Corporate Close-Up: With Uniform Market-Based Sourcing Regulations on the Horizon, Prospects for Uniformity Appear Dim


The Multistate Tax Commission’s Uniformity Committee voted to refer model market-based sourcing regulations and definitions to the group’s Executive Committee, according to a recent article by Daily Tax Report’s Jennifer McLoughlin. The pending approval of these regulations begs the question: how will they help encourage uniformity among the states?

As reported, the draft regulations follow the MTC’s adoption in July 2014 of model legislation that shifts from cost-of-performance to market-based sourcing under Article IV, Section 17 of the Multistate Tax Compact. The market-based approach incorporates the Uniform Division of Income for Tax Purposes Act (UDITPA).

The question of cost-of-performance versus market-based sourcing has been on the table since the MTC proposed changes to apportionment and sourcing provisions in 2013. A report by Richard Pomp, a state-tax specialist and professor at the University of Connecticut School of Law who presided over a hearing in 2013 on amendments to the Multistate Tax Compact, noted that the market-based sourcing amendments were the most sweeping of all of the amendments and generated the most comments at the hearing. Pomp, who is also a member of Bloomberg BNA’s State Tax Advisory Board, said that changing to a market-based sourcing method would allow for flexibility and the ability to deal with definitional issues on an industry-wide basis at a Bloomberg BNA webinar shortly after releasing his report in 2013.

Shirley Sicilian, who was formerly general counsel for the MTC, agreed during the 2013 webinar that focusing on where benefits of services are delivered, rather than where benefits are received, approaches sourcing from the taxpayer’s perspective, but she cautioned that difficulty can still arise.

“[W]e do have a lot of trouble when the taxpayer is selling to an entity and that entity itself is a multistate organization. Then, all these questions come up,” she said during the 2013 webinar.

Pomp highlighted intangibles as being a trouble spot during the 2013 webinar, saying that when the item being sold is an intangible – such as stock, bonds, financial assets, partnership interests, goodwill – it is especially hard to track.

Flash forward to 2015 and there are MTC model regulations and definitions nearing adoption that specifically address market-based sourcing of receipts from services and intangibles.

But the states are still a long way from achieving uniformity. Of the 16 states that are Compact Members of the Multistate Tax Compact, almost 70 percent use cost-of-performance to source receipts from services. That number drops to roughly 56 percent when sourcing receipts from intangibles. (Compact Member States: Alabama, Alaska, Arkansas, Colorado, District of Columbia, Hawaii, Idaho, Kansas, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah, Washington. Compact Member states that use cost-of-performance to source receipts from services: Alaska, Arkansas, Colorado, Hawaii, Idaho, Kansas, Missouri (with a market-based election), Montana, New Mexico, North Dakota, Oregon. Compact Member states that use cost-of-performance to source receipts from intangibles: Alaska, Arkansas, Hawaii, Idaho, Kansas, Montana, New Mexico, North Dakota, Oregon.)

Adopting the new MTC model regulations would require legislative action to change from the cost-of-performance sourcing method to market-based sourcing. Do these states have the political will to take such action, especially when market-based sourcing continues to draw mixed reviews from the private sector? An article in the Tennessean recently hailed the method from a business standpoint, while a story in the National Law Review panned it.

Then there are the big states that use the market-based sourcing method but have not yet issued regulations. While market-based states will likely issue regulations, it seems doubtful that they will adopt the MTC regulations wholesale. Instead, they are expected to pick and choose parts of the model regulations that work for them. This sounds like the opposite of uniformity. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What do you think the new model MTC regulations mean for uniformity among the states?

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