California Again Extends Water’s-Edge Election For Groups With New Foreign Affiliate Taxpayer-Members

October 2017

Summary

In FTB Notice 2017-04 (Oct. 16, 2017), the California Franchise Tax Board (FTB) has extended the water’s-edge election relief issued in 2016 for groups that have a unitary foreign affiliate become a California taxpayer-member as  a result of California’s economic/factor-presence nexus statute.  Absent such relief, a water’s-edge election could be terminated.
 

Details

As we elaborated in our September 2016 BDO SALT Alert, all taxpayer-members must consent to a California water’s-edge election.  Failure to adhere to California’s consent procedures renders the election terminated.  For taxable years beginning in 2011, California enacted an economic/factor-presence nexus statute that included a sales threshold of $500,000 (indexed for inflation).  Cal. Rev. & Tax. Code § 23101(b).  For the 2016 taxable year, the sales threshold is now $547,711.  As a result, a unitary foreign affiliate with California sourced sales in excess of the threshold (for example, from sales of tangible personal property or services, licenses of software or intangibles, or interest income on intercompany debt) that was outside a California water’s-edge group could become a California taxpayer-member by virtue of meeting the sales threshold.  However, the unitary foreign affiliate had not consented to the California’s water’s-edge election, and under Cal. Rev. & Tax. Code § 25113 the election could be terminated.
 
On September 9, 2016, the FTB issued Notice 2016-02 that, if certain conditions were satisfied, the California water’s-edge election would not be terminated if California’s economic/factor-presence nexus statute resulted in a unitary foreign affiliate becoming a non-consenting California taxpayer-member of the water’s-edge group.  However, Notice 2016-02 only provided relief for taxable years ending on or before December 31, 2016.  Notice 2016-02 provided no relief for the 2017 taxable year.
 
With the issuance of Notice 2017-04, if the conditions originally set forth in Notice 2016-02 are satisfied, then water’s-edge election relief will be provided for unitary foreign affiliates that become California taxpayer-members solely as a result of California’s economic/factor presence statute for taxable years beginning on or before December 31, 2017.    
 

BDO Insights

  • The issuance of Notice 2017-04 is an important continuing development for California water’s-edge groups that have had a unitary foreign affiliate become a California taxpayer in 2017 or prior years as a result of California’s economic/factor presence nexus statute, including the interplay with the FTB’s market-based sourcing regulations.
  • Taxpayers considering the effect of Notice 2017-04 should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740s.
 

For more information, please contact one of the following practice leaders: 
 
West:     Southeast:
Rocky Cummings
Tax Partner
 
    Scott Smith
Tax Managing Director
 
Paul McGovern
Tax Managing Director
 
    Tony Manners
Tax Managing Director
 

   
Northeast:     Southwest:
Janet Bernier
Tax Principal
 
    Tom Smith
Tax Partner
 
Matthew Dyment
Tax Principal
 
    Gene Heatly
Tax Managing Director
 

   
Central:     Atlantic:
Nick Boegel
Tax Managing Director
 
    Jonathan Liss
Tax Managing Director
 
Joe Carr
Tax Partner
 
    Jeremy Migliara
Tax Managing Director
 
Mariano Sori
Tax Partner
 
    Angela Acosta
Tax Managing Director
 
Richard Spengler
Tax Managing Director