CORPORATE CLOSE-UP: CALIFORNIA CLARIFIES MARKET-BASED SOURCING RULES FOR INTANGIBLES

Amendments to California’s market-based sourcing rules define “marketable securities,” specify how sales of such securities should be assigned and provide guidance on the assignment of interest receipts, dividends and goodwill.

“What’s most interesting about these amendments is what they don’t include—examples showing how to assign asset management fees,” Eric J. Coffill, senior counsel with Sutherland in Sacramento told Bloomberg BNA Sept. 23. The examples appeared in earlier iterations of the amendments, but were not included in the recent adoption, Coffill said.

Amendments to Cal. Reg. tit. 18, § 25136-2 define “marketable securities” as “any security that is actively traded in an established stock or securities market and is regularly quoted by brokers or dealers in making a market.” Unlike general corporations which must exclude from their sales factor amounts received from treasury functions, taxpayers who are principally engaged in purchasing and selling intangible assets must include gross receipts from such transactions in their sales factor, under the amendments, from the sales factor.

Under the amendments, sales of marketable securities are sourced to the location of the customer as follows:

  • If the customer is an individual, the sale is sourced to California if the customer's billing address is in California.
  • If the customer is a business entity, the sale is sourced to California if the customer's commercial domicile is in California.

Gross receipts from interest are sourced under the amendments as follows:

  • Interest from investments, other than loans, are sourced to California if the investment is managed in California.
  • Interest from loans secured by real property are sourced to California if the real property is located in California.
  • Interest from loans not secured by real property are sourced to California if the borrower is located in California.

Loans are defined as “any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another person. Loans include participations, syndications, and leases treated as loans for federal income tax purposes.”

Gross receipts from dividends or goodwill are assigned according to the same rules applicable to the sale of shares of stock or an ownership interest in a pass-through entity. 

The amendments are applicable to taxable years beginning or after Jan. 1, 2015. But a taxpayer may elect to apply the new provisions retroactively to taxable years beginning on or after Jan. 1, 2012, assuming a return filed in those years is open to adjustment under applicable statutes of limitation. 

Continue the discussion on LinkedIn: How will California’s new regulations play out in the audit process?

For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library .