Multistate Tax Alert: CA Officially Adopts Regulation on Market Sourcing for Sales of Other than Tangible Personal Property
A new California Code of Regulations, title 18, section 25136-2 (the “Regulation”) was published, but it is applicable retroactively to taxable years beginning on or after January 1, 2011. The Regulation provides guidance: (1) regarding sales factor assignment for sales of other than tangible personal property under California’s market-sourcing statute applicable to taxpayers electing to use single sales factor (“SSF”) apportionment, and (2) for purposes of determining whether an entity is “doing business” in California according to the state’s statutory “economic nexus” standards.
The Regulation begins with the general rule that sales of other than tangible personal property are in California if the taxpayer’s market is in this state. Thereafter, the Regulation applies a series of complex cascading market sourcing rules through defined terminology and specified examples interspersed with several sets of special rules. An understanding and correct application of these new market sourcing rules is important to properly: (1) consider whether to elect SSF apportionment, (2) identify entities that have a filing obligation in California, and (3) prepare and file state income and franchise tax returns under the new rules.
The attached Tax Alert summarizes the Regulation’s key provisions.