Corporate Close-Up: Time to Adopt a Model Sourcing Mediation Provision?

A growing number of states are moving away from the cost-of-performance method and toward a market-based approach when apportioning sales receipts under their corporate income tax regimes, the Bloomberg BNA 2016 Survey of State Tax Departments shows.  

One result is that taxpayers are more likely to be taxed by two or more states on the same transaction. A proposal by the ABA Tax Section to provide a mechanism for aggrieved taxpayers to petition for non-binding mediation with states under these circumstances was recently rejected by a hearing officer for the Multistate Tax Commission.  

 “In the absence of evidence that unfair, multiple taxation is occurring to any material degree … I am of the opinion that the best approach is for tax administrators to consider claims by taxpayers of multiple taxation as part of current formal and informal procedures, and then to consider relief when compelling,” the hearing officer said.

 An example of such a sourcing dispute was AT&T Corp. v. Oregon Dept. of Rev., Or., No. S060150 (Sept. 11, 2015). In that case, the Oregon Supreme Court concluded that the state was entitled to employ an “all or nothing” cost-of-performance methodology because the “greatest share” of the costs of performance occurred in its jurisdiction. AT&T unsuccessfully argued that most of its performance costs occurred in New Jersey, which also adheres to an “all-or-nothing” approach, resulting in both states taxing the same receipts.

 If the idea of a state weighing the impact of other jurisdictions’ sourcing rules on taxpayers seems far-fetched, consider Alabama. The ABA’s proposal was based on Ala. Admin. Code r. 810-27-1-4.17.01(d), which provides:

 Whenever a taxpayer is subjected to different sourcing methodologies regarding intangibles or services, by the Department of Revenue and one or more other state taxing authorities, the taxpayer may petition for, and the Department of Revenue shall participate in, and encourage the other state taxing authorities to participate in, non-binding mediation in accordance with the mediation rules promulgated by the Multistate Tax Commission from time to time, regardless of whether all the state taxing authorities are members of the Multistate Tax Compact.

 The provision offers a practical solution for addressing instances of multiple taxation arising from conflicting state sourcing methods. While the MTC hearing officer’s rejection of the ABA’s proposal is a setback, the growing disparity in state sourcing methods is likely to all but guarantee that the idea will eventually get another day in court.

 Continue the discussion on LinkedIn: Are there sufficient state procedural mechanisms in place for resolving unfair state sourcing results?

 For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.