Indiana Market Based Sourcing Rule: Changes and Impact on Apportionment
Signed May 1, 2019, Indiana Senate Bill 563, adopts market-based sourcing rules and also makes certain other changes to Indiana’s apportionment provisions, effective retroactively for tax years beginning after December 31, 2018. Physical presence is not required to establish nexus for Indiana corporate income tax purposes (effective January 1, 2019). The corporate income tax law has been revised and provides that income derived from Indiana shall be taxable to the fullest extent permitted by the Constitution of the United States and federal law, regardless of whether the taxpayer has a physical presence in Indiana.
Changes affecting Apportionment of Service Income
Indiana now follows the Multi State Tax Commission’s Model Apportionment rules for market-based sourcing for services. For professional in-person services sourcing of revenue, Indiana does not look to where the customer received the “benefit” of the service (market-based sourcing). Rather, Indiana separately defines sourcing rules for “in-person” services.
In-person services are services that are physically provided in person by the taxpayer, where the customer or the customer’s real or tangible property upon which the services are performed is in the same location as the service provider at the time the services are performed.
If the service provided by the taxpayer are provided in-person, the service is delivered to the location where the service is received. Therefore, the receipts from a sale are in [state] if and to the extent the customer receives the in-person service in [state]. In assigning its receipts from sales of in-person services, a taxpayer must first attempt to determine the location where a service is received, as follows:
- If the service is performed with respect to the body of an individual customer in [state] (e.g. hair cutting or x-ray services) or in the physical presence of the customer in [state] (e.g. live entertainment or athletic performances), the service is received in [state].
- If the service is performed with respect to the customer’s real estate in [state] or if the service is performed with respect to the customer’s tangible personal property at the customer’s residence or in the customer’s possession in [state], the service is received in [state].
- If the service is performed with respect to the customer’s tangible personal property and the tangible personal property is to be shipped or delivered to the customer, whether the service is performed within or outside [state], the service is received in [state] if the property is shipped or delivered to the customer in [state].
The Multi State Tax Commission’s Model Apportionment has additional special rules for contractors, publishing, railroads, publishing and broadcasting, trucking companies, telecommunications, banks and financial institutions.
Indiana’s former apportionment rules were based on quasi cost of performance standards. Indiana’s rules for receipts from sales of services were sourced 100 percent to Indiana if:
- The income-producing activity was performed entirely in Indiana, or;
- The income-producing activity was performed both within and without Indiana, and a greater proportion of the income-producing activity is performed in Indiana than in any other state, based on costs of performance.
Income-producing activity included the “rendering of personal services by employees or the utilization of tangible and intangible property by the taxpayer in performing a service,” and that such activity is deemed to be entirely performed in Indiana if “the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit” occurred solely in Indiana. The Indiana Department of Revenue viewed the term “income-producing activity” for service businesses as the final act of delivery to the Indiana customer rather than the service provider’s operations as a whole, which was similar to a market-based sourcing position.
If you want to discuss how your tax situation may be impacted by this law, please reach out to Cheryl Ganim via email, or by calling 513-241-8313.