New York Follows Suit To Employ Market-Based Sourcing
Sourcing Method
The new law provides that receipts “shall be included in the numerator of the apportionment fraction if the location of the customer is within the state.”[1] Simply put, this means that services performed for customers located within New York will be sourced to New York. The location where the service is actually performed is now irrelevant.
This rule begs the question, is the customer within the state? This determination is made through a hierarchy of sourcing methods:
| The benefit is received in the state; |
| Delivery destination; |
| The apportionment fraction for the receipts within the state for the last tax year; and |
| The fraction used for other “other services and other business receipts” under 1) and 2). |
New York believes that a market-based sourcing regime coupled with aggressive nexus rules and a single sales apportionment factor will increase tax revenue, while decreasing the tax cost for in state businesses with customers located outside New York.
Currently, 19 states (including New York) employ some form of market-based sourcing. Other states utilize different approaches to sourcing, such as the Costs of Performance method which sources service revenue based on where the service is performed. It is not hard to envision how this could potentially cause multiple taxation problems.
Example
Assume a management firm (corporation) has income tax nexus in all states. It is located in New Jersey, and earns revenue from the performance of management services for a company located in New York. Because the services are performed for a New York customer, New York will source those receipts to New York. Under New Jersey sourcing rules, the receipts would be allocated based on where the services were performed. For the purposes of this example, assume all management services were performed in New Jersey. As such, the receipts will be sourced to New Jersey.
The same receipts may therefore be included in the numerators for multiple states, resulting in double taxation. The administrative burden associated with these varying calculations is troublesome.
Policy
From a policy perspective, these results are simply inequitable. While a lively debate may exist on the merits of market-based sourcing as a whole (although that debate may only exist within the confines of tax departments [2] and universities), everyone should agree that the total receipts sourced should add up to 100% of total receipts, no more no less. Under current divergent state practices, this result is far from achieved. This problem is caused in part by the fact that states have acted alone in reforming these regimes, rather than acting under the unified guidance of associations such as the Multistate Tax Commission.
Conclusion
It is essential that taxpayers discuss sourcing regimes with their tax advisors. They should discuss both affirmative strategies to ease this burden and the methods for determining where income is sourced.
If you have any questions regarding sourcing regimes, please contact your WithumSmith+Brown professional or a member of WS+B’s Professional Services Group.
[1] NY Tax Law Section 210-A(10)
[2] And even here it is not as lively as some might like. The prototypical debate goes as follows: Me: “Which allocation method do you think most closely approximates economic reality?” Coworker: “Leave me alone Alex, I’m trying to work.”
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Alexander Fishbane, JD, LLM 212-751-9100 [email protected]  |
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