Multistate Tax Compact timeline, State and Local Tax

The Multistate Tax Compact is one of over 200 interstate compacts in the United States. These compacts are an essential part of government, allowing states to solve regional and national  issues without the intervention of Congress. The Multistate Tax Compact was enacted in 1967, at a time when states were threatened with intervention from the federal government. By enacting the Multistate Tax Compact, the states were able to preserve their sovereignty while giving taxpayers the option of choosing a uniform method of apportioning their income or a state’s legislatively enacted method.

In 1951, the U.S. Supreme Court in Spector Motor Service v. O'Connor  held that states are precluded from taxing the privilege of engaging in an exclusively interstate business. This perspective, based on perceived Commerce Clause limitations, that a state could not impose an income tax on a nondomiciliary engaged solely in interstate commerce, was short lived.  In 1959, the Court in Northwestern States Portland Cement v. Minnesota  again addressed the thorny issue of multistate taxation and for the first time made it clear that there is no Commerce Clause barrier to the imposition of a fairly apportioned corporate income tax on interstate business carried on within a state. The case produced widespread alarm among businesses convinced of dire consequences to the national economy resulting from taxation of corporations carrying on interstate business. There was an outcry for federal legislation restricting the power of states to tax interstate businesses. Congress quickly responded by enacting one of the most vital pieces of legislation setting forth minimum standards for the exercise of state taxing power: Public Law 86-272. Congress also authorized the commission of a study and report by congressional committees, the outcome of which was to be legislation establishing uniform standards for states in taxing the income of interstate businesses.

In 1964, a report, known as the Willis Report, was issued. The Report expressed doubt that any real uniformity could be attained by state action alone. The Report also proposed both substantive and administrative reforms, including a recommendation giving the Treasury Department authority to issue uniform rules and regulations governing state income taxes. Congress thereafter proposed a number of bills that would have established a mandatory method of apportionment and uniform definition of business income. During this tumultuous period in state taxation, the National Conference of Commissioners on Uniform State Laws (NCCUSL) approved the Uniform Division of Income for Tax Purposes Act (UDITPA).  In its Prefatory Note, the UDITPA drafters noted the "need for a uniform method of division of income for tax purposes among the several taxing jurisdictions.” NCCUSL was focused on the division of income and not on rates or tax base calculations. Under UDITPA, all business income is apportioned to a state by multiplying the income by a fraction, the numerator of which is the property factor, plus the payroll factor, plus the sales factor, and the denominator of which is three (i.e., an equally-weighted three factor formula).

Although UDITPA was adopted in 1957, it initially garnered scant attention from the states. However, with a Congressional committee recommending federal legislation to establish a uniform state income tax base and apportionment formula, there was a renewed interest in creating a state-level response to the concerns about the confusing rules and regulations that governed the taxation of businesses operating in interstate commerce. In addition, the visceral response to federal intervention in a state's right to tax and protect political and fiscal sovereignty was palpable. The states' answer to achieving uniformity and avoiding federal intervention was a beautifully simple promise: we, the states, will enact a Multistate Tax Compact ensuring greater uniformity if you, Congress, will shun further intervention into state tax sovereignty.

The Compact was drafted in 1966 and became effective in 1967 after seven states adopted it, effectively quashing any additional federal legislation addressing state taxation. While various federal proposals continued to be considered after the Compact became effective, none were ever enacted.

In 1967, the Council on State Governments, with the cooperation of the National Association of Tax Administrators, the National Association of Attorneys General and the National Legislative Conference issued a summary and analysis of the Multistate Tax Compact..  A copy of this summary is found here.

In 1968 the Multistate Tax Commission issued a brochure outlining the benefits of Compact membership, including a choice of allocation methods under the Uniform Division of Income Tax Act or those of the state. The brochure noted that the Multistate Tax Compact is an agreement among the states to equitably administer the taxation of multistate business. The brochure can be found here.

In 1978, in the matter of United States Steel Corp. v. Multistate Tax Commission, the U.S. Supreme Court was asked to decide whether the Compact was invalid because, among other things, it had not received Congressional approval. U.S. Steel brought the action on behalf of itself and other multistate taxpayers threatened with audits by the Multistate Tax Commission, asking the Court to find the Compact invalid and permanently barring its operation.

The Court affirmed a view that "the application of the Compact Clause is limited to agreements that are 'directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States.'" The Court stated that "On its face the Multistate Tax Compact contains no provisions that would enhance the political power of the member States in a way that encroaches upon the supremacy of the United States." As a result, the Court rejected the contention that the Compact Clause required congressional consent to every agreement between two or more states. The Court thus affirmed the constitutionality of the Multistate Tax Compact.

The Compact includes a number of key provisions. Article III states that “Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may elect to apportion and allocate his income in the manner provided by the laws of such state or by the laws of such states and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with Article IV.”

Article IV of the Compact adopts the Uniform Division of Income for Tax Purposes Act (UDITPA), which defines business and nonbusiness income  and provides for the allocation and apportionment of income.

Commission Powers

The Commission’s powers are elaborated and established under Article VI, section 3 of the Compact. The Commission’s powers include the following: studying state and local tax systems and particular types of state and local taxes; developing and recommending proposals for an increase in uniformity or compatibility of state and local tax laws, with a view toward encouraging the simplification and improvement of state and local tax laws; compiling and publishing information that assists party states in implementing the Compact and taxpayers in complying with tax laws; and administering the functions pursuant to the Compact. In addition, the Commission is authorized under Article VIII of the Compact to perform audits on behalf of party states.

Types of membership

Under Article VI, Compact members are those states that have enacted the Multistate Tax Compact into their state law. These states are represented by the heads of their tax agencies administering corporate income and sales and use taxes. These states govern the Commission and participate in a wide range of projects and programs. These are “party” states.

Sovereignty members are states that support the purposes of the Multistate Tax Compact through regular participation in, and financial support for, the general activities of the Commission.

Associate members are states that participate in Commission meetings and otherwise consult and cooperate with the Commission and its other member states or, as project members, participate in Commission programs or projects.

The Commission elects annually from among its members a chairman, vice chairman and treasurer. The Commission appoints an executive director who serves at the Commission’s pleasure. The executive director appoints and discharges Commission personnel.

With regard to its Audit Program, to participate, Associate Members pay a fee and a 20% surcharge that goes into the general fund. Sovereignty members do not pay the surcharge. Under the Compact, only party states are entitled to participate. Consequently, participation by Associate and Sovereignty members is suspect.


The Commission has an executive committee that assists in the conduct of Commission business. The Commission may establish advisory and technical committees that consider any matter of concern to the Commission.

Article VIII of the Compact provides for interstate audits. Unlike most Compact provisions, only those states that statutorily specifically adopt the Article are bound by its provisions. That is, the Compact does not require party states to adopt Article VIII provisions.

Article VIII states that “Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers, records or other documents may request the commission to perform the audit on its behalf.”

Article VIII further provides that “Information obtained by any audit pursuant to this article shall be confidential and available only for tax purposes to party states.”

The Multistate Tax Commission provides a significant amount of information about the audit program on its website.

Information includes, among other things, a discussion of the income tax audit process, sales tax joint audit process, taxpayer initiated joint audits, the composition and responsibilities of the audit committee, training programs, and audit manuals.

As the Compact only authorizes audits of party states, a challenge to the participation in the audit program by non-party states may arise.  See

The Multistate Tax Commission has entered into agreements with a number of non-party states authorizing the Commission to audit taxpayers for income and/or sales tax on behalf of the state. The party states to the Compact do not have agreements with the Commission but instead look to Article VIII, as enacted in their state statutes, as their authority to engage the Commission. Here are a few of those agreements with non-party states:

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