States say MTC-ya to the Multistate Tax Compact in Hedge Against Gillette


Members of the Multistate Tax Compact are falling like dominos . In March, South Dakota withdrew from the Compact. In April it was Utah. Minnesota left in May.  Oregon left in June, and D.C. withdrew at the end of July.

Of course, most states didn’t withdraw from the Compact completely . Utah, Oregon and D.C. withdrew from the Compact only to reenact it without Article 3 (allowing taxpayers to choose between the Compact’s method of apportionment or the state method) and Article 4 (apportionment provisions). Minnesota still allows for state participation in Commission audits. South Dakota didn’t have a corporate tax anyway, so its complete withdrawal makes some sense.

Despite their hesitance to completely disavow the Compact, states are preparing for the result of the Gillettedecision, in which the California Supreme Court will decide whether the state must allow taxpayers to elect use of the Compact’s three-factor apportionment formula for the years in which California was still a member of the Compact, despite the state’s statutory single-factor sales formula. States with single- factor sales formulas that don’t want to allow taxpayers to choose the three-factor formula are hoping that by severing Articles 3 and 4 from their enactment of the Compact, they won’t be subject to the outcome of the Gilletteruling.

However, a big question is whether the states that have reenacted the Multistate Tax Compact without Articles 3 and 4 will still be considered full compact members. The Multistate Tax Commission gets its funding from member states, so they are in a bind—either stand firm and require full adoption of the Compact for membership, or cave to the growing popularity of single-factor sales apportionment formulas.

The Commission has informally stated through amicus briefs that it would consider treating states as compact members if their re-enactment of the Compact is in “substantially similar form” to other states.  However, allowing for severability of the articles of the Compact cuts against the purpose of the Compact, which is to provide uniformity. Some states are even enacting clauses to the Compact which require state law to trump Compact law in any area of inconsistency.

As the issue evolves and the Gillettedecision is released, the states and the Commission will eventually have to come to some sort of conclusion. Until then, the charts below may be helpful in figuring out a state’s stance and predicting their moves in the future.

While the majority of states still use a three-factor formula as their primary apportionment method, 16 states have single-factor sales formulas, 2 states are transitioning to single-factor sales formulas, and 16 of the states using three-factor formulas double or triple-weight their sales factor.

Of the 17 full compact members of the Multistate Tax Compact, 3 use a single-factor sales formula, 4 double weight their sales factor, and 8 use the equally weighted three-factor formula imposed by the Compact. One compact member does not have a corporate income tax.

State Apportionment Methods

Note: Bolded states are compact members of the Multistate Tax Compact.  

Single-Factor Sales Formula

Transitioning to Single-Factor Sales Formula

Three-Factor Formula with Double-Weighted Sales

Equally Weighted Three-Factor Formula

Not Applicable

California

Colorado

Connecticut (non-manufacturing)

Georgia

Illinois

Indiana

Iowa

Maine

Michigan

Missouri (optional)

Nebraska

New York

Oregon

Pennsylvania

South Carolina

Texas

Utah (manufacturing)

Wisconsin

Minnesota

New Jersey

Arizona (optional)

Alabama

Arizona

Arkansas

Connecticut (manufacturing)

District of Columbia

Florida

Idaho

Kentucky

Maryland (with exceptions)

Massachusetts

New Hampshire

North Carolina

Ohio (triple-weighted sales)

Tennessee

Utah (optional)

Vermont

Virginia

West Virginia

Alaska

Delaware

Hawaii

Kansas

Louisiana

Missouri

Montana

New Mexico

North Dakota

Oklahoma

Rhode Island

Utah (non-manufacturing)

Mississippi Nevada

South Dakota

Washington

Wyoming

   

MTC State Membership Classification

Compact Members

Sovereignty Members

Associate and Project Members

Alabama

Alaska

Arkansas

Colorado

District of Columbia

Hawaii

Idaho

Kansas

Michigan

Missouri

Montana

New Mexico

North Dakota

Oregon

Texas

Utah

Washington

Georgia

Kentucky

Louisiana

Minnesota

New Jersey

West Virginia

Arizona

California

Connecticut

Florida

Illinois

Indiana

Iowa

Maine

Maryland

Massachusetts

Mississippi

Nebraska

New Hampshire

New York

North Carolina

Ohio

Oklahoma

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Vermont

Wisconsin

Wyoming

  

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