Market sourcing v. cost of performance: potential over or under reporting of state tax liabilities (multi-state service providers)

The recent budget shortfalls have led states to pursue corporate tax dollars more aggressively. Taxpayers are aware that the state-tax enforcement, specifically on sales apportionment, is getting stricter these days. A CFO Tax Survey shows that approximately 16% of the 151 tax directors and finance executives said "apportionment and related issues were their biggest worry in terms of state taxation." This issue is a major concern for multi-state companies, especially service-based businesses, because they are not protected under Public Law 86-272 (hereafter P.L. 86-272). According to P.L. 86-272, 15 U.S.C. 381-384, a state is restricted from "imposing a net income tax [and franchise tax measured by net income] on income derived within its borders from interstate commerce if the only business activity of the company within the state consists of the solicitation of orders for sales of tangible personal property ...." P.L. 86-272 further clarifies that the delivery of any type of service that is not conducted for the purpose of facilitating the solicitation of orders is not considered protected activities.