California has recently enacted significant changes that impact corporate taxpayers. Three developments stand out:

1. SB 711 – Federal Conformity Bill: On October 1, 2025, California Senate Bill 711 (“S.B. 711”) and Senate Bill 302 (“S.B. 302”) were enacted into law. S.B. 711 updates California’s reference date for the Internal Revenue Code (IRC) from January 1, 2015, to January 1, 2025, effective for taxable years beginning on or after January 1, 2025.
2. Market-Based Sourcing Amendments: On August 27, 2025, the Franchise Tax Board approved amendments to California Code of Regulations, Title 18, Section 25136-2. These amendments, effective October 1, 2025, overhaul sourcing rules for sales other than tangible personal property (services, intangibles, leases, licensing, and financial instruments).

3. Sales Tax Voluntary Disclosure Agreement (VDA) Updates: The CDTFA revised its VDA program to clarify eligibility and documentation requirements, including a signed statement under penalty of perjury. The revision also notes that businesses whose registration with the Secretary of State is invalid or inactive may be impacted when applying for VDA benefits.

SB 711 – Federal vs. California Treatment

Market-Based Sourcing Amendments – Key Features

General Rule: Sales of services and intangibles are assigned to California if the taxpayer’s market is in California, determined by where the benefit of the service is received or where the intangible property is used.

Cascading Sourcing Rules for Services:

1. Primary Rule: Contract or books/records showing the location of the benefit.
2. Presumptions: Real property, tangible property, intangible property, or individual presence in California.
3. Other Information: Any reliable source if books/contracts are inconclusive.
4. Reasonable Approximation: If a benefit cannot be identified.
5. Billing Address Default: If none of the above applies.

Special Industry Rules:

• Asset Management: Based on the domicile of investors/beneficial owners.
• Large Volume Professional Services (>250 customers): Default to billing address, subject to 5% single-customer exception.
• Intangible Property Transfers/Licensing: Based on the type of intangible and the location of use.
• Marketable Securities: Based on customer domicile or billing address.

Consistency Requirement: Once a taxpayer adopts a reasonable approximation method, it must continue unless FTB approval is obtained to change.

Voluntary Disclosure Agreement (VDA) Updates

Key Revisions:

• Penalty Relief Documentation: Applicants must submit a signed statement under penalty of perjury explaining late filing/payment reasons.
• Secretary of State Status: Businesses whose SOS registration is invalid or inactive may be affected in VDA eligibility.
• Application Forms: CDTFA-38-I (In-State) and CDTFA-38 (Out-of-State) updated to reflect these requirements.
• Processing Time: Responses expected within ~2 weeks of submission.

How KNAV Helps Businesses Navigate California Tax Updates and VDAs

Navigating California tax changes isn’t one-size-fits-all. Each provision—SB 711 conformity, market-based sourcing amendments, and VDAs — has different rules, reporting requirements, and deadlines. KNAV can manage the process from start to finish:

• Exposure Assessment: Identify where your business may have nexus, quantify potential past liabilities, and evaluate the impact of SB 711 and sourcing changes.
• Strategic Guidance: Help determine whether pursuing a VDA or adjusting apportionment/sourcing strategies makes financial and operational sense.
• Full Execution: Handle state-specific filings, correspondence, deadlines, negotiations, and ongoing compliance for R&E, NOLs, interest, and service/intangible sourcing.

Don’t Wait Until the State Contacts You

If your business provides services or intangibles, the revised California market-based sourcing rules may significantly affect how receipts are allocated to the state. Waiting to address potential prior-year adjustments or compliance gaps reduces your options. Once the state initiates contact, VDA eligibility may be restricted, and prior-year adjustments could trigger additional scrutiny.

KNAV can help you take control proactively. Reach out for a confidential assessment and learn how these updates may affect your business and whether a VDA or proactive compliance strategy is right for you.

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