UDIPTA (Uniform Division of Income for Tax Purposes Act) - Essay Example

The Act suggests a three factor approach to allocate business income of a tax payer using payroll, property and sales; it assigns equal weights on each of the three factors. Many states have adopted the act, but others have set their own acts or have simply applied only certain aspects of the act with respect to the treatment of non-business income. The state courts and taxing authorities have interpreted the uniform laws differently according to their differing definitions of business income.

As a result, they have set new laws but apply the act in a clause and change it with regard to the different definition. Many of the states assign significant weight to the sales factor (Garrigan & Parsons 83-131). Revision of the act has led to the creation of the Multi-state Tax Compact that provides equitable apportioning tax bases and resolves apportionment disputes between states, and encourages uniform and compatible state tax systems and how to avoid duplicative taxation. This compact also includes the uniform act and its three-factor apportionment formula enacted by at least 20 states in the nation.

Some states like Alabama have entirely adopted the UDITPA definitions of business income and non business income (UDITPA Sec 1(a) and (e) without modification. This is where business income comprises of incomes arising from transactions, regular activities of trade and business and acquisition, management and disposition of property. Non-business income means all income from allocation other than business income, which includes interest, dividends, and rents. Many states provide that rents received by a REIT (Real Estate Investment Trust) are a form of income generated in connection with a trade or business hence treated as business income.

In places of multistate operations, the business income is divided among the states according to the proportion