Section 2115: Beware of Double Counting

Many practitioners both in and outside of California struggle with Section 2115 of the California Corporations Code.  That statute purports to apply a laundry list of California statutes to out-of-state corporations to the exclusion of the law of their state of incorporation.  An out-of-state corporation is subject to Section 2115 if: (i) more than 1/2 of its outstanding voting securities are held of record by persons having addresses in California; and (ii) the average of the property factor, payroll factor and sales factor is more than 50%.  The three factors referred to in the statute are defined in Sections 25129, 25132 & 25134 of the California Revenue and Taxation Code.   Corporations are required to calculate these factors for purposes of apportioning income for tax purposes.  Thus, the place to find corporation's property, payroll and sales factor is on Side 2 of Schedule R (Apportionment and Allocation of Income) to the California corporate tax return.

When looking at Schedule R, however, it is important to recognize that the percentage listed for the sales factor is double weighted.  This is made clear by General Information G to the Schedule.  According to the Assembly floor analysis of the bill, the legislature mandated double weighting of the sales factor in 1993 in an effort to increase state tax revenues.  However, the legislature did not change the definition of "sales factor" in Section 25134 of the Revenue and Taxation Code.  Thus, the sales factor should not be double counted when determining the average of the property, payroll and sales factors for purposes of Corporations Code Section 2115.

Practitioners should also be aware that some corporations are exempt from the application of Section 2115 and that the timing of the application of the statute presents its own complexities as evidenced by a recent case that I discuss in this blog posting and commentary.