MTC issues draft model market-sourcing regulations
TAX ALERT |
Update: On Dec. 10, 2015, the Multistate Tax Commission's Uniformity Committee approved the Commission’s draft market-based sourcing model regulations for consideration by the MTC’s Executive Committee. Additionally, the Uniformity Committee established a new work group to address alternative apportionment.
On Nov. 30, 2015, the Multistate Tax Commission (MTC) released draft model regulations interpreting Model Compact Article IV, which was revised July 29, 2015, to implement market-based sourcing provisions for receipts from sales other than sales of tangible personal property.
The revised model statutory language provides that receipts, other than receipts from the sale of tangible personal property, are sourced to the enacting state if the taxpayer’s market for the sales is in the state. Whether a taxpayer’s market is in the state depends upon the activity from which the taxpayer derives the receipts in question. Per the model statute:
- In the case of a sale, rental, lease or license of real property, receipts are sourced to the state if and to the extent the property is located in the state.
- In the case of the rental, lease or license of tangible personal property, receipts are sourced to the state if and to the extent the property is located in the state.
- In the case of a sale of a service, receipts are sourced to the state if and to the extent the service is delivered to a location in the state.
- In the case of intangible property, receipts are sourced to the state if and to the extent the property is used in this state, provided that intangible property utilized in marketing a good or service to a consumer is used in the state if that good or service is purchased by a consumer who is in the state, and subject to certain exclusionary rules applicable in specific circumstances.
If the state or states of assignment cannot be determined under these rules, the state or states of assignment must be reasonably approximated. However, if the taxpayer is not taxable in a state to which a receipt is assigned under these rules, or if the state of assignment cannot be reasonably approximated, the receipt must be thrown out from both the numerator and denominator of the receipts factor.
The draft model regulations provide significant guidance regarding the application of the statutory language both generally and in a number of specific situations. Some highlights include:
- The regulations distinguish between in-person services, which are defined as services performed by the service provider on the customer’s real or tangible property at the location of that property, professional services and all other services.
- In regard to in-person services, it is important to note that receipts from services performed on tangible property at the service provider’s location will be sourced to the location where the property is shipped subsequent to the completion of the service.
- Professional services, which are defined as services that require specialized knowledge and in some cases require a professional certification, license or degree, must be sourced based on a reasonable approximation of the location of delivery, which will require taxpayers to balance the customers’ residence or commercial domicile with the specific location at which the benefit of the service is received. For example, legal services may be deemed to be delivered at an individual client’s residence, the state or states that have jurisdiction over the matter, the court or courts where the matter is heard, the location of the property or activity involved, or other locations depending on the nature of the issue.
- Other services are subject to a variety of rules, with distinctions for delivery via physical versus electronic means, individual versus business customers, and direct versus ‘on behalf of’ delivery. Navigating these rules will require substantial transaction-by-transaction analysis and the implementation of a robust program of data controls.
- When sourcing receipts from licensing intangibles, the regulations distinguish between marketing intangibles, production intangibles, mixed intangibles, and intangibles that are in substance sales of goods or services. In relation to marketing intangibles, the regulation requires the use of actual market data or, in the absence of such data, the application of a population factor. Interestingly, the regulations contemplate the use of a population denominator that includes locations outside of the United States where a taxpayer can prove that the marketing intangible is materially used outside of the United States.
- Receipts from the sale of intangibles are only included in the receipts factor if the intangible is a contract right associated with a particular geographic area or the sale is actually a license. All other receipts from the sale of intangibles are excluded. This exclusionary rule applies to the sale of an ownership interest in an entity, the sale of business goodwill, the sale of an agreement not to compete, or similar intangible value.
- Lastly, the regulations provide a number of special rules that impact specific industries. For example, receipts from sales of digital goods and services will be sourced using the rules applicable to sales of services regardless of the terms and conditions applicable to the agreement of sale.
The draft regulations will be considered by the Uniformity Committee at its hearing on Dec. 10, 2015, and may be subject to change prior to finalization. At present, taxpayers should review the regulations, and consider the impact of finalization on their corporate income tax apportionment profile. Additionally, taxpayers should consider providing commentary, as input now may still influence the shape of the final regulations.