On August 27, 2025, the California Office of Administrative Law approved the California Franchise Tax Board's (FTB) amendments to its market-based sourcing rules for receipts from services and intangibles for California corporate franchise and income tax purposes.¹ The amended regulations apply to tax years beginning on or after January 1, 2026. A copy of the final text of the amended regulations is available here.

Finalizing the amendments ends several years of interested parties meetings and multiple rounds of revisions to the regulatory language.² The amendments make significant changes for specific industries, such as financial services and professional service providers, as well as changes with a cross-industry impact.

Rules for assignment of sales of services

The changes revamp the FTB's rules for assigning sales of services to businesses and government entities by providing rebuttable presumptions as to the manner in which various kinds of service revenues should be sourced.

The amended regulations adopt the following presumptive methods for the sourcing of services:

1. Services that are related to real property are sourced to the location of the real property.
2. Services that are related to tangible personal property (TPP) are sourced to the location of the TPP at the time the services were performed, unless the TPP is directly or indirectly delivered to the customer after the services, in which case the services are sourced to the location of delivery.
3. Services that are related to intangible property are sourced to the location where the intangible property is used by the customer.
4. Services related to individuals are sourced to the location of the individual at the time the services are performed.

Asset management fees

The FTB has added a provision to the regulations that requires taxpayers to source revenues for asset management services to the location of the "beneficial owner," essentially requiring a "look through" to the location of the investors that are invested in the funds. The provision adds a "value of interest" methodology and mathematical explanation with examples to source these fees to the location of the beneficial owners.

The amendments also add definitions related to the sourcing of asset management fees, including guidelines for which services are defined as "asset management services" for purposes of the regulations. The definitions of administration services, distribution services, and management services are closely modeled after the corollary definitions in CCR Section 25137-14 (the special industry revenue-sourcing regulation for mutual fund service providers that provide services to regulated investment companies).

Large volume professional services

The amendments include a provision for large-volume providers of professional services that is intended to act as a safe harbor.

If a taxpayer provides substantially similar professional services to more than 250 customers, gross receipts from those services will be assigned to the customer's billing address. If, however, more than 5% of the taxpayer's receipts from sales of that service are derived from a single customer, the receipts from this customer do not fall under the rule.

The amendments define professional services as management services, tax services, payroll and accounting services, audit and attest services, actuary services, legal services, business advisory consulting services, technology consulting services, services relating to brokering securities that generate commission income, investment advisory services other than asset management services, and services related to the underwriting of debt or equity securities.

Services provided under US government contracts when the contract cannot be disclosed

As stated above, the amendments to the rules for the assignment of sales of services include those provided to government entities. In addition, the FTB has created a new rule to specifically address services to the US government "when the government contract cannot be disclosed and no information about the service is publicly available." Under this new rule, the receipts are assigned to California based on the ratio of the population of California over the total US population.

Sourcing of sales of marketable securities for broker dealers

The amendments address the sourcing of sales of marketable securities including a definition of "customer" that is specific to these sales. For purposes of sourcing sales of marketable securities, the customer is the person, without regard to intermediaries, who gains the greatest possession of economic rights in the marketable securities. This provision includes a cascading set of rules to source the sales, including a provision that determines the customer's location by reasonable approximation if neither the customer's billing address nor the customer's commercial domicile can be determined.

Modification of examples

The FTB removed several examples that applied the market-based sourcing rules to specific factual circumstances. These examples included sourcing for accounting firms and online advertisers. In their stead, the FTB added several new or revised examples applying its updated rules.

Implications

Several of the provisions will be required for certain taxpayers starting in their tax year beginning on or after January 1, 2026. Significantly, asset management service providers will be required to "look through" to source revenues to the location of the "beneficial owner. In addition, the large volume professional services provision is framed as a requirement, "services shall be assigned to customer's billing address," rather than as a permissible choice. Similarly, US government contract service providers with confidential or classified contracts will be required to source sales based on a US population ratio. In light of the new requirements, taxpayers with receipts from services or intangibles will want to review the provisions and related examples to understand their impact for tax years beginning on or after January 1, 2026.

The long development period leading up to the finalization of these rules means that many of the changes have already been scrutinized and commented on by interested parties and the FTB. Furthermore, because the proposed language has been publicly available for several years, both taxpayers and FTB auditors have already been looking to the proposed regulations for guidance, even for years prior to their applicability date. In addition, in March 2022, the FTB published Legal Ruling 2022-01, which stated its litigating position regarding sourcing rules for sales of services to businesses, which, the FTB presumably intended to capture in the final changes to 25136-2.³

With the amendments now final, taxpayers with service and intangible sales have more certainty when planning for and preparing their 2026 California returns. Both taxpayers and the FTB can start interpreting and applying the amendments, although it will still be some time before audits of taxpayers' 2026 returns will shed light on the FTB's application of the regulatory changes.