California’s Proposition 39 Mandates Use of Single-Sales Factor

by Pillsbury Winthrop Shaw Pittman LLP
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[author: Michael J. Cataldo]

Proposition 39 was passed by 60.1 percent of the California electorate on the November 6th, 2012 statewide ballot. As a result, most multistate businesses must apportion income to California using a single-sales factor method of apportionment for taxable years beginning on or after January 1, 2013.

In general, an apportioning trade or business must use a three-factor method of apportionment based on property, payroll, and double-weighted sales.1 For taxable years beginning on or after January 1, 2011, an apportioning trade or business other than a financial, extractive or agricultural business may make an annual election to use a single-sales factor method of apportionment.2 However, for taxable years beginning on or after January 1, 2013, Proposition 39 (1) eliminates this election and (2) mandates the use of the single-sales factor method of apportionment for most businesses.3

Mandatory Market-Based Sourcing
For taxable years beginning on or after January 1, 2011, but before January 1, 2013, taxpayers electing to use the single-sales factor method of apportionment must use market-based rules to source sales of other than tangible personal property for sales factor purposes.4 Taxpayers that either do not elect or are not eligible to elect to use the single-sales factor method of apportionment during these years must source such sales to the location where the income-producing activity occurs, based on costs of performance.5 For taxable years beginning on or after January 1, 2013, Proposition 39 requires the use of market-based sourcing rules for sales of other than tangible personal property for all taxpayers, including financial, extractive and agricultural businesses.6

Special Sourcing Rules for Certain Cable Businesses
Proposition 39 also provides a modified sales factor sourcing rule for certain cable businesses that make at least $250 million of annual expenditures in California.7 In such California’s Proposition 39 Mandates Use of Single-Sales Factor cases, 50 percent of the gross receipts derived from certain cable services that would otherwise be assigned to California under the market-based sourcing rules for sales of other than tangible personal property are excluded from the sales factor numerator.8


  1. Section 25128(a). All statutory references are to the California Revenue and Taxation Code.
  2. Section 25128.5.
  3. Section 25128.7. Financial, extractive, and agricultural businesses must apply an equally-weighted three-factor apportionment formula based on property, payroll, and sales. See Section 25128(b).
  4. Section 25136(b).
  5. Section 25136(a).
  6. Section 26136. The special sourcing rules set forth in Regulation 25137-4.2 continue to apply to financial businesses except for those provisions relating to costs of performance and throwback sales. See Regulation 25136-2(g)(3)(D). All regulatory references are to Title 18 of the California Code of Regulations.
  7. Section 25136.1.
  8. Section 25136.1(a)(1).

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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