Help with apportionment and allocation

Single sales-factor versus three-factor

Here are some examples to help you determine if you should use the single sales-factor or the three-factor formula.

50% gross receipt test for QBAs

Scenario: Corporation A is a bank. Corporations B and C are general corporations. Corporation A, B, and C are members of the same combined reporting group, Group X. Group X receives less than 50% of its gross business receipts from qualified banking and financial activities during 2013. For the 2013 taxable year, what formula does Group X need to use to apportion its business income to California?

Answer: Group X must use a single-sales factor to apportion its business income to California because it derived less than 50% of its gross receipts from Qualified Business Activities (QBA).

If Group X generates more than 50% of its gross receipts from one or more QBAs in any year for 2013 forward, it will use the three-factor formula consisting of property, payroll, and single-weighted sales to apportion its business income to California.

Partnerships

Scenario: Partnership A files its 2013 Partnership Return (Form 565) and uses a single-sales factor to apportion its business income to California. Is Partnership A required to provide information to its partners on their pro rata share of the California and everywhere property, payroll, and sales?

Answer: Yes, even though Partnership A is required to apportion its business income to California using a single-sales factor, Partnership A is still required to provide its partners their pro rata share of the California and everywhere property, payroll, and sales on the California Schedule K-1 so their partners may determine whether they are doing business in California. This requirement is also applicable to LLCs (treated as partnerships) and S Corporations. Visit Doing business in California for more information.

Special industries (CCR sections 25137-1 to -14)

Scenario: S Corporation A is in the air transportation business and falls under CCR Section 25137-7 for the allocation and apportionment of income to California. For the 2013 taxable year, what formula does S Corporation A need to use to apportion its business income to California?

Answer: Apportioning trades or businesses (including pass-through entities) that use a special formula under CCR sections 25137-1 to -14 must use the single-sales factor to apportion its business income to California except for those that derive more than 50% of their gross business receipts from QBAs.

Those who use a special formula under CCR sections 25137-1 to -14 must follow the special formula for the sales factor, disregarding the rules for the property and payroll factors (CCR section 25137-7(f)), except for the exemptions provided at CCR section 25136-2(g)(3).

Sole proprietorship

Scenario: John W is a nonresident individual of California who owns a sole proprietorship that derives income from inside and outside California. What formula does John W need to use to apportion his business income to California?

Answer: A nonresident individual with income from a business, trade, or profession who must apportion its business income to California under CCR section 17951-4 must use the single-sales factor for taxable years beginning on or after January 1, 2013, unless more than 50% of the gross receipts were derived from a QBA.

Sales of tangible personal property

Sales of tangible personal property are in California if at least one of the following applies:

The property is delivered or shipped to a purchaser in California
The property is shipped from California to a state where the taxpayer is not taxable or the purchaser is U.S. government

Here are some examples to help you with sales of tangible personal property.

For taxable years beginning on or after January 1, 2011, sales are in California if any member of the combined reporting group is taxable in California, or if the goods are shipped from California to a state where no member of the combined group is taxable.

RTC 25135(a) & (b) and regulations thereunder

Public Law 86-272

Scenario: Corporation D, an out-of-state corporation, sells tangible goods and qualifies for protection under PL 86-272. For the 2013 taxable year, Corporation D has $1,000,000 of California sales but no property or payroll in California. Does Corporation D have sales assigned to California for purposes of the California sales factor numerator?

Answer: Corporation D, though considered doing business in California because it has $1,000,000 in California sales, has no California sales for California sales factor purposes because it is not taxable in California under PL 86-272. Therefore, Corporation D must file a California return to pay the minimum tax. However, since Corporation D is protected under PL 86-272, it will not be subject to California franchise tax.

Combined report

Scenario: Corporation D, an out-of-state corporation, sells tangible goods and qualifies for protection under PL 86-272. For the 2013 taxable year, Corporation D has $1,000,000 of California sales but no property or payroll in California. Corporation D is also a wholly owned subsidiary and member of the combined reporting group of Corporation E, a California corporation. Is the $1,000,000 in California sales considered to be California sales for sales factor purposes?

Answer: Yes, the $1,000,000 in California sales receipts are assigned to California. Even though Corporation D remains protected under PL 86-272, the $1,000,000 in sales receipts are assigned to California for sales factor purposes because Corporation E, a member of the combined group, is taxable in California.

Sales of other than tangible personal property

For taxable years beginning on or after January 1, 2013, sales of other than tangible personal property are assigned to California sales factor based on market assignment.

Under market assignment, sales of other than tangible personal property are assigned to the California sales factor numerator if:

Sales from services are in California to the extent the purchaser of the service received the benefit of the services in California
Sales from intangible property are in California to the extent the property is used in California. In the case of marketable securities, sales are in California if the customer is in California
Sales from the sale, lease, rental, or licensing of real property are in California if the real property is located in California
Sales from the rental, lease, or licensing of tangible personal property are in California if the property is located in California

Market assignment is a significant law change since this causes the sales to be assigned to the state where the customer is located, generally. Accordingly, you have apportionable business income or income from California sources if you have any of the above income from California. This applies to all apportioning trades or business, including corporations, pass-through entities, and nonresidents. See table above to see whether there is a filing requirement for each type entity and for nonresidents.

See CCR section 25136-2 for specific rules and examples.

Here are some examples to help you with sales of other than tangible personal property.

Special industries (CCR sections 25137-1 to -14)

Scenario: Corporation F is an air transportation company that uses the special industry allocation and apportioning rules under CCR Section 25137. Does market assignment apply to Corporation F?

Answer: Taxpayers required to follow special industry apportionment and allocation under CCR sections 25137-1 to -14 must follow the sales factor provisions under the special industry regulations, with the exception of any rule excluded by the provisions of CCR section 25136-2(g)(3). The property and payroll factors from the special regulations are not used.

Service provider with no California location

Scenario: In 2013, Corporation G is in the business of providing monthly web service for its customers who are located across the United States. Corporation G's properties and employees are located in Minnesota. Corporation G has no employees or location in California. Corporation G has $4,000,000 in total sales receipts, $1,000,000 of which are from individual customers located in California, therefore those customers received the benefit of the service within California. Corporation G's total business income is $2,000,000 and Corporation G has zero nonbusiness income. What is Corporation G's income subject to tax in California for 2013?

Answer: Corporation G exceeds the sales thresholds for doing business in California under RTC Section 23101(b), therefore it has a filing requirement in California. Furthermore, Corporation G is subject to the franchise tax and must compute its income using the apportioning rules of UDITPA. Corporation G's California sales factor is 25% ($1,000,000 CA sales/$4,000,000 total sales) and its business income in California is $500,000 ($2,000,000 Unitary Business Income (UBI) x 25% sales factor) and will be subject to tax on that income.

California source income of nonresidents

Scenario: Jill, a nonresident of California, owns a web design business that she holds as a sole proprietorship. She works from her home out of state but has customers in various states including California. For the 2013 taxable year, Jill's sales receipts from California customers are $300,000 out of the total sales receipts everywhere of $1,000,000. Does Jill have a filing requirement in California?

Answer: Yes, nonresident individuals are taxed on all California source income. Jill's sole proprietorship is carrying on a business in and out of California and will be required to apportion its income to California using UDITPA rules. Under market assignment, sales of services are assigned to California if the purchaser of the service received the benefit of the service in California. Accordingly, $300,000 will be assigned to the California sales factor numerator for Jill's sole proprietorship and Jill would apportion 30% ($300,000 CA sales/$1,000,000 total sales) of business income from her sole proprietorship to California.

Water’s-edge filers

If you are a water’s-edge filer, use:

Corporation Tax Booklet Water’s-Edge Filers (Form 100W, coming soon)
California Corporation Franchise or Income Tax Return - Water’s-Edge Filers (Form 100W, coming soon)

Net loss

Follow apportionment and allocation rules if your trade or business has a net loss.

Use Apportionment and Allocation of Income (Schedule R, coming soon) to help you calculate nonbusiness income. Use the form locator for prior years.

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