States are changing the way they calculate corporate income tax.
Just when you thought you knew everything there was to know about multi-state corporate income tax apportionment, the states start switching up the rules!
Nexus definition varies.
For many years, corporate taxpayers could bank on a few understood conventions when figuring out their tax responsibilities in various states. First, nexus was an issue. In order to be subject to the jurisdiction of a state taxing authority, a corporation had to maintain some sort of physical presence in the state. But states are slowly chipping away at that concept, especially in the income tax area. Now, economic nexus is all the rage in various states. Corporate taxpayers don’t only have to worry about states where they have physical presence. But they also need to consider where they might have some economic presence. So these taxpayers have to worry about pretty much every state!
Many states determine appropriate taxable income differently.
Over the past decade, many states have drastically changed the way in which corporate taxpayers determine their appropriate taxable income. Historically, states followed a three-factor formula of property, payroll, and receipts. Taxpayers that sold services or other non-tangible products usually could base their apportionment on where they did the work, or where they performed the service. But over the past decade, we’ve seen two significant shifts. First, many states have transitioned to single-factor apportionment, with the focus only on receipts. This puts an increased focus on a taxpayer’s revenue. It shifts focus away from where people/property are (i.e., where the revenue is generated).
Market-based sourcing is becoming more common.
Finally, with respect to the receipts factor, market-based sourcing is now all the rage. Twenty-three states (and counting) use this method as the basis for the apportionment of services and other business receipts. Under market-based sourcing, receipts for services and service-type revenue are apportioned to a state, based not on where the service is performed, but where the service is delivered or where the benefit of the service is received by the customer. This method drastically changes the way service-providers are taxed. It likely results in state taxation in many more locations than under prior regimes. And it wouldn’t be multistate taxation without pretty much every state taking a little bit different tact as to how they implement their own market-based sourcing regime!
More fun for tax practitioners, perhaps less for corporate taxpayers. If you want to learn more, come to the 2017 CCH Connections User Conference on October 23rd in San Francisco and sign up for “Market Based Sourcing 101; A Review of New Apportionment Methods for Corporate Income Taxpayers,” presented by yours truly.