Recently, the California Office of Tax Appeals (OTA) approved an apportionment methodology that would allow retailers to include in “gross receipts” several types of vendor allowances received by retailers in the general course of their business. In the Matter of the Appeal of Bed Bath & Beyond, Inc.,1 the appellant requested two adjustments to its California apportionment factor for the taxable years ending on February 28, 2009; February 27, 2010; and February 26, 2011.
The first issue addressed was whether Bed Bath & Beyond’s (“BBB’s”) receipts from its treasury function should be included in its sales factor. California Regulation section 25137(c)(1)(D) states that gross receipts from the taxpayer’s treasury function should be excluded from both the numerator and denominator of the sales factor. It was specifically provided to overturn the holding in Microsoft.2 BBB claims that Regulation section 25137(c)(1)(D) is contradictory to Microsoft. The OTA found that the Regulation was validly adopted and within the Franchise Tax Board’s (FTB’s) rule-making authority. In doing so, the OTA rejected this element of BBB’s refund claim.
The next issue addressed by the OTA was whether vendor allowances should be included in the sales factor. The OTA defined and analyzed seven types of vendor allowances. These included general vendor allowances, markdown reimbursements, vendor rebates, supply distribution charges, vendor compliance charges, and cooperative advertising allowances. Their analysis also referred to the Microsoft case. In Microsoft, the court concluded that “gross” means the whole amount received. While the FTB specifically promulgated a regulation addressing this issue for treasury receipts, no such rule has been put in place related to vendor allowances.
The FTB argued that vendor allowances are offsets to cost of goods sold, not receipts. However, the OTA, in accordance with the broad reading of its definition of gross receipts, would include vendor allowances. Unfortunately for BBB, the OTA found that the burden of proof for the refunds related to vendor allowances fell on the taxpayer. They concluded that while some vendor allowances should be included in the sales factor, BBB did not show that it was entitled to a refund and what amount that refund should be.
Ryan’s income tax professionals are here to assist our clients in obtaining refunds related to apportionment changes. Please contact your Ryan professional if you have vendor allowances but have not included those amounts in your apportionment factor.
1 In the Matter of the Appeal of Bed Bath & Beyond Inc.; OTA Case No. 18011340; 2022 – OTA – 134.
2 Microsoft Corp., b. Franchise Tax Bd. 39 Cal. 4th 750 (2006).
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