California Changes Combined Reporting for Assignment of Combined Group Sales

By Jonathan E. Kraft, SingerLewak LLP, Los Angeles, CA

Editor: Mark G. Cook, CPA, MBA

State & Local Taxes

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 §25106.5(c)(7)(B)3, which adopted the Joyce rule in 2000. However, in 2009, the California legislature adopted the Finnigan/Nutra-Sweet rule, requiring revision of the existing regulations (CA Rev. and Tax. Code §25135).

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 specific member has nexus in the state. Thus, even if a member entity is not taxable in California, all sales appropriately assignable to California must be included in the sales factor numerator.

It is important to note that the inclusion of sales of the nontaxable member does not necessarily mean that an entity without nexus in the state will be subject to tax. The Finnigan rule, which has been upheld by the California Court of Appeals (Citicorp North America, Inc. v. Franchise Tax Board, 100 Cal. Rptr. 2d 509 (Cal. Ct. App. 2000), cert. denied, Sup. Ct. Dkt. No. 00-1537 (6/29/01)), is merely a method of calculating how much income is properly attributable to the business activities of the combined reporting group in the state. With the adoption of Finnigan, California eliminated its throwback rule (Appeal of Finnigan Corp., No. 88-SBE022-A (Cal. State Bd. of Equalization 1/24/90)). As long as any member of the combined reporting group is taxable in another state, receipts from the sale of tangible personal property will not be thrown back to California, regardless of whether the sale was generated by a member not taxable in that other state.

As of this writing, the FTB has not finalized the Finnigan regulations. However, based on a consensus of the interested parties, the FTB will use the language from a 2000 version of the draft regulation as a starting point. A final draft of the regulation is not expected until after publication of the 2011 tax forms; however, the revised regulation will be made retroactive, if necessary.


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

The editor would like to offer a special thanks to Christian J. Burgos, J.D., LL.M., for his assistance with this column.

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 SingerLewak LLP.

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