12 May 2025 Alaska legislature approves market-based sourcing for sales of services and intangible property, and single sales factor apportionment for "highly digitized businesses"
On May 9, 2025, the Alaska legislature passed Senate Bill 113 (SB 113), which generally adopts Multistate Tax Compact (Compact) provisions relating to the allocation and apportionment of income by updating definitional provisions, adopting market-based sourcing for services and intangible property, and adopting single sales factor apportionment for "highly digitized businesses." SB 113, which has been sent to Governor Mike Dunleavy for consideration, would be effective January 1, 2026. Alaska has historically adopted the Compact's definitions of "business" and "nonbusiness" income. SB 113 would repeal these definitions and replace them with definitions of "apportionable" and "nonapportionable" income. Apportionable income would be defined as all income apportionable under the United States Constitution and not allocated under Alaska law. The definition would adopt the traditional "transactional test" (i.e., income arising from transactions and activity in the regular course of the taxpayer's trade or business). SB 113 would also modify and expand the traditional "functional test" to include income arising from tangible and intangible property "if the acquisition, management, employment, development, or disposition of the property is or was related to the operation of the taxpayer's trade or business." SB 113 would also modify the definition of "sales" to provide that it includes all non-allocated gross receipts of the taxpayer received from transactions and activity in the regular course of the taxpayer's trade or business. The definition of sales, however, would not include a taxpayer's sales from hedging transactions and from the maturity, redemption, exchange, loan, or other disposition of cash or securities. Alaska has historically adopted the cost-of-performance method for allocating sales other than sales of tangible personal property. SB 113 would move Alaska to market-based sourcing as follows:
If the state or states of assignment for the foregoing categories of receipts cannot be determined, sourcing of such sales would be reasonably approximated. A throwout rule would also apply to the extent such sales cannot be assigned or reasonably approximated. The Alaska Department of Revenue would be authorized to adopt regulations to implement these provisions. Alaska uses an evenly weighted three-factor apportionment formula based on property, payroll and sales within the state. Three-factor apportionment would continue generally, however, SB 113 would adopt a single sales factor apportionment formula for "highly digitized businesses" along with the changes related to market-based sourcing previously discussed. SB 113 would provide that a business is engaged in a "highly digitized business" if more than 50% of its Alaska sales consist of any combination of:
SB 113 would also authorize the Alaska Department of Revenue to require a taxpayer to apportion income as a highly digitized business if it determines that the taxpayer's business activity in Alaksa may be otherwise characterized as a highly digitized business. A public utility apportioning income pursuant to Alaska Statute 43.20.146 or a utility providing telecommunications services would not be subject to the provisions relating to highly digitized businesses. This provision would apply to taxpayers filing a return for a tax year beginning on or after January 1, 2026. If SB 113 becomes law, Alaska would become the latest state to move to market-based sourcing for sales other than the sale of tangible personal property. SB 113 would adopt a broader definition of apportionable income. The bill's proposed taxation of highly digitized businesses is unique and appears very broad in its potential application. This is the first regular session of the state's 34th Legislature. Since the legislature is still in session, Governor Dunleavy has 15 days (Sundays excluded) to sign, veto or let the bill become law without his signature. If the bill is vetoed while the legislature remains in session, it would take a 3/4th vote of the combined houses to override the veto because it is a bill to raise revenue. The legislative session is scheduled to end on May 21, 2025. If the Governor vetoes the legislation after the session has adjourned, the legislature must take up the vetoed bill within five days after convening the second regular session in January 2026.
Document ID: 2025-1046 | ||||||||