On August 27, California submitted amendments to the Secretary of State and released the final text of Regulation Section 25136-2. This regulation governs how sales other than tangible personal property are assigned to California for tax apportionment purposes.
Applicability Timeline
The regulation applies to taxable years beginning on or after January 1, 2011, but only if the taxpayer made a single sales apportionment election. It becomes applicable to all taxpayers for taxable years beginning on or after January 1, 2013. Amendments concerning marketable securities, dividends, goodwill and interest assignments apply to years beginning on or after January 1, 2015. The latest amendments take effect for years beginning on or after January 1, 2026.
General Assignment Rules for Services
Sales from services are assigned to California based on where the customer receives the benefit of the service. This is defined as the location where the customer directly or indirectly receives value from the delivery of the service. The regulation outlines several presumptions:
- Services related to real or tangible personal property are assigned to California if the property is located in the state when the service is received. If delivery occurs after the service is performed, the delivery location is used.
- Services involving intangible property are assigned to California to the extent the property is used in the state. Assignment rules vary for marketing, non-marketing and mixed intangible property.
- The location of the benefit must be substantiated by the taxpayer’s contracts or business records.
- If the location cannot be substantiated, other sources of information may be used.
- If the location still cannot be determined, it must be reasonably approximated based on the customer’s activities and available data. For example, population data may be used.
- If the location remains undetermined, California is presumed to be the location if the customer’s billing address is in the state.
- Services provided to individuals are assigned to the location where the individual was physically present when the service was received.
- The regulation includes additional examples to guide application.
Special Sourcing Rules
Asset Management Services
These include administration, distribution and management services provided to funds. The benefit is received at the domicile of the investors unless the investor holds title for a beneficial owner, in which case the domicile of the beneficial owner is used. Domicile is presumed to be the billing address unless the taxpayer has actual knowledge of a different principal place of business or primary residence.
Professional Services
This category includes management, tax, payroll, accounting, audit, actuarial, legal, consulting, technology consulting, securities brokerage, investment advisory and underwriting services. These services follow the general assignment rule. However, if the taxpayer provides substantially similar services to more than 250 customers, gross receipts are assigned to the customer’s billing address. If more than 5% of receipts from the service come from a single customer, that customer is excluded from this rule.
Services Under U.S. Government Contracts
If the location of the benefit cannot be determined due to a lack of publicly available information, the benefit is deemed received in all 50 states and sourced based on the latest U.S. census data.
Assignment of Sales From Intangible Property
Sales from intangible property are assigned to California based on usage in the state. For complete transfers of intangible property rights, such as stock sales or ownership interests in pass-through entities, or when gross receipts derive from dividends or goodwill, the assignment method depends on asset composition:
- If real and tangible personal property assets exceed 50% of total assets, payroll and property factors are used. Use prior year data if the sale occurred before mid-year; use current year data if after.
- If real and tangible assets are 50% or less, the sales factor is used, with the same timing rules.
Marketable Securities
Sales from actively traded securities are assigned to California if the customer’s billing address (for individuals) or commercial domicile (for business entities) is in California. If this cannot be determined, reasonable approximation is used.
Your Guide Forward
Cherry Bekaert’s State & Local Tax team is dedicated to assisting businesses in understanding and applying the updated sourcing rules under California Regulation Section 25136-2. Whether your organization provides professional services, manages assets or deals in intangible property, our team is here to help you navigate these changes and align your tax strategies accordingly.
