FTB issues Legal Ruling on California's Market-Based Rules

On March 25, 2022, the Franchise Tax Board issued Legal Ruling 2022-01 relating to the application of California's market-based rules in Revenue and Taxation Code (R&TC) section 25136 and California Code of Regulations, title 18, section (Regulation) 25136-2. The Legal Ruling applies to apportioning taxpayers with sales from services and to business customers and taxpayers whose filing obligations and tax liabilities are determined in reference to Section 25136 and Regulation 25136-2.

The Legal Ruling presents the proper application of rules related to the assignment of sales from services to this state for apportionment purposes. It also retroactively revokes Chief Counsel Ruling (CCR) 2015-03 and CCR 2017-01.

If a taxpayer relied on either of the revoked CCRs when determining its tax filing position, the Large Corporate Understatement Penalty (LCUP) will not be assessed against it, and an Accuracy Related Penalty (ARP) will also not apply, assuming the taxpayer filed a California return. However, if a taxpayer relied on the CCRs' analyses to determine it did not have a filing requirement, and consequently filed a late return, a delinquent penalty will apply. Furthermore, interest will be assessed on any underpayment amounts resulting from a taxpayer's reliance on the CCRs.