The California Franchise Tax Board (FTB) recently issued a Chief Counsel Ruling 2012-03 addressing the throwback rules applied to sales made, by California based corporations, to purchasers located in foreign jurisdictions and other states. The throwback rule under California Revenue and Taxation Code (CRTC) Section 25135(a)(2) says that if tangible personal property is shipped from California to a state where the taxpayer is not taxable the sales will be “thrown back” in the numerator of the California sales factor.
In the Chief Counsel Ruling, the FTB advises a multistate corporation, based in California, on two issues. Addressing the first issue, the Ruling holds that the corporation should not throw back gross receipts from sales of tangible personal property made to purchasers in a foreign jurisdiction for purposes of determining its California sales factor numerator if there were more than $500,000 of sales transacted in the foreign jurisdiction.
The second part of the Ruling holds that gross receipts from sales of other than tangible personal property to purchasers in other states, made by a member of the corporation’s combined reporting group, would also excluded from the sales factor numerator.
Under California law, income is apportioned using a three factor formula consisting of a single weighted property factor, a single weighted payroll factor and a double weighted sales factor. Beginning in 2011, taxpayers were allowed to apportion income based on a single sales factor. CRTC Section 25135 provides rules for determining the portion of sales included in the numerator of the California sales factor. In particular, Section 25135(a)(2) provides that sales are attributed to California if the property is shipped from California and either (A) the sales are made to the United States government or (B) the taxpayer is not taxable in the state of the purchaser. Section 23151 requires that every corporation doing business within California and not expressly exempted from taxation by the provisions of the California Constitution shall annually pay to the state, for the privilege of exercising its franchise within this state, a tax according to or measured by its net income.
In discussing the first holding, the FTB discusses Section 25122, which provides relief from California taxation under certain circumstances;
For purposes of allocation and apportionment of income under this act, a taxpayer is taxable in another state if (a) in that state it is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax, or (b) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.
The Ruling points out;
Pursuant to Section 23101(b)(2), for taxable years beginning on or after January 1, 2011, a corporation is “doing business” in California if its sales exceed the lesser of five hundred thousand dollars ($500,000) or 25 percent of the taxpayer’s total sales.5 In determining California sales, Section 23101(b)(2) requires that the sales be assigned in accordance with Sections 25135 and 25136(b). Just as an entity would be taxable in California for years beginning on or after January 1, 2011 by virtue of having sales of over $500,000 in this state, [taxpayer] is considered to be taxable in foreign jurisdictions under Section 25122 where [taxpayer’s] sales exceed $500,000 as a result of [taxpayer] satisfying one of the conditions under Section 23101(b)(2). By having more than $500,000 in sales in a foreign jurisdiction, [taxpayer] meets the jurisdictional standard applicable to a state of the United States applied in that foreign jurisdiction.
In Other words, just as a taxpayer may be taxable in California under Section 2301(b) as a result of having sales exceeding $500,000 assigned to California, a taxpayer may also be considered taxable in another jurisdiction where their sales exceed $500,000. As a result, where a taxpayer is considered taxable in a foreign jurisdiction, under Section 25122, those sales will not be “thrown back” into the California sales numerator.
In the second holding, the FTB points out that beginning with the 2011 tax year, sales made to purchasers in other states are not subject to the throwback rules if sales of any member of the corporation’s combined reporting group exceed $500,000 in those states. Under this particular scenario, the corporation stated that one of its combined return group members made sales of other than tangible personal property to purchasers in another state and was able to establish this through the group member’s books and records. Under California law applicable to post-2010 tax years, sales of other than tangible personal property are sourced to the location where the benefit is received, and taxpayers may establish this through their books and records, thus the unitary member’s non-TPP sales were taken into consideration in reaching the $500,000 threshold. Additionally, California nexus is determined on a unitary basis, so the throwback rule will not apply to TPP sales shipped from California to another state where any member of the unitary group is considered taxable in that state.
Consequently, the taxpayer was not required to throw back domestic sales of TPP when another member of the taxpayer’s unitary group was taxable in another state under Section 25122.