When sourcing receipts for corporate income tax purposes, a growing minority of states are shifting the methodology they use from cost of performance to market-based sourcing. As the trend continues, an increasing number of taxpayers may face situations in which either none of their income is taxed or more than 100 percent of their income is taxed.
This trend is also causing state tax departments and taxpayers to rely on alternative apportionment provisions to balance these inequities by allowing either the department or the taxpayer to source receipts using a method that deviates from the state’s standard statutory apportionment formulas.
Despite the growing reliance on alternative apportionment statutes, there is little guidance on how states will apply these rules. Twelve states do not provide any guidance on this topic at all, according to the Bloomberg BNA 2014 Survey of State Tax Departments,. Although Mississippi is one state without guidance, this is likely to change now that it has enacted legislation providing new alternative allocation rules.
The need for legislation arose following the Mississippi Supreme Court’s decision in Equifax Inc. v. Mississippi Dept. of Rev.,125 So.3d 36 (Miss. 2013) , in which the court held that the taxpayer bore the burden of proof when challenging the reasonableness of the department’s required use of an alternative apportionment method. Because the Equifax taxpayer failed to meet its burden of proving unreasonableness of the department’s decision to use an alternative method and of the penalties imposed, the court ruled in the department’s favor.
Miss. 2014 H.B. 799, enacted April 10, 2014, allows the taxpayer to request, or the commissioner to require, the use of an alternative allocation or apportionment method if the standard method applicable to the taxpayer does not equitably allocate the taxpayer’s income. However, the legislation requires the party seeking to use the alternative method to prove by a preponderance of the evidence that the standard method does not fairly represent the extent of the taxpayer’s business activity in Mississippi and that the proposed method more does so more fairly than any other reasonable method available.
The legislation also prohibits the commissioner from assessing penalties relating to a deficiency arising after the taxpayer is required to use an alternative method unless the commissioner can prove by a preponderance of the evidence that the taxpayer’s method lacked a reasonable basis did not follow Mississippi’s existing statues or regulations.
Mississippi’s new alternative allocation and apportionment provisions apply prospectively. As a result we will have to wait until Jan. 1, 2015 to see how the state handles sourcing disputes.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn : Do you think Mississippi’s new alternative apportionment provision is a step in the right direction, or does it stand alongside other states as the status quo?
For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.
By Lauren Colandreo
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Follow me on Twitter: @LColandreo
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