Apr 20, 2015
From KPMG TaxWatch
In Technical Advice Memorandum (TAM) 2015-01, the Franchise Tax Board (FTB) addressed whether payments received pursuant to certain cost sharing arrangements (CSAs) constitute gross receipts for purposes of the California sales factor. Beginning in 2011, California’s definition of “gross receipts” is tied to what is considered income, gain, or loss under the Internal Revenue Code. While the definition of gross receipts is not tied to the Internal Revenue Code for years prior to 2011, the FTB stated at the outset of the TAM that for consistency purposes California will follow federal law for earlier years as well. As such, the TAM addresses in detail the federal treatment of CSAs, Cost Sharing Transactions (CSTs) and Platform Contribution Transactions (PCTs).
CSAs are arrangements under which controlled participants share the costs/risks of developing an intangible (such as intellectual property) in proportion to their reasonably anticipated benefits (RABs)—that is, additional income generated or costs saved—expected to be derived from the intangible. CSTs are payments made in a given taxable year among controlled participants of the CSA to achieve their respective RAB share of the intangible development costs (IDCs) for that year. PCTs, on the other hand, are arm’s length payments made by one controlled participant in the CSA to another in exchange for platform contributions made by the other member—that is, some resource, capability, or right that the other member has developed, maintained, or acquired externally and contributed to the development of the shared intangible. (Note that neither IDCs nor platform contributions may include land or depreciable property.)
In its analysis, the FTB noted that federal Treasury regulations have been explicit for some time that PCT payments are considered compensation (income) for use of intangibles, services, or other resources outside of the CSA, and CST payments are considered reimbursements of costs for the recipient (contra-expense). Thus, under California law, a PCT payment is considered payment for a service or use of an intangible asset or resource; a CST payment, on the other hand, generally does not constitute payment for the purchase of products or services, but is treated as a reimbursement of costs. As such, for California sales factor purposes, PCT payments should be considered gross receipts. CST payments will not be treated as gross receipts, unless they exceed the costs being reimbursed.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.