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Tax Law

California’s Three-Member Franchise Tax Board to Consider Proposed Market-Based Sourcing and Alternative Apportionment Regulations at December Meeting

On December 18th, the three-member Board of the Franchise Tax Board (FTB) will hold its final quarterly meeting of 2020.  At the meeting, the Board will consider the 2021 Rulemaking Calendar.  The Calendar contains the agency’s schedules for its administrative rulemaking processes on various regulation projects.  Two significant corporate franchise tax regulation projects on the Calendar include amendments to California’s market-based sourcing regulation, FTB Regulation 25136-2 and California’s alternative apportionment regulation, FTB Regulation 25137.

FTB’s 25136-2 regulation project aims to provide more clarity and detail surrounding the state’s market-based sourcing regime for sales of services and intangibles.  The most recent iteration of the proposed regulation provides additional guidance around terms used in the regulation and provides new sourcing rules for specific industries. The draft language also includes new presumptions for sourcing sales of services to business and government entity customers based on the type of services performed.  For a more detailed discussion of the 25136-2 regulation project, please see our previous post: How Does California Source Sales of Services and Intangibles for Apportionment Purposes?

The 25136-2 regulation project has been ongoing since 2017 and FTB has held five interested parties meetings to obtain public comment on different iterations of the proposed amendments.  Those meetings were contentious at times as FTB’s proposed changes have raised significant questions on both substantive and procedural issues, including the effective date of the final regulation. The proposed 2021 Rulemaking Calendar provides that this regulation project will be completed by spring 2021 and that the regulation will be finalized by fall 2021.

Next, FTB’s 25137 regulation project is intended to provide guidance on the state’s process for petitioning the Board to use an alternative apportionment formula.  The latest iteration of the proposed regulation provides guidance on how taxpayers can preserve their rights and privacy during the alternative apportionment petition process.  For a more detailed look at the 25137 regulation project, please see our previous post: The Long Road to Clarity: FTB Holds Latest Meeting in Multiyear Project to Clarify Alternative Apportionment Petition Process.

This regulation project also has been ongoing since 2017 and FTB has held a total of four interested parties meetings on the proposed amendments.  The proposed Rulemaking Calendar provides that this regulation project will be completed in late spring 2021 and that the regulation will be finalized by late 2021.

The Board meeting is open to the public and will be hosted virtually.  Information on how to attend the meeting is available here, and interested parties have the opportunity to make comments at the meeting.  Please contact the Eversheds Sutherland SALT team if you have questions or concerns about these draft regulations or the meeting process.