Market-Based Sourcing

What is market-based sourcing?

Market-based sourcing assigns service revenue to the state where the client receives the benefit of the service, not where the work was performed. A majority of states now use this approach for services. For a firm doing all its work from one office, market-based sourcing means revenue follows the client list. That single rule change is why many service firms suddenly file in states they have never visited.

Finding where the benefit is received

For individual clients, the benefit is usually received where they live. For business clients, states look to the location of the client's operations that used the work. A marketing plan for a client's Ohio division sources to Ohio. When the benefit spans multiple states, some states allow reasonable allocation; others default to the client's commercial domicile or billing address. Keep client addresses and engagement locations clean in your billing system, because that record is your sourcing evidence.

Planning once revenue follows clients

Concentrating clients in one state concentrates your tax there. Diversifying nationally spreads filing obligations. Neither is automatically better, but both are worth knowing before you sign a large out-of-state engagement. Compare rates and thresholds in your top client states. In some cases, a single large client triggers nexus, a return, and an apportionment calculation that costs more in preparation fees than the tax itself.