A Pinch of Salt, September 2010- The Implementation of ‘Market’ Sourcing Rules: Practical Concerns

by Eversheds Sutherland (US) LLP

California is the most recent state to develop market-based rules to source receipts from the sale of services and intangibles. In this Pinch of SALT, we survey the various methods states use to apply market-based sourcing to service and intangible income and address how California and the Multistate Tax Commission are proposing to tackle market-based sourcing and the associated problems. We conclude that while market sourcing offers a principled way to source receipts from the sale of services and intangibles, in practice, marketsourcing rules are likely to create a variety of administrative problems and will not advance uniformity. These challenges are particularly concerning in states that weight the sales factor more heavily or use a single-sales-factor apportionment formula.

Costs of Performance

Of the 46 states with corporate income taxes, 23 states have adopted the Uniform Division of Income for Tax Purposes Act, and most others have adopted a similar method to apportion the business income of multistate taxpayers. Approximately 30 states use the costs-of-performance method to source receipts from sales of services or sales or licenses of intangibles. 1

Under the standard UDITPA rule, receipts from sales other than sales of tangible personal property are sourced to the state if ‘‘the greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.’’2 Thus, the costs-of-performance method requires the taxpayer to identify individual lines of income, determine the income-producing activities for each income line, and determine where the income-producing activities (and associated costs) take place. Although taxpayers and auditors may disagree on how a company’s income lines should be broken down or on which incomeproducing activities are associated with each income line, the benefit of this method is that taxpayers generally have access to relevant cost data — or can design systems to capture that information — because the costs-of-performance method considers the taxpayer’s activities.

That said, the costs-of-performance method has been criticized on several fronts. The purpose of the sales factor is to reflect the contribution of the market to the taxpayer’s income. This objective may not be achieved under the costs-of-performance method if the income-producing activities required to generate income take place in states other than where the taxpayer’s customers are located. This problem is particularly acute in states that use the standard all-or-nothing UDITPA rule, which sources receipts to the state only if the preponderance of the income-producing activities occur within the state, as opposed to a ‘‘proportionate’’ costs-of-performance method that sources sales based on the relative proportion of income-producing activities taking place in each state.3

Please see full article below for more information.

LOADING PDF: If there are any problems, click here to download the file.

Written by:

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.