Key Takeaways
- "Benefit received" sounds simple. State auditors and courts have spent years proving otherwise
- If your market-based sourcing position rests on billing addresses, expect it to be the first thing an auditor challenge
Welcome to this edition of state tax developments. The State Tax News and Views is published weekly. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance and incentive needs.
State and local tax apportionment rules have changed dramatically—and “benefit received” has now become one of the least intuitive concepts in SALT.
For multistate businesses earning revenue from services and intangibles, understanding market-based sourcing is no longer optional. Audit exposure, double taxation risk, and significant assessment liabilities all hinge on how your business sources receipts—state by state.
From Cost-of-Performance to Market-Based Sourcing: What Changed and Why?
For decades, states sourced service revenue using cost of performance (COP) rules—looking to where the service provider performed the work or incurred its costs. Under a COP framework, income from multistate service providers was typically sourced to the provider’s headquarters or delivery locations, even when customers and economic activity were spread nationwide.
As state economies shifted toward services and intangibles, many states concluded that COP no longer reflected where economic value was actually consumed. The result has been a steady—and now dominant—shift to market-based sourcing, particularly for services, SaaS, data, and intangible receipts.
Market-based sourcing is now the majority rule across the states. But agreement largely ends there. States frequently use similar statutory language while applying it very differently—making “benefit received” one of the most disputed and least predictable standards in state income tax.
What Does “Benefit Received” Actually Mean?
At first glance, “benefit received” sounds straightforward. In practice, it raises difficult questions:
- Is the benefit received by the direct customer, or by the customer’s customer?
- Is it received where the service is ordered, managed, used, or monetized?
- Can a benefit be received in multiple states simultaneously?
One of the most counterintuitive aspects of market-based sourcing is that identical statutory language can yield different sourcing results from state to state. Phrases like “where the purchaser receives the benefit of the service” or “where the service is received” appear uniform on their face, but states disagree on what “receives” and “benefit” actually mean—especially for:
- B2B services
- Centralized management services
- SaaS and software platforms
- Digital advertising and data driven services
- Pharmacy benefit management (PBM) services
Some states interpret the benefit as received at the customer’s headquarters, reasoning that centralized decision making and contract management reflect where value is realized.
Other states look to where the service is actually used, deployed, or monetized—even if that usage occurs far downstream from the contracting entity.
The result: two states can both call themselves “market-based” yet source the same receipts to entirely different locations—creating risks of double taxation, over apportionment, or nowhere income.
Direct Customer vs. Look-Through Sourcing: A Critical Distinction
One of the biggest fault lines in market-based sourcing is whether states require a look-through approach—sourcing receipts based on where ultimate end users receive the benefit, rather than the direct contractual customer.
Courts and tax departments are increasingly willing to look beyond contractual relationships to identify who actually experiences the economic effect of a service.
Minnesota: Humana MarketPoint, Inc. v. Commissioner or Revenue
The Minnesota Supreme Court’s ruling in Humana MarketPoint illustrates how far courts will go in applying look-through theories. The court held that pharmacy benefit management service receipts could be sourced to the location of the customer’s customers—individual plan members—rather than the contracting insurer. Receipts were sourced to Minnesota because plan members used those services in-state, even though the insurer customer was headquartered elsewhere.
Maine: Express Scripts Inc. v. State Tax Assessor
Maine courts reached a similar conclusion in Express Scripts, applying look-through sourcing for PBM services based on where plan members received the benefit—not the contracting party’s location. Both decisions signal a broader trend toward downstream-recipient analysis.
That reasoning extends well beyond insurance and PBM services. It has significant implications for advertising services, SaaS platforms, data services, and management services performed for holding companies or centralized affiliates.
SALT Audit Alert: Look-through sourcing is especially challenging because it often requires data taxpayers do not routinely collect—such as end-user locations or usage metrics. Once a state adopts this framework, the burden frequently shifts to the taxpayer to substantiate why look through sourcing should not apply.
Key Differences in How States Apply Market-Based Sourcing
Even when states appear aligned on paper, meaningful differences emerge in practice:
| Issue | Variation Across States |
| Who receives the benefit | Direct customer vs. end users or downstream recipients |
| Level of precision required | Detailed factual analysis vs. reasonable approximation |
| Single vs. multiple locations | 100% sourcing to one state vs. apportionment across states |
| Documentation expectations | Contracts, customer data, usage metrics increasingly required |
| Fallback rules | Cascading hierarchies vary widely in structure and application |
The Billing Address Misconception—A Common Audit Trigger: A common misconception is that billing address equals market location. In reality, billing address is usually a fallback—not the primary rule.
Unsupported billing address sourcing has become a frequent audit adjustment as states place increasing emphasis on economic reality over administrative convenience. Relying on billing addresses without proper analysis of where the benefit is actually received is a significant compliance risk.
Even states that do permit billing-address sourcing impose meaningful limits. California’s FTB recently amended its market-based sourcing regulations under Cal. Code Regs. tit. 18 sec. 25136-2 to allow billing-address sourcing—but only for professional service providers with more than 250 customers for a given service, and with an exception carved out for larger customers.
The amendment reflects a broader regulatory trend: billing address may be administratively convenient, but states are increasingly conditioning its use on scale, customer type, and service category. Businesses that treat billing address as a default—rather than a documented, justified position—do so at their own audit risk. Further, the amendments to California’s regulations illustrate that market-based sourcing is not a settled framework—it’s an evolving one. Sourcing positions established years ago may be based on rules that have since shifted.
See related: California Finalizes Market-Based Sourcing Changes
Not Every State Has Moved to Market-Based Sourcing: Florida’s COP Approach
Not all courts have embraced market-based sourcing—and that creates its own complexity for multistate businesses.
In Florida, recent decisions have reaffirmed the state’s COP sourcing rules and rejected attempts to apply market-based theories. In a recent case involving a Fiserv subsidiary, a Florida court held that service receipts must be sourced based on where the taxpayer incurred its costs to perform the services—not where customers or end users were located—resulting in the abatement of a $3.4 million corporate income tax assessment.
The Florida ruling highlights a growing disconnect: some states are expanding market-based sourcing through judicial interpretation while others continue to enforce COP rules based on statutory text. Multistate businesses must navigate both frameworks simultaneously.
Fiserv Arm Freed From $3.4M Fla. Tax Bill In Sourcing Fight - Paul Williams, Law360 ($):
Key Takeaways for Multistate Service Businesses
Market-based sourcing was intended to simplify the sourcing of services. In practice, it has simply shifted the complexity from the service provider’s operations to the customer’s footprint and behavior—often with less reliable data and greater variability across jurisdictions.
What your business should be doing now:
- Analyze sourcing state by state—even when statutory language appears uniform, application varies significantly
- Use caution when relying solely on billing address or customer domicile
- Expect increased scrutiny in states expanding look-through theories
- Collect and preserve documentation—contracts, customer data, usage metrics, and end-user location data are increasingly expected during audits
- Revisit sourcing assumptions as courts continue to redefine “benefit received”
Until states adopt clearer definitions—or greater uniformity—“benefit received” will remain one of the most fact intensive and contested areas of state income tax.
Contact our State and Local (SALT) team to schedule a sourcing review.
