How does California apportion a charter and aircraft management company, and how far does the air transportation regulation reach?

The operator and its receipts

A hypothetical operator shows the problem. It manages 25 business aircraft for their owners from bases in several states; ten are based in California, where the operator also runs a maintenance shop. It holds an FAA certificate to fly charter for hire and, with an owner's consent, sells charter trips on the owner's aircraft to the public. When a trip needs an aircraft it does not manage, it arranges one with another operator. Seven of the managed aircraft are light jets at or under 12,500 pounds maximum takeoff weight; the other 18 are midsize and large-cabin jets above that line.

In a year its receipts are $100 million: $50 million of charter on managed aircraft, $10 million of brokered charters, $22 million of management fees and crew charges billed to owners, and $18 million of maintenance. Each stream is a different kind of receipt, and only one is a candidate for the air transportation formula.

What Regulation 25137-7 provides

The regulation opens with its scope: "The unitary business of air transportation includes the operations of scheduled airlines, supplemental airlines and air taxis. All members of a unitary group that are engaged in a unitary business of providing air transportation must apportion business income from air transportation as provided in this regulation" (Cal. Code Regs., tit. 18, section 25137-7(a)(1)). Where it applies, it is mandatory. The factors are otherwise computed under the general statutes and regulations "except as provided in this regulation" (section 25137-7(b)), and for taxable years beginning on or after January 1, 2013, "only the receipts factor references in this regulation are applicable" unless the taxpayer is one of the businesses that still use three factors, now agricultural and extractive businesses (section 25137-7(f); Rev. and Tax. Code sections 25128(b), (c)(2), 25128.7).

The receipts rule assigns revenue "from hauling passengers, freight, mail and excess baggage" by "the ratio which the air time of the taxpayer's aircraft spent in this state bears to the total air time (block to block) of such aircraft everywhere, by model of aircraft," weighted at 80 percent, and "the ratio of arrivals and departures in this state to total arrivals and departures everywhere by model of aircraft," weighted at 20 percent, excluding flight training (section 25137-7(b)(3)(A)(i), (ii)). "Air time" runs from when the aircraft "first moves under its own power from the boarding ramp for the purposes of flight" until it "comes to a rest after landing and blocks are placed on the aircraft wheels" (section 25137-7(a)(9)), so taxi time counts. A model is a manufacturer's model group (section 25137-7(e)). Annual statistics are used if available; representative periods require the Franchise Tax Board's permission (section 25137-7(c)(2), (3)).

The regulation was last amended with an operative date of April 19, 2010, and subsection (f) was added in 2013 as a change without regulatory effect. The FTB's Multistate Audit Technique Manual restates the formula (MATM 7735) and says nothing about charter operators, management companies, or receipts other than hauling revenue.

Does the regulation reach an on-demand operator of business jets?

Four parts of the text bear on the hypothetical operator, and they point in different directions.

Air taxis. "Air taxis" means "aircraft used by an air carrier which does not utilize aircraft whose maximum certificated takeoff weight as determined by the Federal Aviation Administration, is greater than 12,500 pounds in air transportation and which does not hold a certificate of public convenience and necessity or other economic authority" (section 25137-7(a)(3)). The weight test applies to the carrier, not to each aircraft. A carrier that uses one aircraft above 12,500 pounds is outside the definition, and its light jets are not air taxis either. The hypothetical operator has none.

Supplemental airlines. The regulation does not define the term. Federal rules use "supplemental operation" for common carriage in airplanes with more than 30 passenger seats or more than 7,500 pounds of payload, or certain airplanes listed for domestic or flag operations, and "on-demand operation" for carriage in which "the departure time, departure location, and arrival location are specifically negotiated with the customer," in airplanes with "a passenger-seat configuration of 30 seats or fewer, excluding each crewmember seat, and a payload capacity of 7,500 pounds or less" (14 C.F.R. section 110.2). Business jet charter within those limits is on-demand, not supplemental. Federal economic rules call a carrier that uses no large aircraft (more than 60 seats or 18,000 pounds of payload), holds no certificate of public convenience and necessity, and registers with the Department of Transportation an "air taxi operator" (14 C.F.R. sections 298.2, 298.3(a)). Federal law treats such an operator as an air taxi; California's definition, written in the vocabulary of the Civil Aeronautics Board it still names, stops at 12,500 pounds.

"Includes" and certificated aircraft. "Includes" is usually read as illustrative. The regulation's "certificated aircraft" are aircraft operated by an air carrier engaged in air transportation, defined by cross-reference to 49 USC 1301, "while there is in force a certificate or permit issued by the Civil Aeronautics Board of the United States, the Department of Transportation or its successor," or the California Public Utilities Commission (section 25137-7(a)(2)). That cross-reference is to the former codification; current federal law defines an "air carrier" as "a citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation" (49 U.S.C. section 40102(a)(2)). The FAA "is an administration in the Department of Transportation" (49 U.S.C. section 106(a)), and a direct air carrier "will be issued an Air Carrier Certificate" (14 C.F.R. section 119.5(a)). On that reading the operator flies certificated aircraft and is in the unitary business of air transportation whether or not it fits a named category. The contrary reading is that the named categories, each with its own representative period rules in subsection (d), would do no work if every certificated carrier were covered, and that a definition drawn to keep heavier aircraft out of "air taxis" should not be undone through the word "includes."

The taxpayer's aircraft. The formula measures "the air time of the taxpayer's aircraft." Managed aircraft belong to their owners, and the text does not say whether aircraft an operator flies under its own certificate, but does not own or lease, qualify.

The FTB has published no position on any of these questions. A return that applies the regulation to a heavy-jet charter operator, and a return that does not, can each point to text.

What the formula reaches, and a worked computation

Even inside the regulation, the formula reaches one stream: here, the $50 million of charter on managed aircraft. An owner's own flights produce management fees and crew charges, not the operator's fares. Brokered charter is flown on another carrier's aircraft and is not "the taxpayer's aircraft" on any reading.

The computation runs model by model. One large-cabin model earns $30 million; 20 percent of its block-to-block air time and 30 percent of its arrivals and departures are in California, so its share is 0.8 times 20 percent plus 0.2 times 30 percent, or 22 percent: $6.6 million. One midsize model earns $20 million with figures of 35 and 45 percent, a share of 37 percent: $7.4 million. California charter receipts are $14.0 million, or 28 percent. Time over other states and foreign airspace stays in the denominator. California's throwback rule reaches only tangible personal property shipped from California (Rev. and Tax. Code section 25135(a)(2)), so minutes over states where the operator is not taxable are not reassigned to California.

The common error is to apply the 28 percent to every stream. The regulation forecloses that: everything other than hauling revenue follows the general statutes and regulations (section 25137-7(b)).

The general rules for the other streams

Maintenance. For taxable years beginning before January 1, 2026, a service to a business customer is assigned where the contract or books and records place the benefit, then by reasonable approximation, then by where the order was placed, then by billing address; a service to an individual is presumed received at the billing address (Cal. Code Regs., tit. 18, section 25136-2(c)(1), (c)(2), prior text). For taxable years beginning on or after January 1, 2026, the amended regulation presumes the benefit received in California to the extent the service predominantly relates to "[t]angible personal property and the tangible personal property is located in this state when the service is received," a presumption either side may overcome by a preponderance of the evidence (section 25136-2(c)(1)(A), as amended effective October 1, 2025). Its repair example places "the benefit of the service" at "the delivery location of the tangible personal property." An aircraft maintained in the California shop and returned to its owner there points to California even when the owner then flies it home; whether a ferry flight out of state changes the delivery location is not addressed. For 2026, the $18 million is largely California.

Management fees and crew charges. These are services to the owner. Under the prior text the management agreement and the operator's records, which ordinarily name the aircraft's base, are the starting point. Under the amended text the property presumption applies "to the extent" the aircraft is in California when the service is received, and the regulation defines "to the extent" for a customer receiving the benefit in more than one state. The measure is where the aircraft is during the service period, on the ground as well as in the air, not the charter flight percentage. If the ten California-based aircraft account for $9 million of fees and spend nearly all of the service period in California, nearly all of that $9 million is presumptively California for 2026. Hangar rent is a receipt from real property, assigned where the hangar is (Rev. and Tax. Code section 25136(a)(3)).

Brokered charters. The operator's service is arranging a trip. The receipt is in California "to the extent the purchaser of the service received the benefit of the services in this state" (Rev. and Tax. Code section 25136(a)(1)). The amended regulation applies a presumption even to a service that only arranges carriage (its logistics example, for goods), so the presumption discussed below for passengers may reach a brokered trip; where no presumption settles the location, the cascade applies: contracts and books and records, then other sources of information, then reasonable approximation, then billing address (section 25136-2(c)(1)(B) to (E), as amended).

Charter, if the regulation does not apply. Under the prior text, charter sold to individuals is presumed received at the billing address, and charter sold to businesses follows the contract and books, then reasonable approximation. Under the amended text, the presumption for services relating to "[i]ndividuals who are physically present in this state at the time the service is delivered," read with "to the extent," supports measuring a flight by the share of the trip spent in California, which is what the air-time ratio measures; origin and destination readings are also available, and the regulation has no aviation example. Its logistics example assigns a freight service to the delivery location, and the FTB rejected a comment urging a mileage approach (Final Statement of Reasons, Regulation 25136-2, comment 8), but that example concerns goods, not passengers.

For a 2026 year, the stream-by-stream result is about $41 million of California receipts before brokered charters ($14.0 million of charter, about $18 million of maintenance, $9 million of management fees), against $28 million if the charter percentage were applied to all $100 million. The air-time idea is sound for charter; applied to maintenance and management, it understates California, and that is the part of such a method most exposed on examination.

When neither fits: section 25137 and the label on the method

Where the standard provisions "do not fairly represent the extent of the taxpayer's business activity in this state," section 25137 permits separate accounting, excluding or adding factors, or "any other method to effectuate an equitable allocation and apportionment" (Rev. and Tax. Code section 25137). The party invoking it must show by clear and convincing evidence that the standard method does not fairly represent the activity and that its alternative is reasonable (Microsoft Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 750, 765). The library's article on section 25137 petitions covers the procedure.

The label on the charter method matters. The special industry regulations implement section 25137 (the reference note to Regulation 25137-7 cites sections 25101.3 and 25137), and the prior text of Regulation 25136-2 incorporates the sales factor provisions of Regulations 25137 through 25137-14 (section 25136-2(h)(3), prior text). For an operator inside 25137-7, its formula is the standard rule. For an operator outside it, a return citing 25137-7 risks being read as a section 25137 method used without approval, and FTB Notice 2004-5 (August 6, 2004) treats such a position on an original return as erroneous for purposes of the accuracy-related penalty under Revenue and Taxation Code section 19164, unless an audit manual, a published decision, an approved petition or a closing agreement covers the facts. The same computation, presented as a reasonable approximation under Regulation 25136-2, stays within the standard rules, but it must then be defended as an approximation of where customers receive the benefit.

Practice notes

The analysis starts with the fleet list and the revenue map. One aircraft over 12,500 pounds maximum certificated takeoff weight takes the carrier outside the air taxi definition. The revenue map separates charter on managed aircraft, owner flights, brokered trips, management and crew charges, maintenance and hangar rent, because each follows its own rule. For charter, the operator decides whether it treats Regulation 25137-7 as applying or uses its formula as a reasonable approximation, records why, and labels the return position to match; the data are the same either way: block-to-block time and arrivals and departures by model group, training excluded, annual figures. The other streams are sourced under the version of Regulation 25136-2 for the year, the prior text through 2025 and the amended text for 2026 estimates and returns, and never by the charter percentage. The flight data that lower the California figure also place receipts, aircraft and crews in other states, which bears on filings there. Where nothing fits, a section 25137 petition is the sound course, not an unapproved formula on the original return. G&G State Tax Group provides apportionment studies and sourcing method design for aviation and other transportation businesses, and representation when those methods are examined, alongside its state and local tax practice.