Market-based sourcing was touted as the easy sourcing methodology when it was first enacted. However, it has proven to be anything but. One clear example is the sourcing of services. Numerous questions arise when attempting to source a service, such as where is a service received? Is the service received where it was ordered from, where it was provided to, or somewhere else? A recent decision of the Minnesota Supreme Court just made things a bit messier in that sourcing dilemma.
At issue in Humana MarketPoint, Inc. v. Commissioner of Revenue, A25-0058 (Sept. 24, 2025) was the sourcing of service receipts for corporate franchise tax purposes. One of the members of the Humana combined group provided services to a related member and the related member’s customers. Minnesota assigns services to the state where they are received. The company argued that those services are received by the related member in Wisconsin, i.e., the company’s customer. Conversely, the Commissioner argued that those services were received by the related member’s customers, some of whom were in Minnesota.
Ultimately, the Court held that “received” means “‘to come into possession of or get from some outside source.’” Which isn’t the most helpful in the context of services. Nevertheless, the Court determined that services do not need to be directly received by the customer—allowing for sourcing to the customer’s customer in certain circumstances. Under the facts presented in Humana, the Court held that the services were received by both the related member and by the related member’s customers. Due to the parties’ stipulations, which the Court noted were “unique circumstances,” the company’s service receipts were sourced to the location of the related member’s customers.
While the Humana case had a clear resolution, the decision created uncertainty for both taxpayers and the Commissioner. Take, for example, the situation where a taxpayer provides two services for a set fee of $100. One service is received by the direct customer and the second is received by the customer’s customer. How would that service be sourced? Would the receipts be bifurcated between the two locations? If so, how would the bifurcation be determined?
To make things more interesting, the service sourcing provisions are cascading in Minnesota. If the location of receipt is not readily determinable, then the service is sourced to the office where the services were ordered. See Minn. Stat. § 290.191 subd. 5(j). Application of that provision sources the entire service receipt to the customer’s location, not to the customer’s customer’s location.
While sourcing of services continues to be an evolving area, taxpayers in Minnesota should consider what services are being provided before automatically applying an ultimate customer method of sourcing.