Weekly Round-Up: A Lack of Clear Standards for Alternative Apportionment


Alternative apportionment can be invoked in California when the inclusion of receipts from an activity qualitatively different from the taxpayer's principal business leads to substantial quantitative distortion. In General  Mills Inc. v. California  Franch. Tax Bd., 208 Cal. App. 4th 1290 (Cal. Ct. App. Aug. 29, 2012), the taxpayer was caused to use alternative apportionment because its hedging activities, while critical to the success of its primary business, were determined to be qualitatively different from the sale of consumer food products such that the quantitative distortion caused by the hedging activities did not fairly represent the extent of taxpayer's business in California, Daniel J. White and Andrew D. Grace, both with the  State and Local Tax group of KPMG LLP's Washington National Tax practice, explain in this week’s issue of the Weekly State Tax Report.

Putting aside the issue of whether it was decided correctly, the case, along with an earlier decision in General Mills Inc v. California Franch. Tax Bd., 92 Cal. Rptr. 3d 208 (Cal. Ct. App. April 15, 2009), do little, if anything, to clarify when invocation of alternative apportionment is appropriate, the authors argue. In fact, the cases complicate an already complex area. It is unclear what, if any, tests exist to prove that alternative apportionment should be allowed or should not be required. Prior to the General Mills cases, taxpayers most likely assumed that qualitative distortion could result only from activities that were far removed taxpayer's principal activity. Taxpayers understood, but may not have agreed, that treasury related activities were far enough removed from the business of selling software, cars or clothing that a court could deem such treasury activities as qualitatively different.

Activities that were inextricably linked to the taxpayer's principal activity, however, were likely assumed to be qualitatively similar so that there would be no question as to the application of the standard apportionment rules. The General Mills cases, however, open the door for taxpayers and administrators alike to pull apart and balkanize various aspects of a taxpayer's business in seeking to invoke alternative apportionment for a variety of activities, especially those that arguably have no independent profit motive. In addition, from a quantitative perspective the two cases open the door for alternative apportionment on a myriad of activities that have a relatively insignificant impact on the overall apportionment percentage, the authors state.

For an in depth look at these case, check out the article by White and Grace in this week’s issue of the Weekly State Tax Report .

In other developments…

The 2013 Texas legislative session is likely to produce just narrow, technical changes to the major state-level taxes applicable to most businesses , according to the Texas State and Local Tax Law Blog.

Morrison & Foerster LLP issues the January 2013 issue of New York Tax Insights , which contains, among other things a look at the New York Court of Appeals decision in Matter of EchoStar Satellite Corp.

Obamacare: 5 states to watch , by Politico Pro.

Compiled by Priya D. Nair
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