Cal. Code Regs. Tit. 18, §§ 17053.49-3

Current through Register 2024 Notice Reg. No. 49, December 6, 2024

Section 17053.49-3 - Qualified Taxpayer

(See Regulation Section 17053.49-0 for Table of Contents.)

(a)In General. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, a qualified taxpayer is any taxpayer or partnership that is engaged in an activity that is described in Division D of the SIC Manual. The determination of whether a taxpayer is engaged in an activity that is described in Division D of the SIC Manual shall be made under the rules and methods described in the SIC Manual, 1987 edition, herein incorporated by reference, and the rules in this regulation on the basis of all of the facts and circumstances. Thus, for example, a taxpayer is a qualified taxpayer where such taxpayer is engaged in multiple business activities, one or more of which constitutes an activity that is described in Division D of the SIC Manual. For purposes of the MIC, a SIC Code assignment to a given taxpayer's activity made by any federal, state (other than the Franchise Tax Board), regional, or local government agency shall not be controlling.

(b)Business Activities Treated as an Establishment. The determination of whether a taxpayer is engaged in an activity that is described in Division D of the SIC Manual shall be made by reference to the classification of business activity rules contained in the SIC Manual. If a taxpayer is engaged in one or more lines of business that is treated as an establishment under the SIC Manual, and that establishment is properly classified in Division D of the SIC Manual, then the taxpayer is a qualified taxpayer. In contrast, if a taxpayer is only engaged in business activities that are properly classified in any division or divisions of the SIC Manual other than Division D of the SIC Manual, then the taxpayer shall not be treated as a qualified taxpayer.

(1)Establishment. For purposes of this section, the term "establishment" shall mean an economic unit (as distinguished from subunits such as departments), generally at a single physical location, where business is conducted or where services or manufacturing or other industrial operations are performed. For example, a factory, mill, store, hotel, movie theater, mine, farm, ranch, bank, railroad depot, airline terminal, sales office, warehouse, or central administrative office would each be treated as an establishment. There are two types of establishments under the SIC Manual, auxiliary establishments and operating establishments.

A.Activities Conducted at Different Physical Locations. Business activities conducted at different physical locations shall generally be treated as separate establishments. Thus, for example, if a taxpayer manufactures clay tiles in Los Angeles and operates a retail tile store in Tarzana, each of these activities would be generally treated as a separate establishment.

B.Activities Conducted at A Single Physical Location. Where distinct and separate business activities are performed at a single physical location (such as construction activities operated out of the same physical location as a lumber yard), each activity shall be treated as a separate establishment where all of the following are satisfied:

1. No single industry description in the SIC Manual includes such combined activities;

2. Separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting; and

3. Employment in each such economic activity is significant (as defined in subsection (b)(4)).

Where all of the requirements in subsection (b) (1)B. of this regulation are not satisfied, then all of the activities conducted at that location shall be assigned a single SIC Code based upon the principal activity being conducted at that location. For example, where there are five distinct and separate business activities being conducted at a single physical location and none of those activities meet all of the requirements of subsection (b)(1)B. of this regulation, that location would properly be assigned a single SIC Code representing the principal business activity.

(2)Auxiliary Establishments. Auxiliary establishments are establishments that are principally engaged in performing management or support services for other establishments of the same taxpayer. Auxiliary establishments shall generally be assigned the same SIC Code as the principal activity of the operating establishment that they serve. However, establishments principally engaged in producing goods or providing services for other establishments of the same taxpayer, when such goods or services are covered by industries in Divisions A through D, inclusive, of the SIC Manual, shall be classified as operating establishments in such divisions of the SIC Manual on the basis of their principal activity. Examples of auxiliary establishments include, but are not limited to, the provision of management and other general administrative functions, such as accounting, data processing, legal services, research and development, testing, and warehousing.

A.Auxiliary Activities Conducted at a Different Physical Location than the Supported Establishment. Auxiliary activities conducted at a different physical location from the supported establishment or establishments shall be treated as a separate establishment, and shall be classified as either an auxiliary establishment or an operating establishment under the rules of this regulation. Thus, for example, if a taxpayer manufactures plastic foam products in San Jose and has a finished goods warehouse in Fremont from which it fills orders and ships the finished goods to its customers, each of these activities will be treated as a separate establishment.

EXAMPLE 1: C manufactures computers, an activity properly classified under SIC Code 3571, at its manufacturing plant in San Diego. C also conducts research and development activities at C's facility in Rancho Cordova for the purpose of enhancing the performance of existing C products and to develop new products to be manufactured by C. Assume that C's Rancho Cordova research facility is properly treated as a separate establishment under the rules in this regulation and principally performs research and development activities in support of C's manufacturing facility in San Diego. Under these facts, C's research facility in Rancho Cordova would be properly classified as an "auxiliary establishment" under the rules in this regulation. Moreover, since C's research facility is properly classified as an auxiliary establishment, it would be assigned the same SIC Code (SIC Code 3571) as C's manufacturing establishment in San Diego.

EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C's manufacturing plant is located in Austin, Texas. Under these facts, the result is the same as in EXAMPLE 1 because the physical location of the auxiliary establishment is irrelevant to the determination of whether the activity being classified will be treated as an auxiliary establishment.

EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that C's research facility principally performs commercial research and development performed on a contract basis for parties other than C. Under these facts, while C's research facility would still be treated as an "establishment" under the rules in this regulation, it would not be treated as an "auxiliary establishment" since C's research facility in Rancho Cordova does not "primarily" support C's manufacturing activity. Instead, C's research facility would be treated as a separate operating establishment, and would be assigned a separate SIC Code based on its primary activity (SIC Code 8731, Commercial Research and Development).

B.Auxiliary Activities Conducted at the Same Physical Location as the Supported Establishment. Where auxiliary activities are performed at the same physical location where the supported establishment or establishments are located, the auxiliary activities shall be treated as a separate establishment, and shall be classified as either an auxiliary establishment or an operating establishment under the rules of this regulation, when each of the following is satisfied:

1. Separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting;

2. The auxiliary unit serves other establishments of the same taxpayer; and

3. Employment is significant (as defined in subsection (b) (4)) for both the auxiliary and operating activity.

(3)Operating Establishments. Any establishment that is not treated as an auxiliary establishment shall be treated as an operating establishment and shall be assigned a SIC Code on the basis of its principal activity, which shall be determined by reference to its principal product or group of products produced or distributed, or services rendered. In the case of activities classified under Division D of the SIC Manual, the principal activity of the establishment shall be determined by reference to the value of production of each product being produced. For purposes of this section, the product or service contributing to the largest proportion of the cost of goods manufactured, excluding overhead, shall be treated as the principal activity of the establishment. However, in cases where multiple manufacturing and non-manufacturing activities are conducted at an establishment and the taxpayer can demonstrate that value of production does not adequately represent the relative economic importance of each of the varied activities being conducted at the establishment, the taxpayer may instead use employment or payroll information in the same manner to determine the principal activity of the establishment.

EXAMPLE 1: D is solely engaged in the following activities, both of which are conducted at the same physical location -- the manufacturing of wood kitchen cabinets and the retail sale of packaged dairy products. D employes 1 individual to manufacture the wood cabinets and 10 individuals to run the retail store. Assume the retail sale of packaged dairy products is the principal activity being conducted at this location. D does not maintain separate books and records for each of the activities, but instead maintains a single set of books and records. Since D does not maintain separate books and records for the manufacturing operation under subsection (b)(1)(B)2., and since the employment in this activity is less than 25% of the total employment and thus not significant under subsection (b)(1)(B)3., the manufacturing activity does not constitute a separate establishment from the retail operation. Moreover, under the rules in this section, D's principal activity at the establishment would be classified under SIC Code 5451 (Dairy Products Stores). Therefore, D is not engaged in an activity described in Division D of the SIC Manual and is thus not a qualified taxpayer.

EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that D employs 4 individuals in its wood cabinet manufacturing activity, but still does not maintain separate books and records for the wood cabinet manufacturing activity. Because the number of individuals employed in both the manufacturing operation and the retail operation is more than 25 percent of the total number of individuals D employs, employment in each of the activities would be considered significant. However, because D does not maintain separate books and records for each activity, D is treated as having only one establishment. Since the retail operation (SIC Code 5451 - Dairy Products Stores) is the principal activity of D's single establishment, D is not engaged in an activity described in Division D of the SIC Manual, and is thus not a qualified taxpayer.

EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that D maintains separate books and records for the manufacturing activity. Since D is maintaining separate books and records, and the number of individuals employed in both the manufacturing operation and the retail operation is more than 25 percent of the total number of individuals D employs and thus treated as significant, both the manufacturing operation and the retail operation constitute separate establishments. As a result, D is engaged in an activity described in Division D of the SIC Manual, the manufacturing of wood kitchen cabinets (SIC Code 2434), and is a qualified taxpayer.

(4)Determining Whether Employment is Significant. For purposes of this section, the determination of whether employment is significant shall be based upon all of the facts and circumstances. However, employment in an economic activity shall be deemed "significant" whenever more than 25 percent of the taxpayer's total number of employees at a single physical location, or more than 25 percent of the taxpayer's total dollar value of payroll at a single physical location, is attributable to the business activity being tested for separate establishment status.

(5)Activities Properly Assigned a SIC Code in a Non-Qualified Activity. In the case of certain manufacturing-type activities that are conducted at establishments principally engaged in activities that are properly classified under divisions other than Division D of the SIC Manual, such activities shall not be treated as an activity described in Division D of the SIC Manual. Examples of these types of activities include, but are not limited to, the following:

A. processing on farms if the raw materials are grown on the farm and the manufacturing activities are on a small scale without the extensive use of paid labor;

B. threshing;

C. cotton ginning;

D. the dressing and beneficiating of ores;

E. the breaking, washing, and grading of coal;

F. the crushing and breaking of stone;

G. the crushing, grinding, or other preparation of sand, gravel, and nonmetallic chemical and fertilizer minerals other than barite;

H. fabricating operations performed at the site of construction by contractors;

I. cutting and selling purchased carcasses;

J. preparing feed at grain elevators and farm supply stores;

K. stemming leaf tobacco at wholesale establishments;

L. production of wiping rags;

M. the breaking of bulk and redistribution in smaller lots, including packaging, repackaging, or bottling products, such as liquors or chemicals;

N. establishments principally engaged in selling, to the general public, products produced on the same premises from which they are sold, such as bakeries, candy stores, ice cream parlors, and custom tailors;

O. tire retreading and rebuilding;

P. sign painting and lettering shops;

Q. computer software production; and

R. the production of motion picture films (including video tapes).

EXAMPLE 1: B is engaged in the retail sale of bakery products and the manufacturing of fresh bread products primarily for direct sale by B on B's premises to retail customers. Both activities are conducted at a single physical location in Auburn. While B's manufacturing activity appears to be "described in" SIC Code 2051 (Bread and Other Bakery Products), if B's principal activity is the retail sale of these bakery products, then B will not be treated as engaged in an activity described in Division D of the SIC Manual since B is properly treated as being principally engaged in the retail sale of bakery products under SIC Code 5461 (Retail Bakeries). As a result, assuming that the baking operation is not properly treated as a separate establishment under the rules of this section, the baking operation would be properly classified as being part of the retail bakery operation.

EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of selling most of its bakery products through its retail store, B sells 80 percent of its bakery products to the wholesale bakery trade. Assuming that B's manufacturing operation would otherwise be properly treated as a separate establishment from its retail store, then B would be treated as engaged in an activity that is properly classified under SIC Code 2051 (Bread and Other Bakery Products).

Cal. Code Regs. Tit. 18, §§ 17053.49-3

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).