A key concern facing multistate corporations is the sourcing of receipts that are not from the sale of tangible personal property. Traditionally, most states have applied cost-of-performance sourcing, under which receipts are sourced to the state in which the most costs related to that particular multistate business activity are incurred.
However, as noted in the Bloomberg BNA 2015 Survey of State Tax Departments, a growing minority of states are shifting to a market-based approach to sourcing. In market-based sourcing the receipts from sales of services and intangibles are sourced to the state in which the market for the taxpayer’s sale is located.
Virginia is considering a move from cost-of-performance sourcing to market-based sourcing. The Virginia House Finance Committee has asked the state’s Department of Taxation to study the merits of market-based sourcing. The Finance Committee has made this request after several bills related to market-based sourcing were introduced in the legislature, but not passed. The most recent bill, 2015 House Bill 2233, was the basis for their suggestion.
The working group requested by the Finance Committee has been tasked with studying the specifics of implementing market-based sourcing in Virginia. They will also consider the possibility of implementing thresholds, perhaps in property or payroll, above which corporations could elect whether or not to use market-based sourcing. The group will then make a recommendation in a report by Dec. 7, 2015 and draft legislation for consideration by the legislature.
Should Virginia decide to implement market-based sourcing, the state will join a growing number of taxing jurisdictions moving away from cost-of performance. Massachusetts, Nebraska and Pennsylvania began using market-based sourcing in tax year 2014, while the District of Columbia, New York and Rhode Island (for C corporations only) have implemented a market-based approach in tax year 2015.
Additionally, the Multistate Tax Commission has moved from cost-of-performance to market-based sourcing. While a majority of states still use cost-of performance sourcing, the trend toward more states using market-based approaches is undeniable. Whether Virginia will join them remains to be seen.
The text of Virginia’s announcement of the working group can be found here: http://www.tax.virginia.gov/content/market-based-sourcing-study-0
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