The compensation of any employee on account of activities which are connected with the production of nonbusiness income shall be excluded from the factor.
EXAMPLE (A):
The taxpayer uses some of its employees in the construction of a storage building which, upon completion, is used in the regular course of taxpayer's trade or business. The wages paid to those employees are treated as a capital expenditure by the taxpayer. The amount of such wages is included in the payroll factor.
EXAMPLE (B):
The taxpayer owns various securities which it holds as an investment separate and apart from its trade or business. The management of the taxpayer's investment portfolio is the only duty on Mr. X, an employee. The salary paid to Mr. X is excluded from the payroll factor.
If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under the Uniform Division if Income for Tax Purposes Act are not uniform in the treatment of compensation paid, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
EXAMPLE:
A taxpayer has employees in its state of legal domicile (State A) and is taxable in State B. In addition the taxpayer has other employees whose services are performed entirely in State C where the taxpayer is immune from taxation by Public Law 86-272. As to these latter employees, the compensation will be assigned to State C where their services are performed (i.e., included in the denominator--but not the numerator--of the payroll factor) even though that taxpayer is not taxable in State C.
Cal. Code Regs. Tit. 18, § 25132