New California Apportionment Regulations
The California Franchise Tax Board has modified the special corporation franchise and income tax apportionment rules that apply to the motion picture and television industries. The old regulations were limited to motion picture and television film producers, television commercial producers, and television networks (the old Regulation remains applicable to tax years 2010 and prior).
The new regulations broadly expand the types of taxpayers that are subject to the special apportionment rules to include any business entity that is in the business of producing or distributing motion picture, film, or television programming, or television commercials, whether broadcast or telecast through the public airwaves, by cable, direct or indirect satellite transmission, or any other means of communication, either through a network (including owned and affiliated stations) or through an affiliated, unaffiliated, or independent television broadcasting station. The regulation also states that income from new technologies, including, but not limited to, video streaming and online websites, to the extent that they are used by such business entities to produce business income, will also be subject to the special rules.
The new regulation also includes news or sports films produced for telecast in the definition of "film."
California has had special regulations that apply only to the motion picture and television industries governing how they apportion their income to the state. These special apportionment rules indicate that the sales factor must include revenue from films in release to theaters and television stations located in California. And for film or advertising related to television release, viewership or subscriber information is used for purposes of allocation.
However, motion picture and television companies must also include in the property factors certain amounts related to either the cost of films or revenue derived from films. These additional property amounts are attributed to the State in the ratio of the total California receipts as a fraction of total receipts.
Observation:News and sports films were excluded from the old regulation and accordingly subject to tax under the generic income tax apportionment rules. Consequently, news and sports filmed for telecast will now be included in the calculation of the “property factor” as “films” and (if located in the State) attributed to the State in the ratio of the total California receipts as a fraction of total receipts.
The rest of the basic content of the regulation has not changed. To provide greater clarity to the existing rules, advertising revenue is now specifically identified as part of "film gross receipts." This treatment is consistent with the practice of the Franchise Tax Board under current Regulation section 25137-8. In addition, the new regulations identify "distributors" as part of the industry covered by this regulation. The distribution industry covered by the proposed regulation has changed in that the number of independent distribution companies has increased and there is a greater separation of production and distribution.
Companies that use the special industry apportionment formula or are affected by the new regulation should review the sourcing of income under the new regulation effective for tax year 2011.