Although California adopted single-factor market-based sourcing for corporations a decade ago, disputes under the former “costs of performance” sourcing rule continue. One such case, Appeal of Wedbush Capital, OTA Case No. 22019441, 2026-OTA-405 (issued May 22, 2026; released Aug. 3, 2026), involved a securities broker-dealer’s sourcing of securities trading receipts. The Office of Tax Appeals (“OTA”) opinion shows that significant hurdles remain for some taxpayers.
Background: Until 2013, most corporations were required to source to California their gross receipts from sales (other than from sales of tangible personal property) if the corporation’s income-producing activity was performed both within and outside California and a greater proportion of those activities were performed in California than in any other state (sometimes known as “all or nothing” sourcing). Income-producing activity included the performance of personal services and the utilization of tangible and intangible property by the corporation. Costs of performance included direct costs giving rise to the particular item of income.
The Facts: Wedbush Capital is a global financial services firm whose wholly-owned subsidiary, Wedbush Securities, Inc. (“Wedbush”), is a securities broker-dealer headquartered in Los Angeles, with offices throughout the United States. Wedbush engaged in various types of securities trading, specifically principal trading sales, which involved the buying and selling of inventoried securities for its own account, and agency trading sales, where Wedbush secured a buyer before it purchased and then resold the securities at the gross price it paid in exchange for a fee from the buyer. Wedbush made agency sales to both institutional investors (e.g., pension funds) and retail customers, such as companies and individuals.
For the 2010 tax year, Wedbush filed its California corporate tax return using the former four-factor apportionment formula (property, payroll, and double-weighted sales). In its reported sales factor, it included both types of trading income based on its net profits/losses, instead of using gross receipts, and sourced the net amounts based on the headquarters of the target companies whose securities it purchased and sold.
On audit, the Franchise Tax Board (“FTB”) included Wedbush’s sales of securities in the sales factor using gross receipts, not net profits/losses, because Wedbush was a registered broker-dealer and its sales did not constitute a treasury function. The FTB sourced to California approximately 80 percent of Wedbush’s gross receipts from institutional sales based on the locations of its employees who conducted the transactions (both dealers and researchers), somewhat less for sales made to non-institutional investors.
Taxpayer’s Position: Wedbush took the position that its costs of purchasing the underlying securities were material expenditures that were necessary to generate its trading revenue, and that those costs should be reflected in the costs of performance analysis. It also contended that for sourcing its institutional sales, only approximately 17 percent of the trading receipts should be sourced to California based on the targets’ headquarters locations, as a proxy for its researchers’ activities.
The OTA Opinion: In a “nonprecedential” opinion, the OTA rejected Wedbush’s claim that it was entitled to include its costs of purchasing the underlying securities in its costs of performance analysis. According to the opinion, Wedbush’s gross receipts should be sourced based on where its trading activities were conducted and the costs to purchase the securities were of no relevance in determining where those activities took place. The OTA discussed several frequently-cited California cases involving the sourcing of sales of securities -- most of which, it should be noted, involved treasury functions or hedging activities – and none of which considered the costs to purchase the securities in the costs of performance analysis.
The OTA also held that it was reasonable for the FTB to source to California 80 percent of the gross receipts from Wedbush’s institutional sales based on the location of its researchers. The OTA found it unlikely that Wedbush’s researchers spent a substantial amount of time at the more than 5,100 target companies’ headquarters, and there was no evidence in the record showing the percentage of their time investigating at the targets’ headquarters versus their time researching at their assigned offices at Wedbush. The OTA upheld the FTB’s adjustments in their entirety.
Observations: While the OTA opinion is unfavorable to Wedbush, it could benefit other securities broker-dealers not headquartered in California or having a less substantial presence there. However, its designation as a “nonprecedential” opinion limits its application to other taxpayers.
This update is one in a series of updates written for the September 2026 edition of The BR State + Local Tax Spotlight.
© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.