Where does a digital subscription business source California receipts from individual subscribers, and what becomes of the rest?

A service receipt, measured by the market

Revenue and Taxation Code section 25136(a)(1) places "[s]ales from services" in California "to the extent the purchaser of the service received the benefit of the services in this state," for taxable years beginning on or after January 1, 2013. The sales factor is "a fraction, the numerator of which is the total sales of the taxpayer in this state during the taxable year, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year" (Rev. and Tax. Code section 25134). Gross receipts are "the gross amounts realized" on the performance of services in a transaction that produces business income (Rev. and Tax. Code section 25120(f)(2)), so a subscription business counts the fees it bills, not its margin on them.

This article treats the subscription as a service, as the regulation's own example of a prepaid music subscription does. A business that instead licenses content for the subscriber to keep starts from the intangible branch of section 25136(a)(2), which places those receipts where the intangible is used, and the analysis below applies to it only by analogy.

The library's articles on the market-sourcing regulation as a whole and on the billing address as a proxy for business customers cover those questions; this article stays with the individual subscriber and with the receipts California does not claim.

Taxable years beginning before 2026: the billing-address presumption

The prior text of the regulation has a separate rule for individuals. "In the case where an individual is the taxpayer's customer," the benefit of the service is "presumed to be received in this state if the billing address of the taxpayer's customer, as determined at the end of the taxable year, is in this state," and if the taxpayer assigns by billing address, "the Franchise Tax Board will accept this method of assignment" (Cal. Code Regs., tit. 18, section 25136-2(c)(1)(A), prior text). The presumption "may be overcome by the taxpayer" by showing, on a preponderance of the evidence, that its contract or its books and records kept in the normal course of business "provide the extent to which the benefit of the service is received at a location (or locations) in this state," and the FTB "may examine the taxpayer's alternative method" (same subparagraph). If the taxpayer overcomes the presumption but its contract and records do not fix a location, the location "shall be reasonably approximated" (section 25136-2(c)(1)(B), prior text).

Three features of that rule decide most subscription cases.

First, only the taxpayer can overcome the presumption. The prior text gives the FTB no matching right for individual customers; its role is to test the taxpayer's alternative method. A business that reports by billing address has a method the FTB has said it will accept.

Second, the evidence that overcomes the presumption has to match how the fee is earned. The regulation's examples draw the line. A travel information service charging individuals per call, with 15 percent of its customers billed to California addresses and 7 percent of its calls originating here, overcomes the presumption with its call records and assigns 7 percent of the receipts to California; the same service charging a flat monthly fee does not, because its charges do not depend on the calls, and the billing address controls (section 25136-2(c)(1)(C), Examples 2 and 3, prior text). A wireless carrier whose records show where its network facilities serve customers overcomes the presumption and assigns by the California share of those facilities (Example 1). A flat-fee subscription is the third example's facts: usage logs show where subscribers watched, listened or logged in, but the fee does not vary with that use, and on the regulation's own reasoning the logs do not displace the billing address.

Third, a subscriber with no billing address is approximated, not dropped. In the regulation's fourth example a music service sold as a prepaid plan with car purchases has only email addresses for its subscribers, and it may reasonably approximate their location by the ratio of the selling dealer's California locations offering the plan to all of its locations offering it (Example 4). "Reasonably approximated" considers sources other than the contract and the books and records, and "[i]nformation that is specific in nature is preferred over information that is general in nature" (section 25136-2(b)(7), prior text). A location "cannot be determined" only when the records of the taxpayer or of its customer "do not indicate the location where the benefit of the service was received" (section 25136-2(b)(2), prior text).

Once a taxpayer uses a method of reasonable approximation, it "must continue to use that method in subsequent taxable years," a change requires the FTB's permission, and a method the FTB has accepted in writing continues to be accepted absent a change of material fact (section 25136-2(h)(2)(A), prior text). The prior text writes no comparable consistency rule for the billing-address presumption itself.

Taxable years beginning in 2026 and later: one cascade for everyone

The amendments to regulation 25136-2, filed with the Secretary of State on August 27, 2025 and effective October 1, 2025, apply to taxable years beginning on or after January 1, 2026, and the FTB's Final Statement of Reasons states there is "no election to apply the rules to previous tax years." The same document explains that the rules "were simplified into one set of rules for individuals and businesses," and it rejected a comment asking that the individual billing-address rule be kept (Final Statement of Reasons, response to Comment 9, September to October 2024 comment period).

The amended cascade begins with presumptions. "The location of the receipt of the benefit of the service shall be presumed to be in this state to the extent the service predominantly relates to" four things, the fourth being "[i]ndividuals who are physically present in this state at the time the service is delivered" (Cal. Code Regs., tit. 18, section 25136-2(c)(1)(A)1 and 1.d). "The taxpayer or the Franchise Tax Board may overcome a presumption" by a preponderance of the evidence, and the party doing so "shall first consider the information contained in the taxpayer's contracts or books and records kept in the normal course of business before considering all other sources" (section 25136-2(c)(1)(A)2). For any service, the location is substantiated from the contracts or books and records, then from all other sources of information, then "shall be reasonably approximated," and only after those steps "shall be this state if the customer's billing address as indicated in the taxpayer's books and records is in this state" (section 25136-2(c)(1)(B) through (E)).

For a subscription business the change runs in four directions.

1. The question becomes where the subscriber is. A streaming, app-based or online course subscription is used by a person at the place where that person is when the content plays. The physical-presence presumption measures that place, and the business's own session data (device location, IP geolocation, the service address on the account) is the evidence the presumption invites. The FTB described the "predominantly relates to individuals" language as "clear and administrable in most instances" (Final Statement of Reasons, responses to Comments 5 and 15, January to February 2025 comment period), and it described that presumption and its related examples as a clarification of the existing regulation rather than a change (response to Comment 17).
2. The FTB can now rebut. Under the prior text only the taxpayer could move off the billing address. Under the amended text either party may overcome a presumption, so a business that keeps billing-address reporting while its own logs place more subscribers in California than its invoices do has given the FTB the evidence for that showing.
3. The flat-fee reasoning loses its footing. The prior examples turned on whether the charge varied with use, because the question was whether the taxpayer's records overcame a billing-address presumption. The amended presumption asks where the individuals are when the service is delivered, a question usage data answers whether or not the fee varies with it.
4. Approximation is protected and sticky. "The taxpayer's reasonable approximation method shall be used unless the Franchise Tax Board shows, by a preponderance of the evidence, that such method is not reasonable," and once used, a method continues in later years; "[a] change to a different method of reasonable approximation may not be made without the permission of the Franchise Tax Board" (section 25136-2(i)(2)(A) and (C)). Where population is used to approximate, it is the U.S. population from the most recent census, with foreign populations added where the benefit is substantially received abroad (section 25136-2(b)(10)).

One question the text leaves open matters to subscriptions: the regulation does not say whether a monthly access right is "delivered" at each session or when the period is sold, which decides how a subscriber who travels or moves mid-month is counted. The measure itself is not open. The presumption applies "to the extent" the service relates to individuals in California, and the regulation's own online example assigns a website's view-based advertising fees under it by the ratio of viewings and clicks in California to viewings and clicks everywhere (Cal. Code Regs., tit. 18, section 25136-2(c)(1)(A)1.d and the regulation's Web Corp examples). A business that measures sessions consistently, writes down the measure, and applies it the same way to every state is in the strongest position.

What happens to the receipts California does not claim

California's throwback rule is in section 25135(a)(2), and it reaches "[t]angible personal property" shipped from a California location where the purchaser is the federal government or the taxpayer "is not taxable in the state of the purchaser." Section 25136, which governs services and intangibles, has no equivalent. A subscription fee that the regulation assigns to Ohio is not a California sale, whether or not the business files in Ohio, and it is not removed from the denominator, because the denominator is total sales "everywhere" (section 25134) and neither era of the regulation contains a step that excludes a service receipt from it.

The test of whether the taxpayer "is taxable in another state" (Rev. and Tax. Code section 25122) still matters to a subscription business in two ways: only a taxpayer whose business income is taxable both within and without California apportions at all (Rev. and Tax. Code section 25121), and the test decides throwback for tangible goods, such as goods sold with a subscription and shipped from California, which the library's article on throwback and internet activities covers.

The consequence is the "nowhere" result. A business that files only in California puts its California-assigned receipts in the numerator and every receipt in the denominator; the rest are in no numerator on any return it files. For a business taxable in at least one other state, that is the correct California answer. Whether those receipts are taxed elsewhere is a question for the other states' laws.

The other side: why "nowhere" usually means a filing duty elsewhere

Public Law 86-272 does not help a subscription business. The federal statute bars a state's net income tax only where the business's in-state activity is "the solicitation of orders" for "sales of tangible personal property" approved and filled from outside the state (15 U.S.C. section 381(a)). It does not reach services or digital access, so a state with an economic nexus standard can tax a remote subscription business on receipts alone.

Texas. A foreign taxable entity has nexus for franchise tax purposes, without physical presence, if it has gross receipts from business done in Texas of $500,000 or more in a federal accounting period ending in 2019 or later, measured "as sourced under § 3.591(e) and (f)" (34 Tex. Admin. Code section 3.586(f)(1)). Texas sources most services where they are performed (34 Tex. Admin. Code section 3.591(e)(26)), but internet hosting has its own rule: "receipts from internet hosting are Texas gross receipts if the customer is located in Texas," hosting includes on-demand access to "entertainment streaming services" and other computer services run on the provider's property, and the customer's location is "the physical location where the purchaser or the purchaser's designee consumes the service," determined in good faith from the information reasonably available, the billing address being one reasonable choice where nothing better is known (section 3.591(e)(13)(A), (B), (E)). The Comptroller's own example treats a company's "subscription receipts for its streaming service using its website" as internet hosting receipts sourced to the customer's location (section 3.591(e)(3)(I), Example 1). A national subscription service with $500,000 of receipts from Texas subscribers is within the Texas franchise tax.

New York. A corporation is subject to the corporate franchise tax if its New York receipts reach the threshold in N.Y. Tax Law section 209.1(b), stated as $1 million and adjusted for inflation under section 209.1(e) to $1,283,000 for tax years beginning in 2024 through 2026, with a lower entry point ($12,000 for those years) for members of a unitary group whose New York receipts are aggregated (section 209.1(d)). Receipts from digital products, defined as "any property or service, or combination thereof, of whatever nature" delivered by wire, cable, satellite or similar media and including "an audio work, audiovisual work, visual work" and an "information or entertainment service," with "delivered to" including "accessed by" (N.Y. Tax Law section 210-A.4(a)), are sourced by a hierarchy that begins with "[t]he customer's primary use location of the digital product" and then "[t]he location where the digital product is received by the customer" (section 210-A.4(c)). For an individual customer, the Department's regulation provides that "the primary use location is presumed to be at the customer's billing address," with reasonable approximation where the address is unknown (20 NYCRR 4-3.4(a)). New York thus keeps for subscribers the billing-address presumption California gave up in 2026.

The same subscriber can therefore be counted three ways: in California from 2026 by where the subscriber is when the service is delivered, in Texas by where the subscriber consumes the service, and in New York by billing address. The rules do not have to agree, and a sourcing workbook that carries both the billing address and the session location for each subscriber can apply each state's rule. Some states, unlike California, exclude from their own denominators receipts assigned to states where the taxpayer is not taxable; the library's article on unsourced receipts and throwout surveys them. For a California filer that is a question about those states' returns, not California's.

Consistency across affiliates and across years

The regulation's consistency rules are written for a taxpayer's method of reasonable approximation. Nothing in either era permits two members of one group, selling the same subscription on the same terms, to source it by different steps of the cascade. Across years, a business whose California percentage falls sharply from one year to the next needs a file showing that the earlier year was wrong under the regulation, not that a more favorable method was chosen.

A year reported on a method the regulation does not support is corrected by an amended return. Where the correction reduces California tax, it is a claim for refund, filed within the later of four years from a timely filed return, four years from the original due date, or one year from the overpayment (Rev. and Tax. Code section 19306(a)). The 2026 cascade cannot be used for an earlier year; the Final Statement of Reasons forecloses an election. And a correction that moves receipts out of California's numerator is also a statement about where those subscribers are, which the business's posture in the states that receive them needs to match.

A worked example

A California corporation sells subscriptions to flat-fee streamed courses. Every subscriber is an individual and pays the same monthly fee. Annual subscription receipts are $60 million. The business files only in California. Its Texas and New York receipts exceed those states' thresholds (stated below), so it is taxable in another state within the meaning of Rev. and Tax. Code section 25122 and apportions its income. Its billing records place 20 percent of subscribers in California, 10 percent in Texas and 8 percent in New York, the rest spread across 40 other states. Its session logs, which record the approximate location of each stream, place 22 percent of viewing in California, 9 percent in Texas and 8 percent in New York.

For a calendar year before 2026, the billing-address presumption assigns $12 million (20 percent) to California. The session logs do not overcome it on the regulation's flat-fee example, because the fee does not vary with viewing, and only the business could raise them in any case. The California sales factor is $12 million over $60 million, 20 percent. The remaining $48 million is in the denominator and in no numerator.

For calendar 2026, the physical-presence presumption looks to where subscribers are when the courses are delivered. The session logs, kept in the normal course of business, place 22 percent there, so $13.2 million is assigned to California and the factor is 22 percent. Either party could argue a different location by a preponderance of the evidence, beginning with the same records; the billing address is reached only if every earlier step fails.

In both years the $6 million billed to Texas subscribers ($5.4 million by consumption location) and the $4.8 million billed to New York subscribers are California "nowhere" receipts, and in both years they exceed the Texas $500,000 threshold and New York's inflation-adjusted threshold ($1,283,000 for tax years beginning in 2024 through 2026). The business has a Texas franchise tax report and a New York corporate franchise tax return to consider for each such year, and in those states the receipts are measured by each state's own rule, consumption location in Texas and billing address in New York.

Practice notes

The first question for a subscription business is which era of regulation 25136-2 governs the year: a return for a taxable year beginning before 2026 starts from the billing address, and one for a later year starts from where subscribers are when the service is delivered. The sound practice is to retain the billing address and the session location for each subscriber for every year, so that each era's rule and each other state's rule can be applied from one set of data. A flat-fee business on the prior text that wants to depart from billing address needs records tied to how the fee is earned, which most flat-fee businesses do not have. From 2026, the measure of physical presence, once chosen, is documented as a method in the year it is first used, because the FTB can rebut a presumption with the business's own logs and because an approximation is protected only when it is shown to be one. Receipts assigned away from California are a list of states to review, not a saving: each state where subscribers generate receipts above its threshold is a state where a return may be due, under that state's own sourcing rule. G&G State Tax Group provides market-sourcing analysis and multistate filing reviews for subscription and other consumer service businesses alongside its state and local tax practice.