Recent North Carolina legislation directed the state’s Department of Revenue to analyze the effect of using market sourcing for the sales factor on corporate taxpayers (including S corporations and limited liability corporations electing to be taxed as C corporations). A new reporting requirement has been imposed on corporations to enable the data collection for the market-sourcing study.
North Carolina currently sources receipts that are not from the sale of tangible personal property under the cost-of-performance method. Under the cost-of-performance method, receipts generally are assigned to the location in which the costs of providing the services were incurred without regard to the location of the customer. The market-sourcing method generally assigns receipts to the location where the benefit is received by the customer without regard to where the services were performed. To comply with North Carolina’s data collection mandate, Form CD-400 MS, “Market-Based Sourcing Informational Report” must be filed by all corporations if all of the following are true:
- A corporation’s 2014 apportionable income was greater than $10 million.
- A corporation’s 2014 apportionment factor was less than 100 percent.
- A corporation’s sales factor was used in its 2014 apportionment factor.
If Form CD-400 MS is required, a corporation must recompute its 2014 sales factor in accordance with the market-based sourcing rules outlined in the legislation. Under the market-sourcing principles of the legislation, the sale, rental, lease, or license of real and tangible personal property is unchanged, and these receipts should be apportioned to North Carolina if the property is located in the state. Sales of services are deemed North Carolina sales if the service is delivered to a location in the state. The sale, rental, lease, or license of intangible property is apportioned to North Carolina if the property is “used in the state,” in other words, purchased by a consumer in the state. The sourcing of service and intangible revenue likely will be different from that reported on the 2014 return. North Carolina has provided additional guidance on applying the market-sourcing rules to certain transactions.
The form must be filed on or before the original due date of the 2015 corporate return, which is on or before April 15, 2016, for calendar-year taxpayers. No extension is available for filing CD-400 MS. Therefore, if a corporate taxpayer is filing a North Carolina extension, the information form must be completed and filed with the extension request. The state may assess a $5,000 penalty for failure to file the form.
The form is informational only and should not affect a corporation’s 2015 tax liability.