On November 6, California voters passed Proposition 39, which changes the state’s default apportionment to a single sales factor method. Additionally, Proposition 39 adopted a mandatory market-sourcing method for sourcing sales of services and intangibles. Yet taxpayers in California may still elect to apportion income using the equally weighted three-factor formula provided for in the Multistate Tax Compact because the Compact has still not been effectively repealed.
- Filing Options through 2012
In our October Alert,1 we stated that for tax years beginning on or after January 1, 2011, corporations have three apportionment options:
- Double-Weighted Sales Method (former default). Three-factor, double-weighted sales factor, with cost-of-performance sourcing for sales other than sales of tangible personal property.2
- Compact Method. Three-factor, single-weighted sales factor, with cost-of-performance sourcing for sales other than sales of tangible personal property.3
- Sales-Factor-Only Method. Sales factor only, with market-based sourcing for sales of services and intangibles.4
Of course, our conclusion was based on the Gillette decision, in which a California Court of Appeal held that the Legislature’s enactment of a double-weighted sales factor did not remove a taxpayer’s right to elect the Compact method.5 Additionally, the Legislature’s attempt to repeal the Compact by passing Senate Bill 1015 (2012) was invalid because that bill was not passed with a two-thirds majority vote, as required under Proposition 26.
For tax years beginning before January 1, 2013, Proposition 39 changes nothing. Taxpayers continue to have these three options for sourcing business income.
- Filing Options beginning in 2013
For tax years beginning on or after January 1, 2013, Proposition 39 changes the default filing method. Starting in 2013, the default is a single sales factor.6 The option of using a three-factor formula that gives double weight to the sales factor is eliminated.7
Proposition 39 does not, however, repeal the Compact. Indeed, Proposition 39 contains the same language with respect to the Compact that was before the court in Gillette.8 The court in Gillette said that language did not repeal the Compact.9 That same court—the Court of Appeal—has made clear that repeals by implication do not work.10 Thus, Proposition 39 does not repeal the Compact.
Therefore, the result of Proposition 39’s passage is that for tax years beginning on or after January 1, 2013, taxpayers have two filing options:
- Sales-Factor-Only Method (Default Option). Sales factor only, with market-based sourcing for sales of services and intangibles.11
- Multistate Tax Compact Method (By Election). Three-factor, single-weighted sales factor, with cost-of-performance sourcing for sales other than sales of tangible personal property.