After years of administrative fits and starts, asset managers need to be aware that California has finalized a regulation that sources fees to California based on investor location.
On September 10, 2025, the California Franchise Tax Board (FTB) published the final regulations addressing market-based sourcing rules for sales other than sales of tangible personal property, Cal. Code Regs. Tit. 18, § 25136-2. The regulations, which take effect on October 1, 2025, will apply to taxable years starting on or after January 1, 2026. Of interest to asset managers is that the FTB will source fees from asset management services to California for income tax purposes in proportion to the fees received from California-resident investors.
Specifically, the final regulation sources receipts, likely received in the form of management or performance 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.
The new rule requires that asset managers calculate the sales factor by determining the proportionate average value of interests held by California-resident investors and beneficial owners in proportion to investors and beneficial owners everywhere. To make matters more complicated, asset managers also need to be aware of California’s economic nexus threshold. To the extent that the asset management or performance fees attributable to California exceed the California economic nexus threshold ($735,019 of receipts attributable to California for 2025), the asset manager would be deemed to have California income tax nexus and a related filing obligation, even if it has no physical presence in or connection to California.
Our previous advisory also addressed San Francisco’s proposal to source asset managers’ fees to San Francisco based on investor location for purposes of the city’s gross receipts tax. The city’s proposed sourcing rules have not yet been adopted, but on July 1, 2025, the city’s tax collector issued updated proposed regulations that incorporated feedback following the initial release of the proposed regulations in February 2025. The updated proposed regulations largely leave the sourcing rules for asset management services unchanged from the prior proposed regulations.
Finally, the city’s updated proposed regulations have not amended the tax years the regulations would apply for. The updated proposed regulations indicate that the regulations still apply for tax years starting on or after January 1, 2025.
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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