Why Some Pass-Through Entities Might Miss Out on the MTC Compact Election Debate

The debate surrounding apportionment formulas is reaching a fever pitch as the California Supreme Court considers Gilletteand the MTC reevaluates section IV of the Multistate Tax Compact, which requires that member states allow for the election of a three-factor apportionment formula as an alternative to the state’s statutory formula.  The Gillettecase is moving along, with an answer brief on the merits filed July 16. A public hearing was held by the MTC in late March which considered changes that would allow states to choose their own apportionment formula while still adopting a uniform market-based sourcing method for sales of items other than tangible personal property

While much of the focus has been on apportionment of income for standard corporations, pass-through entities are often overlooked. Most states require the same apportionment formula to be used by both corporations and pass-throughs, but there are a few states which require a different method of apportionment.  

Connecticut requires pass-through entities to use an evenly weighted three factor formula, while C corporations use a single factor or double weighted sales factor formula, depending on their income-producing activity. 

New Jersey requires S corporations to use the same apportionment formula as C corporations, but requires partnerships, LLPs and LLCs to use an evenly weighted three factor formula.

In New York, S corporations must use a single factor formula, while partnerships, LLPs and LLCs must use an equally weighted three factor formula.

While Arkansas uses the same apportionment formula for pass-throughs as it does for C corporations, it requires partnerships and LLCs to assign state income to each member before they utilize the apportionment formula.

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