One of the latest trends in state and local corporate income tax has been the adoption of market-based sourcing for the sales of services. In 2018, new state legislation made significant changes to the New Jersey Corporation Business Tax Act, including the implementation of market-based sourcing for services beginning in 2019.
The New Jersey Corporation Business Tax Act imposes tax on domestic and foreign corporations having a taxable status in New Jersey based on the portion of net income allocable to New Jersey. In order to properly determine the net income allocable to New Jersey, corporate taxpayers doing business both within and outside New Jersey must source their revenue to the appropriate state.
Market-based sourcing provisions require multistate corporate taxpayers to source the sales of services based on where the benefit of the service is received rather than where the service is performed. Prior to the new legislation, the sourcing of service revenue was based on the cost of performance. If a corporation performed a service in New Jersey, then the income from that service was sourced to New Jersey. The location of the recipient generally was not a factor when apportioning service revenue under the cost of performance method.
Effective for tax years ending on or after July 31, 2019, receipts from the sales of services will be sourced to New Jersey if the benefit of the service is received at a location in New Jersey. The destination of the service now becomes relevant rather than the location of performance. If the benefit of the service is received both within and outside New Jersey, then the portion to be allocated to New Jersey will be based on the percentage of the value of the service received in New Jersey to the total value of the service. When the state in which the benefit received cannot be determined for an individual customer, the benefit of the service is deemed to be received at the customer’s billing address. For a business customer, the benefit of the service is deemed to be received at the location from where the services were ordered. If that location cannot be determined, then the benefit of the service is deemed to be at the business customer’s billing address.
While the new market-based sourcing provisions will reduce the CBT liabilities of many in-state service corporations with customers located in other states, it will increase the CBT liabilities of out-of-state service corporations with customers located in New Jersey. Multistate corporate taxpayers must closely analyze the new market-based sourcing provisions for New Jersey as well as the sourcing provisions for other states where business is conducted to properly source service revenue and determine the impact on their state tax liability (ies).
Article contributed by Jennifer Wallace, CPA.
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