What is Market-Based Sourcing?

What is market-based sourcing? This is the concept of attributing revenue to the location where the customer receives the benefit.

Let’s talk about this from the perspective of a service provider, like an attorney.  In the past, most states used the cost of performance method to source receipts from services, so an attorney would attribute his service revenue to the state where he did the work.  This was pretty simple to keep track of.  All the revenue for a particular office would be taxable in the state where that office was located.

In today’s world where e-commerce is increasing for all types of businesses, the states are looking for new ways to get a share of the tax revenue.  For this reason, many states have adopted market-based sourcing.

Now, that attorney has to look to see where it’s clients received the benefit of the legal work.  Though this might be fairly straightforward for a client that only has one location, it still may create new reporting requirements for the law firm if the client is in a different state than the law firm’s office.  What if the client has multiple locations?  What if a law firm writes the employee handbook for a client that will use that same handbook for all its employees in various locations across the country?  How do we decide where the client receives the benefit in that situation?

Many states, including New Jersey, have  provision for this.  If the state of benefit cannot be determined, the benefit of the service is deemed to be received at the customer’s billing address or the address from which the services were ordered in the customer’s ordinary course of operations.

Though not every state has adopted market-based sourcing, most have.  Service businesses need to evaluate their customers to determine if more complex recordkeeping is required to comply with the state income sourcing rules of all the states in which it does business or has customers.