California’s 2026 Market-Based Sourcing Changes: What Service Professionals Need to Know

Beginning with the 2026 tax year, California is simplifying how service professionals apportion their income between California and other states. For businesses and individuals with clients both inside and outside California, this rule change could significantly affect how much income is taxable in California.

At Velin & Associates, Inc., we want our clients—whether you’re a YouTuber, Shopify seller, Amazon business owner, doctor, dentist, filmmaker, TikToker, or a high net worth individual—to understand how these new rules work and how they may impact your tax planning.

The Old Rules: Complex and Time-Consuming

Prior to 2026, determining how much of your professional income California could tax depended on whether your client was an individual or a business:

• For individuals: Income could be sourced based on the client’s billing address.
• For business clients: Service providers had to determine where the benefit of the service was received. This required reviewing contracts, books, and records. If that information wasn’t clear, professionals had to dig deeper, applying cascading rules and other factors.

This approach was not only time-consuming but also left taxpayers exposed to challenges during an IRS or Franchise Tax Board (FTB) audit.

The New 2026 Rules: Simpler and More Predictable

Starting in 2026, certain service professionals with more than 250 customers can use a much simpler method: source their income based solely on the client’s billing address.

Example: If a California tax professional provides services to 500 clients and:

• 100 clients have billing addresses in Arizona
• 400 clients have billing addresses in California

Then 20% of gross receipts are sourced to Arizona and 80% to California.

This eliminates guesswork and makes compliance far more straightforward.

Who Can Use the Simplified Method?

This new sourcing method applies only to certain professional service providers, including:

• Tax services (like CPAs and enrolled agents)
• Accounting and payroll services
• Audit and attest services
• Business advisory consulting
• Legal services
• Management services
• Actuarial services
• Technology consulting
• Securities brokerage (commission income)
• Investment advisory services (other than asset management)
• Underwriting services (debt or equity)

Why This Matters for Professionals

If you provide services across multiple states, these changes could directly impact your California tax liability.

• CPAs for YouTubers or TikTokers:

If you advise creators in multiple states, your income will now be sourced by their billing address—not by trying to determine where they “receive the benefit.”

• CPA for Shopify or Amazon Business Owners:

Many e-commerce sellers operate nationally. With the new rules, your client’s billing address determines sourcing—not complicated contract interpretations.

• Dentist CPA or Medical Practice CPA:

If you handle professionals who serve patients across state lines (such as telehealth practices), billing address sourcing will simplify apportionment.

• CPA for High Net Worth Individuals:

If you provide investment advisory or consulting services to clients across states, sourcing is now clearer and less prone to audit disputes.

Key Takeaways

1. Simplification – For qualifying professionals with 250+ clients, billing address sourcing replaces the old, complex “benefit of service” rules.
2. Audit Protection – Clearer rules reduce the risk of disputes with the California Franchise Tax Board.
3. Tax Planning Opportunities – Businesses with significant out-of-state client bases may see a reduction in California-taxable income.

How Velin & Associates, Inc. Can Help

These changes underscore the importance of proactive tax planning. At Velin & Associates, Inc., we work with a wide range of professionals—YouTubers, Shopify store owners, Amazon sellers, dentists, doctors, filmmakers, TikTok creators, and high net worth individuals—to ensure that income is sourced properly and that no opportunities for savings are missed.

Whether your business is in California or you serve clients across the country, our team helps you stay compliant while optimizing your tax strategy.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org