News & Press

Tax Impacts PR Firms Should Be Aware Of

Michael R. Belfer, CPA

This article is featured in O’Dwyer’s May ’23 PR Firm Rankings Magazine.

The U.S. Supreme Court’s 2018 tax decision in South Dakota v. Wayfair, Inc. greatly impacted the public relations, advertising, and media industries, as it required states to impose sales and use tax collection and remittance obligations on remote sellers, based solely on their economic activity in a state. The Court’s decision in Wayfair affected both remote sellers of goods as well as businesses that provide services.

In general, states are constitutionally required to have a minimal connection to impose their taxes on an out-of-state taxpayer. Economic nexus laws establish this minimum link via a revenue threshold which, if exceeded, is deemed enough of a connection with a jurisdiction to create a tax obligation for the out-of-state taxpayer.

Currently, all 45 sales taxing states have mandated some level of a “factor presence” threshold for purposes of establishing sales tax nexus. Additionally, about a dozen of those states also utilize a receipts threshold test for corporate income taxes (e.g., New York), and/or other tax compliance, such as partnership filings and excise taxes (e.g., California and Washington). Accordingly, determining how receipts are sourced to a state becomes critical in light of the potential for increased income tax exposure under economic nexus. This is particularly important for service providers due to the shift in state sourcing rules from the cost-of-performance methodology to the increasingly popular market-based sourcing approach.

With service providers now required to consider the impact of economic nexus, public relations, advertising and media should consider the following:

State sourcing of service revenue

The two primary models that states use to source service revenue for income tax purposes are: one, cost of performance and two, market-based sourcing.

Under the cost-of-performance approach, service revenue is sourced to the location from which the services are rendered, or more specifically, the place where the costs to perform the services are incurred. When services are performed in multiple jurisdictions, some states require that either the majority or greatest proportion of the services need to be performed in the state, in order to source any revenue there—in essence, an all-or-nothing test. Other states divide the revenue proportionally based on the percentage of service rendered in the state compared to the overall whole of the service rendering.

For market-based sourcing, revenues are sourced to the location of the customer, or more specifically, the location where the benefit of the service is received. State regulations contain various criteria for determining the jurisdiction where the benefit is received, such as the customer’s billing address, the service delivery location, the order from location or even a reasonable approximation based on the particular circumstances at hand.

Market-based sourcing leading to economic nexus

As the vast majority of states now use market-based sourcing for corporate tax purposes, with many of them using this methodology for partnership filings as well, the interplay between the market-based sourcing concept and triggering economic nexus must be understood for the potentially significant impact on one’s state taxes.

How may this affect public relations, advertising and media firms? To illustrate, take the following example: Corporation A renders $750,000 of services from its office in New York to a client located in California, a market-based state. Assume California has also adopted a $500,000 income tax economic nexus threshold. Since Corporation A’s service receipts are sourced to California under market-based sourcing, it will have exceeded California’s economic nexus threshold, thereby requiring Corporation A to file an income tax return in the state. Had California been a cost of performance jurisdiction, Corporation A would not have a state filing requirement because no receipts would be sourced to California given that none of the services were rendered there. Thus, Corporation A wouldn’t exceed California’s economic nexus threshold.


Each year more and more states make the switch to market-based sourcing for service revenue to better reflect—and of course, tax—the ever-expanding service-based economy. By layering in an economic nexus threshold, states stand to cast a wider net, sweeping up new taxpayers. While the above example was simple, in practice, service providers, such as public relations, advertising and media firms, can be operating in dozens of states while rendering services for clients in many others. This sharply increases the complexity of applying these rules and the need to have an in-depth understanding of the revenue-sourcing methodologies and how they intersect with the economic nexus. It’s important for public relations, advertising and media firms to consult with their trusted advisor as they consider the state sourcing for their service revenue and how the economic nexus will impact their firm’s tax obligations.

For more information, contact Michael Belfer at [email protected].


Michael Belfer is Partner and Chair of Anchin’s Public Relations, Advertising & Media Group.