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In recent months, many states have changed methods of allocating sales from the cost-of-performance to a more market-based sourcing. These changes of sourcing methods impact the numerator in the sales factor apportionment by state. As the market heats up with changes related to federal tax reform, state legislatures are looking at how to bring more tax dollars into their states.

"Cost-of-performance" is the method of assigning gross receipts to a state for the purposes of determining the sales factor based on where the cost of the services was performed. For example, if the taxpayer was providing engineering services in North Carolina but the customer was in Michigan, the receipts from those services would be allocated to North Carolina as the cost of those services were performed in North Carolina.

"Market-based sourcing" is the method of assigning gross receipts to a state based on where "benefit is received" for the purpose of determining the sales factor. For example, if the taxpayer was providing engineering services in Michigan for a customer in California, the gross receipts would be allocated to California since that is where the benefit of services was received.

Market-based sourcing varies by state; in some states it can vary by industry. The trend is moving to a market-based apportionment method. As we continue to sort through the federal tax reform modifications, we should keep in mind that states are adjusting to conform with or against the federal changes, creating the need to reconsider current and future state tax filings.