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California alternative apportionment must involve apportionment

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June 2019


The California Franchise Tax Board (FTB) released Legal Ruling 2019-01 regarding requests for variances to the standard apportionment formula pursuant to California Revenue and Taxation Code (CRTC) section 25137.

The FTB lays out certain subject matters it does not consider to be appropriate for alternative apportionment claims under CRTC section 25137, including unitary combinations, combined report mechanics, the determination of income, the division of income into business and nonbusiness, tax rates, tax credits, and water’s-edge mechanics.

The takeaway

The ruling reiterates the application of CRTC section 25137 relief to situations where the standard apportionment formula does not fairly represent a taxpayer’s business activity in the state.

This can be a complex analysis, and the line between situations that result from UDITPA apportionment provisions versus other provisions of the tax code often can be unclear. Taxpayer requests for relief under CRTC section 25137 should be prepared with care toward presenting why the distortion is caused by the allocation and apportionment provisions rather than another provision of the law.

Taxpayers should continue to evaluate whether the representation of their business in California under the state’s allocation and apportionment rules is fair, especially in the context of the state’s recent transition to a single sales factor formula and the application of varying market-based sourcing rules for sales of other than tangible personal property.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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