Disputes between businesses and states over the use of “look-through sourcing” methods to source service receipts are cropping up across the country with greater frequency.  Look-through sourcing is a corporate income tax concept that generally refers to the act of sourcing service receipts to the location of the customer’s customer, as opposed to the location of the direct customer, for apportionment purposes.

Most states have adopted market-based sourcing rules that require businesses to source service receipts to the location where the customer receives the benefit of the service. But determining who the customer is and where the customer receives the benefit of the service can be challenging—particularly in the case of business to business sales. The majority of states have yet to adopt clear guidance on look-through sourcing.

“I think we're going to see more litigation around look-through sourcing,” State & Local Tax special counsel Zachary Atkins said. “And I think that is driving a lot of rulemaking efforts to try to put something on paper to delineate where look-through sourcing applies and where it doesn’t.”

Several courts across the country have recently rejected attempts to apply look-through sourcing methods.  Atkins described those cases as the tip of the iceberg and explained that he expects to see more litigation surrounding look-through sourcing even as states like California, New York and Washington look to establish or revise their market-based sourcing rules.

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