Sourcing of dock sales affects net income and net worth taxes.

• Author: Tapajna, Joseph J.

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 throw-back 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...