How are receipts from services performed at sea sourced for state tax purposes?

Why the cascade runs out, and where the proxy comes from

The market-based rules assign a service receipt to California to the extent the customer receives the benefit here, and for a business customer the regulation, for taxable years beginning before 2026, works through a sequence: the contract and books and records first, reasonable approximation when those do not fix the location. A harbor project fixes a site; a towing contract fixes two endpoints and a route; a salvage job fixes a position at sea. None of these translates automatically into a percentage of the receipt earned in California, and the regulation offers no marine rule to do the translation. What California does offer is analogy. The special industry regulation for commercial fishing (Cal. Code Regs., tit. 18, section 25137-5) apportions that industry using port days, on the theory that where a vessel touches is the workable measure of where its economic activity happens, and the FTB's Multistate Audit Technique Manual addresses vessels such as tug boats and barges in a section of its own (section 7815), separate from its voyage-day treatment of sea transportation (section 7760). True carriers, vessels in the business of transporting freight or passengers for hire on defined routes, may fall within a special formula of their own, the sea transportation rule based on voyage days (Cal. Code Regs., tit. 18, section 25101), and where a special regulation applies, it governs. For the marine service business that fits no special rule, the analogies do a different job: they establish that a day-count, location-touch proxy is a method the state itself considers reasonable, which is most of the battle when the standard is reasonable approximation. Port and voyage logs are records the operator already keeps, contemporaneous, third-party corroborated through harbor records and charters, and vessel-specific, which makes the proxy cheap to run and hard to impeach.

Dredging and marine construction contracts accounted for as long-term contracts are governed first by the contractor regulation, which assigns receipts to the project location and apportions projects that straddle the state line by project costs, or by another method such as engineering cost estimates that provides a reasonable apportionment (Cal. Code Regs., tit. 18, section 25137-2). The approximation method below is for towing, salvage, and other marine service receipts that no special regulation reaches.

The water lines, and the hybrid method

The map matters because sourcing by port days alone quietly assumes every working day belongs to some state, and for ocean work that assumption is wrong. Three lines divide the water. Out to three nautical miles from the coast, the water is California (or the neighboring coastal state) and days there are that state's days. From three nautical miles to the territorial limit, roughly twelve nautical miles, the water is the United States but no state, a band the sourcing rules do not address: the benefit-received analysis has no state to point to, yet the receipts are not foreign either, and positions taken for this band should be chosen consciously and held consistently, because it is the zone an auditor can argue in either direction. Beyond the territorial limit, the work is performed outside the United States, and the supportable position is that the benefit of the service is received outside any state, so the receipts source nowhere for state formula purposes, reducing every state's numerator while remaining in the denominator. The hybrid method assembles these pieces: identify each contract's receipts, allocate the contract's working days among the zones using the logs, source the state-water days by state, treat the beyond-the-limit days as non-U.S., and decide the middle band once, in writing. Port days approximate where the customer receives the benefit only where the benefit is tied to the location of the work, as in harbor work or salvage of a specific hull; for long tows, the delivery point and the customer's own operations deserve weight in the approximation. Consider a hypothetical operator with two revenue streams that differ in kind: the method should be run stream by stream, because near-shore project work is nearly all state water and sources almost entirely to the project state, open-ocean transits run mostly outside state waters and, on a work-location view, source almost nowhere, and the documentation for each is different, project records for the first, voyage logs and route plots for the second.

Two era notes keep the California method current. The regulation this analysis runs on was amended for taxable years beginning on or after January 1, 2026 to open the cascade with rebuttable presumptions that the taxpayer or the FTB may overcome by a preponderance of the evidence; for those years the port-day method applies only where no presumption reaches the service or one is overcome, and the two-era mechanics are covered in the companion article on market-based sourcing of services and intangibles, and an at-sea method built before the amendment should be re-papered against the new rules rather than assumed forward. And Washington, a neighboring state a California operator may well meet, taxes towing for hire under its public utility tax rather than the business and occupation tax (Rev. Code Wash. 82.16.010), while other marine service receipts apportioned under the business and occupation tax follow a benefit-received cascade (Wash. Admin. Code 458-20-19402). The day counts should still be consistent across both states, even where the Washington tax and its attribution rules differ.

Practice notes

The method memo is the deliverable, and it should exist before the first return takes a position: the proxy chosen, the analogies relied on, the water-line treatment including the middle band, the records that feed the computation, and the commitment to consistency across states and years. Once adopted, the method is an asset because approximation methods are judged on reasonableness and consistency; a taxpayer that changes proxies year to year to chase the lowest number has undercut the consistency that makes an approximation method persuasive. Operationally, the log discipline is everything: vessel-by-vessel day counts by jurisdiction, kept as the year runs, tied to charters and harbor records, because the reconstruction alternative is expensive and unpersuasive. Watch the interaction with the rest of the return: the same day counts that source receipts also locate mobile hulls and crews for California's doing-business thresholds (Rev. and Tax. Code section 23101(b)) and for any state that still uses property and payroll factors, and those figures should not tell different stories about where a vessel spent the year. And treat the special regulations as a boundary question worth revisiting as the business mixes: an operator that grows a scheduled freight route may drift into a true transportation formula for that stream, while the project work stays on the approximation method, and running each stream under the rule that governs it is both the correct answer and the audit-resistant one. G&G State Tax Group provides sourcing method design and apportionment audit representation for marine and other mobile-operation businesses alongside its state and local tax practice.