California FTB proposes revisions to market-based sourcing rules

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July 2020

Overview

The California Franchise Tax Board (FTB) held an Interested Parties Meeting (IPM) on July 21 to discuss proposed amendments to market-based sourcing rules under California Code of Regulations, title 18 (CCR), section 25136-2. Four previous IPMs for market-based sourcing rules had been held from 2017 to 2019.

The proposed amendments include changes that could impact taxpayers in many industries. Written comments related to the draft language may be submitted by August 18, 2020.

The takeaway

The language of the market-sourcing regulation has undergone numerous proposed changes over the years, and the rules applicable to taxpayers in many industries may have changed. Careful review of the proposed language is recommended to identify the sourcing methods that could apply. 

Taxpayers whose current methods do not align with the proposed presumptions for sourcing of services should review their facts to see if they could support overcoming the presumption, or should revise their sourcing method for the 2019 tax year assuming that the proposed applicability date is retained.  

Taxpayers that use reasonable approximation methods may not change to a different reasonable approximation method without permission of the FTB. The proposed amendments include language requiring that a taxpayer notify the FTB of its revised reasonable approximation method in the form and manner prescribed by the FTB, but it remains unclear how the FTB will apply that guidance.

Written comments related to the draft language may be submitted by August 18, 2020. Taxpayers are encouraged to review the proposed amendments and consider becoming involved in the process if the proposed changes would be detrimental.

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Peter Michalowski

State and Local Tax Leader, PwC US

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