Perspectives

California adoption of economic nexus principles negates the throwback rule for certain taxpayers

In this article, Bart Baer and Matthew Johnson, of Deloitte Tax LLP, discuss a recent California Chief Counsel Ruling that applies the principles of the state's new economic nexus standards, as well as its Finnigan principles and market-based sourcing, to determine when the throwback of sales of tangible personal property is required.

California Chief Counsel Ruling

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By Bart Baer and Matthew Johnson of Deloitte Tax LLP | Originally published in Bloomberg BNA "Tax Management Weekly State Tax Report" in October 2012

Recent California guidance illustrates the significant impact that a state’s adoption of economic nexus principles has on the continuing viability of the throwback rule.1 The Franchise Board recently released Chief Counsel Ruling 2012-03,2 holding, in two different fact patterns, that a taxpayer should not throw back to California certain sales of tangible personal property shipped from California to other states where California’s economic nexus thresholds were met in the destination states. The result in this Chief Counsel Ruling (‘‘CCR’’) is based on the interplay of California’s recent adoption of economic nexus principles, the definition of when a taxpayer is ‘‘taxable’’ in a non-California jurisdiction for throwback purposes, and California’s re-adoption of Finnigan3 principles.

This article analyzes CCR 2012-03 and discusses its potential implications for similarly situated taxpayers, defining:

  • California’s throwback rule
  • California’s adoption of bright-line nexus standards
  • California’s re-adoption of Finnigan principles
  • CCR 2012-03
  • The taxpayer implications for prospective and retroactive application of CCR 2012-03


1 This article does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences arising from the reader’s particular situation.
Copyright © 2012 Deloitte Development LLC. All rights reserved.
2 Chief Counsel Ruling 2012-03, Franchise Tax Board (Aug. 28, 2012), available at: https://www.ftb.ca.gov/law/ccr/2012_3.pdf.
3 Appeal of Finnigan Corporation, Cal. St. Bd. of Equal. (Aug. 25, 1988); Appeal of Finnigan Corporation, Cal. St. Bd. of Equal. (Jan. 24, 1990).

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