P – P - F · uditpa" • The equitable apportionment trend! – States initially relied on Sec....
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uditpa Uniform Division of Income for Tax Purposes Act PAST – PRESENT - FUTURE
Transcript of P – P - F · uditpa" • The equitable apportionment trend! – States initially relied on Sec....
uditpaUniform Division of Income for Tax Purposes Act"
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PAST – PRESENT - FUTURE!
UDITPA"
!Bruce Johnson, Utah State Tax Commission!Richard Pomp, University of Connecticut!Sheldon Laskin, Multistate Tax Commission!Shirley Sicilian, KPMG!
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• A little history:!– Before UDITPA – statesʼ formulas
varied!
– Drafted by ULC in 1957.!
– Adopted by states starting in 1966.!
– Part of the Multistate Tax Compact (Art. IV).!
– Also adopted by states in the form of a model law.!
– Provisions have been modified by states over the years.!
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• Recent trends in apportionment -!
– Sales factor weighting.!
– Market-based sales factor sourcing.!
– Rethinking what should be included in “receipts.”!
– Rethinking business/non-business income.!
– Equitable apportionment.!
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• The sales factor weighting trend –!
– UDITPA originally called for an equally weighted three-factor formula.!
– States have largely moved to heavier-weighted or single sales factor formulas—either on a mandatory or elective basis (so that only a few now use the equally weighted formula to any extent).!
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• The market sourcing trend –!– UDITPA Sec. 17 calls for sourcing
sales of services and intangibles using predominant cost of performance. But industry regulations have used market sourcing.!
– In early 1990ʼs, a couple states began to move to market sourcing for services and intangibles.!
– More states adopted this approach over the years—with 19 currently using the approach for many types of service and intangible sales.!
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• The equitable apportionment trend!
– States initially relied on Sec. 18 authority in limited circumstances and for the purpose of promulgating industry rules.!
– In the 1990s, states began to use the authority to combat aggressive tax shifting techniques.!
– Modifying the sales factor (inclusion of certain receipts and sourcing) and forced combination have become the focus recently.!
– Taxpayers are also requesting variation.!
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• General policy concerns -!
– What is the purpose of the formula in formulary apportionment—what is it supposed to represent?!
– What does it mean for a formula or the income derived from it to “fairly represent” the activities of a particular business in a state – and what does that mean where a single-sales factor is the standard?!
– What legislative policy is driving the trends?!
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• How the MTC came to this project -!
– Over the years, states have moved away from some of UDITPAʼs provisions.!
– In 2006, MTC asked the ULC to revise UDITPA.!
– But in 2009, the ULC declined.!
– MTC began work on revisions instead.!
– (In the mean time, several states moved to market sourcing.)!
– Revisions were sent to public hearing in 2013.!
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The uniformity process!
Full Commission
States “By Law 7 Survey” to determine if states would adopt SecCon 17 provisions and SecCon 18 regulaCons provision.
SecCon 18 provisions will come back to ExecuCve CommiKee aLer revisions.
ExecuCve CommiKee – 2014 Most SecCon 18 provisions sent back to Uniformity CommiKee with direcCons to revise.
Hearing Officer Report
Uniformity CommiKee/ExecuCve CommiKee Revising Review
MTC Uniformity SubcommiKee Discussion DraL
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• Summary of the Draft Revisions –!
– Factor weighting is left to each state. !
– “Business” and “non‐business income” replaced with “apportionable” and “non‐apportionable income.” Apportionable income would include all income subject to apportionment under the Constitution.!
– Sales factor would be limited to receipts from transactions and activity in the regular course of the taxpayerʼs business.!
– Market sourcing used for all sales including services and intangibles. (Sec. 17.)!
– States given explicit authority to issue alternative apportionment regulations. (Sec. 18.)!
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• DRAFT – removes factor weighting –!
– Double-weighting the sales factor is recommended but not required.!
– Reasons:!
• The apportionment formulas have not been grounded in any particular economic theory.!
• The proposal recognizes that states adopt formulas for policy reasons that may involve all sorts of issues.!
• Political pressure has typically been to move toward a more heavily weighted sales factor.!
– Effect on uniformity? Effect on equitable apportionment?!
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• DRAFT - changes definitions of “business”/ “non-business” –!
– Changes terminology to “apportionable” and “allocable.”!
– Makes clear that there are two separate tests – transactional and functional.!
– Makes the definition of apportionable income coextensive with the constitutional limits.!
– But also allows income that would be allocated to a state to be apportioned by that state.!
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• Hearing Officer Recommendations –!
– Remove the word “regular” in the definition of apportionable income.!
– Change “and” to “or” in the definition of apportionable income.!!
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• DRAFT – narrows definition of “sales” (in sales factor) –!
– Equates “sales” (or receipts) with transactional income (or revenue) as opposed to functional income. !
• Transactions and activities in the regular course of the taxpayer's business would be included. !
• Functional income, that is sales of assets used in the business, etc, would not be included in “sales.”!
– Intent is to better reflect market for the businessʼs products or services.!
– Also excludes receipts from corporate treasury functions.!
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• Hearing Officer Recommendations –!
– Would correct a reference to “gross receipts of the taxpayer not allocated ...” (since income is allocated, not receipts). !
– Proposed two alternative draft definitions of receipts.!
• “Receipts” means gross receipts of the taxpayer that are received from, or associated with, transactions or activities generating apportionable business income defined in Article IV.1.” !
• “Receipts” means gross receipts of the taxpayer that are received from, or associated with, transactions or activities generating apportionable business income defined in Article IV.1 excluding substantial amounts of such gross receipts from an incidental or occasional sale of a fixed asset or other property that was, or is, related to or part of, the operation of the taxpayerʼs trade or business.”!
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• DRAFT – uses market sourcing for services and intangibles –!
– Services -!• Sourced by delivery.!
– Intangibles -!• Leased or licensed, and sales contingent upon use !
– Sourced by use. !
• Marketing intangibles leased or licensed !– Sourced by use of consumer good.!
• Sales of intangibles restricted to geographic area that includes the state !– Sourced to that state!
– Hierarchy of sourcing rules –!• Determine state,!• Reasonably approximate state, or!• Throw-out.!
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• Hearing Officer Recommendations –!!
– No changes to language.!
– Urges the MTC to make regulations a priority.!
– Look to the work being done by the SSTP and in the sales tax area generally.!
– Consider revisiting cost of performance.!
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• DRAFT gives states explicit regulatory authority under Sec. 18 –!
– MTC and the states have a long-standing practice of doing regulations using Sec. 18 authority believing that the language would allow this. !
– The provision lacked explicit authority, however, and now the revisions make clear that states have the ability to issue industry-wide or issue-wide rules.!
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• Hearing Officer Recommendations –!
– Require the issuance of regulations where the state has adopted under Sec. 18 a policy that will apply industry-wide, or generally with respect to an issue.!
– Place the burden of proof on the party (DOR or taxpayer) that asserts application of an alternative apportionment method.!
– Prohibit retroactive revocation of taxpayer-specific alternative apportionment requirement/permission (without a showing of cause).!
– Provide relief from penalties where taxpayers follow authoritative guidance.!
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• Recent actions –!
– October 2013 – Executive Committee requested that Uniformity Committee consider the Hearing Officer report recommendations.!
– May 2014 Committee rejecting all of the Hearing Officer recommendations. !
– May 2014 – ExCom voted to move Sec. 17 revisions (market sourcing) forward. Voted to accept some of the H.O. recommendations, in some cases with modifications, particularly on Sec. 18 (equitable apportionment). Returned the project to the Uniformity Committee.!
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• Continuing work –!
– Executive committee sent the following instructions to the Uniformity committee:!
– Include a provision preventing retroactive revocation of a taxpayer's alternative apportionment method, unless there has been a material change in or a material misrepresentation of the facts. !
– Include a provision addressing who bears the burden of proof—with a general presumption that the party asserting alternative apportionment bears that burden.!
– Include a provision that would prevent assessment of penalties solely on the basis of failing to use alternative apportionment where the taxpayer otherwise followed applicable authorities.!
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• Outlook for adoption by states –!
– MTC project team is reviewing its track record in getting uniformity proposals adopted.!
– The project team has reached three tentative conclusions: !
• First, political considerations are often the primary factor affecting whether MTC models are adopted by states. !
• Second, it seems that sometimes MTC models are developed after the optimal time for states to act on them. !
• Third, some of the projects selected appeared to have limited relevance to many states.!
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• Uniform regulations –!
– Everyone agrees that, especially with respect to market sourcing, there is a need for detailed regulations grounded in practical knowledge of how transactions are conducted and the availability of information.!
– Uniformity has to be viewed on an industry basis.!
– Definition of terms.!
– Use of existing models being developed by states that have moved to market sourcing.!
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Questions"(Thank you.)!
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