Oct 03, 2016
From KPMG TaxWatch
Over the last several months, the California Franchise Tax Board (FTB) has been working on revisions to the state’s market-based sourcing regulation for sourcing sales of other than tangible personal property. The regulation, Cal. Code Regs. § 25136-2, was approved on September 15, 2016 by the Office of Administrative Law (OAL).
The final version is somewhat different than earlier proposed iterations of the regulation. One of the items addressed in an earlier proposed version was how the market-based sourcing provisions apply to fees earned by asset managers. However, last year the FTB pulled the proposed version’s two examples that indicated that receipts from asset management services should be sourced to the location of the investors in the fund (i.e., sourced using a look-though approach). That the FTB adopted such an approach was not entirely surprisingly, as there are “look-through” rules in another California regulation that addresses fees received by asset managers from performing services for RICs. The FTB has communicated that the asset manager examples will be reintroduced in a future regulation, but they are not included in the version that was recently finalized. This leaves the sourcing of fees received by asset managers somewhat unclear.
In addition, the final version of the regulation includes a reference to dividends and goodwill in a subclause that addresses the sourcing of sales of intangible property—specifically sales of stock or ownership interests in a pass-through entity (Section 25136-2(d)(1)(A)(1)(a)). This rule provides that the source of a sale of stock or ownership interest in a pass-through entity is determined by looking through to the underlying location of the sold entity’s assets and depends on whether the majority of those assets are intangible property or real and/or tangible personal property. It is unclear how this subsection would apply to sourcing dividends or goodwill.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.