Takeaways

A new Multistate Tax Commission work group held its first meeting to discuss changes to the MTC’s model receipts sourcing regulations for income apportionment purposes.
Comments made at the meeting suggest the MTC may consider moving away from a mileage-based sourcing method for package delivery services and away from a departures-based sourcing method for airline codeshare revenue.
The work group will consider changes to the MTC’s sourcing regulations of more general applicability, including its market-based sourcing regulations.

On October 13, 2022, the work group tasked with reviewing the Multistate Tax Commission’s (MTC) model receipts sourcing regulations held its first meeting. The well-attended meeting was rather curious. Despite the work group’s expansive mandate “to identify updates, corrections, or conforming changes, [and] to consider issues that may not be sufficiently addressed by existing model regulations,” the kickoff meeting focused almost entirely on specific aspects of the MTC’s special industry regulations for trucking companies and airlines.

In August, the MTC’s Uniformity Committee voted to take up a new project to review the MTC’s model receipts sourcing regulations used for apportioning income. The project’s scope includes the MTC’s market-based sourcing regulations and special industry regulations. The Uniformity Committee, which is responsible for furthering the MTC’s broader uniformity goals by identifying areas in need of greater simplicity, fairness and consistency, formed a work group to review the existing model regulations and make recommendations to the committee.

Surprisingly, the MTC’s general sourcing regulations were not the focus of the October 13 meeting. Nor were they even brought up. Instead, the focus of the meeting was on two special industry regulations: (1) the mileage-based regulation for trucking companies (Reg. IV.18.(g).); and (2) the departures-based regulation for airlines (Reg. IV.18.(e).).

The discussion of the trucking company regulation centered around the sourcing of interstate package delivery receipts, i.e., receipts from freight, mail and express hauling, based on mileage. Under the MTC’s current regulation, the taxpayer’s total revenue attributable to the taxing state from interstate freight, mail and express is equal to:

That portion of the receipts from movements or shipments passing through, into, or out of this state as determined by the ratio which the mobile property miles traveled by such movements or shipments in this state bear to the total mobile property miles traveled by movements or shipments from points of origin to destination.

Brian Hamer, who serves as counsel for the MTC and led the work group meeting, noted decisions from the Montana Supreme Court and New Mexico Administrative Hearings Office holding that the use of the state’s version of the above model regulation did not fairly represent the extent of the taxpayer’s actual in-state business activities. (Montana Dep’t of Revenue v. United Parcel Serv., Inc., 830 P.2d 1259 (Mont. 1992); Matter of United Parcel Serv, Inc. (Ohio) & Affiliates, N.M. Pub. Dec. No. 19-27 (N.M. Admin. Hearings Off. Oct. 25, 2019).) Both decisions observed that sourcing receipts based on mileage can lead to distortion in large states that have small populations. Incidentally, the taxpayer in each case won.

The discussion of the airline regulation was brief by comparison. The MTC’s current regulation provides that the taxpayer’s total revenue in the taxing state is equal to:

The ratio of departures of aircraft in this state weighted as to the cost and value of aircraft by type, as compared to total departures similarly weighted multiplied by the total transportation revenue. The product of this calculation is to be added to any non-flight revenues directly attributable to this state.

Mr. Hamer brought up the Oregon Tax Court’s recent unpublished decision in Department of Revenue v. Alaska Airlines, Inc. and the court’s conclusion that “codeshare revenue” (revenue from selling tickets for flights on aircraft operated by other companies) was not transportation revenue and thus could not be sourced using Oregon’s version of the above model regulation. (Dep’t of Revenue v. Alaska Airlines, Inc., TC 5406 & 5407 (Or. Tax Ct., Reg. Div., July 21, 2022) (unpublished).) The court held that codeshare revenue had to be sourced using Oregon’s standard cost of performance rules, as the taxpayer in that case had argued.

In all, the work group’s October 13 meeting suggests two things. First, it suggests in the near-term the work group has its sights set on the MTC’s special industry regulations, particularly those that have been the subject of litigation and, more particularly, cases in which the taxpayer prevailed. Second, it suggests the work group’s review of the MTC’s general sourcing regulations, including the market-based sourcing regulations, will come later. Mr. Hamer emphasized that stakeholders wishing to propose any specific areas for the work group to review should reach out to him directly.

The next meeting of the MTC work group is tentatively scheduled for December 15, 2022, at which time the work group is expected to resume discussions on the model trucking company and airline regulations. The Pillsbury SALT team will continue to provide updates on the MTC work group as developments arise.

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