Continuing Efforts to Amend the Multistate Tax Compact

By Jamie C. Yesnowitz, J.D., LL.M., Washington, D.C.; Dale Busacker, J.D., Minneapolis; Chuck Jones, J.D., CPA, Chicago; and Lori Stolly, CPA, Cincinnati

Editor: Greg A. Fairbanks, J.D., LL.M.

State & Local Taxes

In recent months, the Multistate Tax Commission (MTC) has intensified its efforts to adopt significant changes to Article IV of the Multistate Tax Compact incorporating the Uniform Division of Income for Tax Purposes Act (UDITPA). These changes, designed in large part as an “update” to UDITPA, would alter the model allocation and apportionment statute followed by many states for purposes of their corporation income tax laws.


In 1957, the Uniform Law Commission (ULC) promulgated UDITPA to provide uniform laws that states could adopt to assign the taxable income of multistate corporations among the states in which they do business. The MTC was created pursuant to the Compact in 1967 and included the UDITPA provisions as Article IV of the Compact. Due to the significant changes in the U.S. economy since the creation of UDITPA, some of the important uniform provisions were thought by some to be outdated, and many states have enacted legislation that departs from these provisions. As a result, the MTC recommended in 2006 that the ULC start a project to revise UDITPA. After public hearings and comments, the ULC decided to discontinue its work on revising UDITPA in 2009.

The MTC soon started to consider its own revisions to Article IV, and its Uniformity Committee completed its work in March 2012, proposing five significant changes to UDITPA in the areas of (1) apportionment factor weighting; (2) equitable apportionment; (3) business income; (4) market-based sourcing; and (5) redefining the sales factor as a “receipts factor.” The MTC’s Executive Committee in December 2012 approved the proposed model for a public hearing, which was held in March 2013.

Apportionment factor weighting: The Compact currently provides for a three-factor apportionment formula consisting of equally weighted property, payroll, and sales factors. However, many states have moved away from this standard formula and require that multistate taxpayers apportion income using a single sales factor or a three-factor formula with a double-weighted sales factor. The MTC’s Uniformity Committee recommended that the Compact be amended to recommend a double-weighted sales factor to Compact states but ultimately to allow these states to define their own factor weighting fraction.

Equitable apportionment: Under the Compact, if the general allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s business activity in the state, the taxpayer may petition for, or the tax administrator may require, an alternative apportionment methodology. The Uniformity Committee recommended adding a new paragraph providing that if the allocation and apportionment provisions do not fairly represent the extent of business activity of taxpayers engaged in a particular industry, transaction, or activity, the tax administrator may establish rules or regulations, to be applied uniformly, for determining alternative allocation and apportionment methods for such taxpayers.

Business income: The Compact currently defines “business income” as “income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” The Uniformity Committee recommended changing the term “business income” to “apportionable income” and revising the definition to

(i) all income that is apportionable under the Constitution of the United States and is not allocated under the laws of this state, including:

(A) income arising from transactions and activity in the regular course of the taxpayer’s trade or business, and

(B) 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.

Market-based sourcing: Under the Compact, sales, other than sales of tangible personal property, are sourced to a state (on an all-or-nothing basis) if (1) the income-producing activity is performed in the state; or (2) the income-producing activity is performed both in and outside the state and a greater proportion of the income-producing activity is performed in the state than in any other state, based on cost of performance (COP). The Uniformity Committee proposed a total revision of this provision that would replace the COP standard with a market-based sourcing approach intended to mirror the destination principle used to source sales of tangible personal property. Specifically, sales of other-than-tangible personal property are sourced to a state if, and to the extent, the taxpayer’s market for the sales is in the state.

To determine whether a taxpayer’s market for sales is in a state, the proposed draft includes subrules that describe the sourcing for different types of transactions, including transactions involving intangible property. If the taxpayer is not taxable in a state to which a sale is assigned or if the state of assignment cannot be determined or reasonably approximated, the sale is excluded from the denominator of the sales factor (commonly termed a “throwout rule”).

Receipts factor: The Compact currently defines “sales” as all of a taxpayer’s gross receipts that are not allocated. The Uniformity Committee recommended that the term “sales” be replaced with “receipts.” The recommended language would define “receipts” as the gross receipts of the taxpayer that are not allocated and that are received from transactions and activities in the regular course of the taxpayer’s trade or business.

Hearing Officer Report

At the MTC’s request, Richard Pomp, a professor of law at the University of Connecticut School of Law, chaired the public hearing on these proposed changes. Following consideration of numerous comments, Pomp, as the hearing officer, released a detailed report analyzing the proposals and recommending further changes to key provisions of Article IV of the Compact (see Report of the Hearing Officer: Multistate Tax Compact Article IV (UDITPA) Proposed Amendments). The report “provides a background to the amendments, a summary of the proposals’ substantive features, a review of the public testimony, and the Hearing Officer’s comments and recommendations, including in some cases, his proposals for a redrafted statute.”

In endorsing the Executive Committee’s approach on factor weighting, Pomp explained that the “proposal to allow states to define the factor weighting fraction is a concession to reality” and that “[t]he recommendation of double weighting is unlikely to have much effect.” In addition, Pomp noted that “perhaps uniformity should be viewed on an industry basis, rather than on a more general level.”

Pomp proposed a new version of the equitable apportionment provision. The existing (and committee draft) language would be amended to replace the specifically enumerated alternatives with “any reasonable method to effectuate an equitable allocation and apportionment of the taxpayer’s income.” Pomp also proposed two new paragraphs to clarify equitable apportionment issues. Under these proposals, the tax administrator would be authorized to publish rules and regulations when the general allocation and apportionment provisions do not fairly represent the business activity of taxpayers that are engaged in a particular industry, transaction, or activity.

Further, the party petitioning for, or the tax administrator requiring, an alternative apportionment method, has the burden of proof. If the tax administrator requires the use of an alternative apportionment method, civil or criminal penalties cannot be imposed if the taxpayer reasonably relied on the general apportionment provisions. Finally, a taxpayer permitted to use an alternative apportionment method may not have such permission revoked for transactions that have already occurred unless there has been a material change in, or a material misrepresentation of, the facts provided by the taxpayer.

Pomp proposed a new revised draft defining “apportionable income” as

all income that is apportionable under the Constitution of the United States and is not allocated under the laws of this state, including but not limited to:

(A) income related to the operation of the taxpayer’s trade or business; or

(B) income from tangible [and] intangible property if the acquisition, management, employment, development, or disposition of the property is, or was, related to, or part of, the operation of the taxpayer’s trade or business.

The proposed redraft would clarify that the transactional test in (A) and the functional test in (B) are independent of each other. Unusual situations not included within either category would be tested under the constitutional standard.

Pomp recommended revising the COP method by replacing the “all-or-nothing” method under the current COP standard with a proportionate approach, rather than adopting the market-based sourcing approach proposed by the Uniformity Committee and revising the MTC regulations to better define the direct costs that are included in COP. Pomp also explained that there would be value in extending COP to independent contractors. In addition, the controversy concerning how to define an “income-producing activity” could be addressed by viewing the entire apportionable business income of a unitary business as the income-producing activity. Because the nexus requirement would be satisfied by this origin-based COP approach, Pomp noted that there would be no need for a throwout or throwback rule. However, Pomp acknowledged that “COP is incompatible with the economic development considerations that led to single-factor apportionment.” Therefore, states that have adopted single-sales-factor apportionment would be unlikely to adopt COP.

Pomp proposed two alternative revisions of the committee’s draft definition of “receipts.” The proposed revisions eliminate the “gross receipts of the taxpayer that are not allocated” language, because receipts (as opposed to gain or loss) are not allocated. Under the first alternative, “receipts” are defined as “gross receipts of the taxpayer that are received from, or associated with, transactions or activities generating apportionable business income defined in Art. IV.1.”

Pomp explained that the first alternative is broader than the Uniformity Committee’s proposal and the second alternative. The first alternative implements the principle that for apportionable income, the related receipts should be included in the sales factor so that the apportionment formula is more likely to be fair and reflect a reasonable sense of how income is generated. The second alternative contains the same language as the first alternative, but adds language to exclude “substantial amounts of such gross receipts from an incidental or occasional sale of a fixed asset or other property that was, or is, related to, or part of, the operation of the taxpayer’s trade or business.” The second alternative thus excludes some situations that might otherwise raise issues of alternative apportionment.


The proposals to revise Article IV of the Compact have received considerable attention. Although all five of the main topics discussed in the report are important, the changes proposed to the alternative apportionment and market-based sourcing provisions may be the most wide-ranging and controversial. With respect to the scope of alternative apportionment, the question of which party has the burden of proof when an alternative apportionment method is sought has been addressed in at least one high-profile case in the past year (see Equifax, Inc. v. Department of Revenue, No. 2010-CT-01857-SCT (Miss. 6/20/13)), with more litigation on this point likely to follow. Pomp’s proposed amendment would clarify that the party invoking the alternative apportionment method has the burden of proof.

State tax authorities are likely to argue that the burden of proof should always be on the taxpayer, regardless of which party raises the issue, given the general presumption of correctness concerning assessments issued by the state. On the other hand, strong equitable arguments can be raised by taxpayers that assert that the burden of proof should be the same for either the taxpayer or the tax administrator, and that a taxpayer following statutory rules should not be subject to penalty if a state tax authority decides to make an assessment based upon an alternative apportionment.

During the past several years, market-based sourcing of sales other than sales of tangible personal property has become a popular departure from the UDITPA COP method. Under market-based sourcing, states generally require receipts from the sale of services to be sourced based on the location of the service provider’s customers or on the location where the customers received the benefit from the service provided, rather than the location where the service provider performed the services.

The nuances of market-based sourcing vary among states. Considering that states are moving toward market-based sourcing, it is curious that Pomp recommended using a modified COP method rather than market-based sourcing. However, Pomp presumes that the Executive Committee will endorse the market-based sourcing approach and draft model regulations. He explained that “[s]peed is of the essence if the MTC is to exert influence in this area” and that “[i]t can only be hoped that the states that have already marched down the path of market-based sourcing will reverse their current practices if those turn out to be inconsistent with MTC model regulations.”

It will be interesting to see how the MTC responds to the report, as the MTC could take steps to follow Pomp’s recommendations, retain its own drafted language, or strike a compromise between the two approaches. Also, it would stand to reason that even after the MTC adopts final language to amend the Compact, model regulations further explaining the new provisions in the Compact would need to be drafted. Of course, the biggest issue that will be unresolved for some time is whether the states will be motivated to change their statutes (and regulations) to conform to the provisions in a revised Compact.

This item is, in part, an updated version of material that was published in recent Grant Thornton State & Local Tax Alerts.


Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington, D.C.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or

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

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