For some many years, corporate taxpayers could bank on a few understood conventions when figuring out their tax responsibilities in various states. First, was a nexus issue. In order to be subject to the jurisdiction of a state taxing authority, a corporation was required to maintain some sort of physical presence in the state. But states are slowly chipping away at that concept, especially in the income tax area, with economic nexus being all the rage now in various states. Now, corporate taxpayers not only have to worry about states where they have physical presence, but also where they might have some economic presence. So these taxpayers have to worry about pretty much every state!
In addition, over the past decade, many states have drastically changed the way in which corporate taxpayers determine their appropriate taxable income in a state. Historically, states followed a three-factor formula of property, payroll, and receipts. And those taxpayers that sold services or other non-tangible products usually could base their apportionment on where they did the work, or where the service was performed. But over the past decade, we’ve seen two significant shifts. First, many state have transitioned to single-factor apportionment, with the focus only on receipts. This puts on increased focus on a taxpayer’s revenue, and away from where people/property are (i.e., where the revenue is generated). In addition, with respect to the receipts factor, market-based sourcing is now all the rage, with 23 states (and counting) using this method as the basis for the apportionment of services and other business receipts. Under market-based sourcing, receipts for services and service-type revenue are apportioned to a state based not on where the service is performed, but instead based on where the service is delivered or where the benefit of the service is received by the customer. This method drastically changes the way service-providers are taxed, and likely results in state taxation in many more locations than under prior regimes. And it wouldn’t be multistate taxation without pretty much every state taking a little bit different tact as to how they implement their own market-based souring regime!
The result? More fun for tax practitioners, perhaps less for corporate taxpayers. If you want to learn more, come to the 2017 CCH Connections User Conference on October 23rd in San Francisco and sign up for “Market Based Sourcing 101; A Review of New Apportionment Methods for Corporate Income Taxpayers,” presented by yours truly.
