Is the billing address a safe proxy for where a service customer receives the benefit?

What the billing address is, and what the rules ask instead

The term is narrow. The MTC model regulation defines "billing address" as "the location indicated in the books and records of the taxpayer as the primary mailing address" of the customer (Model General Allocation and Apportionment Regulations, Reg. IV.17.(a)(3)(A)), Massachusetts uses the same words (830 CMR 63.38.1(9)(d)1.c), and California's amended regulation reaches "the customer's billing address as indicated in the taxpayer's books and records" (Cal. Code Regs., tit. 18, section 25136-2(c)(1)(E)). It is a mailing instruction, and for a business customer of any size it usually points to an accounts payable function.

The rules ask where the customer uses the service. California's statute sources a service receipt "to the extent the purchaser of the service received the benefit of the services in this state" (Rev. and Tax. Code section 25136(a)(1)). FTB Legal Ruling 2022-01 (March 25, 2022), the FTB's governing interpretation for business customers, asks who the customer is, what it bought, what benefit it received and where, and states that "it is always the value to the taxpayer's customer that is analyzed"; its three situations place the benefit at the event a planner was hired to stage, at the members a pharmacy benefit manager serves for a health plan, and at the plant where a subcontractor's consulting work is used, and nothing in it mentions the invoice. New York asks where the customer "derives value from the service" (20 NYCRR 4-4.2(a)); the Multistate Tax Compact's model statute places a service receipt in the state "if and to the extent the service is delivered to a location in this state" (Compact Art. IV.17(a)(3)); Illinois places it in the state "if the services are received in this State" (86 Ill. Adm. Code 100.3370(c)(8)(D)).

The proxy works for a single-location customer and fails for the customers that carry most of a service firm's receipts: multistate businesses whose payables sit in one state and whose operations in several, foreign groups that pay through a U.S. affiliate, and customers that buy through an intermediary.

California: where the billing address sits, in both eras

For taxable years beginning before January 1, 2026, the regulation split by customer type. For an individual customer the billing address came first, as a presumption rebuttable by a preponderance of the evidence from the contract or the books and records, with reasonable approximation behind it (Cal. Code Regs., tit. 18, section 25136-2(c)(1)(A) and (B), prior text). For a business customer the benefit was presumed received where the contract or the taxpayer's books and records, "notwithstanding the billing address of the taxpayer's customer," indicated; failing that it was reasonably approximated; failing that the receipt followed the place from which the customer placed the order; and only "if the location where the benefit of the service is received cannot be determined pursuant to subparagraphs (A), (B), or (C)" did the billing address decide (section 25136-2(c)(2)(A) through (D), prior text). That text governs every open year through 2025, including fiscal years that began in 2025.

From 2026 one cascade applies to every customer. After the rebuttable presumptions for services that predominantly relate to California real property, tangible personal property, intangible property or individuals physically present in California (section 25136-2(c)(1)(A)1), the location is substantiated by the taxpayer's contracts or books and records (section 25136-2(c)(1)(B)); if those cannot substantiate it, "all other sources of information may be used" (section 25136-2(c)(1)(C)); if it still cannot be determined, it "shall be reasonably approximated" (section 25136-2(c)(1)(D)); and only then is the receipt assigned to California "if the customer's billing address as indicated in the taxpayer's books and records is in this state" (section 25136-2(c)(1)(E)). For U.S. government contracts a population ratio replaces the billing address (section 25136-2(c)(1)(F)). The individual-customer presumption in favor of billing address is gone.

Two definitions gate the last step. "Cannot be determined" means that the taxpayer's records, or the customer's records available to the taxpayer, do not indicate the location where the benefit was received (section 25136-2(b)(4)). A firm whose engagement letters name the customer's business unit, whose time records show which customer site each consultant served, or whose project files carry the sponsor's office is not a firm whose records fail to indicate the location, and it cannot reach the billing address by declining to look. "Reasonably approximated" means that, considering all sources other than the contract and the books and records, the location is determined "in a manner that is consistent with the activities of the customer to the extent such information is available to the taxpayer," with the rule that "information that is specific in nature is preferred over information that is general in nature" (section 25136-2(b)(10)). A method keyed to the customer's own activities, such as its headcount by state for a service used by its workforce, is an approximation; the state on the remittance envelope approximates nothing. The regulation's concession to small taxpayers marks the line: the FTB "shall consider the effort and expense required to obtain the necessary information, as well as the resources of the taxpayer," and its example is a bookkeeping firm whose only records for ten years have been invoices carrying the client's billing address (section 25136-2(i)(1) and its example). The example turns on a firm that holds nothing else.

The amended text then changes the answer for one class. If a taxpayer "provides services to more than 250 customers in any single, professional service" on the regulation's closed list, which includes business advisory consulting, technology consulting, legal, tax, audit and attest, payroll and accounting, actuarial and management services (section 25136-2(b)(9)), receipts from that service are assigned to the customer's billing address, except that "if more than five (5) percent of its receipts from sales of that service are derived from a single customer, then receipts from this customer do not fall under this rule" and run the cascade (section 25136-2(c)(3)). For those services, and only from 2026, the billing address is the method rather than the fallback, and the quality of the billing field becomes a sourcing question in its own right.

A method of reasonable approximation, once in place, is protected and sticky: it "shall be used unless the Franchise Tax Board shows, by a preponderance of the evidence," that it is not reasonable (section 25136-2(i)(2)(A)), and it continues in later years unless the FTB permits a change (section 25136-2(i)(2)(C)). The protection runs to a documented approximation; a billing-address schedule adopted because it tied to the general ledger is not one.

New York, the model regulation, Massachusetts and Illinois

New York's Article 9-A regulations, adopted December 27, 2023, make the point procedurally. Receipts from other services are apportioned by a hierarchy: where the benefit is received, then the delivery destination, then the preceding year's apportionment of those receipts, then the current year's apportionment of the receipts that could be sourced under the first two methods (20 NYCRR 4-4.2(b)). A corporation moves down only if, "after exercising due diligence," it lacks the information for the method above; where information is not readily available it "must make reasonable inquiries to a business customer to determine" it; it "must document the steps taken before abandoning each method"; and if the Commissioner finds it had, or could have obtained, the information for an earlier method, the Commissioner "may require the corporation to use such method" (section 4-4.2(b), (d)(1)(i), (d)(2), (d)(3)). For a business customer the benefit is presumed received in New York, "without regard to the billing address," where the customer receives it there, and a benefit received in several places is apportioned by the value derived in each (section 4-4.4(b)(1) and (3)). Only an individual customer carries a billing-address presumption (section 4-4.4(a)), and a presumption is overcome only by clear and convincing evidence (section 4-4.2(e)).

New York's one business billing-address rule shares its elements with California's professional services rule but is a presumption: where a corporation has more than 250 business customers purchasing substantially similar services and no more than 5 percent of those receipts come from the customer in question, the benefit is presumed received at the customer's billing address (section 4-4.2(d)(1)(ii)). New York also answers the intermediary problem. Where a business customer derives value at the location of its own consumers, the receipt is apportioned by the consumers' location; the corporation makes its inquiries to the business customer, which can answer from its own books and records; if the consumers cannot be located after due diligence the business customer's location is used, and if neither can be found the corporation moves to the preceding year method; and the intermediary rules yield to the business address presumption where it applies (section 4-4.8(a) through (d)). An approximation the Commissioner finds unreasonable may be replaced, the burden then falling on the corporation to show the Commissioner's method is not reasonable (section 4-4.5(c)(4)).

The Multistate Tax Commission's model, as amended February 24, 2017, supplies the structure most market states copied. The model statute requires that the state of assignment be "reasonably approximated" where it cannot be determined, and excludes from the denominator a receipt assigned to a state where the taxpayer is not taxable or whose state cannot be determined or approximated (Compact Art. IV.17(b), (c)). The model regulation requires a taxpayer to "make a reasonable effort to apply the primary rule applicable to the sale before seeking to apply the next rule" (Reg. IV.17.(a)(4)(B)), imputes to the taxpayer the sourcing information a related-party customer holds (Reg. IV.17.(a)(5)(C)), and treats a method properly applied on an original return as correct for that year (Reg. IV.17.(a)(7)(B)). Its professional services category carries rules for individual customers, business customers, large-volume transactions and related parties (Reg. IV.17.(d)(4)); the billing address is the third step for a business customer, after the state where the customer principally manages the contract and its place of order, and a taxpayer with more than 250 customers for substantially similar services may elect it for any customer that supplies no more than 5 percent of its service receipts.

Massachusetts, whose regulation the Commission's drafters consulted, requires assignment to rest on "objective criteria" supported by contemporaneous records (830 CMR 63.38.1(9)(d)1.d), excludes from numerator and denominator a sale whose state cannot be found by reasonable good-faith effort (section (9)(d)1.f.i), and treats the method on an original return as "a correct determination by the taxpayer" that neither side may change for that year, while allowing the Commissioner to substitute an appropriate approximation where the taxpayer's is unreasonable (section (9)(d)1.g.i and 1.g.ii(B)). Services are assigned by where they are delivered, not by where the taxpayer's property or payroll sits (section (9)(d)4.a); professional services carry their own rules at section (9)(d)4.d, not restated here.

Illinois states most plainly that the ordering office and the billing office are fallbacks. Services are in Illinois "if the services are received in this State." Where the state of receipt is not readily determinable, or the customer has no fixed place of business there, the services "shall be deemed to be received at the location of the office of the customer" from which they were ordered in the regular course of its business, and "if the ordering office cannot be determined, at the office of the customer to which the services are billed" (86 Ill. Adm. Code 100.3370(c)(8)(D)). Where the taxpayer is not taxable in the state of receipt, the receipts "must be excluded from both the numerator and denominator of the sales factor." A billing-address schedule skips two steps and cannot run the throw-out test, because it never identifies the state of receipt.

A place-of-performance state such as Texas sources a service receipt to where the work is done rather than to the customer, so a schedule keyed to the customer's address is wrong there for a different reason, and the workbook needs a performance-location field for those states.

Fee types that need separate treatment

The payables center, the foreign customer and the intermediary each put an address on the invoice that is not where the customer uses the service, and the worked example below takes each in turn. Pooled fee types compound all three. A consulting firm's revenue account can hold project fees, reimbursed travel, and reserves and true-ups with no customer at all. Project fees are received where the customer's team uses the work. Reimbursed expenses follow the service they support, and whether they are gross receipts at all is a question each state's definition of gross receipts answers first. Where one sale combines services with tangible or intangible property, California assigns each portion separately if its value is readily ascertainable and otherwise by the principal purpose of the contract (section 25136-2(e)). A schedule that sources the account balance by customer sources every stream by the rule that fits one of them.

A worked example

A management consulting firm, organized as an LLC taxed as a partnership, has receipts of $40 million from 320 business customers and files in many states. Its billing system assigns each invoice the customer master's remit-to address. Three customers show what the schedule does; the states named are the ones whose rules are set out above.

Customer A pays $3 million, 7.5 percent of the firm's receipts. Its headquarters is in Illinois, the division that engaged the firm and uses the work sits in Colorado, and its invoices go to a shared-services center in New York. The schedule sources $3 million to New York. The engagement letter names the Colorado division, and the time records show the consultants at the division's Colorado and Illinois sites in a ratio of three to one. Under New York's rule the customer derives no value in New York, Customer A is above the 5 percent line so the business address presumption is unavailable, and the $3 million leaves New York's numerator (20 NYCRR 4-4.4(b), 4-4.2(d)(1)(ii)). Under Illinois' rule the services are received where the customer's people use them, which puts $750,000 in Illinois' numerator, and because the firm is taxable in Colorado and Illinois no throw-out arises. Under California's prior and amended texts the books and records substantiate a location outside California, and because Customer A exceeds 5 percent of the receipts from the service, the 2026 professional services rule does not reach it.

Customer B pays $1.6 million, 4 percent. It is a manufacturing group whose parent sits abroad; the engagement supports plants outside the United States, and a U.S. affiliate pays the invoices from Massachusetts. The schedule sources $1.6 million to Massachusetts. The engagement letter and the project files place the benefit at the foreign plants. Massachusetts assigns consulting under its professional services rules rather than its in-person services rules (830 CMR 63.38.1(9)(d)4.b.i, 4.d), so whether the receipt leaves its numerator turns on those rules, not on the general statement that a service is assigned where it is delivered (4.a). Under California's prior text the books and records place the benefit abroad; under the amended text the professional services rule assigns the receipt to the affiliate's Massachusetts billing address; California's numerator holds none of it in either era. California's definition of reasonable approximation adds the populations of other countries where the benefit is substantially received outside the United States (section 25136-2(b)(10)), which assumes the taxpayer knows which receipts are foreign. Under the MTC model and Illinois the receipt is tested for exclusion from the denominator where the firm is not taxable where the benefit is received, a test the schedule never reaches because it never identifies the receipt as foreign. The reverse error, tagging a customer as foreign because its parent is, moves U.S. receipts out of every numerator.

Customer C pays $1 million, 2.5 percent, through a procurement platform in New Jersey that contracts for an end customer whose team sits in California. The schedule sources $1 million to New Jersey, which is where the inquiry begins, not where it ends: New York sources an intermediary transaction by the consumers' location after inquiry of the business customer, Legal Ruling 2022-01 places a subcontractor's receipts at the end customer's plant, and the MTC model imputes a related-party customer's information to the taxpayer. For the 2025 return, under California's prior text, the firm's inquiry to the platform, answered from the platform's records, places the benefit with the end customer's California team, and the $1 million is a California receipt. For taxable years beginning in 2026 the answer reverses: the firm provides business advisory consulting services to more than 250 customers, Customer C is below 5 percent, and section 25136-2(c)(3) assigns the receipt to the platform's New Jersey billing address. Had the end customer's team been in New York, New York would reach the same billing-address result by presumption, since the intermediary rules yield to it (20 NYCRR 4-4.2(d)(1)(ii), 4-4.8(d)), and the presumption is overcome only by clear and convincing evidence, the Department also having to show the firm had or could have obtained the information (section 4-4.2(e)).

The 2026 California rule therefore splits the firm's customers in two. Customer A, and any other customer above 5 percent of the receipts from the service, runs the cascade and its payables center is irrelevant; the rest are assigned to their billing addresses, and for them the payables center is the answer. Whether every receipt the firm books as consulting is "business advisory consulting services," and whether a reimbursement is part of "that service," are classification questions the closed list answers by its terms, and they decide which receipts the billing address governs. For the 2025 return and every earlier open year, the billing address is the last step for all 320.

What a sourcing workbook must capture

The workbook that survives audit in a market state is not a revenue schedule with a state column. It carries, for each customer and each fee type, the fields the cascades ask about, in the order they ask. First, the customer as the regulations define it, the party that entered into the contract, separated from the intermediary it bought through and from the affiliate that pays; New York needs that distinction to classify the customer and run its intermediary rules (20 NYCRR 4-4.1(b) and (c)), and Legal Ruling 2022-01's subcontractor analysis needs it too. Second, the location where the customer uses the work: the business unit in the engagement letter, the sites in the time records, the sponsor's office, and for an intermediary transaction the end customer's location obtained by inquiry; these are the books-and-records fields that occupy the first operative step in California, the "where benefit received" step in New York and the "received" step in Illinois. Third, the approximation data for customers whose records do not place the benefit: headcount or sites by state for a workforce service, and the population base, foreign populations included where the benefit is substantially received abroad. Fourth, the country of every customer, so that foreign receipts are identified before any U.S. state is assigned and the exclusion rules can be run. Fifth, the office that principally manages the contract, the place of order and the billing address, recorded as what they are: the steps of the model's professional services rule, the last two steps of the prior California cascade, the last step of the amended one, and the method for the professional services class. Sixth, the fee type, each stream carried separately from the ledger account that pools them. Seventh, the method and the step reached for each receipt, with the inquiries made and the records relied on, because New York requires documentation of the steps taken before abandoning each method, Massachusetts and the MTC model bind both sides to the method on the original return, and California protects a reasonable approximation only when it is shown to be one and requires consistency once it is used. Two counts serve the high-volume rules, the number of customers per professional service and each customer's share of the receipts from it, and the list of states where the taxpayer is taxable is the last field, because the Illinois, Massachusetts and model exclusion rules cannot be applied without it.

Practice notes

The sound sequence for a service firm that has sourced by billing address is a reconstruction of the cascade from the engagement records for the open years, customer by customer and fee type by fee type, with the billing address kept as the column of last resort and the professional services class, where it applies, identified by a customer count and a 5 percent test rather than assumed. Engagement letters and time records usually answer the payables-center and foreign-customer cases without inquiry; intermediaries need one. In California, a reconstructed method for taxable years beginning in 2026 is documented as an approximation where that is what it is, so that the preponderance burden on the FTB and the consistency rule work for the taxpayer, and the pre-2026 returns and amended returns run on the prior cascade. In New York, each abandoned method carries a written record of the due diligence, because the Commissioner can send the taxpayer back up the hierarchy on a showing that the information was obtainable. A schedule that over-assigned receipts to states where the taxpayer files is a refund item there and an exposure item in the states where the customers' people sit, and the refund side closes on each state's limitation period, while the exposure side stays open in any state where no return was filed. For a partnership or LLC, every change in the state assignment of receipts changes each owner's state-source income and the entity's withholding and composite positions. G&G State Tax Group provides market-sourcing reconstructions, sourcing workbook design and refund and audit representation for service businesses alongside its state and local tax practice.