How are asset management fees sourced for California apportionment?
Edvin Givargis Published 6 minute read
The short answer
For taxable years beginning on or after January 1, 2026, receipts from asset management services are sourced under amended California regulations to the domicile of the investors, or of the beneficial owners where an investor holds title for someone else, with receipts assigned in proportion to the average value of the interests held by California-domiciled investors. Mutual fund service providers were already there: a special industry regulation has long sourced their receipts by the average value of fund shares held by California shareholders. The contested territory is the years before 2026, where the general benefit-of-service rule, a revoked ruling that once pointed to the manager's direct customer, and a later ruling adopting look-through reasoning leave open years genuinely arguable in both directions.
Two regimes, one question
The question in every case is the same: when a manager in one state earns fees from a fund or account whose investors are somewhere else, whose location counts? California answers it under two separate authorities, and the first step in any file is deciding which one applies. Mutual fund service providers, meaning providers of management, distribution, and administration services to regulated investment companies, are governed by a special apportionment regulation, California Code of Regulations, title 18, section 25137-14. Every other asset manager, including managers of private funds, separate accounts, and pooled vehicles that are not regulated investment companies, falls under the general market-based sourcing rules for services in CCR section 25136-2, which were amended comprehensively in 2025.
The mutual fund service provider rule
Section 25137-14 has sourced receipts by investor location for many years, and its mechanics preview where the general rule has now arrived. Receipts from services to a regulated investment company are assigned to California based on a shareholder ratio: the average value of the fund's shares owned by shareholders domiciled in California over the average value of all shares. The fee follows the money's owners rather than the fund's own commercial domicile or the location where the manager performs the work. A manager with no California office and no California employees can therefore have substantial California receipts solely because California residents hold the funds it services, and the reverse is equally true for a California manager servicing funds held elsewhere.
Everyone else, before 2026
For managers outside the mutual fund regulation, the sourcing rule is the general one: receipts from services are assigned to California to the extent the purchaser receives the benefit of the service in California. The contested question was always who the purchaser is. The Franchise Tax Board's ruling practice answered it one way and then the other. A 2015 chief counsel ruling concluded that investment management services were received by the manager's direct customer, so the fees were sourced without looking through to the investors. In 2022, the Franchise Tax Board revoked that ruling retroactively and issued Legal Ruling 2022-01, which reasons that where the direct customer is not the ultimate beneficiary of the service, the benefit is received where the downstream parties receive it. The Board coupled the revocation with penalty relief for taxpayers that had relied on the revoked ruling, which is itself a measure of how much the position moved. The result for open years before 2026 is a genuinely unsettled question: the regulation in force for those years does not state an investor look-through for asset managers in terms, the ruling practice points in both directions depending on the year, and the answer a taxpayer filed on may be worth defending or worth amending depending on which side of the flow the taxpayer sits.
The rule for 2026 forward
The amendments to CCR section 25136-2, finalized in 2025, resolve the question prospectively and in detail for taxable years beginning on or after January 1, 2026. Asset management services, defined as the direct or indirect provision of management, distribution, or administrative services to funds, are sourced to each investor's domicile, or to the beneficial owner's domicile where the investor holds title on behalf of someone else. A beneficial owner is a person who made an independent decision to invest; entities such as master funds and feeder funds are looked through rather than treated as the investor, and participants in a defined benefit plan are not treated as the beneficial owners of the plan's assets. Domicile is presumed to be the billing address in the taxpayer's books and records unless there is evidence that the principal place of business or primary residence is different. Receipts are then assigned in proportion to the average value of the interests held by California-domiciled investors or beneficial owners, with reasonable estimation permitted where exact average values are not available. The value-based allocation deserves attention in fee modeling: it assigns receipts by the investors' shares of asset value, not by the fees those investors actually bear, so discounted fee arrangements for particular investors do not reduce the California percentage the way an actual-fee allocation would.
What the sourcing answer sets in motion
Investor-domicile sourcing does more than move numbers within an apportionment schedule. California receipts drive the doing business tests of Revenue and Taxation Code Section 23101(b), so a manager with no California presence can be pulled into a filing obligation solely by the domicile of its investors, and the same receipts feed the market-based rules that assign a nonresident's distributive share. The interaction with the water's edge rules is its own subject, because the inclusion tests for a foreign corporation are built on federal concepts rather than California sourcing, and the two systems can classify the same fee stream differently. And the effective date does not close the earlier years: the amendments speak from 2026, the Franchise Tax Board may contend that the look-through approach merely clarifies what the prior regulation already required, and taxpayers with the opposite interest will contend that a rule adopted for 2026 is evidence the prior rule said something else. Both arguments are live until the open years close.
Practice notes
Three files are worth building now. First, the investor domicile data: the 2026 rule is administrable only with investor-level records, the billing address presumption rewards taxpayers whose books actually contain the addresses, and estimation is a fallback rather than a plan. Second, the open-year position: a manager that sourced fees to the direct customer, or to the place of its own performance, should know before the statute runs whether its exposure or its refund claim is the larger number, because the same unsettled law produces both. Third, consistency across regimes: the mutual fund ratio, the new investor look-through, and the doing business thresholds each use investor location in slightly different ways, and a return that sources one fee stream by investor domicile while ignoring investor domicile for the nexus analysis invites the examination it could have avoided.
This article states the law as of September 11, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.