Missouri Adopts Market-Based Sourcing for Services & Intangibles
Author: Mary Reiser
Effective August 28, 2015, Missouri Senate Bill 19 enacts market-based sourcing provisions for receipts from sales of services and intangibles for taxpayers electing to use the optional single-sales factor apportionment method for Missouri income tax purposes. The new law clarifies the single-sales factor apportionment provision enacted in July 2013, which the Missouri Department of Revenue (DOR) interpreted to only apply to sales of tangible property.
Under the current law, taxpayers generally are eligible to annually elect to apportion their income under one of several available methods:
- The standard three-factor, using a cost of performance approach
- The business transaction single-factor, a partially/wholly or within/without approach
- The optional single-factor, a destination-based sourcing approach
As originally enacted, the statute governing the optional single-sales factor provided specific guidance on how to source sales of tangible property, but it provided no specific guidance on other transactions. This lack of guidance—coupled with DOR issuing numerous notices denying taxpayers the right to elect the optional single-sales factor for sales other than the sales of tangible property—created the need for the new legislation.
With the enactment of SB 19, Missouri will be designated as the taxpayer’s “market for sales” under the following circumstances:
- For sales, rentals, leases or licenses of real property or rentals, leases or licenses of tangible personal property to the extent that the property is located in the state
- For sales of services to the extent the ultimate beneficiary of the services is in the state
- For rentals, leases or licenses of intangible property to the extent the property is used in the state by the rentee, lessee or licensee
- For intangible property used to market a good or service to a consumer to the extent the good or service is purchased by a consumer in the state
- For franchise fees or royalties received for the rent, lease, license or use of trade names, trademarks, service marks or franchise rights to the extent the franchise is in the state
- For sales of intangible property to the extent the property is used in the state
DOR has implied it is likely to issue regulations on SB 19, but regulations likely will not be issued prior to the bill’s effective date.
Despite Gov. Jay Nixon’s characterization of SB 19 as a clarification of the existing optional single-sales factor law, DOR has indicated it will not recognize the election for receipts from sales of services and intangibles on tax returns filed prior to August 28, 2015. However, DOR has affirmed it will allow the election on any tax return filed on or after the legislation’s effective date, regardless of the tax year. Taxpayers should evaluate this new law in deciding whether to elect the optional single-sales factor apportionment method for sales other than the sale of tangible personal property. Taxpayers wishing to make the expanded single-sales factor election should wait to file their tax returns on or after August 28, 2015.
It’s important to note that DOR only recognizes an apportionment election on an originally filed return, meaning taxpayers will not be allowed to amend their tax returns to claim the newly expanded election.
To learn more about how this new law could affect your organization, contact your BKD advisor.