On October 3, 2019, California’s Office of Tax Appeals (OTA) held that value-added tax (VAT) imposed on the provision of services is included in the sales factor of California’s apportionment formula. The taxpayer, filing on a worldwide unitary basis, included VAT in its sales factor denominator that it billed, and collected, to its customers in foreign jurisdictions on service fee invoices. After auditing the taxpayer, the Franchise Tax Board (FTB) took the position that VAT was improperly included in the sales factor. On appeal, FTB argued that the definition of “sales” in California Code of Regulations 25134(b) only allows for excise or sales tax (including VAT) in the sales factor for sales of tangible personal property—not for sales of services. OTA rejected FTB’s position and concluded that the term “sales” for purposes of calculating the sales factor is defined in California’s Rev. & Tax. Code section 25120(e) as “all gross receipts” in agreement with a California court’s prior broad construction of the term to include “the whole amount received.” See Microsoft Corp. v. FTB, 39 Cal.4th 750, 759 (Cal. 2006). OTA also rejected FTB’s deference argument because Regulation 25134 is based on a Multistate Tax Commission model regulation, not unique to FTB, and not ambiguous.
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