by Steve Kranz, Diann Smith and Beth Freeman

On May 6, the House Judiciary Subcommittee on Commercial and Administrative Law (CAL), chaired by Representative Steven Cohen (D-TN), held a hearing on state income taxation to explore what role, if any, Congress should play in developing apportionment uniformity. Three witnesses were invited to testify: John A. Swain, Professor of Law, University of Arizona Rogers College of Law; James R. Eads, Jr., Executive Director, Federation of Tax Administrators (FTA); and Daniel B. De Jong, Tax Counsel, Tax Executives Institute, Inc. (TEI). A consensus was reached among the three witnesses that uniformity in apportionment methods was desirable, but they differed in their opinions on what role the Federal Government should play in developing uniform apportionment standards.

Professor Swain testified that uniformity in taxation of multistate businesses is an important goal. He stated that, given the current disparity among states' apportionment laws, Congress now has a "predicate for action" on this issue. Without uniform rules, there is a risk of both over-taxation and under-taxation of companies that conduct business in multiple states. Professor Swain noted that it is unlikely states will cooperate and adopt uniform apportionment rules voluntarily. As a result, he concluded that a prima facie case exists for federal intervention because the states' failure to coordinate their apportionment rules has resulted in (1) the risk of multiple taxation of interstate commerce and (2) greater tax compliance burdens on interstate business than would be present under uniform rules.

FTA Executive Director Eads focused on the idea that apportionment rules are best left to the states. Mr. Eads testified that state tax agencies are consistently confronted with issues related to state corporate taxation, and these agencies have the knowledge, experience, and expertise to create workable solutions to apportionment issues. He also emphasized that a rapidly changing economy necessitates state control of the apportionment rules. He expressed concern that federal involvement would prove to be burdensome and inflexible in responding to changes in the economy and in addressing how and where corporate income is generated and should be taxed. However, when Congresswoman Judy Chu (D-CA) mentioned the continued issue of over-taxation and under-taxation without uniform apportionment, Mr. Eads conceded that this problem will persist absent federal involvement.

According to TEI Tax Counsel De Jong, a consensus on a uniform apportionment standard would be difficult to accomplish but could only be done with involvement by the Federal Government. Mr. De Jong noted that changes to the current multijurisdictional apportionment rules would result in both winners and losers among multistate businesses. Mr. De Jong noted that establishing a uniform structure without federal involvement would be difficult because each state would have its own idea of what a uniform structure would look like. The challenge for the states and possibly Congress is to find a balance between the states' legitimate need for revenue and taxpayers' relief from double taxation.

Sutherland Observation: It is not clear what triggered the Subcommittee's interest in state income tax apportionment. While no bill pending is in Congress and no constituency group has publically pressed for such a bill, it is possible that the hearing was scheduled to educate members on the problems facing business and the inability of states to provide true uniformity. Given that the Multistate Tax Commission (MTC) has begun an ambitious project to revise that part of the Multistate Tax Compact that incorporates Uniform Division of Income for Tax Purposes Act (UDITPA), taxpayers should consider whether a better solution would be provided by federal legislation creating an apportionment framework.

Please contact Sutherland if you are interested in learning additional information about the effort to oppose taxation of electronically delivered products and services. 

Michele Borens                   202.383.0936           michele.borens@sutherland.com

Jeffrey A. Friedman              202.383.0718            jeff.friedman@sutherland.com

Stephen P. Kranz                202.383.0267            steve.kranz@sutherland.com

Marc A. Simonetti               212.389.5015            marc.simonetti@sutherland.com

Eric S. Tresh                       404.853.8579            eric.tresh@sutherland.com

W. Scott Wright                  404.853.8374            scott.wright@sutherland.com

Diann L. Smith                    212.389.5016            diann.smith@sutherland.com

Richard C. Call                    212.389.5031            richard.call@sutherland.com

Miranda K. Davis                 404.853.8242            miranda.davis@sutherland.com

Jonathan A. Feldman           404.853.8189           jonathan.feldman@sutherland.com

Lisbeth Freeman                 202.383.0251           beth.freeman@sutherland.com

Natanyah Ganz                   202.383.0275           natanyah.ganz@sutherland.com

Matthew P. Hedstrom          212.389.5033            matthew.hedstrom@sutherland.com

Charles C. Kearns               404.853.8005            charlie.kearns@sutherland.com

Jessica L. Kerner                212.389.5009            jessica.kerner@sutherland.com

Pilar Mata                           202.383.0116            pilar.mata@sutherland.com

J. Page Scully                     202.383.0224            page.scully@sutherland.com

Jolie A. Sims                       404.853.8057            jolie.sims@sutherland.com

Maria M. Todorova                404.853.8214           maria.todorova@sutherland.com

Mark W. Yopp                     212.389.5028            mark.yopp@sutherland.com

The © 2010 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is for informational purposes and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.

CIRCULAR 230 DISCLOSURE: To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing or recommending to another party any transaction, arrangement, or other matter.