Internet advertising - everyone is doing it.

What do I mean?  Well, it has become commonplace for certain types of companies to allow other companies to post "ad impressions" or advertisements on their websites.  By allowing these other companies to advertise on their site, they are creating "advertising revenue." 

THE QUESTION

When a company has Internet advertising revenue, the company needs to figure out what state the revenue should be sourced to for apportionment purposes.  (NOTE:  The sourcing question would come after the company has determined what states it has a taxable presence or nexus in.)

THE PROBLEM

The old rules related to sourcing advertising revenue dealt with advertisements in magazines or newspapers.  The Internet takes sourcing advertising revenue to a whole new (complicated) level.  In addition, most states have NOT addressed this issue.  The few that have, have reached different conclusions. Hence, possible sourcing solutions may include:

1. Source to the state of the viewer of the advertisement (most difficult to do)
2. Source to the state of the advertiser (headquarters or multiple locations?)
3. Source to the state where the server upon which the website is hosted is located
4. Source to where the services are performed (which are connected to posting the advertisement)
5. Source to where the benefit of the advertising services is received (generally the headquarters of the advertiser; could be multiple locations)

So What?

If your company or client is receiving advertising revenue from allowing third parties to advertise on its website, your company or client may want to review how it is sourcing that revenue for state income tax purposes before an auditor does.