Amendments to the California Franchise Tax Board's market-based sourcing regulations for sales of non-tangible personal property and services (Cal. Code Regs. tit.18 Section 25136-2) are expected to become final in mid-September. Once final, the amendments will be effective for tax years beginning on or after January 1, 2015. The amendments will modify provisions related to sourcing of sales of marketable securities and other similar financial instruments, gross receipts from intangible property, and dividends and interest, however derived, and deletes certain benefit-of-service examples that had been proposed.

Implications

These sourcing rules apply for determining the apportionment factor for the year. But, as importantly (or in some cases, more importantly), they couple with California's economic nexus rules, which find that a corporation with California receipts over $536,446 (adjusted annually for inflation) is doing business in the state.¹ Application of these rules might cause an entity to have a California filing requirement for 2015 that it did not anticipate or might change the expected California taxable income for an entity that expects to file a California corporate franchise or income tax return. Corporations headquartered outside the US that are affected by these amendments may wish to make a water's edge election. Thus, with the October 17, 2016 filing deadline, taxpayers filing their 2015 California tax returns on an extension may have to take immediate action to reflect these changes in their return.

The regulation also contains a unique provision allowing taxpayers to elect to apply the new rules retroactively to years beginning on or after January 1, 2012, if they so desire. This provides an opportunity for those taxpayers who benefit positive from the new regulations to file amended returns and claim refunds.

EY is closely monitoring this development and will issue an additional Alert, providing an in-depth discussion of the amendments to the market-based sourcing regulation when the amendments are formally adopted.

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ENDNOTES

¹ See Cal. Franchise Tax Board, General Information on New Rules for Doing Business in California (available on the Internet here (last accessed Aug. 24, 2016).