SeeSALT Blog
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.
On March 1, 2023, a Florida trial court confirmed that costs of performance (COP) sourcing, not market-based sourcing, is Florida’s standard methodology for sourcing service receipts for apportionment purposes. In Billmatrix Corp. v. State of Florida, Department of Revenue, No. 2020-CA-000435 (Fla. 2d Cir. Ct. Mar. 1, 2023), the court strongly rebuked the Florida Department of Revenue for attempting to apply market-based sourcing in contravention of its own COP sourcing regulation. 
