Your Place or Mine? - PowerPoint Presentation

Your Place or Mine?Attribution of receipts from services and intangibles for apportionment Purposes John A. Swain Chester H. Smith Professor of Law University of Arizona Rogers College of Law Arizona Tax Conference October 11, 2018

OverviewUDITPA overviewThe UDITPA sales f actor Rationale Shortcomings Destination-based attribution Models Pros and cons

Swain, Burger King, et. al. v.City of Toltec, AZ

UDITPA OverviewProblem: taxing multistate business incomeSolution: formula apportionmentUnitary business principle “Slicing a shadow” => “wide latitude” Internal consistency External consistency

Formula Apportionment: How It WorksApportionment factor x unitary business incomeApportionment factor is average of three ratios Property factor Payroll factor Sales factor

The Controversial Sales FactorSales factor rationaleAcknowledge contribution of market state to production of income Tangible personal property (Section 16) Destination is a reasonable proxy Issues Nexus, PL 86-272 => throwback Movement/use of goods elsewhere

The Controversial Sales Factor:Services and Intangibles (Sec. 17) Attributed where “income-producing activity [IPA] is performed … “based on the costs of performance [COP]” Sometimes consistent with destination principle Haircut Any locally produced and provided service Sometimes inconsistent with destination principle Telecommunications Brokerage services Cable or satellite TV Any remotely produced service

Origin of the COP/IPA RulesMercantile economy (late 1950s)Financial institutions and public utilities were excluded from UDITPANexus concerns “Not very well thought out” Equitable apportionment fallback

Weaknesses of Place of Performance ApproachDoes not reflect contribution of market stateDuplicative of property and payroll factors Inconsistent with treatment of tangible personal property (which may also be produced out of state)

Compliance IssuesAll or nothing ruleProblems with proportionate attribution alternative Too much turns on characterization Digital products and software Cloud computing Bundled transactions Interpretive controversies over meaning of IPA/COP Yellow pages (Wis. v. Tenn.) Telecommunications services and Satellite TV Plagued by “vagueness,” “ambiguity,” “substantial debate,” “lack clear guidance,” “whipsawing,” “tremendous flexibility, and hence tax planning opportunity, “frequent litigation,” “inconsistency,” and confusion for taxpayers and taxing authorities alike”

CounterargumentsProportionate attribution Counterbalances super-weighting of sales factor by back-door re-introduction of property and payroll factors But s till not consistent with tangible personal property Contrary to legislative intent of super-weighting because discourages local production Nexus concerns Services/intangibles have no throwback rule But see Geoffrey => Wayfair

Administration and CompliancePro Con Avoids many interpretive and accounting issues Consistent with policy underlying sales factor B to C transactions are easier to source Report to more states B to B transactions where customer uses in multiple states are harder to source

Additional ConsiderationsEquitable apportionment (Section 18)Special apportionment rules Transportation companies Financial institutions Publishers

MTC Model Statute(a) Receipts , other than receipts described in Section 16, are in this State if the taxpayer’s market for the sales is in this state . … (3) The taxpayer’s market for sales is in this state:  in the case of sale of a service , if and to the extent the service is delivered to a location in this state ; and   ( 4) in the case of intangible property ,   ( i ) that is rented, leased, or licensed, if and to the extent the property is used in this state , provided that intangible property utilized in marketing a good or service to a consumer is “ used in this state” if that good or service is purchased by a consumer who is in this state; and   ( ii) that is sold, if and to the extent the property is used in this state … ( b) [authority to approximate]   (c) [ throwout rule]  

MTC Regulations50 pagesLend certainty, but mind-numbing

Conclusion … and Two “Thought Questions”ConclusionsDestination approach is good policy Administrable … relatively speaking Almost a necessity with super-weighting of the sales factor Industry and transaction specific rules add certainty Questions Are states an inappropriate level of government to impose corporate income taxes? What about gross receipts taxes?

Thank you! Questions?