SeeSALT BlogPillsbury SALT partners Carley Roberts, Zachary Atkins and Aruna Chittiappa will be presenting at the 32nd Annual State and Local Tax Forum taking place Oct. 27–29, 2025.
Articles Posted in Apportionment
Sourced and Settled: California FTB Finalizes its Long-Awaited Market-Sourcing Regulation, Applicable to Tax Year 2026 and Beyond
Posted
After nearly a decade in development, the California Franchise Tax Board (FTB) has finalized its amended market-based sourcing regulation under Regulation Section 25136-2, which governs the sourcing of receipts from services and intangible property.
The regulation was approved by the Office of Administrative Law and filed with the Secretary of State on August 27, 2025. The revised rules will apply to tax years beginning on or after January 1, 2026. Among the most significant changes to the regulation are:
- For purposes of population-based reasonable approximation, taxpayers are limited to populations of specific foreign jurisdictions or geographic areas where sales can be substantiated, rather than the broader population of the country. The regulation does not resolve whether California’s population—the numerator—may similarly be confined to the localities where sales occur.
- A new framework and examples for sourcing receipts from services, beginning with a presumption of where the benefit of the service is received depending on whether the service primarily relates to real property, tangible personal property, intangible property, or individuals.
- The location of the benefit is then substantiated through cascading rules: (1) contracts or the taxpayer’s books and records, (2) all other sources of information, (3) reasonable approximation, or (4) the customer’s billing address.
- For services provided to the U.S. government, if none of the first three rules apply, the receipts are sourced based on the ratio of California’s population to the national population.
- New examples address logistics services (sourced to the tangible property delivery location), pharmaceutical development services (sourced to the clinical trial testing location), digital advertising services (sourced via look-through to the individual ad viewer’s location), and call center services (sourced via look-through to the customer’s own individual customers).
- New definitions, sourcing methodology and examples for asset management services, assigning receipts based on the average value of assets held by investors or beneficial owners domiciled in California.
- New definitions, sourcing methodology and examples for select types of professional service providers with more than 250 customers.
- Use of reasonable approximation to determine the location where an intangible is to be used following a complete transfer of property rights.
- New rules and an example for bundled sales of services and tangible and intangible property.
- Definition of “customer” of marketable securities, excluding intermediaries.
- New rule that the taxpayer’s reasonable approximation method or location of the customer for marketable securities will be accepted unless the FTB can prove by a preponderance of the evidence that it is unreasonable.
Putting Regulations to the Test: California Taxpayers Cleared to Challenge Regulations in OTA Appeals
Posted
The California Attorney General has confirmed the Office of Tax Appeals (OTA) may decline to apply a tax regulation in a taxpayer appeal if it conflicts with the relevant statute. OTA must afford appropriate deference to the issuing agency, but its authority extends to setting aside the regulation for that appeal. OTA lacks authority to invalidate or repeal the regulation more broadly or to apply its conclusions outside the specific appeal.
California’s Market-Based Sourcing Amendments; Public Hearing Requests Due by Oct. 16
Posted
The California Franchise Tax Board (FTB) announced it has initiated the formal rulemaking process to amend Regulation Section 25136-2, which governs the sourcing of receipts from services and intangible property. The proposed changes would apply to taxable years beginning on or after January 1, 2024. Continue Reading ›
California Lawyers Association Tax Policy Seminar
Posted
Pillsbury SALT partner Robert P. Merten III will present at a tax policy seminar hosted by the California Lawyers Association on October 18.
California’s 2024-2025 Budget Seeks to Block $1.3 Billion of Refunds for Water’s Edge Taxpayers, Suspend NOL Deductions, and Limit Tax Credit Utilization
Posted
The May Revision of California’s 2024-2025 state budget seeks to block refund claims, worth approximately $1.3 billion for historical tax years, and $200 million per year going forward, by codifying informal guidance recently rejected by the Office of Tax Appeal’s (OTA) decision in the Matter of the Appeal of Microsoft Corporation & Subsidiaries (Appeal of Microsoft) and by granting the Franchise Tax Board’s (FTB) quasi-legislative rulemaking authority exempt from the procedural protections afforded by the Administrative Procedure Act. The May Revision also proposes to suspend net operating loss (NOL) deductions and limit tax credit utilization to $5 million per year for tax years 2025-2027; however, the legislature proposes to apply the changes to tax years 2024-2026 instead.
Reminder: “Gross” Does Not Mean “Net” – California OTA Holds All Repatriated Dividends Must Be Included in Sales Factor
Posted
The California Office of Tax Appeals (OTA), in a decision marked “not precedential” in the Matter of the Appeal of Microsoft Corporation & Subsidiaries, held 100 percent of repatriated dividends under the Tax Cuts and Jobs Act (TCJA) must be included in the taxpayer’s sales factor denominator.
- First, the OTA rejected the “matching principle” included in FTB Ruling 2006-01, and supported its holding based primarily on the plain language of Cal. Rev. & Tax. Code § 25120(f)(2), and legislative history.
- Second, the OTA rejected the FTB’s argument that repatriated dividends constitute a substantial and occasional sale of property under FTB Regulation 25137(c)(1)(A).
- Last, the OTA determined the FTB failed to carry its burden to show the taxpayer’s inclusion of 100 percent of repatriated dividends in the sales factor denominator is distortive under Cal. Rev. & Tax. Code § 25137.
- Anyone may submit a request to the OTA requesting the decision be marked “precedential.”
COST’s 2024 Spring Conference
Posted
SALT partners Zachary Atkins and Evan Hamme will speak at COST’s upcoming Spring Conference.
Maine Expressly Requires Express Scripts to Apportion Services Receipts Using a Look-Through Approach
Posted
On November 7, 2023, the Supreme Judicial Court of Maine held a taxpayer’s receipts from the performance of pharmacy benefit management (PBM) services should be apportioned using a look-through approach. Specifically, the court held such services receipts should be apportioned to the state where the prescription drug is dispensed by retail pharmacies to individual members (i.e., the market member method), rather than the state where the taxpayer’s client’s primary commercial and administrative headquarters is located (i.e., the market client method).
No Sugarcoating: The California Office of Tax Appeals Limits the California FTB’s Application of Legal Ruling 2006-01
Posted
In the Appeal of Southern Minnesota Beet Sugar Cooperative (2023-OTA-342P) (Beet Sugar), the California Office of Tax Appeals (OTA) issued a precedential opinion holding the California Franchise Tax Board (FTB) is not entitled to apply its FTB Legal Ruling 2006-01 (Apr. 28, 2006) to prohibit taxpayers from including in their apportionment factors property, payroll, and sales that generated statutorily deductible income. The OTA’s guidance on the FTB’s interpretation and application of Legal Ruling 2006-01 in this opinion also has implications beyond the specific issue in Beet Sugar, as the FTB has been attempting to expand the application of the limited legal ruling to other inapplicable situations. For example, an opinion by the OTA in the Appeal of Microsoft Corporation & Subsidiaries (OTA Case Number 21037336) is also anticipated to be issued soon, which appeal concerns whether the FTB is entitled to apply Legal Ruling 2006-01 to prohibit taxpayers from including in their apportionment sales factors statutorily deductible foreign dividend amounts.