“OCCASIONAL SALES” AND
SINGLE SALES FACTOR
APPORTIONMENT IN CALIFORNIA
By Eric J. Coffill
For decades, California utilized a mandatory corporate franchise
tax equally-weighted three factor apportionment formula of payroll,
property and sales, thus assigning a 33% weight to the sales factor.
In 1993, California double-weighted sales in the three-factor
formula, increasing the weight of the sales factor to 50%.1 Recently,
following a number of unsuccessful attempts over the years by the
California Legislature to change the apportionment formula to
mandatory use of single-factor sales, the California voters passed
Proposition 39 at the November 6, 2012 General Election requiring,
for taxable years beginning on or after January 1, 2013, corporate
taxpayers to apportion using single-factor sales.2 Accordingly, with
three possible exceptions,3 current California law relegates payroll
and property factor issues to obscurity. For example, a taxpayer
with all of its manufacturing capacity (i.e., 100% property) and all
of its employees (i.e., 100% payroll) outside of California, but with
all of its sales assigned to California, will have a 100% California
apportionment formula.4
Attorney Advertising
Fal l 2013
INSIGHTS
STATE+LOCAL TAX
1“Occasional Sales” and Single Sales Factor Apportionment in California
By Eric J. Coffill
3Upcoming Speaking Engagements
7State Taxation of Financial Institutions
By Craig B. Fields and Nicole L. Johnson
10 Applying the True Object Test to Determine the Taxability of Services
Involving Telecommunications
By R. Gregory Roberts and Rebecca M. Ulich
14 Economic Nexus Curtailed—Again
By Craig B. Fields, Mitchell A. Newmark and Richard C. Call
16 New Incentives Replace California’s EZ Credits
By Andres Vallejo
STATE + LOCAL TAX GROUP
Co-Editors
Jenny Choi and
Rebecca M. Ulich
IN THIS ISSUE
New York
Craig B. Fields cfields@mofo.com
Paul H. Frankel pfrankel@mofo.com
Hollis L. Hyans hhyans@mofo.com
Mitchell A. Newmark mnewmark@mofo.com
R. Gregory Roberts rroberts@mofo.com
Irwin M. Slomka islomka@mofo.com
Open Weaver Banks obanks@mofo.com
Amy F. Nogid anogid@mofo.com
Michael A. Pearl mpearl@mofo.com
Richard C. Call rcall@mofo.com
Ted W. Friedman tfriedman@mofo.com
Nicole L. Johnson njohnson@mofo.com
William T. Pardue wpardue@mofo.com
Rebecca M. Ulich rulich@mofo.com
Kara M. Kraman kkraman@mofo.com
San Francisco
Thomas H. Steele tsteele@mofo.com
Andres Vallejo avallejo@mofo.com
Peter B. Kanter pkanter@mofo.com
James P. Kratochvill jkratochvill@mofo.com
Kirsten Wolff kwolff@mofo.com
Sacramento
Eric J. Coffill ecoffill@mofo.com
Jenny Choi jennychoi@mofo.com
Leslie J. Lao llao@mofo.com
Washington, D.C.
Linda A. Arnsbarger arnsbarger@mofo.com
Philip M. Tatarowicz ptatarowicz@mofo.com
Denver
Thomas H. Steele tsteele@mofo.com
continued on page 2
2State + Local Tax Insights, Fall 2013
Now, it is all about sales. If single-factor sales were not enough,
for taxable years beginning on or after January 1, 2013, sales
of other than tangible personal property are assigned for
sales factor purposes based on a so-called “market” approach,
instead of costs of performance.5 Also, recall that for taxable
years beginning on or after January 1, 2011 California returned
to a Finnigan approach under which all sales of a combined
reporting group properly assigned to California will be
included in the California sales factor, regardless of whether
the member of the combined group making the sale is subject
to California tax.6
The trend toward hyper-weighting the California sales
factor—now to 100% sales beginning in 2013—continues
to increase the tax value of that factor. There have been,
and will continue to be, a wide variety of sales factor issues
in California and all those issues now take on a heightened
importance in terms of tax effect. One such issue, the
inclusion in the sales factor of receipts from so-called
“occasional sales,” is the subject of this article. As more fully
discussed below, California Franchise Tax Board (“FTB”)
Regulation 25137(c)(1)(A) generally provides that when
substantial gross receipts arise from an occasional sale of a
fixed asset or other property held or used in the regular course
of the taxpayer’s trade or business, those receipts must be
excluded from the sales factor.7
Regulation 25137(c)(1)(A)
Regarding the preliminaries, the sales factor is a fraction,
the numerator of which is the total sales of the taxpayer in
California during the income year and the denominator of
which is all gross receipts everywhere not allocated.8 Over the
years, and often following in the footsteps of the Multistate
Tax Commission, the FTB has promulgated a number
of special regulations under the authority of California
Revenue and Taxation Code9 Section 25137, which provides
special rules for apportionment. Such special regulations
are not to be taken lightly. If a relevant special formula is
specifically provided in the FTB’s Section 25137 regulations
(“25137 Regulations”) and the conditions and circumstances
delineated in such a regulation are satisfied, the California
State Board of Equalization (“SBE”) has held that the method
of apportionment prescribed in that regulation shall be “the
standard” by which taxpayers and the FTB are to compute
the taxpayer’s apportionment formula.10 In other words,
once found to be applicable to the particular situation, 25137
Regulations “will control.”11
The FTB’s special regulatory sales factor rules for so-called
“occasional sales” are found in Regulation 25137(c)(1)(A),12
which provides in full:
(A) Where substantial amounts of gross receipts
arise from an occasional sale of a fixed asset or
other property held or used in the regular course
of the taxpayer’s trade or business, such gross
receipts shall be excluded from the sales factor.
For example, gross receipts from the sale of a
factory, patent, or affiliate’s stock will be excluded
if substantial. For purposes of this subsection,
sales of assets to the same purchaser in a single
year will be aggregated to determine if the
combined gross receipts are substantial.
1. For purposes of this subsection, a sale
is substantial if its exclusion results in
a five percent or greater decrease in the
sales factor denominator of the taxpayer
or, if the taxpayer is part of a combined
reporting group, a five percent or greater
decrease in the sales factor denominator
of the group as a whole.
2. For purposes of this subsection, a sale is
occasional if the transaction is outside of
the taxpayer’s normal course of business
and occurs infrequently.
Accordingly, the key operative concepts under Regulation
25137(c)(1)(A) are: (1) substantial (vs. insubstantial) sales
amounts; (2) from an occasional sale; (3) of a fixed asset
or other property; (4) which is held or used in the regular
course of the taxpayer’s trade or business.
“Substantial Amounts”
While “substantial amounts” is a key term long found in
Regulation 25137(c)(1)(A), it was only defined therein
by the FTB’s amendments to the regulation filed on
January 30, 2001 and operative as of January 1, 2001.13
The 2001 amendments added the definition, now found in
Regulation 25137(c)(1)(A)(1), that a sale is “substantial” if its
exclusion results in a 5% or greater decrease in the taxpayer’s
sales factor denominator or, if the taxpayer is part of a combined
To ensure compliance with requirements imposed by the IRS, Morrison &
Foerster LLP informs you that, if any advice concerning one or more U.S.
federal tax issues is contained in this publication, such advice is not intended
or written to be used, and cannot be used, for the purpose of (i) avoiding
penalties under the Internal Revenue Code or (ii) promoting, marketing, or
recommending to another party any transaction or matter addressed herein.
The FTB has promulgated a number of special
regulations under the authority of California
Revenue and Taxation Code Section 25137,
which provides special rules for apportionment.
The trend toward hyper-weighting the
California sales factor—now to 100% sales
beginning in 2013—continues to increase
the tax value of that factor.
