December 01, 2010
California, Wanting To Promote Job Growth, Moves To An Elective Single Sales Factor Apportionment Model
For tax years beginning on or after January 1, 2011, multi-state businesses may elect to use a single sales factor ("SSF") method of apportionment when filing their California franchise tax returns. Companies headquartered in California may experience a significantly lower California franchise tax as the exclusion of the payroll and property factors may lead to a lower California apportionment percentage.
Under current law, most businesses with activities inside and outside of California must use a three-factor apportionment formula (property, payroll, and sales, with double weighted sales) to determine their California franchise tax. However, for tax years beginning on or after January 1, 2011, these businesses may make an annual election to apportion their corporate taxable income using one factor, a single sales factor (SSF.) (This election is not available to companies deriving more than half of their gross receipts from agriculture activities, extractive industries, savings and loans, or banks and financial activities.)
Borrowing a page from the "playbook" of New York, Oregon, Georgia, and other states that recently moved to a SSF approach, the change is intended to encourage multi-state businesses to establish and expand their operations in California. The anticipated impact, as apparently experienced elsewhere, is an increase to direct investments in California, the promotion of job growth, and the development of the state’s commercial and industrial infrastructure. Given California’s large budget deficits, it is hoped that the expected benefits will outweigh the costs.
The election must be made on an original, timely filed California income tax return, including extensions. The election is irrevocable. The Franchise Tax Board is currently drafting regulations to clarify the implementation and proper method of election for use of the SSF method.
Contact your Marcum LLP tax advisor today to find out how this development may impact your business.