Question

For a service business, the trend is towards market-based sourcing (where the customer is) rather than where the service is delivered from. Does this favor states that are highly populated or states that are lightly populated? If an individual service provider has withholdings made on her service receipts by a Company in a state that she is not a resident of what is likely the mitigating provision in her resident state? What is the result if the resident state has no income tax?

Answer 1

In market-based sourcing, the allocation of revenue is made to the State where the benefits of the services are actually received and would be ultimately used. It is a destination based Marketing. Hence, this would favor the states that are highly populated as the major revenue would land with them owing to the high customer base.

If an individual service provider has withholdings made on service receipts by a company kn state that she os a non resident, then she would get the benefit of the same while paying income tax in the state where she is resident. The quantum of the benefit would be based on the income tax law of the resident state and the treaty(if any) signed between the two States.

However, if the resident state has no income tax, the tax withholding in the non resident state would not be refunded or no benefit against such withholding would be available.