Updated California FTB Market-Based Sourcing Regulations: Key Takeaways for Asset Managers

In September 2024, the California Franchise Tax Board (FTB) issued revised proposed regulations regarding market-based sourcing rules for sales other than sales of tangible personal property. Subsections 25136-2(c)(2) and 25136-2(c)(3) of the proposed regulations specifically clarify and modify the application of market-based sourcing rules for asset management services and large-volume services. Now updated for public hearings and written comments, the proposed amendments were submitted on Aug. 14, 2025, to California’s Office of Administrative Law (OAL) for final approval. If approved, the amendments to the regulation will be effective for tax years beginning on and after Jan. 1, 2026.

Market-Based Sourcing

California’s general rule sourcing sales from services is based on where the customer receives the benefit of the service provided, a concept known as market-based sourcing. Within these amendments, several definitions were also clarified. The most important one is “benefit of the service is received,” which means the location where the taxpayer’s customer has either directly or indirectly received value from the delivery of that service. California advises taxpayers to take appropriate steps to determine where the benefit of the service is received. Taxpayers should use evidence from contracts or business records. However, if this evidence is not readily available or cannot be determined, the default presumption is that the benefit is received at the customer’s billing address. If the taxpayer believes these methods do not adequately reflect the location where the benefit of services was received, a reasonable approximation is allowed to appropriately reflect the sourcing of the taxpayer’s income.

Asset Management Services

For asset management services (defined as “the direct or indirect provision of management, distribution or administration services to funds”), California requires taxpayers to use a look-through approach to determine where the benefit of services is received. The benefit is considered received where the investor or beneficial owner is domiciled, which is assumed to be the billing address, unless the asset manager knows the principal business is different than the beneficial owner’s address. Once the asset manager determines domicile, receipts from services should be allocated to California based on the proportionate average value of interests held by resident investors and beneficial owners at the beginning and ending of each tax year. If the taxpayer cannot determine the average value of interest, California allows for reasonable estimates when exact values are unavailable.

The FTB considers the effort and cost involved in obtaining necessary information and may accept alternative sources or reasonable approximations, especially for small businesses. The regulations may require new or more detailed processes to track where investors receive the “benefit” of management and advisory services. As a result, firms should also review contracts, investor communications, and any internal documentation to ensure consistency with the new rules, especially where the FTB may rely on these to determine sourcing. Once a taxpayer adopts a reasonable approximation method, it must apply it consistently unless permission is granted to change it. The method must reasonably relate to the taxpayer’s income.

Large Volume Professional Services

The regulations also address receipts from large-volume services. For all other services defined under “Professional Services,” which excludes asset management services and the underwriting of debt or equity securities, California allows businesses with more than 250 customers to allocate receipts from those services based on the customer’s billing address. However, if more than five percent of the receipts for such service are from a single customer, receipts from that customer will not be subject to this rule, and a more in-depth analysis will be required. As an example, since broker-dealers provide a vast line of services to their customers, they must assign revenue from services separately. By splitting up services into different buckets, broker-dealers can apply this rule to each of their service lines, creating efficiency in tracking and tax reporting.

Conclusion

While the new regulations may offer more favorable treatment for in-state asset managers and service providers with investors outside of California, they can also increase tax compliance for out-of-state businesses with investors in California. Please consult your CBIZ professional for more information and to allow you to start planning for potential California filing requirements.