Vermont adopts market-based sourcing, with special considerations for law firms

In June 2019, Vermont Governor, Phil Scott, had signed into law a miscellaneous tax bill, HB 514, which invoked various changes to the Vermont Business Income Tax. Many of these changes went into effect during 2019 and 2020. One such change was the switch to market-based sourcing for entities doing business in Vermont, which has now been codified effective Dec. 1, 2021, via an amendment to the Vermont Rules Section 1.5833.

Under prior law, Vermont required businesses to apportion income to the state using a three factor, double weighted sales factor formula with a cost-of-performance sourcing methodology used for service-based businesses. Under HB 514 and Rule Section 1.5833, the state now requires that gross sales or fees for services performed within the state be considered “sales in Vermont” if the taxpayer’s market for such sales is within Vermont. This sourcing method is more commonly referred to as market-based sourcing.

Vermont has provided specific guidance for certain service industries, such as law firms, that may face challenges in applying these new market-based sourcing provisions. The state requires that receipts for legal services for individual clients be sourced to Vermont if the principal residence of the client is within Vermont. If the law firm, for example, does not know or have the individual’s principal residential address, the services should be sourced to the billing address of the individual client. For business clients, fees for legal services will be sourced to Vermont if the agreement for legal services is principally managed by the client in Vermont.

What does CohnReznick think?

Vermont follows a number of other states that have made the change from cost-of-performance to market-based sourcing for the sales of services. Market-based sourcing can add complexity for professional service providers to properly determine their sourcing of sales for income tax purposes. Accordingly, they will need to pay close attention to these rules when looking at their apportionment factor within Vermont and across the United States.



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corey rosenthal

Corey Rosenthal

JD, Principal, Practice Leader, State and Local Tax (SALT) Services

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