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Market sourcing for services: Comparing California and Oregon regs

Inside Deloitte

In this edition of Inside Deloitte, Scott Schiefelbein compares California’s and Oregon’s market-sourcing rules for sales of services.


The apportionment of income for state corporate income tax purposes is an important—and vexing—consideration for the state income tax practitioner. In 2018 Oregon became the last West Coast state to adopt the market-sourcing regime for the apportionment of sales of items other than tangible personal property.1 California had adopted mandatory market sourcing for the apportionment of such sales as early as 2013,2 while since June 1, 2010, Washington state had adopted market sourcing for revenues from services and other “apportionable activities” for purposes of the state’s business and occupation tax.3

This article compares the market-sourcing rules for sales of services for the two West Coast states that impose corporate income taxes. Including over 8,000 words, California’s market-sourcing regulations ranked among the most extensive, detailed set of rules in the country in 2017.4 However, the Oregon market-sourcing rules almost double that word count.

Both of these sets of regulations attempt to bring clarity to an incredibly complex question—how to source sales from two extremely broad sectors of economic activity—“services” and “intangibles”—for state income tax purposes. Given the length of the rules, the sourcing of revenue from sales of intangibles will be analyzed in-depth in a separate article; while this article refers to the sourcing of intangibles to provide the broad framework of the California and Oregon rules, it focuses on the detailed provisions for sourcing sales of services.

Both sets of rules attempt to use categorization of different economic activities, varying sets of “cascading” rules (discussed below), and examples to provide clarity to taxpayers and tax advisers alike. However, as this article will demonstrate, the two sets of rules, despite using highly similar terminology, often take very different approaches to the seemingly simple question: “Where does this sale occur?

A note to readers regarding GILTI and market sourcing: As a result of federal tax reform, this “Where does the sale occur?” question is increasingly important for multinational taxpayers that file state income tax returns on a water’s-edge basis. For tax years beginning on or after January 1, 2018, new IRC section 951A requires US taxpayers to include in taxable income their share of global intangible low-taxed income (GILTI) earned by some foreign affiliates. These foreign affiliates may generate GILTI through sales or licensing of services and intangibles.

The US Constitution requires the fair apportionment of GILTI, which could lead US taxpayers to conduct detailed apportionment reviews under market-sourcing regimes for such sales. A discussion of GILTI and market sourcing will be the subject of a forthcoming article.

Download the PDF to read the article in full.

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​If you have questions regarding this edition of Inside Deloitte, please contact:

Scott Schiefelbein, managing director, Deloitte Tax LLP


1 Or. Rev. Stat. section 314.665(4); Or. Admin. R. 150-314-0435.

2 Cal. Rev. & Tax. Code section 25136. Starting in 2011, California had allowed taxpayers in most industries to elect to use market sourcing if the taxpayers elected to use the single sales factor for apportionment purposes. Cal. Rev. & Tax. Code section 25128.5.

3 Wash. Admin. Code 458-20-19401(10).

4 Cal. Code Regs. section 25136-2.

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