A recently released California Chief Counsel Ruling authorized a corporate taxpayer to use its customers’ billing addresses as a proxy for the customers’ “commercial domicile” in calculating the taxpayer’s sales factor numerator. Chief Counsel Ruling 2011-01 (Aug. 23, 2011, rel. Dec. 28, 2011).
For sales factor purposes, California sources the sales of intangibles and services using costs of apportionment (COP). The sales of intangibles and services are attributable to California if a greater proportion of the income-producing activity is performed in California than in any other state, based on COP. Before 2008, taxpayers could not include payments to agents and independent contractors as part of the taxpayer’s COP analysis. But beginning in 2008, California began to require taxpayers to take into account payments made to agents and independent contractors in calculating COP. As part of the analysis, the taxpayer must determine the location of the income-producing activity, and the regulations provide a comprehensive list of cascading rules to determine the appropriate location of the income-producing activity. See Cal. Code Regs. tit. 18, § 25136.
This taxpayer was in the business of placing targeted advertisements for its customers with online publishers (i.e., website owners or operators). Customers contracted with the taxpayer, who in turn contracted with online publishers to place online ads on websites that targeted a customer's audience. The cost to purchase ad space from online purchasers represented the taxpayer’s largest cost of performance.
Under the cascading rules for determining the location of third-party, income-producing activity, a taxpayer defaults to the commercial domicile of its corporate customer if the services were performed in more than one state and the contracts or taxpayer records do not identify in what state all or a portion of the services were performed. However, this particular taxpayer also did not have enough information to determine its customers’ commercial domiciles. The taxpayer’s records did include the customers’ billing addresses, and it therefore sought to use the billing address as a reasonable proxy for the commercial domicile information required by the regulation.
The Chief Counsel allowed the taxpayer to source its sales using its customers’ billing addresses.
As technology evolves and the location of services becomes increasingly blurred, it is becoming more difficult to identify where services are being performed, which may lead to more use of the final default rules under those regulations that use a cascading approach.