Background

On September 10, 2025, the California FTB announced that it formally adopted a final regulation addressing the sourcing rules for sales other than sales of tangible personal property, including the sourcing of receipts from “asset management services.”[1]

Under California law, sales from services are sourced to the state to the extent the purchaser receives the benefit of the service in California. With respect to asset management services, determining where the purchaser receives the benefit of the service has been the source of ambiguity and debate. In a typical fund structure, the asset manager receives fees from the fund entities with which the asset manager has an investment management agreement, rather than from the fund’s underlying investors directly.

The California FTB has taken the position that asset management fees are sourced to the location of the ultimate investor, rather than to the fund entity paying the asset management fee. However, the prior regulation did not provide specific guidance regarding asset management services other than with respect to mutual fund service providers.

The California FTB’s final regulation

The final regulation largely adheres to the approach taken in the proposed regulations by sourcing receipts from asset management services (e.g., management fees and incentive fees) to the domiciles of the investors unless the investor is holding title to the assets for a beneficial owner, in which case receipts from asset management services are sourced to the domicile of the “beneficial owner” of the assets. Thus, asset managers may be subject to California income tax if the fund’s underlying investors or beneficial owners are domiciled in the state, even if the asset manager and the fund otherwise have no connection to California and even if the asset manager operates exclusively outside the US.

For these purposes, a “beneficial owner” is any person who made an independent decision to invest assets. Importantly, such term does not include master funds, feeder funds, or other similar entities that are required by agreement with their investors to invest the assets. As a result, the final regulation requires looking through fund entities to determine beneficial ownership for purposes of sourcing receipts from asset management services.

Receipts from asset management services will be assigned to California in proportion to “the average value of interest in the assets” held by the asset’s investors or beneficial owners domiciled in California. An investor or beneficial owner’s domicile is presumed to be the investor or beneficial owner’s billing address unless the asset manager has actual knowledge that the investor or beneficial owner’s primary residence or principal place of business is different than the billing address.

Next steps

Asset managers should discuss planning considerations with their tax advisors in light of the final regulations, such as:

• Whether to request additional information from investors to validate the domicile of investors or beneficial owners (e.g., for asset managers with a non-California (or non-US) investor base, it may be prudent to substantiate that investors or beneficial owners are not domiciled in California)
• To what extent it is necessary to look through certain investors to determine beneficial ownership (e.g., fund of funds investors, access vehicles, and other entity investors)
• How existing fee arrangements (e.g., investor-specific fee reductions) may impact amounts allocated to California and whether to explore alternative fund structures or compensation arrangements
• Whether to make a “pass-through entity tax” election in California

Sales of management company interests also may be subject to California taxation. Asset managers considering sales of interests should consult with their advisors regarding the tax impact of such sales.