State Market-Based Sourcing Needs Clear Laws, Not Court Approvals

The Minnesota Supreme Court’s ruling in Humana MarketPoint, Inc. v. Commissioner of Revenue illustrates a growing shift in state tax policy—away from where services are contracted for or performed and toward where they’re “felt.”

The decision could undermine predictability in corporate tax liability. States that want to tax economic presence over contractual reality should codify the practice instead of implying it in court. And courts shouldn’t be tasked with stretching statutory language until it snaps.

Humana centered on a question poised to arise with increasing frequency: When a company provides services to a client in a given state, and that client passes on elements of those services to end users in other states, which state gets to tax the income? The one furthest down the line, according to Minnesota. The court’s decision partially relied on where the services were ultimately received, not where the work was performed or where the contract was executed.

This reflects a broader trend in state tax policy. In the quest for revenue, states are analyzing where services are felt, enjoyed, or otherwise experienced by an end user. The economic logic is sound, but the shift reduces any pretense that a corporate taxpayer can predict where they’ll be liable for tax.

The details of the Humana case are instructive. One entity provided pharmacy benefit management services to another—the latter being an insurance company based in Wisconsin. The insurance company had members throughout the country, including in Minnesota. The question was whether Minnesota’s franchise tax could reach income generated from the provision of pharmacy benefit services even though the entity had no direct contracts or employees in the state.

The Minnesota Supreme Court said yes, because Minnesota was where the services were ultimately received. Not by a direct customer, but by that customer’s customers—the individual health plan members who picked up prescriptions in Minnesota pharmacies. The court “looked through” to the transaction chain to source income and skipped over the legal transaction to focus on where the economic benefit was felt by the end customer.

The statutory reasoning was implicit: Minnesota’s corporate tax apportionment rule requires service receipts to be sourced to the state where they’re received. The entire decision turned on the Minnesota legislature’s phrasing of the statute as “received” rather than “directly received.” Humana argued it should mean received by their contractual customer, the insurer, whereas the state argued it could mean anyone that received services down the transaction chain. The court agreed with the state based on the absence of an adverb.

If states don’t explicitly rewrite the rules of tax nexus—moving from legal relationships to economic impact—they might reinvent sourcing rules every time a case gets to court.

Photographer: Jon Cherry/Bloomberg via Getty Images

The decision’s direct impact is that tax exposure in Minnesota is no longer tethered to a contractual relationship. The taxpayer in Humana performed services for a known party and structured its business accordingly. Minnesota’s highest court held that the tax commissioner could look beyond that relationship and assign tax liability based on where the benefit of those services was ultimately felt. This makes clear that the transaction doesn’t control sourcing—downstream knock-on effects do.

It wasn’t legislative intent or clear statutory language that got them there, but what was missing from the law. The court saw the lack of language clarifying that tax liability was limited to income from services directly received, and it used that omission to reach as far downstream as the facts would allow.

That’s the real problem. The ruling wasn’t necessarily wrong under the text, but it reveals how thin the statutory language was to begin with. If states don’t explicitly rewrite the rules of tax nexus—moving from legal relationships to economic impact—they might reinvent sourcing rules every time a case gets to court. That makes it nearly impossible for corporate taxpayers to be certain what taxes they’ll be subject to and organize their offerings accordingly.

Legislatures need to codify adoption of market-based sourcing in clear and direct language. States that believe services received indirectly or by third-party beneficiaries create income or franchise tax nexus should provide definitions, limits, and examples. That’s the bare minimum in a tax system that now expects companies to identify, track, and allocate service benefit flows to parties they haven’t contracted with.

Until lawmakers provide such statutory clarity, courts shouldn’t infer sweeping sourcing theories from ambiguous statutes or drafting omissions. State tax agencies should issue interpretive guidance that forces lawmakers to engage with and clarify the issue of income sourcing.

And taxpayers themselves—especially those operating across state lines and with complex transaction chains—must demand that rules be built on ex ante predictability, not ex post inference.

Taxing income from services based on where they’re enjoyed is a defensible policy. In fact, doing so limits the degree to which taxpayers can leverage low-tax jurisdictions to duck liability. In a post-Wayfair world, it isn’t surprising that states are chasing economic presence where they can get it. But states having that right doesn’t absolve them of the obligation to draft clear rules and put corporate taxpayers on notice.

The Minnesota Supreme Court didn’t interpret a clear law or apply an unambiguous statute to an edge case. Rather, it filled a vacuum. If more states follow suit, we’ll be left with a state income tax system where exposure hinges on the whims of a customer and a court’s willingness to read into legislative absence.

The case is Humana MarketPoint, Inc. v. Comm’r of Revenue, Minn., No. A25-0058, decided 9/24/25.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social

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