Recent state court decisions are reshaping how states source receipts for income, franchise, and gross receipts tax purposes—particularly for businesses that sell through intermediaries. For consumer products and retail companies, these developments reflect a growing judicial focus on “ultimate destination” sourcing: where goods ultimately end up in the hands of the customer.
Recent decisions in Texas and Ohio illustrate this shift. In both jurisdictions, courts have signaled a willingness to look beyond formalities and instead focus on the location of the end market. This represents a departure from traditional sourcing approaches that rely on legal title transfer, contractual delivery terms, or the location of distributors and other intermediaries.
For retailers, this trend aligns with the realities of modern supply chains. Products routinely move through distributors, fulfillment providers, e-commerce platforms, and third-party sellers before reaching the end consumer. Historically, these intermediary steps often supported sourcing positions outside the customer’s state. Today, however, states are increasingly challenging those positions—particularly where the facts suggest that the true market is elsewhere.
This shift might create heightened risk in several common retail structures. Distributor and reseller arrangements, as well as drop-ship and marketplace models, are drawing increased scrutiny where sourcing is tied to intermediary locations rather than customer delivery. In addition, inconsistent approaches across income, franchise, and gross receipts taxes may create further exposure and attract audit attention.
Potential Business Implications
Retail and consumer products companies may want to consider the following actions:
- Evaluate current sourcing methodologies to determine whether they reflect an “ultimate destination” framework;
- Identify risk areas in distributor, marketplace, and drop-ship models where customer location may differ from contractual terms;
- Coordinate sourcing positions across tax types to ensure consistency and defensibility; and
- Prepare for audit scrutiny by strengthening documentation around product flow and customer location.
States are increasingly prioritizing economic reality over form. As a result, sourcing outcomes are being driven less by how a transaction is structured — and more by where the customer receives the product. Taking a proactive approach now may help reduce audit risk and position businesses for evolving enforcement trends.