Missouri Clarifies Sourcing for Service Providers in New Sales Factor Regulations Applicable to 2020 Tax Year
States shifting to market-based sourcing have to define the market. States using market-based sourcing often look to where the “benefit” of the service was received. Determining the receipt of a benefit may be difficult, forcing states to adopt proxies or assumptions for defining the location of a customer’s benefit. Missouri statutes source sales of services in state to the extent the “ultimate beneficiary” of the service is located in the state.
Until recently, Missouri did not define the term “ultimate beneficiary” or provide guidance on where service receipts might be sourced. However, the Missouri Department of Revenue adopted regulations effective for tax years beginning on or after January 1, 2020, providing such guidance.
Under Rule 12 CSR 10-2.076(2)(L), ultimate beneficiary is defined as follows:
- “Ultimate beneficiary of the service,” as that term is used in section 143.455.12(1)(c), RSMo and except for bartering or similar in-kind transactions, means the entity that receives benefit or value from, but does not also receive monetary or credit-based payment (other than refunds, cashback, or discount-equivalents) in direct connection with, the service at issue. Examples of the ultimate beneficiary of the service include:
- For entertainment services, the individual(s) viewing, interacting with, experiencing, or otherwise deriving entertainment value from such services;
- For education services, the individual(s) receiving instruction, teaching, coaching, or lectures from the education provider, regardless of the medium used to transmit such educational content, e.g., telephonically or by internet or mail;
- For investment advising or investment management services, the location of the ultimate investor, determined by ignoring investment intermediaries such as investment funds; and
- For advertising services, the entities which have their products, services, or messages advertised through the provider of advertising services.
Further, under Proposed Rule 12 CSR 10-2.076(10):
- Ultimate Beneficiary Approximation. In the event that the ultimate beneficiary is a corporation or other entity that owns, or operates in, locations in multiple states, and the extent to which the ultimate beneficiary is located in Missouri is not reasonably determinable:
- The extent to which the ultimate beneficiary is located in Missouri may be reasonably approximated as the ratio of the ultimate beneficiary’s locations in Missouri to the number of its locations throughout the United States;
- If the ratio in subsection (A) above is not reasonably determinable, the extent to which that ultimate beneficiary is located in Missouri may be approximated as the ratio of one to the number of states in which the ultimate beneficiary operates; and
- If the ratio in subsection (B) is not reasonably determinable, the extent to which the ultimate beneficiary is located in Missouri may be approximated as fifty percent (50%). A taxpayer shall not be subject to an addition to tax for negligence in relying upon this approximation.
A key observation is the “ultimate beneficiary” may or may not be a “customer’s customer” of the service provider. For example, Proposed Rule 12 CSR 10-2.076(2)(L)(3) allows service providers to look through to the more distant consumer of the service—the investors—while Proposed Rule 12 CSR 10-2.076(2)(L)(4) considers the intermediary—the purchaser of the advertising services—the ultimate beneficiary of the service. Stated differently, sourcing must stop after the transaction between the service provider and its customer.
For additional guidance on the new Missouri sourcing regulations, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.