United States: Nebraska Department Of Revenue Amends Apportionment Regulations To Incorporate Market-Based Sourcing

On December 27, 2015, the Nebraska Department of Revenue issued long-awaited regulations clarifying and interpreting Nebraska's statutory adoption of market-based sourcing for service revenue.1 A new regulation provides guidance for taxpayers on how to request a special apportionment formula if the general apportionment provisions do not fairly represent taxable income attributable to Nebraska.2 Property and payroll factor provisions also are modified.3


When a group of corporations conducts a unitary business both within and outside Nebraska, it must determine the income of the group attributable to its activities in the state by using an apportionment formula utilizing the combined income approach. Nebraska uses a single factor, sales-only formula to apportion income.4

Nebraska historically followed preponderance cost of performance principles in sourcing sales of items other than tangible personal property for purposes of the sales factor calculation. Specifically, this approach required sales other than the sales of tangible personal property to be sourced to Nebraska if the taxpayer either (a) performed the activity in Nebraska; or (b) if the greatest proportion of income-producing activity occurred in Nebraska.5 Effective for tax years beginning on or after January 1, 2014, Nebraska requires taxpayers who apportion income for sales other than the sale of tangible personal property to source the sales using the market-based approach.6

Sales Sourcing Regulations

For tax years beginning on or after January 1, 2014, sales other than the sales of tangible personal property are included in the numerator of the sales factor as provided by regulation.7 The regulations specify that the determination of whether particular sales are attributable to Nebraska must be made on a transaction-by-transaction basis, not a customer-by-customer or contract-by-contract basis.8

Sales of Services

Sales of services are sourced to Nebraska for income tax purposes if the sales are derived from a Nebraska buyer.9 If the service relates to real property or tangible personal property, then the sale of the service is deemed to have been derived from a Nebraska buyer if the real property is located in Nebraska, or if the tangible personal property is located in Nebraska at the time the service is received.10 The sale of a service rendered to an individual is a Nebraska sale if the individual is "physically present in this state at the time the service is received."11 The sale of a service rendered to a buyer engaged in a trade or business in Nebraska is a Nebraska sale if the service relates to that part of the trade or business that is operated within the state.12 However, to the extent the buyer uses the service on a multistate basis, the sale is apportioned (via a "reasonable method"13) between use in Nebraska and use in other states.14 Services which relate to a product of the buyer are considered to be used at a location without considering the location of the buyer's customers.15 Relevant examples are provided.16

Application Services

Sales of application services are attributable to Nebraska if the buyer uses the application service in Nebraska. An application service is defined as "computer-based services provided to customers over a network for a fee without selling, renting, leasing, licensing, or otherwise transferring computer software,"17 and includes software as a service (SaaS), platform as a service (PaaS) and infrastructure as a service (IaaS).18 Application services are considered Nebraska sales if the buyer's use location of the application service is in Nebraska.19

For the sale of an application service, the buyer's use location is either the buyer's business address if it is used in the regular course of the buyer's business, or the individual buyer's billing address.20 Where the use of an application service (by a buyer other than an individual) occurs on a multistate basis, the sales are apportioned based on the proportion of the use of the application service or intangible property that occurs in Nebraska and the other states, using any reasonable method.21 If the location of use of the application cannot be determined, the sale of the application service is in the state from which the order was placed in the regular course of the buyer's business.22 If that location cannot be determined, the sales are attributed to the buyer's billing address.23

Sales of Intangible Property

Intangible property is defined as "all personal property which is not tangible personal property," including patents, copyrights, trademarks, trade names, royalties and formulas.24 Sales of intangible property are attributable to Nebraska if the buyer uses the intangible property within Nebraska, even if the buyer's customers are located in another state.25 If the buyer uses the intangible property within and outside Nebraska, the sales are attributable to Nebraska in proportion to the use of the intangible property in Nebraska and the use everywhere during the tax period.26 Different rules apply to multistate income from marketing intangibles, production intangibles, service intangibles and mixed intangibles. Specifically, if an intangible is used for marketing, the portion of income considered to be Nebraska income is based on the share of the receipts that reflect the sales of the buyer within and outside Nebraska.27 If the intangible is used in production, its Nebraska use is the share of the production which occurs in Nebraska using the intangible relative to the production of the product using the intangible elsewhere.28 If an intangible is used by the buyer like a good or service, the sales are attributable to Nebraska by applying the rules for sales of services.29 If the intangible is used in more than one of these ways, and the fees for each are listed separately, the separate uses should be attributed to Nebraska separately.30 If the fees are not separately stated, the sales should be attributed based on the type of predominant use.31 If the location of use cannot be determined, the sale of intangible property is sourced to Nebraska if the buyer's billing address is in Nebraska.32

Income from intangible assets held in connection with a treasury function, such as interest, dividends, investment income and other net gains from the sale of intangible property, is sourced to Nebraska to the extent the investment, management, and record-keeping activities associated with the investments occur in Nebraska.33 This does not include net gains from the sale or redemption of marketable securities or hedging transactions.34


With respect to secured loans, gross interest, fees, points, charges, and penalties from the loans, net gains from the sale of the loans, and loan servicing fees derived from loans, such income is sourced to Nebraska if the property securing the loan, either real or tangible, is located in Nebraska.35 If the property securing the loan is located both within and outside the state, then the income attributable to Nebraska is based upon the ratio of the annual average amortized loan balance of a loan secured by the property located in Nebraska to the annual average amortized loan balance of a loan secured by the property located both within and outside Nebraska.36 If a loan is secured by mobile property that is in Nebraska only part of the time, the average amortized loan balance is attributable to Nebraska in proportion to the time the property was physically present or used in Nebraska as compared to the total time or use of the property everywhere.37

With respect to unsecured loans, gross interest, fees, points, charges, and penalties from loans, net gains from the sale of the loans, and loan servicing fees derived from loans, such income is sourced to Nebraska if the borrower is located in Nebraska.38 The borrower is presumed to be located in Nebraska if he or she has a Nebraska billing address.39 For credit cards, income and net gains are sourced to Nebraska if the card holder's billing address is in the state.40

Other Sales

Gross receipts from the lease, rental or licensing of tangible personal property are sourced to the location of the property.41 Likewise, gross receipts from the sale, lease, rental or licensing of real property are also sourced to the location of the property.42

Further, the legislation contains a catch-all provision addressing sales, other than sales of tangible personal property, which are not specifically addressed by the provisions discussed above.43 These other sales must be sourced to Nebraska "so as to fairly represent the extent of the taxpayer's business activity" in Nebraska.44 If the buyer is an individual, a sale is deemed to have occurred at the buyer's billing address.45 If the buyer is a business, a sale is deemed to have occurred at the location where the order was placed and if that location is not readily determinable, then the sale is deemed to have occurred at the customer's billing address.46

Communication Companies Continue to Use Costs of Performance

Unlike other services, the services sold by communication companies are deemed a Nebraska sale if the income-producing activity is performed in Nebraska or the income-producing activity is performed both within and outside Nebraska with a greater proportion of the activity being performed in Nebraska than in any other state, based on costs of performance.47

Special Apportionment Formula

Nebraska business entities or unitary groups generating income from a taxable business activity within the state and subject to tax in at least one other state must apportion income using the sales factor only.48 If the Nebraska apportionment provisions do not fairly represent taxable income attributable to Nebraska, the taxpayer may petition for permission to use a special apportionment formula.49 The petition must be filed before filing any returns using the proposed formula and must: (i) identify the taxpayer; (ii) state the pertinent facts; (iii) show that the standard apportionment formula does not fairly represent the taxable income attributable to Nebraska; (iv) state the reasons why a special apportionment formula does fairly represent the taxable income attributable to Nebraska; (v) describe clearly the proposed special apportionment formula; (vi) include a request for hearing, if one is desired; and (vii) include any other information that the taxpayer believes supports the petition.50 The Tax Commissioner is required to respond to the request by first class mail within 30 days, with the lack of a response indicating denial of the request.51 The Tax Commissioner may approve the petition if the taxpayer's factual situation is both unique and nonrecurring, and the apportionment formula in Nebraska regulations otherwise produces distortion, and may place conditions on approval.52 The Commissioner may also require taxpayers with unique and nonrecurring factual situations to use a special apportionment formula.53

If a business entity is engaged in a multistate business and the income derived within Nebraska is separate and distinct from the income originating from other states, the taxpayer may petition for permission to separately account taxable income to Nebraska, rather than apportioning the taxable income to Nebraska.54

Property and Payroll Factor Provisions

The property factor of the apportionment formula generally used to apportion the income of a multistate business for pre-1992 tax years includes all real and tangible personal property owned or rented and used during the tax period. The payroll factor used for the same period includes total compensation paid to employees in the regular course of trade or business during the tax year.55 The new regulations provide that these property and payroll factors may now be used in the computation of a special apportionment formula, as well as to calculate the Financial Institutions Deposit Tax or the Nebraska Advantage Research and Development Tax Credit.56


Nebraska's apportionment approach follows the growing trend among states to source sales according to market, rather than cost of performance.57 The new regulations related to its market-based sourcing statutes provide key guidance in a number of areas which were not addressed in the related statutes, including the requirement that sales be considered on a transaction-by-transaction basis. Also, the regulations allow the Tax Commissioner to require a taxpayer to use a special apportionment methodology in certain circumstances and to indicate denial of taxpayer requests to use this type of apportionment by a lack of response. Taxpayers should be aware of this power and consider requesting a required hearing with respect to special apportionment.

Also, industries such as trucking companies, airlines, financial institutions, and television and radio retain industry-specific apportionment formulas. The addition of the special apportionment request should cause these taxpayers to consider whether these industry-specific formulas are presently creating distortion in their taxable income attributable to Nebraska.

Despite the guidance included in the regulations, Nebraska taxpayers could still face a lack of clarity in interpreting the terms "location" and "delivery or receipt." Also, the rules could prove difficult to apply to the license of intangibles because of uncertainty as to whether the term "customer" refers in that context to the taxpayer's customer or the ultimate consumer of the product bearing an intangible.

The release of Nebraska's regulations should trigger a renewed examination by taxpayers of the manner in which they invoice and document sales for sales factor sourcing purposes. While states may be purportedly adopting market-based sourcing methodologies to amplify tax liabilities of taxpayers with little physical presence, taxpayers maintain some autonomy to navigate these rules to their benefit.


1 NEB. ADMIN. CODE 24-301, 24-305, 24-311, 24-315, 24-323, 24-326, 24-329, 24-331, 24-333, 24- 335, 24-337, 24-338, 24-341, 24-342, 24-343, and 24-347. Clarifying NEB. REV. STAT. § 77- 2734.13(1), as amended by L.B. 872, Laws 2012. Effective for tax years beginning on or after Jan. 1, 2014.

2 NEB. ADMIN. CODE 24-381.

3 NEB. ADMIN. CODE 24-361, 24-362, 24-363, 24-364, 24-365, 24-367, 24-371, 24-372, 24-373, and 24-375.

4 NEB. REV. STAT. § 77-2734.05.

5 NEB. ADMIN. CODE 24-040.04 (applicable to tax years beginning prior to Jan. 1, 2014).

6 NEB. REV. STAT. § 77-2734.13(1), as amended by L.B. 872, Laws 2012.

7 NEB. REV. STAT. § 77-2734.14(3); NEB. ADMIN. CODE 24-331.01.

8 NEB. ADMIN. CODE 24-331.01.

9 NEB. REV. STAT. § 77-2734.14(3)(a).

10 NEB. REV. STAT. § 77-2734.14(3)(a)(i), (ii); NEB. ADMIN. CODE 24-333.01A, 24-333.01B.

11 NEB. REV. STAT. § 77-2734.14(3)(a)(iii); NEB. ADMIN. CODE 24-333.01C.

12 NEB. REV. STAT. § 77-2734.14(3)(a)(iv); NEB. ADMIN. CODE 24-333.01D. It is presumed that a service provided to a buyer operating in Nebraska relates to a part of the trade or business that is operated in Nebraska.

13 "Reasonable method" is defined by NEB. ADMIN. CODE 24-333.04. Specifically, to be a reasonable method of calculation, the method must be applied in a consistent manner to determine what amount of the service or application is received or used in Nebraska. The method must be supported by the service or application provider's business records at the time the service is received, and must be described by the taxpayer.

14 NEB. REV. STAT. § 77-2734.14(3)(a)(iv); NEB. ADMIN. CODE 24-333.01D(1). Specifically, operating or engaged in a trade or business in Nebraska means having property, payroll, or customers in Nebraska. NEB. ADMIN. CODE 24-333.01D(2).

15 NEB. ADMIN. CODE 24-333.01 D(3).

16 NEB. ADMIN. CODE 24-333.01 D(4).

17 NEB. REV. STAT. § 77-2734.04(2).

18 Id.

19 NEB. REV. STAT. § 77-2734.14(3)(b), (c); NEB. ADMIN. CODE 24-333.02.

20 NEB. REV. STAT. § 77-2734.14(3)(b); NEB. ADMIN. CODE 24-333.02A, 24-333.02B.

21 NEB. REV. STAT. § 77-2734.14(3)(b), (c); NEB. ADMIN. CODE 24-333.02B(1).

22 NEB. ADMIN. CODE 24-333.02B(2).

23 NEB. ADMIN. CODE 24-333.02B(3).

24 NEB. REV. STAT. § 77-2734.04(14).

25 NEB. ADMIN. CODE 24-335.01.

26 NEB. ADMIN. CODE 24-335.01A.

27 NEB. ADMIN. CODE 24-335.01A(1). Examples of a marketing intangible include licensing of a service mark, trademark or trade name.

28 NEB. ADMIN. CODE 24-335.01A(2). Examples of a production intangible include licensing of patents or copyrights.

29 NEB. ADMIN. CODE 24-335.01A(3). Examples of a service intangible include licensing use of a legal research service.

30 NEB. ADMIN. CODE 24-335.01A(4).

31 Id.

32 NEB. ADMIN. CODE 24-335.01B.

33 NEB. REV. STAT. § 77-2734.14(2)(d); NEB. ADMIN. CODE 24-335.02.

34 NEB. REV. STAT. § 77-2734.14(2)(d); NEB. ADMIN. CODE 24-335.02B.

35 NEB. REV. STAT. § 77-2734.14(3)(e); NEB. ADMIN. CODE 24-335.03.

36 NEB. REV. STAT. § 77-2734.14(3)(e); NEB. ADMIN. CODE 24-335.03A, A(1).

37 NEB. ADMIN. CODE 24-335.03A(2).

38 NEB. REV. STAT. § 77-2734.14(3)(f).

39 NEB. REV. STAT. § 77-2734.14(3)(f); NEB. ADMIN. CODE 24-335.04.

40 NEB. REV. STAT. § 77-2734.14(3)(g), (h); NEB. ADMIN. CODE 24-335.05, .06.

41 NEB. REV. STAT. § 77-2734.14(3)(i); NEB. ADMIN. CODE 24-337.01. If the property is used or located within and outside Nebraska, the gross receipts are attributed to Nebraska in proportion to the percentage of time the property was used or located in Nebraska.

42 NEB. REV. STAT. § 77-2734.14(3)(j); NEB. ADMIN. CODE 24-337.02.

43 NEB. REV. STAT. § 77-2734.14(3)(k).

44 NEB. REV. STAT. § 77-2734.14(3)(k); NEB. ADMIN. CODE 24-338.01.

45 NEB. REV. STAT. § 77-2734.14(3)(k); NEB. ADMIN. CODE 24-338.01A.

46 NEB. REV. STAT. § 77-2734.14(3)(k); NEB. ADMIN. CODE 24-338.01B.

47 NEB. REV. STAT. § 77-2734.14(3)(k); NEB. ADMIN. CODE 24-333.03.

48 NEB. ADMIN. CODE 24-301.

49 NEB. ADMIN. CODE 24-381.01.

50 NEB. ADMIN. CODE 24-381.01B.

51 NEB. ADMIN. CODE 24-381.01F.

52 NEB. ADMIN. CODE 24-381.01D.

53 NEB. ADMIN. CODE 24-381.02.

54 NEB. ADMIN. CODE 24-381.03.

55 NEB. ADMIN. CODE 24-372.01.

56 NEB. REV. STAT. § 77-2734.1; NEB. ADMIN. CODE 24-361, 24-371.

57 Market-based sourcing was adopted by the Multistate Tax Compact in 2014, and has been adopted by 20 states as of 2015. Market sourcing has most recently been adopted by Alabama, California, the District of Columbia, Illinois, Maine, Massachusetts, Michigan, Nebraska, New York, Oklahoma, Rhode Island, Utah, and Wisconsin. Tennessee is adopting market-based sourcing for tax years beginning on or after July 1, 2016. Additional states will likely replace cost of performance sourcing with the market-based sourcing method in the future.

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