North Carolina adopts market-based sourcing

Nov 13, 2019
Nov 13, 2019
0 min. read

On Nov. 8, 2019, North Carolina Gov. Roy Cooper signed Senate Bill 557 requiring multistate corporations to use market-based sourcing to calculate their sales factor. North Carolina joins more than 30 other states in replacing the cost-of-performance standard for sourcing sales of services and intangibles. 

Market-based sourcing is effective for tax years beginning on or after Jan. 1, 2020. The law provides that all receipts are sourced to North Carolina if the taxpayer’s market for the receipts is in the state. If the market cannot be determined, the law states that the sourcing of the sales shall be “reasonably approximated.” Additionally, the law creates a “throw out” rule for services and intangible property. If the source cannot be reasonably approximated, the receipts are excluded from the denominator of the sales factor. 

More specifically, the law provides that sales of services are sourced to North Carolina if the services are delivered to a location in the state. The rental, leasing, or licensing of intangible property is sourced to North Carolina if the property is used in the state. Apportionment rules for electric power companies, banks, and pipelines have also been amended by the law.


Companies doing business in North Carolina are advised to pay close attention to the market-based sourcing changes and revisit their sourcing methodology as the market based sourcing rules are vastly different from historical North Carolina sourcing rules. The new method will certainly effect corporate tax burdens. Corporate taxpayers with North Carolina net losses should evaluate their tax position to determine the optimal filing method.

Two aspects of the law that bear particular attention: 

First, companies with regional business activities should be aware that sales of certain intangible property such as contract rights and licenses which authorize a holder to conduct business in a specific geographic area will be sourced to North Carolina if the geographic area includes all or part of the state. 

Second, the law allows a taxpayer with North Carolina net losses at the end of its 2019 taxable year to elect to apportion receipts using the cost-of performance method. The election is irrevocable and remains in effect until the net loss balance expires.

Companies engaging in any business activities in North Carolina should consult with their tax advisors to determine the application of the new market-based sourcing rules to their operations

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