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Single-Sales Factor and Assignment of Sales

Revisions to the California Revenue and Taxation Code (R&TC) have changed how apportioning trades and businesses are taxed in the state. Review the information below and see Doing Business in California and Corporation Tax Law Changes for more details.

The new laws affect all taxpayers carrying on or doing business in and out of California or taxpayers who have income from California sources including corporations, estates and trusts, exempt organizations operating an unrelated business, pass-through entities (i.e. partnerships, limited liability companies (LLCs), S corporations) and their partners, members, shareholders, and nonresident individual income taxpayers.

All taxpayers that are organized, incorporated or Doing Business in California, register or file a certificate with the California Secretary of State, or have income from California sources have a filing requirement in California, must file the appropriate tax return, and pay the appropriate tax and fees. However, you must determine whether Public Law 86-272 (15 USC Section 381) prevents the state from asserting its right to impose a tax based on net income. Even if a taxpayer is protected by its provisions, they may still have an obligation to file a return and pay the minimum franchise tax. For part-year residents or nonresidents, California source income includes but is not limited to wages, 1099 income, income or loss that flows through from pass-through entities (CA K-1), and income from intangibles and services. The required forms are as follows:

Entity Type Form

C Corporations that:

  • Are incorporated in California.
  • Are qualified to do business in California  by registering with the Secretary of State.
  • Are doing business in California.
  • Have income from California sources.

100 & 100W (Water's-Edge)

 S Corporations that:

  • Are incorporated in California.
  • Are qualified to do business in California by registering with the Secretary of State.
  • Are doing business in California.
  • Have income from California sources.

100S

Partnerships that:

  • Are engaged in a trade or business in California.
  • Have income from California sources.

565

Limited Partnerships that:

  • Filed a certificate or registered with the Secretary of State.
  • Are doing business in California.
  • Have income from California sources.

565

Limited Liability Companies treated as partnerships that:

  • Have income from California sources to report to its members.
  • Are not doing business in California.
  • Are not organized in California.
  • Are not registered with the Secretary of State.
  • Are not subject to the annual tax or LLC fee.

565

Limited Liability Companies treated as partnerships that:

  • Organized in California.
  • Are registered with the Secretary of State.
  • Are doing business in California.
  • Have income from California sources.

568

California Residents when:

  • Income is above filing requirement.

540

Part-year and nonresidents who:

  • Have income from California sources.

540NR

Refer to the following for additional information:

If a corporation has income from sources both inside and outside of California, it is required to allocate and apportion its income according to Uniform Division of Income Tax Purposes Act (UDITPA) as provided in Chapter 17, Part II of the California Revenue and Taxation Code (R&TC). For taxable years beginning on or after 1/1/2013, R&TC Section 25128.7 requires all business income of an apportioning trade or business, other than an apportioning trade or business under R&TC Section 25128(b), to be apportioned to California using the single-sales factor formula.

When a corporation is a partner in a partnership, the portion of the partner's distributive share (constituting business and nonbusiness income) that has its source in California, or that is included in the taxpayer's business income, is determined in accordance with California Code of Regulations (CCR), title 18, Section 25137-1.

Nonresident individuals who have income from a business, trade or profession may be required to apportion their net income in accordance with Chapter 17, Part II of the R&TC. For more information, refer to CCR Section 17951-4.

For taxable years beginning on or after 1/1/2013, all apportioning trade or businesses, except those that derive more than 50% of their gross receipts from qualified business activities (QBA), shall apportion their business income to California using a single-sales factor. Those apportioning trades or businesses who derive more than 50% of their gross receipts from the QBAs listed below, shall continue to apportion their business income to California using the three factor formula of property, payroll, and single-weighted sales factors:

  • Agricultural
  • Extractive
  • Savings and loan
  • Banking or financial

Corporation A is a bank. Corporations B and C are general corporations. Corporation A, B, and C are members of the same combined reporting group, Group X. Group X receives less than 50 percent of its gross business receipts from qualified banking and financial activities during 2013. For the 2013 taxable year, may Group X use a single-sales factor to apportion its business income to California?

Group X must use a single-sales factor to apportion its business income to California because it derived less than 50% of its gross receipts from QBAs. If Group X generates more than 50% of its gross receipts from one or more QBAs in any year for 2013 forward, it will use the three-factor formula consisting of property, payroll, and single-weighted sales to apportion its business income to California.

S Corporation B is in the air transportation business and falls under CCR Section 25137-7 for the allocation and apportionment of income to California. For the 2013 taxable year, is S Corporation B required to use the single-sales factor to apportion its business income to California?

Yes, apportioning trades or businesses (including pass-through entities) that use a special formula under CCR Section 25137-1 through -14 must use the single-sales factor to apportion business income to California except for those that derive more than 50% of their gross business receipts from QBAs. Those who use a special formula under CCR Section 25137-1 through -14 must follow the special formula for the sales factor, disregarding the rules for the property and payroll factors (CCR Section 25137-7(f)), except for the exemptions provided at CCR Section 25136-2(g)(3).

Partnership C files its 2013 Partnership Return (Form 565) and uses a single-sales factor to apportion its business income to California. Is Partnership C required to provide information to its partners on their pro rata share of the California and everywhere property, payroll, and sales?

Yes, even though Partnership C is required to apportion its business income to California using a single-sales factor, Partnership C is still required to provide its partners their pro rata share of the California and everywhere property, payroll, and sales on the CA Schedule K-1 so their partners may determine whether they are doing business in California. This requirement is also applicable to LLCs (treated as partnerships) and S Corporations. See General Information on New Rules for Doing Business in California for more information.

John W is a nonresident of California who owns a sole proprietorship that derives income from inside and outside California. Does the single-sales factor apply?

Yes, a nonresident individual who has income from a business, trade, or profession and who must apportion its business income to California under CCR Section 17951-4 and must use the single-sales factor for taxable years beginning on or after 1/1/2013, unless 50% of the gross receipts were derived from a QBA.

Sales of Tangible Personal Property

Sales of tangible personal property are in California if at least one of the following applies:

  • The property is delivered or shipped to a purchaser in California.
  • The property is shipped from California to a state where the taxpayer is not taxable or the purchaser is U.S. government.

For taxable years beginning on or after 1/1/2011, sales are in California if any member of the combined reporting group is taxable in California, or if sales are shipped from California to a state where no member of the combined group is taxable.[1]

Corporation C, an out-of-state corporation, sells tangible goods over the internet and qualifies for protection under PL 86-272. For the 2013 taxable year, Corporation C has $1,000,000 of California sales but no property or payroll in California. Does Corporation C have sales assigned to California for purposes of the California sales factor numerator?

Corporation C, though considered doing business in California because it has $1,000,000 in California sales, has no California sales for California sales factor purposes because it is not taxable in California under PL 86-272. Therefore, Corporation C must file a California return to pay the minimum tax. However, since Corporation C is protected under PL 86-272, it will not be subject to California franchise tax.

Same example as above except that Corporation C is a wholly owned subsidiary and member of the combined reporting group of Corporation P, a California corporation. Is the $1,000,000 in California sales considered to be California sales for sales factor purposes?

Yes, the $1,000,000 in California sales receipts are assigned to California. Even though Corporation C remains protected under PL 86-272, the $1,000,000 in sales receipts are assigned to California for sales factor purposes because Corporation P, a member of the combined group, is taxable in California.[2]

Sales of Other Than Tangible Personal Property

For taxable years beginning on or after 1/1/2011 and before 1/1/2013, sales of other than tangible personal property are assigned for California sales factor purposes using one of the following:

  • Market assignment if the taxpayer elected the single-sales factor to apportion business income to California.
  • Cost of performance if the taxpayer did not elect the single-sales factor.

Corporation D, a California corporation, elected the single-sales factor for its 2011 tax return but used the 3-factor formula for its 2012 tax return. How are sales assigned for each taxable year?

For the 2011 taxable year, Corporation D will use market assignment to determine the amount of California sales receipts to be included in its California sales factor numerator, but will use the income producing activity/greater cost of performance method for its 2012 tax return.

For taxable years beginning on or after 1/1/2013, sales of other than tangible personal property are assigned for sales factor purposes using market assignment for all taxpayers required to apportion their income in accordance with the UDIPTA rules or within the special industry regulations under CCR Section 25137-1 through -14.

Corporation E is an air transportation company that uses the special industry allocation and apportioning rules under CCR Section 25137. Does market assignment apply to Corporation E?

Taxpayers required to follow special industry apportionment and allocation under CCR Section 25137-1 through -14 must follow the sales factor provisions under the special industry regulations, with the exception of any rule excluded by the provisions of CCR Section 25136-2(g)(3). The property and payroll factors from the special regulations are not used.

Under market assignment, sales of other than tangible personal property are assigned to the California sales factor numerator if:

  • Sales from services are in California to the extent the purchaser of the service received the benefit of the services in California.
  • Sales from intangible property are in California to the extent the property is used in California. 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 California.
  • Sales from the rental, lease, or licensing of tangible personal property are in California if the property is located in California.

See CCR Section 25136-2 for specific rules and examples. Under the old rules (pre-2011 taxable years and for those taxpayers who did not elect the single-sales factor for 2011 and 2012), sales from other than tangible personal property are assigned to the state where the greater costs of performance of each income producing activity are located. Market assignment is a significant law change since this causes the sales to be assigned to the state where the customer is located, generally. Accordingly, you have apportionable business income or income from California sources if you have any of the above income from California. This applies to all apportioning trades or business, including corporations, pass-through entities, and nonresidents. See table above to see whether there is a filing requirement for each type entity and for nonresidents.

Corporation F, a California corporation, is a service provider with customers located in and out of California. For the 2012 and 2013 taxable years, 100% of Corporation F's property and payroll are in California. For both years, Corporation F's sales to individual customers are divided between California, Nevada, and Oregon, with 50% in California, 30% in Nevada, and 20% in Oregon. For the 2012 taxable year, Corporation F did not elect the single-sales factor method of apportionment. What are the California sales receipts for the purpose of the California sales factor numerators for the 2012 and 2013 taxable years?

For the 2012 taxable year, Corporation F did not elect the single-sales factor so it must assign receipts for California sales factor numerator purposes to the location of the greater costs of performance for each income producing activity. Because Corporation F is 100% in California, the greater costs of performance are in California and 100% of the sales receipts are assigned to its California sales factor numerator. For the 2013 taxable year, California requires the use of market assignment and the single-sales factor apportionment method for all taxpayers. Since 50% of Corporation F's total sales are made to customers located in California and those individual customers located in California received the benefit of the services in California, then 50% of the sales receipts will be assigned to Corporation F's California sales factor numerator.

For out-of-state taxpayers, the market rule coupled with the doing business rules may result in a filing requirement in California.

Corporation G is in the business of providing monthly web service for its customers who are located across the U.S. Corporation G's properties and employees are located in Minnesota. Corporation G has no employees or location in California. Corporation G has $4,000,000 in total sales receipts, of which $1,000,000 are from individual customers located in California, therefore those customers received the benefit of the service within California.[3] Corporation G's total business income is $2,000,000 and Corporation G has zero nonbusiness income. What is Corporation G's income subject to tax in California for 2013?

Corporation G exceeds the sales thresholds for doing business in California under R&TC Section  23101(b), therefore it has a filing requirement in California. Furthermore, Corporation G is subject to the franchise tax and must compute its income using the apportioning rules of UDITPA. Corporation G's California sales factor is 25% ($1,000,000 CA sales/$4,000,000 total sales) and its business income in California is $500,000 ($2,000,000 Unitary Business Income (UBI) x 25% sales factor) and will be subject to tax on that income.

Partnership A, a NY partnership, is an online service provider. All of its properties and payroll are in NY but it has customers in various states including California. It has no other connections to California. Partnership A has the following sales:

Tax Year CA Sales Total Sales Single-Sales Factor Election?

2012

1,000,000

10,000,000

No

2013

450,000

5,000,000

n/a

For the 2012 and 2013 taxable years, does Partnership A have a filing requirement in California and does it have California source income that flows through to its partners?

Partnerships are required to file a return in California when they are engaged in a trade or business in California or have California source income\loss that flows through to partners. For the 2012 taxable year, Partnership A is doing business in California. Partnership A did not elect the single-sales factor method of apportionment; therefore, it uses the greater costs of performance for each income producing activity to assign its sales receipts. Based on the costs of performance, no sales would be assigned to California. Therefore, for the 2012 taxable year, Partnership A does not have California source income. But, it has a filing requirement in California because it is engaged in a trade or business in California. For the 2013 taxable year, Partnership A will use market assignment for assigning sales of other than tangible personal property. Under market assignment, Partnership A will assign $450,000 in sales receipts from customers located in California to its California sales factor numerator because the customers received the benefit of the service in California. Partnership A will apportion 9% ($450,000 CA sales/$5,000,000 total sales) of its business income to California. The partners of Partnership A will have California source income for the 2013 taxable year and will be subject to tax on income attributable to California. See General Information on New Rules for Doing Business in California to determine whether the partners are considered doing business in California.

Jill, a nonresident of California, owns a web design business that she holds as a sole proprietorship. She works from her home out of state but has customers in various states including California. For the 2013 taxable year, Jill's sales receipts from California customers are $300,000 out of the total sales receipts everywhere of $1,000,000. Does Jill have a filing requirement in California?

Yes, nonresident individuals are taxed on all California source income. Jill's sole proprietorship is carrying on a business in and out of California and will be required to apportion its income to California using UDITPA rules. Under market assignment, sales of services are assigned to California if the purchaser of the service received the benefit of the service in California. Accordingly, $300,000 will be assigned to the California sales factor numerator for Jill's sole proprietorship and Jill would apportion 30% ($300,000 CA sales/$1,000,000 total sales) of its business income from her sole proprietorship to California.

[1] R&TC Sections 25135(a) &(b)

[2] R&TC Section 25135(b)

[3] R&TC Section 25136(a)(1)

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