At your service: FTB ruling looks at "personal services," time-spread method.

• Position: California tax - Franchise Tax Board

What constitutes a "personal service" for purposes of attributing gross receipts to California using the time-spread method provided by California Revenue and Taxation Code Sec. 25136(d)(2)(C)?

Receipts from a sale "other than a sale of tangible personal property" are included in the sales factor under the rules set forth in Sec. 25136.

Sec. 25136 assigns receipts from sales of other than tangible personal property to the state where the income-producing activity occurs. If the income-producing activity occurred in more than one state, the sale is assigned to the state in which the greater costs of performance occurred.

Sec. 25136(d)(2) provides special rules for determining when receipts from income-producing activities are in California. Sec. 25136(d)(2)(C) addresses gross receipts from the performance of personal services and provides that the time each employee spends in each state will constitute a separate income-producing activity for purposes of the sales factor.

This method, known as the time-spread method, provides for a "ratio which the time spent in performing such services in this state bears to the total time spent in performing such services everywhere."

What is a Personal Service?

The factual situations addressed in this ruling raise the question of the extent to which a service is considered a personal service under Sec. 25136 (d)(2)(C). While the concept of personal services has been used in different contexts in the California income and franchise tax regulations, "personal service" is not defined in Part 11 of the Revenue and Taxation Code.

The concept of personal services has been part of California's apportionment of income regulations for more than 50 years. Prior to the adoption of the Uniform Division of Income for Tax Purposes Act, former Sec. 25101(a) provided that "[i]n the case of personal service organizations, such as advertising agencies, business management firms, etc., the property factor is generally omitted since it is not a material income-producing factor in this type of business."

Also, the concept of personal services is found in Sec. 17951-4, which provides rules to compute the payroll factor for nonresident sole proprietors and partners engaged in the practice of a profession, defined in Sec. 17951-4(h) as "the practice of law, accounting, medicine, scientific or engineering discipline and the practice of any other profession involving personal services where capital is not a material...