(4) Professional services.
(a) Except as otherwise provided in this
rule, professional services are services that require specialized knowledge and
in some cases require a professional certification, license, or degree. These
services include the performance of technical services that require the
application of specialized knowledge. Professional services include, without
limitation, management services, bank and financial services, financial
custodial services, investment and brokerage services, fiduciary services, tax
preparation, payroll and accounting services, lending services, credit card
services (including credit card processing services), data processing services,
legal services, consulting services, video production services, graphic and
other design services, engineering services, and architectural
services.
(b) Overlap with other
categories of services.
(i) Certain services
that fall within the definition of "professional services" set forth in this
rule are nevertheless treated as "in-person services" within the meaning of (2)
above, and are assigned under the methods of that section. Specifically,
professional services that are physically provided in person by the taxpayer
such as carpentry, certain medical and dental services, or child care services,
where the customer or the customer's real or tangible property upon which the
services are provided is in the same location as the service provider at the
time the services are performed, are "in-person services" and are assigned as
such, notwithstanding that they may also be considered to be "professional
services." However, professional services where the service is of an
intellectual or intangible nature, such as legal, accounting, financial, and
consulting services, are assigned as professional services under this rule,
notwithstanding the fact that these services may involve some amount of
in-person contact.
(ii)
Professional services may in some cases include the transmission of one or more
documents or other communications by mail or by electronic means. In some
cases, all or most communications between the service provider and the service
recipient may be by mail or by electronic means. However, in these cases,
despite this transmission, the assignment methods that apply are those set
forth in this section and not those set forth in (3) above, pertaining to
services delivered to a customer or through or on behalf of a
customer.
(c) Assignment
of receipts. In the case of a professional service, it is generally possible to
characterize the location of delivery in multiple ways by emphasizing different
elements of the service provided, no one of which will consistently represent
the market for the services. Therefore, the location of delivery in the case of
professional services is not susceptible to a general method of determination,
and must be reasonably approximated. The assignment of receipts from a sale of
a professional service depends in many cases upon whether the customer is an
individual or business customer. In any instance in which the taxpayer, acting
in good faith, cannot reasonably determine whether the customer is an
individual or business customer, the taxpayer shall treat the customer as a
business customer. For purposes of assigning the receipts from a sale of a
professional service, a taxpayer's customer is the person that contracts for
the service irrespective of whether another person pays for or also benefits
from the taxpayer's services. In any instance in which the taxpayer is not
taxable in the state to which receipts from a sale is assigned, the receipts
are excluded from the denominator of the taxpayer's receipts factor.
(i) Receipts from sales of professional
services other than those services described in (c)(ii) below (architectural
and engineering services), (c)(iii) below (services provided by a financial
institution), and (c)(iv) below (transactions with related parties), are
assigned in accordance with this section.
(A)
Professional services delivered to individual customers. Except as otherwise
provided in this section, in any instance in which the service provided is a
professional service and the taxpayer's customer is an individual customer, the
state or states in which the service is delivered must be reasonably
approximated as set forth in this section. In particular, the taxpayer shall
assign the receipts from a sale to the customer's state of primary residence,
or, if the taxpayer cannot reasonably identify the customer's state of primary
residence, to the state of the customer's billing address; provided, however,
in any instance in which the taxpayer derives more than 5 percent of its
receipts from sales of all services from an individual customer, the taxpayer
shall identify the customer's state of primary residence and assign the
receipts from the service or services provided to that customer to that
state.
(B) Professional services
delivered to business customers. Except as otherwise provided in this section,
in any instance in which the service provided is a professional service and the
taxpayer's customer is a business customer, the state or states in which the
service is delivered must be reasonably approximated as set forth in this
section. In particular, unless the taxpayer may use the safe harbor set forth
in (C) below, the taxpayer shall assign the receipts from the sale as follows:
first, by assigning the receipts to the state where the contract of sale is
principally managed by the customer; second, if the place of customer
management is not reasonably determinable, to the customer's place of order;
and third, if the customer place of order is not reasonably determinable, to
the customer's billing address; provided, however, in any instance in which the
taxpayer derives more than 5 percent of its receipts from sales of all services
from a customer, the taxpayer is required to identify the state in which the
contract of sale is principally managed by the customer.
(C) Safe harbor; large volume of
transactions. Notwithstanding the provisions set forth in (A) and (B) above, a
taxpayer may assign its receipts from sales to a particular customer based on
the customer's billing address in any taxable year in which the taxpayer
engages in substantially similar service transactions with more than 250
customers, whether individual or business, and does not derive more than 5
percent of its receipts from sales of all services from that customer. This
safe harbor applies only for purposes of this rule and not otherwise.
(ii) Architectural and engineering
services with respect to real or tangible personal property. Architectural and
engineering services with respect to real or tangible personal property are
professional services within the meaning of this rule. However, unlike in the
case of the general method that applies to professional services, the receipts
from a sale of an architectural service are assigned to a state or states if
and to the extent that the services are with respect to real estate
improvements located, or expected to be located, in the state or states; and
the receipts from a sale of an engineering service are assigned to a state or
states if and to the extent that the services are with respect to tangible or
real property located in the state or states, including real estate
improvements located in, or expected to be located in, the state or states.
These provisions apply whether or not the customer is an individual or business
customer. In any instance in which architectural or engineering services are
not described here, the receipts from a sale of these services must be assigned
under the general method for professional services.
(iii) Services provided by a financial
institution. The apportionment rules that apply to financial institutions are
set forth at ARM Title 42, chapter 26, [subchapter 13, MAR Notice Number
42-2-986 ]. ARM Title 42, chapter 26, [subchapter 13] includes specific rules
to determine a financial institution's receipts factor. However, the rules in
ARM Title 42, chapter 26, [subchapter 13] also provide that receipts from
sales, other than sales of tangible personal property, including services
transactions that are not otherwise apportioned under that subchapter, are to
be assigned pursuant to this rule. In any instance in which a financial
institution performs services that are to be assigned pursuant to this rule
including, for example, financial custodial services, those services are
considered professional services within the meaning of this rule, and are
assigned according to the general method for professional services transactions
set forth in this rule.
(iv)
Related party transactions. In any instance in which the professional service
is sold to a related party, rather than applying the method for professional
services delivered to business customers, the state or states to which the
service is assigned is the place of receipt by the related party as reasonably
approximated using the following hierarchy: 1.) If the service primarily
relates to specific operations or activities of a related party conducted in
one or more locations, then to the state or states in which those operations or
activities are conducted in proportion to the related party's payroll at the
locations to which the service relates in the state or states; or 2.) If the
service does not relate primarily to operations or activities of a related
party conducted in particular locations, but instead relates to the operations
of the related party generally, then to the state or states in which the
related party has employees, in proportion to the related party's payroll in
those states. The taxpayer may use the safe harbor provided by this rule
provided that the department may aggregate the receipts from sales to related
parties in applying the 5 percent method if necessary or appropriate to avoid
distortion.