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Multistate Tax Alert: Multistate Tax Commission Adopts Changes to Article IV of the Multistate Tax Compact



On July 30, the Multistate Tax Commission (“MTC”) adopted amendments to five provisions of Article IV of the Multistate Tax Compact (“Compact”). These amendments revise the Compact’s provisions regarding factor weighting and the sourcing of service and intangible revenue and the definitions of the terms “sales” and “business income.” The amendments also grant to state tax agencies the explicit authority under Article IV.18 (“Section 18”) to establish apportionment regulations (e.g., industry-wide and transaction-based regulations). While the Compact has been adopted by a number of states, these MTC amendments will not become the law of a particular state unless formally adopted by that state.

Additionally, several other amendments to Section 18 that were not yet up for consideration by the MTC were approved by the MTC’s Executive Committee on July 31 for submission to Compact member states as part of a Bylaw 7 survey.1 These amendments, recommended by Richard Pomp,2 would generally place the burden of proof on the party seeking the application of an alternative apportionment method and limit the ability of a taxing authority to impose criminal and civil penalties in instances where the taxpayer files consistent with a statutory method of apportionment. The revisions also protect taxpayers from a state tax agency’s retroactive revocation of written permission to use an alternative apportionment method. If approved in the Bylaw 7 survey, these amendments would be ready for approval of the MTC at its July 2015 annual meeting.

In this alert we summarize the approved and pending amendments to Article IV and provide taxpayer considerations as the MTC moves forward with developing regulations to implement the Article IV amendments.

MTC amends compact

The MTC voted to adopt amendments to five Article IV provisions. These amendments are summarized as follows: 3

Factor weighting (Art. IV.9). Removes the three-factor apportionment formula requirement and instead provides a suggestion (but not a requirement) that the state use a double-weighted sales factor formula.

Sales factor sourcing for services and intangibles (Art. IV.17). Generally provides for market sourcing instead of the existing cost-of-performance provisions. For services, this would be based on where the service is “delivered.” Utilization of intangibles would be sourced based on “use,” and certain intangible receipts (e.g., hedging/treasury receipts) would be excluded from the numerator and denominator.

Definition of sales (Art. IV.1(g)). Changes the term “sales” to “receipts” and updates the definition to include only those receipts “that are received from transactions and activity in the regular course of the taxpayer’s trade or business.” The definition also specifically excludes receipts from hedging and securities transactions and eliminates the carve-out for securities dealers that had been contained in the December 2012 proposed amendments.

Definition of business income (Art. IV.1(a)). Changes the term “business income” to “apportionable income,” provides a broad definition that includes all income apportionable under the Constitution of the United States that is not allocated, and retains the existing “transactional” and “functional” tests but makes several substantive changes to the “functional” test.

Alternative Apportionment Regulations (Art. IV.18(b)). Provides the state tax agency with the explicit authority to establish regulations for determining alternative apportionment “if the allocation and apportionment provisions of [Article IV] do not fairly represent the extent of the business activity of taxpayers engaged in a particular industry or in a particular transaction or activity. . . .”

Section 18 revisions released for bylaw 7 survey

On July 31, the Executive Committee passed a motion to release for a Bylaw 7 Survey the remaining suggested additions to Section 18, specifically Section 18(c), (d), and (e). Regarding the three provisions, the language to be provided for the survey generally consists of Richard Pomp’s recommendations, with clarifying language outlined as follows:4

Burden of Proof Exception (Art. IV. 18(c)). Under new Art. IV 18(c), the burden of proof generally lies with the party asserting alternative apportionment. However, the burden of proof is shifted to the taxpayer in circumstances where the state tax agency imposes an apportionment method on the taxpayer that differs from the statutory formula if the state tax agency can establish that “in any two of the prior five tax years” the taxpayer used a method at variance with the method used in other years.

Limitation on Civil or Criminal Penalties (Art. IV. 18(d)). Generally precludes a state tax agency from imposing civil and criminal penalties on a taxpayer whose income was reported pursuant to a statutory apportionment or allocation method but was subsequently adjusted by the state tax agency through use of an alternative method.

Written Permission for a State Tax Agency (Art. IV 18(e)). Prevents a state tax agency from retroactively revoking a previously granted alternative apportionment methodology if the taxpayer received written permission from the relevant state tax agency and there has not been a material change in or misrepresentation of the facts upon which the state tax agency had relied.

If approved in the Bylaw 7 survey, these amendments would be ready for approval by the MTC at its July 2015 annual meeting.

Also, during the July 31 meeting the Executive Committee directed the Uniformity Committee to commence with the drafting of model regulations related to the amendments approved by the MTC on July 30.


Although the MTC’s actions are not binding on the states and have no effect in a particular state until adopted into law by that state, taxpayers potentially affected by the adoption of any of these amendments may wish to closely monitor:

  • The MTC’s pending action on Section 18 and its development of regulations to implement the Article IV amendments.
  • The legislative and regulatory processes of the various states.
  • The pending Compact litigation in California, Minnesota, Oregon, and Texas.

Additionally, regardless of the ultimate fate of the approved or proposed amendments, states (whether MTC members or not) may independently incorporate certain aspects of these concepts in their laws and, in fact, many of these changes reflect ongoing state law trends of which taxpayers should be aware (e.g., a shift to market-sourcing of revenue derived from services and intangibles).

Upcoming events

Please join us for our Dbrief Webcast, “MTC Update,” scheduled for October 7, 2014, at 2:00 PM EST, to learn more about the potential effects of the recently adopted and other proposed MTC initiatives and explore ways to prepare for changes as states seek to follow suit. Presenters include Valerie Dickerson, Managing Partner, Multistate Washington National Tax, Deloitte Tax LLP, and Joe Huddleston, Executive Director, Multistate Tax Commission. If you do not already subscribe to our Dbriefs Webcasts, follow this link and register for “Dbriefs - Technology Executives” to be notified when registration is available for this event.


For questions regarding this Alert or other matters involving the MTC, please reach out to either of the following Deloitte Tax LLP professionals.

Valerie Dickerson
Managing Partner, WNT Multistate
Deloitte Tax LLP, Washington, D.C.
+1 202 220 2693
Karen Boucher
Director, WNT Multistate
Deloitte Tax LLP, Milwaukee
+1 414 977 2710
Michael Paxton
Manager, WNT Multistate
Deloitte Tax LLP, Washington, D.C.
+1 202 220 2123

To receive these alerts and stay connected, please sign up for our weekly newsletter State Tax Matters.

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

1 Bylaw 7 requires that “[a]ny recommendation for action submitted by the Executive Committee to the [MTC] relating to uniform or compatible tax laws . . . shall be circulated to the [state Compact] members . . . to determine if the affected members will consider adoption of the recommendation within their respective jurisdictions.” MTC Bylaw 7(g). Available at:
Richard Pomp is the Alva P. Loiselle Professor of Law at the University of Connecticut Law School. Pomp was the hearing officer for the MTC’s March 28, 2013, hearing on the MTC Uniformity Committee’s proposed amendments.
3 For a draft of the amended language as approved by the MTC on July 30, please see the MTC’s “Multistate Tax Compact Article IV Recommended Amendments” available on the MTC website at:
Scheduled_Events/47th_Annual_Meetings/Proposed Model Compact Article IVAmendments (FINAL).pdf
4 For a draft of the revised language as approved by the Executive Committee on July 31, please see the MTC’s “Suggested Revisions to the Hearing Officer’s Section 18 Proposed Amendments” available on the MTC website at:
Scheduled_Events/47th_Annual_Meetings/UDITPA Article IV, Section 18 Proposed Revisions (July 28, 2014).pdf.

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