TEI - Denver Chapter May 13, 2015 Michele Borens Marc Simonetti Developments in Sourcing
Agenda Introduction Market Sourcing Professional Services E-Services Financial Services Cable Service 2
3 Market Sourcing - Developments
Shift to Heavier Sales Factor Weighting 4
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. 5 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 Recent Developments: Since 2008 AL, AZ, CA, IL, MA, OK, PA, TN, UT, WA have shifted to market-based sourcing regimes
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? Attribution rules for sales, other than sales of tangible personal property 6
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 Reasonable Approximation? 7
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) Availability of look-through information may be limited 8
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. 9
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. If overcome, location determined by: (1) customer activities; (2) location customer placed order; (3) billing address. 10
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 Throwout Rule 11
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 If a customer receives the benefit of the service in multiple states, only the proportion of the benefit received in Georgia is included in the sales factor numerator. 12
Introduction - Pennsylvania General Rule Sales from services are in PA if the service is delivered to a location in this state. 13 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.
Introduction - Pennsylvania Proportionate Benefit If the service is delivered both to a location in and outside PA, the sale is in PA based upon the percentage of total value of the service delivered to a location in this state. 14
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. 15
16 Professional Services
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. Accounting/Audit Service source receipts according to time spent performing service in each state. 17
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. If customer is not taxable in the state where services are received, receipts are thrown out of the sales factor. 18
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. All of the receipts from engineering services are sourced to GA because the recipient received all of the benefit of the services in GA. 19
Professional Services State Treatment Pennsylvania General rule applies. If state cannot be determined, alternating rules apply: Sourced to location where customer is billed if customer is individual. Sourced to location where services are ordered or billing address if customer is business. 20
Professional Services State Treatment Tennessee General rule applies. 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. Even if all the engineering services are performed outside the state, if the work product is delivered to a location in the state then these receipts would likely be sourced to TN. 21
22 E-Services
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. 23
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. 24
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. Cloud Computing? Software as a Service? 25
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. If a service then sourced based on where service is delivered (or billing address). 26
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. If a license then license considered used in TN if customer is in TN and receipts would be sourced to TN. 27
28 Financial Services
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 service. 29
Financial Services State Treatment Georgia Brokerage Services Service provided to brokerage customers sourced to the location of the customer. Services to Regulated Investment Companies Look through rule applies to services to RIC s (receipts attributable to GA when RIC shareholders domiciled in GA. 30
Financial Services State Treatment Illinois Brokerage Services Receipts from brokerage, fiduciary, and advisory services are in IL if the services are received in IL. Pennsylvania Brokerage Services Receipts from brokerage, fiduciary, and advisory services are in PA if the services are delivered in PA. 31
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 sourced based on TN general market sourcing rules and where the service is delivered. 32
33 Cable Service
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: 50% of sales sourced to CA under standard rule shall not be assigned to this state. 34
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. 35
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. Cable provider must use reasonable amount of effort to determine amount attributable to GA marketplace. 36
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. 37
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 purchaser is located in TN then service would likely be considered delivered to TN. 38
Questions? Michele Borens Partner Sutherland Asbill & Brennan LLP 202.383.0936 michele.borens@sutherland.com Marc Simonetti Partner Sutherland Asbill & Brennan LLP 212.389.5015 marc.simonetti@sutherland.com 39
Connect with us! The Sutherland SALT Shaker mobile app is now available in the itunes App store and on Google Play for Android! Visit us at www.stateandlocaltax.com @Sutherland_SALT Sutherland SALT Group 40