Corporate Close-Up: Show Me Your Customers—Missouri Adopts Market-Based Sourcing for Sales of Services and Intangibles

With the signature of Gov. Jay Nixon (D) on May 6, Missouri joined an increasing number of states that take a market-based approach to sourcing receipts from sales of services and intangibles. [S.B. 19, enacted May 6, 2015]

The new sourcing provision is part of the election enacted in 2013 that allows taxpayers to apportion income to Missouri based entirely on sales. The legislation clarifies the 2013 law to ensure equal application of single factor apportionment to service providers and technology companies, according to a May 6 press release from the governor's office.

As a result of the legislation, a transaction involving the sale of other than tangible personal property occurs in Missouri if the taxpayer's market for the sale is in the state.  The market for sales of services is in Missouri to the extent the ultimate beneficiary of the service is located in the state.  Similarly, the rental, lease or license of intangible property will be considered an in-state sale to the extent the property is used in Missouri.

Sourcing receipts from the sale of intangible property also depends on where the property is used.  Receipts from the sale of a contract right or government license to conduct business activity in a specific geographic area are derived from Missouri if the geographic area includes all or part of the state. Sales of intangible property that are contingent on the productivity, use or disposition of the property are treated in the same manner as the rental or licensing of intangible property and assigned to Missouri to the extent the property is used in Missouri.  All other receipts from sales of intangible property are thrown out, or excluded from both the numerator and denominator of the sales factor.

If assignment of receipts to Missouri cannot be determined or reasonably approximated upon application of the new sourcing rules, then those sales are also excluded from the denominator of the sales factor.

While Governor Nixon, in his press release, referred to the legislation as a "clarification to state tax law," commentators were already discussing the difficulty of identifying the ultimate beneficiary of a service in order to determine where the market for a sale is located.  As reported by Radha Mohan in the May 8 Weekly State Tax Report panelists at Bloomberg BNA's annual Roundtable on May 4 debated the extent to which taxpayers needed to look through a transaction to find their customers' customers.

Even if a taxpayer is able to determine who the end user or beneficiary is, the panelists agreed a look-through approach may not be the best way to source receipts in all cases, particularly in business-to-business transactions.  Additional guidance from Missouri and other states that have adopted market-based sourcing is definitely needed to help taxpayers determine the location of their markets.

What is meant by an ultimate beneficiary?  Continue the discussion on Bloomberg BNA.

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