Understanding uniformity and diversity in state corporate income taxes.

NCCUSL has recently formed a drafting committee to revise UDITPA. The NCCUSL website says, "The drafting committee will focus in part on revisions to Section 17 of UDITPA, which deals with sales factor sourcing for transactions other than sales of tangible goods, but also will engage in a comprehensive review of the Act." (Italics added.) Thus it is natural to ask what to expect of this effort. Will it be successful? Can a redraft of UDITPA reverse the deterioration of the original model act? Is it likely to resolve satisfactorily the important issues that the original Act ignored? In short, will it produce "a comprehensive and sensible UDITPA" that states will adopt? (27)

The most important deterioration in uniformity covered by UDITPA has been the increased weight many states now place on sales. Revising UDITPA without dealing with this issue would be to stage Hamlet without the prince. If states had stopped at double-weighting sales, perhaps NCCUSL could gain agreement to include double weighting in a redraft of UDITPA. It seems unlikely, however, that states that have already adopted sales-only apportionment--or any weight on sales greater than 50 percent--will agree to retreat to double-weighting. Certainly, the business interests that have fought for weights in excess of 50 percent will oppose a retreat. This suggests that the effort may be doomed from the outset. (28)

As indicated earlier, UDITPA's failure to deal with nexus and combination was a significant shortcoming. NCCUSL could reasonably be expected to try to rectify UDITPA's failure to consider combination, but business can also be expected to oppose any effort to propose mandatory combination, which would eliminate an important technique of tax planning. By comparison, the existence of P.L. 86-272 makes consideration of a reasonable nexus standard (say, one based on the non-de minimis in-state presence of apportionment factors) an exercise in futility for situations covered by that federal statute. Indeed, business would like to see the safe harbor provided by that misguided legislation extended to sellers of intangible products--something the states are likely to fight hard to prevent. Again, the prospects for a fundamental revision of UDITPA do not seem bright. (29)

If these prognostications are accurate, the one bright spot in state corporate income taxation will be conformity to the federal definition of income--such as it is. We will be left with state corporate income taxes that are not uniform in other respects, except in so far as assertion of nexus is constrained by P.L. 86-272. Weights on sales in apportionment formulas may fall on both sides of 50 percent, with political pressure for higher weights. States will treat sales of intangibles in a variety of ways. Combination will not be universal, there will not be a standard test for the existence of a unitary business, and states will use a variety of ways to compensate for the lack of combination. Costs of compliance and administration will be needlessly high, and there will be gaps and overlaps in taxation.

Acknowledgments

The author acknowledges the helpful comments of Walter Hellerstein and George Zodrow, but is solely responsible for the views expressed here and for any errors.

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