California amends sourcing guidance service providers

Executive summary

The California Franchise Tax Board (FTB) published amendments to the California Code of Regulations (CCR) section 25136-2 that provides sourcing guidance for taxpayers. The amended rules provide clarification for companies, in particular financial service and professional service providers, that did not have a framework for sourcing receipts previously. The rules are effective for tax years beginning on or after Jan. 1, 2026.

The California FTB has formally adopted modifications to CCR section 25136-2 governing the sourcing of receipts from sales other than tangible personal property, effective for tax years beginning on or after Jan. 1, 2026. CCR section 25136-2 governs sales other than tangible personal property, including services, intangibles, and receipts from the sale, lease, rental, or license of real or tangible property. Under California’s market-based sourcing framework, receipts are assigned to the location where the customer receives the benefit of the service, not the place of performance. Because that location can be difficult to determine for receipts of services or intangibles, the amended rules add clarity and more examples for sales factor sourcing purposes. The revision also establishes presumptions that, if met, would require taxpayers to source receipts to California and explains how taxpayers may rebut those presumptions using contracts, books and records, other reliable information, or reasonable approximation when appropriate. The FTB’s stated objective is to improve compliance and ease of administration by simplifying sourcing rules and creating specific rules for certain industries.

These changes may alter how taxpayers source receipts from services and intangibles. Key updates include new default rules and presumptions for identifying where the benefit of a service is received, fresh definitions and sourcing rules for asset management services, and a definition of professional services with a special rule for large volume providers. Additionally, the amendment includes new sourcing rules for certain government service contracts and clarified definitions for sourcing receipts from sales of marketable securities.

Updates to the default sourcing rules and presumptions for service receipts

The revised regulation establishes a single framework of presumptions for all customers, focusing on where the benefit of a service is received when the service predominantly relates to real property in the state, tangible personal property used or delivered into the state, intangible property used in the state, or individuals physically present in the state at the time of delivery. Taxpayers may rebut these presumptions by a preponderance of the evidence, first relying on contracts and contemporaneous books and records, then any other reliable information, and if necessary, a reasonable approximation. If the location still cannot be determined, the receipts are sourced to the location of the customer billing address.

Industry-specific guidance

Confidential government contracts

For services performed under United States government contracts, the location of the benefit should be determined from contracts, books and records, other available information, or reasonable approximation. However, to the extent the location cannot be determined under these methods, because the contract cannot be disclosed or such information is not publicly available, a new rule provides that the benefit is deemed received based on the ratio of the California population to the total U.S. population. The amended regulations confirm that all other sources of information may be considered after first consulting contracts, and book and records kept in the normal course of business. The regulation also adds and updates examples not only for government contracts, but also for services involving real property, logistics and delivery, milestone payments for research and development, internet advertising, call centers, and tangible personal property.

Asset management services receipts

Asset management services not covered by CCR section 25137-14 are sourced to the domicile of the beneficial owner. The regulation defines a beneficial owner as a person who makes an independent decision to invest assets and excludes master fund entities, shareholders of publicly traded corporations, and participants in defined benefit plans. The domicile of the investor or beneficial owner is presumed to be the billing address in the taxpayer’s books and records unless the taxpayer has actual knowledge of a different principal place of business or primary residence.

Receipts are assigned in proportion to the average value of each owner’s interest, generally computed as the beginning of year value plus the end of year value divided by two. For services provided to business entities, a look through rule applies and sourcing is based on the domicile of the beneficiaries. If the average value by state is not known, receipts may be assigned using a reasonable estimate supported by available data.

Large volume professional services rule

For providers of professional services, the revised regulation defines professional services to include management, tax, payroll and accounting, audit and attest, actuarial, legal, business advisory consulting, technology consulting, brokerage services that generate commission income, investment advisory services other than asset management services, and services related to underwriting debt or equity securities. When a taxpayer provides any single professional service to 250 or more customers, receipts from that service are assigned to the customer’s billing address. A customer that accounts for more than five percent of the receipts from that single service is excluded from this billing address rule.

The amendment addresses large volume service providers and acknowledges the administrative difficulty of determining the location where the benefit of the service is received on a customer specific basis. The revised regulations permit the assignment of receipts to the customer billing address as a rebuttable proxy, as the billing address is readily available and can serve as a reasonable approximation of the place where the benefit of the service is received.

Conclusion

The amendments prioritize identifying the market for services through contracts, contemporaneous records, other reliable information, or reasonable approximation, reserving the billing address as a last resort. They expand investor-based sourcing to the broader asset management industry beyond CCR section 25137-14, signaling that the domicile of investors or beneficial owners is the proper location for determining where the benefit is received. They also recognize the administrative burdens faced by large national service providers and permit billing address sourcing for large volume professional services as a practical proxy when granular benefit location data is not feasible. Taxpayers operating in the industries discussed in this article should reach out to their state and local tax advisors for guidance.