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California market sourcing ruling: Services for service providers

Inside Deloitte

In this edition of Inside Deloitte, Bart Baer, Jairaj Guleria, and Lauren Knapp of Deloitte Tax LLP, discuss a recent California chief counsel ruling regarding the application of market-based sourcing rules for services provided to service providers.


In Chief Counsel Ruling (CCR) 2017-01,1 the California Franchise Tax Board issued guidance interpreting its market-based sourcing rules for services, stating that where a taxpayer/service provider is performing services for another service provider (client service provider), the benefit received is the client service provider being relieved of having to perform some of its contractual obligations for its own customers.

As discussed below, this generally results in the service fees being sourced to the principal location of the client service provider and not to the location of its ultimate customers. A fact pattern involving services being performed for a service provider appears to be a matter of first impression and may have significant implications for the sourcing of receipts from subcontracting and outsourcing service relationships.

The Franchise Tax Board (FTB) also maintained its existing position on the sourcing of receipts from so-called non-marketing services first set out in CCR 2015-03,2 which limits situations in which the benefit received from services is determined regarding the customer’s customer. Finding that the services were non-marketing services, the FTB determined in CCR 2017-01 that the taxpayer should assign sales of those services to California to the extent that its direct customer, and not its customer’s customer, receives the benefit of the service in the state.3

Finally, in concluding that the benefit received by the taxpayer’s customer is that of being relieved of the obligation to perform services it was contractually obligated to fulfill, CCR 2017-01 determined that the location where that benefit is received is the location where the taxpayer’s customer (that is, the client service provider) would otherwise have performed the services itself.

This article analyzes CCR 2017-01 and discusses its potential implications for similarly situated taxpayers.

Read other editions of Inside Deloitte.


1 California Franchise Tax Board, Chief Counsel Ruling (CCR) 2017-01 (Apr. 7, 2017).

2 FTB, CCR 2015-03 (Dec. 31, 2015).

3 CCR 2017-01, supra note 1, at 3.

​If you have questions regarding this edition of Inside Deloitte, please contact:

Bart Baer, principal, Deloitte Tax LLP

Jairaj Guleria, partner, Deloitte Tax LLP

Lauren Knapp, manager, Deloitte Tax LLP

The authors would like to acknowledge the contributions of Jessica Backer to the drafting process. She is a consultant working in the San Francisco office of Deloitte’s Multistate Tax practice.

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