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Unique Opportunities Presented by Multistate Sourcing Disputes

In the multistate tax world, there have been several recent court cases issued by state courts around the country which present tax savings opportunities for businesses that provide services and license intangibles. Specifically, there have been significant judicial decisions issued by tribunals in Florida, Pennsylvania, Ohio, and Texas that involve how a state sources revenue from services and intangibles for purposes of computing a company’s sales factor.

The sales factor is the ratio of gross revenue attributable to (sourced to) a state divided by the business’s total revenue from all locations. The sales factor is generally the sole or most significant component of the apportionment factor. The apportionment factor is the percentage of business income or other applicable state tax base that is subject to tax for a reporting corporation or pass-through entity with nonresident owners.

Background on sourcing

The most common distinction in sourcing revenue from services and certain intangibles can be summarized as follows:

  1. Some states use a method for sourcing which looks to where the costs of performance are incurred for the income-producing activity, referred to as a cost-of-performance rule.
  2. Other states look to the market for the service or the use of the intangible (i.e., where the customer is based or where the benefit is received), referred to as market sourcing.

Despite these clear distinctions, certain state revenue departments have been applying their sourcing rules incorrectly when auditing multistate businesses. These practices were challenged in court cases across the U.S., culminating in a hodge-podge of approaches that present taxpayers with savings and planning opportunities.


In Target Enterprise, Inc. vs. FL Dept. of Rev., FL. Cir. Ct (2nd), No. 2021-CA-002158 (11/28/2022), a subsidiary provided management consulting, merchandising, and marketing services to its retail parent company. The Florida Department of Revenue argued that the appropriate method for sourcing these services should be based on the retail square footage of the parent located in the state versus total parent retail square footage located everywhere.

The applicable Florida rules provides that the receipts at issue are sourced to Florida if (1) the income-producing activity is performed wholly within Florida, or (2) the income-producing activity is performed inside and outside Florida, but a greater proportion is performed in Florida, based on costs of performance. Fla. Admin. Code Rule 12C-1.0155(2)(l). Despite the plain language of the rule, the Florida Department of Revenue focused on where the services were delivered or consumed. This market sourcing interpretation is consistent with prior guidance issued by the state revenue department.

The Florida Second Circuit Court determined that the key inquiry for sourcing should be based on where payroll is located since the employees of the taxpayer perform the relevant income-producing activities. Based on the payroll documentation, the predominant amount of the taxpayer’s payroll costs were incurred outside of Florida. Accordingly, the Court applied the plain meaning of the regulation cited above to rule against the Florida Department of Revenue and conclude that none of the taxpayer’s receipts should be sourced to Florida.

In a related decision, a Florida State Circuit Court recently denied the Department of Revenue’s attempt to apply a market sourcing (customer location) approach to a group of companies engaged in financial technology services in Billmatrix Corp., et. al v. Florida Department of Revenue, Circuit Court, 2nd Dist., Leon County, No. 2020 CA 000435 (3/1/23). The Circuit Court in Billmatrix cited the Target Enterprise decision as the basis for its conclusion that the key inquiry for sourcing is determining the location of where costs are incurred in providing the services at issue, as opposed to looking to the location of the customers receiving the services.

Considerations from Florida: Corporate taxpayers filing in Florida are left with a choice: do they follow the Department’s prior guidance employing a market sourcing approach or the Court’s opinion. Furthermore, taxpayers may want to consider filing amended returns using the Court’s approach if they originally filed using the method presented by the Florida Department of Revenue.


Pennsylvania had a similar sourcing dispute make its way up to the state’s highest court in Synthes USA HQ, Inc. v. Commonwealth of Pennsylvania, 11 MAP 2021. Earlier this year, a decision was rendered by the Pennsylvania Supreme Court, which overruled the Pennsylvania Department of Revenue's denial of the taxpayer’s refund request which applied a market sourcing approach for determining the taxpayer's Pennsylvania sales factor.

Synthes centered on Pennsylvania’s cost-of-performance rule for tax years prior to 2014 under the state’s corporate net income tax. Under the prior statute, a sale of a service occurs in Pennsylvania 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 costs-of-performance. See 72 P.S. § 7401(3)2.(a)(17).

The Pennsylvania Department of Revenue interprets “income-producing activity” as the actual provision of a service to the customer — which occurs where the benefit of the service is received. Synthes, a Pennsylvania-based company, originally filed its corporate net income tax return sourcing its revenue from services based on the location where its personnel performed income-producing activities. Based on the Department of Revenue’s market sourcing approach, Synthes filed for a refund sourcing its revenue from services based on where the benefit of the services was received.

The Pennsylvania Department of Revenue denied Synthes’ refund claim and essentially took a position contrary to its own guidance. This denial was the subject of the court case and was ultimately overruled.

Considerations from Pennsylvania: While the case involved a corporate net income tax statute that is no longer in effect, the analysis of both the Pennsylvania Supreme Court may be extended to pass-through entities, in addition to sourcing of revenue from intangibles. The language of the Pennsylvania statute cited above still applies for purposes of sourcing revenue from sales other than from tangible personal property when nonresident owners of pass-through entities apportion income to Pennsylvania for personal income tax purposes. See 61 PA Code Sect. 109.5. Accordingly, nonresident owners of pass-through entities conducting a substantial amount of business in Pennsylvania may have tax savings opportunities from both a planning and refund claim perspective.

Additionally, the cost-of-performance rule referenced earlier is still the applicable rule for sourcing revenue from intangibles for corporate net income tax purposes until tax years beginning on or after January 1, 2023. See 72 P.S. 7401. Therefore, companies which largely developed various types of intellectual property, R&D, know-how and other intangibles in Pennsylvania could have potential refund opportunities.


The Texas Supreme Court faced the same issue in Sirius XM Radio, Inc. v. Hegar, 643 S.W.3d 402 (Tex. 2022), which involved how receipts from services should be sourced for purposes of the state’s franchise tax. The Texas Supreme Court considered the Comptroller’s market sourcing approach of sourcing Sirius XM’s subscription revenue based on the location of the customer’s automobile radio where the satellite signal was decoded—this was based on the premise that this activity allowed the radio signal to be accessed and heard by the customer.

Pursuant to Texas Tax Code section 171.103(a)(2), receipts from services should be sourced based on the location of performance. And the applicable regulation provides that if services are performed in multiple states, they are sourced based on the fair value of the services rendered in the state. See 34 TX Admin. Cd. 3.591(e)(26).

The Texas Supreme Court held that the sourcing of the satellite services should be based on the location of Sirius XM’s personnel or equipment that perform the production and broadcasting services since these are the integral activities in delivering the satellite subscription services. Since the majority of Sirius XM’s production and transmission of programming was undertaken in New York and Washington, DC, the receipts from subscriptions should largely not be sourced to Texas. Furthermore, the Texas Court of Appeals determined that costs of performance are a reasonable measure in determining the fair value of services rendered in the state.

Considerations from Texas: The Sirius XM case resulted in the Texas Comptroller’s office amending the rule at issue to be in accord with the Court’s holding. This marks a significant departure from prior guidance which looked to the receipt-producing, end product act (i.e., where the service was received by or rendered to the customer) which was inconsistent with the language used in the Texas tax code. Accordingly, businesses that provide a significant amount of services to Texas customers from outside the state or those primarily using personnel or equipment outside the state may have franchise tax savings and refund opportunities.


Ohio imposes a gross receipts tax, referred to as the commercial activity tax, on all types of business entities engaging in commercial activities in the state. Since the commercial activity tax must be apportioned just like a net income tax base, the issue of how receipts are sourced to Ohio is integral in calculating the total commercial activity tax due. Late last year, the Ohio Supreme Court decided a case involving how revenues from intangibles should be sourced for purposes of the commercial activity tax in NASCAR Holdings Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131 (Ohio Supreme Ct., Nov. 22, 2022).

NASCAR Holdings specifically involved the method used for sourcing NASCAR’s receipts from broadcasting and media revenues, license fees and sponsor fees. The taxpayer sold broadcasting rights for a period of eight years covering races in the U.S., Mexico, the Caribbean, and Canada for a flat fee to a television network. The network subsequently resold the broadcasting rights to various cable and satellite TV providers. Media revenues were generated from licensing the right to use NASCAR’s brand in various online advertising channels. NASCAR also generated fees from licensing its trademark and logo, in addition to sponsorship fees for the rights to advertise as a partner of NASCAR.

When filing its Commercial Activity Tax returns, NASCAR sourced all of the revenue streams referenced above outside of Ohio. The Ohio Department of Taxation audited NASCAR’s returns and adjusted the company’s Ohio-source receipts by applying a method which looked to the ultimate viewing audience.

The Ohio Supreme Court determined that none of the revenues at issue should be sourced to Ohio because the authorizing contracts at issue did not provide a right to use NASCAR intellectual property specifically in Ohio. Since sourcing intangible receipts to Ohio depends on the right to use such an intangible in Ohio, the Supreme Court looked to the governing contracts in determining whether a specific right to use the intangibles in Ohio was explicitly enumerated. The contracts did not expressly discuss Ohio but did provide for the rights to use the NASCAR brand, logo, name etc. over larger and broader geographic areas which included Ohio.

Considerations from Ohio: NASCAR Holdings represents a significant departure from the common practice used by many states and localities of applying a look-through approach in sourcing revenue from intangibles — i.e., looking to the ultimate audience that will be viewing or consuming the broadcasting, advertising, and sponsorship content. Instead, the Ohio Supreme Court focused on the express language of the contracts granting or assigning the intangible rights.

Ohio commercial activity taxpayers which earn revenue from different intangibles, such as patents, trademarks, logos, formulas, movie, or program rights, may have refund and future savings opportunities based on the case. Furthermore, taxpayers earning revenues from similar intellectual property may want to evaluate their sourcing positions in other states with similar rules.


Since states across the U.S. do not use the same rules for sourcing revenue, the exercise of analyzing and computing the sales factor correctly is not a zero-sum game. Just because a company’s sales factor may be reduced in one state does not mean that it should automatically be increased in another state. Applying the holdings of the court decisions discussed above and applying them to specific facts and circumstances may lead to potential tax savings and planning opportunities. For more information, please contact Citrin Cooperman’s State and Local Tax Practice or Jaime Reichardt at

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