Alabama Administrative Code
Title 810 - ALABAMA DEPARTMENT OF REVENUE
Chapter 810-27-1-4 - MULTISTATE TAX COMPACT
Section 810-27-1-4-.17.01 - Sales Factor: Sourcing Sales Derived From Services Rendered To Individual And Unrelated Business Customers
Universal Citation: AL Admin Code R 810-27-1-4-.17.01
Current through Register Vol. 42, No. 11, August 30, 2024
(1) Effective for tax years beginning after December 31, 2010, § 40-27-1, Article IV, Paragraph 17, Code of Ala. 1975 has been amended to state that sales other than sales of tangible personal property pursuant to § 40-27-1, Article IV, Paragraph 16, are to be sourced to this state if the taxpayer's market for the sale is in this state. This regulation sets forth the Alabama Department of Revenue's policy regarding the sourcing of sales derived from services rendered to individual and unrelated business customers.
(2) The taxpayer's market for a sale is in this state if and to the extent the service is delivered to a location in this state. This regulation interprets when and to what extent a service will be considered delivered to a location in this state under certain situations.
(a) In the case where the taxpayer's customer
is an individual, the taxpayer shall source receipts from the sale of a service
consistent with this subparagraph.
1. In the
case where a taxpayer's customer is an individual and the service provided is a
direct personal service, the sale shall be sourced to the state where the
customer received the direct personal service. "Direct personal services" are
services that are delivered or rendered in person by or on behalf of the
service provider to the customer. This type of service requires the service
provider and the customer be together at one location. Direct personal services
include, but are not limited to, salon services, medical and dental services
including examinations and surgeries, dance lessons and other similar services.
(i) Example: Hair Cutting Corp, located in
Alabama and other states, provides hair grooming services for individuals.
Receipts from hair grooming services performed at Hair Cutting Corp locations
in Alabama shall be sourced to this state. Receipts from hair grooming services
performed at Hair Cutting Corp locations outside of Alabama shall be sourced to
the state in which the services were performed.
2. Services delivered to customers which are
individuals with an Alabama billing address that are not direct personal
services should be sourced to this state.
(i)
Example: A brokerage firm provides brokerage services to individuals located
both inside and outside of Alabama. The firm's brokerage service receipts are
sourced to this state if the customer's billing address is in this
state.
3. In the case
where the sourcing methodology specified by subparagraphs 1. or 2. is:
(1) difficult to administer or
(2) fails to reasonably reflect the taxpayers
market in this state, the taxpayer may utilize, or the Department may require,
the use of other criteria and methodologies that will reasonably approximate
the taxpayer's market in this state. If an alternate approach is utilized, the
taxpayer must conspicuously note on the return that an alternate approach was
utilized for sourcing its sales. If the taxpayer fails to make such a
conspicuous disclosure on the return, it will be deemed the taxpayers consent
to the sourcing as detailed in subparagraph 1. or 2. above as applicable.
Although not required, it is highly recommended that in addition to the
conspicuous notation required above, the taxpayer attach to each tax return a
detailed explanation of why it was unreasonable to utilize the methodology
specified by subparagraph 1. or 2. and an explanation of the methodology
used.
(b) In
the case where the taxpayer's customer is a business enterprise which is not
affiliated with the taxpayer, the taxpayer shall source receipts from the sale
of a service consistent with this subparagraph.
1. A business enterprise is affiliated with
the taxpayer if it is a related member pursuant to §
40-18-1(29),
Code of Alabama 1975. "Business enterprise" includes any person other than an
individual.
2. To the extent a
service is provided to an unrelated business enterprise and the service being
provided has a substantial connection to a specific geographic location, the
income shall be sourced to Alabama if the geographic location is in this state.
If the service receipts have a substantial connection to geographic locations
in more than one state, the sales shall be reasonably sourced between those
states.
(i) Example: Cleaning Company Inc.
has a contract to provide cleaning services to Company B, an unrelated business
enterprise. The contract specifies that cleaning services are to be provided to
Company B's locations in Alabama and other states. Cleaning Company Inc. should
source a portion of the total service receipts to Alabama based on the amount
of services performed at Company B's locations in Alabama to the total amount
of services performed at the other Company B locations.
(ii) Example: Hard Hat Inc. contracts with
Company D, a multistate company commercially domiciled outside of Alabama, to
design and build a building in Alabama. Hard Hat Inc. will source service
receipts from this project to this state.
(iii) Example: Training Service Inc.
contracts with Company A, an unrelated multistate business enterprise, to
provide training services to Company A's employees located in Alabama and three
other states The training services are related to a specific geographic
location, therefore they shall be sourced to the location where Company A's
employees received the training and not the location of Company A's commercial
domicile. Training Service Inc. sources receipts from its contract with Company
A by reasonably assigning those receipts between Alabama and other states using
a formula based on the number of training hours provided to Company A locations
in Alabama to the total number of training hours provided to all Company A
locations.
3. To the
extent a service is provided to an unrelated business enterprise and the
service being provided does not have a substantial connection to a specific
geographic location, sales from services delivered to unrelated business
enterprises, commercially domiciled in Alabama, should be sourced to Alabama. A
business enterprise is commercially domiciled in Alabama if its principal place
of business is in Alabama. If the "Principal place of business" or the nerve
center of the business is unknown or it is cost prohibitive to determine, the
taxpayer should source the sale to the "Principal Address" of the entity as
noted on the public records of the corporations section of the Alabama
Secretary of State or the equivalent in the taxpayer's state of domicile.
(i) Example: CPA firm provides tax
preparation services to Company A that is commercially domiciled in Alabama.
Company A also operates business establishments in four other states. The CPA
firm should source these sales solely to Alabama.
4. In the case where the sourcing methodology
specified by subparagraphs 2. or 3. is:
(1)
difficult to administer or
(2)
fails to reasonably reflect the taxpayers market in this state, the taxpayer
may utilize, or the Department may require, the use of other criteria and
methodologies that will reasonably approximate the taxpayer's market in this
state. If an alternate approach is utilized, the taxpayer must conspicuously
note on the return that an alternate approach was utilized for sourcing its
sales. If the taxpayer fails to make such a conspicuous disclosure on the
return, it will be deemed the taxpayers consent to the sourcing as detailed in
subparagraph 2. or 3. above as applicable. Although not required, it is highly
recommended that in addition to the conspicuous notation required above, the
taxpayer attach to each tax return a detailed explanation of why it was
unreasonable to utilize the methodology specified by subparagraph 2. or 3. and
an explanation of the methodology used.
(i)
Example: Computer Fix It Company has a contract with Company C to provide
on-site computer repair services to Company C's customers. Company C is an
unrelated business enterprise which sells computers to customers in Alabama and
many other states. Computer Fix It Company should assign a portion of the total
service receipts to Alabama based on the portion of repair services performed
for Company B's customers in Alabama as compared to the total portion of repair
services performed for all of Company B's customers.
(c) The delivery of a
tangible medium representing the output of a service does not control the
sourcing of receipts from the underlying service.
1. Example: Law Firm Inc. prepares a bond
opinion for refinancing the_corporate debts of Corporation A, a multi-state
corporation commercially domiciled in Alabama. Law Firm Inc. mails the opinion
to an office of Corporation A in Delaware. The receipts from this service will
be assigned to Alabama despite the property deed having been mailed to a
Delaware address unless the taxpayer shows that it is unreasonable to source
the receipts to the commercial domicile of its customer pursuant to (b)4.
above.
(d) Whenever a
taxpayer is subjected to different sourcing methodologies regarding intangibles
or services, by the Department of Revenue and one or more other state taxing
authorities, the taxpayer may petition for, and the Department of Revenue shall
participate in, and encourage the other state taxing authorities to participate
in, non-binding mediation in accordance with the mediation rules promulgated by
the Multistate Tax Commission from time to time, regardless of whether all the
state taxing authorities are members of the Multistate Tax Compact.
Authors: Holly Coon, Dennice Hillard
Statutory Authority: Code of Ala. 1975, §§ 40-2A-7(a)(5), 40-27-1, Article IV(17.).
Disclaimer: These regulations may not be the most recent version. Alabama may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
