California FTB Provides Guidance on Sourcing Service Revenues with Legal Ruling 2022-01

  |   April 14, 2022

Legal Ruling 2022-01 Clarifies Assigning Gross Receipts From Sales of Services

Legal Ruling 2022-01 was issued on March 25, 2022. In this ruling, the California Franchise Tax Board (FTB) put forth a new analysis needed to assign service gross receipts to businesses under market-based sourcing rules. 


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The four questions that need to be addressed when sourcing service revenue are the following:

  1. Who is the customer?
  2. What service is being provided?
  3. What benefit is being received 
  4. Where did the customer receive the benefit of the service?

Legal Ruling 2022-01 concludes that “the location where a service is performed does not determine where to assign the gross receipts from the sale of that service. Rather, the gross receipts are assigned to the location where the direct benefit of the service is received by the customer.” 

Expanding the Use of Look-Through Sourcing

Prior to Legal Ruling 2022-01, under FTB rules, service receipts are assigned to where the taxpayer’s customer receives the benefit of the service, not the location of the customer’s customer. However, under this new ruling, that analysis is essentially rejected. The new position under this Legal Ruling expands the use of “look-through” sourcing, which means sourcing service revenue all the way through to the customer’s customer when the benefit is “directed” that way. An example of this kind of service is a subcontracting arrangement by a business with a corporate subcontractor. This kind of arrangement could involve needing to look at the location of the customer’s customer, because the service provided is “directed towards” someone or something other than the subcontractor’s customer. 

Taxpayers should be aware of this ruling when it comes to sourcing their California sales apportionment, as well as taxpayers currently under audit.

Please reach out to the REDW State and Local Tax team with any related questions.

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