The Multistate Tax Commission is considering changes to how trucking receipts are sourced for determining state income taxes, a move that industry stakeholders are very much against.
For nearly 40 years, states have taxed interstate freight moved by trucks on a mileage-based model. However, some states are lobbying for a destination-based model, which can significantly alter how trucking receipts are divvied up.
According to the current rule, states receive revenue from freight based on the portion of trucking receipts as a ratio of the total miles it took to deliver the cargo. For example, approximately 200 miles of a 1,000-mile trip from Albuquerque to Memphis takes place in Texas. Based on the current model, Texas would receive 20% of income tax from that shipment.
Since that rule was enacted in 1986, the Multistate Tax Commission has embraced a market-based principle for sourcing receipts. In August 2022, the commission’s Uniformity Committee decided to form a working group to revisit current rules and determine whether to replace them with an alternative method that more closely aligns with market-based sourcing.
In January, Laurie McElhatton, a tax attorney for the California Franchise Tax Board, filed a motion with the work group to draft a destination-based model to source trucking receipts. That model will attribute freight revenue to the state where the shipment was picked up, delivered or both, taking every state in between out of the equation. The motion passed under the terms that the destination-based model would be an alternative option to, not a replacement for, the mileage-based model.
However, trucking industry stakeholders fought against the idea of changing trucking receipts sourcing.
Eric Tresh of Eversheds Sutherland, a law firm representing trucking companies, issued a letter to the Multistate Tax Commission expressing concern over an alternative method. Tresh wrote that most work group participants believe that the mileage-based rule better reflects the market and provides uniformity.
“The destination of the property being transported as a proxy for the market for transportation services is incorrect. The destination of a property reflects the market for the property, not the market for the transportation services,” Tesh wrote in the letter. “Moreover, the person (shipper) sending the property generally hires the transportation company and pays for the transportation. The shipper is the transportation company’s customer, not the recipient of the property. Using destination ignores the transportation company’s sale to its customer.”
Opponents of the destination-based model for trucking receipts note that only a handful of densely populated coastal states will benefit, California being one of them. Essentially, states with busy ports and freight hubs will reap the benefits, leaving out the drive-through states. If states get to choose between the two sourcing models, it could lead to more tax disputes and possibly double taxation, Tresh argued.
The California Trucking Association agrees. The association also criticized the Multistate Tax Commission for allowing a few states to essentially hijack the goal of the work group by undermining a rule that most states are fine with and compromising uniformity in the process.
Changing the trucking receipts source method would result in substantial additional compliance costs and increase administrative burdens, the trucking association said.
The Council On State Taxation also expressed concerns over the decision to move forward with a different trucking receipts source model. The trade association pointed out that of the 50 work group members, only six states participated in a vote to draft an alternative model. Only four of those voted in favor, and two of those indicated they would stay with a mileage-based method.
Despite vocal opposition to the draft alternative model and an apparent lack of support among the majority of states, the Multistate Tax Commission kept the proposal on the table during its latest work group meeting on July 15. The commission and the Uniformity Committee will get the final say on whether to adopt the new model.
In its letter, the Council on State Taxation urged the work group and Uniformity Committee to reevaluate whether they should abandon the entire trucking receipts issue and move on to other priorities the work group was tasked to consider.
The heated debate was similar to the National Highway Traffic Safety Administration’s fractured Advisory Committee on Underride Protections. The committee was tasked to provide recommendations on how to reduce underride crashes and fatalities.
Arguments erupted over the definition of a consensus, with members largely in support of a side underride guard mandate arguing a simple majority would suffice despite previous committees requiring a 75% or higher threshold. A simple majority then voted to define a consensus as a simple majority, forcing other members to submit a minority report in what should have been a more cohesive effort to find common ground. LL
Land Line Senior Editor Mark Schremmer contributed to this report.
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