Market-Based Sourcing of revenue for services as related to income tax apportionment purposes is becoming a trend among states. As our economy becomes more service intensive, determining how to properly source service and intangible revenue is vital to the states. According to Bloomberg BNA, California’s latest draft rules for market-based sourcing of sales of intangibles are confusing and could affect defense contractors, asset managers, and R&D service companies.

On May 18, 2018, the California Franchise Tax Board (FTB) held its third Interested Parties Meeting (IPM) regarding proposed amendments to California Code Regulations, Title 18 (CCR), Section 25136-2. This section of the CA Regulations describe the provisions of market-based sourcing rules for California taxpayers.

Background

California shifted from the cost-of-performance method to the market-based sourcing method when assigning income from sales of services and intangibles, such as software.  The shift came with California’s switch to elective single-sales-factor apportionment for multistate taxpayers in 2011 and mandatory single-sales-factor apportionment in 2013.

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