On March 8, 2013, South Dakota Governor Dennis Daugaard signed Senate Bill 239, which repealed all provisions of the Multistate Tax Compact from South Dakota law. While South Dakota does not have an income tax and didn't participate in the Multistate Tax Compact's Audit Program, the move to repeal the measure could be indicative of a growing trend amongst states.
In addition to South Dakota, Utah's Governor recently signed into law Senate Bill 247, which repealed and then re-enacted certain Compact provisions. Notably, Senate Bill 247 did not re-enact Article III (which allows a taxpayer to apportion either under the laws of the state or under the MTC rules) or Article IV (other apportionment provisions). While the exact revenue impacts of Senate Bill 247 are not clear from the fiscal note, the bill's sponsor indicated that the outcome of the Gillette case in California (The Gillette Co. v. Franchise Tax Bd., 209 Cal. App. 4th 938 (Cal. App. 1st Dist. 2012)) is the primary motivation for the bill.*
While the actions of these two states could be seen as isolated incidents, they could also be signs of a growing trend amongst states seeking greater sovereignty over their taxation systems in the ever challenging fight for new business and investments. While states historically under the MTC had control over tax rates, the tax base and tax credits, the control over the method of apportionment is clearly a critical element to states having the freedom to enact special incentive packages or modify their apportionment laws in a way which is considered to be attractive to a target industry. Tax professionals should remain vigilant in monitoring such actions and for any tax planning opportunities which might arise from such developments.
* Editor's Note: The Supreme Court of California extension to serve and file opening brief on the merits expires April 17, 2013.
RELATED LINKS: For apportionment and UDITPA background information, see:
1-3 Bender's State Taxation: Principles and Practice § 3.07 - Apportionment and Unitary Business Principles
1-3 Bender's State Taxation: Principles and Practice § 3.08 - UDITPA Income Classification as Business or Nonbusiness
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