Overview: California SB 132 Ends Three-Factor Apportionment for Financial Institutions

On June 27, 2025, California enacted Senate Bill 132 (SB 132), which significantly changes the way banks and financial institutions apportion income for California tax purposes. Effective for tax years beginning on or after Jan. 1, 2025, SB 132 eliminates the three-factor apportionment method for financial institutions, requiring the use of California’s single sales factor (SSF) formula. This change aligns the financial sector with California’s broader move toward sales-based apportionment.

What Is Changing for Banks and Financial Institutions?

Previous Rule:

Banks and financial institutions could use a three-factor apportionment formula, which considered property, payroll, and sales equally, if they met the “qualified business activities” (QBA) test. QBA include banking and financial gross business receipts, and if more than 50% of a banks and financial institutions’ gross business receipts comprised receipts from QBA, then the three-factor formula applied.
 
New Rule Under SB 132:

For tax years beginning on or after Jan. 1, 2025, all banks and financial institutions must use the single sales factor apportionment formula, regardless of their gross receipts composition. The three-factor method is no longer available to this sector.

Historical Context: California’s Shift to Sales-Based Apportionment

• 1966-2024: California used a three-factor formula (property, payroll, sales) for most businesses, including banks since 1994.
   
• 1993: Double-weighted sales factor introduced for non-banks and financial institutions.
   
• 2011-2013: Transition to elective, then mandatory, single sales factor for most businesses, with exceptions for certain qualified activities, such as banks and financial institutions.
   
• 2025: SB 132 removes banking and financial activities from QBA, mandating SSF for these entities.

Key Tests for California Bank and Financial Institution Taxation
 

• Old Rule: If more than 50% of gross business receipts came from qualified business activities (including banking/financial), the three-factor formula applied.
   
• SB 132 Change: This test is eliminated for financial institutions. All must use the single sales factor apportionment.

• Rule: Financial corporations (those predominantly dealing in money or moneyed capital in competition with national banks) are subject to a higher 10.84% tax rate, versus 8.84% for general corporations.
   
• Test: Over 50% of gross income must be from qualifying financial activities, determined on a separate company basis.
   
• Status: This test and the higher tax rate remain unchanged under SB 132.

• Rule: California Code of Regulations (CCR) 25137-4.2 provides specialized sourcing and apportionment rules for banks and financial corporations with income inside and outside California.
   
• Key Points: Includes special sales factor sourcing for financial transactions and throwback provisions.
   
• Status: These rules continue to apply under the new single sales factor regime.

Impact of SB 132 on Financial Institutions

• Tax Increase Risk: Some non-California-based banks and financial institutions may see higher California tax liabilities, as their California apportionment factor will be based solely on sales and not be diluted with out-of-state property and payroll.
   
• Continued Higher Tax Rate: Entities meeting the financial corporation definition, pursuant to California Revenue and Taxation Code section 23183, remain subject to the 10.84% tax rate.
   
• Special Sourcing Rules Remain: The specialized sourcing and calculation rules under CCR 25137-4.2 still apply for determining the sales factor.

Conclusion

SB 132 finalizes California’s transition to single sales factor apportionment for all business sectors, including financial institutions. While the higher tax rate and specialized sourcing rules remain, the elimination of the three-factor formula may increase the California tax burden for many banks and financial institutions, especially those with significant operations outside the state.