Reed Smith In-depth

After the United States Supreme Court denied the taxpayer’s petition for writ of certiorari in The Gillette Company v. Franchise Tax Board on October 11, 2016, many taxpayers assumed that California’s three-factor apportionment formula option was dead and buried. However, California’s alternative apportionment process and recent litigation provide two potential avenues to obtain representation for property and payroll in the California apportionment formula. Taxpayers can protect their rights by keeping their Gillette claims alive, and file protective claims by using this form. Furthermore, as more states move to single-sales factor, some of the California litigation may have a ripple effect across the nation, which we’ll discuss in our upcoming webinar.

Authors: Kyle O. Sollie

Alternative apportionment – manufacturer case study and procedural process for relief

Inherent distortion for manufacturing companies

For a research and capital intensive company, such as a manufacturer, California’s single-sales factor apportionment formula often does not adequately represent the company’s business activity in California. This notion was affirmed by the United States Supreme Court, which held that the “three-factor formula used by California has gained wide approval precisely because payroll, property, and sales appear in combination to reflect a very large share of the activities by which value is generated.”1

One avenue to rectify the distortion that results from the application of California’s single-sales factor formula to manufacturers and other capital intensive taxpayers is to petition the Franchise Tax Board (FTB) to allow the use of an alternative apportionment formula under California Revenue and Taxation Code (CRTC) section 25137 (CRTC 25137 Petition). CRTC section 25137 provides statutory relief for situations in which the standard apportionment formula does not fairly represent the extent of a taxpayer’s business activity in the state.2 Thus, a manufacturer may argue, for the reasons noted above, that the statutory single-sales factor is distortive 3 and that an alternative, which includes a property and/or payroll component, must be used. Indeed, the FTB’s own witness in the General Mills litigation testified that discounting the payroll and property factors “seems to fly in the face of what the apportionment formula is trying to do.”4