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Notice of public hearing: New apportionment methodology

A public hearing, as required by Section 11346.4 of the Government Code, will be held at 10:00 a. m., December 18, 2006, at 9646 Butterfield Way, California Town Center, Golden State Conference Rooms A and B, in Sacramento, California. This hearing will consider adoption of Section 25137-15 under Title 18 of the California Code of Regulations, authorized under Section 25137 of the California Revenue and Taxation Code, pertaining to the use of alternative apportionment methodologies. An employee of the Franchise Tax Board will conduct the hearing. After the meeting, a report will be made to the three-member Franchise Tax Board for its consideration.

Interested persons are invited to present comments, written or oral, on the proposed regulatory action. Persons who make oral comments at the hearing are requested, but not required, to also submit a written copy of their comments. Written comments will be accepted until 5:00 p.m., December 18, 2006.

Assigning business income using the three-factor apportionment formula

Taxpayers who have business activities within and outside of California are required to determine the amount of income properly attributed to California, by use of the Uniform Division of Income for Tax Purposes Act, Section 25120 et seq., California Revenue and Taxation Code. Under this act, business income is assigned to a state by applying a three-factor apportionment formula that separately compares a business' property, payroll, and sales within California, to those three values everywhere. The proposed regulation particularly considers the sales factor, i.e., differences between sales of tangible property, and sales of provided services, in assigning the location of sales. Specifically, the income-producing activity for the sale of mutual funds often occurs in a sole location, or very few locations, while having a market throughout the country. Customers of these companies are the fund shareholders, who receive the benefit of the services in locations scattered throughout the 50 states. Because the services are concentrated in one location, sales receipts are assigned to the single location, even though this is not indicative of the widespread market. The proposed regulation essentially adopts a similar shareholder location sales factor approach to that adopted in other states where mutual fund service providers are located.

The public notice, initial statement of reasons, and express terms of the regulation are available at the Franchise Tax Board's Website at www.ftb.ca.gov. Interested parties can review an in-depth discussion of the proposed regulation, including legal authority and references, disclosures regarding the proposed regulatory action, contact information, and other valuable information.