California changes combined reporting for assignment of combined group sales.

• Author: Kraft, Jonathan F.

On May 26, 2011, California's Franchise Tax Board (FTB) held an interested parties meeting to discuss possible amendments to the regulations pertaining to the assignment of sales of tangible personal property by members of a combined reporting group. The focus of the discussion was on CA Code Regs. Title 18, Section [section]251 06.5(c)(7)(B)3, which adopted the Joyce rule in 2000. However, in 2009, the California legislature adopted the Finnigan/NutraSweet rule, requiring revision of the existing regulations (CA Rev. and Tax. Code S25135).

For tax years before January 1, 2011, receipts from sales of tangible personal property by a combined reporting group were assignable to California as long as the member generating the sale was taxable in the state. Thus, for purposes of the sales factor of California's apportionment formula, California sales (i.e., the numerator) included only those sales shipped to a purchaser in the state by members of the combined group with nexus in the state. As stated in the regulation, "if a member of the combined reporting group sells goods shipped to a purchaser in California, and that member is not taxable in [California], the sale is not assigned to California, even if another member of the combined reporting group is taxable in [California]." Joyce had also provided a throwback provision whereby sales of tangible personal property to a state other than California were thrown back to California if the goods were shipped from the state and the member was not taxable in the destination state {Appeal of Joyce, Inc., No. 66-SBE-070 (Cal. State Bd. of Equalization 11/23/66)).

For tax years beginning on or after January 1, 2011, California has adopted the Finnigan/NutraSweet rule, which requires that receipts from the sale of tangible personal property of all members of the combined reporting group be assigned (i.e., sourced) to California, regardless of whether a...