The Nebraska Department of Revenue recently adopted a number of regulations related to apportionment (Reg-24-301 et seq.) to implement the state's recent adoption of market-based sourcing to apportion income derived from sales other than sales of tangible personal property. The new market-based sourcing rules apply to tax years beginning on or after January 1, 2014, the effective date of the legislature's adoption of market-based sourcing. For years beginning before 2014, the cost-of-performance rule applies to apportion income derived from sales of non-tangible personal property.

In adopting the new and amended regulations, the Nebraska Department of Revenue restructured its corporate income tax regulations. Many of the regulations were repealed and reenacted in other places within Title 316, Chapter 24 of the Nebraska Business Entity Regulations. With regard to income from sales other than sales of tangible personal property, the pre-2014 rules are now promulgated in Neb. Reg. 24-331 and are largely unchanged. The new rules implementing market-based sourcing that were adopted are listed as follows:

Neb. Reg. 24-333 Sales Factor; Sales Other Than Sales of Tangible Personal Property in Nebraska; Services

These provisions source services related to real or tangible personal property based on the location of the property. This regulation also provides examples of when services used in multiple states would be attributed to Nebraska in proportion to the benefit received in Nebraska. The rule also provides guidance on the sourcing of "Application Services," which are to be sourced based on proportional use in Nebraska over usage everywhere.

Neb. Reg. 24-335 Sales Factor; Sales Other Than Sales of Tangible Personal Property in Nebraska; Intangible Property

In addition to sales from intangible property, this rule also sources certain financial services-type receipts such as income from loans (e.g., secured loans generally sourced by property location and unsecured loans generally use borrower location) and credit cards (e.g., generally credit card holder location).

Neb. Reg. 24-337 Sales Factor; Sales Other Than Sales of Tangible Personal Property in Nebraska; Leasing Tangible Personal Property in Nebraska; Selling or Leasing Real Property in Nebraska

Sourcing is generally applied based on property location.

Neb. Reg. 24-338 Sales Factor; Sales Other Than Sales of Tangible Personal Property in Nebraska; Sales Not Specifically Addressed

Sales should be attributed so that "they fairly represent" the taxpayer's Nebraska activity. If the buyer is an individual, the sale is deemed to occur at the individual's billing address. Sales to non-individuals are sourced to where the order is placed or, if that location cannot be determined, billing address.

Implications

As the market-based sourcing rules are relatively new, it remains to be seen how the Nebraska Department of Revenue will apply these rules in audit situations.

The new and amended regulations took effect December 27, 2015.

———————————————