Webinar Slides: Source Your Sales - A Multi-State Primer for Apportionment in Service

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CBIZ & MHM
Executive Education Series™
Source Your Sales: A Multi-State Primer
for Apportionment of Services
James Helms
May 17, 2018

About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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CPE Credit
This webinar is eligible for CPE
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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

James Helms is a Senior Manager who joined CBIZ MHM, LLC in
2012. He specializes in the resolution of state income, franchise, and
sales tax issues. Mr. Helms also handles dispute resolutions including
business/nonbusiness analysis, unitary determinations, U.S.
Constitutional limitations on taxation of multijurisdictional activities,
and filing methodology issues for companies with multiple lines of
business
864.241.0598 • jhelms@cbiz.com
James S. Helms, CPA
Senior Manager
Presenter

Agenda
Sourcing of Services – Overview
02
01
03
04
Income Producing Activity / Cost of Performance
Market-Based Sourcing
Other Methods
0 Questions
4
05

SOURCING OF SERVICES - OVERVIEW

• Generally three methods of sourcing services
• Income producing activity / cost of performance
• Majority cost of performance
• Ratio cost of performance
• Market-based
• Where income producing activities are performed
• Rules among states vary and are open to interpretation
• Complexity can mean uncertainty
• Uncertainty causes controversy

Example
• Taxpayer is an accounting firm located in PA
• All of its services are performed in its PA office
• 90% of its receipts are from MD clients
• Annual receipts of $10M for 2013 and 2014
• How will these receipts be sourced for receipts factor
purposes in PA and MD?

PA – Market-based sourcing
• Effective for 2014, replacing majority COP
• Only applies to services receipts
• Based upon the percentage of total value of the
service delivered to a location in PA
• Deemed delivered to location of customer's regular
course of operations
• If unknown, then customer's billing address

Example
• 2013
• PA is majority COP while MD is market-based sourcing
• MD: $9M (90% receipts factor)
• PA: $10M (100% receipts factor)
• 2014
• Both PA and MD are market-based sourcing
• MD: $9M (90% receipts factor)
• PA: $1M (10% receipts factor)

Practical Considerations:
• Is there guidance for specific industries (i.e., personal services)
• Does market-based sourcing create nexus in factor presence
states
• How does a switch in sourcing methodologies impact state tax
liabilities
• Is there a reasonable approach to follow considering the state’s
similar, yet different, rules and differing interpretations of the
same rules
• How do you accumulate information to properly source sales
for compliance needs
• Does the state have a “look-through” assignment rule and do
you have the information necessary to comply

INCOME PRODUCING ACTIVITY/
COST OF PERFORMANCE

Cost of performance methods
Location of “income-producing activity”
Location of “income-producing activity”
based on “cost of performance” if income
producing activity occurs in multiple states
 “Majority” states source 100% of receipts
to state with greater preponderance of
costs
 “Ratio” states source relative to percentage
of costs in each state

Cost of Performance States
Alaska Idaho Montana (until 2018) Oregon (until 2018)
Arizona (unless election) Indiana New Hampshire Vermont
Arkansas (ratio) Kansas New Jersey (ratio) Virginia
Colorado (ratio) Kentucky (until 2018) New Mexico West Virginia
Florida Mississippi (ratio) North Dakota
Hawaii Missouri

 What Costs are included?
 Direct costs
 Indirect costs
 Independent contractors
 Transaction approach versus operational approach
 AT&T Corp. v. Comm'r of Revenue, Mass. App. Tax Bd.
Dkt. No. C293831 (June 8, 2011) - income-producing
activity was the business of providing a national,
integrated telecommunications network that was
operated and managed in New Jersey
 AT&T Corp. v. Department of Revenue, Oregon Sup. Ct.,
No. SC S060150, (Sept. 11, 2015) – Supreme Court held
income-producing activity was based on a transactional
approach

Florida
 Income producing activity is defined as “the
transaction and activity directly engaged in by
the taxpayer for the ultimate purpose of
obtaining gains or profits”
 Creates a de facto market-based souring regime
 Technical Assistance Advisement, No. 17C1-004,
Florida Dept. of Rev., (April 17, 2017) – call
center activities
 Technical Assistance Advisement, No. 12C1-006,
Florida Dept. of Rev., (May 17, 2012) – online
education courses

 Indiana
 Letter of Findings No. 02-20130359, Indiana Dept. of
Rev., (November 26, 2014) – Online courses sourced
to location of student viewing course
 Recent findings have been centered around cost of
performance rules as compared to more of a market-
based sourcing model
 The University of Phoenix, Inc. v. Indiana Department of
State Revenue, Indiana Tax Court, No. 49T10-1411-TA-
00065, (Nov. 30, 2017) – Online courses sourced based
on cost of performance

MARKET-BASED SOURCING

WHAT is market-based sourcing?
• Method of assigning a taxpayer’s receipts to the
numerator of a state’s receipts factor
• Generally for receipts from sales of “other than tangible
personal property”
• Services, intangible property, interest, dividends
• Alternative to cost of performance sourcing

WHY market-based sourcing?
• Criticism of cost of performance
• Ignores customer base
• Doubles up on location of payroll, property
• Provides benefit to service providers with in-state facilities
but an out-of-state customer base
• Shifts tax burden from service-provider taxpayers with in-
state facilities to those with out-of-state facilities
• “Aligns” sourcing of other than TPP with sourcing of TPP

Issues with Market-Based Sourcing
• Services
• Where is the market when selling to multistate businesses?
• Is there enough ambiguity to invite controversy?
• Do differences in state regimes preclude a single approach?
• Lack of information regarding benefit location if based on
look-through of your customer’s activities (i.e., provision of
internet content for advertisers)

Market Sourcing States
Alabama (2011) Iowa Minnesota Oregon (2018)
Arizona (option to elect in 2014) Kentucky (2018) Missouri (if single
sales factor
elected)
Pennsylvania (2014)
California (2013) Louisiana (2016) Montana (2018) Rhode Island (2015)
Connecticut (2016) Maine (2007) Nebraska (2014) Tennessee (2016)
District of Columbia (2014) Maryland New York (2015) Utah (2009)
Georgia Massachusetts (2014) Ohio (CAT) Washington (B&O)
Illinois (2009) Michigan (2012) Oklahoma Wisconsin

Other Market Sourcing States
• Where the service is delivered
• Alabama, Massachusetts, Pennsylvania
• Where the benefit is received
• Iowa, Michigan, Ohio, Utah, Washington, Wisconsin
• Where the service is received
• Illinois, Maine, Minnesota
• Where the customer is located
• Georgia, Maryland, Oklahoma

California’s Adoption
• Tied to single-factor sales
• Optional for tax years beginning 1/1/11
• Mandatory for tax years beginning 1/1/13
• Issued comprehensive regulatory guidance

California Law
• Identifies five types of sales
• Tangible personal property
• Services
• Intangibles
• Real property
• Leases of tangible personal property
• Attempts to define identification of market for each
• Market defined relative to benefit received by customer

Sale of services
• Where is the benefit received?
• Did the customer receive the benefit in California?
• Entity
• Taxpayer’s books and records (creates rebuttable presumption)
• Reasonable approximation of benefit
• Where service ordered
• Billing address
• Individual
• Billing address (creates rebuttable presumption)
• Taxpayer’s books and records
• Reasonable approximation

California Look-Through Rule
• Cal Code Regs. tit.18 § 25136-2(c)(2)(E)(4) (Example 4)
• Web Corp provides internet content to its viewers and receives
revenue from providing advertising services to other businesses
• The fee collected is determined by reference to the number of
times the advertisement is viewed and/or clicked on by viewers
• Use books and records to source receipts based on where the
advertisement is viewed and/or clicked on by viewers

• Cal Code Regs. tit.18 § 25136-2(c)(2)(E)(5) (Example 5)
• Same facts as Example 4 except books and records cannot
determine the location
• Reasonably approximate based on ratio of the number of its
viewers in CA to the number of its viewers everywhere

• Chief Counsel Ruling 2015-03
• Sales of non-marketing services should be assigned to the
location of the taxpayer's customer and NOT the location of the
taxpayer's customer's customers
• The value of a non-marketing service lies not in the advertising or
promoting of a product, service or other item, but rather the
value lies in the service being used in the business operations of
the taxpayer's customer

New York
• Effective tax years beginning on or after January 1, 2015
• Applies to receipts from services not otherwise
specifically sourced under N.Y. Tax Law §§ 210-A(1)
through (9) (includes most services)
• Issued proposed regulations

New York - Sourcing Hierarchy
• Location where benefit is received;
• Delivery destination;
• The apportionment fraction for such receipts within the state
determined pursuant to N.Y. Tax Law § 210-A for the preceding
taxable year; or
• The apportionment fraction in the current taxable year determined
pursuant to N.Y. Tax Law § 210-A for those receipts that can be
sourced using the hierarchy of sourcing

New York - Proposed Regulation § 4-2.15
• Depends on whether the customer is an
customer or business customer
• Special rules for
• in-person services
• services related to real property
• intermediary transactions

• In the case where the taxpayer’s customer is an
• Billing address in the taxpayer’s records
• Cannot use the general population as a proxy

• In the case where the taxpayer’s customer is a business
• Location indicated in the taxpayer’s books and records
• Reasonable inquiries of the customer required

• In-Person Services
• Services rendered to the body of an individual or in the physical
presence of an individual
• Services rendered on the tangible personal property of a customer
• Involve or require significant in-person contact
• The benefit of the service is received at the location where the service
is received by the customer
• Presumed to be the location where the service is performed

• Services Related to Real Property
• The benefit of a service is received where the real property
is located

• Intermediary Transactions
• Provided by the taxpayer, at the direction of the intermediary,
directly to the consumer; or sold by the taxpayer to the
intermediary, who then passes on the service or other business
activity related to tangible personal property to the consumer
• Use same hierarchy of methods but based on the location of the
individual or business consumers rather than the intermediary

Multistate Tax Commission
• Market-based sourcing of receipts from the sale of
services and intangibles
• Based on MA rules
• TN and MT have adopted

Multistate Tax Commission - Article IV, Section 17
• The market for services is determined based on the location of
delivery of the service
• Establish uniform rules for different services
• Basic framework
• General rule
• Throwout receipts

• In-Person Services
• Services that are ‘physically provided in person by the
taxpayer,’ where the customer’s real or tangible property upon
which the services are performed is in the same location as
the service provider at the time the services are performed
• Delivered to the location where the service is received

• Professional Services
• Professional services are services that require specialized
knowledge, including in some cases, a professional
certification, license or degree
• The customer is considered to be the person that contracts for
the service, regardless of whether another person pays for or
also benefits from the service

• Depends on whether the customer is an or
business
• If provided to an customer:
 Customer’s state of primary residence
 Customer’s billing address

• If provided to a business customer:
 State where the contract of sale is principally managed by the
customer
 Customer’s place of order

• Services Delivered to the Customer or on Behalf of the
Customer, or Delivered Electronically Through the Customer
• Generally instate if and to the extent that the service is
delivered instate
• Physical delivery to or on behalf of a customer
 Location where the services are delivered
 Reasonable approximation

• Services Delivered to the Customer or on Behalf of the Customer,
or Delivered Electronically Through the Customer
• Electronic transmission delivery to a customer
 Sourced if and to the extent the customer receives the service in the state
 Safe harbor for business customers
 State where the contract of sale is principally managed by the
customer
 Customer’s place of order

• Services Delivered to the Customer or on Behalf of the
Customer, or Delivered Electronically Through the Customer
• Services delivered electronically through or on behalf of an
individual or business customer
 State where the services are delivered as determined by the location
of the end users or other third-party recipients
 Secondary reasonable approximation rules

OTHER METHODS

Delaware, North Carolina, South Carolina, and
Texas
 Sales are sourced to where income producing
activities which give rise to the receipt are
performed
 Costs can be considered in assigning receipts if
services are rendered in multiple states
Other Methods

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