California’s recent tax changes allow taxpayers to elect between significantly different income tax apportionment regimes, and revert back to the Finnigan method to calculate a combined return. The apportionment election requires taxpayers to choose between a single-sales factor and market sourcing for sales of services and intangibles, or a three-factor formula (double-weighting sales) and a costs-of-performance sourcing method. In this Pinch of SALT, we will explain California’s new apportionment regime and related nuances taxpayers should consider in evaluating options and requirements.

Costs-of-Performance Is Given a Second Life

On February 19, 2009, California abandoned its long-standing costs-of-performance apportionment method used to source receipts earned from services and intangibles. This repeal turned out to be shortlived as California’s Legislature restored costs-ofperformance for some taxpayers.

California was an early adopter of the Uniform Division of Income for Tax Purposes Act and the Multistate Tax Compact. As a result California has mandated taxpayers use the costs-of-performance sourcing method for over 40 years to source income from services and intangibles.1 The repeal of the costs-of-performance method, enacted February 19, 2009, was set to become effective January 1, 2011.