New Hampshire adopts market-based sourcing

On Sept. 6, 2019, New Hampshire Gov. Chris Sununu signed Senate Bill 190, adopting market-based sourcing for purposes of the state’s Business Enterprise Tax and Business Profits Tax (BPT). The new sourcing methodology, which replaces the current cost-of-performance method, becomes effective on Jan. 1, 2021, and applies to all taxable periods ending on or after Dec. 31, 2021.

Under a cost-of-performance approach, sales other than sales of tangible personal property were considered to be within New Hampshire if the revenue-producing activity was either performed wholly within the state or performed both within and outside the state with a greater proportion performed within the state than any other state, based on costs of performance.

The amended sourcing law provides that the following categories of sales/income must be sourced to New Hampshire when calculating the apportionment sales factor:

• Sales, rentals, leases, or licenses of real property located within the state
• Rentals, leases, or licenses of tangible personal property located within the state
• Sales of services delivered to a location within the state
• Sales, rentals, leases, or licenses of intangible property used within the state
• Interest income when the debtor or encumbered property is located within the state
• Divided income when the business is domiciled in the state
• Other income that is derived from sources within the state

If the state or states of assignment cannot be determined through the foregoing rules, the state or states of assignment must be reasonably approximated. The amended law also includes a “throw-out rule,” which excludes from the numerator and denominator of the sales factor any sales other than sales of tangible personal property if the taxpayer is not taxable in the state to which the sale is assigned, or if the state of assignment cannot be determined or reasonably approximated.

Finally, the bill establishes a legislative committee to study the apportionment of gross business profits under the BPT and to study other states’ market-based sourcing rules and their impact.

Takeaways

All companies doing business in New Hampshire and selling services or selling mixed services and tangible personal property should be aware of the revised sourcing methodology. New Hampshire is one of over two-dozen states to adopt market-based sourcing. As noted above, the sourcing rules can be complicated. Companies should consult with their tax advisors for additional information.