Specialty Tax Spotlight — Domestic Transfer Pricing

Specialty Tax Spotlight

Domestic transfer pricing is a less spotlighted — but an increasingly important — facet of tax planning. In this episode of Specialty Tax Spotlight, Sean Muller and Josh Finfrock examine how companies operating within U.S. borders must still address complex pricing structures when managing related entities across state lines, within various legal entity structures, or under different regulatory frameworks.

Key Points:

• Domestic transfer pricing is critical beyond international contexts, especially in regulated and private equity-backed businesses.
• Management service and leasing agreements help separate functions while ensuring financial clarity and compliance.
• Proper documentation and appropriate transfer pricing allocations are foundational to defending intercompany arrangements with tax authorities.

Domestic transfer pricing isn’t confined to multi-state tax considerations — it’s increasingly relevant in industries like health care, engineering and private equity. Josh discusses how these businesses often operate under various state regulations or different capital structures that require entities like Management Services Organizations (MSOs) to ensure compliance and operational efficiency.

Whether through separating service arms or establishing leasing entities, transfer pricing plays a pivotal role in aligning cost, benefit and control within the enterprise. Management services and employee leasing agreements help maintain regulatory boundaries while supporting internal function-sharing across entities. “A lot of times it is separating services activities because … if it’s a group that’s buying many different practices or different service firms to roll up a group of scale, there may be a central corporate kind of back office that’s doing a lot of central functions,” explains Josh.

Josh also emphasizes that transfer pricing is about more than paperwork. However, intercompany contracts formalize internal arrangements and provide essential audit trails. These contracts become the legal backbone for defending pricing models under scrutiny from the Internal Revenue Service (IRS) or state tax authorities. Accurate transfer pricing begins with assessing functions, assets and risks. It requires collaboration with legal advisors and a clear methodology for markup and cost allocation, ensuring each party in the structure receives and pays for the value they gain.

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