Tax Break

State defections impact U.S. interstate tax compact

March 7, 2013

Worried about challenges to their corporate tax base, some U.S. states have started to modify their participation in the Multistate Tax Compact, with a few withdrawing altogether.

The 45-year-old compact was forged to ensure companies operating in multiple states do not pay tax on the same income in more than one state. It also benefited the states by helping them fight off then-pending federal intervention on the topic.

Now that some states are pulling out, the question arises: What impact will this have on the compact and its administrator, the Multistate Tax Commission?

Executive Director Joe Huddleston said that while the MTC hates to lose states, the commission’s membership has always been somewhat fluid and its ongoing operation is not in doubt.

In the last few months, California and South Dakota have left the compact and stopped paying dues. But the commission’s joint audit program, in which multiple states simultaneously audit the same corporate taxpayer, has gained new members.

Massachusetts and Minnesota both joined the audit program last year. It is now the biggest revenue generator for the MTC.

Of the commission’s $6.7 million fiscal 2013 budget, $1.8 million came from membership dues, $4.1 million from the audit program, and the rest from other fees, according to data the MTC provided to Reuters.

Utah, now considering legislation modifying its adoption of the compact to protect its own tax formulas, has not proposed exiting it altogether. The state paid $32,000 in MTC dues this year. Offsetting that is several million dollars it brings in each year in additional tax revenue from audits done in the joint audit program, said Huddleston.

Of those states that have left the MTC, South Dakota paid $12,000 in MTC dues in fiscal 2013 ending in June. California, historically the largest contributor, paid $537,000.

California is embroiled in a legal challenge to its corporate tax formula. Facing millions in refund claims from corporate taxpayers who would rather use the MTC tax formula than the state’s, California last year dropped out of the MTC.

The remaining member states contributing the most to the commission’s budget are Texas, which paid $185,000 for fiscal 2013, and New Jersey, which paid $116,000.

Dues are based on relative tax revenues for the states.

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