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NAVIGATING MARKET SOURCING & APPORTIONMENT RULES
July 28, 2016
BDO USA, LLP, a Delaware limited liability partnership, is
the U.S. member of BDO International Limited, a UK
company
limited by guarantee,
and forms
part of theMarket Sourcing & Apportionment Rules
BDO KNOWLEDGE
Webinar Series
‒ Navigating
international BDO network of independent member firms.
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WITH YOU TODAY
•
MARIANO SORI, CPA, JD – Partner - State and Local Tax , Income & Franchise Tax
National Practice Leader
•
BRANKO MARUSIC, JR., CPA, JD – Sr. Director, State and Local Tax
•
ANGELA ACOSTA, CPA – Sr. Director, State and Local Tax
•
TODD FACIANA, CPA, JD, LLM – Sr. Manager, State and Local Tax
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INTRODUCTORY COMMENTS
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INTRODUCTORY COMMENTS
•
•
Market-based sourcing is a hot topic in state income tax
-
Many states are adopting it
-
Represents a U-turn from the “old” cost of performance method (at least in theory)
-
Significance is underscored in those states that also adopt single sales factor apportionment, and
even more so in states with a bright-line nexus standard based on sales
Market-based sourcing is not uniform and is full of pitfalls
–
States have adopted diverse market-sourcing methods
-
State market-sourcing methods may require specific procedures
 Taxpayers may need to document why a sourcing procedure doesn’t apply
 Taxpayers may be bound as to their sourcing procedures for future return filings
•
Market-based sourcing guidance is still evolving
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AGENDA
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AGENDA
• History of Income Tax Apportionment
• Sales Apportionment Trends
• Market-Based Sourcing Methods
• Closer Look at Market-Based Sourcing Laws
• Sourcing Comparisons and Conflicts: Same Facts – Different Method
• Throw-Out Rules and Alternative Apportionment
• Market-Based Sourcing of Intangibles
• Key Takeaways
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HISTORY OF INCOME TAX APPORTIONMENT
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HISTORY OF INCOME TAX APPORTIONMENT
UDITPA
•
UDITPA § 15 states the following with respect to the sales factor:
“The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this
state during the tax period, and the denominator of which is the total sales of the taxpayer
everywhere during the tax period.”
•
UDITPA § 17 states the following with respect to sales other than of TPP:
Sales, other than sales of tangible personal property, are in this state if:
(a) the income-producing activity is performed in this state; or
(b) the income-producing activity is performed both in and outside this state and a greater
proportion of the income-producing activity is performed in this state than in any other state,
based on costs of performance.
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HISTORY OF INCOME TAX APPORTIONMENT
Multistate Tax Compact
•
•
Prior to July 30, 2014, the Multistate Tax Compact ("Compact") sourced sales in the following manner:
-
Tangible personal property (“TPP") – Destination sourcing
-
Other than TPP (services or intangibles) – Cost of performance (“COP”)
Market-based sourcing arguably serves the purpose of the sales factor by more accurately reflecting
the customer base for taxpayer’s services
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HISTORY OF INCOME TAX APPORTIONMENT
COP Sourcing
•
Historically, most states have used the approach for sourcing services
-
Allocates income to states based upon where cost of performing services were incurred
-
What is an income producing activity?
-
What “costs” to include in the determination?
-
Three COP sourcing methods:
 Plurality Method – all or nothing
 Majority Method – all or nothing
 Proportionate Method
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HISTORY OF INCOME TAX APPORTIONMENT
COP Sourcing - Example
•
•
Facts
-
30% of Costs in State A
-
30% of Costs in State B
-
40% of Costs in State C
Application
-
PLURALITY: All receipts sourced to State C
-
MAJORITY: Receipts sourced nowhere
-
PROPORTIONATE: Receipts sourced 30/30/40% to States A/B/C, respectively
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SALES FACTOR APPORTIONMENT TRENDS
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Sales factor Apportionment Trends
What is a Service?
•
States may characterize the same transaction differently such as:
-
Sale of a Service or Sale of TPP? (e.g., electricity)
-
Sale of services vs. sale of intangibles (e.g., software)
 Custom vs. off‐the‐shelf
 Software as a Service
 Data storage and retrieval
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SALES FACTOR APPORTIONMENT TRENDS
Single Sales Factor Formula (“SSF”) States
States that Require SSF or Provide an SSF Election
Arizona (election*)
Louisiana (2016)
Oregon
California
Maine
Pennsylvania
Colorado
Michigan
Rhode Island
Connecticut (2016)
Minnesota
South Carolina
Delaware (2020)
Mississippi (industry specific)
Texas
District of Columbia
Missouri (election)
Utah (industry specific and
elective)
Georgia
Nebraska
Virginia (retail req., mfg. elective)
Illinois
New Jersey
Wisconsin
Indiana
New York
Iowa
North Carolina (2018)
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SALES FACTOR APPORTIONMENT TRENDS
Trends in Heavier Weighting of Sales Factor
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SALES FACTOR APPORTIONMENT TRENDS
Ignoring COP and Alternative Apportionment
•
Limiting the Income Producing Activity
-
Some states with COP sourcing interpret many income producing activities as beginning and
ending with the state’s resident customer receiving the service
 Ignores the costs and efforts of producing the service
 Results in sourcing to where the customer is located or receives the service
•
Section 18 - Alternative Apportionment
-
UDITPA § 18 provides for the use of an alternative method of apportionment where the
statutory formula distorts the amount of income reported to a state with respect to a
taxpayer’s activity in the state
 Provides COP states with the opportunity to source sales where customer located or service
is delivered
 How is unfairness or improper reflection shown?
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INCOME TAX APPORTIONMENT TRENDS
Market-Based Sourcing
•
Many states are moving toward market-based sourcing, particularly for sales of services and
intangibles
•
Under a market-based approach, sales of services are assigned to the state in which the services or
benefits of the services are received or delivered, or where the customer or marketplace is located
•
Reasons
-
Difficulty in determining where the costs of production for a service or intangible are located
-
Attempt to match receipts to the source of the corresponding revenue stream
-
Desire to reduce tax burden on in-state economic actors and to reduce tax burden on mobile
capital
-
As states have increased weight on sales factor, market-based sourcing of services makes
theoretical and economic sense
-
Move away from an “all or nothing” approach
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INCOME TAX APPORTIONMENT TRENDS
Sourcing of Revenue in 2016
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MARKET-BASED SOURCING METHODS
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MARKET-BASED SOURCING METHODS
Overview - Variety of State Approaches
•
23 states now require or provide election to use market-based sourcing
•
General rules of sourcing services
-
“Delivered to a location” in the state
-
“Where benefit of the service is received”
-
“Where receipts derived”
•
Throw-out rules
•
“Look-thru rules” for sales of services to customers of, or through, the customer
•
Complex regulations vs. simple/general statutory standards
-
Use of examples to illustrate (or implement?) the rule
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MARKET-BASED SOURCING METHODS
Overview - Variety of State Approaches (Cont’d)
•
Some states apply a proportionate approach where receipts of services are sourced in proportion to
the benefit received by the recipient of the service in the state.
•
Some states determine market using a hierarchy approach (where a taxpayer cannot comply with the
threshold sourcing rule, move to next rule)
-
The hierarchy approach may require documentation as to the reasons why a particular sourcing
step was not attainable
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MARKET-BASED SOURCING METHODS
Services
Market-Based
Sourcing
Market-Based
Sourcing
Market-Based
Sourcing
Market-Based
Sourcing
Where Benefit
Received
Where Service
Received
Where Service
Delivered
Where Customer
Located
Arizona (election)
Connecticut
Alabama
Georgia
California
Illinois
District of Columbia
Maryland
Iowa
Maine
Louisiana
Nebraska
Michigan
Minnesota
Massachusetts
Oklahoma
Missouri (election)
Pennsylvania
New York
Tennessee
Rhode Island
Utah
Wisconsin
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MARKET BASED SOURCING METHODS
The “MTC Model”
The “MTC Model” - Overview
•
MTC Model Regulation is still in “Working Draft” form (issued November 30, 2015)
•
Serves as the model for the Massachusetts, Rhode Island, and Tennessee market-based sourcing
regulations
•
General rule for sourcing services: “delivered to a location” in the state
•
Throw-out rule
•
Uses complex set of cascading rules to source sales of services
Multistate Tax Commission (MTC Reg. IV.17, “Working Draft” as of Nov. 30, 2015)
•
In-person services – Where the service is received/delivered in physical presence of the customer or
its property
•
Professional services
-
Require specialized knowledge, license or degree and includes legal, accounting, management, financial,
investment, fiduciary, payroll, data processing, consulting, engineering
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MARKET BASED SOURCING METHODS
The “MTC Model” (Cont’d)
Multistate Tax Commission (MTC Reg. IV.17, “Working Draft” as of Nov. 30, 2015) (Cont’d)
•
Professional services (cont’d)
-
Individual customer – [1] Primary residence [2] Billing address
-
Business customer – [1] Where contract of sale managed by customer [2] Customer’s place of
order [3] Billing address
-
Separate rules for architectural/engineering services, financial services, and related parties
-
Overlaps with “in-person” services – In-person sourcing rules control (e.g., medical/dental
services), but not for legal, accounting, financial, or consulting
-
“Safe harbor” - Source to billing address if engage in substantially similar services with more
than 250 customers, and do not derive more than 5% of gross receipts “from that customer”
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MARKET BASED SOURCING METHODS
The “MTC Model” (Cont’d)
Multistate Tax Commission (MTC Reg. IV.17, “Working Draft” as of Nov. 30, 2015) (Cont’d)
•
Services delivered to or on behalf of a customer, or delivered electronically through the customer
-
By physical means – Where service is delivered (uses examples to illustrate).
-
By electronic transmission – Individual customer
 [1] Where service is received [2] Reasonable approximation [3] Billing address
-
By electronic transmission - Business customer
 “Location at which the service is directly used by the employees or designees of the
customer”
 “Secondary Rule of Reasonable Approximation” – [1] Where contract of sale principally
managed by the customer [2] Customer’s place of order [3] Billing address
 “Safe harbor” – Source to billing address if engage in substantially similar services with
more than 250 customers, and do not derive more than 5% of gross receipts “from that
customer”
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MARKET BASED SOURCING METHODS
The “MTC Model” (Cont’d)
Multistate Tax Commission (MTC Reg. IV.17, “Working Draft” as of Nov. 30, 2015) (Cont’d)
•
Services delivered electronically through or on behalf of a customer are sourced to the end users or
third party recipients of the customer (“customers of the customer” or “look-thru” rule)
•
Software
•
-
Services delivered electronically through or on behalf of a customer are sourced to the end
users or third party recipients of the customer (“customers of the customer” or “look-thru”
rule)
-
Software
Sale or license of digital products
-
Apply sourcing rules for services delivered “to a customer by electronic transmission;” or
-
Apply sourcing rules for “services delivered electronically through or on behalf of a customer”
(including “look-thru rule”)
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CLOSER LOOK AT MARKET-BASED SOURCING
METHODS
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
Alabama
Alabama (Ala. Admin. Code § 810-27-1-.17)
•
General rule for sourcing services is where service is delivered (follows MTC)
•
Individual customer
•
-
“Direct personal service” – Location of the customer’s person or property receiving the service.
-
All other services – Billing address
-
Alternative method requires “conspicuous” note on return
Business customer (unaffiliated)
-
“Substantial connection to a specific geographic location”
-
Default is customer’s commercial domicile; if unknown, then “principal address” of the
customer or use a reasonable approximation method
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
California
California (Cal. Code Regs. tit. 18, § 25136-2)
•
General rule of sourcing services – “Where the benefit of a service is received”
•
Means the location where the taxpayer’s customer has either directly or indirectly received value
from delivery of that service
-
Individual customer
 [1] Billing address
 [2] Reasonable approximation
-
Business customer
 [1] Contract and taxpayer’s or customer’s books and records indicate where benefit of
service received
 [2] Reasonable approximation
 [3] Where customer placed order
 [4] Billing address
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
California (Cont’d)
Chief Counsel Ruling 2015-03 (Dec. 31, 2015)
•
Treated taxpayer’s financial information and analytical applications services that its customers
included in a service provided to their own customers as sales of “non-marketing services
•
Based on example in California regulations concerning non-marketing intangibles, Chief Counsel ruled
the taxpayer should assign its receipts to its business customer’s location rather than the customer’s
customer location (sometimes referred to as the “look-thru” rule)
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
New York
New York (Proposed N.Y. CC&R § 4-4.6)
•
General rule for sourcing (non-enumerated) services – Where benefit of service is received, but uses a
“sourcing hierarchy”
•
Taxpayers are expected to apply due diligence when applying the “sourcing hierarchy,” including
maintaining contemporaneous records
•
“Sourcing hierarchy”
-
Where benefit of service is received
-
Delivery destination
-
Prior year NY sales factor
-
Current year NY sales factor
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
New York (Cont’d)
New York (Proposed N.Y. CC&R § 4-4.6) (Cont’d)
•
•
“Where benefit of service is received”
-
Individual customer – Billing address
-
Business customer – According to contract, taxpayer’s books and records, and “reasonable
inquiries of the customer”
-
In-person services- Location of customer’s person or property receiving the service
-
Professional services – Use general rule (contract, books and records, customer inquiry)
-
Default to reasonable approximation method
Delivery destination
-
Individual customer – Taxpayer’s books and records.
-
Business customer – Location at which customer manages the contract of sale (default to billing
address)
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
New York (Cont’d)
New York (Proposed N.Y. CC&R § 4-4.6) (Cont’d)
•
•
“Intermediary” rule – services provided “through an intermediary” to a consumer or “on behalf of an
intermediary” to a consumer
-
Apply “sourcing hierarchy” as to the consumer, not intermediary
-
“Look-thru” rule
Prior year sales factor cannot be used for 2015 tax year (initial year for NY market-based sourcing) or
by new taxpayers
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
New York (Cont’d)
New York (Proposed N.Y. CC&R § 4-4.9)
•
Digital products “sourcing hierarchy”
-
Place of primary use
 Individual customer – Billing address
 Business customer – Use general rule for sourcing services (contract, records, customer
inquiry)
-
Where digital product is received – Use where services are delivered rule
-
Prior year NY sales factor
-
Current year NY sales factor
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
Georgia
Georgia (Ga. Comp. R. & Regs. r. 560-7-7-.03)
•
General rule for sourcing services – Derived from customers within the state or otherwise attributable
to the state’s marketplace
•
Georgia regulations apply basic rule for sourcing services receipts based on where the recipient of the
services receives the benefit and illustrates with examples
•
EXAMPLE: A corporation headquartered in State A, building an office complex in Georgia, contracts
with an engineering firm from State B to oversee construction of the buildings on the site. The
engineering firm performs some of their service in Georgia at the building site and additional service
in State B. All of the gross receipts from the engineering service are attributable to Georgia.
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
Illinois
Illinois (35 ILCS § 5/304)
•
Services
-
Individual customer – Received in Illinois
-
Business customer – Gross receipts from services may only be attributed to a state where the
business customer has a fixed place of business
 If the state where services are received is not determinable or there is no fixed place of
business:
o [1] Place of order
o [2] Billing address
-
Throw-out – If taxpayer is not taxable in state where services received, the sale must be thrown
out
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CLOSER LOOK AT MARKET-BASED SOURCING METHODS
Beware of Traps
•
•
Changing methods can be problematic.
-
Massachusetts prohibits changing sourcing methods filed with the original return (but changes
to the method can be made with each annual original return filing as long as the return
declares the taxpayer’s change in method).
-
For California taxpayers using the “reasonable approximation” sourcing method, which will be
frequently used when its contracts or books and records do not provide the location, the
“reasonable approximation” sourcing method cannot be changed on the current or future
returns without the Director’s consent.
How much documentation is sufficient?
-
•
Most states’ sourcing methods are silent on this requirement
Customer’s Billing Address.
-
While sourcing to a customer’s billing address may seem like the easiest option, this method is
generally disfavored and has been viewed as too narrow and easily manipulated
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SOURCING COMPARISONS AND CONFLICTS:
SAME FACTS – DIFFERENT METHOD
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SOURCING COMPARISONS AND CONFLICTS:
SAME FACTS – DIFFERENT METHOD
Example 1
Taxpayer performs non-advertising and marketing services for its business customer. The customer uses
and includes the taxpayer’s services in its goods or services sold to its customers. Taxpayer’s business
customer orders the service from an office located in State A, and the customer’s billing address is State
B. The end-users of taxpayer’s services through taxpayer’s business customer are located in multiple
states.
•
CA Chief Counsel Ruling 2015-03 – “Non-marketing service” sourced to customer’s location (no “lookthru” rule applied)
•
MTC Model Reg. IV.17.(d)(3)(B)3.d., Example (iv) – Taxpayer third-party call center customer services
provided to Retail Co sourced to where phone calls to taxpayer were placed, or based on a population
ratio as “reasonable approximation”
•
New York – Reasonable approximation method or default to customer billing address under delivery
destination (#2 in sourcing hierarchy)
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SOURCING COMPARISONS AND CONFLICTS:
SAME FACTS – DIFFERENT METHOD
Example 2
Payroll Services Corp provides payroll services to Company A. Company A is domiciled in State A and has
employees in multiple states. The contract between Payroll Services Corp and Company A does not
specify where the payroll services will be used by Company A. Payroll Services Corp’s books and records
indicate the number of employees of Company A in each state where Company A conducts business.
•
Cal. Code. Regs. tit. 18, § 25136-2(c)(2)(E), Example 1 – Payroll Services Corp sources its receipts
using the ratio of in-state employees over total employees.
•
MTC Model would treat as “professional services” sourced according to [1] Where contract of sale
managed by customer [2] Customer’s place of order [3] Billing address
•
New York proposed regulations would likely require use of a reasonable approximation method (census
data not permitted)
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SOURCING COMPARISONS AND CONFLICTS:
SAME FACTS – DIFFERENT METHOD
Example 3
Web Corp provides internet content to viewers and receives revenue from advertisers. Web Corp’s
advertising receipts are determined based on the number of times an advertisement is viewed and/or
clicked on by Web Corp’s viewers.
•
Both MTC Model and California Model source Web Corp’s receipts measured by viewings or clicks
•
Differences could arise if must use reasonable approximation
-
MTC Model – Use population ratio
-
California Model – [1] Place of order [2] Billing address
-
New York – Could default to billing address under where service delivered (#2 sourcing
hierarchy)
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SOURCING COMPARISONS AND CONFLICTS:
SAME FACTS – DIFFERENT METHOD
Example 4
Training Corp provides live and on-line training to Customer. Customer is headquartered in TN and has
offices in CA, MA, and NY where Training Corp performs in-person training for Customer. Training Corp’s
on-line training is cloud-based and is accessed by Customer’s employees from their offices in CA, MA, NY,
and TN. All invoices list Customer’s TN HQ as the billing address.
•
In-person training services receipts are likely sourced in proportion to offices where training is
physically delivered to the employees of Customer under MTC (MA, RI, TN), California, and New York
models.
•
On-line services
-
California model – if cannot rely on books/records or identify consistently applied reasonable
approximation method, source based on place of customer order, or billing address
-
MTC Model (MA, RI, TN) and NY proposed regulations would likely treat as digital product, and
likely source to customer offices (MTC) and customer primary use location (NY)
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THROW-OUT RULES AND ALTERNATIVE
APPORTIONMENT
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THROW-OUT RULES AND ALTERNATIVE APPORTIONMENT
Throw-Out Rules
•
Some states that use a market-based sourcing have enacted a throw-out rule
-
Throw-out applies to sales of services, intangibles, or tangible property to states in which
taxpayers are not taxable
-
Throw-out may also apply to income which cannot be assigned to a specific income producing
activity, including income from intangible assets.
-
Some states apply throw out to service income if the amount of payment to a non-employee
service provider cannot be determined or sourced
-
If throw-out applies, must exclude sales from the sales factor numerator and denominator
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THROW-OUT RULES AND ALTERNATIVE APPORTIONMENT
Examples of Throw-Out States
•
Alabama (sales other than sales of TPP)
•
Colorado (certain services of agents or independent contractors)
•
District of Columbia (sales other than sales of TPP, eff. 1/1/2015)
•
Idaho (certain services of agents or independent contractors)
•
Illinois (services only)
•
Maine (sales of TPP only)
•
Massachusetts (sales other than sales of TPP)
•
Oregon (certain services of agents or independent contractors)
•
Washington (B&O, services only, and only if part of service performed in WA)
•
West Virginia (sales of TPP only)
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THROW-OUT RULES AND ALTERNATIVE APPORTIONMENT
Alternative Formulas and IPA Interpretations
Alternative Formulas:
•
Vodafone Americas Holdings, Inc. v. Roberts, No. M2013-00947-SC-R11-CV (Tenn. Mar. 23, 2016).
IPA Interpretations
•
Indiana Dept. of Rev., Letter of Findings 02-20140455 (Jan. 28, 2015)
•
AT&T v. Dep’t of Revenue, 357 Or. 691 (Sept. 11, 2015)
•
AT&T Corp. v. Comm’r of Revenue, Mass. ATB 2011-524 (June 8, 2011), aff’d, No. 11-P-1462 (Mass.
App. Ct. 2012)
•
Cable One v. Idaho State Tax Commission, No. 41305-2013 (Id. Oct. 29, 2014)
•
Dish DBS Corporation, f/k/a EchoStar, DBS Corp., and Affiliates v. Department of Revenue., No. 14ALJ-17-0285-CC (S.C. Admin. Law Judge Div. May 20, 2016)
•
Utah State Tax Commission, Initial Hearing No. 09-0578 (Aug. 11, 2012)
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MARKET-BASED SOURCING OF INTANGIBLES
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MARKET-BASED SOURCING OF INTANGIBLES
Overview
•
Sourcing receipts derived from the sale or license of intangible property is difficult because
intangibles, by their nature, do not have a definite geographical location
•
States vary on how to source revenue from intangibles
-
•
Income from Intangibles (e.g. license fees, royalties) may be treated differently than gains
from the sale of intangibles
Market-based sourcing/location of use/situs of intangible
-
Many states source revenue from intangibles based on market-based sourcing or extent
intangible is used in state
-
Rules for sourcing revenue from intangibles may or may not be within the provisions for
sourcing service revenues
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MARKET-BASED SOURCING OF INTANGIBLES
Issues
•
Where utilized by payor (e.g., licensee)
-
Where licensee is located?
-
Where licensee manufactures product?
-
Where licensee sells product?
•
What if location of utilization cannot be determined?
•
What if taxpayer/licensor is not taxable where intangibles are utilized?
•
What about wholesale license transactions?
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MARKET-BASED SOURCING OF INTANGIBLES
The “MTC” Model
Multistate Tax Commission (MTC Reg. IV.17, “Working Draft” as of Nov. 30, 2015)
•
•
Licensing of intangibles
-
General rule of sourcing – Where intangible is used
-
License of marketing intangibles – Royalties and licensing fees sourced to the extent
“attributable to the sale . . . of goods, services, or other items . . .” purchased by customers in
the state
-
License of production intangibles – Source to where used
-
License of mixed intangible – Based on license if fees for each intangible are separately and
reasonably stated in the contract; otherwise, treat as a marketing intangible
Sale of an intangible
-
Apply intangible licensing sourcing rules if sale resembles a license or sale of goods and services
-
Otherwise, except for intangibles that authorize business activity in specific geographic area,
the receipts are “thrown out,” including receipts from sales of goodwill, partnership interests,
and covenants not to compete
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MARKET-BASED SOURCING OF INTANGIBLES
California
California (Cal. Code Regs. tit. 18, § 25136-2)
•
•
•
Licensing of intangibles
-
License of marketing intangibles – Sourced to the extent attributable to sales of underlying
goods or services to ultimate consumer; reasonable approximation
-
License of production intangibles – Source to where used
Sale of an intangible
-
[1] Source to location of use
-
[2] Reasonable approximation
-
[3] billing address
Uses examples to illustrate application of the rules
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MARKET-BASED SOURCING OF INTANGIBLES
Illinois
Illinois (35 ILCS § 5/304)
•
Licensing or sale or an intangible
-
Production intangible – Place of use (throw out if cannot be determined)
-
Marketing intangible – Commercial domicile of licensee/purchaser
 Throw out if does not constitute > 50% of taxpayer’s total gross receipts for current taxable
year and two prior years
-
“Taxpayer” means an entire Illinois unitary group
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KEY TAKEAWAYS
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KEY TAKEAWAYS
Practical Considerations
•
•
•
Situate service centers in market-based sourcing state
-
Minimizes costs in states applying cost-of-performance rule
-
No effect in market-sourcing state
Closely evaluate differences among states’ market-based sourcing rules
-
Proportionate or all-or-nothing approach?
-
Does state use tiered/cascading sourcing rules, e.g. billing address as proxy for location of
customer?
-
Does the state provide a “safe-harbor” rule for sourcing of receipts from services?
Document Each Step of the Market-Based Sourcing Hierarchy
-
•
May need to demonstrate why the initial sourcing steps were not attainable
Choose the sourcing method CAREFULLY!
-
The state may not permit taxpayer’s to change methods once chosen without permission
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CLOSING COMMENTS
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CLOSING COMMENTS
•
Trends – Single sales factor apportionment, market-based sourcing, and relevance in relation to
historical COP and three factor apportionment
•
State approaches to sourcing sales of services – Delivery vs. benefit received, direct vs. intermediary
services, hierarchical rules, reasonable approximation, and throw-out
•
State approaches to sourcing receipts from intangibles – Sale vs. license, marketing vs. production
intangibles, and throw-out
•
Traps to look out for – Maintaining proper documentation, and adopting a sourcing method you may
later regret
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QUESTIONS?
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CONCLUSION
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SPEAKER BIOGRAPHIES
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BIOGRAPHY
EXPERIENCE SUMMARY
Mariano Sori is a partner in BDO’s State & Local Tax services practice. He has more than 27 years of state
tax consulting experience within a public accounting environment and concentrates on income and
franchise tax issues such as jurisdiction to tax, state tax base modifications, apportionment of income,
business/non-business income, unitary taxation, gross receipt taxes, allocation of partnership items, and
state filing options.
Mariano Sori, CPA, JD
State and Local Tax
Partner
Mariano focuses on performing state tax diagnostic reviews designed to provide businesses with an
assessment of their state tax position, including the identification of refund and prospective filing
opportunities and the reduction of exposure in multiple jurisdictions. In addition, Mariano assists
businesses in designing and implementing structural enhancements in order to generate long-term state tax
reductions.
Mariano consults on all aspects of state income tax, including participating in mergers and acquisition
[email protected]
transactions, due diligence reviews, representation on state tax controversy matters, and assisting
Direct: +312 616- 654
companies with state tax compliance and state tax accrual reviews. He has worked with Fortune 1000 and
Mobile: +815 341 2242 mid-size companies in industries such as manufacturing, retail, consumer services, financial services, real
330 N. Wabash, Suite
3200
Chicago, IL 60611
Tel: +312 856 9100
Fax: +312 856 1379
www.bdo.com
estate, technology, and transportation.
PROFESSIONAL AFFILIATIONS
American Bar Association
American Institute of Certified Public Accountants
Illinois CPA Society
EDUCATION
J.D., Law, IIT-Chicago Kent College of Law
B.S., Accounting, Indiana University
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BIOGRAPHY
EXPERIENCE SUMMARY
Branko works with retailers, manufacturers, service providers, healthcare providers, contractors, the
entertainment and amusement industries and others to identify substantial state and local tax savings. He
advises small to publicly-traded companies on multi-state income tax planning and restructuring and
provides audit representation, letter ruling requests, analysis of tax exposures in non-filing states and the
use of voluntary disclosure agreements. Also skilled in sales, use, property and other miscellaneous state
and local taxes, Branko advises clients on potential tax risks and exposure while simultaneously identifying
tax savings and refund opportunities.
Baranko Marusic, Jr.,
CPA, JD
Sr. Director, State and
Local Tax
[email protected]
Direct: +314 889 1170
101 South Hanley Road
Suite 800
St. Louis, MO 63105
Tel: +314 889-1100
Fax: +314 889 1101
www.bdo.com
Branko possesses over 35 years of experience assisting companies in obtaining significant tax savings. He
has published articles and commentary including tax analysis cited with approval by an United States
Appeals Court. He is a frequent lecturer and presenter to various associations and trade groups on state
and local tax issues. He has also argued tax cases before state Supreme Courts (Note: BDO is not engaged
in the practice of law). Additionally, Branko is an Adjunct Professor for the Graduate Accounting Program
on State and Local Tax at Saint Louis University.
PROFESSIONAL AFFILIATIONS
American Institute of Certified Public Accountants, Member
American Bar Association, Member
Associated Industries of Missouri Tax Committee, Member
Institute of Professionals in Taxation, Member
Missouri Bar Association, Member
Missouri Society of Certified Public Accountants, Member
EDUCATION
J.D., Washington University in St. Louis
B.S., Business Administration, University of Missouri – Columbia
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BIOGRAPHY
EXPERIENCE SUMMARY
Angela has over 20 years of experience in all aspects of state and local taxation including: planning and
restructuring of multi-state businesses, audit controversy and appeal, nexus studies, voluntary disclosure
agreements, negotiated incentives, tax credits, FAS 109 review, FIN 48 implementation, litigation support,
mergers and acquisition, sales and use tax consulting, outsourced engagements, unclaimed property and
many others. She specializes in all areas of state and local taxes and has extensive experience in income
and franchise taxes.
Angela Acosta, CPA
Sr. Director, State and
Local Tax
[email protected]
Direct: +248 688 3313
Mobile: +734 716 6733
755 West Big Beaver
Suite 1900
Troy, MI 48084-0178
Tel: +248 362 2100
Fax: +248 362 4459
www.bdo.com
Prior to joining BDO, Angela practiced for almost 5 years at Grant Thornton, 2 years at PwC, and 9 years at
Arthur Andersen, as well as almost 5 years in industry focusing on state and local taxation at a large utility
company with over 200 entities.
INDUSTRY EXPERIENCE
Angela has worked with a variety of public and privately owned clients and has provided tax services for
clients such as Hyatt, Infusystem, Ford Direct, PF Chang’s, Dominos, DTE Energy, Lear Corporation, Dow
Corning, Dura Automotive, ArvinMeritor, Visteon, Ramco-Gershenson Properties Trust, Sun Communities,
Asset Acceptance Corporation and Tecumseh Products Company.
PROFESSIONAL AFFILIATIONS
American Institute of Certified Public Accountants
Michigan Association of Certified Public Accountants, Former Vice Chair of the State and Local Taxation
Task Force
Prior Board Chair, Accounting Aid Society
Michigan State Chamber Tax Policy Committee
Inforum
MWTA
EDUCATION
M.B.A., Michigan State University
B.A., Accounting, Michigan State University
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BIOGRAPHY
EXPERIENCE SUMMARY
Todd is a state and local tax specialist who represents and advises clients on a wide array of
income/franchise tax, sales/use tax and other tax issues that arise in the context of controversies and
mergers and acquisitions.
Todd Faciana
Sr. Manager, State and
Local Tax
[email protected]
Direct: +215 636 5512
Mobile: +610 462 3853
BDO USA LLP
1801 Market Street,
Suite 1700
Philadelphia, PA 19103
Tel.: +215-564-1900
Fax: +215 636 5501
www.bdo.com
Todd is a California licensed C.P.A. and a Pennsylvania and New Jersey licensed attorney who has been
practicing in the field of state and local taxation for over 13 years. In addition to his experience with BDO,
Todd has several years of Big Four firm experience as a state and local tax specialist (compliance and
consulting), two years as a legal intern with the Pennsylvania Office of Attorney General – Tax Litigation
Section, and over three years of experience as a state and local tax attorney with a Top 100 law firm.
His work experience includes a wide array of state and local tax offerings, including representing clients
before the Pennsylvania Department of Revenue, Board of Appeals and Board of Finance and Revenue,
representing clients before the New Jersey Division of Taxation and Conferences and Appeals and assisting
clients with voluntary disclosures, tax amnesties, tax due diligence reviews, and income/franchise and
sales/use tax advisement.
PROFESSIONAL AFFILIATIONS
American Institute of Certified Public Accountants
Pennsylvania Institute of Certified Public Accountants
EDUCATION
Tax LL.M., Temple University, Beasley School of Law
J.D., Pennsylvania State University, Dickinson School of Law
B.S., California State University, Long Beach
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BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to
a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active
involvement of experienced and committed professionals. The firm serves clients through 41 offices and more than 400 independent alliance
firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global
network of 1,204 offices in 138 countries.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee,
and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the
BDO Member Firms.
www.bdo.com
To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in
this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding taxrelated penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another
party any tax-related matters addressed herein.
Material discussed in this publication is meant to provide general information and should not be acted on without professional advice tailored to
your individual needs.
© 2013 BDO USA, LLP. All rights reserved. www.bdo.com
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