State Tax Group Tables Proposal on Financial Institutions

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By Tripp Baltz

Members of a Multistate Tax Commission work group tabled for now an industry proposal to modify model apportionment rules to provide that all entities more than 50 percent owned by a bank holding company should apportion their income under the MTC’s financial institution rules.

Members agreed the proposal, put forward by Karen Boucher, managing member of the Financial Institutions State Tax Coalition, was something they favor in principle but might not fit within the focus of the work group. That focus is to draft a proposed model regulation for apportioning income for entities with little or no receipts derived from activities in the regular course of business.

The Section 18 work group of the MTC’s Uniformity Committee is considering regulatory changes that may be necessary because many states have eliminated the property and payroll factors from their apportionment formulas when moving to market-based sourcing, favoring sales as the singular factor. The Uniformity Committee has directed the Section 18 work group to draft a proposed model regulation in light of changes made to Sections 1 and 17 of Article IV of the Multistate Tax Compact, the Uniform Division of Income for Tax Purposes Act (UDITPA). Those changes reflect a gradual shift by states away from cost-of-performance and toward market-based sourcing for purposes of apportioning business income.

Problematic for Industry

Boucher told the work group that excluding from the general receipts factor—previously referred to in MTC rules as the sales factor—receipts from investment and trading that are part of a taxpayer’s regular course of business is problematic for the financial services industry.

She said the Oregon Legislature acknowledged this problem by approving a bill in its 2017 session ( H.B. 2273) with a narrow definition of “sales,” similar to that of the MTC’s recent UDITPA amendments, and specifically providing that the new definition doesn’t apply to taxpayers who apportion income under the state’s financial services rule.

The segment of the financial industry with the greatest potential for apportionment problems is subsidiaries of bank-holding companies, Boucher said. She urged the group to consider adding taxpayers that are more than 50 percent owned by a bank holding company to the Section 18 regulation and assigning receipts according to the financial institution rules.

‘Back Door’

Members of the committee decided not to amend the draft, however. “I like it, in part because it promotes uniformity and presents sort of a ‘back door’ opportunity to encourage adoption of the financial institutions” special industry rule, said Holly Coon of the Alabama Department of Revenue, chairwoman of the work group. “But I wonder if this should be handled separately outside of the context of the Section 18 rule.”

The group also discussed a recommendation from Ernst & Young LLP to amend the proposed model regulation to clarify treatment of receipts from hedging activities. The proposal would expand the MTC’s definition of marketable securities to include futures or forward contracts, options, notional principal contracts such as swaps, and other derivative contracts and similar financial instruments regardless of whether such instruments result from hedging activities.

The work group also tabled that proposal until it could get more information about it from EY.

To contact the reporter on this story: Tripp Baltz in Denver at

To contact the editor responsible for this story: Jennifer McLoughlin at

For More Information

Information on the Section 18 work group is at

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