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TAX CLINIC

allocable to a single state (in the case of from intangibles unless the intangible is calculation and there is no applicable
nonbusiness income derived from the a government license, geographic license exception (e.g., the treasury function
sale of intangible personal property, this (e.g., cable TV, FCC), etc. provisions discussed above), the
is generally the taxpayer’s state of com- To the extent a particular state majority of states require taxpayers to
mercial domicile). includes gross receipts from the sale, as- assign their revenue using the most
signment, or licensing of intangible prop- specific information possible. To make
Apportionment and revenue erty in the sales factor (e.g., California), this process easier, many states have
assignment determining the amount of total gross issued guidance on how to assign (or
Apportionment is the method by which receipts to include in the denominator source) gross receipts from sales of
multistate taxpayers divide their incomes is relatively straightforward. However, intangible property. California, for
or losses among the various states in determining the amount of gross receipts example, requires taxpayers to assign
which they have a taxable presence. to include in the numerator (i.e., the sales gross receipts from sales of intangible
The states are free to develop their own attributable to any particular state) can property to California to the extent
apportionment methodologies as long as be complex because revenue assignment the property is used in California (Cal.
those methodologies pass constitutional rules vary by state. Code Regs. tit. 18, §25136-2(d)(1)).
muster. The majority of the states Taxpayers are required to determine
apply a single sales factor method of California as an illustration the “location of the use” by using a
apportionment, which means the state For example, California “sales” gener- cascading set of rules. First, if there
taxes a share of the corporation’s total ally include gross receipts from the sale, is a contract between the parties that
profit that is based on the share of the assignment, or licensing of intangible indicates that the property is used in
corporation’s nationwide sales occurring personal property (see Cal. Code Regs. California at the time of the sale, use
in that state. Some states, however, tit. 18, §25134(a)(1)(E)). But California of the property is presumed to be in
continue to use a multifactor formula taxpayers should first consider how they California (Cal. Code Regs. tit. 18,
that considers the multistate taxpayer’s are using their investments in cryp- §25136-2(d)(1)(A)). If there is no
property and payroll as well as sales. toassets before automatically including contract, or if the taxpayer overcomes
Multifactor formulas can be weighted in such receipts in their California sales the presumption that the property is
a variety of ways (e.g., equally weighted, factor. Specifically, taxpayers may ex- used in California, the location of the
double-weighted sales, etc.). As state clude from their California sales factor use must be reasonably approximated
taxation is trending toward the single “interest and dividends from intangible (Cal. Code Regs. tit. 18, §25136-2(d)
sales factor method of apportionment assets held in connection with a treasury (1)(B)). Finally, if the location of the
and considering that payroll and property function of the taxpayer’s unitary busi- use cannot be reasonably approximated,
factors are not generally affected by ness as well as the gross receipts and the location of the use is in California
intangible property, the remainder of this overall net gains from the maturity, if the purchaser’s billing address is in
discussion focuses on how cryptoasset redemption, sale, exchange or other California (Cal. Code Regs. tit. 18,
transactions are treated for sales factor disposition of such intangible assets” §25136-2(d)(1)(C)).
apportionment purposes. (Cal. Code Regs. tit. 18, §25137(c)(1) In the context of a single sale of
The sales factor for any particular state (D), emphasis added). For this purpose, cryptoassets made to a known purchaser,
is a fraction consisting of the taxpayer’s a taxpayer’s “treasury function” is the California would likely deem the
sales attributable to that state in the “pooling, management, and investment “location of the use” to be in California
numerator and the taxpayer’s total sales in of intangible assets for the purpose if the purchaser is located in California.
the denominator. What constitutes “sales” of satisfying the cash flow needs of Unfortunately, cryptoasset transactions
for this purpose varies by state. Several the trade or business, such as provid- seldom occur that way. Rather, the
states have updated their definitions ing liquidity for a taxpayer’s business majority of cryptoasset transactions
of “sales” or “gross receipts” (based on cycle, providing a reserve for business occur through exchanges where buyers
changes to the Multistate Tax Compact contingencies, business acquisitions, and sellers very rarely know each other.
definition) to (1) include only receipts etc. … [and] includes the use of futures The revenue assignment analysis
from transactions in the regular course of contracts and options contracts to hedge becomes much more challenging in this
the taxpayer’s trade or business, except (2) foreign currency fluctuations” (id.). scenario where there are no contracts
excluding receipts from hedging transac- If taxpayers must generally include between the buyers and sellers and
tions and/or treasury operations, and, gross receipts from sales of intangible where there is an intended degree
importantly here, (3) excluding receipts personal property in their sales factor of anonymity.

24 May 2022 The Tax Adviser