California Amendments to Apportionment Regulations Effective for the 2026 Tax Year

California has amended its market-based sourcing regulations under Section 25136-2, effective for tax years beginning on or after January 1, 2026. These amendments provide significant clarifications and modifications to how businesses source receipts for California apportionment purposes, particularly affecting asset management firms, professional service providers, and companies engaged in the sale of intangible assets.

The FTB began working on these amendments in January 2017 with the first of six Interested Parties Meetings, and the process concluded with the Office of Administrative Law's approval of the final amendments on August 27, 2025. The regulations became final on October 1, 2025.

This article summarizes the following four significant categories of amendments to the regulations effective January 1, 2026:

1. Amendments impacting providers of “asset management” services. Essentially, a “look-through” method of apportionment is now required for asset management service revenues if service revenues fall within one or more of the three types of asset management revenues. Care should be taken to ensure that the revenues are subject to the new “look-through” rules.
2. Amendments relating to providers of professional services who are treated as “large volume” providers of professional services.
3. Amendments creating general “presumptions” for determining how to source services revenues that don’t fall under the “asset management” or “large volume professional services” categories.
4. Amendments relating to the sourcing of sales of intangible assets, including sales of stock in a corporation, sales of partnership interests, and sales of goodwill. Sourcing receipts of dividends is also addressed in this section of the amendments. These amended rules, when applicable, apply to all businesses that are required to apportion income, not just service providers.

Asset Management Revenue Sourcing

This group of amendments establishes three distinct types of qualifying asset management services. If revenues fall within the definition of “asset management” revenues, then, under the amended regulations, such revenues are sourced using a “look-through” approach by “looking through” the fund where assets are held to the locations of the investors in the fund:

1. Administration Services – Clerical, accounting, legal, and tax services related to fund management. These only qualify if the provider also offers (or is affiliated with an entity offering) management or distribution services during the same tax year.
2. Distribution Services – Activities including advertising, servicing, marketing, or selling interests in a fund. Advertising, servicing, and marketing only qualify when performed by (or affiliated with) an entity that also sells fund interests.
3. Management Services – Rendering investment advice, making purchase/sale decisions regarding securities, and providing related services for security transactions.

New “Look-Through” Sourcing Methodology for Asset Management Services Revenues

Under prior regulations applicable for years beginning on or before December 31, 2025, sourcing was less prescriptive and based on where the "benefit of service" was received, which some asset managers interpreted as the fund's domicile. The new regulations require a "look-through" approach:

1. Receipts must be sourced to the location (domicile) of investors or beneficial owners (not the fund entity itself). This is the provision referred to as a “look-through” rule, since it requires “looking through” to the investors in determining how to source asset management revenues.
2. The beneficial owner's domicile is presumed to be the billing address in the entity's or asset manager's records.
3. Receipts are allocated proportionally based on the average value of investor interests (calculated using beginning and end-of-year values).

When domiciles are unknown, “reasonable estimation” is required. The only guidance the regulation provides for this situation is where an asset manager does not know the domiciles of the investors in the funds being managed, but knows that an entity making investments in the fund is in the business of investing capital for the employees of “State B”. In that case, the “reasonable estimate” is to source such asset management revenues to State B, since all of the funds are managed for employees of that state.

Example of “Look-Through” Approach

An asset management company, “Mgmt Co,” is paid $2 million during the 2026 tax year for asset management services, including investing the assets of a fund, “Fund A.” Mgmt Co has no other sources of income. Mgmt Co makes purchase and sale decisions regarding the assets of Fund A. Mgmt Co operates exclusively in New York and has no physical presence in California. Fund A is an LLC domiciled in New York and has investors located in several states, including California. Investors owning 40% of Fund A’s assets at the beginning and end of the 2026 tax year are residents of California. Since 40% of the average value of the assets of Fund A are held by California residents, 40% of Mgmt Co’s $2 million services revenues, or $800,000, is treated as earned from California sources. Because $800,000 exceeds California’s “economic nexus” threshold, Mgmt Co. is subject to a filing requirement in California and must apportion 40% of its taxable income (or loss) to California.

Potential Economic Nexus Impact

As illustrated in the above example, these changes to apportionment methodologies could create a California economic nexus for asset managers that previously sourced revenues to fund locations. California's economic nexus threshold for the 2024 tax year is $735,019 in California receipts (or 25% of total receipts, if less). The FTB has not yet officially released the indexed threshold for the 2025 tax year, though it is expected to increase based on California's 3.0% inflation rate.

Large Volume Professional Services

For taxpayers in the business of providing “professional services,” new rules have been adopted to simplify the sourcing of revenues of such service providers, when the business has more than 250 customers for one or more of the following types of services:

• Management, tax, payroll, accounting, audit, attest, and actuarial services
• Legal services and business advisory consulting
• Technology consulting
• Securities brokering generating commission income
• Investment advisory services (other than asset management)
• Services related to underwriting debt or equity securities

For providers of one of the above categories of services who have more than 250 customers in one or more of such categories, revenues must be assigned to the customer's billing address. This is not an elective method but rather a mandatory assignment rule.

Professional services businesses with less than 250 customers in any of the above categories must source revenues by referring to the regulations’ “presumptions” for determining the “location of the receipt of the benefit of the service,” discussed in more detail below.

Important Exception to the Billing Address Rule for Large Volume Service Providers

Suppose a single customer generates more than 5% of total revenues. In that case, the customer's receipts are sourced according to the rules that apply to services generally (i.e., looking to the “presumptions” discussed below to determine where the “benefit was received,” not automatically to the billing address under the large-volume rules).

Planning Opportunity

Consider whether billing addresses can be updated to improve sourcing for clients that are open to being invoiced from locations outside of California. Since the regulations rely on billing addresses in the taxpayer's books and records, coordinating with clients to use non-California billing addresses where appropriate may reduce California-sourced receipts.

General Presumptions Relating to the Location of the Receipt of the Benefit of a Service

When service providers are not “asset managers” or “large volume professional services” providers, they generally must source service revenues to the location where their customer receives the service benefit. The amended regulations created new “presumptions” which treat the benefit of a service as received in California when the service "predominantly" relates to:

• Real property located in California
• Tangible property located in California when service is received (if delivered to the customer after service, source to delivery location)
• Intangible property used in California
• Individuals physically present in California when service is delivered

Since these presumptions may be overcome by the FTB or by the taxpayer, taxpayers should review their books and records or other sources of information to confirm whether application of the “presumptions” is appropriate.

Sales of Stock, Sales of Passthrough Entity Interests, Sales of Goodwill, and Receipts from Dividends

Note that these amendments apply to all businesses required to apportion income within and without California (i.e., not just to service providers, as was the case for the first three categories of amendments discussed above). Readers should note that this fourth category of amendments modifies sourcing rules for capital transactions that often qualify as "occasional sales" excluded from the apportionment factor. Therefore, it is important to note that many asset sales to which these amendments would otherwise apply will actually be excluded from the sales factor entirely under the “occasional sale rule” (contained in Regulation Section 25137(c)), making these amendments inapplicable to such “occasional” asset sales.

Sales of Stock or Interests in Entities, Sales of Goodwill, or Sourcing of Dividends

Step 1: Determine asset composition of the underlying entity in which interest was sold (or to which the sold goodwill relates, or from which a dividend was received):

Calculate the percentage of tangible vs. intangible assets using the original cost basis.

Critical exclusion: Cash, prepaid items, and accounts receivable are excluded from this calculation.

This changes prior rules that required including cash in determining the percentage of intangible assets of the underlying entity.

Step 2: Apply an appropriate sourcing method

If >50% intangible assets: Use the sales factor of the underlying entity for the most recent 12-month period prior to sale.

Exception: If a sale occurs more than 6 months into the current tax year, use the current year sales factor.

If >50% tangible assets: Use the average of California property and payroll factors.

Additional rules may apply if taxpayers are unable to compute the above percentages. First, suppose a taxpayer is unable to determine the composition of the sold entity’s (“underlying entity”) assets. In that case, the taxpayer shall use the payroll and property factor of the sold entity to assign the receipts from the sale. Suppose the taxpayer does not have access to payroll and property information but does have access to sales factor information. In that case, the sales factor information of the sold entity should be used to assign the receipts from the sale. Suppose the taxpayer does not have access to payroll, property, or sales information. In that case, the taxpayer should source receipts of the sale (or dividend) to the commercial domicile of the sold entity (or dividend payor.

Compliance Considerations

Effective Date

All amendments are effective for taxable years beginning on or after January 1, 2026. While many businesses have already implemented the methodologies required by the new regulations, some will need to adjust their sourcing practices to comply.

Action Items for Taxpayers

1. Revenue Sourcing Review: Clients should review current sourcing methodologies for asset management and professional services to determine if adjustments will be required for 2026. Consider the impact on financial statement reporting (tax provisions) if applicable.
2. Economic Nexus Analysis: Asset management firms that previously sourced revenues to fund domiciles should review whether the look-through approach creates California filing obligations. Consider Voluntary Disclosure if nexus concerns arise.

Ready to review your revenue sourcing strategy for 2026?

Contact our team today to schedule a personalized compliance assessment and prepare your business for the new California apportionment regulations.