Over the past two years, the California legislature has enacted significant changes in California tax law, including a substantial modification to California’s apportionment rules (the “New Apportionment Rules”) used to determine California-source business income, for franchise and income tax purposes, of multi-state taxpayers doing business in California (“Taxpayers”). The New Apportionment Rules are effective for tax years beginning on or after January 1, 2011.

Under the New Apportionment Rules Taxpayers are now able to elect between two different apportionment regimes for determining California-source business income: (1) a new single-sales factor apportionment formula based on market sourcing or (2) the continued use of a double-weighted sales factor apportionment formula based on costs of performance sourcing. The foregoing apportionment rules apply to Taxpayers other than those engaged in specialized industries and/or businesses; the latter-referenced taxpayers are subject to industry and/or business-specific apportionment rules.