California is one of the most recent states to consider legislation adopting mandatory worldwide combined reporting. The ability of a state to mandate worldwide combined reporting is a hotly debated topic, with states frequently asserting that they are losing out on tax revenue due to the lack of ability to force companies to file on a worldwide basis. However, while states typically look at the amount of income that is excluded from the apportionable tax base, they don’t focus on the currently excluded factors that would be included in the apportionment formula. Thus, worldwide reporting will result in more tax owed by some taxpayers, and less tax owed by others. As a result, it is difficult for a state to predict whether it will raise more tax revenue by imposing worldwide combined reporting.

It must be noted, however, if California does pass a mandatory worldwide combined reporting regime, there will be one additional consequence that impacts those companies that are subject to the San Francisco gross receipts taxes. San Francisco bases the composition of a combined reporting group for its gross receipts taxes on the composition of the group for purposes of the California return. Thus, if California goes mandatory worldwide, so will San Francisco unless it affirmatively decouples. While this may not have an impact with respect to gross receipts that are directly allocated to San Francisco, it should impact both the composition of the gross receipts that are included in the apportionable part of the tax base, plus the composition of the payroll factor used to apportion that apportionable part of the tax base.