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Single Sales Factor Election to Taxpayers Meeting Special Apportionment

For taxable years beginning on or after January 1, 2011, and before January 1, 2013, apportioning taxpayers are allowed to elect to apportion their income using the single sales factor. Proposition 39 now requires the use of the Single Sales Factor method of apportioning income to be used for tax years beginning on or after January 1, 2013. We received many questions regarding these law changes and to clarify taxpayer’s situations. The following is an example of one of questions we received:
 
Question:

For taxable years beginning on or after January 1, 2011, and before January 1, 2013 can a multistate taxpayer that is not otherwise precluded from making a timely single sales factor election under R&TC Section 25128, make a single sales factor election if they are required to follow special industry apportionment and allocation regulations per R&TC Section 25137?

Answer:

Yes. Multistate taxpayers who are not otherwise precluded from making a timely single sales factor election under R&TC Section 25128.5, (taxpayers that are precluded are those taxpayers that derive more than 50 percent of their gross business receipts from a qualified business activity – agricultural, extractive, savings and loan, and banking or financial business.), and who are required to follow special industry apportionment and allocation regulations under Section 25137, may make such an election for taxable years beginning on or after January 1, 2011 and before January 1, 2013. Specifically, Title 18, Regulation Section 25136-2(g)(3) provides that:
 
The sales factor provisions set forth in Regulation Sections 25137 through 25137-14 are hereby incorporated by reference, with the following modifications for taxable years beginning on and after January 1, 2011. . .

The regulation, thereafter, sets forth various portions of Regulation Sections 25137 through 25137-14 that are not incorporated into the market-based rules of Regulation Section 25136-2.

In other words, a multistate taxpayer who is required to follow special industry apportionment and allocation regulations under Regulation Section 25137 may make a single sales factor election for taxable years beginning on or after January 1, 2011, and before January 1, 2013. If the taxpayer makes such an election, the taxpayer must follow the sales factor provisions, with the exception of any rule excluded by the provisions of Regulation Section 25136(g)(3), and is not required to use the property and payroll factor rules.

Proposition 39 was approved by the voters in the November 2012 election. Proposition 39 amended the R&TC Section that allowed the annual election, by adding an end date for the availability of the annual single sales factor election and made the use of single sales factor apportionment mandatory for all but those taxpayers required to use equal-weighted three factor apportionment. The annual election could only be made for taxable years beginning on or after January 1, 2011, and before January 1, 2013. Proposition 39 also repealed the section allowing the annual election as of December 1, 2013.

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