Zach Gladney, senior associate in the firm’s State and Local Tax Group, was quoted in a State Tax Notes article discussing Section 18 of the Uniform Division of Income for Tax Purposes Act (UDITPA), which provides a variety of methods by which a statutory apportionment formula could be changed, and what would be considered reasonable proposed alternative methods.
“The language presents a lot of options…given the ‘any other method’ language, states are left to their own creativity to fashion an alternative method…practitioners are seeing an ever expanding range of alternative methods approved by the state,” Gladney said.
According to the article, how reasonableness is determined is not entirely clear. However, in the Oregon Supreme Court case Twentieth-Century Fox Film Corp. v. Dep’t of Revenue, the court examined whether the department’s adjustment to the statutory apportionment formula was reasonable and identified three possible components of reasonableness, namely that the division of income (1) fairly represents business activity and, if applied uniformly, would result in taxation of no more or no less than 100 percent of the taxpayers income; (2) does not create or foster lack of uniformity among the UDITPA jurisdictions; and (3) reflects the economic reality of the business activity engaged in by the taxpayer in the state.
Gladney said that Twentieth Century-Fox is perhaps the only case that really sets forth a test for determining what is reasonable. Although the case does an excellent job of giving guidance to a subjective concept, it is Oregon case law and other state courts can and do use a variety of other tests to determine whether an alternative method is reasonable.