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By Tripp Baltz
Dec. 7 — A “global” regulation dealing with special purpose entities that don’t have ordinary sales income will be among the items taken up by the Multistate Tax Commission’s Uniformity Committee at a Dec. 14 meeting in Houston.
Bruce Fort, MTC counsel, told Bloomberg BNA Dec. 6 a special work group will present an update on the regulation to the committee, but he doesn’t expect the committee to take action on the proposal. He said he also will present a memo addressing other regulations under the Multistate Tax Compact Article IV, Section 18, in light of changes recently approved to the market-based sourcing regulations in Section 17 of the compact.
The work group will seek guidance from the MTC’s Uniformity Committee on “how specific or how general this regulation ought to be,” Fort said. “Hopefully the committee will tell us what they want, whether broad with lots of flexibility, or outlined down to the dollar.”
The Uniformity Committee, which has the purpose of promoting compatibility in tax systems between and among the states, has been amending the compact’s apportionment and allocation regulations to reflect an ongoing shift among states toward market-based sourcing and away from cost-of-performance for purposes of calculating multistate corporate income tax liability. Section 18 of Article IV, which is the Uniform Division of Income for Tax Purposes Act, deals with situations in which business income is distorted.
Distortion can arise from “any situation in which standard apportionment does not reflect an entity’s business activity in the state,” Fort said. More specifically, the work group has been focused on rules for entities with de minimis receipts. Such special purpose entities include financial services institutions and other entities that derive their income from dividends, interest and royalties, as opposed to the sale of goods and services, he said. De minimis receipts are defined in the draft regulation as less than 3.33 percent of a the taxpayer’s gross receipts.
Greg Matson, executive director of the MTC, said the committee is likely to consider a vote on the draft regulations at its meeting in March.
Other MTC committees will be meeting in Houston. The Audit Committee will receive a report on income and sales tax audits completed so far in 2017. The Nexus Committee will consider a report on collections from the MTC’s multistate voluntary disclosure program. It will also hear a presentation on survey responses from the National Nexus Member Program states regarding their policies concerning unitary groups seeking voluntary disclosure and net operating losses claimed with voluntary disclosure.
Matson said the MTC’s Executive Committee will continue a “longstanding discussion about helping states to get more uniform tax administration” in areas where it is really needed, such as RAR (revenue agent reporting) adjustments. IRS examinations can result in changes to federal taxable income that, as a result, can necessitate the amendment of hundreds of state and local income tax returns potentially due within a very short time frame. Failure to file such returns in a timely manner can result in penalties and interest.
“This is the type of uniformity goal for which the compact was created and adopted,” Matson said. The MTC RAR model is designed to achieve more uniform tax administration, he said.
Matson said the Uniformity Committee also will discuss the proposed IRC Sec. 385 debt-equity regulations and state conformity, and the Executive Committee will consider federal issues and their implications for the states.
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