By Nick Kump and Scott Wright
The Louisiana Court of Appeal held that income derived from diagnostic testing of Louisiana patients’ blood samples and other medical specimens performed in Texas should be sourced to Texas for corporate income tax apportionment purposes. The taxpayer, which operates a multistate network of laboratories where it performs medically prescribed diagnostic services, had sought a refund for overpayments on its 2005 and 2006 income taxes. The court held that because the taxpayer is a service business and not a manufacturer or a merchandiser the income it derives from performing services does not constitute “net sales” (which refers to sales of tangible items) under the states’ general apportionment formula. While noting that Louisiana had expressly adopted market-based sourcing beginning in 2016, the court concluded that for prior years the state’s apportionment formula “clearly does not look to the location of the taxpayer’s market or customers; instead, the source of the income is the state where the income-producing service is performed.” Accordingly, the court held that the income derived from services performed in Texas was attributable to Texas and not to Louisiana. Quest Diagnostics Clinical Labs., Inc. v. Barfield, No. 2015-0926 (La. App. 1 Cir. 9/9/16).