The California Franchise Tax Board (FTB) issued Chief Counsel Ruling 2017-01 on August 2, 2017, regarding market-based sourcing rules for performance of “non-marketing” services. Where a subcontractor performed administrative or non-marketing business services for a health plan client, the members or sponsors of the health plan are not considered the direct customers of that subcontractor, but rather only the health plan entity.

The FTB held that sales of services, just as sales of goods, should be considered California sales where the seller’s direct customers received the benefit of the service in California. If a direct customer receives benefits of the service in more than one state, the gross receipts related to performance of the service will be apportioned to the extent that part of the benefit was received in California.