Rerouting Revenue: MTC’s Ground Transportation Sourcing Proposal

The Multistate Tax Commission (MTC) recently proposed a new sourcing rule that would impact how transportation companies allocate revenue. Although the MTC’s regulations don’t automatically become law, they could significantly affect how transportation companies assign receipts if adopted by states. The potential impact of these changes and states’ responses remain uncertain, but it will be important for transportation companies to monitor developments closely.

In 2022, the MTC Uniformity Committee voted to review the model receipts sourcing regulations for apportionment purposes. The project was broad and intended to address standard and special industry sourcing; however, just months into the review, the focus seemed to narrow in on the transportation industry.¹

Currently, the MTC regulations and most state sourcing laws provide that revenue of transportation companies should be sourced to states based upon a ratio of mileage driven in the state. The impetus of such scrutiny by the MTC seems to be two UPS cases.² The findings made note that sourcing transportation receipts based on mileage can lead to distortion in large geographic states with relatively small populations. Both decisions involved MTC member states – Montana and New Mexico – where the MTC model statues and regulation had been integrated into the states’ laws.

On March 28, 2024, the MTC released proposed draft changes to include a new subsection, “Ground Transportation and Product Delivery,” which provides that receipts from the transportation of tangible personal property are assigned to the states of pickup and delivery. Specifically, state receipts shall be determined by multiplying the taxpayer’s total receipts by the percentage of total pickup and deliveries that take place in the state over total pickup and deliveries everywhere. The MTC suggests that this pick-up-and-delivery approach more closely aligns with the market-based sourcing in that it follows the destination of the service or customer delivery.

Prior to the release of the draft regulations, the MTC received comments from other state organizations, state representatives, and industry practitioners expressing concern over the change in sourcing. The MTC held an open public comment session at the meeting on April 3, 2024, and continues to be open to comments.

While providing guidance and influence, the MTC regulations are not automatically enacted – even by MTC member states. It will be important for transportation companies to monitor states’ adoption of the MTC’s proposed sourcing changes as they could significantly impact the assignment of receipts.

KSM’s State & Local Tax Group follows legislative activity across the country. If you have questions about how these proposed regulations might affect your business, please contact your KSM advisor or complete this form.

¹ Both ground and air transportation sourcing were reviewed; this article is limited to the sourcing of ground transportation services.

² Montana Dept of Revenue v. United Parcel Service, Inc., 830 P.2d 1259 (Mont. 1992); Matter of United Parcel Service, Inc. (Ohio) & Affiliates, N.M. Pub. Dec. NO. 19-27 (N.M. Admin. Hearing Off. Oct 25,2019)