More States Move to Market Sourcing for Intangibles: Tax Group

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By Tripp Baltz

Market-based sourcing is now the norm among states.

A majority of states have migrated to market-based apportionment to source receipts from sales of services and intangibles for purposes of business income taxation, a Multistate Tax Commission attorney said.

States that have recently moved from cost-of-performance to market-based sourcing include Connecticut, Louisiana, Nebraska, Oregon, and Rhode Island, Helen Hecht, MTC general counsel, said April 24. Hecht gave an update on uniformity issues in the states during the MTC’s Spring Committee Meetings in Bloomington, Minn.

The MTC adopted regulations to implement market-based sourcing under the Multistate Tax Compact’s Uniform Division of Income for Tax Purposes Act, Article IV, Section 17 in 2017, Hecht said. Market-based sourcing is the sourcing of sales of services and intangibles to the state where the consumer receives the benefit. Nearly 30 states have adopted market-based sourcing rules for sales other than of tangible personal property, according to a February 2018 report by Deloitte.

State Proposals

Proposals have been put forward to adopt market sourcing in New Mexico, Kentucky, and North Carolina, Hecht said. California and Washington reportedly are working on changes to their market-sourcing regulations to follow the “benefits-received” approach, she said.

Hecht also gave an update on developments involving sales and use tax notice and reporting requirements similar to those in a 2010 Colorado law. The Colorado statute took effect July 1, 2017, after it was affirmed as constitutional by the U.S. Court of Appeals for the Tenth Circuit in February 2016.

The law requires sellers that don’t collect and remit Colorado sales and use taxes to (1) notify buyers at the time of transaction that tax isn’t being collected but may be due, (2) provide consumers an annual report of their purchases, and (3) send an annual report to the state Department of Revenue showing the total dollar amount of each buyer’s purchases. The first reports were due to the state March 1.

Reporting Requirements

Vermont, Washington, Pennsylvania, Minnesota, and Rhode Island have enacted similar laws, and bills have been introduced in Alabama and Hawaii, Hecht said. In some cases, state legislation requires marketplaces such as Inc. to either collect tax on third-party marketplace sales or file information reports, she said.

In other business, the Uniformity Committee agreed to study a proposal from Michael Mazerov, a senior fellow with the Center on Budget and Policy Priorities, to consider drafting a model combined reporting statute that would institute a “Finnigan” approach, reflecting a trend among states moving in that direction.

At present, the MTC has a model combined reporting statute reflecting the “Joyce” approach, Greg Matson, executive director of the MTC, told Bloomberg Tax. The model was approved by the commission in 2006 and amended in 2011, Matson said.

Sales Factor Calculation

Joyce and Finnigan refer to two ways of calculating the sales factor numerator in a unitary combined report or consolidated return filed by a group of affiliated corporations. Under Joyce, each individual entity is regarded as the taxpayer, whereas under Finnigan the group as a whole is treated as the taxpayer. The names come from two California State Board of Equalization decisions.

Phil Skinner, member of the MTC Uniformity Committee and deputy Idaho attorney general, said he would chair a work group to do some research on Mazerov’s idea, reporting back to the MTC at its annual meeting in July in Boston.

To contact the reporter on this story: Tripp Baltz in Bloomington, Minn., at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

The MTC's combined reporting model statute is at

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