A Pinch of Salt- December 2010- Understanding California’s New Apportionment Regime

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California’s recent tax changes allow taxpayers to elect between significantly different income tax apportionment regimes, and revert back to the Finnigan method to calculate a combined return. The apportionment election requires taxpayers to choose between a single-sales factor and market sourcing for sales of services and intangibles, or a three-factor formula (double-weighting sales) and a costs-of-performance sourcing method. In this Pinch of SALT, we will explain California’s new apportionment regime and related nuances taxpayers should consider in evaluating options and requirements.

Costs-of-Performance Is Given a Second Life

On February 19, 2009, California abandoned its long-standing costs-of-performance apportionment method used to source receipts earned from services and intangibles. This repeal turned out to be shortlived as California’s Legislature restored costs-ofperformance for some taxpayers.

California was an early adopter of the Uniform Division of Income for Tax Purposes Act and the Multistate Tax Compact. As a result California has mandated taxpayers use the costs-of-performance sourcing method for over 40 years to source income from services and intangibles.1 The repeal of the costs-of-performance method, enacted February 19, 2009, was set to become effective January 1, 2011.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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