Authors
Los Angeles County Superior Court issued a decision in Smithfield Packaged Meats Corp. v. California Franchise Tax Board that could have significant repercussions for corporate taxpayers. The Court held that Smithfield was entitled to a refund because a single sales factor apportionment formula does not fairly reflect the activities that gave rise to its income because it ignores Smithfield’s 40,000 employees and 30 processing facilities outside California. The Court allowed an alternative method under California Revenue and Taxation Code (“CRTC”) Section 25137, finding that the standard three-factor UDITPA formula is a reasonable alternative under that section. The Court also held that Smithfield was entitled to use three-factor apportionment because it qualified as an agricultural business under CRTC Section 25128(b). Significantly, in reaching its decision, the Court ruled that a Franchise Tax Board (“FTB”) regulation under CRTC Section 25128 was invalid as it exceeded the scope of, and conflicted with, the statute.
The Reed Smith State Tax team is hosting a webinar on March 10 to discuss the impact of this decision on California taxpayers, to discuss who should claim refunds or petition for alternative apportionment, and to address, more broadly, how this decision will affect other similar cases pending in states such as Pennsylvania, and New Jersey.
Smithfield's Background
Smithfield is the world's largest hog producer, with vertically integrated operations spanning hog production, harvesting, and packaged meats. None of Smithfield's thousands of hog farms or harvesting facilities are located in California; its only California presence was a small processing facility producing less than 0.5% of total volume. Smithfield filed a refund claim arguing it qualified as an agricultural business entitled to use a three-factor apportionment formula under CRTC Section 25128(b) rather than California's single-sales factor formula, and, alternatively, that use of a single-sales factor formula was distortive under CRTC Section 25137.
The Court's Decision
The Court ruled in Smithfield's favor on three independent grounds. First, the court held that Smithfield qualifies as an "agricultural business" under CRTC Section 25128(b) because more than 50% of its gross receipts derive from agricultural activities. The statute defines "agricultural business activity" to include "activities relating to any stock," "activities relating to cultivating the soil or raising or harvesting any agricultural or horticultural commodity," and "the raising, feeding, caring for, training, or management of animals on a farm.” The Court found that Smithfield’s hog production and harvesting activities fell squarely within this definition.
Second, the court held that Regulation 25128-2 was invalid as applied to Smithfield. The regulation provides further guidance to determine what constitutes gross receipts from “agricultural business activities” under CRTC Section 25128. In relevant part, the regulation applies a "product-based" approach that treats any processed product as generating no agricultural receipts, irrespective of any agricultural activities occurring prior to processing. The Court held this approach conflicts with the plain language of CRTC Section 25128, which focuses exclusively on a taxpayer's "activities" rather than the character of its final products, and that the statute provides “no authority to disregard a taxpayer’s activities leading up to a final sale.” The decision invalidating Regulation 25128-2 has important implications for other pending cases in which taxpayers are challenging FTB regulations that exceed the scope of, or conflict with, the underlying statute.
Third, the Court ruled that even if Smithfield were not an agricultural business, it would be entitled to use three-factor apportionment under CRTC Section 25137, which permits deviation from the standard apportionment formula when it does not “fairly represent the extent of the taxpayer’s business activity” in California. The Court interpreted “business activity” broadly to encompass all income-generating activities, including those reflected in the payroll and property factors, and found that while only 1.02% of Smithfield’s business activities occurred in California, over 6.6% of its income was being attributed to the state through use of the sales factor formula. The Court rejected the FTB’s argument that Section 25137 should look only at sales as the measure of distortion, noting that this approach would foreclose use of alternative apportionment with respect to the allocation provisions and the payroll and property apportionment provisions of the Revenue and Taxation Code.
Client Alert 2026-047