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, which would replace the state's current cost of performance method for sourcing sales of services and intangible property with market-based sourcing, effective January 1, 2026.
  • The bill would replace existing definitions of "business" and "nonbusiness" income with "apportionable" and "nonapportionable" income, broadening the scope of what is considered apportionable.
  • A single sales factor apportionment formula would be implemented for "highly digitized businesses," defined by specific criteria related to electronic transmission and internet sales.
  • If enacted, these changes will require businesses to reassess their income sourcing and apportionment strategies, particularly those engaged in digital services and sales.
 

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.

Definitional changes

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.

Adoption of market-based sourcing

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:

  • Sales, rentals, leases, or licenses of real property would be sourced to Alaska if the property is located in the state.
  • Rentals, leases, or licenses of tangible personal property would be sourced to Alaska if the property is located in the state.
  • Sales of services would be sourced to Alaska if and to the extent the service is delivered to a location in the state.
  • With respect to intangible property, the following rules would apply:
    • Marketing intangibles would be sourced to Alaska based on in-state usage provided that the good or service marketed is purchased by an Alaskan consumer
    • Contract rights, government licenses, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area would be used in Alaska if the geographic area includes all or part of the state
    • Intangible property sales that are contingent on the productivity, use, or disposition of the intangible property would be treated as a sale of the rental, lease, or licensing of such intangible property and sourced accordingly
    • All other sales of intangible property would be excluded from the numerator and denominator of the sales factor

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.

Highly digitized businesses

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:

  • Intangible property1 delivered2 by electronic transmission in Alaska
  • Services delivered by electronic transmission3 in Alaska
  • Services related to computers, electronic transmissions, or internet technology delivered in Alaska
    Or
  • Tangible personal property delivered in this state from internet sales,4 if the internet is the primary mode of customer access in Alaska.

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.

Implications

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.

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Endnotes

1 Intangible property would be defined to include "licenses and sublicenses for data access, streaming or other electronic transmission of music, videos, books, games, or other digital goods, and remote access software."

2 The term "delivered" would be defined to include "delivered to or on behalf of a customer or delivered through a customer."

3 Electronic transmission would be defined to include "transmission by wire, lines, cable, fiber optics, electronic signals, satellite transmission, audio or radio waves, or similar means, whether or not the provider owns, leases, or otherwise controls the transmission equipment."

4 Internet sales would be defined to include "sales through an Internet website, application, or other electronic means, including sales made by computer, tablet, telephone, or other similar devices."

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Contact Information

For additional information concerning this Alert, please contact:

State and Local Taxation Group

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor

Document ID: 2025-1046