How are a healthcare management services organization's fees from affiliated practices sourced for apportionment?

The structure and what it changes

Apportionment divides a multistate company's income among the states. Each state's formula includes a sales factor or gross receipts fraction: the receipts assigned to the state (the numerator) over the receipts everywhere (the denominator). Sourcing is the choice of which state a given receipt is assigned to.

In its usual form, the corporate practice of medicine doctrine bars lay investors from owning a medical practice. The practice is therefore a professional corporation owned by licensed physicians or dentists. A management services organization (MSO) supplies the non-clinical side. In California, practicing without a valid certificate is a public offense, and a person who "conspires with or aids or abets another" to do so is guilty of the same offense (Cal. Bus. and Prof. Code section 2052(a), (b)). "Corporations and other artificial legal entities shall have no professional rights, privileges, or powers" (section 2400). A person practices dentistry who "Manages or conducts as manager, proprietor, conductor, lessor, or otherwise, a place where dental operations are performed" (section 1625(e)). Each director, shareholder and officer of a dental corporation must be a licensed person (section 1805).

A staff presentation to the Medical Board of California's Education and Wellness Committee is not a rule. Its file name and agenda date it to January 29, 2015. It contrasts an MSO "arranging for, advertising, or providing medical services" with one "only providing administrative staff and services for a physician's medical practice," and it lists an entity that "makes decisions on coding and billing procedures" as a red flag.

Other states reach a similar place by different routes. Texas disciplines a physician who "directly or indirectly aids or abets the practice of medicine by a person, partnership, association, or corporation that is not licensed to practice medicine by the board" (Tex. Occ. Code section 164.052(a)(17)). The Louisiana State Board of Medical Examiners states that a physician's employment by a business corporation "does not per se violate the Medical Practice Act." It treats a corporation that controls a physician's medical judgment as engaged in the unauthorized practice of medicine (statement of position, December 2024). The North Carolina Medical Board's position is that businesses practicing medicine in North Carolina "must be owned in their entirety by persons holding active North Carolina licenses" (position statement 10.1.2). These are a sample. The doctrine varies by state and by profession, and no state without any form of it was identified at a primary source.

The doctrine matters to sourcing in one way. The professional corporation, not the investors, contracts for the MSO's services and pays the fee. It is therefore the customer under every regulation that defines the customer by the contract (New York and Massachusetts state that definition expressly). Patients and payers receive the clinical service from the practice. They do not buy the MSO's service.

A percentage-of-collections fee is lawful in California if it is "commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer" (Cal. Bus. and Prof. Code section 650(b)). The practical point for apportionment is that a fee bundling administration with space and equipment contains more than one kind of receipt: a service, and the rental of real or tangible property. The sourcing rule depends on which kind. The sources read do not assign a bundled MSO fee to one category. California's bundled-sale provision, as it reads in the second modified text of the amendments, applies to a sale "from the provision of a service, and tangible or intangible property": "If the value of each portion is readily ascertainable, then each portion shall be separately assigned using such values." The provision for values that are not readily ascertainable was not read. An agreement that states the value of the space and equipment supplies the values that provision asks for. The fee in the worked example has no rent component.

California

California assigns service receipts to California "to the extent the purchaser of the service received the benefit of the services in this state" (Cal. Rev. and Tax. Code section 25136(a)(1)). It apportions the business income of an apportioning trade or business by the sales factor alone, with an exception for businesses described in section 25128(b) (section 25128.7). The regulation of the Franchise Tax Board (FTB) finds the location of the benefit by working through steps in a fixed order (Cal. Code Regs., tit. 18, section 25136-2). The amendments apply to taxable years beginning on or after January 1, 2026, prospectively and with no election to apply them to earlier years (FTB Final Statement of Reasons).

For 2026 and later, the presumptions come first. The Final Statement of Reasons says that "the presumptions at proposed subsection (c)(1)(A)1. apply before substantiating the location." The benefit is presumed received in California "to the extent the service predominantly relates to" any of four things. They are real property located in California; tangible personal property located there when the service is received; intangible property used there; or "Individuals who are physically present in this state at the time the service is delivered" (subsection (c)(1)(A)1.a. to d.). A presumption yields only to a showing, "based on a preponderance of the evidence," that the benefit is received elsewhere. A preponderance means that the evidence overall favors that conclusion. The party overcoming a presumption "shall first consider" the taxpayer's contracts or books and records ((c)(1)(A)2.). After the presumptions, the steps run in this order. First come the taxpayer's contracts or books and records ((c)(1)(B)). Next come all other sources of information, then reasonable approximation and, last, the customer's billing address in the taxpayer's books and records. The customer is the professional corporation. A separate rule assigns receipts to the customer's billing address when a taxpayer has more than 250 customers for a single listed professional service ((c)(3)). An MSO with a handful of practices cannot use that rule.

No published example concerns an MSO, so the application is reasoned from the text. The FTB could be expected to test each component of a percentage-of-collections fee against the presumptions first. Space and equipment relate to California real property and tangible property. Billing and collections arguably relate to the practice's receivables, which are intangible property "used in this state." Scheduling and front-desk work relates to individuals physically present when the service is delivered. Where a presumption fits, it governs to the extent it fits, and it yields only to proof by a preponderance of the evidence. The taxpayer therefore cannot choose the contracts path over a presumption that fits. The contracts and books decide where the fee lands only when no presumption fits or one is overcome. On the example's facts every path ends in the clinic's state.

If the fourth presumption (individuals physically present) applies, central scheduling for clinics in several states would be split by where the patients are, patient by patient. Example 7 in the amended regulation shows the method. In it, a call center keeps no call records, and the business customer's own sales data by state govern under the step for all other sources of information. For an MSO, the practice's patient data are the "other sources" the MSO must be able to obtain and produce. No example read answers whether an MSO's scheduling, call-center or front-desk services "predominantly relate" to individuals physically present. The closest published example is a "Law Corp" example in the second modified text (a professional service to a business entity). It was not read.

For taxable years before 2026, the prior text applied this order to a business customer. First came the location the contract or the taxpayer's books and records indicate, which was presumed and could be rebutted by a preponderance of the evidence. Then came reasonable approximation, then the location from which the customer placed the order, and last the customer's billing address (section 25136-2(c)(2)(A) to (D), prior text). A commenter raised the individuals presumption. The Final Statement of Reasons answers by pointing to the Web Corp example in the existing regulation and treating the provision as clarifying existing rules. The FTB could therefore apply the same patient-location method to open years before 2026 (years still open to adjustment) under the prior text's approximation step. This article does not call the patient-location method new as a matter of the FTB's position. No California provision read excludes a receipt assigned to a state where the taxpayer is not taxable.

New York

New York corporations source receipts under a market sourcing approach, which looks to the customer's location. The approach is "generally effective for tax years beginning on or after January 1, 2015," and the Department of Taxation and Finance reports that the notice of adoption of the corporate tax reform regulations was published on December 27, 2023 (Corporate Tax Reform page). A receipt from services that no other subdivision of Tax Law section 210-A addresses goes into the numerator "if the location of the customer is within the state." A four-step hierarchy decides whether it does. The steps are, in order: whether the benefit is received in this state; the delivery destination; the preceding year's within-state fraction for such receipts; and the current year's fraction for the receipts sourced under the first two (section 210-A(10)(a), (b)). The taxpayer "must exercise due diligence under each method" before rejecting it.

In New York, the customer is "the party who enters into a transaction with the corporation for the purchase of a service or other business activity from the corporation," so the professional corporation is the customer, and a corporation is a business customer (20 NYCRR section 4-4.1(b)). For a business customer, the benefit is presumed received in New York "without regard to the billing address" of the customer if the customer receives it there. A benefit received in several places is apportioned by the value the customer derives in each (section 4-4.4(b)(1), (3)).

The location of a third party, such as the consumer, counts "only in the case of an intermediary transaction" (section 4-4.4(b)(2)). In an intermediary transaction, the business customer derives value from a service at the consumer's location and not its own. The transaction takes one of two forms. In the first, the corporation provides the service "directly to the consumer" at the business customer's direction. In the second, the corporation sells the service to the business customer, "who then passes on the service or other business activity to the consumer," and must be obligated to perform a substantial portion after the property the service relates to is delivered to the consumer (section 4-4.1(c)(1)(i), (ii)). A billing or administrative service relates to no property the practice delivers to a patient, so the second form does not fit an MSO's fee. The first form could fit a patient-facing service run at the practice's direction. The definition has no healthcare illustration, and its application to an MSO is open.

The in-person rule lists "medical and dental services, including medical testing and x-rays," but it applies to services rendered to the body or in the physical presence of an individual. Those are the practice's services and not the MSO's (section 4-4.3(b)). The in-person rule and the intermediary-transaction rule are separate routes to the patients' location, and one service cannot use both, because intermediary transactions "do not include services or activities apportioned under the special rules in section 4-4.3." The billing-address presumption is available only if the corporation has more than 250 business customers purchasing substantially similar services and the customer in question accounts for no more than 5 percent of receipts (section 4-4.2(d)(1)(ii)). A corporation must document the steps it takes before abandoning each method, and the Commissioner may require an earlier method if the information could have been obtained (section 4-4.2(d)(2), (3)).

Massachusetts

For a sale of a service, Massachusetts assigns the sale to the state "if and to the extent the service is delivered to a location in the commonwealth" (G.L. c. 63, section 38(f)(3)). The Department of Revenue's regulation lists management services among professional services: "Professional services include, without limitation, management services, bank and financial services,". For assigning the sale of a professional service, the regulation defines the customer as "the person who contracts for such service, irrespective of whether another person pays for or also benefits from the taxpayer's services" (830 CMR 63.38.1(9)(d)4.d.i, iii). That definition applies to professional services, a category that names management services. It is not a general definition of the customer.

For a business customer, the regulation works through a sequence. The first step is the state where the customer principally manages the contract, meaning the location of the customer's primary contact person for implementation and day-to-day execution. The next steps are the customer's place of order and then its billing address. A customer supplying more than 5 percent of service sales must have its contract-management state identified. The billing-address safe harbor (a rule under which the billing address is accepted) is limited to a taxpayer with more than 250 customers and a customer at or below 5 percent. A sale that cannot be assigned after a reasonable good-faith effort, or that would be assigned to a state where the taxpayer is not taxable, is excluded from both numerator and denominator (4.d.iii and 1.f). For a one-clinic professional corporation, the state where the customer principally manages the contract coincides with the practice's location.

Example 14 assigns an adviser's fee from a fund partnership to the state where the fund principally manages the contract and states that the partners' residences are not relevant. It is the closest example read, and it does not involve healthcare. An MSO with staff on site raises the question whether the in-person rules apply instead. The regulation assigns professional services "of an intellectual or intangible nature" under the professional services rules "notwithstanding the fact that such services may involve some amount of in-person contact" (4.d.ii(A)). The first sentence of 4.d.ii was not read.

Illinois

"Sales of services are in this State if the services are received in this State" (86 Ill. Adm. Code 100.3370(c)(8)(D); 35 ILCS 5/304(a)(3)(C-5)(iv)). The statute adds a limit: gross receipts from services provided to a corporation, partnership or trust "may only be attributed to a state where that corporation, partnership, or trust has a fixed place of business." Two situations trigger a fallback. In the first, the state of receipt is not readily determinable. In the second, it is a state where the customer has no fixed place of business. In either, the services are deemed received at the location of the office of the customer from which they were ordered in the regular course of its trade or business. If the ordering office cannot be determined, they are deemed received at the office of the customer to which the services are billed. The regulation contains the same conditions and fallback steps. It also excludes receipts when "the taxpayer is not taxable in the state in which the services are received or deemed to be received," so the receipts "must be excluded from both the numerator and denominator of the sales factor."

For an MSO, Illinois counts the fee only if the professional corporation has a fixed place of business in Illinois. A clinic the practice operates there would ordinarily qualify. The regulation defines "fixed place of business" by the meaning the term has in section 864 of the Internal Revenue Code and the related Treasury regulations (86 Ill. Adm. Code 100.3405(b)(1)), and this article does not apply that meaning to a practice. The regulation read has no healthcare example, and its examples other than Example 3 under subparagraph (D)(iii) were not read.

Texas

Texas apportions margin, the amount subject to its franchise tax, by a fraction of Texas gross receipts over gross receipts from the entire business (Tex. Tax Code section 171.106(a)). Texas gross receipts include receipts from "each service performed in this state" (section 171.103(a)(2)). The Comptroller's rule sources a service to "the location where the service is performed." A service is performed "at the location or locations where the taxable entity's personnel or property are doing the work that the customer hired the taxable entity to perform," and "Activities that are not directly used to provide a service are not relevant" (34 Tex. Admin. Code section 3.591(e)(26)(A)). The Texas Supreme Court reads "service performed in this state" to locate performance "at the place where the taxpayer's personnel or equipment is physically doing useful work for the customer" (Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. March 25, 2022)).

Texas does not look to the customer's location. The contract defines the work, but the customer's location and the patients' location do not enter the calculation. A billing center in Texas that collects for practices elsewhere therefore generates Texas receipts for the work done there, to the extent collection is part of the service the practice hired the MSO to perform. The MSO's own employees on site at a Texas clinic are its personnel performing the service in Texas. The practice's own employees are not. General corporate overhead of the MSO in Texas does not count, because activities not directly used to provide the service are not relevant. The facts must therefore say who employs the on-site staff.

Where one charge covers work inside and outside Texas, the receipts are Texas gross receipts "on the basis of the fair value of the services that are performed in Texas." The rule says that "the relative value of each service provided on a stand-alone basis may be considered," that "Units of service, such as hours worked, may also be considered," and that "The cost of performing a service does not necessarily represent its value" (subparagraph (B)). It gives no formula. The rule splits the charge by fair value. This article applies that split to each practice's fee as if it were a single charge. No source read confirms that reading. The measure of fair value also remains unsettled: in Sirius XM the court noted that no court had yet considered the Comptroller's argument that the taxpayer's evidence of fair value was insufficient. No Comptroller guidance on a split charge was found in the sources read.

Florida

Florida apportions by a three-factor fraction. The sales factor counts for 50 percent, the property factor for 25 percent and the payroll factor for 25 percent. The sales factor's numerator is "the total sales of the taxpayer in this state" (Fla. Stat. section 220.15(1), (5)). The rule counts "the gross receipts from the performance of such services including fees, commissions, and similar items" as sales of a taxpayer providing services (Fla. Admin. Code r. 12C-1.0155(1)(h)). It attributes personal services to Florida "if such services are performed in Florida," and it treats mixed performance separately. Where services relating to a single item of income are performed partly inside and partly outside Florida, they go to Florida "only if a greater portion of the services were performed in Florida, based on costs of performance." Services performed in each state "may constitute a separate income producing activity, even though the client is billed a lump sum amount," and the separate activities are measured by the ratio of time spent in Florida to total time spent everywhere (r. 12C-1.0155(2)(e)). Other sales are attributed to Florida when the income producing activity is performed wholly in Florida, or when "the greater proportion of the income producing activity is performed in Florida, based on costs of performance" ((2)(l)).

The rule's words give only half of the Florida picture, and they name no customer location. The Department of Revenue has issued four technical assistance advisements on service receipts, each binding the Department "only under the facts and circumstances described in the request." Advisement 18C1-011 (September 27, 2018) applies paragraph (2)(l). It states that paragraph (2)(e) does not apply because that paragraph addresses taxpayers that provide personal services. It says that "the most important factor to determine is where the customer is located," and it sources the income "to the location of the customer to which the services are provided, on a market basis." Advisement 20C1-001 (January 13, 2020) gives the same answer. Advisement 20C1-010 (September 11, 2020) sources the income "to the location to which the services are provided, on a market basis." Advisement 23C1-012 (October 3, 2023) addresses service income received as a flow through for services performed both inside and outside Florida, and it applies paragraphs (1)(h) and (2). Its discussion says that, "to the extent that those services are provided to customers located in Florida," paragraph (2) directs that the income is sourced to Florida. None of the four advisements read concerns a management services organization or a physician practice. The Department's likely position is that the sale to the practice is the income producing activity and the receipt goes to the practice's location. That position is reasoned from the advisements and is stated in none of them for an MSO.

The taxpayer's side rests on the rule's words. A complaint filed in the Leon County circuit court in February 2025 (OptumRx, Inc. v. State of Florida Department of Revenue, No. 2025 CA 000188) argues that an income producing activity is defined by reference to its costs of performance. It cites two earlier circuit court decisions as supporting the taxpayer's reading: Target Enterprises, Inc. v. Department (No. 2021-CA-002158, November 28, 2022) and Billmatrix Corporation v. Department (No. 2020-CA-000435, March 1, 2023). Neither decision was read, a complaint is a pleading and not authority, and the status of the case is not known. No source read answers whether an MSO's administrative services are personal services under paragraph (2)(e) or an other sale under paragraph (2)(l).

Washington, San Francisco and Los Angeles

These are pointers only, and the classification of an MSO's fee under each is open.

Washington. For apportionable activities, which include the service and other activities classification, the statute attributes gross income to Washington through a sequence of steps that begins "Where the customer received the benefit of the taxpayer's service" (RCW 82.04.462(3)(b)). The Department of Revenue's rule states the method. Where the service is provided to a customer engaged in business and relates to the customer's business activities, "the customer receives the benefit of the service where the customer's related business activities occur" (WAC 458-20-19402(303)(c)). The rule's human resources example attributes the receipts one third to each of three states in which the customer has an office using the services (Example 35). The books and records must show that the method "fairly apportions, and does not distort" ((302)(c)(ii)). Washington also has an exclusion that works on the denominator only. Gross income attributable to a state where the taxpayer is not taxable is excluded from the receipts factor's denominator if some of the activity is performed in Washington (RCW 82.04.462(3)(c)). In Washington Imaging Services, LLC v. Department of Revenue, No. 84101-2 (Wash. May 19, 2011), the Washington Supreme Court held that all of the payments a company received constituted its gross income. The company paid a radiology group a share of its net receipts under their contract, and it "does not act in an agent's capacity to pass payments from the patients through" to the group. The decision concerns the measure of gross income and not apportionment. The Department's industry guide for medical clinics (dated July 10, 2017) does not address management companies, and no published deduction for MSO fees was found.

San Francisco. The Treasurer's page states that "The descriptions below apply to tax year 2025 only." Its Category 5 includes NAICS 54 (Professional, Scientific, and Technical Services), 55 (Management of Companies and Enterprises) and 62 (Healthcare and Social Assistance). NAICS is the federal industry classification code system. The page's Category 4 includes 5611 (Office Administrative Services). Categories 1, 4, 5 and 6 allocate 75 percent of gross receipts to the City and 25 percent by payroll. An MSO's category turns on its NAICS code, which the page does not resolve. The code sections (953.20 to 953.26 and 956.1(e)) were not read.

Los Angeles. The Office of Finance business tax rate table (revised 08/25) lists Professions and Occupations, Class 9, at $4.25 per $1,000 of gross receipts, with an entry reading "Professions & Occupations/ Health Maintenance Org*," and it lists Miscellaneous Services, Class 8, at $3.56 per $1,000. It has no management services row. Which class an MSO's fee falls in depends on the Municipal Code's class definitions, which were not read.

Where the rules agree and where they split

When the MSO's billing staff, its on-site staff and the managed practices are all in one state, every rule read gives the same answer: the fee belongs to that state. The rules split when the MSO centralizes work in one state and the practices are elsewhere. California, New York, Massachusetts and Illinois then assign the fee to the practice's state. Texas assigns to Texas the part of the work done at the center. Florida's rule text points to the state where most of the cost of performance lies, while the Department's advisements point to the customer's location. The numerators across states can therefore add up to more than the fee, as the worked example shows. That result follows from the rules and is not a defect any state intends. Where a state excludes receipts assigned to a state where the taxpayer is not taxable, as Illinois does, the exclusion adds a further difference. This article writes to the states read and makes no count of how many states follow either approach.

Related-party pricing and combined reporting

When the MSO and the practices are related by common control or contract, the price of the management agreement is a pricing question and not a sourcing rule. A repricing changes the amount of the fee in every state's numerator and denominator and changes no sourcing rule.

California applies Internal Revenue Code section 482 in these words: "The provisions of Section 482 of the Internal Revenue Code, relating to allocation of income and deductions among taxpayers, shall be applicable," except as provided in Article 1.5 of the chapter (Cal. Rev. and Tax. Code section 24725). Where the apportionment provisions "do not fairly represent the extent of the taxpayer's business activity in this state," the taxpayer may petition for, or the FTB may require if reasonable, one of several alternatives. They are separate accounting, the exclusion of factors, the inclusion of additional factors or "any other method" of equitable apportionment (section 25137). Separately, the FTB may require "a consolidated report showing the combined net income" of a corporation and the corporations it owns or controls, directly or indirectly, or that own or control it (section 25104). A combined report treats the related corporations as one group.

New York keeps a discretionary adjustment. The commissioner may adjust the apportionment fraction if it "does not result in a proper reflection of the taxpayer's business income or capital within the state," and the adjustment may be made in his or her discretion or on the taxpayer's request. "The party seeking the adjustment shall bear the burden of proof" (Tax Law section 210-A(11)). The current regulation is 20 NYCRR section 4-1.6, adopted December 27, 2023, the day the earlier section 4-6.1 was repealed. Under it, a request to vary the factor "must be submitted in writing," and the party seeking to vary it "bears the burden of proof to demonstrate by clear and convincing evidence" that the factor "does not result in a proper reflection of the taxpayer's business income or business capital within New York State" and that the proposed adjustment is appropriate (section 4-1.6(c)(1), (d)). The subdivisions read say nothing about related-party pricing. Washington treats related entities as separate persons: "The fact that entities are related does not change the fact that they are separate persons for tax purposes" (Det. No. 23-0009, 45 WTD 020).

Whether the professional corporation is a member of the MSO's California combined group is a separate question. The income and factors of two or more corporations are included in a combined report "only if" the corporations are "members of a commonly controlled group" (section 25105(a)). The common-ownership test turns on "stock representing more than 50 percent of the voting power of the corporations" ((b)(2)). Stock representing voting power includes stock where ownership is retained but the voting power is transferred for one year or less, or by proxy, voting trust, written shareholder agreement or a similar device where the transfer is revocable by the transferor ((f)(5)). Control without ownership is the open question. One example is a stock transfer restriction or succession agreement over the physician-shareholder's stock. No source read applies that paragraph, or any control test, to an MSO and a practice. If the practice were a member, the fee would be an intercompany receipt (a receipt between members of the same group) eliminated from the combined sales factor. The elimination provision (section 25106.5) and its regulation were not read. Neither was New York's combined report provision (Tax Law section 210-C).

What changed or may change

California's amended regulation applies to taxable years beginning on or after January 1, 2026, with no election for earlier years. The filed date in subsection (j)(3) was a placeholder in the second modified text, and the final text's date was not read. New York's Part 4 regulations took effect December 27, 2023, when section 4-6.1 was repealed. Massachusetts sources services under the regulation for taxable years beginning on or after January 1, 2014. The current text of G.L. c. 63, section 38 carries a note that it is effective for taxable years beginning on or after January 1, 2023. Illinois amended 86 Ill. Adm. Code 100.3370 effective September 11, 2023. Texas amended rule 3.591 effective January 24, 2021 and again effective March 14, 2023, and the texts of subsection (e)(26) in the two versions were not compared. Florida amended its rule effective January 8, 2019, and its advisements on service receipts run from 2018 to 2023. San Francisco's categories apply for tax years beginning on or after January 1, 2025, and the Treasurer's page says its descriptions apply to tax year 2025 only. Washington last amended WAC 458-20-19402 effective June 15, 2024.

Worked example

All parties, facts and figures in this example are invented, and the year is 2026.

Setting. A dermatology MSO, a corporation, runs a billing and collections center in Texas and manages three physician-owned professional corporations (the practices). One practice is in California, one is in Texas and one is in State C, a market state where the MSO is taxable. Each practice sees its patients at its own clinics. The MSO's employees staff the clinics on site. The MSO charges each practice a fee of 15 percent of the practice's collections and has no other receipts.

Premises that carry the result.

1. Each practice contracts in its own name, has its day-to-day contact at its clinic, orders from and is billed at its clinic's address, and treats patients who are physically in its clinic's state. No fee has a space or equipment component.
2. The central billing work is part of the service each practice hired the MSO to perform. Under rule 3.591(e)(26)(A) it therefore counts as performance of the service in Texas, and not as an activity that is not directly used to provide the service.
3. For each fee, 30 percent of the fair value of the services is the central billing work done in Texas and 70 percent is the on-site work done at the clinic. The split is an assumption of the example, because the Texas rule gives no formula.
4. For California, every presumption and every later step in the sequence ends in the practice's state. State C is assumed to source the same way. The MSO is taxable in all three states, so no throwout arises (throwout is the exclusion of receipts assigned to a state where the taxpayer is not taxable).

Fees for the year.

• California practice: collections of $24,000,000, fee of $3,600,000.
• Texas practice: collections of $6,000,000, fee of $900,000.
• State C practice: collections of $10,000,000, fee of $1,500,000.
• Total fees: $6,000,000.

California (a single sales factor):

• Numerator: the California practice's fee, $3,600,000.
• Fraction: $3,600,000 over $6,000,000 is 60.00 percent.

Texas (gross receipts from services performed in Texas over gross receipts from the entire business):

• Central billing work on all three fees: 30 percent of $6,000,000 is $1,800,000.
• On-site work at the Texas clinic: 70 percent of $900,000 is $630,000.
• Texas gross receipts: $1,800,000 plus $630,000 is $2,430,000.
• Fraction: $2,430,000 over $6,000,000 is 40.50 percent.

What the example shows. The same $6,000,000 of fees gives California 60.00 percent and Texas 40.50 percent, a gap of 19.50 points. The Texas numerator holds $1,080,000 of the California practice's fee and $450,000 of State C's. Those amounts are also in the numerators of California and State C, respectively. Adding the three numerators gives $3,600,000 plus $1,500,000 plus $2,430,000, which is $7,530,000, or 125.50 percent of the fees. The excess of $1,530,000 equals 30 percent of the $5,100,000 of fees from practices outside Texas. The Texas practice's own fee is Texas receipts under every rule ($270,000 of central work plus $630,000 of on-site work), so the overlap comes only from the fees of practices outside Texas. The Texas figure moves with the fair value split, and State C's figure moves with its own rule.

What it leaves out. State C's rules, Florida, the MSO's property and payroll (which a single sales factor and a Texas receipts fraction do not use), any rent component, related-party pricing, local gross receipts taxes and each practice's own receipts from patients.

Practice notes

Build a customer schedule for every managed practice before the first return. Include the contracting entity, the clinic addresses, the primary day-to-day contact and where that person sits, the place of order and the billing address. Record, by location, where the work for each fee is done and what it is worth, separately for centralized work and on-site work, and where the practice's patients are when they are served. Keep any space or equipment component of the fee separately identified in the agreement and the books (Cal. Bus. and Prof. Code section 650(b)).

Compute each state from the same location data and compare the sum of the numerators with total fees. A sum above 100 percent is overlap to document, not an error to remove. Document the steps taken before moving down any sequence, so that a billing-address result is the last step reached and not the first. Rely on a billing-address presumption in New York or California only if the MSO has more than 250 customers. Treat the billing address at the end of the California and Massachusetts sequences as a last step and not as a safe harbor. G&G State Tax Group advises healthcare management organizations and their affiliated practices on apportionment, sourcing and multistate procedure alongside its state and local tax practice.