Uniformity of State Tax Laws - Possible? Desired?

When businesses operate in more than one state, the question arises as to how to determine how much of its income should be subject to tax in each state in which it is subject to tax. This is a matter that has been argued at the Supreme Court level numerous times and states have modified their approaches over the years.

Decades ago (1957), the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted the Uniform Division of Income for Tax Purposes Act (UDITPA). It was last amended in 1966. UDITPA provides rules on apportionment and allocation of multistate business income among states.

In 2007, NCCUSL decided to form a committee to look at changes to update UDITPA. Section 17 of UDITPA which deals with sourcing of sales that are not of tangible property was to be a focal point, but other areas could be looked at as well. Section 17 was clearly outdated. UDITPA provides that sales of tangible personal property are sourced to the destination state. Section 17 uses a costs of performance sourcing rule meaning that typically, sales of services and intangibles are sourced to the origin state. Several states including California have modified their laws to source services to the market (destination) state.

The Committee held its first meeting in late May 2008. There were protests by some businesses urging NCCUSL to terminate the project (see letter submitted by COST and a business coalition). Yet, others supported the project (see, for example, letter from Utah).

Uniformity among states cannot be guaranteed through a UDITPA revision though because states are not required to adopt the Act.

Well, on June 30, the committee voted to recommend termination of the project. Basically, it doesn't meet the goals for a uniform law if it is unlikely that any state is going to adopt the model law.

So, does this mean that Congress might step in?

I doubt it. If Congress took on how to source and apportion income among the states, there would be long debate among members of Congress, the business community and state governments (and some academics, of course) as to what the uniform rule should be. I think Congress is well aware that the states are struggling with how much to tax businesses versus how much to incentivize them to locate or stay in their state. While there has been some concern expressed in the press (Business Week, 7/1/09) as to whether federal stimulus dollars are being spent on state corporate tax breaks, I don't think Congress is going to step in.

Congress already has multistate issues on its plate that it has not be able to resolve in the past 6+ years - (1) updating PL 86-272 and (2) legislation to allow states to collect sales tax from remote vendors.

Perhaps states will move to uniformity given that more are moving to a single sales factor and sourcing sales of services to the market state (which makes sense to do along with a single sales factor if the state is trying to encourage businesses to locate property and payroll in the state). But, when (if) all states have these rules, the economic development aspect of it will be diminished - because all states are then offering the same incentive. So states will then have to find some other incentive to keep and attract businesses. It could be lower rates, more tax credits (such as hiring credits and R&D credits) or even repeal of the corporate income tax.

So, let's see what happens next. What do you think?