Bass, Berry & Sims attorneys Mike Sontag, Steve Jasper, and Michael Cottone authored an article for State Tax Notes examining the "increasingly aggressive and inconsistent positions" states are taking regarding cost-of-performance sourcing (COP) and offering suggestions for taxpayers looking to push back against this trend.
In the article, the authors analyze how "state taxing authorities have sought to take advantage of the uncertainty inherent in the COP standard in several ways," including:
- Distinguishing between direct and indirect costs;
- Labeling some items as third-party costs;
- Choosing between transactional and operational approaches to identifying income-producing activities; and
- Selectively imposing alternative apportionment.
Recognizing that the "fundamental problems in the COP method are rooted in the states' incentives to maximize income" and that motivation is unlikely to change, the authors also evaluate remedies states can implement – such as market-based sourcing or proportional COP tests – to avoid many of the problems associated with COP.
The full article, "'Heads I Win, Tails You Lose' Sales Factor Sourcing," was published by State Tax Notes on March 12, 2018, and is available online (subscription required).