Multistate Audit Technique Manual

CALIFORNIA FRANCHISE TAX BOARD Internal Procedures Manual Page 1 of 52Multistate Audit Technique Manual _______________________________________________________________________________ 7500 SALES FACTOR The numerator of the sales factor is the total sales in this state during the taxable year. The denominator is the total sales everywhere during the taxable year. (R&TC §25134.) Only sales derived from business activities are considered in the sales factor -- nonbusiness sales are excluded. Historically, there were two schools of thought with respect to the sales factor. Since the property and payroll factors primarily reflected manufacturing or production activities, some authorities felt that a sales factor was needed to balance the other two factors and give weight to the market. Others thought that a sales factor was unnecessary and a two-factor formula of payroll and property was sufficient. The opponents to the sales factor cited the difficulty of assigning sales to a particular location or state. They argued that sales could arbitrarily be assigned to origin, destination, or even state of manufacture. The model formula under UDITPA uses an equally weighted three-factor apportionment formula that generally assigns sales to the state of destination, and this is the method that California used prior to 1993. In recent years, many states have been using tax policy to create economic incentives. Accordingly, there has been a trend ...