October 9 2024

California Proposes Changes to Apportionment Rules, Applies Market-Based Sourcing to Non-Resident Directors

The California Franchise Tax Board (FTB) recently proposed significant amendments to the state's personal income sourcing and apportionment rules. In particular, these changes target non-resident corporate directors who receive compensation for services performed outside California, but where the corporation has a commercial domicile in the state.

The new amendments stipulate that if a corporation's commercial domicile is in California, then any fees paid to non-resident non-employee directors for services, regardless of where performed, will be considered California-source income. Under the proposed regulations, only non-resident employee compensation will be sourced based on where the employee performs their duties. For non-resident directors, their compensation will be subject to California tax if their corporation is domiciled in the state.

The amendments also clarify that income earned in the state by non-resident performers or professionals, and paid on some basis other than a daily, weekly or monthly basis, must be included in their California gross income. The income must be apportioned between California and other states and foreign countries in such a manner as to allocate to California that portion of the total compensation which is reasonably attributable to personal services performed in the state.

Note: The regulations build on Chief Counsel Ruling 2019-03 (as a PDF), which clarified that compensation paid to an independent, non-resident director of a company is sourced to where the highest-ranking corporate officers carry out the Board's directions (i.e. sourced to where the decisions and actions of the Board are executed).

Source: IBFD tax research platform news