On May 20, 2025, the California Franchise Tax Board (FTB) issued its Second Notice of Modifications to Proposed Regulation Section 25136-2, which would affect how businesses source sales of services and intangible property for California income tax purposes.

On Jan. 6, 2025, the FTB released initial amendments to Proposed Regulation Section 25136-2. Following a public hearing on Jan. 30, 2025, where stakeholders provided feedback, the FTB issued a second round of amendments in response to the comments received.

Key Substantive Changes in the May 20 Amendments

• Presumptions and Substantiation Rules - On May 20, 2025, the FTB amended Proposed Regulation Section 25136-2 to clarify four presumptions for sourcing service revenue to California: when the service relates to (1) real property located in California, (2) tangible personal property delivered in California, (3) intangible property used in California, or (4) individuals physically present in California at the time of service. The FTB clarified these presumptions may be rebutted by a preponderance of evidence, including contracts or business records maintained in the ordinary course.
   
• Various examples were modified for clarity in response to taxpayers’ comments.

Administrative and Miscellaneous Changes in the May 20 Amendments

• Updated Applicability Date - The effective date of these amendments has been shifted to apply to taxable years beginning on or after Jan. 1, 2026, providing businesses additional time to comply.
   
• Terminology Standardization - Consistent use of “benefit of the service” language throughout.

The FTB did not issue a notice for an additional public hearing in response to the recent modifications. Due to the limited scope of these changes, a further hearing may not be scheduled. After the comment period concludes on June 5, 2025, the FTB can submit the regulation to the Office of Administrative Law (OAL) for review if no comments are received. The OAL may either approve or disapprove the proposal. If disapproved, the FTB must address the identified issues and resubmit the regulation for review.