Kentucky Proposes Market-Based Sourcing Rules

first_imgKentucky proposed regulatory changes for market-based sourcing and using a a single receipts factor corporate income tax apportionment formula.The regulation would incorporate new provisions in 2018 legislation.Market-Based Sourcing RulesReceipts from sales other than sales of tangible personal property are in Kentucky, if the taxpayer’s market for the sales is in the state. The proposed regulation establishes uniform rules for:determining whether the market for a sale is in Kentucky; andreasonably approximating the state or states of assignment if the location of the taxpayer’s market cannot be determined.Several of the assignment rules apply in sequential order. Taxpayers must also:determine the method of assignment in good faith and with reasonable effort;keep contemporaneous records that explain the determination; andexercise state-to-state and year-to-year consistency in the inclusion or exclusion of receipts.Sourcing for ServicesIn general, taxpayers must assign receipts from services to Kentucky if the services were delivered to a location in the state. The term “delivered to a location” refers to the location of the taxpayer’s market for the service. This may not be the location of the taxpayer’s employees or property.In-Person ServicesTaxpayers must assign receipts from in person services to Kentucky if the customer receives the service in the state. This includes services performed in Kentucky that relate to:the customer’s body, like hair cutting or X-ray services;the customer’s physical presence, like live entertainment or athletic performances;the customer’s real estate;the customer’s tangible personal property at the customer’s residence or in the customer’s possession; andthe customer’s tangible personal property that is shipped or delivered to the customer.Professional ServicesA taxpayer that delivers a professional service to an individual customer must assign the receipts to Kentucky if:the customer’s primary residence is in the state; orthe customer’s billing address is in the state.A taxpayer that delivers a professional service to a business customer must assign the receipts to Kentucky if:the contract of sale is principally managed by the customer in the state;the customer placed the order for the service in the state; orthe customer’s billing address is in the state.Taxpayers can also use a safe harbor rule for large volume transactions. A taxpayer can assign its receipts from services based on a particular customer’s billing address if the taxpayer:does not derive more than 5% of all its service receipts from that customer; andengages in substantially similar service transactions with more than 250 customers.Special rules apply to:taxpayers that derive more than 5% of all service receipts from a customer;services delivered physically or electronically for or through a customer;architectural and engineering services;financial services;broadcast advertising services; andservices sold to related members that own or control the taxpayer.Intangible PropertyTaxpayers must assign receipts to Kentucky from the license or sale of intangible property used in the state. The assignment depends on the type of license or nature of the property sold. This includes distinct sourcing rules for:marketing intangibles;production intangibles;broadcasting intangibles;mixed intangibles;contract rights or government licenses that authorize use in a specific geographic area;software transactions;digital goods or services; andtransactions that resemble the sale of goods or services.Throwout RulesReceipts from other than tangible personal property must be thrown out of the receipts factor if:the taxpayer is not taxable in the state where it assigns the receipts; orthe state of assignment cannot be determined or reasonably approximated.Industry Specific Sourcing RulesThe regulation sets forth receipts factor sourcing rules for various industries. This includes rules for:bargelines;buslines;passenger airlines;pipelines;public service companies;air freight forwarders;railroads;regulated investment companies (RICs);securities brokerage services; andtrucklines.Public Hearing and Comment PeriodKentucky will hold a public hearing for the proposed regulation on December 21, 2018. It will accept written comments through December 31, 2018.103 KAR 16:270, Kentucky Department of Revenue, filed November 14, 2018Login to read more tax news on CCH® AnswerConnect or CCH® Intelliconnect®.Not a subscriber? Sign up for a free trial or contact us for a representative.last_img

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