The FTB has adopted changes to California’s apportionment sales factor market-based sourcing regulation, effective for taxable years beginning on or after January 1, 2026. (18 Cal. Code Regs. §25136-2) These changes will significantly impact most multistate taxpayers with California customers, whether the taxpayer is located inside or outside California.
Some of the most significant changes include:
- Revamping the rules for sourcing revenues from services to provide one set of cascading rules for sourcing sales to both individuals and businesses, rather than separate rules, and providing clarity as to how these rules are applied;
- A new rule for sourcing sales of professional services, which includes, among other services, investment advisory services (other than asset management services) and tax and payroll and accounting services. Taxpayers who provide services to more than 250 customers in any single professional service can source the revenue from those services to each customer’s billing address. However, different rules apply to receipts from customers who generate more than 5% of the taxpayer’s receipts;
- Specific sourcing rules for revenues from asset management services other than those asset management services already covered under 18 Cal. Code Regs. §25137-14 (which addresses mutual fund service providers);
- A new rule as to how to source revenues from a sale when the sale involves both sales of services and property or sales of both tangible and intangible property; and
- Clarifying rules for sales of intangible property, including marketable securities.
The revised regulation includes additional examples to illustrate how these rules are applied.
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