California adopts final amendments to its market-based sourcing regulation

After many rounds of proposed changes, comments and discussions, the California Franchise Tax Board (FTB) has adopted amendments to the California Code of Regulations, title 18, section 25136-2, related to its market-based sourcing rules (the Regulations). The Regulations are effective Oct. 1, 2025, and applicable to tax years beginning on or after Jan. 1, 2026.

Specifically, on Aug. 27, 2025, the California Office of Administrative Law approved the FTB’s amendments to the Regulations with a formal announcement from the FTB on Sept. 10, 2025. The final Regulations can be found here.

The Regulations update rules and provide clarification for sourcing sales of services and intangibles, with new changes for professional and financial service providers, as described below.

Assignments of sales of services

The Regulations state that sales from services are assigned to California to the extent the customer of the taxpayer receives the benefit of the service in California. The Regulations include presumptions as to the location of the benefit of the service in California as follows:

• Services that relate to real property located in California should be sourced to California.
• Services that relate to tangible personal property (TPP) located in the state should be sourced to the location of the TPP when services were received. If the TPP is directly or indirectly delivered to the customer after the service is performed, then the services are sourced to the location of the delivery.
• Services that relate to intangible property should be sourced to the location where the intangible property is used by the customer.
• Services that relate to individuals that are physically present in the state should be sourced to the location of the individual at the time the service is performed.

The Regulations provide that the FTB or the taxpayer may overcome the above presumptions by showing, based on a preponderance of the evidence, that the benefit of the service is received at a location other than the determination above, starting first with the information in the taxpayer’s contracts or books and records kept in the normal course of business.