United States

California: FTB Issues Draft Language for Revised Market Sourcing Regulation

Apr 30, 2018
From KPMG TaxWatch

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On May 18, 2018, the California Franchise Tax Board (FTB) will hold its third Interested Parties Meeting on Draft Regulation Section 25136-2 – Market-Based Rules for Sales Other Than Sales of Tangible Personal Property. The language included in the current version of the draft revised regulation was recently released for consideration at the upcoming meeting. The last interested parties meeting on the regulation was held in June 2017. There are numerous changes in the recently-released draft regulation. One such change is that the FTB staff added simplifying rules for assigning receipts from sales of services to businesses, noting that taxpayer and FTB staff have faced challenges trying to assign such sales. Another change is that the draft regulation would provide guidance on how government contractors should source receipts when they are unable to ascertain where the benefit of a service is received. Under the draft regulation, if the taxpayer's services are provided under a U.S. government contract, and the location where the benefit of the service was received cannot be determined by contract or books and records, or if the contract cannot be disclosed, and the location cannot be reasonably approximated by any other method, the taxpayer may reasonably approximate the location by using the ratio of California over U.S. population. The draft regulation includes several new and revised examples. One such example relates to the assignment of asset management fees that are not subject to CCR section 25137-14 because the taxpayer is not providing services to at least one Regulated Investment Company. Under the draft language, the benefit of asset management services is received by the shareholders or investors of the assets unless the shareholder or investor is holding title for a beneficial owner. If the shareholder or investor is holding the asset for a beneficial owner, the benefit is received by the beneficial owner of the asset. Asset management fees will be assigned to the domicile of the shareholder, beneficial owner, or investor. To aid in making this determination, a new definition of domicile is added to the draft regulation. If the taxpayer does not know the domicile of these parties, the receipts will be assigned to California to the extent the domicile is reasonably approximated to be in California. If neither one of these methods is possible (i.e., the taxpayer does not know the domicile and it cannot be reasonably approximated), asset management fees will be sourced using the ratio of California population over U.S. population. In addition to the draft language, the FTB also posted certain 50 State Analysis charts detailing of how other states treat or address certain types of receipts.  Please stay tuned to TWIST for updates on the revisions to CCR 25136-2.


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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.