Tax and Legal Groups Urge Revisions to Model State Law on Partnership Income

WASHINGTON – Leading accounting and legal organizations are pressing for significant changes to a proposed model law designed to standardize how states tax the income of partnerships, arguing that the current draft could create more uncertainty for businesses operating across state lines. In formal comments submitted in late May 2026, the American Institute of Certified Public Accountants (AICPA) and the law firm Eversheds-Sutherland critiqued the latest version of the model provisions released by the Multistate Tax Commission (MTC).

The feedback, submitted on May 21 and May 29 respectively, addresses the MTC’s April 15, 2026, draft of its “Combined Model Provisions” for the state taxation of partnerships. The MTC, an intergovernmental state tax agency that works to promote uniformity in state tax laws, is scheduled to review these critiques during a public work group meeting on June 17, 2026. The outcome of this process could eventually influence tax legislation in dozens of states, directly impacting any partnership or LLC with multi-state operations.

The MTC’s project aims to solve a long-standing problem for businesses structured as partnerships: a complex and inconsistent patchwork of state laws for sourcing income. Currently, the 43 states that levy a personal income tax have varied rules for determining how much of a partnership's income is taxable within their borders, particularly for partners who are not residents of the state where the business operates.

Generally, states tax their residents on their worldwide income, including their full share of partnership profits regardless of where they were earned. For non-resident partners, however, states typically only tax the portion of income derived from in-state sources. This distinction is the source of frequent disputes and compliance headaches. States employ different methodologies to determine the source of income. Some, like New York, may look to where services are performed at the partnership level, while others might focus on the location of the partnership's customers or assets. For gains on the sale of a partnership interest, some states treat it as a sale of an intangible asset sourced to the partner’s home state, while others require the gain to be apportioned using the partnership's business activity factors.

This lack of uniformity creates significant administrative burdens and potential for double taxation, where the same income is taxed by both the partner's state of residence and the state where the partnership operates. The MTC’s model law seeks to create a clear, consistent framework that states could adopt to simplify this process for both taxpayers and tax administrators.

The project, which began with a white paper on sourcing partnership income, has evolved over several years. The MTC work group previously determined that a model regulation might be more effective than a model statute, as it could provide greater certainty in applying the principles to specific, fact-based situations. The current draft combines various provisions into a single model.

The critiques from the AICPA and Eversheds-Sutherland, while supporting the goal of uniformity, are focused on refining the technical details of the proposal. The groups are pushing for clearer definitions and more robust rules to prevent ambiguity and ensure the model can be applied consistently across different industries and business structures. The core of their concern is that without sufficient clarity, a uniform model could inadvertently create new compliance challenges or lead to inequitable tax outcomes for businesses.

For small and mid-sized companies, the stakes are high. Partnerships and LLCs have become the dominant legal structure for new businesses, prized for their flexibility and pass-through tax treatment, which avoids the double taxation inherent in traditional C-corporations. However, as these businesses grow and expand their geographic footprint, they are increasingly ensnared in the complexities of multi-state tax compliance. Issues such as properly allocating profits and losses, tracking each partner’s basis, and navigating different state rules for deductible expenses already demand significant resources.

In our experience, the MTC's effort to create uniformity is a positive development in principle, but the practical application is where businesses will either find relief or new burdens. A one-size-fits-all approach to income sourcing can be problematic because the economic reality of a real estate partnership is vastly different from that of a national consulting firm or a software-as-a-service company. We've seen clients struggle when states apply rigid apportionment formulas that don't accurately reflect where value is actually created. The key for any successful model will be its ability to provide clear, consistent rules that are also flexible enough to accommodate diverse business models. Business owners should not wait for this to be resolved; understanding your current multi-state tax exposure is a critical first step. For companies needing guidance on these complex issues, C&S Finance Group LLC offers expert tax preparation and compliance services to ensure you are positioned correctly, no matter how the rules evolve. Visit us at csfinancegroup.com to learn more.

All eyes in the state and local tax community will be on the MTC’s work group meeting on June 17. The discussion of the comments received will be a crucial indicator of the commission's willingness to refine its proposal. The path forward for the model provisions will be determined by these deliberations, which will ultimately shape the future of state partnership taxation and the compliance landscape for countless businesses across the country.