In simple terms, the "income-producing activity" test and the "costs of performance" (COP) test are used to source sales of services to the state where the service is performed. "Market-based" sourcing is sourcing sales of services to the state where the customer receives the benefit.
Example: a service was performed in State A, and the customer is in State B.
If State A is a market-based sourcing state, the sale would not be sourced to State A. If State B was a COP state, then the sale would not be sourced to State B either. On the other hand, if State A is a COP state, the sale would be sourced to State A. If State B is a market-based sourcing state, the sale would also be sourced to State B.
In other words, depending on the rules of the states involved, you could source the sale to both states, one state, or none of the states.
Now, most states which are COP states source sales based on where the greater portion of the income-producing activity was conducted. However, there are some states that prorate the sourcing of the sale when some services are performed in more than one state.
Currently, 10 states use "market-based" sourcing (6 of those states changed within the past few years. California changes to "market-based" sourcing in 2011, and New York is currently considering tax reform that would change to "market-based" sourcing.
If you have any questions or need assistance, please contact me at email@example.com.