During a special meeting held on Feb. 2, the Uniformity Committee of the Multistate Tax Commission (MTC) voted to advance proposed amendments to its model sourcing regulation rule applicable to airlines. The MTC’s Executive Committee will hold a meeting on Feb. 17 to take public comments on the rule. The updated rule includes changes to the sourcing treatment of codeshare agreements, inclusion of sales of miles and Wi-Fi charges as transportation receipts (subject to certain exemptions), and addition of certain “clarifying” examples.
Subsequently, the Model Receipts Sourcing Regulations Review Workgroup (Workgroup) announced that it would begin reviewing its broadcasting special industry model regulation as the next phase of its project.
Link to Airline Rule Airline Rule
In August 2022, the Uniformity Committee voted to create the Workgroup to analyze its special industry model sourcing rules. The Workgroup’s overarching goal is to review the model special industry sourcing rules to ensure they align with the MTC’s change from cost-of-performance sourcing to market-based sourcing. The Workgroup initially focused its review on the transportation/trucking rule, but changes to that rule were jettisoned after receiving pushback from industry.
The Workgroup began discussing the special industry rule for airline receipts (Airline Rule) at the urging of the Oregon Department of Revenue (following its loss at the Oregon Tax Court when applying the original Airline Rule’s sourcing methodology). Specifically, the Oregon Department of Revenue litigated a case involving the receipts retained by an airline for selling the tickets for flights operated by other airlines (i.e., codesharing). In that case, the department argued those receipts constituted transportation revenue, which were required to be sourced under the departures approach, as the Airline Rule requires. The taxpayer disagreed, asserting those receipts were not transportation revenue because they were not receipts received for the transport of passengers on flights they operated. Ultimately, the Oregon Tax Court agreed with the taxpayer, confirming receipts for codeshare agreements were not “transportation receipts.”
The MTC’s current Airline Rule uses a departures-based sourcing method for transportation revenue: the existing sourcing method requires the use of a formula with weighted-in state departures in the numerator, and total departures in the denominator.
For purposes of its review, the Workgroup identified certain issues with the current Airline Rule, which it addressed as follows:
- “Airline” Defined. The amended rule provides a definition for “airline” as a taxpayer that transports passengers, freight, or packages by air for a charge and holds an air carrier certificate issued by the Federal Aviation Administration or similar foreign air carrier permit. Other definitions were also added.
- Transportation Receipts. The proposed updates to the Airline Rule likewise claim to expand the definition of “transportation revenue receipts” by including total amount of receipts of the taxpayer—including those for in-flight purchases—using the general sourcing rule.
- Codesharing Agreements. The amended rule suggests that if the receipts received by the airline selling the tickets are considered “transportation revenue,” they must be sourced by that airline under the departures approach. If not, they would be sourced under the general sourcing rules.
- Sale of Points or Miles. The proposed Airline Rule would add sales of miles and points to the definition of transportation receipts. It also suggests that the departure method would be used to source the sale of points or miles by related parties.
- Clean Up Changes. The proposal also suggests adding background or clarifying information to its rules. This includes the addition of certain examples.
Industry representatives have expressed concern about the proposed changes, noting that the current rule has operated effectively for more than four decades and provides sufficient flexibility for the evolving aviation sector. They also challenged several aspects of the proposal, including: (1) the method for separating transportation and non-transportation miles, citing administrative difficulty and infeasible tracking; (2) replacing “revenue” with “receipts,” which they argue conflicts with other apportionment rules and the Internal Revenue Code; and (3) the proposed treatment of code sharing revenue, noting that airlines would struggle to untangle multiple overlapping contracts involving booking platforms and travel agents.
While the MTC usually takes these issues up at its normally scheduled meetings, the Uniformity Committee’s scheduling of a “special” meeting on Feb. 2 was a bit unusual. As noted, the Uniformity Committee voted to move the Workgroup’s proposed changes along. To this end, the Executive Committee has scheduled a public hearing on Feb. 17 to take comments on the proposed changes to the Airline Rule.
Link to Broadcasting Rule Broadcasting Rule
With the Airline Rule now being sent to the Executive Committee, the Workgroup has also announced that it will begin to review the special industry rule for the sourcing of receipts from television and radio broadcasting (Broadcasting Rule). Its next meeting is scheduled for Feb. 19.
Much like the Airline Rule, the Workgroup has characterized the existing Broadcasting Rule as “archaic,” noting that its references to receipts from “television, film, or radio programming” and “television and radio stations” fail to address modern services, such as internet streaming or digital advertising, and that the rule’s original audience-based sourcing principles no longer reflect current broadcasting models. The Workgroup concluded that the rule warrants review because it appears outdated in its omission of contemporary broadcasting activities (i.e., streaming, online content, and creators or providers that license content to broadcasters), and because it overlaps with, and at times conflicts with, other sourcing principles, leading to confusion.