California Changes Rules for Sourcing Income

California Sourcing Income

Starting in 2026, the California Franchise Tax Board (FTB) will apply new rules for determining how much of a company’s sales income is taxed in California. The changes affect businesses that sell services or intangible property—such as financial services, software, investment advice, or intellectual property rights—whether they are based inside or outside the state.

Key updates include:

• A single set of rules for sourcing revenues from services, replacing the old split between individuals and businesses.

• Special provisions for professional service providers (tax, payroll, accounting, investment advisory) that source revenue to the customer’s billing address when serving many clients, with different treatment for large customers.

• Clearer guidance on how to allocate sales that involve both services and property.

• Updated rules for sourcing intangible property such as securities.

Why it matters:

California taxes income that is considered California-sourced. If a business has customers in California, a share of its revenue will be taxed there—even if the business operates elsewhere. These new sourcing rules change how sales are counted as California income, which can directly impact a company’s tax bill.

Final regulations https://www.ftb.ca.gov/tax-pros/law/final-regulations/index.html