five options and decided that double-weighting sales in the apportionment formula achieved this goal. By making this recommendation, the committee stated that the adjustment more accurately reflects the reality of apportionable income and reduces the likelihood that the apportionment formula will produce distortion.

Replace Cost-of-Performance Sourcing Rule With Market-Based Sourcing Rules

Under the current framework for sales-factor numerator sourcing, receipts from the sale of services and intangibles are evaluated using the cost-of-performance rules. These rules source receipts to a state if the “income-producing activity” is performed within the state, or in the case of activity performed in multiple states, the cost of performing the activity occurs in a particular state by a greater proportion. The committee saw that this rule evaluates a taxpayer’s market by examining the place where the service is performed. However, with trends in globalization, as well as new technology that allows services to be performed remotely, the committee recognized that this approach is now outdated. In response, it proposed amendments that move more toward a market-based sourcing approach. The proposed amendment will also allow for the proportional sourcing of receipts “to the extent” the market is in the state. (For an in-depth discussion of these rules, including a state-by-state survey of the adoption of market-based sourcing rules, see Schadewald, “Apportionment Using Market-Based Sourcing Rules: A State-by-State Review.”)

Replace the Definition of “Sales”

A proposed amendment would replace the Article IV(1)(g) definition of “sales” with a definition for “receipts.” The “receipts” definition includes the transactional test limitation already present in the commission’s regulations. Additionally, with the exception of taxpayers that are securities dealers, the definition excludes receipts dealing with the treasury function (i.e., financial transactions such as repaying a loan or making an investment), as well as other financial activities without a customer (e.g., interest income).

Explicitly Authorize Industrywide or Issuewide Alternative Apportionment Rules

For taxpayers engaged in an industry in which the current allocation and apportionment provisions do not fairly represent the extent of their business activity, the final proposed amendment expands the tax administrator’s authority to adopt an appropriate apportionment and allocation method for those taxpayers. This treatment also applies to taxpayers engaged in a particular transaction or activity not fairly accounted for under the primary framework for allocation and apportionment.

The proposed amendments are being evaluated by the Multistate Tax Commission’s Executive Committee, which declined to adopt them at its Aug. 2 meeting. Instead, before adopting the amendments, the commission plans to open debate on the amendments to a wider audience.


Mark Cook is a partner at SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600, ext. 2143, or

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.