If they build it, will they come? ALAS Advisory Group prepares Final Program Design to present to MTC Executive Committee amidst light early interest from states

The Multistate Tax Commission’s (“MTC”) Arm’s-Length Adjustment Services Advisory Group (“the Group”) met via teleconference to continue working on the Final Program Design. States participating on the call were: Alabama, Florida, Kentucky, North Carolina, Pennsylvania, and the District of Columbia.

State Interest Unexpectedly Low

After the last meeting, on March 4, the Group sent invitations to 48 states to join the program. Of the responding 21 states, 4 states indicated an interest in joining the program: Alabama, Iowa, New Jersey, and North Carolina. The states that declined generally did so because of budgetary constraints and perhaps uncertainty as to what the actual costs of the program will ultimately be. The Group hopes for additional commitments from states before the MTC Executive Committee meets in Washington, D.C., on May 7.

Final Program Design

In the effort to finalize the Program Design for presentation on May 7, the Group revisited the cost of participation for each state from the previous version of the Program Design. The most substantive clarifications were to the breakdown of the components constituting the estimated costs of the Program. The budget is divided into two categories: (1) General Services and (2) Transfer Pricing Analysis. The estimated 4-year total cost of both components is $7,833,000 or about $200,000 annually per state (based on 10 participating states). General Services makes up approximately one-third of the cost and the Transfer Pricing Analysis makes up the other two-thirds.

The Transfer Pricing Analysis breaks down into two more categories: a cost for (pre-analysis) technical review and a cost for economic analysis. The technical review cost is for an MTC staff member to coordinate the process and train the state staff. The fee for the economic analysis is divided equally at the beginning of each year, and an end-of-year adjustment occurs to reflect actual usage overall and per state. Project Facilitator Dan Bucks made four observations regarding the costs to each state:

The primary driver of costs for each state is a state’s decisions on how to use the Program. If a state requests more economic reviews, the cost would increase. Alternatively, a state with lower usage would bear a lower cost of participation.
The second driver of costs for each state is the changing costs of economic reviews throughout the year. It is possible that the cost will fluctuate over a one-year period, and states can monitor the relative cost and use the Program accordingly.
The cost of individual economic analysis reports varies depending on the number of states requesting the report. Interstate cooperation on an analysis with broad multistate impact is encouraged to reduce the cost per report.
State can use the program differently to suit their particular needs and budgetary constraints.
States also have the ability to request to use completed economic analyses in which it did not originally participate (“late use”). This emphasis on information sharing would allow states to monitor the resolution of a similar issue in another state before choosing whether to help fund the analysis. States that paid to complete the initial analysis report have an incentive to encourage others to use the analysis on a delayed basis, to reduce its bottom-line cost of generating the analysis. It was also suggested that the economic reports might be used by states in audits for other taxes. If the reports have multiple uses, the Program may have a much farther reach than originally anticipated.

Next Steps

The Advisory Group has requested a deadline of April 17, 2015, for comments to the design report. The MTC Executive Committee will review the Final Program Design at its May 7, 2015, meeting. The Group is waiting for responses from 27 states indicating whether they will participate in the Program. The Executive Committee will decide if there is sufficient interest from states to launch the Program. If approved, the budget for the Program would be voted on at the MTC’s annual meeting in July.

Documents From This Meeting

1. Final Program Design
2. Examples Illustrating Economic Analysis Fee Process
3. Draft Contract