Multi-state Tax Compact

[Snaggletooth]

somebody wake up Nancy Parker...I don't even know what her board name is.

I'm not going to get into the matter of states slugging it out as to state source income - that will only make things more confusing. This problem would be a problem even if there were no disputes as to which states could claim "source" income.

There was in the old days (when I was a young practitioner) a sort of convention amongst all the states about carving up income for taxpayers obligated to more than one state. It went something like this: taxpayer 1) initially assumes tax liability to his home state for ALL his income, then 2)defines income attributable to other states and 3)calculates a credit on his home state tax return equal to the lesser of (i)tax on that income at the rates supplied in his home state, or (ii)actual tax payable to the other state(s). In order to claim the credit, there were sometimes requirements that the taxpayer furnish a copy of the foreign state return when filing his home state.

I know a former player for the Detroit Lions who had to file in over 18 states during a two-year period. When he retired, he went to Texas where he would never have to file a state tax return again. To put this in perspective, some of these guys make $400,000 per GAME regardless of where they are playing, and the temptation to tax players on visiting teams has caused state revenue people to salivate at the very thought of the money to be collected from out-of-state players.

The presentation above is long-winded, but this was the norm and in fact still is the norm, generally speaking, unless states have reciprocity. But that is only "generally speaking" and there are probably more exceptions than rules. Now to finally get around to my REAL question, after setting the stage with the above (which most of you already know).

A couple of guys working in state governments tell me that more and more states are signing the so-called "Multi-state Tax Compact." Consignatory states have dramatically altered the way state returns are filled out. As opposed to the procedure above, taxpayers simply do not include out-of-state income on their home state returns at all. No need to go through the mechanics of calculating universal income and then going through all the gyrations and paperwork of taking the aforementioned credit. Very easy. Especially if there is a multi-state 1065 or 1120S - even the HOME state gets a K-1 for only its proportionate share!

Not so fast though. To qualify for this treatment, both the home state and the foreign states must be cosignatories to this Multi-state Tax Compact. If ANY of the states are not, then we are back to the gross inclusion and credit calculation. Plus, even though this is easier for the states under compact, the exclusion of income at the top level means the taxpayer is reporting his income under lower tax brackets and I'm sure that has stopped some states from signing up.

The real problem for us is this: What does the practitioner do when his client has income from several states -- and the states are a mixture of compact and non-compact states? This happens to all of us occasionally even in Tennessee, and I would think rather extensively in places such as Rhode Island and Connecticut. Does the taxpayer's "home" state prevail?

Thank all of you for staying awake throughout all of this.

Regards, Ron Jordan

[jainen]

double taxed income

Not all states offer a credit for the double taxed income, so sometimes the credit goes on the non-resident return instead of the home state.

[JON]

Multi State???????????

The only one I am aware of is Sales Tax oriented. They reached the 36 states signing a year ago. All the states enjoy finding non residents taxable in their states-that is found money from non voters...

I do believe there is federal authority as to not being taxed in two states without the benefit of a tax credit.

There have been state groups willing to share information for sales/income tax purposes..

I still think "nexus" is the important factor. Feds said they would listen to legislation once they got 36 states, but no action that I know of has been taken. A couple of missing states include California and New York. The coalition wanted to get by the "nexus" issue, but well not be able to without federal help, and that has not happenned yet, I do not think, but if your a pro sports person your filing habits have been established for years. Filing in a bunch of states (entertainers).

[Snaggletooth]

Question

I really wanted an answer to the question. With respect to Jainen and JON, their posts were informative but did not head in a direction to answer the question. Perhaps the real problem is that my initial post wandered all over the place and didn't make the question very clear (I'm bad about that - much worse thatn Jainen and JON).

Specifically, if you are filling out a return in a state that [has, has not signed the compact],
and there is out-of-state income from other states that [have, have not signed the compact]
then how can you file to respect your home state? Keep in mind that some of the information returns (1120S, 1065, 1041 K-1s) report income based on the method of their domicile, and gross income for the "universal aggregate" method may not be available.

As bizarre and strained as the above question may be, I have two such clients who must deal with this - one in a "compact" state, and one in a "non-compact" state. The income in question is investment in 1120S who have at least six states (each). The S corps themselves are (you guessed it) one in a compact state, and another in a non-compact state.

[JON]

Sorry

What income tax compacts are you referring to??? Nexus rules-the compacts I am aware of are for sharing information-not establishing where and what to file. If you have "nexus" you file in that state. Quill and Wrigley still have some power even if it may not last much longer. Please give me the compacts you are referring to...

[Lion]

Multiple States

I'm in CT and do not do the home state first as you say. I do all the non-resident states first where my client (wrestler, screen writer, or whatever) worked and has W-2s and/or 1099s. Then I prepare the CT return and calculate his credits due to taxes paid in other jurisdictions. And, yes, CT does want a copy of each foreign state tax return. I myself have a farm in IL, so I file an IL non-resident return and take a credit on my CT resident return. It's a royal pain. And, although the theory is to not tax income that another jurisdiction has already taxed; in practice, there is definitely an overlap. As you mentioned, the starting point for all of the states I've worked with is the federal AGI with some state modifications, followed by calculating what the state tax would've been on ALL the income, and finally applying a proportion to the tax (and not to the income). As you say, it keeps those higher rates in play based on federal AGI instead of just the income earned in that state. Tough to explain to clients. Especially why they might still owe CT tax when all their income was earned in NY and they already paid whopping NY state taxes. Now, CT hits them with underpayment penalties and interest on top of income tax. They are not happy campers and want to kill the messenger. But, don't think I'll ever see NY and CT enter into any kind of reciprocity agreement.

[Snaggletooth]

Thanks for the Interest

in this weighty and cumbersome subject.

Lion, thanks for posting. I believe CT would be one of those very difficult states to
deal with out-of-state income since there are so many states in close proximity.
And you're right - NY is it's own unique element - I had to do one for someone who
had moved here from NY and I nearly croaked. Not only that, their taxing authorities
are known to have knock-down-drag-out wars with other states. If you don't think they like CT, you might ask someone in NJ about them.

JON, I was afraid you going to ask the obvious -- "WHAT multistate compact??" And I thought by now that the lady from THETAXBOOK would have jumped in to save me, but alas, I am left alone to swim in this slough I have created.

The problem with giving a straight answer is that the compact itself is difficult for me to find, because it is NOT a federal statute. I haven't been able to find it. However, it is abundantly referenced in the state tax codes that have been signatories. You can find references in California, Maine, Alaska, Hawaii, and a host of other states. The best and most sweeping reference I can find is in the Alabama link. Try this link:

http://www.ador.state.al.us/incometax/1webreghold/MultiStatereg27.htm

This one addresses all manner of compromised income situations and gives examples. Some of the other states are less descriptive, and some of the states are not maintaining their links.

Regards to all, Ron Jordan

[JON]

Compacts

Compacts have been formed for the sharing if infomation-income and sales taxes. They have nothing to do with the taxation. "nexus" which can be harder in some states than others to determine is still the key to filing requirements. Some states have have reached deals between each other, but that can be found in the states statutes and is not hidden. California jus won battle on "nexus" again with I think Borders. If you have "nexus" in a state you better file-unless your state has a specific agreement with them.

The Great Lakes, Northestern etc compacts are the states sharing audit information and I think were created for sales tax first although sharing income tax is also done.

If "nexus" established you need to file. This is found revenue for other states. They love to collect it from non residents. The professional players taxation was established years ago-W-2s just made the employers have to help a little bit. Plus here in Minnesota gues how many Twins, Vikings, Wild and Wolves are even residents of the state. But we get them-as do the other states....NEXUS NEXUS

[Snaggletooth]

Greedy States

I believe the taxation of athletes began in the 80s, and Pennsylvania started it all -- one of the greediest states (there are others, and JON is right, the victims don't vote, so why not soak 'em for the max?).

I don't know how they got away with it but they did. Extremely transitory personnel coming and going from other states do not have their "source income" comprised by the transient states. This applies to Truck Drivers, Long-Distance Hauling companies, Professional Consultants, rescue-type construction responding to disasters, etc. who make transitory passage through a state on a regular basis. Out of all this professional athletes are the only transient group I know that gets hit.

After all has been said and done, I wonder if Pennsylvania even enjoys a "net" increase in collections. Lots of teams have to come to Pittsburgh and Philadelphia, but the athletes in those cities have to go into other states, and I'm sure are allowed a credit on PA taxes as a result. Wonder why they didn't just leave it alone and let each state collect on the entirety of the incomes of their athletes?

[Nancy]

Multistate issues

Not asleep...just away from my office.

A copy of the multistate tax compact is available at the Multistate Tax Commission website: http://www.mtc.gov/ABOUTMTC/compact.htm. The compact is a proposal that states may choose to incorporate into state tax code.

Ron, what type of returns are you filing? If you are filing individual income tax returns and reporting income from a flow-through entity (1120S, 1065), the multistate rules should have already been applied in the preparation of the business return. The individual state returns would be prepared according to the rules for each state. I am not aware of any individual state income tax returns that allow resident taxpayers to elect to simply not include out-of-state income on the return. The income reported on each nonresident state K-1 would determine whether or not a nonresident return would be required to be filed.

[JON]

Commission

I believe they have 36 members. This one was assigned the task, obviously among others, to get agreement between states on sales and use. NY and Ca are among some off the ones who have not signed on. I do not think this has accomplished much, but thanks for the site. They had to get the 36 to get started. I still think the case law is what happens now, although this compact could become strong if they reach concensus on anything.........

[Snaggletooth]

Nancy

Hi Nancy - I guess to answer your question, I should paint a scenario.

Blurbo Corporation is chartered in Alabama, and operates as a foreign corporation
in New Jersey, Virginia, Colorado, Ohio, and Missouri. To make this easy, let's assume 1120S Income is all Ordinary Income, Earnings in Alabama are $300K, and each of the other states are $20K apiece, for a total of $400K. Please never mind the Franchise Taxes, as this is not germane to the discussion. What we focus on is the K-1s.

Alabama is a signatory state to the Compact. There are four owners, two 30% owners in Alabama, one 20% owner in Arkansas and another 20% owner in Virginia.

Since Blurbo is an Alabama corporation, does this mean that the K-1s to ALL shareholders observe the compact regardless of their home state? If so, you could add up all the K-1s to all states for all shareholders and they would equal the total. This is easy enough - Blurbo observes the Compact whether the K-1 recipients live in a Compact state or not.

Or, alternatively, does it mean that Blurbo must first measure the states of the owners as to whether the owners live in a Compact state or not, and THEN issue the respective K-1s such that 1)the proportionate state income is shown 2)total income is shown on an "either-or" basis?

Sorry Nancy - I'm not clear in my presentation. I know the problem but I'm doing a poor job of portraying the question.

Regards, Ron J.

[Bees Knees]

Ron,

I do not know the details of the compact, or their jurisdiction for that matter. So I am shooting from the hip. But in my dealings with multi state issues in the past, the partnership or the S corporation fills out the K-1s in a manner consistent with the state they are registered with as a taxpaying entity. So for example, Minnesota partnerships and S corporations are required to fill out their State K-1 adjustment schedules under Minnesota law. If there is a nonresident partner or shareholder, they get the K-1 adjustment that Minnesota said to give them.

However, whether their nonresident partner or shareholder is then free to file their own home state return using data from the State K-1 adjustment schedule is another matter. The entity must file the return based upon state law in which the entity operates, but the partner or shareholder is still required to file their individual state return based upon state law in which they reside. Those could mean two completely different sets of rules, just to make filing even more complicated.

[JON]

Nexus

If you have "nexus" in those states-then you file in those states at the corporate level. Most states use a factor(one to three), but some are different.... The factors will assign some income to the state based on the allocation. The factors normally will come into play only if you have nexus, payroll or property, in the state. It is not easy, but that is close. NY at one time wanted income based on trips to the state-so there are obviously exceptions.

[JON]

Nexus

Actually we only wish it is as easy as that above.

The 1980s a Minnesota corporation selling gas station equipment delivered the equipment to Iowa on their own trucks and in some cases sent their own employees for installation. The result was Iowa got them and prorations happenned after a costly fight. Nexus was established by using your owned vehicle to deliver. In Minnesota even to closed years allows credit for assessements of tax from other states.

Your compact is supposed to try to get agreement on issues-if they can congress will act-not in my lifetime will it be done, but would be nice. Remember the last I heard NY and CA has not signed on.

Entertainers and ballplayers are seperate issues-if they are performing in the state I think the majority of the states want their cut. Ballplayers worked their agreement years ago throught their employers 70s.

Great issue-good luck.