California is finally ready to proceed with the formal rulemaking process to adopt substantial amendments to its market-based sourcing rules. The state’s Franchise Tax Board approved a request from its staff to begin formal rulemaking on significant amendments to its market-based sourcing rules last week.

Market-based sourcing, adopted by more than 30 states, is quickly becoming the method of choice for states as they abandon the cost-of-performance method.

Tax professionals who spoke with Law360 said that they hoped the new rules, when adopted, would lead to more efficiency in the sourcing of services in the nation's most populous state.

"From a practical perspective, it will at least bring clarity in some areas," said Carley Roberts, a State & Local Tax partner at Pillsbury.  

However, Roberts still had cautions, noting that the changes are substantial and saying that tax professionals should become familiar with the many edits in the proposed rules. She said she was pleased with an amendment regarding reasonable approximation.

"It says the FTB shall accept the taxpayers' reasonable approximation methodology," Roberts said. "I like the language — it's certainly favorable to the taxpayer."

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