1. Sales in the state that exceed the lesser o $500,000 or 25-percent o the taxpayer’s total sales (includingsales by an agent or independent contractor)2. Real property and tangible personal property in the state that exceed the lesser o $50,000 or 25-percent o the taxpayer’s total real property and tangible personal property3. Payroll in the state that exceeds the lesser o $50,000 or 25-percent o the total compensation paid by thetaxpayerFor tax years beginning prior to January 1, 2011, a taxpayer was considered to be doing business in the state i it was activelyengaged in any transaction or the purpose o fnancial or economic gain or proft.
Single Sales Factor (“SSF”) Election
The February 2009 state budget agreement, passed under Governor Arnold Schwarzenegger, changed the apportionment ormulaused to determine Caliornia taxable income or businesses with multi-state operations. Beginning January 1, 2011, businessessubject to the Caliornia Corporate Income or Franchise Tax may make an annual irrevocable election to apportion income usinga single sales actor (“SSF”) apportionment ormula. The election is irrevocable only or the tax year to which the election isapplied. As such, taxpayers have the ability to choose the apportionment option that would yield the least amount o tax on anannual basis.Under prior law, businesses with activities or income derived rom sources both within and outside o Caliornia, were required tocalculate their Caliornia income tax using the three-actor apportionment method (i.e., property, payroll, and sales) with double-weighted sales (i.e., the sales actor is used twice in the apportionment ormula). Taxpayers not making the SSF election wouldcontinue to use the three-actor, double-weighted sales apportionment ormula.The move to an elective SSF was meant as a business development incentive to attract businesses into the state. The absenceo a property and payroll actor or income tax apportionment purposes would encourage businesses to establish operations inCaliornia, given the tax costs o such a move would be nil. Moreover, given the trend by most states move to a SSF method o apportionment, Caliornia-established business would be given equal ooting when competing with out-o-state competitors whohave the ability to manipulate their sales activities and source such sales to SSF states.The election to use a SSF must be made on an original, timely-fled return, including extensions, and is an irrevocable annualelection. Presumably, many Caliornia corporations will choose to make the SSF election and beneft orm a decrease in Calior-nia income tax. However, out-o-state corporations will likely choose to continue to utilize the three-actor, double-weighted salesormula described above.Businesses that derive more than 50% o its gross business receipts rom agricultural, extractive, savings and loan, and bankingand fnancial activities, are excepted rom the SSF election, and must use an evenly-weighted three actor apportionment ormula.The Franchise Tax Board (“FTB”) is currently drating regulations that would clariy the implementation and the proper method o electing the use o a SSF apportionment method.On January 10, 2011, Governor Jerry Brown revealed his proposed state budget or the 2011-2012 fscal year, which wouldremove the election rom the statutory language, and make the SSF mandatory or all businesses.
For tax years beginning on or ater January 1, 2011, receipts rom sales, other than sales o tangible personal property, will besourced based on the ollowing: