The California Franchise Tax Board (FTB) made significant revisions to the state’s market-based sourcing regulation for the apportionment of sales. The new rules, which will take effect for tax years beginning on or after January 1, 2026, are expected to have a significant impact on many multistate businesses with customers in California (18 Cal. Code Regs. §25136-2).
Key Changes to the Regulation
The updated regulation introduces several notable changes to how businesses must source their revenue for tax purposes:- Service Revenue Rules: The new rules simplify the process for sourcing revenue from services by providing a single set of cascading rules for both individual and business customers, replacing the previous separate rules. The changes also aim to provide clearer guidance on how these rules should be applied.
- Professional Services: A specific rule has been added for professional services, such as tax, accounting, and investment advisory services. Under this new rule, taxpayers who provide a particular professional service to more than 250 customers can source the revenue to each customer’s billing address. However, a different rule applies to customers that account for more than 5% of the taxpayer’s total receipts.
- Asset Management and Bundled Sales: The updated regulation now includes specific rules for sourcing revenue from asset management services that were not already covered under existing regulations for mutual fund service providers. Additionally, new guidance has been provided for sales that involve a combination of services and property, or both tangible and intangible property.
- Intangible Property: The regulation also clarifies the rules for sourcing sales of intangible property, including marketable securities.
