Clients and Associates,
In a year in which the California Franchise Tax Board (the “CaliforniaFTB”) has already adopted rules that change how asset management fees are sourced, the San Francisco Tax Collector (“SF Tax Collector”) has also finalized similar rules. Broadly, the SF Tax Collector is now taking the position that, regardless of where an asset manager is actually located, if it provides services to investors within the city limits of San Francisco, then fees for those services should be subject to the San Francisco gross receipts tax. This position has now been codified in Tax Collector Regulation 2025-1 (the “SFRegulation”).
California FTB Sourcing Rules
Earlier this year, the California FTB adopted sweeping, new amendments to California FTB regulation Section 25136-2 (the “FTB Regulations”). The FTB Regulations addressed sourcing many different types of income to California for state taxation purposes. One such source is fees earned from asset management services. Effective for tax years beginning on or after January 1, 2026, an asset manager’s fees will be sourced to California for investors who are located in California.
The FTB Regulations apply regardless of an asset manager’s location inside or outside of California. When providing such services to investors domiciled in California, asset management fees are sourced to California solely based on such investors’ domicile. Asset managers are tasked with determining the domicile of investors by looking through to beneficial owners of the managed assets (e.g., this could require a manager to inquire whether a fund of funds has any California-based investors). Then, once an asset manager determines all California-domiciled investors, the asset manager’s total asset management fees are apportioned to California based on the average proportion of California-domiciled assets under management (“AUM”) to the manager’s entire AUM.
The full FTB Regulations can be found here: Amendments to 25136-2.
SF Sourcing Rules
The SF Regulation is very similar to the FTB Regulations and apportions asset management fees to San Francisco based on the proportionate AUM of investors in San Francisco. However, one key threshold difference is that the SF Regulation is purported to be in effect for all tax years beginning on or after January 1,2025. Under the SF Regulation, an asset manager determines the average AUM of San Francisco-based investors throughout the year compared to an entire fund’s AUM. The percentage of San Francisco attributed AUM is multiplied by the asset management fees earned. The result is the amount of asset management fees that are sourced to San Francisco and subject to the San Francisco gross receipts tax.
An asset manager must also determine whether investors are domiciled in San Francisco. If an investor’s address in the asset manager’s records is in San Francisco, then the investor is presumed to be domiciled in San Francisco. However, if the asset manager has actual knowledge of a different principal place of business or primary residence of such investor, then the presumption does not control. Additionally, if the asset manager cannot determine the domicile of an investor, then it may use a reasonable approximation to determine a domicile, which is further described in the SF Regulation.
Additionally, much like the new California FTB rules apportioning asset management fees to California, the SF Regulation now also looks through to beneficial owners of investors in order to determine if they are San Francisco-based. Therefore, asset managers will have to look through fund of funds investors and similar investment vehicles to determine if there are any San Francisco-domiciled investors.
While the SF Regulations could be viewed as a broad overreach by the City of San Francisco, as of now, they are the law there. Asset managers, regardless of where they are, should be aware of the impact of managing the assets of San Francisco investors.
The full SF Regulation, including examples of its application, can be found here: SF Regulation.
The above summary is also a very brief overview of the FTB and SF Regulations, and we welcome any conversations with asset managers who would like to better understand the implications of such Regulations. Please contact Kevin Leiske at [email protected] for any further discussions.
Cole-Frieman & Mallon LLP (CFM) is a leading investment management law firm known for providing top-tier, innovative, and collaborative legal solutions for complex financial services matters. Headquartered in San Francisco, CFM services start-up investment managers, multibillion-dollar funds, and everything in between. The firm provides a full suite of legal services to private funds and their managers across a diverse range of asset classes, including fund formation, regulatory compliance, counterparty documentation (digital and traditional prime brokerage, ISDA, repo, and vendor agreements), employment and compensation matters, and routine business matters. CFM is particularly well known for its pioneering work with digital asset funds and their managers. The firm’s corporate and intellectual property (IP) practice groups advise founders, management teams, and investors during all stages of a business’s lifecycle including fundraising, M&A, governance, IP, employment, tax, and regulatory compliance for service and product launches. CFM also publishes the prominent Hedge Fund Law Blog. For more information, please add us on LinkedIn, follow us on X, and visit us at colefrieman.com.