Starting in 2023, Multnomah County/City of Portland (Mult/PDX) changed the methodology used to source service revenue. Prior to 2023, Mult/PDX used what is known as the “Cost of Performance” methodology, beginning this year they switched to what is known as the “Market Based” sourcing of revenue methodology. This change now conforms to the State of Oregon which has been using Market Based revenue sourcing rules since 2018.
Revenue from services is sourced to a tax authority (state/city/county) under two general methodologies. The following example illustrates each:
Consulting Inc. has one office located in downtown Portland and performs all work in their local offices.
- Under the “Cost of Performance” methodology, you look to where the revenue producing work is performed, so in the scenario above, that revenue is considered to be Portland revenue since the work was performed in the Portland area.
- Under the “Market Based” (also referred to as “Economic Benefit”) methodology, you look to where the client/customer benefits from the service activity. If in the scenario above your client/customer is in California, then that revenue is California sourced revenue because they received the economic benefit of those services in California. Therefore, while you may have believed you were not doing multi‐state business, because your client is in a Market Based state there may be a filing requirement for multistate tax returns. Note also that your client/customer may actually benefit from your service in numerous states under this methodology.
Under these two methodologies, you may get exact opposite answers. Over half of the states currently that have income taxes have adopted the Market Based methodology of sourcing income.
Mult/PDX has not yet released specific rules or regulations regarding their new Market Based sourcing of service revenue, but we anticipate it will be following Oregon sourcing rules. In 2018, when the State of Oregon adopted Market Based sourcing, we wrote an article that covered this topic in more detail. Since not all types of “service” revenue are apportioned exactly the same, we recommend you review the Oregon rules (and the Mult/PDX rules when available) before applying them to source your 2023 service-based revenue for Mult/PDX.