BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
TO: All Concerned Persons
1. On September 9, 2010, the department published MAR Notice No. 42-2-845 regarding the proposed adoption of the above-stated rules at page 1968 of the 2010 Montana Administrative Register, issue no.17 and subsequently on October 28, 2010 at page 2540 of the 2010 Montana Administrative Register, issue no. 20.
2. A public hearing was held on November 22, 2010, to consider the proposed adoption. David Gibson and Roy Adkins, representing Qwest; Nancy Riedel, representing Verizon; Adam Mylen, representing AT&T; Michael Green and Mary Whittinghill, representing Montana Taxpayers' Association (Montax); Norm Ross, representing Pacificorp; Lane Roquet, representing Devon Energy; Bill May, representing CenturyLink; Geoffrey Feist, representing Montana Telecommunications Association; and Carl Hotvedt, representing the Public Safety Services Bureau of the Montana Department of Administration (PSSB-DOA); appeared at the hearing.
Written comments were received from John McNamara, representing AT&T; Diann Smith, representing Sutherland, Asbill & Brennan, LLP (Sutherland); Nancy Riedel, representing Verizon; Tara Veazey, representing Montana Budget and Policy Center (MBPC); Mary Whittinghill, representing the Montana Taxpayers Association (Montax); and Senator Jeff Essmann, representing Senate District 28.
3. The department determined it would be beneficial to provide an Economic Impact Statement (EIS) to the Revenue and Transportation Interim Committee (Committee) concerning the subject of these rules. The department advised the Committee at the September 16, 2010 Committee meeting that the EIS would be prepared and presented to the Committee at their next scheduled meeting, which was set for November 18 and 19, 2010. On November 17, 2010 the department provided the EIS to the Committee for its consideration.
4. As provided for by 2-4-305(9), MCA, the Committee notified the department that it objected to the proposal notice. Therefore, the department was not permitted to adopt these rules until publication of the last issue of the register that is published before the expiration of the six-month period during which the adoption notice must be published.
The Committee has not met since this notification was given to the department, nor has it reiterated its previous objection. Accordingly, the publication that will occur with the filing of this adoption notice is the last one prior to the expiration of the six-month period from the publication date of the proposed action on these rules.
One purpose of this delay was to allow time for the Legislature to review and take action on these rules. During the 2011 Legislative Session, there were no bills introduced, and no inquiries made to the department by either a legislator or a legislative committee concerning the subject of these rules. With all applicable legislative deadlines passed, the department notes that the Legislature chose not to address these rules in the normal course of its work.
The department has fully complied with, and met, its responsibilities to delay the publication of the adoption notice pursuant to 2-4-305(9), MCA. Accordingly, it is now proceeding to file this adoption notice with the Secretary of State.
5. The information that follows is the contents of that Economic Impact Statement provided to the Committee:
The Montana Department of Revenue is proposing to adopt new rules for the apportionment of income to Montana by multistate corporations that provide telecommunications services. The primary purpose of these rules is to fulfill the objective in 15-31-312, MCA, of ensuring that the income reported to Montana fairly represents the extent of the taxpayer's business activity in the state. The rules also seek to achieve greater equity among corporate taxpayers by treating income earned by telecommunication corporations in a similar and consistent manner as income earned by multistate corporations generally. The rules also aim to provide clear and specific guidance to telecommunications companies on how to apportion income to Montana for tax purposes.
The proposed rules provide for standard definitions for various telecommunications services that are drawn from the definitions enacted in Montana law for the Retail Telecommunications Excise Tax (RTET). The proposed rules address the issue of outer jurisdictional property - such as satellites and undersea cables - in calculating the property factor used in allocating taxable income to Montana by corporations providing telecommunications and ancillary services. The proposed property factor rule is intended to prevent the assignment of income earned in the United States (including Montana) to locations beyond the U.S. The proposed rules would require telecommunications companies to calculate their Montana sales factor to reflect sales made to Montana citizens and businesses, which is the same "market sourcing" method required of approximately 92 percent of 6,500 multistate corporate taxpayers and used by virtually all 8,100 Montana-based corporate taxpayers. The market sourcing method recognizes the contribution of Montana sales to the earning income in this state and is the predominant method of calculating the sales factor because it fairly represents business activity in this state. This market sourcing rule would replace a "greater cost-of-performance method" currently allowed for a small number of multistate telecommunications companies. The department has determined that the "greater cost-of-" method typically under-represents the extent of the Montana business activity of multistate telecommunications companies and, due to its lack of clarity and consistent accountability, provides opportunities for such companies to manipulate the assignment of income among various states in ways not permitted for corporations generally.
Introduction: The four proposed rules do the following. New Rule I provides definitions for the new section; New Rule II provides that these rules apply to corporations providing telecommunications and ancillary services (ancillary services include call waiting, call forwarding, etc.); New Rule III provides direction on reporting outer jurisdictional property for Montana tax purposes; and New Rule IV provides direction on calculating the sales factor based upon gross receipts from sales of telecommunications services.
The proposed rules are based upon a model rule developed by the Multistate Tax Commission (MTC), of which Montana is a member by virtue of its adoption of the Multistate Tax Compact (15-1-601, MCA). The MTC consists of member states which focus its efforts on resolving taxation issues that impact the member states. The model rule was developed during the period from 2003 through 2007 with the involvement and leadership of a number of states including Montana. The MTC conducted a public participation process which included a public hearing and opportunities for comment. According to the hearing officer's report, industry representatives provided comments, some of which were incorporated in the model language. Several states, including Illinois, Massachusetts, Michigan, Ohio, and California have already adopted the model rule or key elements of the rule. But at least 15 other states have adopted some version of the principle that allocation of sales of services should be based on market data, not the greater cost-of-performance. According to the hearing officer's report, the model rule is designed to be consistent with the Streamlined Sales Agreement data. The MTC also consulted with Federal Communications Commission (FCC) staff regarding FCC required reporting data.
New Rule III updates the property apportionment factor for corporations providing telecommunications and ancillary services. New Rule I defines outer jurisdictional property as property, such as underseas cable and orbiting satellites that are not physically located in any particular state. Under the proposed rule, this kind of property would not be included in either Montana property or in the total amount of property used in calculating the property factor. This kind of property cannot be in the numerator of the property factor, since it is in outer space or in the ocean, not in any state, and therefore should not be in the total property denominator.
The MTC model rule updates the sales apportionment factor for corporations providing telecommunications and ancillary services. The hearing officer's report indicates that the reason for the development of the new model rule is the far greater degree of deregulation in the industry. As noted in the hearing officer's report (p. 4):
"As regulated utilities, telecommunications carriers were excluded from UDITPA's coverage. This is, therefore, the first time the Commission has considered the adoption of an appropriate apportionment formula for income arising from the sale of telecommunications and ancillary services."
Montana apportionment factor calculations for corporate license tax are based upon Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA was a model act developed in the 1950s and finalized in 1957. UDITPA was intended to reduce the issues and costs corporations may have in complying with different tax laws and definitions in the many different states.
Corporations with business activities in Montana and other states calculate the amount of taxable revenue to apportion to Montana using three factors - payroll, property, and sales - which are weighted equally. For example, a multistate corporation with $1 million in payroll in Montana and $10 million in total payroll would have a payroll apportionment factor of 0.1 ($1 million / $10 million = 0.1). Similarly the corporation would calculate the other two factors based upon the Montana property versus total property and Montana sales versus total sales. The average of the three factors produces the total apportionment factor. The total apportionment factor is multiplied by the total taxable income to get Montana taxable income. This method was adopted to make it easier for multistate corporations to calculate their taxable income in the states they operate, instead of requiring them to keep track of the revenues and costs associated with multiple individual transactions. The three factors - payroll, property, and sales - are thought to provide a reasonable representation of a corporation's business activity in the state.
Assigning sales to a state based upon sales actually made to customers in that state - market sourcing - is the predominant method of calculating the sales factor to apportion business income. As noted above, approximately 97 percent of multistate corporations filing in Montana are required to calculate their sales factor on this basis because of the general provisions of corporate tax law or various rules the department has adopted over several decades.
However the original UDITPA rules provided a different method for assigning sales, other than sales of tangible personal property, to a state. Sales, such as sales of services, are treated as in-state sales if the income-producing activity is performed in the state. If the income-producing activity is performed both inside and outside the state and the greater proportion of the income-producing activity is performed in the state versus any other state, based on cost-of-performance, then the total amount is assigned to the state. Conversely, if the greater cost of performing a service lies in another state, then the sales of the service is not assigned to this state.
This original language is reflected in 15-31-311, MCA. However, the following section, 15-31-312, MCA, provides language allowing the tax administrator to employ another method if the allocation and apportionment provisions do not produce a fair representation of the taxpayer's business activity in the state because it fails to recognize the contribution to corporate income from the Montana market-sales made to Montana citizens and businesses. Thus, the department has determined that the greater cost-of-performance for the sales factor calculation is inappropriate in the case of providers of telecommunications services - as it has several times in past decades for other service industries, including railroads, trucking, airlines, construction contracts, publishing companies, and television and radio broadcasting.
While 15-31-312, MCA, provides the tax administrator the ability to modify the sales factor calculation if determined to be necessary to satisfy the "fair representation of business activity standard" state law, it does not inform these taxpayers in advance as to how to do their tax calculations to meet this standard. Besides exposing the taxpayer to challenges, reviews, and audits of their business workpapers and tax returns, not providing clear guidance upfront is inconsistent with the Montana Taxpayer Bill of Rights. The Montana Taxpayer Bill of Rights, 15-1-222 (14), MCA, states "the taxpayer has the right to assistance from the department in complying with state and local tax laws that the department administers; . . .."
The telecommunications sector is complex and has changed over time, especially since the break-up of the Bell system in the early 1980s and the passage of the 1996 Telecommunications Act. Besides the legal and business framework, the technology has changed dramatically, creating new products and services, and allowing companies to computerize and centralize operations. So the MTC model rules fill a void by providing definitions and property and sales factor calculation information, including clarifying that the greater cost-of-performance method is not appropriate for telecommunications services by multistate corporations.
Montana has retained the original, equally weighted three-factor formula developed more than 50 years ago, but over time has found it necessary to adopt rules specific to an industry or activity to achieve the goal of using formulas which fairly represent the extent of the taxpayer's business activity in the state. To date these rules have addressed railroads, trucking, airlines, construction contracts, publishing companies, and television and radio broadcasting. The rules specific to an industry or activity were developed through the MTC as well, and are intended to provide better clarity and equity for taxpayers and greater efficiency for both the taxpayers and the tax administration agency.
A base assumption in the following answers to the questions required by an EIS is that state law, 15-31-312, MCA, will be followed by the tax administrator. That section states:
"15-31-312 Apportionment formula -- unitary business provisions. If the allocation and apportionment provisions of this part do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
(1) separate accounting, provided the taxpayer's activities in this state are separate and distinct from its operations conducted outside this state and are not a part of a unitary business operation conducted within and without this state. For purposes of this part, a "unitary business" is one in which the business conducted within the state is dependent upon or contributory to the business conducted outside this state or if the units of the business within and without this state are closely allied and not capable of separate maintenance as independent businesses.
(2) the exclusions of any one or more of the factors;
(3) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or
(4) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income." (Italics added)
Economic Impact Statement
· The class of persons affected by the proposed rule, including classes that will bear the costs of the proposed rule and classes that will benefit from the proposed rule. (2-4-405(2)(a), MCA)
This rule applies to corporations who provide telecommunications services and who are doing business in the state of Montana and also in other states. It addresses apportionment of net business income and exclusion of outer jurisdictional property for Montana corporate tax purposes by those telecommunications firms that do business in more than one state. If the telecommunications corporation does business in multiple states, including Montana, this rule may affect calculation of the overall apportionment factor used to apportion income to Montana for corporate tax purposes because the rule removes the option of calculating the sales ratio using the greater cost-of-performance method for these corporations in many instances and it eliminates outer jurisdictional property in calculation of the property factor.
The department has determined that an estimated 15 multistate telecommunications corporations may be materially affected by the proposed rules. Another 32 multistate telecommunications corporations may be minimally affected. This estimate is based on returns from 245 companies that filed retail telecommunications excise tax returns for the last quarter of FY 2010. Of these 245 companies, more than 190 are judged not to be affected at all because they operated wholly within Montana and are not subject to income apportionment; they are cooperatives or pass-through entities instead of corporations; or they have little or no sales in Montana. The 32 multistate telecommunications corporations that may be minimally affected had Montana sales between $25,000 and $250,000 per quarter. The 15 multistate telecommunications corporations that may be materially affected had Montana sales of $250,000 or more per quarter.
In terms of the classes that benefit, for telecommunications firms doing business only in Montana, the proposed rule has no direct impact since 100 percent of their net income is earned in the state and is taxable only in the state, both currently and under this rule. However, this class benefits indirectly because the rule change improves equity in taxation, vis-a-vis multistate corporations providing telecommunications services. Equity in taxation means that taxpayers with comparable sales or income and similar circumstances (for example, not eligible for different tax credits) are taxed similarly.
Currently equity in taxation between single-state and multistate companies offering telecommunications services is not guaranteed. For example, a multistate firm who is providing services in multiple states, including Montana, and who has less than half of its costs for performing the service inside Montana may argue that none of its sales of services in Montana should be in the sales factor calculation. In fact, the hearing officer's report (p. 8-9) includes the following from the State of California:
". . . Recently, some members of the telecommunications industry have asserted claims that the numerator of the sales factor in California should be zero, even to the exclusion of intrastate calls, because the greatest cost-of-performance is located in another state."
The Montana-only company does not have the choice to lower its taxable income by claiming that in-state sales should be excluded. All of its net income is taxable.
A second equity issue involves access to the capital markets and capital. If a multistate corporation can reduce its taxes relative to its in-state competition and the rest of its expenses remain the same, the multistate corporation creates a relative advantage in obtaining capital in the markets both in terms of cost and availability. This advantage does not just play out in the telecommunications sector, but improves the multistate corporation's ability to compete against all businesses in the capital markets. This is inconsistent with the state interest in maintaining competitive neutrality. Approximately 14,000 corporations filing tax returns in Montana - either multistate corporations or Montana-only corporations that already report using Montana market sales for tax apportionment purposes - will benefit from better competitive equity when multistate telecommunications corporations are required to report sales on the same market basis.
· A description of the probable economic impact of the proposed rule upon affected classes of persons, including but not limited to providers of services under contracts with the state and affected small businesses, and quantifying, to the extent practicable, that impact. (2-4-405(2)(b), MCA)
The department does not anticipate the market-based sales factor calculation will have a direct effect on small businesses since the 15 multistate corporations that may be affected cannot be characterized as small businesses. Small Montana-based telecommunications businesses will benefit when competing with larger multistate businesses for contracts or when procuring resources such as capital and equipment from a more equitable tax treatment. The rule excluding use of outer jurisdictional property - satellites and underseas cable - in the property factor is not expected to affect small businesses.
Depending upon how the multistate telecommunications taxpayer calculated the sales factor, this may have some impact on its taxes owed or tax refunds. In order to determine the economic impact upon this class, a fairly extensive review of the corporate filings, and possibly additional information, may have to be requested from the companies in order to determine the economic impact on the class. In the absence of clear rules corporations can and do develop their own methods which may or may not be consistent with state law. The one case where an effect is known, was a change in the low six figures (individual taxpayer information is confidential). Without substantial additional audit resources devoted to the question, which the department cannot spare, it is not certain how many other corporations would be affected or if they are affected in the same way.
As discussed above, the current policy that allows a small set of taxpayers to choose the greater cost-of-performance method for calculating the sales factor is not consistent with competitive neutrality. It puts Montana providers at a competitive disadvantage, both in the private marketplace and in terms of securing contracts to provide services to the state. It distorts the cost of capital and access to capital for all corporations except for the select few, relative to the competitive norm. Revising this 53 year-old concept for today's reality forwards the state goal of competitive neutrality.
The change in data is not expected to impose substantial costs on the taxpayers in terms of being able to comply with state tax rules. In Montana companies providing telecommunications services to retail customers are required to collect retail telecommunications excise taxes (RTET) based upon sales, as well as Public Service Commission (PSC), Consumer Counsel Tax and other taxes, either based upon sales or customer information. The department modified the MTC model rule definitions in order to utilize definitions already established in Montana law for the RTET. In fact, this modification represents the only substantial revision of the MTC model, and the intent was to reduce the cost to taxpayers. A number of other states have adopted the model rules for telecommunications services, including Massachusetts, Michigan, Illinois, and Ohio, and at least 16 other states have replaced the greater cost-of-performance with market based sales calculations for services. Furthermore, the MTC hearing officer's report notes that the model rules were drafted to track as closely as possible the sourcing rules for sales and use tax purposes in the Streamlined Sales and Use Tax Agreement. The MTC hearing officer's report also notes that FCC staff familiar with FCC reporting requirements for providers of telecommunications services were consulted in the process of developing the model rules.
Increased clarity in how these apportionment factors are to be calculated may reduce the costs of properly complying with state tax law for these taxpayers.
· The probable costs to the agency and to any other agency of the implementation and enforcement of the proposed rule and any anticipated effect on state revenue. (2-4-405(2)(c), MCA)
The department expects that the rules will provide clarification and guidance to the affected taxpayers and will make the process of ensuring that state tax law is complied with as efficient and effective as possible.
The department does not anticipate increased costs due to implementation to this agency or to other agencies, and has not projected additional revenue due to this rule. However, if companies affected are profitable in the future, there may be some additional revenue which goes directly to the state general fund. If this sector is not profitable and sustains losses, the net operating losses allocated to the state will be greater under this rule. Under current law Montana allows corporations to claim current year losses against the three prior years' net income, and file amended tax return(s). Adoption of the rule may therefore, lower state revenue, when there are higher net operating losses during an economic recession.
· An analysis comparing the costs and benefits of the proposed rule to the costs and benefits of inaction. (2-4-405(2)(d), MCA)
The costs of the proposed rule changes fall into two categories - compliance costs and changes in taxes owed due to the rule change. The costs accrue to two general parties - taxpayers and the tax administrator.
Over the last five years, the department's corporate license tax audit, penalty and interest have averaged over $20 million per year - $13.4 million from audits and $6.7 million from penalties and interest. Shifting resources to focus more on a particular industry group, when the issue can be addressed by rules, is not an effective use of limited state resources and risks loss of revenue from the state's existing audit program. Another potential consequence of this alternative may be an increase in complaints or litigation, raising costs for the department and taxpayers, and potentially also putting state revenues at risk.
Taxpayer costs will be reduced because staff time taken up with questions from the tax administrator, audit work, protests, appeals, and litigation will be reduced.
The costs of compliance will be reduced for the tax administrator since the need to review and audit taxpayer work papers and tax returns should be reduced. The clarity brought to the process should reduce the tax administrator's litigation and appeal costs. It will also reduce the risk that the state's tax policy (and tax revenue) will be eroded over time by inadvertent or conscious failure to use formulas that fairly represent the extent of the taxpayer's business activity in the state.
· An analysis that determines whether there are less costly or less intrusive methods for achieving the purpose of the proposed rule. (2-4-405,(2)(e), MCA)
The department does not believe that there is a less costly or intrusive method for achieving the purpose of the proposed rule. The likely alternative is to increase the frequency and depth of review of this group of corporations' tax returns to determine if the apportionment of income adequately and equitably reflects the level of business activity within the state. Conduct-increased audits of multistate corporations in this industry would be significantly more intrusive of corporate business operations than adopting this rule.
The other alternative is to do nothing and the department believes that doing nothing does not support state law or state tax policy.
· An analysis of any alternative methods for achieving the purposes of the proposed rule that were seriously considered by the agency and the reasons why they were rejected in favor of the proposed rule. (2-4-405(2)(f), MCA)
Please see the response above.
· A determination as to whether the proposed rule represents an efficient allocation of public and private resources. (2-4-405(2)(g), MCA)
The department anticipates that the proposed rule will improve efficiency in terms of public resources and has the potential to improve allocation of resources in the private arena. The proposed rule improves efficiency for the department because it clarifies and standardizes the filing method for all members of the industry. Right now taxpayers can, and do, file using different methodologies. These proposed rules use information that is available to this group of taxpayers already. As noted already, some 20 or more other states have adopted this rule or a similar, broader rule applying to all corporations. The state administers other telecommunications taxes which require companies to maintain market sales data.
In terms of the allocation of private resources, the rules, as described above, are judged to improve competitive equity within the telecommunications industry and potentially incorporate capital markets generally. Any improvement in competitive equity improves the efficiency of the capital markets in allocating private capital to its best uses.
· Quantification or description of the data upon which subsections (2)(a) through (2)(g) are based and an explanation of how the data was gathered. (2-4-405(2)(h), MCA)
The information on which the responses above were based includes discussion with department's audit and legal staff. Also, the following MTC documents: Report of the Hearing Officer (April 2008) and the Supplemental Report of the Hearing Officer (May 2008) Regarding the Proposed Model Regulation for Apportionment of Income from the Sale of Telecommunications and Ancillary Services were reviewed. Information was also gathered from the MTC and a number of other state tax administration agencies regarding use of market versus cost-of-performance for services. The most recent corporate license tax return masterfile (2008), updated in May 2010, was used for the total number of corporations filing in Montana and the number with Montana addresses. The information on corporate gross revenue and retail revenue is from the Retail Telecommunications Excise Tax return data for quarter 4, FY 2010 and the audit, penalty and interest revenue is from the statewide accounting, budgeting, and human resource system (SABHRS).
5. Oral and written testimony received at, and subsequent to, the hearing is summarized as follows along with the response of the department:
COMMENT NO. 1: Support - Mr. Carl Hotvedt, with the PSSB -DOA and Ms. Tara Veazey, with the MBPC commented that they strongly support the proposed rules.
Mr. Hotvedt stated they believe the rules clarify the responsibility for collecting and remitting fees supporting the 9-1-1 emergency services throughout Montana.
The MBPC stated that the new rules, which adopt the recommendations of the highly regarded Multistate Tax Commission (MTC) in relation to the apportionment of business income of telecommunications companies, would ensure that Montana receives income taxes that more fairly and adequately represent the extent of the business conducted by telecommunications companies in the state. The existing method results in lower tax revenue to the state, which is unfair given the amount of business activity in the state.
The MBPC further commented that the department's Economic Income Statement (EIS) indicates that the new rules would affect a very small number of corporations doing business in Montana, and that the rules would bring those corporations into alignment with thousands of others doing business in the state and achieve tax and competitive equity within the telecommunications and other Montana industries. At least 20 states have already adopted similar rules.
RESPONSE NO. 1: The department thanks the Public Safety Services Bureau of the Montana Department of Administration and the Montana Budget and Policy Center for the comments by their representatives.
COMMENT NO. 2: Legislative intent/Uniform Division of Income for Tax Purposes Act (UDITPA) - Senator Jeff Essmann and representatives of AT&T, Verizon, and Montax provided comments stating that the proposed rules represent an unlawful application of the department's authority and that the rules violate or circumvent the legislative intent and, therefore, are unenforceable.
They further stated the department is ignoring the plain meaning of the law and ignoring obvious legislative intent. The proposed rules establish a sourcing scheme for the telecommunications industry that is plainly at odds with Montana statute, which provides that a multistate corporation "shall allocate and apportion its net income as provided in this part" and requires use of an equally weighted, three-factor formula - consisting of a property factor, payroll factor, and sales factor to apportion income to the state. They stated the overall allocation or the apportionment of services should be handled by the Legislature, rather than by the department.
Montax stated the department already has the authority under 15-31-312, MCA, to adjust apportionment factors as it believes is appropriate under the fair and equitable standards of that, so-called relief provision.
AT&T stated the proposed rules exceed the department's authority to deviate from the statutory formula. They stated that the Legislature has delegated to the department the authority to deviate from the statutory apportionment formula, within established boundaries, and that 15-31-312, MCA, provides for a modification to the statutory formula where those allocation and apportionment provisions "do not fairly represent the extent of the taxpayer's business activity in Montana." However, they further stated, the proposed rules do not constitute a proper use of the departments discretion allowed by the law.
Verizon stated that most states across the nation, particularly those active in the Streamlined Sales Tax Project (SSTP) recognize that tax policies intended to apply to digital goods need to be the result of separate and thoughtful consideration by the Legislature rather than the result of an administrative reinterpretation of statutes that were enacted well before this form of commerce even existed. There are myriad problems associated with taking short cuts to expand tax policies based merely on administrative procedures, including the fact that the legislative intent has not been determined. As noted, there are many providers of digital products and services that are not providing traditional telecommunication services, and as such, these rules create an increased likelihood of confusion, competitive inequities, administrative burden, and disparate tax treatment.
Verizon further stated that the enactment of the MTC recommendation was vigorously opposed by the telecommunications industry primarily due to the observation that the model regulation could result in a violation of the Commerce Clause requirement of fair apportionment. Montana's reliance on the same language that was disputed in the adoption of the MTC model regulation perpetuates the same constitutional arguments. Specifically, proposed Rule IV (6) recommends apportionment of wholesale revenues, not on the basis of the location of the buyer of the services, but rather by reliance on industry average data obtained from the Federal Communications Commission. Because this suggestion utilizes random data from many other companies, it does not reflect a reliable in-state apportionment of the individual taxpayer's portion of interstate wholesale revenues; a clear violation of the constitutional fair apportionment standards.
Verizon further stated legislative intent is missing from an administrative procedure that makes sweeping changes to long-standing, established methods applicable to a broad group of taxpayers. Principles of uniformity and equity generally provide that variations from statutorily prescribed formulas should be imposed only in uncommon situations. If there are concerns with the constitutional apportionment statute, the appropriate remedy would be to amend the statute to be applied uniformly and fairly to all similarly situated taxpayers.
Verizon further requested the department seek a statutory amendment which clearly signifies legislative intent to adopt a new apportionment standard.
Montax stated that part of the justification in the Economic Impact Statement (EIS), prepared for this rule action, was that the original UDITPA excluded regulatory unity. Montana never did include that exception and now, 27 years after the enactment of the statutes, is not the time to do it.
Montax further stated that it is an inappropriate use of the UDITPA relief provision in 15-31-312, MCA. They also stated it does not require the department to establish that the cost-of-performance method does not fairly represent a taxpayer's business in the state nor does it require the department to demonstrate that this proposed method is more equitable than some other method. They stated that few states have adopted the MTC model regulation or any kind of uniform or comprehensive change to the cost-of-performance system.
AT&T cited 15-31-311, MCA, which prescribes how the sales factor should be computed and, with respect to sales other than sales of tangible personal property, that the statute applies UDITPA's long-standing income-producing activity (IPA) test and said the Montana Legislature has chosen to look to the activities of the vendor in generating a particular stream of income as the appropriate proxy for determining where sales other than sales of tangible personal property have occurred.
AT&T also commented that the proposed rules would abandon the IPA test with respect to the telecommunications industry and replace it with a series of standards that postulate where each of various types of telecommunications services may have been consumed. They further commented that this "market state" approach does not purport to create an improved system for implementing the Legislature's IPA test with respect to telecommunications service providers, but rather it constitutes a wholesale rejection of the IPA test; and that by fundamentally altering the methodology by which the sales factor is computed for telecommunications services, the proposed regulation changes the impact of a legislative enactment and, therefore would be unenforceable. AT&T also commented that the Montana Legislature embraced UDITPA by statutory enactment and any decision to make a conceptual shift should be made by the Legislature and not by administrative rule.
AT&T explained that their conclusion is not altered by ARM 42.26.261(2), and that they view this right to establish "appropriate procedures" as conveying only the right to identify, and require the use of calculation methodologies that will best carry out the Legislature's directive. As applied to the sales factor, the department may mandate the use of specific tools that it deems most effective in measuring a taxpayer's IPAs. However, AT&T further stated they do not view this regulation as investing in the department the right to reject an apportionment standard selected by the Legislature in favor of a different one of its own choosing.
AT&T further commented that if the IPA test distorts any particular taxpayer's business activity in Montana, such distortion must be demonstrated before the department may invoke its remedial authority under statute, and that the department's own rule (ARM 42.26.261(1)), acknowledges that the department's authority under 15-31-312, MCA, should be applied only in limited and specific cases where unusual fact situations produce incongruous results. AT&T explained that to meet this standard, before rejecting the statutory apportionment formula, the department must first document the unusual fact situations that produce incongruous results and, for an industry as diverse as the telecommunications industry, they doubt this showing may be made persuasively on an industrywide basis. They also commented that while the reasonable necessity in the proposed regulation asserts that the IPA/Cost-of-Performance (COP) test produces distortion on an industrywide basis, they are not aware of any study conducted by the department to support that conclusion. In the absence of a showing of actual distortion, AT&T does not believe the department may lawfully invoke the remedial authority permitted by statute.
AT&T commented that as a corollary to a demonstration of distortion, before deviating from the statutory sourcing methodology, the department should also be capable of showing that its alternative methodology would in fact produce a superior reflection of business activity in Montana, yet, the department has made no such showing. They further commented that it is not at all apparent to them that the proposed regulation would produce a better reflection of each telecommunications service provider's Montana sales.
Verizon stated concerns with New Rule IV (8), which requires that "gross receipts from the sale of telecommunications services which are not taxable in the state to which they would be apportioned pursuant to (1) through (6) shall be excluded from the denominator of the sales factor." This policy is extremely controversial because the in-state apportionment is skewed depending on a taxpayer's taxability in other states. In other words, the "throwout" provision that requires taxpayers to exclude some but not all of the receipts from the apportionment formula is fundamentally flawed because of its random results. Industry's position during the discussions of the MTC model regulation was the same as it is today; apportionment using cost-of-performance formulas, which exist in the majority of states, reflects the contributions of the taxing state to the creation and performance of the services that generate income and, as such, is an appropriate methodology resulting in equitable apportionment.
Verizon further stated any change in the apportionment rules will result in changes in the way tax returns are prepared, and understanding these changes and applying them to a taxpayer's particular facts and circumstances takes time and resources. Therefore, a compliance burden on taxpayers is the direct result of such a change. Section 15-31-312, MCA, which permits an apportionment formula that deviates from the statutory mandate, was derived from Section 18 of the UDITPA.
Section 18 of the UDITPA was originally established to provide exceptions to the general apportionment principles that were deemed necessary to maintain fairness and equity in unusual, nonrecurring circumstances for individual taxpayers. However, Verizon opposes relying on the relief provisions of 15-31-312, MCA, to invoke broad-based changes to the statutorily prescribed formula in the absence of an actual change to the statutes.
RESPONSE NO. 2: The department thanks Senator Essmann for his comments and thanks AT&T, Verizon, and Montax for the comments of their representatives.
Senator Essmann, AT&T, Verizon, and Montax's statement that the proposed rules exceed the department's authority to deviate from the statutory formula provided for in Title 15, chapter 31, part 3, and that the department's reliance upon the relief provision found at 15-31-312, MCA, is unsupported.
The department does not agree that these rules are inconsistent with legislative intent. Quite the opposite, the department finds that these rules are fully consistent with and supportive of 15-31-312, MCA, that authorizes, in clear and plain terms, the department to modify apportionment provisions to fairly represent the extent of taxpayer business activity in Montana. Further, the adoption of these rules is supported by substantial precedent existing in this state. Between 1977 and 2004, the department adopted industry-specific rules for railroads, trucking, airlines, construction contracts, publishing companies, and television and radio broadcasting - rules that implemented, in part, the relief provision found at 15-31-312, MCA. To the department's knowledge, none of the above rules have been successfully challenged on the grounds that the utilization of the relief provision found at 15-31-312, MCA, on an industrywide basis was somehow prohibited. In addition, the Montana Legislature has never restricted the department's ability to enact industry rules under Title 15, chapter 31, part 3, generally, or 15-31-312, MCA, specifically. Similarly, the Montana Legislature has not acted to amend or rescind the industrywide rules that were previously adopted by the department from 1977 forward, and which similarly relied upon 15-31-312, MCA, for support. The precedent of the department adopting specific apportionment rules for a wide variety of service sector industries to better represent their business activity in this state is a long-standing practice.
Article VII of the Multistate Tax Compact, located at 15-1-601, MCA, explicitly authorizes the MTC to adopt recommended uniform regulations related to the division of income. Article VII specifically contemplates that each state tax agency will enact its uniform regulations, and in doing so, may consider "adoption in accordance with its own laws and procedures." (Article VII, (3)). And, the department is unaware of any court decision holding that a state revenue agency, by adopting a uniform MTC regulation promulgated under the procedures prescribed in the compact, somehow "violated" the legislatively enacted compact by adopting industry-specific rules that were themselves drafted by the MTC.
Enacting the MTC model regulation is consistent with legislative intent as set forth in Montana's constitution and statutes. In the department's view, promulgating rules in a UDITPA jurisdiction, such as Montana, and that were drafted by the MTC, is more likely to result in uniform treatment of comparably situated taxpayers and all corporate taxpayers generally. The department recognizes that rulemaking is not a guarantee of absolute uniformity in every jurisdiction. However, the department believes that the promulgation of these rules is a step toward uniformity, which the Montana Legislature understood is a primary purpose of UDITPA.
Respectfully, the department does not agree that proving "distortion" is a necessary or useful objective because to utilize 15-31-312, MCA, the department must demonstrate that the normal formula (cost-of-performance) does not fairly represent the extent of the applicable business activity in the state. Dep't of Revenue v. United Parcel Service, Inc. (1992), 252 Mont. 476, 481, 830 P.2d 1259, 1262. The department is confident that such a requirement is met; assigning most, if not all sales, to a state other than where the customer resides does not fairly represent the extent of the company's business activity in Montana, particularly when thousands of customers residing in Montana contribute to the revenue generated by the companies on an annual basis. Similar to the need for, and subsequent adoption of those other industrywide rules pursuant to 15-31-312, MCA, substituting a market-sourcing method for a cost-of-performance method is necessary for the telecommunications industry.
COMMENT NO. 3: MTC regulations/litigation - Sutherland, AT&T, Montax, and Verizon provided comments regarding the Multistate Tax Commission's regulations for apportionment by stating that the MTC rules received considerable objections from the industry and the hearings examiner even stated, in his report, that he did not believe it was appropriate for MTC to wait for legislative and statutory changes because that was simply moving the process along too slowly.
Sutherland stated that they were directly and consistently involved in the MTC's drafting and adoption of the Model Regulation for Apportionment of Income from the Sale of Telecommunications and Ancillary Services. To the extent that Montana's proposed New Rules adopt the same language as the MTC's model, Montana's proposal suffers from the same deficiencies as the MTC's model.
Sutherland and Verizon stated the proposed New Rules incorporate several material differences from the MTC model that introduce additional legal and procedural issues. Deviations in the proposed New Rules occur in the following sections:
· The definition of "ancillary service";
· The definition of "telecommunications service"; and
· The itemized exclusions from the definition of "telecommunications service."
Sutherland and Verizon further stated the third deviation in the department's rules from the MTC model will expand the scope of services subject to the special apportionment rules to taxpayers in industries not traditionally associated with telecommunications. The MTC model regulation, but not Montana's proposed New Rules, exclude from the definition of telecommunications service internet access service; audio and video programming services; ancillary services; and digital products delivered electronically such as software, music, video, reading materials, and ring tones. Each of these services or products specifically not subject to the MTC's special apportionment rules for telecommunications services is at risk of becoming subject to Montana's special apportionment rules. These deviations are important and unacceptable because the concept of uniformity disappears and taxpayers providing these services may be completely unaware of Montana's intent because the proposed New Rules are promoted as being based on the MTC's model. Significantly, many of the services specifically excluded by the MTC's language were excluded precisely because representatives of companies providing such services convinced MTC representatives that these were not the type of services that should be connected with telecommunications services.
Sutherland further stated by removing these services from the list of items that are not telecommunications services, but not adding these items to the definition of telecommunication services, Montana is providing absolutely no guidance to taxpayers providing these services as to the expected apportionment rule. If Montana adopts the proposed New Rules as written, does a company that sells digital books follow the sourcing provisions in the New Rules or under the standard apportionment statute? Montana, under the cloak of uniformity, is proposing a rule that was rejected by the MTC and further confuses the proper sourcing for a significant number of taxpayers.
Verizon stated they are aware that the department's position is that digital products are "related services" that are subject to the retail telecommunications excise (RTE). However, Verizon's position is that the current RTE definitions do not include digital products and they believe it is inappropriate to adopt a rule to attempt to enhance or influence a position that is currently the subject of litigation. Furthermore, they believe an expansion of the RTE base to include these new products or services clearly requires a statutory change that would need to be enacted by the Montana Legislature. Accordingly, the proposed rule is not using terms that are consistent with the MTC recommendation, despite the indication to the contrary.
Montax and Verizon commented that they are concerned about the departures from the MTC model, which they believe are an effort in the department's efforts to enhance its litigation position regarding the retail telecommunications excise tax. Specifically, the addition of digital downloads, and ringtones for the definition of telecommunication services. They stated that this is not in the MTC model and it is not in keeping with the nationwide treatment of the sale of digital products.
They stated that the momentum across the country addressing taxation of digital goods and services is getting a lot of focus and it is clear among the streamlined states that those type of services and products not be lumped in with the telecom service category. They are different and even though they are being provided by traditional telecom service providers they are not the same type of service that has historically been offered.
RESPONSE NO. 3: The department thanks Sutherland, AT&T, Montax, and Verizon for their comments about the definitions contained in the rules. The department does not believe that these rules affect the litigation underway with respect to the retail telecommunications excise tax. Instead, the department's objective was intended to maintain consistency in the interpretation of certain terms for multiple tax purposes in Montana. Doing so ensures better clarity and understanding of Montana's tax practices affecting telecommunications services. As Verizon acknowledges, the clarification is consistent with the department's historic interpretation of those terms. In the department's view, the definition of the affected terms in these rules is supported by the definitions adopted by the Montana Legislature for the RTET in 15-53-129, MCA, and the department's subsequent interpretation of those terms in the RTET and now in the corporate license tax contexts. Moreover, the clarification provided by the definitions helps ensure that services that produce business income are fairly and equitably apportioned. The department believes that the limited divergence from the MTC definitions is warranted to achieve those goals and is authorized under Montana law.
COMMENT NO. 4: Applicability - Montax questioned when the effected taxpayers could expect the rules to be applicable to their business. Since this is a change in business, would they take effect immediately upon adoption?
RESPONSE NO. 4: The department appreciates Montax's question concerning the applicability date for these rules and agrees that the rules should be clarified in that regard. The department intends for these rules to have a prospective application for tax years beginning after December 31, 2011. This application date will allow taxpayers to implement any reporting changes that may be required to comply with these rules.
The new rule shown in section 6 below reflects the applicability date.
Also, as stated during the hearing, the department will instruct corporate taxpayers of the implementation date of these rules.
COMMENT NO. 5: Uniformity - AT&T stated that the goal of the Multistate Tax Compact - and its centerpiece, UDITPA is to advance uniformity among state taxing regimes. Among the Compact's core purposes: "[to] promote uniformity or compatibility in significant components of tax systems," and "[to] avoid duplicative taxation." Consistent with these stated ends, Montana's Supreme Court has acknowledged that "UDITPA was drafted as a practical means of assuring that a multistate taxpayer is not taxed on more than its total net income. "American Tel. & Tel. Co. v. State Tax Appeal, L. 241 Mont. 440.447(1990).
They further stated the proposed rule would undermine these core purposes. States which are not home to significant IPAs of telecommunications service providers will find in the MTC's model telecommunications apportionment regulation a ready vehicle to source additional revenue to their jurisdictions. It seems beyond debate that contributing to a landscape of competing sourcing regimes is poor policy. It does not serve the interests of the Montana business community. Nor does it serve the interests of Montana consumers, who likely will face higher costs as a result of the increased tax burden.
AT&T encouraged the department to defer any industry-specific rules until after the National Conference of Commissioners on Uniform State Laws (NCCUSL), acting on the request of the MTC, completes its review of UDITPA generally, and Section 17 specifically. If and when that process results in the MTC's recommendation of legislation that would source services revenue more broadly under a market state approach, the danger of multiple taxation that accompanies selective application of a market state regime would be substantially lessened.
RESPONSE NO. 5: The department thanks AT&T for its comments. However, the department does not agree that the adoption of the proposed MTC model regulations will conflict with the core purpose of uniformity. The entire premise of creating and adopting model rules is to promote consistency throughout the states and to provide a platform of model regulations to which all states can adopt. Without these model regulations, the ability to fulfill that core purpose as states review and update their apportionment practices would be more difficult. In addition, the predominant method of apportionment for multijurisdictional corporate taxpayers is the market approach. Uniformity of treatment among taxpayers is served by applying the market approach to the sales factor of telecommunications companies as it does to most multijurisdictional corporations. Therefore, the adoption of these rules actually advances the core purpose of uniformity among states and among taxpayers.
The department also respectfully disagrees that states lacking significant income-producing activities find the MTC model regulations as a ready vehicle to source additional revenue to their jurisdictions. These states, including Montana, simply find that the cost-of-performance method does not adequately or fairly reflect the business activity of the telecommunication industry occurring in their states.
COMMENT NO. 6: Efficiency - AT&T urged the department to consider the administrative inefficiencies the proposed rules would create. Once the relevant COPs are evaluated for any revenue stream, the provider has determined where to source that revenue stream for all states following the IPA standard. The IPA/COP methodology serves the Multistate Tax Compact's primary goals, to "facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration."
AT&T stated the proposed rule would increase administrative burdens on many levels. In place of the consistent application of an IPA yardstick to each revenue stream, the proposed rule creates at least a half-dozen different sourcing methodologies which require application of a series of sub-rules. Providers would be required to make many sourcing decisions at the transactional level. These complexities will materially increase providers' compliance costs, and increase costs for Montana consumers. The proposed rule would increase auditing costs for both taxpayers and the department, and likely result in more sourcing disputes between taxpayers and the department.
RESPONSE NO. 6: The department appreciates the concerns and comments offered by AT&T with respect to perceived inefficiencies within the application of the proposed rules.
The current greater cost-of-performance method for apportioning telecommunications services does not fairly represent the extent of the telecommunications industry in the state. No evidence was provided to the department demonstrating that the cost-of-performance method is easier to administer or that there is consistent application of that method by telecommunications companies among the states or over time.
The department finds that there are sound policy and administrative reasons for using the gross receipts definition enacted by the Montana Legislature for the RTET as the foundation for the definition of receipts for corporate income tax apportionment. Maintaining consistency between the definitions - and interpretations under those definitions - between these apportionment rules and RTET definitions means that telecommunications taxpayers can use their already existing calculations for Montana excise tax purposes for their Montana corporation tax apportionment reporting. Telecommunications receipts will mean the same thing and be calculated in the same way for both excise tax and corporate tax purposes. Such consistency should create the potential for greater administrative ease and lower burdens for telecommunications taxpayers through common use of an existing calculation for two tax reporting purposes.
In the department's view, the potential administrative convenience offered by AT&T simply does not outweigh the inequity of the cost-of-performance method as applied to this industry. Pursuant to the proposed rules, in most instances, the sale of telecommunication services will be sourced to the customer's service address. This information is readily available to taxpayers and should not cause excessive administrative burdens to the taxpayer.
COMMENT NO. 7: Proposed amendment presented at the hearing - Sutherland, Verizon, and Montax stated they were concerned about the proposed amendments presented by the department at the hearing. Specifically, the ability for the public to comment on these amendments since these amendments were not published anywhere for the public to review and provide comment.
They stated that with the proposed amendments, the department is intending to remove yet another service from the scope of services that are specifically defined in the MTC model regulation as not being telecommunication services - data processing, and information where the purchaser's primary purpose for the underlying transaction is the processed data. The reference deleted at the hearing expands the types of services considered to be telecommunication services and, as such, will subject many taxpayers beyond those that provide traditional telecommunications services to these apportionment regulations.
This change is a concern as it pertains to lack of uniformity and potential apportionment of a product that has no relation to telecommunication services other than the use of telecommunication services as a transmittal medium.
Sutherland stated the changes proposed by the department at the hearing may make the reasonable necessity insufficient because it does not put the public on notice of the material changes to the MTC model regulations or that these changes may cause many taxpayers selling digital goods and information services to potentially become subject to a different apportionment regime.
RESPONSE NO. 7: The department would like to thank Sutherland, Verizon, and Montax for voicing their concern that other impacted taxpayers, who were not present at the hearing, would not have the opportunity to pose questions and offer concerns for the supplemental amendment offered by the department at the hearing. Based on these comments, the department will not include the proposed amendments presented at the hearing in this rulemaking action. The department will present those amendments at a later date in another rulemaking action, which will allow all interested parties an opportunity to present any concerns at that time.
COMMENT NO. 8: EIS - Montax presented comments concerning the Economic Impact Statement provided to the Revenue and Transportation Interim Committee on November 17, 2010. Montax stated that the introduction to the EIS states that several states have adopted the MTC model or key elements of it. The states listed include Illinois, Massachusetts, Michigan, Ohio, and California. In fact, only Massachusetts has adopted the model. Michigan and Ohio have adopted similar special rules but recall, they are gross receipts states. Illinois has a slightly different model, but it was fully vetted as it was adopted by statute. California has recently reaffirmed the use of the COP methodology and telecommunications carriers use a net plant approach, not the market approach being considered by Montana. The market approach is only applicable to taxpayers who opt to use a single sales factor apportionment methodology.
Montax questioned what is meant by at least 15 other states (in addition according to the report, to Illinois, Massachusetts, Michigan, Ohio, and California) have adopted some version of the principle that allocation of sales of services should be based on market data. They further commented that they were aware of only ten states in total that rely on the market approach being suggested in Montana those being Georgia, Illinois, Iowa, Maine, Maryland, Michigan, Minnesota, Ohio, Utah, and Wisconsin.
Montax further stated that the EIS says that this rule indirectly benefits telecommunications firms doing business only in Montana because it somehow creates equity in taxation. The existing COP rules are applicable to interstate revenues not intrastate revenues. The intrastate revenues of firms only doing business in Montana, as well as the intrastate revenues of firms doing business both within and outside of Montana, are currently assigned to Montana. Equity with regards to intrastate revenues already exists.
RESPONSE NO. 8: The department appreciates Montax's comments on the EIS. The information on which the EIS was based includes discussion with department audit staff and legal staff. Also the following MTC documents: Report of the Hearing Officer (April 2008), and the Supplemental Report of the Hearing Officer (May 2008) Regarding the Proposed Model Regulation for Apportionment of Income from the Sale of Telecommunications and Ancillary Services, were reviewed. The department believes that its conclusions concerning the states that use a market approach for measuring business activity for tax purposes is fundamentally accurate. The fact that the context may vary from state to state does not change the conclusion.
Montax appears to misapply the requirements of an EIS. The last paragraph of its comment above misconstrues the intent of 2-4-405(2)(a), MCA - "The class of persons affected by the proposed rule, including classes that will bear the costs of the proposed rule and classes that will benefit from the proposed rule." It is the department's opinion that the EIS accurately reflects and illustrates the requirements of 2-4-405(2)(a), MCA.
The rules create equity between intrastate telecommunication and interstate firms. Because intrastate firms must fully account for all the income they earn in Montana, and that full accountability ensures that the intrastate firms reported income fairly represents business activity in the state. With regard to interstate firms the cost-of-performance method does not ensure full accountability of income to Montana in a manner that fairly represents the taxpayer's business activity in the state. Therefore, interstate firms under the cost-of-performance method gain an unfair competitive advantage in the market place as compared to intrastate telecommunication firms.
These rules help restore competitive equity among all of these firms by achieving better accountability of income earned in relationship to business activity that each company conducts in Montana.
6. Based on the comments presented at the hearing the department agrees that the rules should have included an applicability date. The following rule addresses that question:
NEW RULE V (42.26.1205) APPLICABILITY (1) The rules contained in this subchapter are effective for tax years beginning after December 31, 2011.
AUTH: 15-1-201, 15-31-201, 15-31-313, MCA
IMP: 15-1-601, 15-31-301, 15-31-302, 15-31-303, 15-31-304, 15-31-305, 15-31-306, 15-31-307, 15-31-308, 15-31-309, 15-31-310, 15-31-311, 15-31-312, MCA
7. Therefore, the department adopts New Rules I (ARM 42.26.1201), II (ARM 42.26.1202), III (ARM 42.26.1203, IV (ARM 42.26.1204) as proposed, and V as shown above.
8. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Locate "Legal Resources" in the left hand column, select the "Rules" link and view the options under the "Notice of Proposed Rulemaking" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.
/s/ Cleo Anderson /s/ Dan R. Bucks
CLEO ANDERSON DAN R. BUCKS
Rule Reviewer Director of Revenue
Certified to Secretary of State April 4, 2011