United States

Indiana: Department Grants Taxpayer’s Request to use Market-Sourcing; Service Receipts Not Subject to Throwback

May 11, 2015
From KPMG TaxWatch

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Recently, a taxpayer requested permission to use an alternative, market-based sourcing methodology to source its receipts from providing a variety of health and insurance-related services. The taxpayer was headquartered in California, but was planning on moving its headquarters to Indiana. In its ruling request, the taxpayer stated that if it utilized the statutory costs of performance standard, it expected none of its service receipts to be sourced to Indiana in the years when it will be building out its Indiana facilities because the predominate costs of performance would continue to occur in California. In addition, even after the Indiana facility was fully built, the taxpayer maintained that none of its receipts would likely be sourced to Indiana because the costs of doing business in California are substantially higher than in Indiana. However, the taxpayer had customers in Indiana and under a market-based approach, certain of the taxpayer’s receipts would be sourced to Indiana. The stated reason for the request was to minimize taxpayer’s compliance and audit costs.

The Department agreed that the taxpayer could use a market-based approach in determining Indiana taxable income. Under this approach, service receipts will be sourced based on the location of actual use or receipt of the service, or, if that location is unknown, to the customer’s billing address. The taxpayer next sought clarification that the state’s throwback rule would not apply to its service receipts. While the Department did not simply state that the throwback rule applies only to sales of tangible personal property, it nevertheless concluded that the taxpayer’s “nowhere” service receipts would not be thrown back to Indiana. Finally, the Department confirmed that a related insurance company was excluded from the taxpayer’s combined group because it was regulated by the Department of Insurance and was paying premiums tax. On the other hand, a related HMO would be included because it was not paying insurance premiums tax. Please contact Marc Caito at 317-951-2434 with questions on Revenue Ruling 2014-01IT.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.