California Voters Approve Single-Factor Sales
California residents have the amazing ability to vote on taxes. Thus, this past November 2012, California voters approved two tax-related propositions.
The first, Proposition 30, increases the sales and use tax rates as well as the personal income tax rates for high-income earners. The second, Proposition 39, requires the use of a single-factor sales factor apportionment for most businesses.
Effective from January 1, 2013, through December 31, 2016, the sales and use tax rate in California will increase by 0.25%.
Personal income tax rates are modified by the creation of three new tax brackets for tax years beginning on or after January 1, 2012, and before January 1, 2019.
The new brackets are as follows:
Single Taxpayer Tax Brackets, as of 2012 (Income limits are doubled for taxpayers filing joint returns)
Taxable income over $7,455, but not over $17,676 - Tax Rate: 2.00%
Taxable income over $17,676, but not over $27,897 - Tax Rate: 4.00%
Taxable income over $27,897, but not over $38,726 - Tax Rate: 6.00%
Taxable income over $38,726, but not over $48,942 - Tax Rate: 8.00%
Taxable income over $48,942, but not over $250,000 - Tax Rate: 9.3%
Taxable income over $250,000, but not over $300,000 - Tax Rate: 10.3%
Taxable income over $300,000, but not over $500,000 - Tax Rate: 11.3%
Taxable income over $500,000 - Tax Rate: 12.3%
(These rates will be adjusted for inflation for taxable years beginning on and after January 1, 2013.)
For tax years beginning on or after January 1, 2013, an apportioning business must apportion business income to California by multiplying the business income by the sales factor only, unless an exception applies. Previously, as was noted here, (most) taxpayers had the ability to elect either single-factor sales, or four factor (property-payroll-double-weighted sales) apportionment.
The exceptions to the mandatory single factor sales are as follows. First, a business that derives more than 50% of its gross business receipts from conducting “qualified business activity” is still required to apportion its business income using the three-factor apportionment method. A “qualified business activity” means an agricultural business activity; an extractive business activity; a savings and loan activity; or a banking or financial business activity. Second, special rules apply to the cable industry.
As a reminder, sales of tangible personal property are sourced to California if the property is:
- delivered or shipped to a purchaser in California (except sales to the U.S. government) regardless of f.o.b. point or other conditions of sale; or
- shipped from a place of storage in California and (1) the purchaser is the U.S. government, or (2) taxpayer is not taxable in the purchaser's state (colloquially known as the throwback rule).
Further, for taxable years beginning on or after January 1, 2013, the following rules apply:
- Sales of services are in California to the extent the purchaser received the benefit of the services in California.
- Sales from intangible property are in California to the extent the property is used in the state. 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 the state.
- Sales from the rental, lease, or licensing of tangible personal property are in California if the property is “located” in the state.
In regards to the last bullet point above, sales of tangible personal property are in California if the property is delivered or shipped to a purchaser in California (regardless of f.o.b. point). Further, sales of tangible property are in California if they shipped from a place of storage in California and (1) the purchaser is the U.S. government, or (2) taxpayer is not taxable in the purchaser's state (the throwback rule). Taxpayers should note the intricacies here: for tax years starting before April 22, 1999 and for tax years starting on or after January 1, 2011, sales of goods shipped from California to other states are assigned to California under the throwback rule only when no member of the seller's unitary group is taxable within the destination state.
Combined groups should be aware that all sales of a combined reporting group properly assigned to California are included in the sales factor numerator for the state, regardless of whether the member of the combined reporting group making the sale is subject to the California corporation franchise or income tax. All sales not assigned to California are not included in the sales factor numerator for the state if a member of the taxpayer's combined reporting group is taxable in the state of the purchaser.
Finally, note that proposed amendments to the regulations are currently under review. Further, the California Franchise Tax Board (FTB) will hold a public hearing on February 6, 2013 at 1:00 p.m. at its location at 9646 Butterfield Way in Sacramento to discuss these proposed amendments to Reg. 25106.5 (Cal. Code Regs. § 25106.5, Tit. 18). Specifically, the meeting hopes to elicit public input on the content of proposed amendments giving guidance on how to assign sales of tangible personal property for sales factor purposes. Should you happen to be in the area, stop in for what will surely be a grand old time.