Section 25128.5 of the Revenue and Taxation Code applied to taxable years beginning on or after January 1, 2011 and before January 1, 2013. Section 25128.5, Revenue and Taxation Code, provided that any apportionable trade or business, other than that described in subdivision (b) of Section 25128, could have an irrevocable annual election on an original timely filed return to apportion its income to this state by multiplying its business income by the sales factor.
Section 25128.7 of the Revenue and Taxation Code applies to taxable years beginning on or after January 1, 2013. Section 25128.7, Revenue and Taxation Code, provides that an apportionable trade or business, other than that described in subdivision (b) of Section 25128, Revenue and Taxation Code, shall apportion its income to this state by multiplying its business income by the sales factor.
Example: Corporation A is the parent of Corporations B and C. Corporations A and B are engaged in the manufacture and sale of ocean-going oil tankers and oil pipe, respectively. Corporation C owns a small oil refinery. Corporations A, B, and C are members of a unitary group required to file a combined report in California. The gross business receipts in all states for Corporations A and B are $880 million and $440 million, respectively. Under the provisions of section 25128 of the Revenue and Taxation Code and this regulation, none of those gross receipts are from a qualified business activity. Corporation C's gross business receipts from a qualified business activity (oil refining) in all states are $320 million, and its other business receipts are $80 million. The total gross business receipts of the combined group are $1.720 billion, of which only 18.6 percent constitutes gross business receipts from qualified business activity. The combined business income of the group is subject to apportionment using either a four-factor apportionment formula with a double-weighted sales factor or a single sales factor apportionment formula, whichever is applicable, despite the fact that more than 50 percent of Corporation C's gross business receipts is from an extractive trade or business.
Example 1: A parent company produces crude oil, a combined unitary subsidiary which is part of the apportioning trade or business refines some of the oil into gasoline, another combined unitary subsidiary makes petrochemicals from naphtha obtained from its unitary affiliate's refining operations, and another combined unitary subsidiary uses the petrochemicals to make plastics. The apportioning trade or business sells gasoline and plastics to third parties. Only the products sold to parties outside of the combined unitary group are considered in determining whether this group is engaged in a qualified business activity under section 25128 of the Revenue and Taxation Code. In this example, the only products sold to third parties are gasoline and plastics. Therefore, the intercompany sales of naphtha and petrochemicals are not considered in determining whether the group is engaged in a qualified business activity. Receipts from the sale of gasoline constitute gross business receipts from a qualified business activity (extractive business activity) under section 25128 of the Revenue and Taxation Code and the regulations thereunder. Receipts from the sale of plastics, however, are not gross business receipts from a qualified business activity. (See Regulation section 25128-1 for determining whether an activity is a qualified extractive business activity.)
Example 2: The business activity of an apportioning trade or business is the sale of soup to third parties. However, an entity in the combined apportioning trade or business grows vegetables, which it provides to other entities in the combined apportioning trade or business in order to make the soup. Only the activities which lead to receipts from sales to parties outside of the combined apportioning trade or business will be considered in determining whether the apportioning trade or business is engaged in an agricultural business activity. Because only the sale of soup results in gross business receipts as defined in this regulation, the sale of soup is considered to be the business activity of the apportioning trade or business. The making and sale of soup is not an agricultural business activity under the definition set forth in Revenue and Taxation Code section 25128, subdivision (d)(2), and these regulations because it does not directly involve the production of agricultural products; therefore, the apportioning trade or business does not qualify to use a single-weighted sales factor. The fact that other companies in the combined unitary group were engaged in agricultural production and provided commodities within the combined group to be made into the final product is not taken into account, because any agricultural receipts derived by these other companies are from intercompany sales as defined in subsection (d)(1) of this regulation and, therefore, are not from sales to parties outside the apportioning trade or business. (See Regulation section 25128-2 for determining whether an activity is a qualified agricultural business activity.)
Example 3: An apportioning trade or business operates a winery, which grows all of the grapes used in its wine. The business does not sell any grapes to third parties; all of its third party receipts come from the sale of wine. The winery does not qualify as an agricultural business activity because making and selling wine is not the direct production of an agricultural commodity. Only the product sold to third parties, wine, is considered in making this determination. (See Regulation section 25128-2 for determining whether an activity is a qualified agricultural business activity.)
Example 4: Company A and Company B are engaged in a unitary business. A makes a water's-edge election and, as a result, B is not included in A's combined report. A produces grapes which it sells to B. B in turn processes the grapes into wine and sells the wine to unrelated customers. A is engaged in a qualified business activity, and A's sales of grapes are considered to be gross business receipts from a qualified business activity because its sales are made to an entity outside of the combined apportioning trade or business of A. Sales by A and B are not intercompany sales because B is not part of A's combined report group. (See Regulation section 25128-2 for determining whether an activity is a qualified agricultural business activity.)
Cal. Code Regs. Tit. 18, § 25128
2. Change without regulatory effect amending subsections (a) and (c) filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).
Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25128, Revenue and Taxation Code.
2. Change without regulatory effect amending subsections (a) and (c) filed 12-9-2013 pursuant to section 100, title 1, California Code of Regulations (Register 2013, No. 50).