customer’s customer


California’s long-anticipated market-based sourcing “guidance” is finally out. Legal Ruling No. 2022-01 provides the Franchise Tax Board’s take on how to find the market in certain business-to-business sales. Though the guidance emphasizes that a seller should look to where its direct customer receives the benefit of sales of services, it keeps with current market-based sourcing trends amongst states and directs taxpayers to source such receipts based on the location of the taxpayer’s customer’s customer. The…

Earlier this year, the California Franchise Tax Board (the “FTB”) issued Chief Counsel Ruling 2017-01 (the “2017 Ruling”), which addresses the application of the state’s market-based sourcing rules to non-marketing services under California Revenue and Taxation Code (“Code”) section 25136 and California Code of Regulations (“Regulation”) section 25136-2.  The 2017 Ruling concludes that receipts from non-marketing services should be sourced to California to the extent that a taxpayer’s direct customers (and not its customer’s customer) receive the benefit of the service in California.  The 2017 Ruling reaffirms an earlier ruling, Chief Counsel Ruling 2015-03 (the “2015 Ruling”), where the FTB reached the same conclusion regarding receipts from non-marketing services.  The 2015 and 2017 Rulings seem to foster a common theme developing under California’s market-based sourcing regime that the appropriate market is the location of a taxpayer’s direct customer (and not its customer’s customer).