Governor proposes single sales factor apportionment for financial institutions

Keyed two-thirds vote by Counsel: some firms would pay more and some less

Mar 03, 2025

“Apportionment” is how multistate and multinational businesses allocate corporate income to specific states for state tax purposes. The Governor’s January 10 budget plan proposes to switch specified financial institutions to the “single sales factor” method of corporate tax apportionment.

This proposal (on the administration’s trailer bill website here) is keyed a two-thirds vote by Legislative Counsel, as it would result in some taxpayers paying a higher tax. (This means that it would need to be passed in bills receiving 54 aye votes in the Assembly and 27 aye votes in the Senate.) As the Legislative Analyst’s Office (LAO) noted in its analysis, “some firms would pay and more and some pay less, but [a] net revenue increase [is] expected” from the proposal.

LAO notes administration estimates that the proposal would increase annual state General Fund revenues: by a net $330 million in 2025-26, declining slightly to $270 million by 2028-29. Net increases in General Fund revenues also generally increase annual school funding requirements under Proposition 98.

“By increasing the weight of the sales factor” in apportionment, the Department of Finance (DOF) has noted, “single sales factor apportionment is generally more beneficial than three-factor apportionment to firms with a larger physical presence in the state as they can exclude their property and payroll factors from the calculation.” The proposal, DOF states, therefore rewards businesses “for locating in the state.”

Voters approved Proposition 39 in 2012 that moved the majority of multistate businesses to single sales factor tax apportionment for California.

The LAO’s analysis is here: https://lao.ca.gov/LAOEconTax/Article/Detail/821.

The Department of Finance describes the proposal on pages 131 and 132 of the Governor’s Budget Summary here: https://ebudget.ca.gov/2025-26/pdf/BudgetSummary/RevenueEstimates.pdf.

The proposal recently was discussed in Assembly Budget Subcommittee No. 5 (agenda here and video here with this issue’s discussion starting at the 46 minute point).