California’s Current Sales Factor Landscape



On November 2, 2010, by a margin of nearly 1.5 million votes, California voters rejected Proposition 24.1 In doing so, the voters decided to maintain three business tax provisions scheduled to take effect in 2011: (1) the single sales factor apportionment election; (2) net operating loss carrybacks; and (3) shared tax credits for “unitary” businesses. This Proposition, also known as the Repeal Corporate Tax Loopholes Act, sought to eliminate these provisions enacted in the fiscal year 2008 and fiscal year 2009 budgets to prevent the loss of general fund revenue. Indeed, the California Franchise Tax Board (“FTB”) had projected the single sales factor apportionment election would cost California nearly $2 billion cumulatively by 2013.2 Accordingly, after back-to-back budget measures3 and now the failed Proposition, the dust has settled – for now – for corporate taxpayers who make sales of other than tangible personal property (i.e., intangibles and services) in terms of how California intends to treat those taxpayers who make the single sales factor apportionment election and those who do not.


For tax years beginning on or after January 1, 2011, Revenue and Taxation Code4 section 25128.5 provides an irrevocable annual election for corporate taxpayers on a timely filed return to apportion business income to California by using a single sales factor. This election is available to any business except businesses for which more than 50 percent of the gross business receipts come from the following business activities: agriculture, extractive, savings and loan, and banking or other financial activities (i.e., businesses described in section 25128(c)), which are required instead to use an equally-weighted three-factor apportionment formula.5

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