For Nebraska businesses that sell goods or services across state lines, how each state decides to tax your income directly affects your bottom line. This process, known as apportionment, determines how much of your total profit each state gets to tax. As more states shift to sales-based apportionment and market-based sourcing, many business owners are discovering that their tax liability looks very different from what it did a few years ago. Whether this change helps or hurts you depends entirely on where your customers live, where your work is performed, and how your business operates. 

What is sales-based apportionment? 

Apportionment is simply the formula states use to decide “their slice of your income pie.” Historically, states used three factors: property, payroll, and sales. Today, most states, including Nebraska and Iowa, have moved to sales-only apportionment, which focuses specifically on where sales occur, not where employees or facilities are located. This can be a major win or a surprise cost: 

• If your customers are mostly outside high-tax states, you may owe less tax overall. 
• If your customers are in high-tax states, you may owe significantly more even if all the work is done in Nebraska. 

Understanding where your sales are “sourced” is critical. 

Market-Based vs. Cost of Performance 

Even though most states use sales-based apportionment, they don’t all define “sales location” the same way. Two sourcing methods dominate: 

1. Market-Based Sourcing:

• Income is sourced to the state where the customer receives the benefit of the service.
• Example: A Nebraska consulting firm serves a client in Colorado. Colorado counts the sale, even if all the work happened in Nebraska. 

2. Cost of Performance (COP):

• Income is sourced to the state where the work is performed, and costs are incurred.
• Example: A Nebraska engineering team designs a project for a Missouri client. Because both states are market-based sourcing for service revenue, this income is not sourced to either state. 

The shift toward market-based sourcing has the biggest impact on service providers, SaaS companies, engineering firms, architects, contractors, and technology businesses serving out-of-state clients. 

Regional State Trends 

Most states have now adopted market-based sourcing for services and intangibles, but a few still use or are transitioning from cost of performance.  

How This Impacts Your State Tax Bill 

Your tax burden depends on where your customers are and where your work happens. Here’s how the shift can help or hurt: 

When Sales-Based Apportionment Helps 

• You have sales sourced to states in which you don’t have nexus/filing requirement. 
• Your customers are mostly outside high-tax states. 
• You have a large Nebraska operation but sell across the Midwest. 
• You are a SaaS or consulting business with clients nationwide.
• You’ve historically been taxed on where the work is done (COP states), and now your sales shift outward. 

Example: A Nebraska SaaS company has clients in 30 states, but all work is done in Nebraska. With market-based sourcing, far less income is taxed in Nebraska. 

When Sales-Based Apportionment Hurts 

• You have nexus and sell into high-tax states (like CA, MN, IL). 
• You perform work in a low-tax state, but the benefit is received elsewhere. 
• Your revenue mix has shifted toward services, not goods. 
• You’ve expanded into new markets without reviewing sourcing rules and economic nexus thresholds.  

Example: A Nebraska engineering firm serves clients in California. Under market-based sourcing, more income shifts to California, where tax rates are significantly higher. 

Red Flags That Suggest You Should Review Your Apportionment Method 

You may need an apportionment checkup if: 

• You have a significant level of sales to customers in many states (500k +) and may reach economic nexus thresholds in certain states despite. having no physical presence.
• Your customer locations have changed recently. 
• You added remote employees in new states. 
• Your revenue mix shifted toward service or digital products. 
• You entered new markets without considering nexus rules. 
• You have seen unexpected increases in state tax liability. 
• Your invoices do not clearly describe where the customer receives the benefit. 
• You operate in both market-based and COP states and aren’t sure how to source income consistently. 

Many businesses are surprised to learn they have been overpaying or underpaying and unknowingly creating exposure. 

Strategies to Optimize Your State Tax Position 

Once you understand how your income is sourced across states, the next step is taking proactive measures to optimize your tax position. These strategies can help ensure your apportionment method aligns with your business model and minimizes unexpected state tax liabilities. 

• Map your customer base: Identify where services are delivered versus where they are performed to understand exposure. 
• Review nexus positions: Expanding operations or digital presence can unintentionally create tax obligations in new states. 
• Evaluate entity structure: Certain legal structures may allow for more favorable apportionment results. 
• Track legislation: As Kansas and Arkansas transition to market-based sourcing, anticipate how this will affect your effective state tax rate. 
• Document methodologies: Keep detailed records to support how income is allocated, particularly in states with evolving rules. 

Reduce Risk & Uncover Savings with Lutz 

Our State and Local Tax services help businesses of all sizes to identify risks, uncover savings, and simplify multi-state compliance. We can help you evaluate how evolving apportionment rules impact your company and design a strategy that aligns with your operations and growth plans. Contact us to learn more.