At a time when more states are using tax policy as a way to attract businesses and compete for economic growth with neighboring states, a long-standing cooperative tax agreement among the states is under increasing threat.
The Multistate Tax Compact (MTC), created in 1967 in an effort to ensure that companies operating in multiple states do not pay tax on the same income to more than one state, has lost two members in recent months and faces a reduced role in a third.
Still more states will likely weigh their commitment to the MTC in months to come as they ask, "What are we getting in return?" for being part of the cooperative agreement, said Michael Herbert, a principal with PricewaterhouseCoopers's state and local tax practice.
Adding to state concerns is a multimillion-dollar court challenge that is working its way through the California courts, Gillette Co & Subsidiaries v. California Franchise Tax Board.
In that case, California, a long-time member of the compact, maintains it does not have to allow taxpayers to use an MTC formula to calculate their corporate tax bill, but may insist they use a different California state formula instead.
Gillette, a unit of Procter & Gamble, is pushing for the MTC math, which would save it $4 million in taxes over several years compared to what it would pay under the state's own formula.
Should the company win, California has calculated that it could face $750 million in additional refund claims from other companies. In January, the California Supreme Court agreed to hear the state's appeal.
Concerned that it might not prevail in the courts, California exited the compact late last year in order avoid future claims. The state's 8.84 percent corporate income tax rate is one of the highest in the country.
Now Utah, which has a 5 percent corporate income tax, is considering a bill limiting its MTC participation due to concerns that taxpayers there might mount similar refund claims.
"We want to maintain control of Utah's corporate tax policy, not have that in the hands of the courts or others outside of the state," said state Senator Wayne Harper, Republican sponsor of the bill amending Utah's participation in the MTC.
On February 28, the governor of South Dakota, which has no corporate income tax, signed legislation dropping out of the compact all together.
The move underscored a view among some state legislators that the Multistate Tax Commission, which administers the compact, may be overstepping its mandate by making recommendations on the tax apportionment formula, the taxation of pass-through entities and other topics.
"They are moving in a direction I don't think South Dakota needs to be part of," said Deb Peters, the sponsoring state senator on the legislation exiting the compact.
Peters, a Republican, is part of a National Conference of State Legislatures task force that has criticized the MTC's focus. She is also a member of the American Legislative Exchange Council, which has ties to corporations that oppose the commission's proposals.
South Dakota's exit from the MTC will drop membership in the compact to 25 states.
(Reporting by Nanette Byrnes; Editing by Leslie Adler)