On September 15, 2016, the California Office of Administrative Law approved amendments to California Franchise Tax Board (FTB) Regulation § 25136-2 (the Amendments) relating to the sourcing of revenues for purposes of the sales factor generated from sales other than sales of tangible personal property. The amendments change the state to which revenues derived from dividends, interest, securities and other intangible property are assigned for purposes of determining the California sales factor. Coupled with California's recent adoption of its bright-line nexus standards, companies that are not currently filing tax returns in California may now be subject to California taxation, including the state's $800 minimum tax. These nexus provisions apply not only to corporations, but also to all other types of legal entities.¹ Moreover, since California is not bound by international tax treaties and does not recognize the concept of "permanent establishment," foreign taxpayers that believe they are protected from US taxation under their nation's tax treaties with the US may be subject to California taxation under the new rules.

Business entities that report interest or dividend income for years ended December 31, 2015, but have not filed California returns may need to take action before October 17, 2016. As such, your immediate attention is required.

Implications

The majority of taxpayers that already file returns in California will generally see little impact from the Amendments. Those California taxpayers may, however, want to consider filing amended California tax returns to reflect the new sourcing rules under the Amendments, as these changes could alter their California tax liability.

EY will be issuing a more in-depth Alert on this development early next week addressing the effect that the adopted amendments will have on business entities that are not intending to or have not previously filed in California, as business entities that merely receive interest and dividends may now have a filing requirement in California.

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¹ The rules will also apply to those individuals who are doing business in California. A detailed analysis of how these rules impact individuals who directly invest in stocks and bonds is beyond the scope of this alert.