Apportionment of state sales: Joyce and Finnigan Rules
"Joyce" and "Finnigan" refer to two different ways of calculating the sales factor numerator in a unitary
combined report or consolidated return filed by a group of affiliated corporations. The names come from
two decisions of the California State Board of Equalization: Appeal of Joyce, Inc., No. 66 SBE 069 (Cal.
SBE Nov. 11, 1966), and Appeal of Finnigan Corporation, Cal. St. Bd. of Equal., August 25, 1988
(Finnigan I); Opin . on Pet. for Rhrg, Cal. St. Bd. of Equal., January 24, 1990 (Finnigan II). I'll describe the
difference by reference to a California combined report, but the same principles apply in any state that
allows or requires a unitary combined report or a true consolidated return (i.e., a state consolidated return
that includes all of the members of the federal consolidation, as opposed to a nexus consolidation, which
includes only those members that have nexus with the taxing state).
A "taxpayer" corporation, for purposes of this discussion, is a corporation that has due process/commerce
clause nexus with California and is not protected from income taxation by Public Law 86-272. A California
combined report calculates the liability of each of the taxpayer members of the group with reference to the
income and apportionment factors of all of the members of the unitary group, both taxpayers and
nontaxpayers. In the sales factor, sales of tangible personal property are assigned in the numerator to the
state to which the property is shipped or delivered, unless the seller is not a taxpayer in the destination
state. In that case, the sale is "thrown back" and included in the numerator of the state where the shipment
originated. What if a nontaxpayer makes sales to California customers? This can happen, for example,
when the nontaxpayer corporation is protected from California tax by P.L. 86-272. What happens to those
sales in the sales factor numerator? Are they included in the California numerator, or thrown back to the
origin because the seller is not a California taxpayer?
The answer to this question depends on how you look at the combined group. Is it a group of separate
corporations, each with its own tax liability, or is it a single taxpayer (more similar to a federal consolidated
return)?
In Joyce, U.S. Shoe and its subsidiaries, including Joyce, were engaged in a unitary business of
manufacturing and selling women's shoes. Both U.S. Shoe and Joyce, Inc., subsidiary, sold shoes to retail
stores in California. Joyce was a California taxpayer; U.S. Shoe was not a taxpayer because it was
protected by P.L. 86-272. The SBE ruled that U.S. Shoe's sales shipped to California stores had to be
thrown back to Ohio, the origin of the shipments, and could not be included in the California sales factor
numerator, because U.S. Shoe was not a taxpayer. From that time (1966) forward, the FTB applied the
Joyce rule to both inbound and outbound sales. Thus, if a corporation shipped sales from California to a
state where it did not have DP/CC nexus or was protected by P.L. 86-272, those sales would be thrown
back to California even though other members of the unitary group were taxpayers in the destination state.
The Finnigan decision involved outbound sales. Finnigan and its subsidiary, Disc, were both taxable in
California. Both Finnigan and Disc shipped sales to customers in states where Finnigan was taxable but
Disc was not. Consistent with the Joyce rule, the FTB threw Disc's sales back and included them in the
numerator in California, where the shipments originated. The SBE, applying a statutory construction
analysis rather than a nexus analysis, ruled that the word "taxpayer" in the throwback statute referred to
the unitary group as a whole, not to each corporate member. Therefore, Disc's sales to customers in states
where Finnigan was a taxpayer were not thrown back to California.
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Finnigan I (1988) did not make clear what would happen with respect to inbound sales -- would the Joyce
rule continue to apply in that scenario, or not? In Finnigan II (1990) the Board clarified that it was
overturning Joyce and would apply the Finnigan rule to both inbound and outbound sales.
In the Appeal of Huffy Corporation, Cal. St. Bd. of Equal. No. 99-SBE-005, April 22, 1999, the California
SBOE (California State Board of Equalization) overruled Finnigan and reinstated Joyce. However, the
Board applied its decision prospectively only. As a result, the taxpayer in Huffy did not receive a refund.
Huffy filed suit for refund in Superior Court, and the case was settled; presumably they did get at least part
of their money back in the end.
So California was Finnigan from August 1988 to April 1999, and then reverted to Joyce. In 2000 the FTB
adopted Reg. 25106.5 governing the mechanics of combined reporting, which incorporates the Joyce rule.
The California Court of Appeal upheld the Finnigan approach in Citicorp North America Inc., et al. v.
Franchise Tax Board, No. A086925, Oct 2, 2000, cert. den. U.S. Supreme Court, Dkt No. 00-1537,June
29, 2001. The same court reached the same result in Deluxe Corporation v. FTB, No. A088142
(unpublished), Apr. 26, 2001, cert. den. U.S. Supreme Court, Dkt. No. 01-603, 1-7-02. The Court of Appeal
basically held that either Finnigan or Joyce was a reasonable approach and could be applied by the state
as long as it was consistent.
The California Franchise Tax Board (“FTB”) recently held its first Interested Parties Meeting in May 2011 to
gather input on possible regulations to implement California Revenue & Taxation Code (“R&TC”) Section
25135 (as amended in 2009, effective for taxable years beginning on or after January 1, 20112), which
determines when sales of tangible personal property are treated as California sales. Subsection (b) of
amended R&TC Section 25135 codifies the return to the California State Board of Equalization’s (“SBE”)
decision in Finnigan (referred to herein as the “Finnigan approach”)3 and its resulting tangible personal
property sales factor sourcing rule. The purpose of the contemplated regulations would be
to adopt language implementing this law change.
Any state that has a sales throwback rule and allows or requires a combined report or true consolidated
return has to deal with the Joyce-Finnigan issue. Some go one way, some the other. Kansas, Indiana,
Arizona, and Wisconsin, for example, follow Finnigan, while South Carolina, Maine, Washington DC, and
Illinois follow Joyce. Please refer to the map at the bottom of this article for guidance on each states rules.
The inconsistency between states sometimes creates odd results. A sale shipped from a Joyce state to a
Finnigan state will be included in the sales factor numerator in both states. On the other hand, if it is
shipped from a Finnigan state to a Joyce state, it will not be included in either state's numerator.
The issue arises even in states that do not have sales throwback rules, or where sales of other than
tangible personal property are involved. For example, New York is a non-UDITPA state and has no
throwback rule. In Disney Enterprises et al., No. 818378, New York Division of Tax Appeals, 2/12/2004, an
administrative law judge held that sales shipped to New York customers by three Disney subsidiaries
whose activities in New York, Disney argued, were protected by P.L. 86-272 must be included in the
numerator of the sales factor on the combined return filed by Disney and its subsidiaries (a Finnigan
approach). While the ALJ held that the three subsidiaries were not protected by P.L. 86-272 because of
the activities of Disney and other members of the group in New York on their behalf, he stated that their
status as taxpayers was not determinative of the requirement that their New York sales be included in the
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12353 Sunset Valley Drive, Suite A, Reston, VA 20191
Tel: 703.437.8877 Fax: 703.437.8937
10502 Crestwood Drive, Manassas, VA 20109
Tel: 703-365-8877 Fax: 703-365-8937
Email: info@millermusmar.com
www.millermusmar.com
numerator. Instead, it was the inextricable relationship of the subsidiaries to the taxpayer's unitary business
that justified their inclusion.
As you can see there are several rules that need to be followed and they are state by state specific, but all
these rules create planning opportunities and pitfalls. Clearly, for groups involved in interstate commerce,
careful planning can result in a lower California tax by using multiple corporations. Where the savings are
significant, for many groups of corporations it will be more than worth the cost and effort needed to design
the structure. Nontax factors such as increased shipping and administrative costs and potential delivery
delays must also be considered.
A drawback to the member approach is found where sales are shipped outside of California to a state that
applies the group approach. In this case, these sales will be double counted--by both California and the
destination state--in the sales factors. Therefore, it is imperative that operations be carefully reviewed to
avoid such undesirable results.
Please be advised that, based on current IRS rules and standards, the advice contained herein is not
intended or written by the practitioner to be used and cannot be used by the taxpayer for the purpose of
avoiding penalties. This alert is written in general terms and is not intended to be a substitute for specific
advice regarding tax, legal, accounting, investment planning, or other matters.
For more information on this topic please cotnact us at 703-437-8877 or at info@millermusmar.com
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12353 Sunset Valley Drive, Suite A, Reston, VA 20191
Tel: 703.437.8877 Fax: 703.437.8937
10502 Crestwood Drive, Manassas, VA 20109
Tel: 703-365-8877 Fax: 703-365-8937
Email: info@millermusmar.com
www.millermusmar.com
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12353 Sunset Valley Drive, Suite A, Reston, VA 20191
Tel: 703.437.8877 Fax: 703.437.8937
10502 Crestwood Drive, Manassas, VA 20109
Tel: 703-365-8877 Fax: 703-365-8937
Email: info@millermusmar.com
www.millermusmar.com