Market Based Sourcing for Services

State Tax Trends – Part II

Market Based Sourcing for Services


Many states have recently been trending to changing corporate tax laws to shift the tax burden to out of state businesses in an attempt to attract corporations to open locations in the state and therefore create jobs.  States are accomplishing this shift in tax burden in a number of ways including adjusting the formula they use to allocate and apportion income, updating their income sourcing rules and providing tax credits and other incentives to in-state businesses.  We will explore some of these common law changes in a three part series continuing with our discussion on market based souring for sales of services.


Most states have historically sourced sales for services based on where the services were actually performed.  This can result in a service corporation having a significant amount of their sales allocated to the state where the corporation’s main offices are located.  For example, under this approach a New Jersey corporation which provides services in NJ for a New York customer would treat those sales as taxable in New Jersey.


In order to become more tax friendly to in-state corporations, many states including New York and Pennsylvania have now changed to sourcing corporate sales of services to the state where the customer will benefit from the service.  New Jersey, however, continues to utilize the performance based method.  To go back to the earlier example, the sale by the NJ corporation would continue the be subject tax in NJ since that is where the work is performed but would now also be subject to tax in NY as the customer will benefit from the service in NY.  This difference between New Jersey and New York’s tax law effectively creates double tax on the sale.  Now let’s change the example to a New York corporation performing services in NY for a New Jersey customer.  Under this scenario neither state would tax the sale since the services are performed outside of New Jersey and the benefit from the services is received outside of New York.  As these examples illustrate, market based sourcing rules can provide a great advantage to an in-state company by only taxing sales to in-state customers rather than souring based on where the services are performed.


Len Nitti, CPA, MST


Wilkin & Guttenplan, PC

1200 Tices Lane

East Brunswick, NJ 08816

(732) 846-3000



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s