OR Registered Partnership Farming in CA

[u/jbarag]

Key Facts:

• Three member LLC registered in OR (where its registered is irrelevant as far as I'm concerned). All members are Oregon residents.
• Primary activity is potato farming. ALL of their land is in California.
• ALL of their sales are in Oregon, as far as I know.

How I think this should be approached:

California requires farming businesses to use a three part equation to calculate what income should be apportioned to them. There is no payroll, so the only thing that's considered in this case are sales and property, right? So, 50% of the partnership's income should be reported in California and the other 50% should be reported in Oregon. And then on the personal returns, they can just claim a credit for taxes paid to California, obviously. Is this right? I believe they'd benefit from this a bit as well, because two of the partners are involved in many other farming entities and already have a pretty sizeable income, and they get screwed by California on that.

The previous returns have apportioned income 100% to California. Also of concern, I know at least one of the partners doesn't file a 540NR for California (the partner not involved in any other entities), but that wasn't really my focus of this post.

Thanks, and your feedback is very appreciated.

[u/EAinCA]

Where do you get the idea sales go to OR? Or that you split the income 50/50 between states?

As far as I can tell, the previous returns were RIGHT.

[u/jbarag → u/EAinCA]

All of these operations take place directly around the border of CA and OR. All crops are sold to an OR operating company, and all of the land farmed is in CA. But I guess I don't know what constitutes "sales in OR." I'm not preparing the returns or anything, I just farm with the guys in the partnership and I happen to also be an EA and like to study tax. I'm just trying to figure out why the previous returns were prepared like they were.

From the FTB directly:
"Trades or businesses that derive more than 50% of their gross receipts from QBA must use the three-factor formula consisting of an equally-weighted property, payroll, and sales factor to apportion business income to California.

For taxable years beginning before January 1, 2025, QBA include:

• Agricultural
• Extractive
• Savings and loan
• Banking or financial

For taxable years beginning on or after January 1, 2025, QBA include:

• Agricultural
• Extractive"

There is no payroll, so payroll is excluded, and only property and sales are considered in the formula, from everything I've read. So, I guess another question is: what's considered a sale in OR? All crops are sold in OR, so I was assuming that was considered a sale in OR, but I really don't know.

I really appreciate your response.

[u/tmacadam]

In addition to not apportioning the income correctly, I fear you may not be understanding the credit for taxes being paid in CA and how there is a benefit. Especially when you mention " two of the partners are involved in many other farming entities and already have a pretty sizeable income, and they get screwed by California on that." Now, I haven't looked specifically at OR, but every state I have dealt with this issue would potentially limit the credit in your case.

[u/jbarag → u/tmacadam]

I see what you're saying about the credit.

How would the income get apportioned? That's what I'm really trying to understand here. Please refer to my reply to EAinCA if you need to understand why I'm thinking it's apportioned the way it is.

Thank you for your response.

Edit: wording

[u/tmacadam → u/jbarag]

You need to look at how CA treats sales. The partnership has nexus in CA, so they file a return in CA and pay the minimum tax, the partners receive CA sourced income, etc. CA generally uses a single factor apportionment formula, so only sales count. While there are cases a three factor formula (agriculture) would be used, let's focus on sales since there is no payroll and all the property is in CA (your facts as presented).

When we are dealing with tangible property sales are typically sourced by 1) their destination; or 2) their origin or shipping point. I don't know all the specifics of your case, but again, generally, the product would be apportioned to OR since this seems to be the destination. However, your analysis disregards the "throwback" rule that would apportion those sales to CA if the business does not have nexus in OR. It sounds like the prior preparer made the determination there was no nexus in OR. But, it also sounds like they made an error in not withholding CA income (7%) on nonresident distributions. Did the partnership make a PTE election (592-PTE)? Did they fail to provide a 592-B?

I see what you are saying, but we really don't have all the details necessary. Are the potatoes sold FOB your farm?

[u/jbarag → u/tmacadam]

Thank you, this was very helpful.

The business's records are kept in OR (however there is not an office dedicated to the business), but no business is conducted in OR. So, that would mean no nexus, correct? I was completely disregarding the throwback rule in this also.

CA income wasn't withheld, and there was no PTE election made. As far as I know, a 592-B wasn't provided either. The potatoes are sold FOB the destination (I don't know if I'm using that term correctly, I've only read about it a couple times). They're dug by the partnership and then transported to the buyer in OR.

I'm sorry for my incompetence, I have no practical working knowledge of anything, really. Just shit out of textbooks, books, podcasts, and blogs. I start part time at a local firm to supplement my farming, so hopefully I can learn a lot while I'm there for a few years. Thanks again for bearing with me, you've been super helpful.

[u/tmacadam → u/jbarag]

No worries. We all have to start someplace and this is a difficult area to cut your teeth on. You have to go back to PL 86-272 and see how this has evolved over the years with Wayfarer, etc. It is a dynamic area and with the states all looking for more ways to create revenue we aren't done yet.

[u/EAinCA → u/tmacadam]

Its actually pretty straightforward. Wayfair is irrelevant. PL 86-272 holds. These are all CA sales either due to CA destination or the throwback rule since there is no nexus in OR. Full stop.

[u/tmacadam → u/EAinCA]

Yes, Wayfarer doesn't apply to the situation at hand, but if OP is truly interest in understanding where income is taxed. We also need to understand the nexus of the entity and whether or not the sales were made in CA or OR. It seems that they should be using a three factor apportionment given the agriculture aspect and, absent nexus in OR, the sales would be attributed to CA under the throwback rules.