The California Franchise Tax Board (FTB) announced that it has begun a formal rulemaking process to amend Regulation 25136-2, which governs the procurement of receipts from services and intangibles. The proposed changes would apply to tax years beginning on or after January 1, 2024.
The proposed amendments include several important updates that may impact how taxpayers allocate receipts for California apportionment purposes.
New cascading rules for sourcing receipts from services eliminates the need to consider where the order was placed. Add an example of applying look-through sourcing to logistics services. Add an example of sourcing digital ad revenue based on the circulation rate of a specific ad. Adds an example of procuring drug R&D milestone payments where drug clinical trials occur. New rules for asset management fees based on the average value of assets held by investors or beneficiaries. New rules for professional service providers with more than 250 customers. Guidance for reasonably approximating where intangible assets will be used after all property rights have been fully transferred. New rules regarding bundled services and intangible assets. Clarify what happens when services and intangible assets are sold together. Makes clear that intermediaries are ignored when identifying customers for securities. Modify the use of foreign population in procurement rules to include it in the “foreign jurisdiction or geographic area” in which the sale occurs, rather than the broader “foreign country” when using a reasonable approximation based on population limit as follows. However, the proposed amendment does not address whether California’s population could be limited to the area where the sale occurs.
The proposed changes could have a significant impact on taxpayers who derive significant amounts of income from services and intangible assets. In a recent court decision, a detailed analysis of a proposed rule is difficult because the court has held that if a rule is more specific than the governing law, the rule can override a provision of conflicting law. importance is emphasized. Therefore, taxpayers should consider these changes carefully and consider providing comments.
The FTB has not scheduled a public hearing, but plans to hold one by October 16, 2024, if requested. Taxpayers are encouraged to submit requests and comments on the proposed amendments by 5:00 PM Pacific Time on October 31, 2024. Submissions should be directed. Contact Attorney Hannah Cho at hanna.cho@ftb.ca.gov.
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