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Daimler Claims Double Counting of Leased Vehicles in California Apportionment

Tax Development Jul 20, 2023

Daimler Claims Double Counting of Leased Vehicles in California Apportionment

Daimler North America Corporation (“Daimler”) has been granted additional time to convince the California Franchise Tax Board (FTB) to accept an alternative apportionment sales formula to eliminate sales it asserts are double taxed.1

Daimler is a manufacturer of premium cars and commercial vehicles filing a consolidated California corporate income tax return with its subsidiaries. Daimler typically sells its vehicles to independent third-party dealerships for ultimate sale or lease to customers. Receipts from sales to California dealerships are included in the company’s California sales factor. When a dealership customer prefers to lease a vehicle, the dealership sells the vehicle back to the Daimler leasing subsidiary at the original sales price. The leasing subsidiary subsequently includes the lease payments and residual sales receipts in its sales factor. These transactions result in gross receipts from the same vehicle being included in the California sales factor again, through the leasing subsidiary included in the combined report.

Daimler petitioned the FTB for alternative apportionment under the California Revenue and Taxation Code (RTC) Section 25137, having been rejected by an FTB auditor and the board’s Section 25137 review committee. In its opening brief to the FTB, Daimler indicated multiple cases where receipts with little or no economic profit resulted in an unfair reflection of the taxpayer’s business activity in the state. In Microsoft Corp. v. Franchise Tax Board,2 the California Supreme Court found that the short-term investment receipts were qualitatively different than Microsoft’s software sales and quantitatively distortive because investment receipts comprised 2% of the company’s income but 73% of its gross receipts. Accordingly, Daimler argued that including the undone sales transactions in the sales factor was quantitatively distortive, as the sales produced zero income and comprised nearly 44% of the gross receipts.

In General Mills, Inc. v. Franchise Tax Board,3 the Court of Appeals held that an activity not entered into for the purpose of profit was qualitatively different from sales entered into for profit. This case also involved quantitatively distortive receipts that produced at most 2% of the company’s income but between 8 and 30% of the company’s gross receipts.

Daimler maintained that based on these cases, alternative apportionment should be allowed, as the level of distortion far exceeds the levels in either case. Daimler reasons that removing the undone sales from the apportionment factor is a reasonable remedy to relieve the distortion.

FTB counsel asserted that Daimler failed to meet its burden of proof, citing insufficient responses to certain audit information requests. FTB counsel further disagreed with the assertion that the separate revenue streams did not each contain a profit element. Daimler was granted an additional 45 days from the hearing date to provide additional information to convince the FTB of the validity of its claim.

It is always interesting and informative when a taxpayer requests alternative apportionment and if and when it is granted by the FTB or the courts. With the right facts and circumstances, Ryan’s tax experts have successfully demonstrated to the FTB audit and legal divisions that alternative apportionment is appropriate. We will continue to monitor and learn from the Daimler case. If you believe your apportionment factor does not properly reflect your activity in California or any other state, please contact the Ryan experts listed below.

1 Petition for Alternative Apportionment to the Three-Member Franchise Tax Board, Daimler North America Corporation & Subsidiaries, CNN: 2230130.

2 39 Cal. 4th 750 (2006).

3 208 Cal. App. 4th 1290 (2012).


Josh Booth

Greg Rottjakob

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