Multistate businesses should be aware that over 30 states and the District of Columbia now use market sourcing rules that allow them to allocate and then tax such businesses' income.
For income, franchise and gross receipts tax purposes, states impose their income/gross revenue taxes based on the amount of income or receipts they can assign to such states. In the past, when a business was involved in the sale of services or the sale/lease/license of intangible property (e.g., royalties, software licenses, patents, etc.), most states would allocate income or gross receipts subject to tax either based on an income-producing activities test (e.g., where the service or income-producing activity is performed), while a few states applied a market-based approach. In the last handful of years, we have seen a switch: A majority of states (for example, New York, New Jersey and California) now allocate such sales/revenues based on the market for such sales. This means the location of the customer, or where the customer receives or benefits from the sale, will be used to determine the sales or receipts allocated to that state and thus the amount of income or gross revenues subject to that state's income/franchise/gross revenue tax. And in some cases, the state may require that the income or gross receipts allocated to the state be based on the business' customer's customer location (i.e., the location of the recipient of a secondary transaction), rather than the business' customer location.
More than 30 states and the District of Columbia now determine a business' income or revenues taxable under the state's income/franchise/gross revenues tax using a market-based approach. Because of this, businesses should be mindful that the services they provide, or the royalty/license agreements they enter into, may be taxable in multiple states that follow this market-based methodology. Businesses may consider seeking legal counsel to help them understand these state tax issues and provide advice for minimalizing their state tax exposure.
For More Information
If you have any questions about this Alert and would like more information on how this may affect your company, please contact Stanley R. Kaminski, Lauren A. Ferrante, any of the attorneys in our State and Local Tax Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.