How does California source receipts from services and intangibles?
Edvin Givargis Published 7 minute read
The short answer
By the market, not by where the work is done. For taxable years beginning on or after January 1, 2013, sales of other than tangible personal property are assigned under Revenue and Taxation Code section 25136: services to the state where the purchaser receives the benefit of the service, intangibles to the state where the intangible is used, marketable securities to the customer's location, and interests in real or tangible property to where the property sits. The operating manual is regulation 25136-2, a cascade of rules and presumptions that starts with the contract and the taxpayer's books and ends in approximation. That regulation was comprehensively amended on August 27, 2025, effective for taxable years beginning on or after January 1, 2026, after a rulemaking project that ran the better part of a decade. The result is that two versions of the rules are in force at once: the prior regulation governs the 2025 and earlier returns being prepared and examined now, and the amended regulation governs the year currently in progress. Any sourcing analysis today has to say which era it is speaking to.
The statutory frame, and why sourcing is the whole game
Market-based sourcing arrived with California's move to a mandatory single sales factor. Since 2013, apportionment for most taxpayers is the sales factor alone (Rev. and Tax. Code section 25128.7), which concentrates the entire apportionment result into the assignment of receipts. Cost of performance is gone for these receipts; where the taxpayer's people, servers, and offices sit is irrelevant to the factor. And because Revenue and Taxation Code section 23101(b) counts California sales toward the doing business thresholds using these same assignment rules, sourcing now decides not only how much income California taxes but whether a company must file at all. A service provider with no California presence whose customers receive the benefit in California has California receipts, and enough of them create a filing obligation on their own. There is no throwback for services and intangibles; receipts assigned to a state where the taxpayer is not taxable are simply not California receipts, which is how the zero and near-zero factor questions covered in the related article on zero sales factor apportionment arise.
The rules are California-native. Section 25136 and its regulation do not incorporate the Internal Revenue Code, so the conformity date change made by SB 711 in 2025 has no effect on them; the 2025 amendments are their own, unrelated event.
The regulation through 2025: the cascade as filed returns know it
For services sold to businesses, the prior regulation presumes the benefit is received where the contract or the taxpayer's books and records indicate, and if that cannot be determined, the taxpayer reasonably approximates the location; failing that, the receipts follow the place from which the customer placed the order, and finally the customer's billing address. Services to individuals start from the billing address. Intangibles divide by the nature of the transaction: a complete transfer of all property rights follows the location of use of the intangible, a license of marketing intangibles follows where the ultimate customers are, a license of non-marketing intangibles follows where the licensee uses them, and mixed licenses allocate between the two. Marketable securities go to the customer, defined for businesses by commercial domicile and for individuals by billing address. Interests in real property and tangible personal property follow the property. Threaded through everything is reasonable approximation, the workhorse concept for taxpayers whose contracts and books do not speak in geography, and the source of most of the friction the regime has produced, because the prior regulation left room to argue about whose approximation controls.
This is the version of the rules that governs every open year through 2025: the returns being filed this fall, every amended return for earlier years, and every audit and protest working those periods. Positions built for those years should cite it, not the amendments.
The regulation from 2026: what the amendments change
The amended regulation, effective for taxable years beginning on or after January 1, 2026, keeps the market principle and rebuilds the machinery. The cascade is simplified and unified, with the individual-versus-business branching largely removed: contract and books and records first, then other substantiating information, then reasonable approximation, then billing address. The taxpayer's reasonable approximation gains real protection: the Franchise Tax Board must accept it unless the Board shows by a preponderance of the evidence that the method is not reasonable, and a method previously examined and accepted stays accepted unless the material facts change. That converts approximation from a negotiation into a documented position with a burden allocated against the agency, and it makes the contemporaneous workpapers behind the approximation the most valuable pages in the file.
Three industry rules do the heaviest lifting. Asset management services are sourced by look-through to the domicile of the investors or beneficial owners, in proportion to the average value of their interests, a codification of the approach long applied by variance, covered in detail in the related article on asset management fee sourcing. Professional services get a volume rule: a taxpayer with more than 250 customers for a given professional service, none of them accounting for more than 5 percent of the receipts from that service, sources those receipts by customer billing address, which for accounting, tax, payroll, management, and similar practices replaces customer-by-customer benefit analysis with a mailing list. And where a service is sold to the United States government and the benefit location cannot otherwise be determined, receipts are assigned by California's share of the national population. Marketable securities move to a customer-location rule stated by billing address for individuals and commercial domicile for businesses, and the definitions around beneficial ownership are tightened so that master-feeder structures are looked through rather than treated as the customer.
The effective date is a line, not a wall. The amendments speak from 2026, and the years before it stay governed by the prior text, but both sides will use the amendments as rhetoric in old-year disputes: the Franchise Tax Board can argue a given amendment merely clarifies what the rule always meant, and taxpayers can argue that a rule the state needed a decade of rulemaking to adopt is evidence the prior rule said something else. Both arguments are live in every open year, and which one helps depends entirely on which side of the assignment the taxpayer sits.
Practice notes
The first discipline is era control: every sourcing memo, return position, and audit response should state on its face which version of regulation 25136-2 it applies, because from now until the pre-2026 years close, the two regimes run in parallel and the differences are outcome-determinative in exactly the fact patterns that get audited. The second is the estimate calendar: calendar-year taxpayers are paying 2026 estimates now on the amended rules, and a professional services firm newly under the billing-address rule, or an asset manager whose look-through percentages shift, can find its California factor moving materially between the 2025 return and the 2026 estimates with no change in the business. Third, the reasonable approximation upgrade rewards paper: the preponderance standard and the prior-acceptance rule only protect a method that is documented as a method, adopted at filing time with its data sources and logic recorded, rather than reverse-engineered when the audit letter arrives. Fourth, remember that sourcing is upstream of everything: the same assignments drive the apportionment factor, the section 23101(b) filing thresholds, the nonresident owner distributive-share computations, and the pass-through withholding settings covered in the related withholding articles, so a sourcing change that looks like an apportionment refinement can quietly create filing obligations and withholding duties elsewhere in the structure. The related articles on asset management fees, customer pickup sales, and throwback carry the adjacent pieces of the map.
This article states the law as of September 15, 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.