A battle over the complex issue of how states tax the value of freight movements and deliveries may soon reach a climax, with significant resistance to change coming from the trucking sector.
On one side of the argument is a push by some states, notably California, to move away from what is known as a “mileage approach” and instead to a “pickups and deliveries approach.” The latter is also known as a destination-based system.
The dispute is completely about trucking; it is not part of a wider tax reform process. For example, the collection of motor fuel taxes across various states under the terms of the International Fuel Tax Agreement is not impacted by the discussions and controversy at the quasi governmental Multistate Tax Commission (MTC), which is studying the issue and released a draft proposal last month.
It is a complicated standoff, but here is a quick summary: Shifting to some combination of state income tax determination on the basis of origin/destination could benefit tax revenues in states that are the beginning and end point of delivering a product along the supply chain, like California with its massive Southern California port complex, or a big metropolitan area like New York. But it could damage states that aren’t the starting or end point of a supply chain even if trucks travel many miles in those states.
Big states could benefit
Critics of the plan under consideration at MTC also envision a scenario in which a movement of a truck from a port like Long Beach, California, to a destination such as Chicago could now see the total assessment increase even though the value of the freight is unchanged. Critics note that if that freight movement has tax impacts that state by state now add up to 100% through a largely consistent mileage-based system, those assessments under a hybrid system could, due to inconsistency, rise to a figure that is effectively more than 100% of the value of the freight being transported.
MTC’s Model Receipts Sourcing Regulation Review Work Group, which floated a draft proposal, met Monday. MTC first took up the issue in 2022; its draft proposal was issued last month in anticipation of this week’s meeting. The group is expected to meet again toward the end of the month.
The American Trucking Associations has come out against the change. In a letter sent earlier this month to the MTC, the ATA said it “believes the potential change from the current mileage rule to a … destination-based [sourcing] is not a direction the trucking industry can support.”
The law firm of Eversheds Sutherland, which represents several trucking companies, summarized in a letter to the MTC earlier this month just what is being debated and by extension, just what it is that should be taxed.
“Is the service only the pick-up and drop off of a package?” attorneys Chelsea Marmor and Eric Tresh of Eversheds Sutherland wrote in the letter. “Or is the service the entire transportation — the moment the package is collected until and through the delivery?”
Their answer: “Industry representatives have continuously made clear that the service is provided the entire time the package is in the service provider’s possession.”
“Miles has been the model rule for this industry for almost half a century, and adopted by the majority of states,” Marmor and Tresh said in their letter. “More than half of the states that have participated in the work group stated that their respective state will not depart from a miles rule.”
No power to compel
The MTC does not have legal power to compel a state to adopt a certain system, Marmor said in an interview with FreightWaves. Most states have been using the mileage-based approach to determine the income distribution for state income tax purposes, she added.
But a destination-based system, or a system where the originating point and the destination point are the basis, would be significantly different, Marmor said.
The fact that there could be multiple systems is why the total tax bill for a shipment could be viewed as being more than 100% of the revenue the freight produces. A state that could benefit from an origin/destination model — like California, New York or Illinois — would tax it on that basis. But a state with plenty of miles to be traversed by trucks would want to stick with a mileage-based system.
“The mileage rule says to determine how many receipts you attribute to a state, you take the intrastate miles” Marmor said. She gave the example of a shipment that went through New York. If a truck trip covers 1,000 miles, and 100 of that is in New York, 10% of the income from the freight movement would be allocated to the New York tax system.
The MTC originally looked at a system for a revenue split. A California-to-Illinois trip that had $100 in sales tied to it would see the two states each collect $50.
But now MTC is looking more to a destination-only system, with all $100 considered to be sales to Illinois. That then is part of the Illinois tax base that yields revenue to the state. The former system would have seen that $100 divided among the states where the freight had transited on its way to Illinois.
MTC’s Uniformity Committee is studying the issue. In a letter sent in March to Helen Hecht, the uniformity counsel of the MTC, the Council on State Taxation (COST) questioned why, with most states using the mileage system and uniformity established as a goal, there is a push for a change.
Few states have backed a shift, COST senior tax counsel Stephanie Do said in the letter. “The lack of engagement indicates that a uniformity problem does not exist at a level that warrants the Uniformity Committee’s involvement,” Do wrote. “The committee’s decision to move forward on this creates newfound problems that are inconsistent with uniformity and simplification.”
In a document, the MTC laid out the pros and cons of the various systems used or under consideration. Some of the pros for the mileage system are its current widespread use, that it “appears to be a workable approach” and that it “takes into account that length of trip is a major component of the service that is provided.”
Among its cons are legal decisions in New Mexico and Montana that could be in conflict with the mileage approach, differences with the tax considerations for competing freight transportation options such as rail and air, and a general, slightly vague statement by MTC that mileage systems “may not reflect the many aspects of modern logistics.”
The pros of the delivery method listed by MTC are aligning itself with the New Mexico and Montana decisions and aligning itself with the tax consideration of air transportation, as well as the fact that it “can be said to reflect where the service is delivered.” Its cons are mostly in line with the fact that switching to a delivery method overturns a system that at present is widely used and generally has been uncontroversial.
The push from California
Documents available through the MTC website suggest that California’s Laurie McElhaton of that state’s Franchise Tax Board has been the leading voice for a realignment into a delivery method for determining taxation.
There are some states that have already adopted market-based sourcing for sales of services that would like to align their method for sourcing trucking receipts with more of a market method which might be any combination of delivery and/or pick up,” McElhaton wrote in making her proposal. “Historically, when we have a split in approaches the MTC has offered two different options to states.”
In her proposal, she also recommends a mediation pathway – which MTC has included in its draft rule – to work through controversies between states with different approaches toward taxation.
Marmor and Tresh in their letter criticized the need for a mediation process. “The MTC seems to acknowledge that there will be winners and losers using either pick-up/drop-off or drop-off only because the MTC included a mediation provision,” they wrote. “And particularly, what has been said time and time again, is that having two alternative rules will result in taxation chaos.”
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