Which California businesses still apportion with three factors instead of single sales?

The baseline since 2013

The general formula has moved more than once, and each move left residue. For taxable years beginning before January 1, 2013, RTC section 25128(a) apportioned business income by property plus payroll plus twice sales, over four. For taxable years beginning in 2011 and 2012, RTC section 25128.5 let an apportioning trade or business make an irrevocable annual election, on an original timely filed return, to use the sales factor alone; a business over the 50 percent qualified activity line was outside the election and stayed on its formula (FTB Multistate Audit Technique Manual, MATM 7006). Proposition 39, approved by the voters on November 6, 2012, ended the election and added section 25128.7, which requires all business income of an apportioning trade or business, other than one described in section 25128(b), to be apportioned by the single sales factor for taxable years beginning on or after January 1, 2013 (FTB 2025 Schedule R instructions; Cal. Code Regs., tit. 18, section 25128(a)).

Subdivision (b) is the carve-out, and it survived every change to the general formula without itself changing until 2025. If an apportioning trade or business derives more than 50 percent of its gross business receipts from one or more qualified business activities, all of its business income is apportioned by property plus payroll plus sales, over three. Neither formula is an election. A savings and loan association in 2014 could not choose single sales factor any more than a software company could choose three factors, and the same is true of a farming group today. The Franchise Tax Board's 2025 Schedule R instructions state both rules and add the point that applies regardless of entity form: unitary corporations, partnerships, and LLCs apply the more than 50 percent test to the business receipts of the entire group.

The carve-out and its measuring unit

Two definitions set the boundary of subdivision (b).

The first is the measuring unit. An apportioning trade or business is a distinct trade or business that must apportion its business income because it is derived from sources within and outside California (Schedule R instructions). The unit is the unitary business, not the legal entity, and a member of a combined report does not test its own receipts. Regulation 25128(c) applies the more than 50 percent test to the gross business receipts of the group's entire apportioning trade or business, and the result binds every member, including one that would qualify on its own. The regulation's example is a three-corporation group in which one member refines oil and earns most of its receipts from refining, while the group's qualified receipts come to less than a fifth of the total; the whole group uses the general formula.

The second is gross business receipts: all gross receipts after eliminating receipts from intercompany transactions between members of a combined group required to be included in a combined report under section 25101, or as limited by the water's edge rules of section 25110, whether or not the receipts are excluded from the sales factor by operation of section 25137 (Schedule R instructions; Reg. 25128(b)(3)). Two features matter. Intercompany receipts are out of both numerator and denominator, which makes the test an outside-sales test for a vertically integrated group. And receipts excluded from the sales factor under a section 25137 variance stay in the 50 percent test, so an alternative apportionment adjustment to the sales factor does not change which formula the group is in.

Producing the commodity, not selling to producers or transforming the product

The qualified activities are defined in section 25128(d). Agricultural business activity means activities relating to any stock, dairy, poultry, fruit, furbearing animal, or truck farm, plantation, ranch, nursery, or range, and also includes activities relating to cultivating the soil or raising or harvesting any agricultural or horticultural commodity, including the handling, drying, packing, grading, or storing on a farm of a commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated (section 25128(d)(2), as quoted in 2026-OTA-456). Extractive business activity means activities relating to the production, refining, or processing of oil, natural gas, or mineral ore (Schedule R instructions).

Regulation 25128(d)(2) supplies the governing rule for groups: only sales to parties outside the apportioning trade or business are considered in determining the numerator and the denominator. Its examples follow. A group whose parent produces crude oil, one subsidiary refining it into gasoline, another making petrochemicals from the refinery's naphtha, and a third making plastics, is measured on what leaves the group: gasoline receipts are extractive receipts, plastics receipts are not. A group that grows vegetables to make soup is measured on soup, and making and selling soup is not agricultural. A winery that grows all its own grapes sells only wine, and making and selling wine is not the direct production of an agricultural commodity. The same grapes sold to a unitary affiliate left out of the combined report by a water's edge election are agricultural receipts, because the sales are made to an entity outside the apportioning trade or business.

The agricultural regulation, Cal. Code Regs., tit. 18, section 25128-2, adds that the term in general applies only to taxpayers engaged in the business of farming, and that production means planting, growing, breeding, raising, or fattening one's own agricultural commodity, including processing normally incident to growing, such as picking, washing, inspecting, and packaging produce for sale, but not processing beyond it (Reg. 25128-2(b)(1), (b)(3), as quoted in Chief Counsel Ruling 2012-05). Receipts from products the apportioning trade or business did not produce are not agricultural receipts, and a business selling both its own and purchased product traces the receipts (Reg. 25128-2(e)).

Two Chief Counsel Rulings apply those lines. In Chief Counsel Ruling 2012-04 (September 11, 2012), a grower farming leased land, with other farmers contracted to grow on its behalf, ran a California facility that applied a mechanical process to the whole commodity to transform it into different finished products. Receipts from those products were not agricultural; the ruling likened the processing to the regulation's examples of milling grain into flour and shelling nuts. In Chief Counsel Ruling 2012-05 (September 25, 2012), a company supplied patented seedlings to independent growers, retained title to the plants and crop to protect its patents, and sold the crop for what the ruling described as essentially a commission. The growers chose their methods, paid the vast majority of the growing costs, and bore the risk of loss. The company did not significantly participate in growing and did not bear the risk of loss, retained title did not make it a farmer, and its receipts from selling and distribution services were not agricultural receipts.

The Office of Tax Appeals has now addressed the supplier side. In 2026-OTA-456 (issued July 14, 2026, nonprecedential), an Arizona-based business that developed and manufactured pesticides, herbicides, fungicides, and biological products, largely outside California, and sold them to California growers had used three factors. The panel held that the "activities relating to" language of section 25128(d)(2) refers to the taxpayer's own activities, not those of its customers, and read the legislative history as protecting businesses with no choice about where they produce; treating a supplier to farms as agricultural would, in the panel's view, equally qualify makers of farm equipment. Because the taxpayer failed under the statute, the panel did not decide whether the regulation's business-of-farming limit is valid. The taxpayer had relied on a superior court statement of decision of April 28, 2026, Smithfield Packaged Meats Corp. v. California Franchise Tax Board (Case No. 21STCV39637), which, as the OTA opinion describes it, reads "relating to" as reaching a broad range of activities. The panel noted that the decision was not final and might be appealed, and did not rely on it because it is neither final nor precedential. A trial court ruling binds no other taxpayer, and the regulation remains in force.

Extractive receipts and the refiner

The extractive definition is broader in one respect than the agricultural one, because the statute names refining and processing alongside production. On the statutory text a refiner that buys crude from third parties is conducting an extractive business activity although it extracts nothing, and the regulation's oil example treats gasoline receipts as extractive without asking whose crude it was. The line falls instead at the product: refined oil and gas products are in, products manufactured from them are out. The detailed rules, what counts as production, refining, and processing, how resales of products refined by others are treated, and how a business selling both its own and purchased product traces its receipts, are in a separate regulation, Cal. Code Regs., tit. 18, section 25128-1, to which section 25128's oil example points. Products at the boundary between refined output and manufactured goods are where classification disputes can be expected, and the legislative history the OTA relied on, which describes agricultural and extractive businesses as tied to California by their nature, is available to the Franchise Tax Board in an extractive dispute as well.

The 2025 change, the open years, and the amended regulation

Senate Bill 132, signed June 27, 2025, rewrote section 25128(c). For taxable years beginning on or after January 1, 2025, savings and loan activity and banking or financial business activity are no longer qualified business activities (Schedule R instructions, What's New; MATM 7005). A bank, a savings bank, or a unitary group whose receipts come predominantly from financial activity now apportions on the sales factor alone, using the receipts rules written for banks and financial corporations in Cal. Code Regs., tit. 18, section 25137-4.2 (FTB Bank and Financial Handbook, section 0900). The change affects the formula and nothing else: a financial corporation still pays the higher financial corporation rate, a question the library's companion article on captive finance subsidiaries takes up.

The Franchise Tax Board conformed its regulation in 2026. Regulation 25128(b)(1) now provides that for taxable years beginning before January 1, 2025 the qualified list includes all four activities and that for taxable years beginning on or after that date it means agricultural or extractive activity only. The amendment was adopted as a change without regulatory effect, approved and filed with the Secretary of State on September 16, 2026 (OAL Matter No. 2026-0804-04).

The earlier years are not closed. For every open taxable year beginning before 2025, section 25128(b) with the four-item list is the law. An audit of a 2023 year still asks whether gross business receipts from banking or financial activity exceeded 50 percent and still puts property and payroll into the formula if they did. A refund claim for an open pre-2025 year that recomputes the group on the single sales factor because the 2025 return did so is wrong on the law.

Mixed groups after the change

The library's article on combined groups with both financial and general corporations covers the mixed-group mechanics. The narrower point here is which mixed groups can still end up on three factors.

Before 2025, two routes led a group with financial members to three factors: receipts predominantly financial, or receipts predominantly agricultural or extractive. The first is closed for 2025 and later years. The second remains, and it is the one case in which Regulation 25137-10 still runs in its original form. That regulation governs a combined group whose predominant activity, measured as more than 50 percent of gross income, is not financial, and an occasional year of fluctuation does not change the classification. For taxable years beginning on or after January 1, 2025 only its receipts rules apply, unless the agricultural or extractive exception does (Handbook section 0900). For an agricultural or extractive group with a captive finance arm, a grower with an affiliated lender financing its contract growers or an energy producer with a financing subsidiary, the regulation's property factor rule applies as well, including inclusion of the financial member's intangible property at 20 percent of federal tax basis (Reg. 25137-10(d)(1)(C), described in Handbook section 0900), along with its rules assigning receivables.

The two thresholds differ. Regulation 25137-10 measures gross income with an occasional-year cushion; section 25128(b) measures gross business receipts every year with none. A group predominantly agricultural by receipts whose captive lender produces more than half its gross income could satisfy section 25128(b) and fall outside Regulation 25137-10 at once; the lender's factors would then follow Regulation 25137-4.2, which counts its loans in the property factor at outstanding principal rather than 20 percent of basis (Cal. Code Regs., tit. 18, section 25137-4.2(a)(1), (d)).

Living inside the three-factor formula

A qualified business carries three factors under the property, payroll, and sales rules of RTC sections 25129 through 25136, throwback included. The Schedule R instructions carry a rule with no counterpart under single sales factor: factors with zero balances in both the everywhere and California columns are not included in the fraction, so a three-factor filer with no payroll anywhere averages property and sales over two. The Franchise Tax Board addressed the limit of that convention in Legal Ruling 2019-01 (June 7, 2019), concluding that for a three-factor filer with property and payroll in California but no sales anywhere, relief under RTC section 25137 to exclude the sales factor would be appropriate; the library's article on companies with no gross receipts discusses the point.

The test is annual, and a qualified business can lose the carve-out without changing what it does. A drought year that collapses crop receipts while an affiliated trucking operation holds steady, a commodity price swing, or the acquisition of a downstream manufacturer whose outside sales swamp the group's extractive receipts, each flips the formula for that year. A group that drifts below 50 percent is on single sales factor for that year whether or not it noticed, and a group that drifts above is on three factors whether or not it wanted them.

Where either formula does not fairly represent the business activity in California, section 25137 is available to the taxpayer and the Franchise Tax Board under the procedure the library's article on alternative apportionment petitions describes, but it does not move a group across the 50 percent line, for the reason given above.

Practice notes

The formula determination belongs at the top of the apportionment workpapers each year, computed on gross business receipts from parties outside the combined group with every intercompany receipt eliminated, and with each product line classified against the statutory definitions, Regulations 25128-1 and 25128-2, and the examples in Regulation 25128 before the fraction is struck. Borderline classifications, processed commodities, refined against manufactured products, and commission or distribution receipts against sales of the group's own production, are documented in the year they are made, because Chief Counsel Rulings 2012-04 and 2012-05 show the Franchise Tax Board testing those lines closely. A business that supplies farms, mines, or wells rather than operating them reads 2026-OTA-456 before claiming three factors; the opinion is nonprecedential, but its reasoning on the taxpayer's own activities and on legislative purpose tracks the position the Franchise Tax Board took in that appeal. For a financial group, the 2025 return is the first on single sales factor and the open earlier years stay on the law that governed them, so a reviewer confirms that the compliance software rolled neither formula into the other era. An agricultural or extractive group with a captive finance member is the remaining case in which the full three-factor mechanics of Regulation 25137-10 apply, and the 20 percent intangible valuation and the receivables assignment are checked there each year. A group within a few points of 50 percent models both formulas before filing and keeps the comparison, because the annual test gives no cushion. G&G State Tax Group provides apportionment formula determinations for agricultural, extractive, and financial businesses alongside its state and local tax practice.