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California FTB Chief Counsel ruling addresses sourcing of sales from non-marketing services

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The California Franchise Tax Board (FTB) recently issued a Chief Counsel Ruling clarifying the sourcing of sales from non-marketing services under the state’s market-based sourcing rules. The FTB ruled that, when a taxpayer receives income from subcontracting services that its customers would otherwise be required to perform themselves for ultimate end-user customers, the benefit is received by the taxpayer’s direct customer and not the ultimate customer. The FTB also ruled that the benefit received by the direct customers in this type of relationship is the release of the obligation to perform the subcontracted services themselves for the ultimate customers. Accordingly, the FTB directed the taxpayer to source the service revenue to the location where the subcontracted services would otherwise be performed were it not for the subcontracting with the taxpayer, based on reasonable approximation.