Ca. Tax Lawyer 2016, VOLUME 25, NUMBER 4

In Defense of Regulations: California, Market-Based Sourcing, and the Defense Industry1

By Shail Shah & Alexis Binazir2


California enacted mandatory market-based sourcing rules for sales of other than tangible personal property for most taxpayers for taxable years beginning on or after January 1, 2013.

Relevant to this discussion are the market-based sourcing rules applicable to services. In general, the statute provides receipts from services are sourced to where the benefit of the services is received. The regulations define where the "[b]enefit of a service is received" as the location where the taxpayer’s customer received value from delivery of the service, either directly or indirectly.3 The market-based sourcing regulations require receipts from services performed for business-entity customers to be assigned based on the cascading rules provided in the regulations. The regulations are not meant to be a one-size-fits-all solution for most taxpayers but do provide general guidance for many diverse industries.

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