Sourcing of Dock Sales Affects Net Income and Net Worth Taxes

At a time when states are placing a greater emphasis on the sales factor for net income apportionment (and, in certain states, for net worth), it is important to have an in-depth knowledge of how states include "dock" sales of tangible personal property in the numerator of an apportionment formula's sales factor. Dock sales, also known as pick-up sales, occur when a purchaser uses its own vehicles (or rents them) to pick up goods at a seller's shipping dock. In some states, dock sales also include situations in which a purchaser makes arrangements with a common carrier to pick up the goods at a seller's dock. For deliveries made to another state, dock sales pose serious sourcing issues. States source (i.e., include in the numerator of the sales factor) dock sales to either the destination state or the state in which the dock sale occurs. The destination state is often defined as the final destination location.

North Carolina and Ohio source dock sales to the destination state; on the other hand, Delaware and Texas source them to the state in which the dock sales occur. While some states have well-defined rules for sourcing dock sales, many others are unclear. Differences in states' tax treatments of dock sales may potentially lead to refund opportunities or state tax liability exposure. There may be potential refund opportunities when a dock sale occurs in a state that follows the destination rule and the customer subsequently ships the property to a state that sources dock sales to the state in which the dock sale occurs. This situation creates a "nowhere" sale (i.e., a sale not included in the numerator of any state's sales factor). (This would not benefit a corporation if it were not taxable in the destination state and the state in which the sales originated adopted the sales factor throwback rule to guard against the possibility that out-of-state sales might escape taxation. In that situation, the origination state would include the sales in the numerator of the sales factor.)

Example 1: M, a manufacturer, makes a dock sale in North Carolina, having the goods shipped to Delaware. Even though M files income tax returns in both states, neither North Carolina nor Delaware source the sale, as North Carolina (a destination-sourcing state) sources the sale to Delaware and Delaware sources the sale to North Carolina. Thus, neither state includes the dock sale in its sales factor.

Double taxation may also occur with dock sales. This could potentially happen when a company makes a dock sale in a state that sources dock sales to the state of the sale and the customer ships the property to a state that follows the destination rule.

Example 2: M, a manufacturer, makes a dock sale in Texas, having the goods shipped to North Carolina. Texas sources the sale to Texas (the origination state), and North Carolina includes the sale in its sales factor, because it receives the goods (the destination state). As a result, each state's statutes and regulations require inclusion of the sale in the sales numerator.

Other errors may result when dock sales sourced to a destination state should have been sourced to the state in which the dock sale occurred, and vice versa. The net tax effect depends on the particular states involved and their respective income tax provisions (such as tax rates and whether the sales factor of the apportionment formula is single- or double-weighted).

States that are not clear about how to source dock sales also create significant issues for taxpayers. These states could attempt to source sales to their own state if a dock sale occurs there. Confusion on sourcing dock sales may also affect net worth/franchise taxes in states that apportion net worth using the sales factor as a component of the apportionment formula. Overall, the complexities of sourcing dock sales can create refund opportunities (as well as tax liability exposure) for net income taxes and net worth/franchise taxes.

From Karen J. Boucher, CPA, Milwaukee, WI