California Franchise Tax Board Implement Final Regulations for Market-Based Sourcing for Specified Sales

California’s Franchise Tax Board (FTB) has adopted final regulations that amend the rules governing market-based sourcing for sales excluding sales of tangible personal property. This ends the FTB’s long-standing practice of formally adopting amendments that were first approved in 2016, then revised in September 2024 and May 2025. The final regulations will be applicable to taxable years starting on or after January 1, 2026.

Final Regulations for Market-Based Sourcing for Sales

The final regulations change the existing language of Cal. Code of Regs. 25136-2 as to how California assigns income to applicable taxpayers. For example, under Cal. Code of Regs. 25136-2(c)(2), revenues for asset management services will continue to be sourced to the location of the investor or beneficial owner domiciled in the state, essentially looking to the domicile of a fund’s investors or beneficial owners to get the location. The location of the investor or beneficial owner is the billing address the taxpayer has on file, unless the taxpayer knows the primary residence or place of business is different from that on file.

Asset management service receipts are assigned to California proportionally to the average value of the interest in the assets held by the assets’ investors who are domiciled in California. If the total asset management fees attributed to the limited partners domiciled in California exceeds the economic nexus threshold in California ($735,019 for 2024), then that asset manager is considered to have California income tax nexus and has a filing obligation, even if they have no physical presence in or connection to California.

Anders State and Local Tax advisors keep close watch over state legislation and regulations to help clients remain aware of any changes that could impact their financial planning or tax burden. Learn how our advisors can do the same for your business, and the associated cost, request a meeting below.

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