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Proposition 39’s Single Sales Factor is Not Just for Corporate Taxpayers

“An apportioning trade or business,” which includes a nonresident’s business, trade, or profession that carries on within and out of California[1] is now required to apportion business income using the single sales factor.

Proposition 39, which added R&TC Section 25128.7 for taxable years beginning on or after January 1, 2013, requires

“all business income of an apportioning trade or business, other than an apportioning trade or business described in subdivision (b) of Section 25128, shall be apportioned to this state by multiplying the business income by the sales factor.”

California Regulation Sections 17951 through 17954 requires such businesses to source such business income in accordance with the provisions of the corporate apportionment rules (Sections 25120 to 25139). This regulation also requires a partner’s distributive share of partnership income derived from sources within California (with some modifications) also be determined using corporate apportionment rules.

This means “an apportioning trade or business” regardless of the form of ownership, (e.g. sole proprietorship, partnership, limited liability company, or corporation), that carries on within and out of California under Regulation Sections 17951 through 17954, or the provisions of Section 25128.7[2] is required to apportion the nonresident’s business income using the single sales factor.

The same would be true for a partner’s distributive share. Whether the trade or business is the partnership’s business (if not unitary with the trade or business of its partner), or the partnership interest when combined with the partner’s trade or business (if the partnership’s activities are unitary with the activities of its partner, notwithstanding ownership requirements), the business income of the trade or business would be apportioned using the single sales factor under the provisions of Section 25128.7 unless the trade or business meets one of the exceptions of Section 25128(b).

Our January 2013 issue of Tax News article, Single Sales Factor Election to Taxpayers Meeting Special Apportionment, provides additional guidance for taxpayers required to follow special industry apportionment and allocation regulations under Regulation Section 25137.

Withholding Agents

The new requirement to apportion business income using the single sales factor rules may affect California source income withholding. Withholding agents (for example partnerships or LLCs with nonresident partners or members) who may need to make their first payment (for 2013) by April 15 should consider this change when considering their withholding requirements.

For more information, go to ftb.ca.gov and search for California source income.

[1] Unless the trade or business is within one of the exceptions of California Revenue and Taxation Code Section (R&TC) 25128(b)).

[2] Unless the trade or business is within one of the exceptions of California Revenue and Taxation Code Section (R&TC) 25128(b)).

 

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