Developments in Sourcing

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Developments in Sourcing

TEI - Denver Chapter May 13, 2015

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Agenda

• Introduction – Market Sourcing

• Professional Services

• E-Services

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Market Sourcing - Developments

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Introduction – Market Sourcing

• Two Broad Sourcing Categories

 Cost of Performance = sales from services sourced to 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 cost of performance.

 Market = sales from services sourced to this state if the

taxpayer’s market for the sale is in this state.

• Trends

 Cost of Performance = 28 states

 Market Sourcing = 19 states

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Introduction – Transaction

Characterization

• Is the transaction a service?

 Service v. Purchase of TPP

 Digital Goods

 Cloud Computing

 Service v. Lease of TPP

 Temporary use of property or provision of service?

 Different treatment for sales and use tax purposes?

• Use of intangible property

 Does this distinction matter?

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Introduction – Taxpayer’s Market?

• What is the Taxpayer’s “Market”?

 The customer’s actual location

 Customer’s billing address

 Where purchase order issued

 Service has “substantial connection” to geographic location

 Where customer actually receives service?

• Location of Commercial Domicile

 Principal place of business

 Nerve center?

• Location where the customer receives the benefit of

the services provided

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Introduction – Market Based Sourcing

• Typically based on one of the following:

 Location of customer

 Where benefit of service is derived

 Where intangible personal property is utilized

• Elements:

 Where is customer situated (billing address, commercial domicile or other)?

 Where is benefit derived (what if multiple states)?

 Ability to “look through” to customer’s customers (e.g., sale of fulfillment services to national telecom company)

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Introduction – MTC

MTC Draft Revisions to Sec. 17

(a) Sales, other than sales of tangible personal property described in

Section 16, are in this State if the taxpayer’s market for the sales is in this state. The taxpayer’s market for sales is in this state:

. . .

(3 ) in the case of sale of a service, if and to the extent the service is delivered to a location in this state; and

(b) If the state or states of assignment under subsection (a) cannot be determined, the state or states of assignment shall be reasonably approximated.

(c) If the taxpayer is not taxable in a state to which a sale is assigned under subsection (a) or (b), or if the state of assignment cannot be determined under subsection (a) or reasonably approximated under subsection (b), such sale shall be excluded from the denominator of the sales factor.

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Introduction - California

• General Rule

 CA assigns sales from services to the state “to the extent the purchaser of the service received the benefit of the service” in CA.

• Services to Individuals

 Presumption customer receives benefit at billing address.

 May be overcome by looking at contract or books/records.

• Services to Businesses

 Presumption that benefit received at location determined by the contract or taxpayer’s books/records.

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Introduction - Illinois

• General Rule

 Receipts from services assigned to IL if the “services are received” in IL.

• Corporations, Partnerships, or Trusts

 Services assigned to IL only if the entity has a “fixed place of business” in IL.

 Sourced to location where services ordered if:

 Location where service received “not readily determinable” OR

 Entity does not have a fixed place of business in IL.

 If ordering office cannot be determined, then sourced to billing address

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Introduction - Georgia

• General Rule

 Gross receipts are in GA if the “receipts are derived from customers within this state or if the receipts are otherwise attributable to the state’s marketplace.”

 GA attributes receipts according to where the recipient of the service receives the benefit of the service.

 The location of the taxpayer or the customer is not determinative.

• Proportionate Benefit

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Introduction - Pennsylvania

• General Rule

 Sales from services are in PA “if the service is delivered to a location in this state.”

 Does not apply to receipts from intangibles.

• Services to Individuals

 If sales cannot be assigned under the general rule for a customer who is an individual a service is deemed to be delivered at the customer's billing address.

• Services to Businesses

 If sales cannot be assigned under the general rule a service is deemed to be delivered at the location from which the

services were ordered in the customer's regular course of operations. The customer's billing address may be used if location from where services were ordered cannot be

determined.

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Introduction - Pennsylvania

• Proportionate Benefit

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Introduction - Tennessee

• General Rule

 Receipts are in TN if the “taxpayer’s market for the sale is in” TN.

 A taxpayer’s market for the sale of a service is in TN if the service is delivered to a location in this state;

 A taxpayer’s market for the rental, lease or license of

intangible property is in TN if the intangible property is used in TN – provided that intangible property utilized in

marketing a good or service to a consumer is considered used in this state if that good or service is purchased by a consumer who is in this state.

 A taxpayer’s for the sale of intangible property that is sold is in TN if the intangible property is used in the state.

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Professional Services – State Treatment

• California

 Engineering services sourced to where the work is performed – source to the construction site.

 Attorney – client is multistate business but source services to CA for in-state litigation with respect to in-state realty.

 Payroll Services – for multistate business customer, payroll services provider sourced receipts according to the location of customer’s employees.

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Professional Services – State Treatment

• Illinois

 General rule applies.

 If the services are provided to a corporation, partnership, or trust, the services are only attributable to Illinois if the

customer has a “fixed place of business” in the state.

 If state or fixed place of business cannot be determined, cascading rules apply:

 Sourced to location where customer ordered services; then

 Sourced to location where customer is billed.

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Professional Services – State Treatment

• Georgia

 Engineering firm provides engineering services to a

business headquartered in State A that is building an office complex in GA.

 Engineering firm performs some its services in State B.

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Professional Services – State Treatment

• Pennsylvania

 If state cannot be determined, alternating rules apply:

 Sourced to location where customer is billed if customer is individual.

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Professional Services – State Treatment

• Tennessee

 Receipts are in TN if the “taxpayer’s market for the sale is in” TN – look to where the services are delivered.

 If engineering services performed in the state then would be sourced to location where services performed.

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E-Services – State Treatment

• California

 No specific guidance – general rules apply.

 Where does the customer receive the benefit of the service?

 If customer is an individual –

 Presumption customer receives benefit at billing address.

 If customer is a business –

 Receipts sourced according to language of the contract and taxpayer’s books/records.

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E-Services – State Treatment

• Illinois – Ill. Dept. of Rev., GIL No. IT 14-0003, Apr. 2,

2014.

 Taxpayer A licenses its IT infrastructure (software, programmers, servers, etc.) to Taxpayer B.

 Taxpayer B receives revenue from banks and lending

institutions in return for providing access to A’s infrastructure that allow banks to pull credit reports of prospective borrowers.

 Software license?

 Sourced to customer’s fixed place of business (IITA Sec. 304(a)(3)(C-5)(iii)).

 Providing a service?

 Services received in IL not sourced to IL unless customer maintains a fixed place of business in the state (IITA Sec. 304(a)(3)(C-5)(iv)).

 Highlights importance of transaction characterization.

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E-Services – State Treatment

• Georgia

 Gross receipts from the sale, lease, development or license of custom computer software is sourced in the same manner as services.

 Gross receipts from development and installation of custom software are sourced to location of software’s installation and use.

 If State A Corp. buys software installed and used in GA office, software provider sources all receipts to GA.

 If State A Corp. uses software at both State A office and GA office, receipts sourced to GA to the extent the

software is used in GA.

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E-Services – State Treatment

• Pennsylvania

 Receipts from other than sales of tangible personal property and services sourced based on COP.

 Gross receipts from the sale, lease, development or license of custom computer software could be a service or a

license.

 If a license then sourced based on COP.

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E-Services – State Treatment

• Tennessee

 Gross receipts from the sale, lease, development or license of custom computer software is sourced under TN’s general rule.

 However, TN’s general test is different for services and intangibles.

 Gross receipts from the sale, lease, development or license of custom computer software could be a service or a

license.

 If a service then sourced based on where service is delivered.

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Financial Services – State Treatment

• California

 Asset Management –

 Services provided to pension plans and other investment vehicles on behalf of investors.

 Source rules “look through” to investor location.

 For example:

 Mutual Fund Service Providers –

 Shareholder ratio

 Numerator = average shares owned by the

California-domiciled shareholders of the regulated investment companies receiving the financial

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Financial Services – State Treatment

• Georgia

 Brokerage Services

 Service provided to brokerage customers – sourced to the location of the customer.

 Services to Regulated Investment Companies

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Financial Services – State Treatment

• Illinois

 Receipts from brokerage, fiduciary, and advisory services are in IL if the services are received in IL.

• Pennsylvania

 Receipts from brokerage, fiduciary, and advisory

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Financial Services – State Treatment

• Tennessee

 Special sourcing rules for financial institutions.

 Financial institution receipts are generally sourced based on market or billing address.

 Receipts from services of financial institutions are

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Cable Service

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Cable Service – State Treatment

• California

 No rule specific to cable companies – services sourced to CA to the extent the cable TV purchaser receives the benefit of the cable TV service in CA.

 “Qualified Taxpayer” operating a cable system:

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Cable Service – State Treatment

• Illinois

 Receipts from the sale of broadcasting services are in IL if the broadcasting services are received in IL.

 Broadcasting service includes cable TV.

 35 Ill. Comp. Stat. Sec. 5/304(3)((B-7).

 For advertising revenue, the customer is the advertiser and receipts are sourced to the advertiser’s commercial

domicile.

 Receipts from programming are sourced to the location of where the recipients of the broadcasting services are

located.

 This may be shown by contracts with the recipient or using the billing address of the recipient.

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Cable Service – State Treatment

• Georgia

 Cable providers must source its receipts according to the audience factor.

 Ratio the provider’s subscribers located in GA bears to total subscribers of the cable provider.

 Location of subscriber determined by books and records of the cable provider; or

 Published surveys

 Provided the method used by the cable provider is consistent and fairly represents in-state activity.

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Cable Service – State Treatment

• Pennsylvania

 No rule specific to cable companies – services sourced to PA to the extent the cable TV purchaser is located in PA or the service is billed to a PA address.

 This assumes the provision of cable services are services and not licenses of intangibles.

 For satellite television service providers PA has special rule which provides that receipts are sourced based on a ratio of the numerator of which is the value of equipment located in the state that is owned or rented by the taxpayer and used by the taxpayer in generating, processing or transmitting satellite television services over all such equipment

everywhere.

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Cable Service – State Treatment

• Tennessee

 No rule specific to cable companies – services sourced to TN based on general rule. To the extent the cable TV

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Questions?

Michele Borens Partner

Sutherland Asbill & Brennan LLP 202.383.0936

[email protected]

Marc Simonetti Partner

Sutherland Asbill & Brennan LLP 212.389.5015

[email protected]

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