It has been a busy Spring and early Summer for the Multistate Tax Commission. Of interest in the corporate income tax space, the MTC is finishing up work on its model combined reporting statute, and has announced a reconstituted transfer pricing committee after the less-than-successful ALAS and SITAS projects. In the pass-through arena, the MTC announced its intention to launch a project to address the sourcing of operating income from partnerships, particularly the treatment of income of gain from the sale of partnership interest, and state jurisdiction over out-of-state partnerships and nonresident partners. The MTC also indicated that it would specifically consider investment partnerships and entity level taxes.
Possibly of higher overall impact to the future of state and local taxation, however, the MTC has announced that it will turn its attention to several key issues in the modern economy. In April, the MTC, motivated by the lack of uniformity among the states when it comes to taxing digital products, agreed to study state taxation of digital goods and services. Relatedly, the MTC expanded this initiative in May, announcing plans to explore cryptocurrency issues that affect state and local taxation. All indications are that the MTC will prepare a whitepaper on these topics, which is the prelude to making formal uniformity recommendations.
Our RSM state and local tax policy experts share their views on some of the MTC’s current work.
David Brunori: I have long been a fan of one of the MTC’s primary missions – the advancement of uniformity. Uniformity lessens both compliance and administrative costs, and makes business planning more efficient. Personally, I think we should be applauding the MTC’s involvement in partnership issues. State rules, or all-too-often lack of rules, makes compliance for a partnership doing business across state lines difficult. I think bringing a measure of uniformity, sanity really, to the treatment of the sale of partnership interests is the most critical part of this exercise. As for digital goods and services, the industry growth trend accelerated tremendously during the pandemic, and most sellers are, obviously, operating across state lines. What that area of the tax law needs is clarity, particularly with respect to sourcing. As for cryptocurrency – I don’t understand it. I am guessing states don’t understand it much either. I had the opportunity to buy 100 bitcoins for $125 each years ago. I didn’t. It seems like a mistake now.
Brian Kirkell: When the MTC announces that it intends to study something, taxpayers should pay attention. Almost every state is involved with the MTC at some level, and the work the commission does has a great deal of influence on the development of state tax policy and administration. The commission’s continued focus on corporate tax, particularly combined reporting and transfer pricing, should come as no surprise. These have long been areas of activity for the MTC, and the last few years have seen a number of high profile cases involving combined group exclusions and intercompany transactions. However, the MTC’s intention to address partnership sourcing, transactional issues, tiered structures, and entity-level taxes should generate some excitement for anyone who works in the pass-through space. The applicable sourcing rules are all over the place, and are often internally inconsistent and contradictory to the logic and structure of the corporate sourcing rules – which can be an absolute nightmare when dealing with a mix of individual, pass-through, and corporate owners. Additionally, the varied treatment of gains can have patently unfair results, which anyone who has navigated the taxation of gain from the sale of a lower tier California partnership with New York resident individual partners at the top of the chain can attest to. But, where I think taxpayers will see the most benefit is if the MTC provides rational income tax guidance around the characterization and sourcing of digital services, blockchain activities, cryptocurrency, and other evolving technologies that were far outside the knowledge and predictive capabilities of the drafters of UDITPA in 1957 and the Multistate Tax Compact in 1966. The simple truth is, if partnership transactions are the Wild West, state taxation of the digital economy is Outer Space… where no one can hear you scream.
If these issues impact you or your business, we recommend that you pay attention. The MTC holds live hearings with the opportunity for open discussion, and actively solicits and considers commentary.