California Sales Factor Computation
California has altered its Franchise Tax effective 2011. One of the major changes concerns the California Apportionment formula. Specifically, California has enacted an irrevocable single sales factor election.
Cal. Rev. & Tax. Code § 25128.5 states that, for taxable years beginning on or after January 1, 2011, taxpayers may elect to apportion income to California by multiplying business income by sales factor only. The annual election is irrevocable and must be made on a timely-filed return.
Prior to this election, California used a 4-factor formula of property factor, payroll factor, and sales factor (used twice).
Note that this election can be made by businesses other than those deriving more than 50% of their gross receipts from agriculture, extractive business, savings and loans, or banks and “financial activities.” These businesses, which have always used a separate and unique apportionment schedule, will continue to use the 3-factor apportionment formula. [Cal. Rev. & Tax. Cd. §25128.5(a)]
Taxpayers with operations in California should consider whether to make the single sales factor election. In order to effect the most advantageous election, clients should be aware of the rules surrounding the sourcing of services income. Services income (in other words, sales of other than tangible property) is sourced to California under one of two different methods:
- when a taxpayer elects single-sales factor, service income is sourced under the “market theory” to the place where the “benefit of the service” is delivered;
- when a taxpayer does not elect single-sales factor, service income is sourced under the “cost of performance” theory.
EisnerAmper strongly recommends that in the course of evaluating whether to make the single sales factor election, taxpayers carefully analyze how their sales will be sourced.