California’s Move to Single Sales Factor

By Javier Ramirez and Christian J. Burgos, J.D., LL.M., Los Angeles, CA

Editor: Mark G. Cook, CPA, MBA

State & Local Taxes

On February 20, 2009, Governor Arnold Schwarzenegger signed budget legislation that makes significant changes to California tax law. Under current law, most businesses with activities within and outside California are required to use a three-factor apportionment formula with double-weighted sales. However, beginning January 1, 2011, multistate businesses (other than those deriving more than 50% of their gross receipts from agriculture, extractive business, savings and loans, or banks and financial activities) may elect to use a single sales factor (SSF) method of apportionment for purposes of their California corporate income tax return. This item provides an overview for companies making the election.

Economic Impact

The single sales factor apportionment method is a business development incentive that seeks to attract businesses into a state by eliminating the tax costs of physical relocation. The absence of a property and payroll factor for income tax apportionment purposes is intended to encourage businesses to establish their operations in California. The implementation of the SSF method of apportionment should result in an increase of direct investment in the state, promoting job growth and development of the state’s commercial or industrial infrastructure.

Several states have adopted mandatory SSF apportionment and have seen a steady growth in permanent jobs and net tax revenue, based on a compilation of statistical data from states that have recently adopted SSFs. A recent study conducted by Charles W. Swenson, professor at the Marshall School of Business, predicts that California’s adoption of an SSF will result in an increase of approximately 144,000 permanent jobs as well as a net gain in annual tax collections of approximately $411 million to the state (Swenson, “On the Impact of a Single Sales Factor on California Jobs and Economic Growth” (working paper, June 2010)). Swenson reviewed the experience of five other states that switched to the SSF formula. Those states—Georgia, Louisiana, New York, Oregon, and Wisconsin—all experienced increased job growth within two years of adoption. Proponents of an SSF in California believe that an increase in direct business investment in the state will create additional jobs that would contribute to the state’s personal income tax revenues.

It is also anticipated that California will generate additional revenue from payroll, property, and sales and use tax from businesses physically expanding their operations into the state. Given California’s current financial woes, the potential benefits of implementing an SSF seem to outweigh any potential costs.

Making the Election

Under CA Rev. & Tax. Code Section 25128.5, a business required to apportion its business income may elect to use a sales-only formula to apportion its income subject to the franchise or income tax in California, for tax years beginning on or after January 1, 2011. The business must make the election to use an SSF annually on an original, timely filed return, including extensions, and the election is irrevocable. The Franchise Tax Board (FTB) is currently drafting regulations that would clarify the implementation and the proper method of electing the use of an SSF apportionment method. Moreover, proposed 18 CA Code Regs. Section 25128.5(b)(7) would require taxpayers to attach a written statement notifying the FTB of the election on Part B of Schedule R-1, Apportionment Formula.


As California faces extremely large budget deficits, major tax changes are inevitable. From an income tax perspective, however, some of the changes are taxpayer friendly for companies headquartered in California. The option of using SSF apportionment may benefit businesses physically located in California because the exclusion of the property and payroll factors may lead to a much lower California apportionment percentage. Implementation of an SSF for apportionment appears to be the approach most states are shifting toward. Based on current empirical data, the rewards of direct investment by businesses in the state would appear to provide long-term benefits and support for California’s staggering economy.


Mark Cook is a partner at Singer Lewak LLP in Irvine, CA.

For additional information about these items, contact Mr. Cook at (949) 261-8600, ext. 2143, or

Unless otherwise noted, contributors are members of or associated with Singer Lewak LLP.

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