On Feb. 26, the California (CA) Superior Court of Los Angeles County issued an opinion pertaining to whether a multinational food products company can use a three-factor formula consisting of property, payroll, and sales for purposes of apportioning the company’s net income to CA instead of solely relying on the sales factor. The apportionment ratio is applied to a company’s net income to calculate state taxable income. 

In Smithfield Packaged Meats Corp. v. CA Franchise Tax Board, Case No. 21STCV39637 (Feb. 26, 2026), Smithfield filed refund claims with the CA Franchise Tax Board maintaining that the company should be entitled to use the three-factor apportionment formula available to agricultural businesses instead of the single sales factor formula applicable to most other types of businesses during the tax years at issue. 

Smithfield is one of the largest hog farmers and producers of packaged meat products. Its business consists of hog production and harvesting, processing and packaging of meat products – all of which occur outside CA except for a small processing facility based in the state, which accounted for approximately 0.29% percent of Smithfield’s total company headcount and 0.47% of the company’s product volume by weight. Overall, according to evidence produced by the company, only 1.02% of Smithfield’s activities occurred in CA, while the sales factor calculation resulted in an apportionment ratio of over 6.6%. 

The Superior Court’s holding first discussed the three-factor formula available to agricultural businesses. However, when addressing whether Smithfield should be entitled to an alternative apportionment method (property, payroll, and sales) based on the level of commercial and production activity in CA as compared to all locations, the opinion makes clear that the use of the single sales factor formula alone is distortive and not representative of the company’s commercial activities in the state since predominately all activities occur outside CA (except 1.02%). Accordingly, the Superior Court determined that Smithfield would have been entitled to alternative apportionment under CA Revenue and Tax Code section 25137 even if it could not satisfy the agricultural business definition. 

What does CohnReznick think?

Based on the Smithfield decision, out-of-state taxpayers filing in CA that are engaged in manufacturing, production, or other capital-intensive businesses with zero or minimal property and payroll in CA, as compared to other locations, should have an opportunity for CA income tax savings through requesting alternative apportionment.

While the decision may be appealed by the CA Franchise Tax Board, impacted businesses should consider filing protective refund claims petitioning for alternative apportionment. The applicable statute of limitations for CA income tax purposes is four years; therefore, there are potential CA tax savings opportunities available to manufacturing, production, processing, and other capital-intensive businesses for prior periods in addition to prospective tax filing periods.   

If you have any questions or would like to discuss, please reach out to your contact at CohnReznick or a member of the State and Local Tax team.