California Adopts Single-Sales Factor Regulation

The California Franchise Tax Board has adopted a franchise and income tax regulation allowing taxpayers to use a single-sales factor for apportioning income to the state (Regulation 25128-5). The regulation is applicable to taxable years beginning on or after January 1, 2011.

Taxpayers make the election on a timely filed original return (including extensions) for the year of the election. An election will be deemed valid if: 1) the tax is computed in a consistent manner with the single-sales factor election, and 2) written notification of the election is made on Part B of Schedule R-1 that is attached to the taxpayer’s return. All California members of a combined reporting group must make the election for the election to be valid. Corporations that make the election and also own a partnership must use the single-sales factor formula for determining its distributive share of income and pass-through factors from the partnership.

The standard apportionment formula to apportion income to California is an average of the property factor, payroll factor and a double-weighted sales factor. The election would primarily benefit those corporations that have a large presence in California through the ownership or rental of property and having a large number of employees working in the state. An analysis would be required by taxpayers to compute their apportionment by the standard formula and the single-sales formula to determine which results in a lower tax liability.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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