Asset managers should be aware that California and San Francisco are independently pursuing proposals to source fees to California and San Francisco based on investor location.
At the state level, on May 20, 2025, the California Franchise Tax Board issued a second notice of modifications to the proposed regulation on market-based sourcing rules, Cal. Code Regs. Tit. 18, § 25136-2, for sales other than sales of tangible personal property. Most significantly for asset managers, the second notice changed the effective date of the proposed rules to January 1, 2026, rather than the previous effective date of January 1, 2025. The second notice of modifications did not change the previously proposed rules for asset managers that would source fees from asset management services to California for income tax purposes in proportion to the fees received from California-resident investors.
Specifically, the proposed regulation sources fees from “asset management services” to the “domicile” of the fund’s investors. The domicile of an investor is presumed to be the investor’s (or beneficial owner’s) billing address indicated in the fund’s or asset manager’s records. If finalized, the proposed sourcing rules, which were originally proposed by California years ago, would newly subject asset management fees to California income tax based solely on having investors in the state.
Written comments on the proposed regulation may be submitted by any interested person or their authorized representative by June 5, 2025. Despite the proposed regulation’s inclusion in the regulatory process for years in California, the current proposal appears to have regulatory momentum and should be monitored closely.
Following the state’s lead, after the passage of Proposition M in 2024, the Office of the Treasurer & Tax Collector for the City and County of San Francisco released its market sourcing regulation, Proposed Tax Collector Regulation 2025-1, on February 28, 2025. The proposed regulation generally aligns the city’s gross receipts tax with the California Franchise Tax Board’s proposed sourcing rules for asset managers. Likewise, the city’s proposed regulation would require that gross receipts from asset management services be sourced to San Francisco based on the domiciles of the investors (or the beneficial owners). Of note however, the city’s proposed regulation’s definition of “asset management services” differs from the California Franchise Tax Board’s proposed regulation’s definition, and there is currently no written guidance on this point.
The tax collector held a hearing on April 8, 2025 to provide an overview of the proposed regulation and to allow taxpayers to provide comments on the proposed regulation. During the hearing, taxpayer advocates requested clarity on the proposed regulation’s industry-specific sourcing rules, including for asset management service providers.
Written comments to the proposed regulations were due to the tax collector on April 18, and the tax collector may hold additional hearings to address those comments. Similar to the state’s proposed regulation, San Francisco’s proposed regulation appears to have regulatory momentum and should be monitored closely, especially given the fact that the city’s regulation still has an effective date of January 1, 2025, and there is no current written guidance on whether the tax collector will apply the regulation’s sourcing rules retroactively.
The Alston & Bird State & Local Tax team continues to monitor these California developments for asset managers closely.
If you have any questions, or would like additional information, please contact one of the attorneys on our State & Local Tax team.
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