A taxpayer qualified to use an equally weighted three-factor apportionment formula based on property, payroll, and sales, instead of California’s standard single-sales factor formula, to determine the portion of its business income that was attributable to and taxable by the state, according to a California superior court. In a proposed statement of decision, the court ruled that the taxpayer was an agricultural business required to use a three-factor apportionment formula under California law, because it derived more than 50% of its gross receipts from agricultural business activity. Also, even if the taxpayer was not an agricultural business, it was entitled to use a three-factor apportionment formula because it proved by clear and convincing evidence that the standard single-sales factor formula did not fairly represent its business activity in the state, and that its proposed alternative—the three-factor formula—was reasonable. Using a three-factor apportionment formula instead of a single-sales factor formula reduced the taxpayer’s California tax liability, thereby entitling the taxpayer to a refund.
Regulation declared invalid
The Franchise Tax Board, relying on a California regulation, had looked only at the character of the final products (packaged meats) sold by the taxpayer and concluded that the taxpayer was not an agricultural business. However, this disregarded nearly all of the taxpayer’s agricultural hog production and harvesting activities, which comprised the majority of its operations. Noting that the governing statute required an examination of a taxpayer’s business activities, the court determined that the regulation, as applied to the taxpayer, conflicted with the underlying statute and was invalid. Smithfield Packaged Meats Corp. v. California Franchise Tax Board, California Superior Court, Los Angeles County, No. 21STCV39637, February 26, 2026
