Mulling Over the MTC's Past And Present; A Bloomberg BNA Q&A With Lloyd Looram

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

Lloyd J. Looram, managing director of The Looram Consulting Group, Inc. in Palm Beach Gardens, Florida, recently sat down with Bloomberg BNA to discuss the Multistate Tax Commission, including its history and involvement in litigation addressing the Multistate Tax Compact—such as the recent Gillette opinion in California.

Interview by Jennifer McLoughlin

Lloyd J. Looram, CPA, a state and local tax practitioner with more than 45 years experience, is the Managing Director of The Looram Consulting Group, Inc., a Palm Beach Gardens, Florida boutique state and local tax consulting firm founded in 1991 that serves Global 1,000 clients. Prior to his current position, Lloyd was the State Tax Director for a Fortune 500 company and founder of the state and local tax consulting practice and regional managing partner at Arthur Andersen. He is a member of Bloomberg BNA's State and Local Tax Advisory Board, and was recipient of the 2008 NYU Paul H. Frankel Outstanding Achievement in State and Local Taxation Award.

Bloomberg BNA:

When did you first become involved with the Multistate Tax Commission?

Lloyd Looram:

I first became involved with the Multistate Tax Commission (the MTC) in late 1973 or early 1974 when I joined the corporate tax department of a Fortune 50 conglomerate (the Company) in Stamford, Connecticut.

The Company had a very proactive (some might say aggressive) attitude towards taxes (i.e., federal, international, state and local, etc.). It was quite an educational and eye opening experience for me. My boss, a vice president of the Company and the Director of State Taxes, was a very active member of the Committee On State Taxation (COST).1 In fact, I believe he may have been one of its founders and was also a member of its Board of Directors. At the time I joined his department, he was very active with the MTC, especially as it was at that time that the MTC was aggressively lobbying the state of California to become a member. California was a trendsetter in the field of state and local taxation. It was the leading proponent of the unitary theory of taxation and worldwide combined reporting. Plus, in light of its size, it would have a significant positive benefit to the MTC's fiscal budget. Its becoming a member was crucial to the long-term survival of the MTC. (For the fiscal period of 1976-77, California's share of the budget was $76,428 (35 percent) while the next largest state, Michigan's, was $34,116 (15 percent).)

As the Company owned a major motion picture company headquartered in the Los Angeles area, California was one of the Company's most vital states. Thus, the Company had a critical interest in the outcome of the MTC's efforts. During the initial year that I was with the Company, the State Tax Director spent much of his time in Sacramento.

Bloomberg BNA:

On its website, the Multistate Tax Commission says that “[t]he commission was created in 1967 as an effort by states to protect their tax authority in the face of previous proposals to transfer the writing of key features of state tax laws from the state legislature. For that reason, the Commission has been a voice for preserving the authority of states to determine their own tax policy within the limits of the U.S. Constitution.” Based on your early involvement with the MTC, do you agree with this general account of its formation and purpose? Do you think the MTC's original purpose is misunderstood?

Looram:

Clearly, the MTC was formed to offset federal legislation (referred to by the MTC as “coercive” and “restrictive”) that had recently been enacted, plus to defeat several other pieces of federal legislation that were pending at that time. (“To save the states’ political and fiscal independence from the encroachment of federal legislation”) The federal legislation which was introduced and supported by the business community was in response to a court decision that had expanded the tax reach of the states to the multistate business community. There was also additional federal legislation that was pending at that time that was likewise supported by much of the multistate business community.

Industry had several existing Washington-based vehicles for them to use to lobby Congress. For example, the business community had the National Association of Manufacturers and the U.S. Chamber of Commerce, plus numerous other industry-specific associations and the nascent COST organization. At that time, the states had no such organization to help them.

The MTC was the proposed solution to the states' problem. To make itself acceptable to both the federal legislators and the business community, the MTC adopted a policy of uniformity. (“Simplification of taxpayer compliance and elimination of the possibility of double taxation”) Plus, it also had to demonstrate that the states were both willing and able to work jointly to solve multistate tax problems.

Without question, the present administration of the MTC does not understand what the MTC stood for at its origin, nor does it appreciate the trials and tribulations that the founders of the organization had to endure to get the organization formed. Present management is simply doing whatever is most convenient for them to facilitate, not to lead. It seems clear to me that as current MTC management did not deem it appropriate to include the organization's first Executive Director on any of its defense teams, that it was abandoning its original principles.

Based on recent submissions authored by current MTC management, over the 49 years that the MTC has been in existence, the purpose of the organization has definitely migrated from its original intent. Now, it appears from what I am reading that its primary function is contract auditing. Apparently, the threat of federal legislation has passed?

Likewise, current practitioners that were not present at the time of the MTC's formation do not fully understand the extent or depth of the effort that was required to get the MTC started. Such an organization had never before existed. The passion and tenacity of the founders was unparalleled.

Bloomberg BNA:

What is your recollection of the early, formative years of the MTC and how it worked to shape its general purposes and policies?

Looram:

I came on the scene after most of the heavy lifting had already been done. I attended most of the annual meetings of the MTC from 1975 through 1983. By that time, Gene Corrigan had already been hired as its first Executive Director. I had the opportunity to speak at several of the annual meetings during that period and at one of those meetings, I had the good fortune to hear in person the legendary Frank Kessling, the “Father of Unitary Taxation.” Plus, as I have stated elsewhere, it was almost a religious experience to witness Bill Dexter, the MTC's Chief Counsel, speak. (“preach”)

The MTC drafted and proposed numerous regulations addressing various issues of concern of that time. Like most of its projects, its end products were not mandatory, but merely suggestions. What most multistate taxpayers actually experienced were not the suggested regulations, but actual field audits, and most of the MTC's corporate tax audits were conducted by former California FTB auditors that were seconded to the MTC. Thus, most of the audits were unitary worldwide combined audits even though an individual state might not have adopted such a policy at that time.

Bloomberg BNA:

In the recent California Supreme Court decision Gillette Co. v. Franchise Tax Bd., the court found that a state legislature can override the Multistate Tax Compact and preclude corporations from using the compact's three-factor apportionment formula. What is your reaction to the California decision? What influence do you expect the case to have on the other pending state Supreme Court cases regarding compact election?

Looram:

It was my understanding that when a state joined the Compact that it actually enacted the provisions of the Articles of the Compact into the state's taxing statutes. When a state expressed an interest in joining the MTC, the MTC provided it with the enabling legislation! One of the provisions of those articles that has been discussed and parsed ad nauseum was the right of a taxpayer to elect to use the compact's apportionment provisions in place of the provisions of the state.2

At the time the majority of states joined the compact in the late 60's and early 70's, most utilized an apportionment formula that consisted primarily of three equally weighted factors. Thus, the election provision apparently was innocuous and was not focused on in any meaningful way by either industry or the states. The so-called taxpayer option had very little fiscal impact to either the states or the taxpayers at that time. Today, the situation is dramatically different.

Presently, something like 37 states use either a single factor consisting of sales exclusively or a more heavily weighted sales factor. Thus, utilization of the option can have a decisive impact on the computation of a company's state tax liability.

So, as long as the option provision is on the books, taxpayers have the right to elect it.

I believe that the Gillette decision will, of course, be used by the other states with on-going current litigation. I will, however, need to consult with my crystal ball (which is presently out for repair) to determine what impact, if any, it will have. Unfortunately, I personally am not that prescient.

Bloomberg BNA:

The Gillette decision was largely premised on the characterization of the compact not as a binding interstate compact, but rather as a model law. Do you agree with this characterization, which the Multistate Tax Commission advanced in an amicus brief? If not, how do you view the compact?

Looram:

As I have mentioned, I am not an expert in either contract law or compact law. The ultimate resolution of this most vexing question has a significant legal impact to this case. Thus I must respectfully defer this question to those legal scholars much more eminently qualified than I.

Bloomberg BNA:

Do you believe states will achieve uniformity someday with one common regime for the allocation and apportionment of business income?

Looram:

Never ! Oh! Sorry. Please let me say that some other way. Never! : )

Each state (taxing regime) is sovereign unto itself. It can and will structure its taxing schemes to produce the revenue necessary for the state to operate, while at the same time structure those schemes as best it can to favor its in-state resident companies, while at the same time burden the non-voting non-resident companies less favorably.

When I transferred from the audit division of Lybrand, Ross Bros. and Montgomery into the tax department in the firm's New York City office in 1970, I joined their state and local tax group. At that time, Lybrand was the only “Big 8” accounting firm that had a tax group dedicated exclusively to state and local taxes. At that time, uniformity amongst the states did not exist. When I retire from my present consulting practice, uniformity will still not exist. In fact, I believe that uniformity amongst the states has deteriorated rather than improved during the lifetime of the MTC.

By the way, how long has the MTC been in existence? What was its intended purpose? (“Bringing even further uniformity and compatibility to the tax law governing multistate businesses.”) How many fee-paying members has it had? Do not count associates.

The purpose of these questions is to demonstrate that over the course of the lifetime of the MTC (49 years), it has never been able to gather a simple majority of the states of 50 percent as fee-paying members. I believe that the most it ever had at one time was 21. Thus, how can the organization say that it speaks for the whole of the states if the organization, itself, cannot get a simple majority of the states to join its organization? And, how can it bring about uniformity (whatever that means) if the states themselves cannot agree on one universal or singular name for a tax based on corporate net income?

So will the states achieve uniformity? For your young and impressionable readers out there, this is what is called “The Impossible Dream.”3

Currently known as the Council On State Taxation.

2 Article III, 1., The Taxpayer Option.

3 Man of La Mancha, Mitch Lee & Joe Darion (1965).