Life Coaching, GPS or Tax Planning

SALT Chat

Wayne K. Berkowitz, Partner, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

10.26.20 | SALT Chat

What do these three items have in common? Depending on whom you ask, they can all help you find your way. Not knowing much about life coaching, and as a male being devoid of the gene to ask directions (even from an inanimate object), I tend to be most helpful providing direction in the form of tax planning.

In an earlier blog, I discussed the trend towards single factor apportionment formulas. Today, we will address its first cousin, market-based or customer-based sourcing. In the old-world manufacturing economy, it was easy to “find your way.” You sent thingamajigs[1] to your customer in Ohio and (very) generally speaking, receipts would be sourced to the thingamajigs’ destination, Ohio. So a New York- based manufacturer would get the benefit of apportioning a percentage of his or her tax base outside of New York and either to Ohio (if there was nexus in Ohio, a topic for at least another 100 posts) or possibly to nowhere.

Similarly, receipts from services were generally sourced on the basis of where they were performed or on some cost of performance basis. So a New York attorney with a client in California, who performed most of the work for that client back in New York, would apportion most of that income to New York — again, with many nuances and exceptions, especially for the New York City Unincorporated Business Tax).

While the thingamajigs have remained the same, the so-called new economy and the resulting eroding state tax bases have changed the universe for services, digital products and other intangibles. Market-based sourcing decrees that the tax base should follow your customer.

How does one make this determination? This is where a GPS may come in handy. The states adopting the methodology look to where the benefit of the service (or intangible product) is received. Sometimes it is easy to determine (a New York company supervises the construction of a building for a client in Oregon), but other times it’s just hard to get a read on the location. The jurisdictions have attempted to put in place a hierarchy that looks at factors ranging from the customer’s billing address to the commercial domicile of the customer or a myriad of other factors.

So here’s the bottom line: these rules are highly nuanced. Potential planning opportunities exist. Rules may not even be consistent across types of entities (corporations vs. partnerships) or even state vs. local jurisdictions (New York State vs. New York City).

Don’t tackle these issues without the assistance of a tax professional. Contact me at wberkowitz@berdonllp.com or your Berdon advisor.

Wayne Berkowitz, a tax partner and co-leader of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

[1] Thingamajigs, although similar to widgets, are different in that those of us who have spent years in the profession are tired of hearing about widgets.