Tax Analysts Blog

The Survival of the Multistate Tax Commission

Posted on Sep 11, 2013

In the past year and a half, the Multistate Tax Commission has come under fire. Its relevancy – even its purpose for existence – has been the subject of speculation. That speculation is still ongoing, but eventually will blow over. The MTC isn’t going anywhere. Perhaps it will take a different shape or assume different tasks, but 10 years from now, the commission will still play an important role in state and local taxation.

By way of background, the MTC was established by the Multistate Tax Compact in 1967 as an intergovernmental agency that would work on behalf of states and taxpayers “to administer, equitably and efficiently, tax laws that apply to multistate and multinational enterprises.” The impetus for the compact was the creation of some level of uniformity among state tax systems, which was seen to be lacking in the 1950s, and avoidance of federal intervention in the state taxation of interstate businesses.

Out of fear that Congress would eventually enact legislation that infringed on states' taxing powers, several state tax officials, through the Council of State Governments and the National Association of Tax Administrators, came up with the idea of a multistate tax compact. The compact and the commission were officially enabled on August 4, 1967, after seven states adopted the compact's provisions. As it was conceived, the compact was not a formal congressionally sanctioned document with binding regulatory authority. Instead, it was intended to permit states to retain the ability to pursue their own policy agendas via their tax systems.

Fast-forward to 2012, and things have gotten complicated. Taxpayers in California brought suit arguing that the state, which at the time was a member of the compact, must allow taxpayers to elect whether they wanted to use the apportionment formula provided for in the compact or the formula provided for by California statute. The state argued that there was no election and that taxpayers were required to use the statutory formula. In its amicus brief in support of the state, the MTC argued that in joining the compact, "members did not surrender any aspect of state sovereignty to tax." In other words, even after joining an interstate compact, the state is free to adopt or reject provisions in the compact.

In a well-researched and well-written opinion, a California court concluded that the compact, as "both a statute and a binding agreement among sovereign signatory states," was binding on California and could not be unilaterally altered or amended. Although there were obvious budgetary reasons for a contrary conclusion, had the court decided otherwise, the compact would, for all intents and purposes, have been a sham -- a compact with missing or very dull teeth.

While I agree with the California court, a court in Michigan came to the opposite conclusion in a case with a very similar fact pattern. Both the California and Michigan cases are now pending before the respective state supreme courts. If a split remains after two state supreme courts rule, and because of the potential implications on other interstate compacts, the issue could be enticing to the U.S. Supreme Court. (There are more than 200 interstate compacts.)

But in the end, regardless of the ultimate opinion on whether states can pick and choose provisions in the compact, the MTC will never be the same – and that's not necessarily a bad thing. The commission will undoubtedly continue to promote uniformity, but it may have to accept that states will never use the same apportionment formula. The problem is that the need for economic development often drives states’ choice in an apportionment formula (as evidenced by the move toward single-sales-factor apportionment). Still, the MTC has been very successful in promoting uniform apportionment formulas for special industries. It should continue its efforts in that area. The commission also conducts multistate audits and works on nexus programs.

From a historical standpoint, the compact was created not because states truly wanted uniformity, but because they didn't want the federal government interfering in matters of state taxation. As a result, state representatives created what they believed was a solution that would both encourage uniformity and not get in the way of individual state tax policy. It was a good idea, but by law a compact cannot be both binding and offer states significant choices on whether to follow its terms.

All that being said, even an opinion by the U.S. Supreme Court saying as much won't be the death knell of the MTC. And the reason for that is that the MTC has a valid purpose, it does good work, and it brings a significant amount of tax expertise to the table. The MTC will adapt to whatever is thrown its way, and it may end up a better organization because of it. But I am confident the MTC is going nowhere, and that is a good thing.

Read Comments (2)

David BrunoriSep 11, 2013

Cara, great post. You are absolutely right about the motivation behind the
MTC's creation. Uniformity has always been elusive -- and today it's
impossible. There are a dizzying array of apportionment schemes in the 45
states with a CIT. 16 use double weighted sales or a variation thereof. 16 use
singles sales and only 11 states use the traditional 3 factor formula. Plus a
handful of states allow corporations to elect their formulas. The FTA has a
great chart on the insanity of state apportionment formulas.
http://www.taxadmin.org/fta/rate/apport.pdf That insanity makes the CIT tough
to impose and the MTC's job among the most difficult in the nation.

emsig beobachterSep 11, 2013

Ach, David, my good friend, I believe you suffer from at least a mild form of
dyscalculia if you believe that the varying weights of the factors, and of
course tax rates, are the cause of complexity of state corporate income taxes.
Those factors may have caused headaches for Bob Cratchett as he bent over the
ledgers and calculated Scrooge's tax liabilities with nothing more than quill
pen and paper. Today's Cratchett uses a computer with the requisite software
installed. It is not the difficulty of calculating its California tax liability
that induced the plaintiff to bring suit to be able to use the traditional
equally weighted three factor formula to apportion its net income to
California, but the ease of making the necessary calculations with which to
determine its tax liabilities under each apportionment regime.

It is the derivation of the amount of net income that must be apportioned
and/or allocated to states that is the source of complexity. Another source of
complexity is the varying administrative rules and procedures that confront
multistate and multinational enterprises. Added to these sources of complexity
are the bewildering array of tax credits, etc. that are available to businesses.

In my humble opinion, the MTC has provided a space between almost complete
randomness of state corporate income taxes and therefore much greater
compliance costs for businesses and the rigid conformity that would have been
imposed by Congress. The rigid conformity that would have been imposed by
Congress would have eliminated, or at least greatly reduced the ability of
multistate business to exploit differences in state income tax regimes; and, as
von Hayek said -- capitalism breathes through its loopholes.

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