single-sales apportionment: crafting a comprehensive multi...

Single-Sales Apportionment: Crafting a Comprehensive Multi-State Strategy

Meeting Tax Planning Demands Amid a Dramatic Shift in Apportionment Formulaspresents

Today's panel features:Jon Zefi, Principal, Eisner, New York

Jeffrey Glickman, Partner, State and Local Tax Group, Alston & Bird, AtlantaMitchell Newmark, Of Counsel, Morrison & Foerster, New York

Jon Sedon, Manager, State and Local Tax Group, KPMG, Washington, D.C.Adam Weinreb, Director, Washington National Tax Services Knowledge Management Group, PricewaterhouseCoopers, New York

Wednesday, October 28, 2009

The conference begins at:1 pm Eastern12 pm Central

11 am Mountain10 am Pacific

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A Live 110-Minute Teleconference/Webinar with Interactive Q&A

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Single Sales Apportionment: Crafting a Comprehensive

Multi-State Strategy Webinar

Oct. 28, 2009

Adam Weinreb, PricewaterhouseCoopers Mitchell Newmark, Morrison & [email protected] [email protected]

Jon Sedon, KPMG Jeff Glickman, Alston & [email protected] [email protected]

Jon Zefi, [email protected]

2

Today’s Program

• Legislative Update, slides 4 through 14 (Adam Weinreb)

• Apportionment: Case Law Trends And Developments, slides 15 through 20 (Mitchell Newmark)

• Concurrent Material Issues, slides 21 through 29 (Jon Sedon)

• Resulting Planning Issues, Part I, slides 30 through 44 (Jeff Glickman)

• Resulting Planning Issues, Part II, slides 45 through 58 (Jon Zefi)

3

Legislative Update

4

NOTICE• This document is provided by PricewaterhouseCoopers LLP for general guidance only,

and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice under Circular 230, or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult with a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties, or performance, merchantability, and fitness for a particular purpose.

5

Increased Sales Factor Weighting

• States, in an effort to attract or retain businesses, increase the weight of the sales factor or eliminate the property and payroll factors in favor of a single sales factor

6

Apportionment Formulas* - 1998

Equally weighted three factor formula

Double weighted sales factor

Triple or greater weighted or single sales factor*Does not address industry-specific or optional formulas

AK

HI

ME

VTNH MA

NYCT

PA

MD

DE

VAWV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN ND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA

DC

NJ

RI

7





AK

HI

ME

VTNH MA

NYCT

PA

MD

DE

VAWV

NC

SC

GA

FL

ILOHIN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN ND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA

DC

NJ

RI

8





AK

HI

ME

VTNH MA

NYCT

PA

MD

DE

VAWV

NC

SC

GA

FL

ILOHIN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN ND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA

DC

NJ

RI

9

Recent Legislation– California

• S.B.X3 15: Enacted 2/20/09; single-sales-factor election, effective Jan. 1, 2011

– Colorado• H.B. 1380: Enacted 5/20/08; single-sales factor adopted,

effective Jan. 1, 2009– Maine

• L.D. 499: Enacted 6/7/07; single-sales factor adopted, effective Jan. 1, 2007

– New York• A.B. 4310-C, S.B. 2110-C: Enacted, 04/09/07; accelerated by

one year the institution of the single-sales factor business allocation percentage formula. Previously, the formula for 2007 was to be weighted at 80% for sales and 10%, respectively, for property and payroll

10

Recent Legislation (Cont.)

– Virginia• H.B. 2437: Enacted 4/08/09; allows elective single-sales factor

apportionment for manufacturers, phased-in from July 1, 2011 through 2014

– Pennsylvania• H.B. 1531: Enacted 10/9/9; increases the weight of the sales

factor to 83% from 70% for taxable years beginning after Dec. 31, 2008, and to 90% in tax years beginning after Dec. 31, 2009

11

Recent Legislation (Cont.)

– New Jersey• (2009) A.B. 4028, S.B. 2910: Phase-in of single-sales factor.

Failed to pass

12

Business Activity Tax Bill And Single-Sales Factor

– BAT: Introduced February 2009, would extend P.L. 86-272 protections:

• To all business activity taxes, not just net income taxes• To all “sales transactions” including services, not just to sales

of TPP• To specified “business activities” (such as business activities

directly related to the taxpayer’s potential or actual purchase of goods or services within the state)

• Codifies nexus/physical presence standard – greater than 14 days

13

Business Activity Tax Bill And Single-Sales Factor (Cont.)

– Single-sales factor shifts weight of tax to out-of-state companies

– Out-of-state companies with no physical presence not subject to tax, even if make substantial sales into jurisdiction

– Economic nexus provisions would be voided

14

Uniform Law Commission Abandons UDITPA Rewrite Project

– Study committee of the Uniform Law Commission (ULC), formerly NCCUSL, voted to abandoned UDITPA rewrite

• Rewrite project garnered little support from state legislators and was strongly opposed by many in the business community

• Dave Hilger, UCL UDITPA study committee chairman, reasoned that although it is clear that UDITPA is outdated and needs to be reformed, there is no reasonable probability that the rewrite effort would result in a product that could be uniformly enacted or would directly promote uniformity

15

Apportionment: Case Law Trends And Developments

16

Apportionment

• Why do we care?– After nexus, apportionment is the question

• Constitutional limitations– Unitary business– Apportionment must be fair– Cannot discriminate– Cannot distort earnings in a state

17

Case Law: U.S. Supreme Court

• Fair apportionment– Internal consistency– External consistency

• Non-discrimination– Must not treat foreign corporations differently

from domestic corporations• Unreasonable distortion

– 14% or less may not be enough– 250% or more should be enough

18

Case Law Trends And Developments:Constitutional Issues

• Fair apportionment and non-discrimination

– Pfizer and Whirlpool v. New Jersey• Is the “throwout” unconstitutional?

– New Jersey Natural Gas v. New Jersey• Is the former “regular place of business” requirement

constitutional?

19

Case Law Trends And Developments:Statutory Issues

• Does the sales fraction include receipts at gross or net?– MDC Holdings v. Arizona

– General Mills v. California

• Is a subsidiary’s business attributed to its parent’sholding company?– NES Group v. Massachusetts

20

Thoughts To Take Away

• What we see?– States are getting more creative– States are following other’s cases and statutes– States are sharing information

• What to do?– Document/support reported apportionment figures– Disclose use of alternative apportionment– Stand your ground against unfair apportionment, discrimination

and distortion

21

Concurrent Material Issues

22

NoticeANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

2323

Joyce/Finnigan

• For purposes of inclusion of destination sales in the numerator (or for throwback purposes), who is the taxpayer?– Separate unitary member– Entire unitary group

• California decisions– Appeal of Joyce (1966)– Appeal of Finnigan (I & II) (1990)– Appeal of Huffy (2000) & Citicorp North America (2000)

©2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

2424

Joyce/Finnigan (Cont.)• Joyce

– Sales by a combined group member into a Joyce state, where the member does not have nexus or is P.L. 86-272-protected in that state, are EXCLUDED from the combined group’s sales factor in the state

– Sales by a combined group member from a Joyce state destined for a state in which the member does not have nexus or is P.L. 86-272-protected are thrown back and are INCLUDED in the combined group’s sales factor in the state

• Finnigan – Sales by a combined group member into a Finnigan state, where the

member does not have nexus or is P.L. 86-272-protected in that state, are INCLUDED in the combined group’s sales factor in the state

– Sales by a combined group member from a Finnigan state destined for a state in which the member does not have nexus or is P.L. 86-272-protected are thrown back and are EXCLUDED from the combined group’s salesfactor in the state


2525

Joyce/Finnigan (2009)

No tax

No pre-apportionment combined or consolidated returns (DC)

Finnigan

Joyce (Alaska and Hawaii)

No authority

Source: KPMG LLP


2626

Joyce/Finnigan (Cont.)

• Potential issues– Sales made by a combined group member from a Finnigan state

into a Joyce state, where the member (on a separate entity basis) does not have nexus or is P.L. 86-272-protected in the Joyce state are excluded from the combined group’s sales factor in both states!

– Sales made by a combined group member from a Joyce state into a Finnigan state, where the member (on a separate-entity basis) does not have nexus or is P.L. 86-272-protected in the Finnigan state may be included in the combined group’s sales factor in both states!


2727

80/20 Rules

• 80/20 Rule– Include foreign incorporated entity in combined group if the entity

has 20% or more of its factors in the U.S. – Note the different rules

• 20% of the average of property, payroll and sales– E.g. California, Illinois, Massachusetts

• 20% of the average of property and payroll– E.g. Colorado, North Dakota, Vermont

• No 20% rule– E.g. New York, Kansas


2828

Sales Factor: Sourcing of Services (2009)

No tax

Benefit or market approach

Service performed in date (%)

Income-producing activity/costs of performance approach (AK, DC, HI)

Other

Source: KPMG LLP


2929

Sales Factor: Market Sourcing RulesState Sourced to state if

CA To the extent the purchaser of the service received the benefit of the service in CA

GA Customer has regular place of business in GA or if benefit of service received in GA

IA Benefit of service received in IA

IL/MN Services are received in IL/MN and taxpayer has a fixed place of business; otherwise, if customer office from which services (1) ordered or (2) billed is in IL/MN

MD Principal impetus for sale is in MD; or, if no state with principal impetus, then if domicile is in MD

ME Services received in ME; or, if this is not determinable, then if customer office or home is in ME

MI Benefit of service received in MI

OH Services used or benefit of is received in OH (location of use or receipt)

UT Purchaser of the service receives a greater benefit of the service in UT than in any other state

WI Purchaser receives the services in WI. Different sourcing rules for services related to RP, TPP, businesses and individual.


30

Resulting Planning Issues, Part I

31

Combined Reporting: Pros And Cons

• What is combined reporting?– A method of filing a corporate income tax return for a group of

affiliates conducting a unitary business– The income and expenses of the members are combined and

apportioned to the taxing state based on a combined apportionment percentage

– The combined group can include entities that do not have nexus with the taxing state on a stand-alone basis

– In theory, only the nexus members are subject to the taxing state’s jurisdiction (i.e., can be liable for the taxes due on the combined report); the non-nexus members’ income/expenses and apportionment factors are used solely to compute the state income tax liability of the nexus members

– NOTE: The portion of this presentation related to the pros and cons of combined reporting is based on an article by Ann Holley and Marie Evans entitled “The Pro’s and Con’s of Combined Reporting: A Compendium of Arguments For and Against Combined Reporting” to be published in an upcoming edition of The Tax Lawyer: The State and Local Tax Edition, an ABA Publication.

32

Combined Reporting: Pros And Cons (Cont.)

• Consolidated reporting is different– Each member of the consolidated report computes its own income

and apportionment; only the post-apportionment income/loss is combined

– Mandatory consolidation requires that each member have nexus; elective consolidation may include non-nexus members that elect to join the group

– Members are typically jointly and severally liable for the tax– A state may use the term “consolidation” when it really means

“combination,” and vice versa• Factors sparking debate

– Since 2004, at least seven states have passed combined reportinglegislation (none had been passed in the prior 20 years)

– Growth of tax minimization strategies combined with state budgetary shortfalls

33


• Simplistically, whether you are a taxpayer or a state, one may take the view for or against combined reporting based on whether the alternative provides the better outcome– Taxpayer: Does it pay more or less tax?– State: Does it collect more or less income tax revenue?

• While financial effects are central to the debate, other factors are often discussed– Minimizing opportunities for tax planning– Accurately measuring in-state activity– Compliance and administrative effects– Impact on economic development

34


• Minimizing opportunities for tax planning– Those in favor of combined reporting typically identify tax

planning as an argument in favor of combined reporting– The most common example of a tax planning technique that is

typically nullified by combined reporting is the PIC holding intangible assets

• In a combined reporting state, the income of the PIC and the expense of the operating company would be combined, thus negating the effect of the planning

– Revenue shortfalls have increased awareness in these types of tax planning approaches

– Opponents argue that combined reporting is not the proper way toaddress revenue shortfalls

• No clear evidence that combined reporting increases state revenue• Estimates are not reliable• Other ways exist to counter tax planning (i.e., expense disallowance

statutes)

35


• Accurate measurement of in-state activity– Proponents of combined reporting argue:

• Better measures the amount of income of a unitary business attributable to a state, when the unitary business in conducted by more than one legal entity

• Companies are free to structure business in a way that makes the most sense from a legal and business perspective; combined reporting is tax-neutral

– Opponents respond:• Separate reporting with arm’s length pricing is an accurate

measurement (may even be better)• Combined reporting creates its own distortions• Legal entity structure can still affect tax computation in Joyce

states and based on the ability to share NOLs and credits

36


• Effects on compliance and administration– Opponents point to added complexity

• Transition issues– State: Training, promulgating new rules and regulations,

and developing systems from processing new returns– Taxpayer: Costs to learn and understand rules, and need to

create financial data gathering systems• Increase in costs to both sides due to greater number of entities

under audit and issues to be examined• Increased compliance costs to taxpayers for preparing returns• Difficulty in determining “unitary group”

– Proponents basic retort is that combined reporting is nothing new, and most multi-state taxpayers are probably preparing at least one combined report

• Also lessens need to states to audit certain issues, such as transfer pricing

37


• Impact on economic development– This is really an empirical debate– Opponents rely on evidence that combined reporting increases a

taxpayer’s effective state tax rate, triggering redistributions of capital and jobs among states

• Also point out that worldwide combined reporting affects relations with foreign governments and negatively affects international economic policy

– Proponents point to their own evidence that state taxes play an insignificant role in the business decisions made by taxpayers

38

Establishing The Right To Apportion• In order for a taxpayer to be able to apportion its business income, it

must establish with the taxing state that it has the right to apportion such income

• This right is particularly important in the context of the trend toward single-sales-factor apportionment

• A state with single-sales-factor apportionment provides an incentive to a business to situate all of its assets and employees in that state, since it will have no effect on tax liability with that state

• But, if the right to apportion is not established, that business will pay 100% of its income to the single-sales-factor state– Example: Company A situates all of its assets and employees in

State A, a single-sales-factor state. It has customers and makes sales of tangible personal property to States B, C, D and E via interstate commerce (e.g., UPS delivery). Company A has to report 100% of its income to State A

39

Establishing The Right To Apportion (Cont.)

• So, what must requirement(s) must the taxpayer meet to establish the right to apportion?

• Under the MTC, a taxpayer has the right to apportion if it is “taxable in another state” (MTC Reg. IV.3.(a))

• A taxpayer is “taxable in another state” if it meets either of the following two requirements (MTC Reg. IV.3.(a).(1)):– By reason of its business activity in another state, the taxpayer is

subject to one or more of the following:• Net income tax• Franchise tax measured by net income• Franchise tax for the privilege of doing business• Corporate stock tax

– By reason of such business activity, another state has jurisdiction to subject the taxpayer to a net income tax (regardless of whether it does in fact)

40


• “Subject to tax” (MTC Reg. IV.3.(b))

– Requirements• Taxpayer carries on business activity in the state; and• State imposes a tax on such activity

– Voluntary minimum tax payments do not work if the taxpayer:• Does not actually engage in business in the state, or• Does actually engage in business, but the minimum tax bears

no relationship to business activity– Other taxes may satisfy if they are viewed as a substitute for an

income tax (i.e., they are revenue raising taxes as opposed to regulatory measures)

41


• “Jurisdiction to tax” (MTC Reg. IV.3.(c))

– When the taxpayer’s business activity is sufficient to give the state authority to impose a net income tax on such taxpayer under the Constitution and statutes of the U.S.

– If protected by P.L. 86-272, then no jurisdiction– “State” can mean a foreign country, assuming U.S. jurisdictional

standards applied; treaty provisions are ignored– Big question: What is the jurisdictional standard for state net

income taxes under the U.S. Constitution?• Physical presence – Quill• Economic presence – MBNA (West Virginia) – see changes to

W.V. apportionment statute effective 6/6/08 (W. Va. Code §11-24-7(c))

• Use of intangibles – Lanco (New Jersey)

42


• When determining taxability in another state for purposes of establishing the right to apportion in the taxing state, which state’s jurisdictional standards apply?– MTC and most states do not clearly specify, but case law makes

clear that analysis is based on taxing state’s laws– Two choices

• The taxing state (most states apply this rule) – see Tenn. Code Ann. § 67-4-2010(a) (“A taxpayer is considered taxable in another state only if the taxpayer is conducting activities in that state that, if conducted in Tennessee, would constitute doing business in Tennessee and would subject the taxpayer to either Tennessee's franchise tax or excise tax.”)

• The “other” state – see Cal. FTB Notice (Aug. 16, 1988) (“The law of the destination state, including judicial and administrative interpretation of P.L. 86-272, will be applied in determining whether or not the taxpayer is subject to tax in that state.”)

43


• Some states do not adopt the MTC– New Jersey had its own rule regarding the right to apportion; only

taxpayers that maintained a “regular place of business” outside the state had the right to apportion (see N.J. Stat. Ann. § 54:10A-6)

• That provision was repealed effective for privilege periods beginning on or after July 1, 2010 (see Assembly Bill A2722, signed Dec. 19, 2008)

– Georgia is not an MTC state and only permits apportionment if taxpayer has business income derived in part from “property owned or business done outside this state” (see O.C.G.A. § 48-7-31(b)(2))

• Habersham Mills, Inc. (1975) – “Whether a corporation is subject to the taxing jurisdiction of other states, as we read our statutes on this subject, is immaterial.”

44


• Takeaways– The trend toward single-sales-factor apportionment presents

opportunities for taxpayers to minimize effective state tax rate(create “nowhere income”)

– Accomplishing that objective requires that taxpayers and their advisors understand that the right to apportion is crucial

– What the right to apportion means often depends on state interpretations of what constitutes nexus under the U.S. Constitution

– As state interpretations continue to evolve, consider the impact this may have on whether a taxpayer in that state has the right to apportion

45

Resulting Planning Issues, Part II

46

Contribution of manufacturing operations and

personnel

Sales Company

Contribution of sales operations and personnel

Parent

ManufacturingCompany

Tax-Efficient Supply Chain Management: Contract

Manufacturing

47

Sale of product

Sale of product with “right to use”

intangibles

Parent

ManufacturingCompany

Tax-Efficient Supply Chain Management: Contract Manufacturing (Cont.)

Third-party customers

Purchase of materials

Vendors

Sales Company

Sale of product

48

Overview– A newly created subsidiary, Manufacturing Company, sells products to

Parent at an arm’s-length cost plus mark-up– Parent sells products to a newly created subsidiary, Sales Company, on an

arm’s-length basis– Products sold with embedded “right to use” intangibles– Sales Company sells the products to third parties

Benefit– Manufacturing Company and Sales Company have high apportionment

factors but will have reduced income, based on the profit earned by parent– Parent retains the majority of the profits as a result of “owning” the “right

to use” intangibles related to the products sold – Parent has a low effective state tax rate

Tax-Efficient Supply Chain Management: Contract Manufacturing

(Cont.)

49

Parent

Warehouse/Distribution Co

Contribution of warehouse and

distribution operations and

employees

Tax-Efficient Supply Chain Management: Enhanced

Warehouse/Distribution Company

Store Co

Contribution of Store operations and employees

50

Parent

Warehouse/Distribution Co

Sale of products

Tax-Efficient Supply Chain Management: Enhanced

Warehouse/Distribution Company (Cont.)

Store Co

Sale of products with “right to

use” intangibles

VendorsCustomers

Sale of product

51

Overview:• Warehouse/Distribution Co will purchase products from various vendors and

sell the product to parent

• Simultaneous to the sale to parent, the Store Co purchases the inventory from parent at a cost-plus mark-up and resells it to the ultimate customer

• Since parent retains the right to use certain valuable business assets and functions, it makes the sale to the Store Co at a substantial mark-up over its costs

• Parent earns a majority of the group’s taxable income; however, it will have significantly reduced state income tax liability, since it is located in tax favorable jurisdictions

• Warehouse/Distribution Co and the Store Co will have high apportionment factors but will have engineered minimal income

Tax-Efficient Supply Chain Management: Enhanced Warehouse/Distribution

Company (Cont.)

52

Sale of goods with “right to

use” intangibles

Parent

Tax-Efficient Supply Chain Management: Purchasing/Logistics

Company

Vendors

Customers

Purchasing Co

Purchase of materials

Sale to customers

53

Overview:– Parent isolates its purchasing and logistics functions and related assets in a

separate legal entity, Purchase Co

– Purchase Co will purchase goods from various vendors and sell the product to parent

– Since Purchase Co has risk of loss and retains the right to use certain of the company’s intangible assets (i.e., those related to the purchasing function), it makes the sale to parent at a substantial mark-up over its costs

– Purchase Co will earn a majority of the group’s taxable income; however, it will have significantly reduced state income tax liability since it is located in tax favorable jurisdictions (i.e., unitary)

– Parent will have high apportionment factors but minimal income

Tax-Efficient Supply Chain Management: Purchasing/Logistics

Company (Cont.)

54

Parent

Vendors

Customers

Advertising/Marketing Co

Purchase of products

Sale to customers

Sale of products with “right to

use” intangibles

Tax-Efficient Supply Chain Management: Advertising/Marketing

Company

55

Tax-Efficient Supply Chain Management: Advertising/Marketing

Company (Cont.)•Parent purchases the inventory from Advertising/Marketing Co at a cost-plus mark-up and resells it to the ultimate customer

•Since Advertising/Marketing Co retains the right to use certain valuable business assets and functions and provides value-added activities (marketing) to the assets, it makes the sale to the parent at a substantial mark-up over its costs

•Advertising/Marketing Co will earn a majority of the group’s taxable income; however, it has significantly reduced state income tax liability since it is located in tax favorable jurisdictions

56

Alternative Apportionment

• UDITPA Sec. 18 provides:“If the allocation and apportionment provisions of this Act do not

fairly represent the extent of the taxpayer’s business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer’s business activity, if reasonable: (a) separate accounting; (b) the exclusion of any one or more of the factors; (c) the inclusion of one or more additional factors which will fairly represent the taxpayer’s business activity in the state; or (d) the employmentof any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income.”

57

Alternative Apportionment (Cont.)

• Most states have enacted equitable adjustment provisions

• Typically only applied in unique and non-recurring instances where use of the standard apportionment formula produces an inequitable result

• Taxpayer typically petitions for relief and often must prove that the formula is distortive

58

Alternative Apportionment (Cont.)• In Letter of Decision, Appeal of Argonaut Group, Inc. (Jan. 23,

2009), the California State Board of Equalization concluded that the taxpayer had demonstrated that application of the standard apportionment formula to its non-insurance business led to a grossly distorted result and that the alternative apportionment provisions could be applied

• The corporation owned several insurance company subsidiaries. For the previous six years in question, the corporation generated over $165 million in federal taxable losses and still paid over $6 million in gross premium taxes. Because of the distortion caused by the standardapportionment formula, the company would have had to pay an additional $3.5 million in California corporate taxes because 100% of the income of the California non-insurance company was apportioned to California. This was true even though all the insurance activities took place outside of California. The SBE agreed that the corporation had demonstrated distortion

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