State Tax Snapshot: Arizona Joins Growing List of Market-Based Sourcing States

Arizona recently enacted legislation (S.B. 1046) allowing corporate taxpayers the option of sourcing income to the state based on sales into its market. In doing so, the state joins a growing minority of jurisdictions that have adopted a market-based method for sourcing (i.e., determining which state is entitled to tax) multistate transactions involving the sale of services or intangibles.

For years, nearly all of the states conformed to § 17 of the Uniform Division of Income for Tax Purposes Act (UDITPA) in determining if sales, other than sales of tangible personal property, are taxable within their jurisdiction. The provision provides that such sales are sourced to the state in which the greatest proportion of the income-producing activity is performed. Income-producing activity is determined according to the taxpayer's costs of performance.

But a growing number of states are adopting a market-based sourcing approach in which the receipts are sourced to the states according to factors such as where the customer is located or where the services are performed.

Other states that have adopted a market-based sourcing method include:

  • Alabama (2011 Ala. H.B. 434, effective for tax year 2011 and after);
  • California (for taxpayers electing single-sales factor apportionment Cal. Rev. & Tax. Code §25136(b); Cal. Code Regs. tit. 18, §25136);
  •  Georgia (Ga. Code Ann. §48-7-31(d)(2)(A)(i); Ga. Comp. R. & Regs. r. 560-7-7-.03(5)(c)(1));
  •  Illinois (35 ILCS 5/304(a)(3)(C-5)(iv));
  •  Iowa (Iowa Admin. Code r. 701-54.6(422));
  •  Maine (Me. Rev. Stat. Ann. tit. 36, §5211(16-A)(A); Code Me. R. §18-125-801.06(E));
  •  Maryland (Md. Regs. Code §; 
  •  Michigan (Mich. Comp. Laws §206.665(1)(e), as added by 2011 Mich. H.B. 4361, effective Jan. 1, 2012);
  •  Minnesota (Minn. Stat. § 290.191(5)(i));
  •  Ohio (Ohio Rev. Code Ann. §5733.05(B)(2)(c)(ii));
  •  Oklahoma (Okla. Admin. Code §710:50-17-71(1)(A)(ii));
  •  Utah (Utah Code Ann. §59-7-319(4)); and
  •  Wisconsin (Wis. Stat. § 71.25(9)(dh); Wis. Stat. § 71.25(9)(dk)).

Each of these states has its own approach to market-based sourcing. For example, Maryland looks to the impetus of the sale, while Oklahoma focuses on the location of the customers, said Jamie Yesnowitz, a senior manager with Grant Thornton LLP in a Bloomberg BNA Webinar last year. Minnesota, he said, refers to a set of ordering rules.

By Steven Roll
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