docFar West State Developments
download 
Report Transcription
Far West State Developments
Far West State Developments April 2015 Alaska Arizona California Hawaii Idaho Nevada Oregon Utah Washington COST 2015 SPRING AUDIT SESSION LIST OF STATE DEVELOPMENT CONTRIBUTORS As of April 17, 2015 COST would like to express their appreciation to the state tax attorneys who contributed to the items contained in the State Development Update. Such items should not be construed as legal advice, and taxpayers are encouraged to contact local counsel when considering the impact of the procedural and/or substantive items contained herein. 2015 Copyright Council On State Taxation – All Rights Reserved 1 ALABAMA STATE DEVELOPMENTS Bruce P. Ely ([email protected]) Christopher R. Grissom ([email protected]) James E. Long, Jr. ([email protected]) William T. Thistle II ([email protected]) BRADLEY ARANT BOULT CUMMINGS LLP One Federal Place, 1819 Fifth Avenue North Birmingham, Alabama 35203 205.521.8000 www.babc.com ALASKA STATE DEVELOPMENTS Robert (Bob) Mahon PERKINS COIE LLP 1201 Third Avenue, Suite 4800 Seattle, WA 98101 Tel. (206) 359-6360 Fax (206) 359-7360 Email: [email protected] www.perkinscoie.com ARIZONA STATE DEVELOPMENTS Jeffrey M. Vesely, Esq. ((415) 983-1075) [email protected] Kerne H. O. Matsubara, Esq. ((415) 983-1233) [email protected] Annie H. Huang, Esq. ((415) 983-1979) [email protected] Michael J. Cataldo, Esq. ((415) 983-1954) [email protected] PILLSBURY WINTHROP SHAW PITTMAN LLP P.O. Box 2824 San Francisco, CA 94126 ARKANSAS STATE DEVELOPMENTS Michael O. Parker, Esq. ([email protected]) Thane J. Lawhon, Esq. ([email protected]) DOVER DIXON HORNE PLLC 425 West Capitol, 37th Floor Little Rock, AR 72201 Phone: (501)375-9151 Fax: (501)372-7142 Website: www.ddh-ar.com CALIFORNIA STATE DEVELOPMENTS Jeffrey M. Vesely, Esq. (415) 983-1075 [email protected] Annie H. Huang, Esq. (415) 983-1979 [email protected] Kerne H. O. Matsubara, Esq. (415) 983-1233 [email protected] PILLSBURY WINTHROP SHAW PITTMAN LLP P.O. Box 2824 San Francisco, CA 94126 COLORADO STATE DEVELOPMENTS Not provided. CONNECTICUT STATE DEVELOPMENTS Charles H. Lenore DAY PITNEY LLP 242 Trumbull Street Hartford, CT 06103-1212 Phone: (860) 275-0119 Fax: (860) 881-2438 Email: [email protected] Company Website: www.daypitney.com DELAWARE STATE DEVELOPMENTS Not provided. DISTRICT OF COLUMBIA DEVELOPMENTS Kenneth H. Silverberg [email protected] Christian M. McBurney [email protected] Robert G. Trott [email protected] NIXON PEABODY LLP 401 – 9th Street, NW #900 Washington, DC 20004-2128 202-585-8000 website: http://www.nixonpeabody.com DISTRICT OF COLUMBIA DEVELOPMENTS Donald M. Griswold, Esq. ([email protected]) Walter Nagel, Esq. ([email protected]) Jeremy Abrams, Esq. ([email protected]) CROWELL & MORING LLP 1001 Pennsylvania Ave., N.W. Washington, D.C. 20004 Phone: (202) 624-2500 Fax: (202) 628-5116 Web: http://www.crowell.com/statetax FLORIDA STATE DEVELOPMENTS Jim Ervin HOLLAND & KNIGHT LLP 315 Calhoun Street, Suite 600 Tallahassee, FL 32301 Phone: 850/425-5649 Office Email: [email protected] Company Website: www.hklaw.com FLORIDA STATE DEVELOPMENTS Mark E. Holcomb, Esq. MADSEN GOLDMAN & HOLCOMB, LLP 1705-01 Metropolitan Blvd. Tallahassee, FL 32308 Ph. 850.523.0400 Fax 850.523.0401 [email protected] www.mgh-law.com 2 GEORGIA STATE DEVELOPMENTS John Allan, J.D., C.P.A. ([email protected]) (404) 581-8012 Mace Gunter, J.D. ([email protected]) (404) 581-8256 Eric Reynolds, J.D., C.P.A. ([email protected]) (404) 581-8669 JONES DAY 1420 Peachtree Street, N.E., Suite 800 Atlanta, GA 30309 (404) 581-8330 (fax) HAWAII STATE DEVELOPMENTS Miki Okumura ([email protected]) Telephone: (808) 547-5758 Karyn R. Okada ([email protected]) Telephone: (808) 547-5845 GOODSILL ANDERSON QUINN & STIFEL LLP 999 Bishop Street, Suite 1600 Honolulu, Hawaii 96813 Fax: (808) 547-5880 IDAHO STATE DEVELOPMENTS Robert T. Manicke ([email protected]) Kris J. Ormseth ([email protected]) Dustin R. Swanson ([email protected]) STOEL RIVES LLP 101 S. Capitol Blvd., Ste. 1900 Boise, ID 83702-7705 Phone: (208) 389-9000 Fax: (208) 389-9040 www.stoel.com IDAHO STATE DEVELOPMENTS Kirk Lyda JONES DAY 2727 North Harwood St. Dallas, TX 75201 1.214.969.5013 [email protected] http://www.jonesday.com/klyda/ IDAHO STATE DEVELOPMENTS Robert (Bob) Mahon PERKINS COIE LLP 1201 Third Avenue, Suite 4800 Seattle, WA 98101 Tel. (206) 359-6360 Fax (206) 359-7360 Email: [email protected] www.perkinscoie.com ILLINOIS STATE DEVELOPMENTS Thomas H. Donohoe Jane Wells May Fred M. Ackerson Catherine A. Battin Mary Kay Martire Matthew C. Boch Lauren A. Ferrante MCDERMOTT WILL & EMERY LLP 227 West Monroe Street Chicago, Illinois 60606 (312) 372-2000 www.mwe.com www.InsideSALT.com ILLINOIS STATE DEVELOPMENTS Michael J. Wynne ([email protected]) 312.207.3894 Adam P. Beckerink ([email protected]) 312.207.6528 Jennifer C. Waryjas ([email protected]) 312.207.6470 Douglas A. Wick ([email protected]) 312.207.2830 REED SMITH LLP 10 South Wacker Drive Chicago, IL 60606 312.207.6400 (Facsimile) INDIANA STATE DEVELOPMENTS Francina A. Dlouhy1 FAEGRE BAKER DANIELS LLP 300 N. Meridian Street, Suite 2700 Indianapolis, IN 46204 Tel: (317) 237-1210 Fax: (317) 237-1000 Email: [email protected] www.FaegreBD.com IOWA STATE DEVELOPMENTS John Allan, J.D., C.P.A. ([email protected]) (404) 581-8012 Mace Gunter, J.D. ([email protected]) (404) 581-8256 Eric Reynolds, J.D., C.P.A. ([email protected]) (404) 581-8669 JONES DAY 1420 Peachtree Street, N.E., Suite 800 Atlanta, GA 30309 (404) 581-8330 (fax) 3 KANSAS STATE DEVELOPMENTS S. Lucky DeFries ([email protected]) Jeffrey A. Wietharn ([email protected]) COFFMAN, DEFRIES & NOTHERN, P.A. 534 S. Kansas Ave., Suite 925 Topeka, KS 66603-3407 Phone: (785) 234-3461 Fax: (785) 234-3363 Company Website: www.cdnlaw.com KENTUCKY STATE DEVELOPMENTS Timothy J. Eifler ([email protected]) Direct Dial: (502) 560-4208 Stephen A. Sherman ([email protected]) Direct Dial: (502) 568-5405 Stoll Keenon Ogden PLLC 500 West Jefferson Street, Suite 2000 Louisville, KY 40202 Erica L. Horn ([email protected]) Direct Dial: (859) 231-3037 Jennifer S. Smart ([email protected]) Direct Dial: (859) 231-3619 STOLL KEENON OGDEN PLLC 300 West Vine Street, Suite 2100 Lexington, KY 40507 LOUISIANA STATE DEVELOPMENTS William M. Backstrom, Jr. JONES WALKER LLP 201 St. Charles Ave., Suite 5100 New Orleans, LA 70170-5100 Phone: 504-582-8228 Email: [email protected] Firm Website: www.joneswalker.com Jones Walker SALT Twitter: @JonesWalkerSALT Jones Walker SALT Blog: www.cookingwithSALTlaw.com MAINE STATE DEVELOPMENTS Sarah H. Beard, Esq. PIERCE ATWOOD LLP Merrill’s Wharf 254 Commercial Street Portland, ME 04101 [email protected] (207) 791-1378 MARYLAND STATE DEVELOPMENTS Alexandra E. Sampson, Esq. REED SMITH LLP 1301 K Street, NW, Suite 1000 – East Tower Washington, D.C. 20005 Phone: 202-414-9486 Fax: 202-414-9299 Email: [email protected] MARYLAND STATE DEVELOPMENTS Kenneth H. Silverberg ([email protected]) Christian M. McBurney ([email protected]) Robert G. Trott ([email protected]) NIXON PEABODY LLP 401 – 9th Street, NW #900 Washington, DC 20004-2128 202-585-8000 202-585-8080 facsimile website: http://www.nixonpeabody.com MASSACHUSETTS STATE DEVELOPMENTS Michael A. Jacobs ([email protected]) Phone: 215-851-8868 Robert E. Weyman ([email protected]) Phone: 215-851-8160 Brent K. Beissel ([email protected]) Phone: 215-851-8869 REED SMITH LLP Three Logan Square 1717 Arch St., Ste. 3100 Philadelphia, PA 19103 MICHIGAN STATE DEVELOPMENTS Patrick Van Tiflin, Esq., Chair, SALT Practice Group [email protected] Telephone: (517) 377-0702 Fax: (517) 364-9502 Daniel Stanley, Esq., Partner, SALT Practice Group [email protected] Telephone: (517) 377-0714 Fax: (517) 364-9514 HONIGMAN MILLER SCHWARTZ AND COHN LLP The Phoenix Building, Suite 400 222 North Washington Square Lansing, MI 48933-1800 MINNESOTA STATE DEVELOPMENTS Jerry Geis BRIGGS AND MORGAN, P.A. W-2200 First National Bank Building Saint Paul, Minnesota 55101 (651) 808-6409 [email protected] MISSISSIPPI STATE DEVELOPMENTS Louis G. Fuller BRUNINI, GRANTHAM, GROWER & HEWES, PLLC 190 East Capitol Street, Suite 100 Jackson, Mississippi 39201 P. O. Drawer 119, Jackson, Mississippi 39205 Phone: (601) 948-3101 / Direct: (601) 960-6874 FAX: (601) 960-6902 E-mail: [email protected] Website: www.brunini.com 4 MISSOURI STATE DEVELOPMENTS Janette M. Lohman [email protected] P: 314.552.6161 F: 314.552.7161 M: 314.602.6161 THOMPSON COBURN LLP One US Bank Plaza St. Louis, MO 63101 www.thompsoncoburn.com MONTANA STATE DEVELOPMENTS Michael Green Wiley Barker CROWLEY FLECK PLLP P.O. Box 797 Helena, MT 59624 Phone: (406) 449-4165 Fax: (406) 449-5149 Website: www.crowleyfleck.com NEBRASKA STATE DEVELOPMENTS Kirk Lyda JONES DAY Dallas 1.214.969.5013 [email protected] http://www.jonesday.com/klyda/ NEVADA STATE DEVELOPMENTS Kirk Lyda JONES DAY Dallas 1.214.969.5013 [email protected] http://www.jonesday.com/klyda/ NEW HAMPSHIRE STATE DEVELOPMENTS William F. J. Ardinger Christopher J. Sullivan Kathryn H. Michaelis Stanley R. Arnold RATH, YOUNG AND PIGNATELLI, P.C. One Capital Plaza Concord, NH 03301 Phone: 603.226.2600 E-Mail: [email protected] Web Site: www.rathlaw.com NEW JERSEY STATE DEVELOPMENTS Kyle O. Sollie ([email protected]) Phone: 215-851-8852 / Phone: 215-499-6171 David J. Gutowski ([email protected]) Phone: 215-851-8874 / Phone: 609-524-2028 Robert E. Weyman ([email protected]) Phone: 215-851-8160 REED SMITH LLP Three Logan Square 1717 Arch Street, Suite 3100 Philadelphia, PA 19103 NEW MEXICO STATE DEVELOPMENTS Not provided. NEW YORK STATE DEVELOPMENTS Not provided. NORTH CAROLINA STATE DEVELOPMENTS Charles B. Neely, Jr. ([email protected]) Nancy S. Rendleman ([email protected]) Eugene W. Chianelli, Jr. ([email protected]) WILLIAMS MULLEN P.O. Box 1000 Raleigh, NC 27602 Telephone 919-981-4000 Telecopier 919-981-4300 Website: www.williamsmullen.com NORTH DAKOTA STATE DEVELOPMENTS Michael Green Wiley Barker CROWLEY FLECK PLLP P.O. Box 797 Helena, MT 59624 Phone: (406) 449-4165 Fax: (406) 449-5149 Website: www.crowleyfleck.com NORTH DAKOTA STATE DEVELOPMENTS Kirk Lyda JONES DAY Dallas 1.214.969.5013 [email protected] http://www.jonesday.com/klyda/ OHIO STATE DEVELOPMENTS Anthony L. Ehler ([email protected]) (614) 464-6400 (614) 464-6350 (fax) John S. Petzinger (614) 464-5696 (614) 719-4996 (fax) VORYS, SATER, SEYMOUR AND PEASE LLP 52 East Gay Street P O Box 1008 Columbus, Ohio 43216-1008 www.vorys.com OKLAHOMA STATE DEVELOPMENTS Sheppard F. Miers, Jr. GABLE GOTWALS 100 West Fifth Street, Suite 1100 Tulsa, Oklahoma 74103-4217 918-595-4834, Fax 918-595-4990 [email protected] 5 OKLAHOMA STATE DEVELOPMENTS Kirk Lyda JONES DAY 2727 North Harwood Street Dallas, Texas 75201 1.214.969.5013 [email protected] http://www.jonesday.com/klyda/ OREGON STATE DEVELOPMENTS Robert T. Manicke ([email protected]) Eric J. Kodesch ([email protected]) STOEL RIVES LLP 900 SW Fifth Avenue, Suite 2600 Portland, Oregon 97204-1268 Ph: (503) 224-3380 Fax: (503) 220-2480 www.stoel.com PENNSYLVANIA STATE DEVELOPMENTS Lee A. Zoeller ([email protected]) Phone: 215-851-8850 Frank J. Gallo ([email protected]) Phone: 215-851-8860 Christine M. Hanhausen ([email protected]) Phone: 215-851-8865 REED SMITH LLP Three Logan Square, Suite 3100 1717 Arch Street Philadelphia, PA 19103 RHODE ISLAND STATE DEVELOPMENTS Kirk Lyda JONES DAY 2727 North Harwood Street Dallas, TX 75201 (214) 969-5013 [email protected] http://www.jonesday.com/klyda/ SOUTH CAROLINA STATE DEVELOPMENTS John C. von Lehe, Jr. NELSON MULLINS RILEY & SCARBOROUGH LLP PO Box 1806 Charleston, SC 29402 (843) 534-4311 (843) 534-4349 (fax) [email protected] www.nelsonmullins.com SOUTH DAKOTA STATE DEVELOPMENTS Patrick G. Goetzinger & Andrew J. Knutson GUNDERSON, PALMER, NELSON & ASHMORE, LLP P.O. Box 8045, Rapid City, SD 57709-8045 Tel. 605-342-1078 Fax: 605-342-9503 E-Mail Addresses: [email protected]; [email protected] Website: www.gundersonpalmer.com TENNESSEE STATE DEVELOPMENTS Joseph W. Gibbs ([email protected]) Patricia Head Moskal ([email protected]) Brett R. Carter ([email protected]) Brian S. Shelton ([email protected]) BRADLEY ARANT BOULT CUMMINGS LLP 1600 Division Street, Suite 700 Nashville, TN 37203 615.244.2582 www.babc.com TEXAS STATE DEVELOPMENTS Kirk Lyda JONES DAY 2727 North Harwood St. Dallas, TX 75201 (214) 969-5013 [email protected] www.jonesday.com/klyda UTAH STATE DEVELOPMENTS Mark K. Buchi Steven P. Young Nathan R. Runyan John T. Deeds Pamela B. Hunsaker HOLLAND & HART, LLP 222 South Main Street, Suite 2200 Salt Lake City, Utah 84101 Tel: (801) 799-5800 Fax: (801) 799-5700 Website: www.hollandhart.com VERMONT STATE DEVELOPMENTS Kathryn H. Michaelis ([email protected]) William F.J. Ardinger ([email protected]) Christopher J. Sullivan ([email protected]) Stan Arnold ([email protected]) RATH, YOUNG AND PIGNATELLI, P.C. One Capital Plaza Concord, NH 03301 Phone: 603.226.2600 Web Site: www.rathlaw.com VIRGINIA STATE DEVELOPMENTS William L. S. Rowe ([email protected]) Rita Davis ([email protected]) Emily J. S. Winbigler ([email protected]) HUNTON & WILLIAMS LLP 951 East Byrd Street Richmond, Virginia 23219 6 VIRGINIA STATE DEVELOPMENTS Michael A. Jacobs ([email protected]) Phone: 215-851-8868 Daniel M. Dixon ([email protected]) Phone: 215-851-8160 Michael I. Lurie ([email protected]) Phone: 215-241-5687 REED SMITH LLP Three Logan Square 1717 Arch St Philadelphia, PA 19103 WYOMING STATE DEVELOPMENTS Michael Green Wiley Barker CROWLEY FLECK PLLP P.O. Box 797 Helena, MT 59624 Phone: (406) 449-4165 Fax: (406) 449-5149 Website: www.crowleyfleck.com VIRGINIA STATE DEVELOPMENTS Donald M. Griswold, Esq. ([email protected]) Walter Nagel, Esq. ([email protected]) Jeremy Abrams, Esq. ([email protected]) CROWELL & MORING LLP 1001 Pennsylvania Ave., N.W. Washington, D.C. 20004 Phone: (202) 624-2500 Fax: (202) 628-5116 Web: http://www.crowell.com/statetax WASHINGTON STATE DEVELOPMENTS Robert (Bob) Mahon ([email protected]) Tel. (206) 359-6360 / Fax (206) 359-7360 Gregg Barton ([email protected]) Tel. (206) 359-6358 / Fax (206) 359-7358 PERKINS COIE LLP 1201 Third Avenue, Suite 4900 Seattle, WA 98101 www.perkinscoie.com WEST VIRGINIA STATE DEVELOPMENTS Michael E. Caryl, Esquire BOWLES RICE LLP 101 South Queen Street Post Office Box 1419 Martinsburg, West Virginia 25402 Telephone: (304) 364-4225 Facsimile: (304) 267-3822 e-Mail: [email protected] www.bowlesrice.com WISCONSIN STATE DEVELOPMENTS Carl D. Fortner ([email protected]) Timothy L Voigtman ([email protected]) Theresa A. Nickels ([email protected]) Eric J. Hatchell ([email protected]) FOLEY & LARDNER LLP 777 East Wisconsin Avenue Milwaukee, WI 53202-5367 Tel: 414-297-5739 [CDF] 414-297-5677 [TLV] 608-258-4235 [TAN] 608-258-4270 [EJH Fax: 414-297-4900 Website: www.foley.com 7 ALASKA STATE DEVELOPMENTS Robert (Bob) Mahon Perkins Coie LLP 1201 Third Avenue, Suite 4800 Seattle, WA 98101 Tel. (206) 359-6360 Fax (206) 359-7360 Email: [email protected] www.perkinscoie.com I. INCOME/FRANCHISE TAXES Corporate income tax – foreign dividends. The Alaska Supreme Court held that under Alaska's income tax law the taxpayer was required to include 20% of its foreign parent's dividend income in its unitary business income. The court rejected the taxpayer's argument that the foreign parent's dividend income should be excluded based on Alaska's incorporation by reference of IRC § 882, which would have excluded foreign source dividend income. The court reasoned that IRC § 882 was not incorporated into Alaska tax law by reference because its sourcing provisions are inconsistent with Alaska's formula apportionment methodology. Schlumberger Tech. Corp. & Subsidiaries v. Alaska Dep't of Revenue, 331 P.3d 334 (2014). Referendum upholds lower interest rates on deficiencies and refunds. On August 19, 2014, Alaska voters narrowly rejected a referendum to repeal Alaska Laws of 2013, ch. 10, which substantially reformed Alaska’s oil and gas production tax (see IV below) and reduced interest rates on corporate income tax deficiencies and refunds. Refundable credit for oil refinery infrastructure. Effective January 1, 2015, in-state oil refiners are entitled to a refundable credit against the corporate income tax equal to 40% of qualified infrastructure expenditures or $10,000,000 for each in-state refinery for which qualified expenditures are incurred. Alaska Laws of 2014, ch. 108, § 3. II. SALES AND USE TAXES There have been no notable transactional tax developments in the past year. III. PROPERTY TAXES There have been no notable property tax developments in the past year. IV. OTHER TAXES Referendum upholds oil and gas production tax overhaul. On August 19, 2014, Alaska voters narrowly rejected a referendum to repeal Alaska Laws of 2013, ch. 10, which substantially reformed Alaska’s oil and gas production tax. V. ADMINISTRATIVE MATTERS Review and sunsetting of tax incentives. The Alaska Legislature adopted legislation setting sunset dates for five tax credits and requiring the legislature to review all “indirect expenditures” in 2015 and every six years thereafter. Alaska Laws of 2014, ch. 61. VI. AUTHOR'S BIOGRAPHY Robert (Bob) Mahon is a state and local tax partner in the Seattle office of Perkins Coie, a law firm with more than 1,000 lawyers in 19 offices in the United States and Asia. Mr. Mahon serves as Editor-in-Chief of the Journal of Multistate Taxation and Editor-in-Chief of the ABA Sales and Use Tax Deskbook. He also teaches state and local taxation as an adjunct professor at the University of Washington School of Law. Mr. Mahon is past president of the Washington State Bar Association Tax Section and is listed in The Best Lawyers in America for Tax Law and as Best Lawyers’ Seattle Tax Law Lawyer of the Year. Mr. Mahon received his B.A. with honors from Grinnell College (1992); his J.D. with high distinction from the University of Iowa (1995); and his LL.M. in Taxation from the University of Washington (1996). -2- ARIZONA STATE DEVELOPMENTS Jeffrey M. Vesely, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 2824 San Francisco, CA 94126 (415) 983-1075 [email protected] Kerne H. O. Matsubara, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 2824 San Francisco, CA 94126 (415) 983-1233 [email protected] Annie H. Huang, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 2824 San Francisco, CA 94126 (415) 983-1979 [email protected] Michael J. Cataldo, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 2824 San Francisco, CA 94126 (415) 983-1954 [email protected] Copyright 2015 Pillsbury Winthrop Shaw Pittman LLP All Rights Reserved A. Legislation and Proposed Legislation 1. 2. House Bill 2001, enacted February 17, 2011 – Ariz. Rev. Stat. Ann. § 43-1139 (a) Prior to 2014, multistate taxpayers could elect to use an apportionment formula with an 80 percent-weighted sales factor. (b) Beginning in 2014, electing taxpayers will weight the sales factor as follows: (i) 85 percent for tax years beginning in 2014, (ii) 90 percent for tax years beginning in 2015, (iii) 95 percent for tax years beginning in 2016, and (iv) 100 percent for tax years 2017 and thereafter. Senate Bill 1046, enacted February 21, 2012 – Ariz. Rev. Stat. Ann. § 43-1147(B) (a) “Multistate service providers” may elect to source sales of services for sales factor purposes based on where the customer received the benefit of the service (market-based sourcing), rather than the state where the greater portion of the income-producing activities were conducted, based on costs of performance. (b) A “multistate service provider” is a taxpayer that derives more than 85 percent of its sales from services provided to purchasers who receive the benefit of the service outside Arizona in the tax year of the election. (c) The election is available beginning on or after December 31, 2013, and will be phased in between 2014 and 2017. (i) The phase-in permits the use of market-based sourcing for 85 percent of service sales in 2014, 90 percent of service sales in 2015, 95 percent of service sales in 2016, and 100 percent of service sales thereafter. -1Pillsbury Arizona Update (April 2015).docx (d) The election must be made on a timely filed original income tax return, and is binding for five consecutive tax years. (i) 3. 4. 5. The election may be terminated with the Department of Revenue’s permission or without its permission on the acquisition or merger of the electing taxpayer. House Bill 2673 – Tax Recovery Program (pending) (a) Penalties and interest on unpaid taxes administered by the Department of Revenue would be forgiven, except luxury tax and withholding tax. (b) Application period would be from September 1, 2015, through October 31, 2015. (c) Taxpayers would be required to include payment of tax due with the application, and waive all rights to claim refunds of taxes paid pursuant to the Tax Recovery Program. House Bill 2083 – Shortened Statute of Limitations for Personal Income Tax Assessments (pending) (a) Would reduce the period within which the Department of Revenue may mail any notice of additional tax due for individual income tax adjustments from within four years to within three years after the tax return was filed or required to be filed, whichever is later. (b) Four year statute of limitations would continue to apply to notices based on federal information, but state adjustments made after three years would be limited to changes based on the federal information. (c) Shortened statute of limitations would apply to taxable years beginning in 2015 and thereafter. House Bill 2131 – Attorney Fees in Tax Matters (pending) Would increase the cap on costs and attorney fees prevailing taxpayers may recover from the Department of Revenue in an administrative tax proceeding from $20,000 to $75,000. B. Litigation and Private Letter Rulings 1. 2. Harris Corp. v. Ariz. Dep’t of Revenue, 233 Ariz. 377 (App. 2013) First Data Corp. v. Ariz. Dep’t of Revenue, 233 Ariz. 405 (App. 2013) (a) The Court of Appeals held in Harris Corp. and confirmed in First Data Corp. that the definition of apportionable business income for Arizona purposes contains both a transactional and a functional test, and that the business income test does not contain a liquidation exception. (b) Taxpayers’ Petitions for Review to the Arizona Supreme Court were both denied. Home Depot USA, Inc. v. Ariz. Dep’t of Revenue, 233 Ariz. 449 (App. 2013) (a) Home Depot formed a wholly-owned subsidiary to hold all of its trademarks, trade names, and services marks. The subsidiary licensed these intangibles to Home Depot in exchange for royalty fees. The subsidiary engaged in no other business activity. -2Pillsbury Arizona Update (April 2015).docx 3. 4. 5. (b) The Court of Appeals held that Home Depot and its subsidiary were engaged in a unitary business and required the subsidiary to be included in Home Depot’s combined unitary return. (c) Taxpayer’s Petition for Review to the Arizona Supreme Court was denied. Arizona Corporate Income Tax Ruling CTR 12-1 – Elective Consolidated Returns (a) An affiliated group of corporations which files a federal consolidated return may elect to file a consolidated Arizona income tax return. The election to file a consolidated return is binding on all succeeding taxable years, unless the Department of Revenue consents to a change in filing method. (b) Carry forward of net operating losses incurred before consolidation are limited. (i) Net operating losses may be carried forward only to the extent of that portion of the consolidated income related to the business unit which incurred the prior loss. (ii) When a group of corporations files a consolidated return reporting a net operating loss and one or more corporations cease to be a member of the affiliated group, only that portion of the consolidated loss related to the remaining members of the affiliated group may be carried forward against subsequent income of the consolidated group. (c) The $50 minimum tax is imposed on the single return rather than on each corporation in the group. (d) A single apportionment formula is applied against all of the business income of the affiliated group as if it were a single taxpayer. All Arizona property, payroll, and sales of the affiliated corporations will be included in the numerator of the relevant apportionment factors regardless of whether each of the corporations had nexus within the state on a separate basis. (e) Newly acquired subsidiaries included in the consolidated federal return are considered to have waived any objection to filing a consolidated Arizona return by their consent to the filing of a consolidated federal return. (f) When an affiliated group includes an exempt insurance company, the insurance company’s income and/or loss and apportionment factors are excluded from the Arizona consolidated return. Arizona Corporate Income Tax Ruling CTR 12-2 – Elective Consolidated Returns (a) All members of the affiliated group, including subsequently sold subsidiaries, who are included in an Arizona consolidated tax return for a given year are jointly and severally liable for tax, penalties, and interest of the affiliated group for that year. (b) A mere change in identity, form, or place of organization of the parent does not create a new affiliated group. Taxpayer Information Ruling LR13-004 Proceeds from a patent infringement lawsuit are business income for Arizona corporate income tax purposes where the regular trade or business operations of the patent holder include developing, acquiring and holding patents, and earning income by using patents in manufacturing products or licensing patents to third parties. 6. Arizona Individual Income Tax Ruling ITR 13-2 -3Pillsbury Arizona Update (April 2015).docx (a) Nonresident individuals who are partners of a partnership or are shareholders of an S corporation may elect to join in the filing of a composite individual income tax return with other nonresident partners or shareholders under the following circumstances: (i) Individuals must be nonresidents of the state for the full taxable year. (ii) Individuals (and their spouses) may have no income from Arizona sources other than his or her distributive share of S corporation or partnership income allocable to Arizona. (iii) Deceased members may not be included in the composite return. (iv) All members included in the composite return must have the same tax year for income tax purposes. -4Pillsbury Arizona Update (April 2015).docx CALIFORNIA STATE DEVELOPMENTS Jeffrey M. Vesely, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 2824 San Francisco, CA 94126 (415) 983-1075 [email protected] Kerne H. O. Matsubara, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 2824 San Francisco, CA 94126 (415) 983-1233 [email protected] Annie H. Huang, Esq. Pillsbury Winthrop Shaw Pittman LLP P.O. Box 2824 San Francisco, CA 94126 (415) 983-1979 [email protected] Copyright 2015 Pillsbury Winthrop Shaw Pittman LLP All Rights Reserved Franchise and Income Tax I. Apportionment Formula A. Sales Factor 1. Gross receipts from treasury function and hedging activities. a. b. General Motors Corporation v. FTB, 39 Cal. 4th 773 (2006) (1) California Supreme Court concluded that, except with respect to repurchase agreements (repos), gross proceeds from the sale of marketable securities in the course of treasury function activities, including redemptions on maturity, are to be included in the sales factor. The Court remanded for further proceedings the issue whether inclusion of such proceeds in the sales factor is distortive under Revenue and Taxation Code (RTC) § 25137. In the case of repos, only the interest received from repos should be included in the sales factor. (2) The Court also concluded that research credits can only be used by the member of the unitary group which generated the credit, not the entire group. (See Section II.D.1 below.) Microsoft Corporation v. FTB, 39 Cal. 4th 750 (2006) (1) California Supreme Court held that gross proceeds from the sale of marketable securities, including redemptions on maturity, are includible in the sales factor. (2) Based on the specific facts in the case, the Court concluded that the Franchise Tax Board (FTB) sustained its burden of proving that the inclusion of gross receipts from treasury function activities in the denominator of the sales factor created a distortion under RTC § 25137. (See Section I.B.1 below) -1705841102 c. General Mills, Inc. & Subsidiaries v. FTB, 172 Cal. App. 4th 1535 (2009) (General Mills I) (1) Trial court concluded that commodity hedging transactions did not generate gross receipts for sales factor purposes. (2) Because of its holding above, the court did not consider the issue whether inclusion of such receipts would be distortive under RTC § 25137. (3) On April 15, 2009, the Court of Appeal reversed the trial court’s decision. The Court concluded that taxpayer’s hedging transactions were integral to its core business and held that such transactions generated gross receipts for sales factor purposes. However, since the trial court did not reach the RTC § 25137 distortion issue, the case was remanded to the trial court to address that issue. (4) Petition for review was denied on July 29, 2009. (5) The case was tried on remand on the RTC § 25137 issue. On January 10, 2011, the trial court ruled that the gross receipts from hedging transactions should be excluded from the sales factor under RTC § 25137. An appeal was filed on March 17, 2011. (6) On August 29, 2012, the Court of Appeal affirmed the trial court judgment. Notwithstanding its decision in General Mills I, the Court held that the taxpayer’s hedging transactions were qualitatively different from its main business and that a change in the overall apportionment percentage of 8.2 percent was sufficient quantitative distortion to invoke RTC § 25137. General Mills, Inc. & Subsidiaries v. FTB, 208 Cal. App. 4th 1290 (2012) (General Mills II). (7) d. The taxpayer did not seek review of the Court of Appeal’s decision in General Mills II. Home Depot USA, Inc., SBE Case No. 298683 (Dec. 16, 2008) (1) The SBE held that Home Depot could include its gross receipts from certain treasury functions in its sales factor. (2) Both parties agreed that a qualitative difference between the treasury receipts and receipts generated in the ordinary course of business must exist for the FTB to depart from the standard formula, and such difference existed in this case. However, the parties disagreed on the significance of the quantitative difference between the apportionment results with and without the inclusion of the gross receipts from treasury function. (3) Taxpayer argued that quantitatively, the apportionment results varied by only 3.3 percent with and without the inclusion of the gross receipts, and that this variation was insufficient to satisfy the necessary quantitative difference. (4) FTB argued that inclusion of gross receipts from a treasury function in the sales factor always results in failure of the standard apportionment formula where there is a qualitative difference between the treasury function and the taxpayer’s ordinary business operations. (5) The SBE administrative cases that were deferred pending the resolution of Home Depot were re-activated. -2705841102 (6) In 2008, the FTB put forth a general proposal for settling pending treasury function cases. It is based on the percentage of gross receipts from treasury activities in the sales factor denominator (i.e., total gross receipts including treasury receipts). (a) The tax amounts conceded by FTB are as follows: Percentage Up to 6.6% More than 6.6%, up to 17.3% More than 17.3%, up to 27.9% More than 27.9%, up to 33.9% More than 33.9%, up to 50% More than 50% e. 2. (b) Query: what types of gross receipts should be considered gross receipts from treasury activities? (c) In June 2010, the FTB extended the above proposal (entitled Treasury Function Resolution Program) to taxpayers with pending audits, protests and refund claims. To participate in this program a taxpayer had to have filed a return or claim before January 1, 2010 which included treasury receipts in the sales factor. The taxpayer had to advise the FTB by August 16, 2010 that it wanted to participate in the program. In re Buffets Holdings, Inc., Case No. 08-10141, U.S. Bankruptcy Court (D. Delaware) (Aug. 15, 2011) (1) Bankruptcy court concluded that the FTB’s use of an alternative apportionment formula, which excluded treasury gross receipts from the sales factor denominator, was reasonable. (2) The court also held that the debtors’ “back of the house activities,” including kitchen and food preparation, were properly classified as manufacturing activities for Manufacturers’ Investment Credit (MIC) purposes. Citing Save Mart Supermarkets, 2002-SBE-002 (Feb. 6, 2002), the court concluded that the MIC statute does not require that the food manufacturing or processing be the only business of the taxpayer, only that some of its activities fit in Division D of the Standard Industrial Classification Manual. Regulation 25137(c)(1)(D) a. Effective for taxable years beginning on or after January 1, 2007, the FTB amended Regulation 25137(c)(1) by adding subsection (D) to exclude from the sales factor all interest, dividends and gains (gross and net) in connection with the taxpayer’s treasury function. b. “Treasury function” is defined as “the pooling, management, and investment of intangible assets for the purpose of satisfying the cash flow needs of the trade or business . . . .” It includes the use of futures and options contracts to hedge foreign currency fluctuations, but does not include futures and options transactions to hedge price risks of the products or commodities consumed, produced or sold by the taxpayer. -3705841102 FTB Concession 75% 60% 30% 15% 10% 5% c. 3. Registered broker-dealers and other taxpayers principally engaged in the business of purchasing and selling intangibles of the type typically held in a taxpayer’s treasury function is not considered to be performing a treasury function. In 2009, the statutory definition of “gross receipts” under RTC § 25120 was amended to exclude, amount other items, amounts received from certain transactions in connection with the taxpayer’s treasury function activities. a. For taxable years beginning before January 1, 2011, “sales” for purposes of the sales factor includes all gross receipts not allocated under RTC §§ 25123 through 25127. This was a “clarifying” non-substantive change. RTC § 25120(f)(1). b. For taxable years beginning on or after January 1, 2011, “gross receipts” include the gross amount realized in a transaction producing business income and recognized under the Internal Revenue Code, without reduction for basis or costs of goods sold. RTC § 25120(f)(2). However, gross receipts, even if business income, do not include the following: (1) Repayment, maturity, or redemption of the principal of a loan, bond, mutual fund, certificate of deposit, or similar marketable instrument; (2) The principal amount received under a repurchase agreement or other transaction properly characterized as a loan; (3) Proceeds from the issuance of a taxpayer’s own stock or from sale of treasury stock; (4) Damages and other amounts received as the result of litigation; (5) Property acquired by an agent on behalf of another; (6) Tax refunds and other tax benefit recoveries; (7) Pension reversions; (8) Contributions to capital (except for sales of security by securities dealers); (9) Income from discharge of indebtedness; (10) Amounts realized from exchanges of inventory that are not recognized under the Internal Revenue Code; (11) Amounts received from transactions in intangible assets held in connection with a treasury function of the taxpayer’s unitary business and the gross receipts and overall net gains from the maturity, redemption, sale, exchange, or other disposition of those intangible assets; (a) “Treasury function” means the pooling, management, and investment of intangible assets for purposes of satisfying the cash flow needs of the taxpayer’s trade or business, such as providing liquidity for a taxpayer’s business cycle, providing a reserve for business contingencies, and business acquisitions, and also includes the use of futures contracts and options contracts to hedge foreign currency fluctuations. (b) Treasury function does not include trading activities of a registered broker-dealer. -4705841102 (12) 4. 5. Amounts received from hedging transactions involving intangible assets. Mandatory single-sales factor a. For taxable years beginning on or after January 1, 2011, and before January 1, 2013, multistate taxpayers were permitted to make an irrevocable annual election on an original timely filed return to apportion its income using a single-sales factor. The election was not available to taxpayers listed in RTC § 25128(b), which derived more than 50 percent of their gross receipts from agricultural, extractive, savings and loan, or banking or financial activities. RTC § 25128.5. b. Taxpayers that made the single-sales factor election were required to use marketbased sourcing for the assignment of sales of intangibles and services. Former RTC § 25136(b). Taxpayers that did not make such election sourced such sales to the state where the greater proportion of income producing activity was performed, based on the costs of performance. Former RTC § 25136(a). c. In November 2012, voters approved Proposition 39, which eliminated the single-sales factor election and requires most businesses to use a single-sales factor method of apportionment for taxable years beginning on or after January 1, 2013. Agricultural, extractive, savings and loan, and banking and financial businesses must continue to use an equally weighted three-factor apportionment formula. RTC § 25128.7. d. For taxable years beginning on or after January 1, 2013, Proposition 39 requires the use of the market-based sourcing rules for sales of intangibles and services for all taxpayers, including agricultural, extractive and financial businesses. RTC § 25136(a). e. The special sourcing rules for certain industries and transactions that are set forth in the FTB Regulations under Section 25137 (e.g., Regulation 25137-4.2 regarding banks and financial corporations) generally should continue to apply, subject to certain modifications. f. Note: The FTB announced that mandatory single-sales factor apportionment applies not only to corporate taxpayers but to any “apportioning trade or business,” including sole proprietorships, partnerships, limited liability companies and corporations. See FTB Tax News, April 2013. Regulation 25136-2—Sourcing of sales from intangibles/services a. FTB adopted Regulation 25136-2 to provide guidance on assigning sales of intangibles and services when market-based sourcing is required (i.e., for taxpayers that made a single-sales factor election, and, beginning in 2013, all taxpayers generally). b. Under market-based sourcing, sales of intangibles and services are generally sourced for sales factor purposes as follows. (1) Sales from services are sourced to the state where the purchaser receives the benefit of the services, to the extent the benefits are received. (2) Sales of intangible property are sourced to the state where the intangible property is used. Special rules apply in the case of the sale of ownership interests in a corporation or pass-through entity (other than sales of marketable securities), the licensing of marketing intangibles and the licensing of manufacturing intangibles. -5705841102 6. 7. Sales from the sale, lease, rental, or licensing of real or tangible property are sourced to the state where the property is located. (4) The sales factor provisions in Regulations 25137 through 25137-14 are incorporated, with certain modifications to reflect market-based sourcing. c. On March 29, 2012, the FTB held an interested parties meeting to discuss possible amendments to Regulation 25136-2 to address sales factor sourcing for sales of minority interests in business entities, asset management fees and dividends. d. Second and third interested parties meetings were held on October 18, 2013 and July 8, 2014 to address additional issues, including the sourcing of sales of marketable securities, interest, dividends, goodwill and sales of interests in start-up entities. Finnigan Returns (Again) a. For taxable years beginning on or after January 1, 2011, all sales of tangible personal property of a combined reporting group properly assigned to this state must be included in the sales factor numerator regardless of whether the member of the combined reporting group making the sale is subject to tax in California. Sales not assigned to California are not included in the California sales factor numerator if a member of the combined reporting group is subject to tax in the state of the purchaser. RTC § 25135(b). b. The return to Finnigan is limited to sales of tangible personal property and does not apply to sales of other than tangible personal property. c. On May 26, 2011 and October 4, 2011, the FTB held interested parties meetings to discuss proposed amendments to Regulation 25106.5 (sales factor; sales of tangible personal property; throwback sales), to implement the return of Finnigan. d. On February 6, 2013, the FTB held a public hearing on the proposed amendments to Regulation 25106.5. The proposed amendments were approved and became effective on January 1, 2014. FTB Chief Counsel Ruling 2011-01 a. 8. (3) FTB concluded that a taxpayer may use its customers’ billing addresses maintained in the ordinary course of business as a reasonable proxy for its customers’ commercial domicile, for purposes of assigning sales of other than tangible personal property under Regulation 25136(d)(3)(D), relating to income producing activity performed on behalf of a taxpayer by an agent or independent contractor. Regulation 25128.5 a. On March 29, 2011, the FTB held a hearing on the proposal to adopt FTB Regulation 25128.5 setting forth guidance on the single-sales factor election. On July 7, 2011, the FTB approved the Regulation. -6705841102 9. 10. 11. Equally-weighted apportionment formula under Multistate Tax Compact a. In January 2010, a number of companies filed complaints in San Francisco Superior Court claiming refunds based on the election to compute California apportionable income using an equally-weighted three-factor apportionment formula under the Multistate Tax Compact, in place of California’s standard three-factor formula under RTC § 25128 which includes a double-weighted sales factor. b. Cases included: The Gillette Company & Subsidiaries (CGC-10-495911); KimberlyClark World Wide, Inc. & Subsidiaries; The Procter & Gamble Manufacturing Co. & Affiliates; RB Holdings (USA) Inc.; Sigma-Aldrich Corp.; and Jones Apparel Group. c. On November 2, 2010, the trial court sustained the FTB’s demurrers in the above cases. An appeal was filed on December 2, 2010. d. On June 27, 2012, California repealed the Compact. See Section IX.B.1 below. e. On October 2, 2012, the Court of Appeal issued its opinion in Gillette on rehearing and reversed the trial court. The Court held that the Compact, which required states to offer the three-factor election, was binding on California and superseded subsequent conflicting state law. f. FTB guidance issued on October 5, 2012 (1) FTB issued Notice 2012-01 setting forth the procedures for filing a protective claim for refund if a taxpayer wants to raise the Compact election issue pending in Gillette. FTB will only take action on the claim once Gillette has been fully resolved. (2) FTB issued a News Flash indicating that a taxpayer making the election under the Compact on its 2011 return runs the risk of having the large corporate understatement penalty (LCUP) imposed if Gillette is ultimately reversed. g. On January 16, 2013, the California Supreme Court granted review in Gillette. h. Briefs on the merits have been filed by the parties. FTB Chief Counsel Ruling 2012-01 a. FTB ruled that the gross proceeds from principal trades of a registered broker-dealer should be included in the sales factor under the standard apportionment formula. b. FTB also ruled that intrastate apportionment was not a proper subject for analysis under RTC § 25137, even though inclusion of the gross proceeds from principal trades may impact the intrastate apportionment between the broker-dealer and the financial corporation members of the broker-dealer. Sourcing of Sales of Tangible Personal Property and Shipping Charges a. FTB Chief Counsel Ruling 2013-3 (1) FTB ruled that sales of tangible personal property ultimately destined for another state but shipped to a third party public warehouse in California for temporary storage, pending shipment in the same form as received, to the ultimate destination stare were not sales within California for inclusion in the sales factor. -7705841102 b. B. (2) The goods were not used in California through activities such as warehousing and repackaging, since the goods were stored in California for a limited period of time and were shipped to the ultimate destination in the same form that they were received. (3) Moreover, since the ultimate destination was designated by the taxpayer at the time of the initial order and was separately billed to the buyer’s division in the ultimate state of destination, the temporary storage in California was merely for purposes of further shipment elsewhere in the stream of interstate commerce. Williams-Sonoma, Inc. & Subsidiaries, SBE Case No. 519857 (Sept. 11, 2013) (1) In a letter decision, the SBE ruled that the taxpayer’s receipts from shipping fees on goods sent to California customers were sourced to the taxpayer’s sales factor numerator along with the gross receipts from the sale of those goods. (2) The taxpayer’s shipping services were not considered to be a separate income producing activity subject to the sourcing rules for sales of other than tangible personal property. Distortion and Special Industry Formulas 1. Microsoft Corporation v. FTB, 39 Cal. 4th 750 (2006) a. The California Supreme Court concluded that the FTB sustained its burden of proving the inclusion of gross receipts from treasury function activities in the denominator of the sales factor created a distortion under RTC § 25137. The Court further concluded that the FTB’s “cure” for the distortion of including net receipts from the redemption transactions was reasonable. In reaching these conclusions, the Court emphasized the following: (1) RTC § 25137 is not confined to correcting unconstitutional distortions. (2) The comparison of low margin sales (treasury function) with higher margin sales (software transactions) presents a problem for Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA’s sales factor contains an implicit assumption that a corporation’s margins will not vary inordinately from state to state. (3) The comparison of margins in determining whether distortion exists under RTC § 25137 is not a prohibited separate accounting analysis. (4) RTC § 25137 is not to be applied in only unique non-recurring situations. (5) While the “cure” the FTB proposed in this case was reasonable, the Court cautioned that the FTB’s approach might fail the test of reasonableness in another case. For example, if, unlike the instant case, the treasury operations provide a substantial portion of a taxpayer’s income, the use of RTC § 25137 may be inappropriate. (6) The party seeking to apply RTC § 25137 has the burden of proving by clear and convincing evidence that the standard formula does not fairly represent the extent of the taxpayer’s business activities in California. -8705841102 b. 2. Microsoft Corporation v. FTB, 212 Cal. App. 4th 78 (2012). a. b. 3. The Court’s decision opens the door for challenges to the standard apportionment formula for both taxpayers and the government. The endorsement of a comparison of margins between functions of the unitary business is a significant development. Suit for refund filed on January 22, 2008. Trial court entered judgment on March 21, 2011, ruling in favor of the FTB on the following issues for the 1995 and 1996 tax years: (1) Royalties from computer software products were derived from the licensing of tangible personal property that was shipped or delivered to a location in California and, as such, should be assigned to the California numerator of the sales factor. (2) Gross receipts from marketable securities should be excluded from the sales factor under RTC § 25137. (3) The value of trademarks, copyrights, patents and other intangible assets should not be included in the property factor. (4) The amnesty penalty under RTC § 19777.5 is not unconstitutional. Taxpayer appealed issue (1) above. On December 18, 2012, the Court of Appeal reversed and held in favor of the taxpayer. The Court held that a license to replicate and install software programs in the manufacturing of computers constitutes intangible property. The licensing of software programs did not constitute California sales, because under the sourcing rules applicable to sales of intangibles, the greater proportion of the taxpayer’s costs of performance related to such licensing were incurred in Washington. Franchisors a. In Chief Counsel Ruling 2010-2, the FTB determined that the special apportionment and allocation of income rules applicable to franchisors under Regulation 25137-3 applies to a company’s licensing activity which includes granting licenses for the use of the company’s trademark to licensees who market products bearing the company’s trademark. The FTB also concluded that royalty and franchise payments by the company’s foreign subsidiaries are treated as payments by third-party licensees, where the company has made a water’s edge election. b. DTS, Inc., SBE Case No. 570576 (1) 4. Case involved issue whether Regulation 25137-3 applied strictly to the licensing of trademarks, trade names and service marks as the FTB contended, or whether it also applied to the licensing of patented technology and know-how. Case settled in January 2014. Motion Picture and Television Industry a. The FTB held interested parties meetings in January 2008 and May 2009 to consider revising Regulation 25137-8, regarding apportionment for the motion picture and television industry. On June 16, 2009, the three-member FTB approved proceeding with the formal rulemaking process to adopt proposed amendments to Regulation 25137-8. On September 13, 2011, the FTB held a hearing on proposed amendments to Regulation 25137-8 (renumbered as 25137-8.1) and the proposed adoption of Regulation 25137-8.2, which were approved. Regulation 25137-8.1 is applicable for -9705841102 taxable years beginning before January 1, 2011, while Regulation 25137-8.2 is applicable for taxable years beginning on or after January 1, 2011. b. 5. 6. Banks and Financial Corporations a. On December 4, 2014, the FTB held an interested parties meeting to discuss a possible regulatory effort to address certain apportionment issues involving combined reporting groups that include both banks/financial corporations and general corporations. b. The FTB indicated that the purpose of the meeting was to elicit public input regarding issues that may arise when the financial activities of the group predominant and thus existing Regulation 25137-10 does not apply. c. The meeting discussion focused on the issue of a combined reporting group comprised of both bank/financial entities and general corporations, such as a registered brokerdealer, and the inclusion in the sales factor of the gross receipts from the activities of the broker-dealer. Occasional Sales a. In Emmis Communications Corp., SBE Case No. 547964 (June 12, 2013), the SBE determined in a letter decision that the gross receipts from a media company’s sale of 13 television stations should be included in the sales factor, and should not be excluded as occasional sales under Regulation 25137(c)(1)(A). b. Imperial, Inc., SBE Case Nos. 472648 and 477927 (July 13, 2010) c. II. In Chief Counsel Ruling 2013-1, FTB ruled that a motion picture entertainment company that engaged in a process that transformed two- and three-dimensional films so that they may be displayed in a theater was a “producer” within the meaning of Regulation 25137-8.2. Thus, the revenue derived from such process was gross receipts from “films in release to theaters” assignable under the Regulation. (1) In a summary decision, the SBE ruled that the gross proceeds from the sale should be excluded from the sales factor, because the sale resulted in substantial gross receipts from an infrequent, occasional sale of property that was used in the business. See FTB Regulation 25137(c)(1)(A). (2) The SBE also determined that the gain from goodwill on the sale of a corporation’s assets is business income. In Chief Counsel Ruling 2014-02, the FTB concluded that the taxpayer’s asset sales pursuant to a post-bankruptcy plan of reorganization were within the normal course of business and occurred at short intervals on a regular basis within a two-year period. Thus, the sales were not “occasional sales” within the meaning of Regulation 25137(c)(1)(A) and the resulting gross receipts should be included in the sales factor. Credits A. Research and Development Credit 1. FTB Legal Division Guidance 2012-03-01 a. In June 2011, the FTB issued Legal Division Guidance 2011-06-01 in which it advised that a purely service company with no “gross receipts” within the meaning of RTC § 23609(h)(3) could not claim the California research and development (R&D) credit. - 10 705841102 2. 3. 4. b. In July 2011, the FTB withdrew Legal Division Guidance 2011-06-01. c. On March 16, 2012, the FTB issued Legal Division Guidance 2012-03-01 and confirmed that a taxpayer with no “gross receipts” under RTC § 23609(h)(3) can claim the R&D credit. Pacific Southwest Container, Inc., SBE Case No. 473587 (March 22, 2011) a. The SBE ruled in favor of the taxpayer and concluded the taxpayer met its burden of proof demonstrating that its activities constituted “qualified research.” b. The SBE rejected the FTB’s attempt to impeach the taxpayer’s documentation and other evidence. Pacific Coast Building Products, Inc., SBE Case No. 514183 a. Case involved the following issues: (1) whether taxpayer presented sufficient evidence that its activities constituted qualified research, (2) whether taxpayer met its burden of proving qualified research expenses and (3) whether taxpayer substantiated its fixed-based percentage as required by IRC § 41(c)(3)(A). b. At the initial hearing, issues also were raised regarding the sufficiency of noncontemporaneous documentation and whether the documentation established “a process of experimentation” relating to each project. c. On October 29, 2013, another hearing was held before the SBE for further review of the “process of experimentation” issue. d. On February 25, 2014, the SBE issued a summary decision finding that the taxpayer demonstrated that its activities were qualified activities through contemporaneous and other documentation as well as oral testimony. The SBE also ruled that taxpayer established, through such evidence, that it was engaged in a process of experimentation for substantially all of its research activities. DreamWorks Animation SKG, Inc., SBE Case No. 717701 a. Case involved the issue of whether film production employees who were an integral part of the taxpayer’s software development process performed qualified services as defined in IRC § 41. b. FTB conceded that production employees who were listed on patents performed qualified services. c. In October 2013, the case was dismissed upon request of the FTB, which granted the research credits in full. 5. In testimony before the SBE on February 22, 2011, former FTB Chief Counsel, Geoffrey Way, noted that there is a significant increase in audit activity by the FTB in this area. 6. On October 11, 2012, the FTB held an interested parties meeting to discuss what legislative proposals should be considered in California and how the FTB can expedite the audit process while ensuring the documentation and substantiation for the credit is sufficient to determine the proper qualified activities and expenses. 7. In its Tax News dated December 2013, the FTB stated that “[i]f the IRS audited the Research Credit, we will generally follow the federal determination.” - 11 705841102 a. B. However, while the FTB is now more reasonable with respect to R&D credit claims that have been audited by the IRS, the FTB will nevertheless conduct its own audit in some circumstances. Enterprise Zone Hiring Credits 1. 2. Deluxe Corporation, 2006-SBE-003 (December 15, 2006) a. Case involved challenge to FTB’s position of looking behind vouchers obtained from local enterprise zones. The taxpayer is arguing “voucher reliance” and that RTC § 23622.7 only requires that a certificate (voucher) be obtained from the enterprise zone or other appropriate agency and provided to the FTB upon request. b. On January 31, 2006, the SBE held in a 4-1 vote that the FTB is permitted to look behind the vouchers. Post-hearing briefs were filed regarding whether the 51 remaining employees qualify for the credit. c. On December 15, 2006, the SBE issued a formal opinion confirming the decision in January that the FTB is permitted to look behind the vouchers. In a letter decision issued that same day, the SBE concluded that 15 of the 51 employees at issue qualified for the credit. d. On April 11, 2007, the taxpayer filed a suit for refund in the San Francisco Superior Court (No. CGC-07-462305). e. Trial was scheduled for July 14, 2008, but case settled and has been dismissed. Dicon Fiberoptics, Inc. v. FTB, 53 Cal. 4th 1227 (2012), rev’g, 173 Cal. App. 4th 1082 (2009) a. On March 13, 2007, a suit for refund was filed challenging the FTB’s authority to look behind the vouchers (Los Angeles Superior Court No. BC 367885). b. On August 17, 2007, the trial court sustained the FTB’s demurrer without leave to amend, and on October 3, 2007, an order of dismissal of plaintiff’s action was filed. Plaintiff appealed. c. On May 7, 2009, the Court of Appeal issued a published opinion in favor of the taxpayer. The Court of Appeal concluded that, while the FTB had the authority to look behind the vouchers, the FTB had the burden of proof to demonstrate the invalidity of the vouchers. (1) The vouchers are de facto valid. (2) The FTB cannot request additional information from the taxpayer. d. The FTB filed a Petition for Rehearing, which was denied. e. The FTB then filed a Petition for Review with the California Supreme Court, which was granted on August 19, 2009. f. On April 26, 2012, the California Supreme Court reversed and held that the FTB may conduct an audit to determine whether a taxpayer is entitled to the credit and is not required to accept a voucher as conclusive or prima facie proof. Case settled after remand to trial court. - 12 705841102 3. NASSCO Holdings, Inc., 2010-SBE-001 (Nov. 17, 2010) a. In a letter decision, the SBE held that the taxpayer is entitled to apply its EZ and MIC tax credits to reduce its alternative minimum tax liabilities, which results in no tax owed. b. The FTB filed a petition for rehearing, which the SBE denied on August 31, 2009. c. On November 17, 2010, the SBE issued a formal opinion in favor of the taxpayer. d. The FTB issued Notice 2011-02 (March 18, 2011) to provide guidance regarding the SBE’s formal opinion. 4. On January 11, 2013, HCD proposed regulations that would prohibit retroactive vouchering in certain instances, tighten the vouchering process and create stricter audit procedures. 5. On July 11, 2013, Governor Brown approved AB 93, which creates new economic development incentives to replace the current EZ hiring credit. a. C. EZ hiring credits will be repealed on January 1, 2014. (1) No new EZ hiring credits may be generated for tax years beginning on or after January 1, 2014. (2) EZ hiring credits generated prior to January 1, 2014 may be carried forward for up to 10 years. b. New incentives beginning in 2014 (see Governor’s Economic Development Initiative, Section II.C below). c. On September 26, 2013, the Governor also approved legislation to extend the time period to apply for vouchers for the EZ hiring credit. Governor’s Economic Development Initiative 1. California Competes Credit—Tax credits to retain or attract new business activity in California, to be administered by the Governor’s Office of Business and Economic Development (GO-Biz). a. Credits are available for allocation during various application periods. b. Tax credit agreements are negotiated by GO-Biz subject to approval by a statutorily created California Competes Tax Credit Committee. c. Credit agreements must contain a credit recapture provision, which may be triggered if the taxpayer fails to achieve the agreed upon California employment and investment levels. d. FTB is responsible for reviewing taxpayer books and records to verify compliance with those agreements and recommending any credit recapture to the Committee. e. FTB issued Notice 2014-02 setting forth general procedures applicable to FTB’s review of taxpayer compliance with credit agreements. 2. New Employment Credit—Targeted income and franchise tax hiring credit. 3. Sales and Use Tax Exemption—For purchases of manufacturing-related equipment. - 13 705841102 D. Separate But Unitary 1. General Motors Corporation v. FTB, 39 Cal. 4th 773 (2006) a. California Supreme Court rejected the taxpayer’s argument that a research expense credit should be applied against the tax liability of the unitary group, or in the alternative, should be “intrastate-apportioned” against the tax liability of each of the taxpayer-members of the unitary group. b. The Court accepted the FTB’s argument that the credit should be limited to the taxpayer which incurred the research expenses. 2. Cases pending in the administrative process challenging the siloing of credits under RTC § 25137. 3. Credit Assignment a. E. AB 1452, enacted on September 30, 2008, added RTC § 23663, which provides that an “eligible credit” may be assigned by a taxpayer to an “eligible assignee.” Assigned credits may be applied against the tax of the assignee in taxable years beginning on or after January 1, 2010. The election to assign is irrevocable and is required to be made on the taxpayer’s original return for the taxable year in which the assignment is made. (1) “Eligible credit” means any credit earned by a taxpayer in a taxable year beginning on or after July 1, 2008, or any credit earned prior to July 1, 2008, that is eligible to be carried forward to the taxpayer’s first taxable year beginning on or after July 1, 2008. (2) “Eligible assignee” means any “affiliated corporation” that is properly treated as a member of the same combined reporting group. (3) “Affiliated corporation” means a corporation that is a member of a commonly controlled group. b. The Legislature clarified that any limitations on the allowance of a credit that would apply to the assigning taxpayer also applies to the assignee. See SBX1 28 (Sec. 8(a)). c. The FTB released a set of Frequently Asked Questions (FAQs) and Form 3544 concerning the new credit assignment provisions. On April 3, 2009, FTB held an interested parties meeting (IPM) to discuss the FAQs, and released a summary of the IPM. FTB addressed the manner in which the credit assignment election must be made, substantiation of the credit after assignment, and post-assignment credit utilization limitations. The FAQs were recently amended to address limitations on credits attributed to a disregarded business entity and assignment limitations relating to the low income housing tax credit and the California film and television tax credit. d. On October 1, 2012 and December 5, 2013, the FTB held interested parties meetings to discuss issues relating to defective elections made under RTC § 23663, including identifying and defining defective elections and possible methods to correct a defective election. e. On June 12, 2014, the FTB held a third interested parties meeting to discuss draft language for proposed regulations to address defective credit assignments under RTC § 23663. Other Credits - 14 705841102 1. III. Motion Picture Production Credit a. For taxable years beginning on or after January 1, 2011, a credit is allowed for 20 percent of the qualified expenditures of qualified motion pictures, or 25 percent of such expenditures for independent films or a television series whose production was relocated to California primarily because of the credit. b. The credit may be carried forward for 6 years, and is available for individuals and corporations. c. On October 4, 2013, Governor Brown approved AB 1173, which permits the film tax credit to reduce tax below the tentative minimum tax, retroactively to January 1, 2011. See RTC § 23036(d)(1)(R). d. On September 18, 2014, Governor Brown approved AB 1839, which increases the amount available for the film and television production credit and extends the credit to more types of projects. Deductibility of Dividends/Expense Attribution A. Farmer Bros. v. FTB, 108 Cal. App. 4th 976 (2003), cert. denied, 540 U.S. 1178 (2004) 1. California Court of Appeal held RTC § 24402 unconstitutional under the Commerce Clause. RTC § 24402 allowed a dividends received deduction for dividends from noninsurance companies that were present in California as determined by its apportionment factors. The Court held that such a limitation violated the Commerce Clause. 2. As a result of Farmer Bros., the FTB announced that for years ending on or after December 1, 1999, no deduction would be allowed under RTC § 24402. a. Abbott Laboratories, et al. v. FTB, 175 Cal. App. 4th 1346 (2009) (1) b. On July 21, 2009, in a published decision, the Second District Court of Appeal affirmed in favor of the FTB. The Court held that Farmer Bros. found RTC § 24402 to be unconstitutional in its entirety and could not be reformed. The Court declined to apply the severability provisions of RTC § 23057. River Garden Retirement Home v. FTB, 186 Cal. App. 4th 922 (2010) (1) On July 15, 2010, the First District Court of Appeal largely followed the Abbott Labs decision. The Court concluded that RTC § 24402 cannot be saved by severance of the offending language and the remedy of disallowing the dividends received deduction did not violate the Due Process prohibition against retroactive tax increases. B. Apple Inc. v. FTB, 199 Cal. App. 4th 1 (2011) 1. On January 26, 2010, the trial court issued a final statement of decision in favor of the plaintiff and concluded that the FTB’s disallowance of interest expense deductions under RTC § 24425 was erroneous (San Francisco Superior Court No. CGC-08-471129, Jan. 26, 2010). 2. The trial court concluded that the dominant purpose of plaintiff’s borrowing which generated the interest expense was to fund domestic working capital needs and not to provide funds to the foreign dividend payors whose dividends were deductible under RTC § 24402. 3. The trial court held that none of the interest expense deductions should be disallowed. - 15 705841102 IV. 4. The trial court rejected the FTB’s application of the broad fungibility concept embodied in the foreign investment interest offset rules of Regulation 24344. 5. On September 12, 2011, the Court of Appeal affirmed the trial court on the interest expense deduction issue. The FTB did not file a petition for review. See Section V.B below. 6. Challenges to the application of the foreign investment interest offset rules under Regulation 24344 are pending before the FTB. Business/Nonbusiness Income A. B. C. D. E. ComCon Production Services I, Inc. v. FTB, LA Superior Court No. BC489779 1. On February 2, 2012, the SBE ruled that a break-up fee from a failed merger was business income and that the taxpayer was engaged in a single unitary business with a majorityowned corporation. Comcast Cablevision Corp., SBE Case No. 424198. 2. Taxpayer filed suit in Los Angeles Superior Court on August 6, 2012. 3. On March 6, 2014, the court ruled that the break-up fee was business income and that the evidence did not establish a unitary relationship. Judgment entered August 22, 2014. 4. Case is pending on appeal. 5. On February 9, 2015, the trial court ruled that taxpayer was the “prevailing party” with respect to the unitary issue and thus was entitled to recover litigation costs. C.V. Starr & Affiliates v. FTB, San Francisco Superior Court No. CGC-13-527952 1. On January 11, 2013, taxpayer filed suit regarding issue whether dividend and capital gain resulting from its acquisition and subsequent sale of AIG common stock is business or nonbusiness income. 2. Stipulation of Settlement was filed on May 29, 2014. Fidelity National Information Service Inc. v. FTB, Sacramento Superior Court No. 34-2013-00148015 1. On July 15, 2013, taxpayer filed suit regarding issue whether gain from the sale of a minority stock interest is business or nonbusiness income. 2. Taxpayer also is challenging the constitutionality of the LCUP. 3. Case is pending at trial court, with a hearing scheduled for July 13, 2015. Levi Strauss & Co. and Levi Strauss Associates, Inc., SBE Case No. 547505 1. SBE appeal involving issue whether interest and other expenses incurred in connection with a leveraged buyout (LBO) of a California corporation’s stock are nonbusiness expenses wholly allocable to California. 2. Issue is similar to that raised in Esprit de Corp., SBE Case No. 48986 (Apr. 20, 2001), in which the SBE determined that LBO interest expense was a nonbusiness expense. 3. Prior to the SBE hearing, the case settled. Rheem Manufacturing Company, SBE Case No. 485872 (2010) - 16 705841102 1. F. Pacific Bell Telephone Company & Affiliates, SBE Case No. 521312 (2011) 1. G. The FTB ruled on the business/nonbusiness characterization on the taxpayer’s sale of stock in a corporation under various scenarios. Referring to Occidental Petroleum, 83-SBE-119 (June 21, 1983), the FTB concluded that the frustration of the taxpayer’s intended purpose for the acquisition of the stock was not a determining factor. Rather, the FTB considered the actual operational ties between the taxpayer and the corporation, and the significance of those ties, to be the most important. Water’s Edge Election A. B. C. VI. On September 20, 2011, the SBE ruled that the 2001 and 2002 income from Pacific Bell’s investments in seven foreign phone companies was nonbusiness income. FTB Legal Ruling 2012-01 1. V. The SBE ruled that the FTB properly classified a manufacturing company’s sale of stock in a distribution company as business income because the ownership of the stock was integral to the taxpayer’s strategic business relationship with the distribution company. Fujitsu Holdings, Inc. v. FTB, 120 Cal. App. 4th 459 (2004) 1. California Court of Appeal concluded that for purposes of calculating the Subpart F inclusion ratio under the water’s edge combined report, dividends from lower-tier controlled foreign corporations should be excluded and not taken into account under RTC § 25106. In addition, the Court concluded that California has adopted the previously taxed income provisions of IRC § 959. 2. On the preferential ordering v. pro rata dividend deduction issue, the Court also concluded that the elimination provisions of RTC § 25106 are to be applied prior to the 75-percent dividends received deduction provisions of RTC § 24411. Apple Inc. v. FTB, 199 Cal. App. 4th 1 (2011) 1. California Court of Appeal held that the dividends from a controlled foreign corporation that was partially included in a water’s edge combined report should be treated as paid first out of current year earnings and then out of prior years’ earnings, for purposes of determining whether such dividends should be eliminated under RTC § 25106 or deducted under RTC § 24402. 2. Case also involved RTC §24425 and interest expense disallowance issues. (See Section III.B above) FTB Technical Advice Memorandum 2011-02 1. In TAM 2011-02, the FTB concluded that it would continue to apply the last-in-first-out (LIFO) ordering approach to dividend distributions from subsidiaries that are partially included in a water’s edge combined report. 2. The FTB’s position is that, with each year’s distribution, dividends are deemed first distributed from that year’s unitary earnings, until those earnings are depleted, with the remaining dividends deemed distributed from non-unitary earnings. Tax Shelters A. On March 24, 2011, California enacted legislation applicable to the use of abusive tax avoidance transactions (ATATs) (Senate Bill No. 86.) - 17 705841102 B. C. 1. An ATAT is defined as a tax shelter, a reportable transaction, a listed transaction or a gross misstatement, as those terms are defined in the Internal Revenue Code, as well as any transaction subject to California’s noneconomic substance transaction (“NEST”) penalty. RTC § 19777(b). 2. Statute of limitations for assessments relating to ATATs was extended to 12 years from the due date or filing of the return. RTC § 19755(a)(2). 3. Under RTC § 19774, the definition of a NEST was expanded. b. A transaction is treated as lacking economic substance if the taxpayer does not have a valid nontax California business purpose for entering into the transaction. c. A NEST also includes a transaction that lacks economic substance within the meaning of Internal Revenue Code section 7701(o), with certain language modifications. 1. In a summary decision, the SBE ruled that the FTB properly disallowed certain losses generated by a “Son of BOSS” transaction, which the SBE concluded lacked economic substance. The SBE determined that (1) the taxpayer failed to show subjective intent of entering into the transactions for financial profit and (2) by any objective measure, the transactions at issue were not capable of producing an overall economic benefit aside from the tax losses. 2. The SBE also ruled that the FTB properly disregarded a Nevada corporation as a separate entity, where the taxpayer failed to show that the corporation was formed for a business purpose and that the transactions with the corporation had economic substance. 3. The SBE concluded that imposition of the NEST penalty was proper. FTB Notice 2008-4 On June 6, 2008, the FTB issued Notice 2008-4 regarding resolution of Bogus Optional Basis (BOB) transactions and certain employee stock ownership plan (ESOP) transactions. FTB Notice 2011-01 1. E. A NEST includes the “disallowance of any loss, deduction or credit, or addition to income attributable to a determination that the disallowance or addition is attributable to a transaction or arrangement that lacks economic substance including a transaction or arrangement in which an entity is disregarded as lacking economic substance.” Appeal of Joseph Francis, SBE Case No. 523692 (May 22, 2013) 1. D. a. On January 6, 2011, the FTB issued Notice 2011-01 identifying as a California “listed transaction” certain transactions involving apportioning corporate taxpayers that use one or more partnerships to improperly inflate the denominator of the California sales factor, thereby reducing the amount of business income apportioned to California for franchise or income tax purposes. FTB Notices 2011-03 and 2011-04 1. On April 22, 2011, the FTB issued Notice 2011-03 identifying as a California “listed transaction” certain circular flow of cash transactions involving parent corporations that artificially increase their basis in the stock of their subsidiaries without any outlay of cash or property, prior to the parent selling the stock of the subsidiary to an unrelated party. On August 4, 2011, the FTB issued Notice 2011-04 to withdraw 2011-03 and more “clearly - 18 705841102 identify” the abusive nature of the transactions that the FTB intended to identify as a listed transaction. F. VII. Gonzales v. FTB, California Court of Appeal, First Appellate District Case No. A134238 (April 30, 2013) 1. Taxpayer filed suit seeking a refund of California personal income taxes based on an alleged $142 million capital loss in an abusive tax shelter transaction. Taxpayer also filed a tax refund action in federal district court seeking a federal income tax refund due to disallowance of the same $142 million capital loss at issue in the California refund suit. 2. In March 2011, the federal district court granted summary judgment in favor of the federal government, concluding that the taxpayer had not submitted evidence creating a triable issue of fact on the issue whether the taxpayer entered into the transaction primarily for profit. In September 2012, the Ninth Circuit affirmed the district court’s ruling. 3. The FTB filed a motion for judgment on the pleadings in the California refund suit, contending that the judgment in the federal action collaterally estopped the taxpayer from claiming a profit motive for the transaction. The trial court ruled that the taxpayer’s California tax refund action failed as a matter of law. 4. In an unpublished decision, the Court of Appeal affirmed the trial court’s ruling and concluded that collateral estoppel prevented the taxpayer from re-litigating certain issues in his California tax refund action that were decided in a federal action involving the same disputed transaction. Penalties A. Large Corporate Understatement Penalty (LCUP) 1. In 2009, California imposed a new penalty on corporate taxpayers equal to 20 percent of the understatement of tax if the understatement exceeds $1 million. RTC § 19138. 2. In the case of taxpayers filing a combined report, the $1 million threshold applies to the aggregate amount of the understatement for all entities in the combined report. 3. The LCUP applies to understatements made on an original or amended return filed on or before the original or extended due date of the return for the taxable year. 4. The LCUP is in addition to any other penalties and applies to taxable years beginning on or after January 1, 2003 for which the statute of limitations on assessment has not expired. 5. The LCUP will not apply to understatements in any one of the following situations: a. The taxpayer filed an amended return on or before May 31, 2009 and paid the amount of tax shown on that return by May 31, 2009. b. There is a change of law that causes the understatement, where the law change occurs after the date the taxpayer filed the return (or the extended due date for the return, whichever is earlier) for the taxable year for which the change is operative. A “change of law” means: (1) A statutory change, or (2) An interpretation of law or rule of law by regulation or legal ruling, or (3) A published federal or California court decision. - 19 705841102 FTB is directed to implement the foregoing exception in a reasonable manner. c. B. The understatement is attributable to the taxpayer’s reasonable reliance on a legal ruling by the FTB Chief Counsel. 6. RTC § 19138 does not expressly provide for any “reasonable cause” exception and limits the grounds for refund or credit of any penalty paid to computational errors. 7. The California Taxpayers’ Association (Cal-Tax) filed a lawsuit against the FTB in February 2009 to enjoin the enforcement of the LCUP. On May 21, 2009, the trial court rejected the challenge to the LCUP. On December 13, 2010, the appellate court affirmed the trial court’s decision. California Taxpayers’ Association v. FTB, 190 Cal. App. 4th 1139 (2010). Cal-Tax’s petition for review was denied on March 16, 2011. 8. For tax years beginning in 2010, the LCUP was amended such that the penalty may not be imposed unless the understatement of tax exceeds both $1 million and 20 percent of the tax shown on the original return. RTC § 19138(a)(1). 9. FTB issued Legal Division Guidance 2012-03-02 indicating that a taxpayer cannot, for the same taxable year, make a single-sales factor (SSF) election and report tax based on income apportioned using the three-factor formula to avoid the LCUP in the event the taxpayer is later determined to be ineligible to use the SSF formula. Amnesty Penalty under RTC § 19777.5 1. California imposed a penalty for amounts “due and payable” for taxable years for which amnesty could have been requested (i.e., taxable years beginning before January 1, 2003). Amnesty was available during the two-month period from February 1, 2005 through March 31, 2005. 2. General Electric Company v. FTB, San Francisco Superior Court No. 449157 a. The taxpayer challenged the validity of the Amnesty Penalty under RTC § 19777.5 (SB 1100) in a declaratory relief action. b. It was the taxpayer’s position that the Amnesty Penalty is invalid for a number of reasons and sought a declaration from the Court to that effect. (1) The taxpayer alleged that the Amnesty Penalty is unconstitutional under the Due Process Clause due to the absence of a plain, speedy and efficient remedy to challenge the merits of the penalty either in court or administratively. (2) The taxpayer alleged that the Amnesty Penalty is unconstitutional under the Due Process Clause due to its retroactive nature. (3) The taxpayer alleged that the FTB’s interpretation of “due and payable” in RTC § 19777.5 is at odds with RTC § 19049. The taxpayer requested a declaration from the Court, consistent with RTC § 19049, that no Amnesty Penalty will arise if the taxpayer pays the amount of the assessment on or before it receives a notice and demand for payment or within 15 days thereafter. c. The FTB filed a demurrer to the complaint on the ground that the action was not ripe. The Court sustained the demurrer with leave to amend. On May 10, 2006, the taxpayer filed an amended complaint, to which the FTB filed another demurrer on ripeness grounds. The Court sustained the FTB’s demurrer. d. On September 15, 2006, the taxpayer filed a notice of appeal. - 20 705841102 e. 3. C. VIII. On July 13, 2007, after briefs were filed and while the case was awaiting oral argument, the case settled and the appeal was dismissed. River Garden Retirement Home v. FTB (see Section III.A.2.b above). On September 24, 2008, the trial court granted the FTB’s motion for summary judgment on the Amnesty Penalty issue. The court held that even if the plaintiff’s interpretation of “due and payable” was correct, payment was not made within 15 days of notice and demand. On July 15, 2010, the appellate court held that an amount becomes “due and payable” for purposes of the Amnesty Penalty upon a final determination of tax and thus affirmed the imposition of the penalty. The Court also concluded that RTC § 19777.5 did not operate retroactively and thus did not violate the substantive Due Process Clause. The taxpayer’s petition for review was denied on November 12, 2010. NEST Penalty—See discussion under Section VI.A.3 above. Miscellaneous A. Nexus 1. 2. New “Economic” Nexus Standard a. The definition of “doing business” under RTC § 23101 is amended. b. For taxable years beginning on or after January 1, 2011, a taxpayer is doing business in this state if any of the following conditions has been satisfied: (1) The taxpayer is organized or commercially domiciled in this state; (2) Sales of the taxpayer in this state exceed the lesser of $500,000 or 25 percent of the taxpayer’s total sales; (3) The real property and tangible personal property of the taxpayer in this state exceed the lesser of $50,000 or 25 percent of the taxpayer’s total real property and tangible personal property; (4) The amount paid in this state by the taxpayer for compensation exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer. c. However, in the Assembly Floor analysis for the bill (AB X3 15), it is stated that because of federal law, nexus “does not currently, and would not under this measure, extend to companies whose only connection is that they sell tangible property in the state.” d. In September 2014, FTB announced that the inflation-adjusted threshold values for 2014 are $529,562 in California sales and $52,956 in California property or payroll. FTB Chief Counsel Ruling 2012-03 a. The FTB ruled that foreign sales of tangible personal property (TPP) should not be thrown back to the California sales factor numerator where the taxpayer has more than $500,000 of TPP sales in the foreign jurisdiction, because it would be taxable in such foreign jurisdiction under RTC § 25122 and California’s new doing business standard. (1) The FTB concluded that for years beginning on or after January 1, 2011, the new doing business standard in RTC § 23101(b) will be applied to determine if the taxpayer is taxable in the destination jurisdiction. - 21 705841102 (2) b. 3. 4. The FTB specifically noted that the ruling does not address the question whether a corporation is taxable in the destination jurisdiction prior to January 1, 2011, if one of the conditions under RTC § 23101(b) is met. Similarly, the FTB also ruled that domestic sales of TPP to a state should not be thrown back to the California sales factor numerator where taxpayer’s unitary affiliate has more than $500,000 of sales in that state. FTB Technical Advice Memorandum 2012-01 a. FTB concluded that, for taxable years beginning on or after January 1, 2011, physical presence in the destination state is not required to establish that the taxpayer is subject to tax in that state, for purposes of avoiding sales throwback under RTC § 25135. b. FTB also concluded that, for taxable years beginning before January 1, 2011, physical presence is required in the destination state to avoid throwback, because California’s “economic nexus” provisions under RTC § 23101(b) apply only to taxable years beginning on or after January 1, 2011. FTB Chief Counsel Ruling 2012-07 a. FTB concluded that the in-state presence and activities of a single employee of the taxpayer constituted “doing business” in California such that the taxpayer had sufficient nexus to be required to file California corporation franchise/income tax returns. 5. In Legal Ruling 2011-01, the FTB ruled that mere ownership of a disregarded entity creates California franchise tax nexus. See Section VIII.C.6 below. 6. In Legal Ruling 2014-01, the FTB ruled that a business entity is considered to be “doing business” in California merely by holding a membership interest in an LLC (taxed as a partnership) that is doing business in California. 7. a. Applies whether LLC is member-managed or manager-managed. b. Limits SBE decision in Amman & Schmid strictly to limited partners in a limited partnership. SUP, Inc., SBE Case No. 571262 (Nov. 14, 2012). a. 8. In a summary decision, the SBE ruled that a Nevada corporation that was a general partner of a Nevada limited partnership that was doing business in California was considered to be doing business in California and, thus, was liable for the California minimum franchise tax. Harley-Davidson, Inc. v. FTB, San Diego Superior Court No. 37-2011-00100846 a. Case involves issue whether certain corporate subsidiaries are not taxable in California due to the lack of nexus with the State. b. Case also involves a combined reporting issue. See Section VIII.E.1 below. c. On May 1, 2013, the court ruled that the subsidiaries had nexus with the State and thus were taxable in California. d. On June 27, 2013, the taxpayer filed a notice of appeal. The case is fully briefed and is awaiting oral argument. - 22 705841102 9. 10. B. Daniel V, Inc. v. FTB, Los Angeles Superior Court No. BC457301 (March 13, 2013) a. The court found that the taxpayer, a Nevada corporation, established that it was commercially domiciled in Nevada, so the income at issue was not taxable in California. Court awarded attorney’s fees to the taxpayer. b. FTB filed a notice of appeal on June 17, 2013. On September 16, 2013, the case was dismissed upon FTB request. Swart Enterprises v. FTB, Fresno County Superior Court No. 13CECG02171 a. Case involves issue whether a corporate taxpayer is doing business in California and subject to minimum tax solely through its ownership interest in a California limited liability company. b. Involves 2009 tax year, prior to the 2011 amendment to RTC § 23101 and the enactment of the new economic nexus standard. c. On November 14, 2014, the trial court affirmed its tentative ruling granting taxpayer’s motion for summary judgment and denying FTB’s motion for summary judgment. d. On January 16, 2015, FTB filed an appeal. Attorney’s Fees 1. 2. Northwest Energetic Services, LLC v. FTB, 159 Cal. App. 4th 841 (2008) a. Attorney’s fees were granted based on a “private attorney general” doctrine (California Code of Civil Procedure Section 1021.5). b. On appeal, the Court of Appeal reversed and remanded the case to the trial court on the issue of attorney’s fees. c. Case was settled in July 2010. Hyatt v. FTB, Nevada District Court Case No. A382999 (2008) a. In August 2008, a Clark County, Nevada jury rendered a verdict in favor of plaintiff and awarded $388 million in damages, including $1.1 million for attorney’s fees. b. FTB filed an appeal with the Nevada Supreme Court. c. Oral arguments in the Nevada Supreme Court were heard on May 7, 2012 and June 18, 2012. d. On September 19, 2014, the Nevada Supreme Court upheld the jury verdicts on Hyatt’s fraud and intentional infliction of emotional distress claims. e. (1) The Court reversed the punitive damages award ($250 million) on the basis that Nevada does not authorize punitive damages against a government entity, which, under comity principles, extends to the FTB. (2) Case remanded to the trial court to determine the proper amount of damages attributable to the intentional infliction of emotional distress claim. On November 25, 2014, the Nevada Supreme Court denied petitions for rehearing filed by both parties. - 23 705841102 f. On March 23, 2015, the FTB filed a petition for a writ of certiorari with the U.S. Supreme Court. g. While the Nevada case was pending, Hyatt filed suit in federal district court on April 4, 2014 alleging that the FTB and SBE have violated his due process and equal protection rights by taking more than 20 years to complete the administrative process in his California personal income tax dispute. h. C. (1) On February 10, 2015, the district court dismissed Hyatt’s suit for lack of jurisdiction under the federal Tax Injunction Act. (2) On February 19, 2015, Hyatt filed an appeal with the Ninth Circuit Court of Appeals. SBE case currently pending regarding residency and source of income issues. 3. See Daniel V at Section VIII.A.9 above. 4. See Cutler at Section VIII.F.1 below. Limited Liability Company Issues 1. 2. Northwest Energetic Services, LLC v. FTB, 159 Cal. App. 4th 841 (2008) a. The Court of Appeal held that California’s LLC fee under RTC § 17942 violates the Commerce and Due Process Clauses because it is based on worldwide gross income and not apportioned between gross income sourced within and without California. b. The LLC at issue was a Washington state LLC that registered to do business in California, but never had any sales, property, payroll or other activity in California. c. For taxable years beginning on or after January 1, 2007, legislation was enacted that provides that total income from all sources reportable to California means gross income, plus cost of goods sold, derived from or attributable to California within the meaning of specified provisions of the Corporation Tax Law relating to apportionment and allocation. Ventas Finance I, LLC v. FTB, 165 Cal. App. 4th 1207 (2008) a. 3. At issue was an LLC that had approximately 10 percent of its revenues from California sources. The Court of Appeal affirmed the unconstitutionality of the fee but reversed the trial court’s determination that the company was due a refund for the entire amount of the fee it paid. Bakersfield Mall LLC v. FTB, San Francisco Superior Court No. CGC-07-462728 a. A limited liability company that does business solely within California filed suit challenging the constitutionality of the LLC fee. b. The court denied class status for LLCs that derive all income from within California. c. Discovery has revealed that the taxpayer may have conducted business both within and outside California, and, as such, this case may be controlled by Ventas. See Senate Committee Bill Analysis of SB 342 (Apr. 25, 2011). d. The court overruled the FTB’s demurrer and the case is currently pending in trial court. Issue regarding the denial of class certification is on appeal. - 24 705841102 4. 5. 6. D. CA-Centerside II, LLC v. FTB, Fresno Superior Court No. 10CECG00434 a. Suit is substantially similar to that originally filed in Bakersfield. b. The FTB challenged the attempted class-action certification. The trial court has not certified the case as a class-action, and the Court of Appeal declined the FTB’s petition for a writ directing the trial court to throw out the class-action portion of the lawsuit. c. The court overruled the FTB’s demurrer and the case is currently pending in trial court. Issue regarding the denial of class certification is on appeal. Bunzl Distribution v. FTB, San Francisco Superior Court No. CGC-10-506344 a. Pending case involving issue whether a nonresident corporate member of a singlemember LLC, which is a “disregarded entity” that conducts business in California, is a California taxpayer solely as a result of its membership interest in the LLC. b. Suit also alleges that the policies and/or procedures of the FTB Settlement Bureau violate the statutory settlement rules and constitute improper underground regulations. c. On December 21, 2012, the trial court entered judgment in favor of the FTB. On February 12, 2013, a notice of appeal was filed. Case has been fully briefed on the merits. d. On March 20, 2014, the Court of Appeal asked taxpayer to address whether a final judgment from which taxpayer could appeal exists in this case. On April 1, 2014, taxpayer filed a letter in response. Oral argument to be scheduled. FTB Legal Ruling 2011-01 a. FTB ruled that the sole owner of a disregarded entity “doing business” in California is “doing business” in California even if the owner has no activities in the State other than those of its disregarded entity. b. Disregarded entities include single-member LLCs and qualified Subchapter S subsidiaries (QSubs). Intercompany Transactions 1. The FTB held interested parties meetings on April 21, 2010, September 22, 2010 and August 16, 2011 regarding possible amendments to Regulation 25106.5-1 relating to intercompany transactions between members of a combined reporting group. a. FTB proposed amendments to specify that a taxpayer that makes an election under Regulation 25106.5-1(e) to currently recognize intercompany income/loss on a separate basis shall not include the gross receipts related to such income in the sales factor in the year of the election. b. FTB proposed amendments to address certain issues relating to the FTB’s deferred intercompany stock account (DISA) provisions. Under the FTB’s current DISA rules, gain from distributions in excess of basis is deferred until a triggering event occurs (e.g., member leaves the combined reporting group). FTB has proposed amendments to state that (1) a “brother-sister” merger between members of a combined reporting group will not trigger the recognition of a DISA, (2) a distribution through various tiers of subsidiaries should not trigger more than one DISA and (3) subsequent capital contribution may reduce DISA balances. - 25 705841102 2. c. In October 2013, FTB issued a 15-day change notice to clarify certain proposed amendments and provide that, while the DISA proposed amendments are retroactive, taxpayer can elect to apply such amendments prospectively. d. The proposed amendments were approved and became effective on April 1, 2014. FTB Chief Counsel Ruling 2012-02 a. 3. FTB Chief Counsel Ruling 2012-08 a. 4. E. The FTB ruled that gain from the sale of a partnership interest by a member of a combined reporting group to a unitary partnership is not subject to the gain deferral rules under Regulation 25106.5-1. Instead, the gain should be currently recognized in the year of sale. The FTB ruled that dividends paid to a newly formed unitary holding company should be eliminated from the holding company’s income under RTC § 25106(a)(2)(A), even though the holding company was formed subsequent to the generation of the income from which the dividends were paid, provided that the holding company was part of the unitary group during the period from its formation to its receipt of those dividends. Regulation 25137-1 a. The FTB held a second interested parties meeting on October 18, 2013 to discuss possible amendments to Regulation 25137-1. Issues include the sales factor treatment of intercompany sales between a partner and its unitary partnership and the treatment of distributive share items from a non-unitary partnership. The first interested parties meeting was held on August 21, 2008. b. On July 8, 2014, a third interested parties meeting was held to discuss draft language for proposed regulations. Combined Reporting 1. 2. 3. Harley-Davidson, Inc. v. FTB a. Case involves issue whether FTB improperly discriminates against multistate unitary corporate taxpayers be requiring combined reporting and not allowing them to choose separate reporting. The court sustained FTB’s demurrer regarding this issue. b. Case also involves nexus issues. See Section VIII.A.8 above. c. On June 27, 2013, the taxpayer filed a notice of appeal. The case is fully briefed and is awaiting oral argument. Abercrombie & Fitch v. FTB, Fresno Superior Court No. 12CECG03408. a. Case involving similar combined reporting issue as in Harley-Davidson above. b. Trial court proceedings stayed pending Court of Appeal decision in Harley-Davidson. Mednax Services, Inc. v. FTB, San Francisco Superior Court No. CGC-14-539294 a. Case involves issue whether FTB properly required the taxpayer to file combined income tax reports with other entities pursuant to RTC § 25102. - 26 705841102 F. b. Under RTC § 25102, FTB may permit or require the filing of a combined report by persons “owned or controlled directly or indirectly by the same interests,” where the combination is “necessary in order to reflect the proper income of any such persons.” c. Case also involves issue whether LCUP penalty was properly imposed where FTB is requiring combination under RTC § 25102. d. Trial is set for October 19, 2015. Qualified Small Business Stock (“QSBS”) 1. On August 28, 2012, the Court of Appeal held in Cutler v. FTB, 208 Cal. App. 4th 1247 (2012), that California’s deferral of capital gain from the sale of QSBS violated the Commerce Clause because it was available only to taxpayers that invested in corporations that did a substantial portion of their business in California. The case was remanded to the trial court to determine whether other requirements for qualified small business stock were satisfied. a. The trial court denied taxpayer’s motion for attorney’s fees. b. On September 2, 2014, the Court of Appeal reversed the trial court and awarded attorney’s fees as a private attorney general. Case was remanded to determine the amount of the fees. 2. On December 21, 2012 and in response to Cutler, the FTB issued Notice 2012-03 to inform taxpayers that, for tax years beginning on or after January 1, 2008, the FTB will disallow all California QSBS exclusions and deferrals under RTC §§ 18038.5, 18152.5. FTB’s position is that California’s QSBS statutes are invalid and unenforceable in light of Cutler. FTB announced that it will be issuing proposed assessments back to 2008. 3. On October 4, 2013, Governor Brown approved AB 1412, which re-enacted the QSBS gain deferral and exclusion provisions retroactively for tax years 2008 to 2012, by removing the California presence requirements that the Cutler Court held to be unconstitutional. a. G. Note that under AB 1412, the QSBS must meet the 80-percent California payroll requirement at the time of acquisition. Query whether such requirement is constitutional under the Commerce Clause. Net Operating Loss (NOL) 1. 2. NOL Carryback a. California now allows a two-year carryback of NOLs attributable to taxable years beginning on or after January 1, 2013. RTC §§ 24416.21, 24416.22. b. The suspension of NOL deductions for 2008-2011 (see below) does not apply to the carryback of NOLs attributable to taxable years beginning on or after January 1, 2013. RTC § 24416.21(c). NOL Suspension a. NOL deductions were suspended for taxable years 2008 and 2009 for a taxpayer with income subject to tax of $500,000 or more. RTC § 24416.9. b. The suspension of NOL deductions was extended to the 2010 and 2011 taxable years, except for taxpayers with preapportioned income of less than $300,000. RTC § 24416.21. - 27 705841102 c. H. I. Investment Partnerships 1. In California, the taxable income of a nonresident or out-of-State corporation from sources within the State does not include dividends, interest or gains/losses from “qualifying investment securities” of an investment partnership if certain requirements are met. RTC §§ 17955, 23040.1. 2. “Qualifying investment securities” include, without limitation, common and preferred stock, bonds, debentures and other debt securities, foreign and domestic currency deposits or equivalents, stock and bond index securities, various forward/futures contracts, options and other securities. 3. In Chief Counsel Ruling 2010-1, the FTB concluded that commodity-linked derivatives are “qualifying investment securities.” 4. Similarly, in Information Letter 2010-4, the FTB concluded that derivatives could be included in the definition of “qualifying investment securities,” noting that the reference to “stock and bond index securities” encompasses derivatives. 5. In Chief Counsel Ruling 2013-4, the FTB ruled that a nonresident member of an LLC that provided management services to a private equity fund located in California was subject to California personal income tax on the income, even though the private equity fund was a qualified investment partnership. Procedural Issues 1. J. SBE Written Opinions a. Effective January 1, 2013, the SBE is required to issue written decisions within 120 days of deciding tax appeal cases, including franchise and income tax appeals, when the amount in controversy is $500,000 or more. See RTC § 40. b. The SBE announced that it will narrowly draft its written decisions to comply with the new law. Nonwage Withholding 1. Beginning July 1, 2013, the FTB implemented an ongoing Withholding Voluntary Compliance Program (WVCP) for eligible withholding agents (businesses and individuals) to remit past-due, nonwage withholding for the previous two calendar years (look-back period), plus interest. a. IX. See FTB Legal Ruling 2011-04 regarding guidance on the NOL suspension and extension of carryover periods. All withholding agents are eligible, except if the withholding agent (i) participated in the 2008 Nonresident Withholding Incentive Program, (ii) has been audited by FTB for nonwage withholding or (iii) has been assessed a withholding liability or information return penalty for nonwage withholding. 2. The FTB revised and updated its withholding at source regulations (Regulations 18662-0 through Regulations 18662-14) to conform to current withholding laws and existing FTB procedures. The Regulations took effect on July 1, 2014. 3. On December 12, 2014, the FTB held an interested parties meeting to discuss issues arising with pass-through entity withholding. Legislative Updates and Ballot Measures - 28 705841102 A. B. 2014 Legislative Session 1. On June 20, 2014, the 2014-15 state budget was approved, which included some additional fees but no major broad-based tax increases. 2. AB 1839 was signed into law, expanding the film and television production credit. See Section II.E.1.d above. 3. SB 1335 was signed into law, requiring that new income and corporate tax credits enacted after January 1, 2015 set performance measures and goals. 4. SB 1372 was introduced which would increase the corporation tax rates on publicly held corporations that pay their chief operating officer or highest paid employee more than 100 times the median compensation of all employees. SB 1372 did not gain passage in the Senate. 2012 Legislation 1. C. SB 1015 (June 27, 2012) a. California repealed all provisions relating to the Multistate Tax Compact while Gillette was pending in the Court of Appeal. See Section I.A.9 above. b. The Legislature also declared, as a matter of existing law, that the “doctrine of election” provides that an election affecting the computation of tax must be made on an original timely filed return for the taxable period for which the election is to apply. c. The validity of SB 1015 is in question because of Proposition 26. See Section IX.C.3 below. Election Results of November 2010 Ballot Measures of Note 1. Proposition 24 a. 2. Proposition 25 a. 3. Voters rejected a measure to repeal recent legislation that would allow businesses to carry back losses, share tax credits among affiliated corporations and elect to use a single-sales factor apportionment formula. Voters approved a measure to change the legislative vote requirement to pass a budget from two-thirds to a simple majority. The two-thirds vote requirement for taxes would be retained. Proposition 26 a. Voters approved a measure to increase the legislative vote requirement to two-thirds for state levies and charges by expanding the definition of a “tax” subject to the twothirds vote. In addition, any tax adopted after January 1, 2010, but prior to November 3, 2010, that was not adopted by two-thirds vote will be void unless reenacted by November 3, 2011. b. The FTB issued Legal Division Guidance 2011-01-01 on the impact of the adoption of Proposition 26 on the FTB’s enforcement of Senate Bill No. 401 (SB 401). (1) SB 401, which was enacted on April 12, 2010 and generally applies to taxable years beginning on or after January 1, 2010, conforms to various provisions of - 29 705841102 the Internal Revenue Code that were added or amended after January 1, 2005. (2) D. Election Results of November 2012 Ballot Measures of Note 1. Proposition 30 a. 2. 3. Voters rejected a measure to increase personal income taxes for most taxpayers by imposing a surcharge, ranging from rates of 0.4 percent to 2.2 percent, for the 20132024 taxable years. Proposition 39 a. Voters approved a measure to eliminate the single-sales factor election and require most businesses to use a single-sales factor apportionment formula to determine California business income for taxable years beginning on or after January 1, 2013. b. In addition, Proposition 39: c. XII. Voters rejected a measure to prohibit legislation, including the Governor’s budget, that would reduce taxes by $25 million or more, unless another tax is increased or funding for an existing program is reduced or eliminated. Proposition 38 a. 4. Voters approved a measure to increase the state sales and use tax by 0.25 percent. The increase will be in effect from January 1, 2013 through December 31, 2016. The measure also increased the personal income tax rate for the 2012-2017 taxable years for taxpayers with taxable income exceeding $250,000. Proposition 31 a. E. The FTB will enforce SB 401 at least until November 3, 2011 or until an appellate court rules otherwise. (1) Requires the use of the market-based sourcing rules for sales of intangibles and services for all taxpayers, including agricultural, extractive and financial businesses; and (2) Provides for a modified sales factor sourcing rule for certain cable businesses that make at least $250 million of annual expenditures in California. See Section I.A.4 above. 2014 Election Results 1. On November 4, 2014, voters approved a $7.5 billion water bond measure (Proposition 1) and a state budget reserve “rainy day” measure (Proposition 2) which were supported by Governor Brown. 2. Betty Yee won election in the race for State Controller. 3. The following were elected to the SBE: George Runner, Fiona Ma, Jerome Horton and Diane Harkey. Other Taxes A. San Francisco Gross Receipts Tax - 30 705841102 1. 2. In November 2012, San Francisco voters approved a local measure that would phase out San Francisco’s current payroll tax and implement an apportioned gross receipts tax beginning in 2014. a. The gross receipts tax identifies various industry groupings, each of which has specific tax rate schedules and allocation and apportionment methodologies. b. Combined reporting generally is required. In 2014, the San Francisco Office of the Treasurer and Tax Collector issued gross receipts tax regulations. a. Regulation 2014-1: Interpretations of the former San Francisco gross receipts tax that was repealed in 2001 will not apply to the current gross receipts tax. b. Regulation 2015-2: Single-member entities (including single-member LLCs) that are disregarded for federal income tax purposes will be disregarded for purposes of the gross receipts tax, the payroll expense tax, and any business registration requirements. The owner of the disregarded entity will be the registrant and taxpayer for purposes of the above. c. Regulation 2015-3: Clarifies the definition of gross receipts subject to tax as applied to a person acting as an agent on behalf of a principal. - 31 705841102 HAWAII TAX DEVELOPMENTS MIKI OKUMURA ([email protected]) GOODSILL ANDERSON QUINN & STIFEL LLP 999 Bishop Street, Suite 1600 Honolulu, Hawaii 96813 Telephone: (808) 547-5758 Fax: (808) 547-5880 KARYN R. OKADA ([email protected]) GOODSILL ANDERSON QUINN & STIFEL LLP 999 Bishop Street, Suite 1600 Honolulu, Hawaii 96813 Telephone: (808) 547-5845 Fax: (808) 547-5880 I. LEGISLATIVE Real property taxation is under the jurisdiction of the individual counties in Hawaii. Each county has its own real property tax ordinances. Recent changes to the counties’ real property tax ordinances include the following: A. Separate Tax Class for Residential Investor Property. In 2014, the City and County of Honolulu adopted a new classification, called Residential A, for real property that includes condominium units with no home exemption and an assessed value of $1 million or more, certain parcels zoned or dedicated for residential use with no more than two single family dwelling units, no home exemption and an assessed value of $1 million or more, and vacant land with residential zoning. The current tax rate for the Residential A class is $6.50 per $1,000 net taxable value, while the tax rate for the regular Residential class is $3.50 per $1,000 net taxable value. Effective for the upcoming tax year, Kauai County similarly has adopted a new classification called Residential Investor which includes properties that are valued at $2 million or more and are improved with a dwelling unit(s) that does not qualify for a home exemption. Tax rates for the different residential classes have not yet been set. B. Use of Income Approach. All of the counties annually assess the fair market value of the real property based upon its highest and best use. The ordinances of the various counties have required fair market value to be determined by the market data and cost approaches to value using appropriate systematic methods suitable for mass valuation of properties for taxation purposes, so selected and applied to obtain, as far as possible, uniform and equalized assessments throughout the county. In 2014, Hawaii County amended its ordinances to also specify use of the income approach for real property tax assessments. C. Tax Lien Foreclosure Sale. In general, real property taxes are considered a paramount lien upon an assessed property, and any real property on which a lien for taxes has existed for three years may be sold by way of foreclosure in a tax sale at public auction. In 2014, Hawaii County amended its tax sale ordinance to permit tax sales for properties on which a tax lien has existed for two, rather than three, years. D. City and County of Honolulu Real Property Tax Advisory Commission. In 2011, the City and County of Honolulu City Council established the Real Property Tax Advisory Commission, comprised of seven citizens who are directed to conduct a bi-annual review of the Honolulu real property tax system. In 2014, the Commission issued a report recommending, among other things, repeal of the exemptions for for-profit child care centers and credit unions and adoption of a graduated tax rate for Residential A property and Commercial property. II. ADMINISTRATIVE A. Offers in Compromise. Effective November 30, 2014, Section 18-231-3-10(a) of the Hawaii Administrative Rules (“HAR”) was amended to add a third basis for consideration of an offer to compromise 1 a tax liability. Under the amended rule, compromises may be considered not only if there is doubt as to liability or doubt as to collectability, but also if the compromise promotes effective tax administration. B. Cash Economy Special Enforcement Unit. Also effective November 30, 2014, new HAR Sections 18-231-91 through 18-231-100 were adopted to implement Sections 231-91 through 231-100 of the Hawaii Revised Statutes, as amended, relating to the Hawaii Department of Taxation’s cash economy enforcement unit. The cash economy enforcement statute was enacted in 2009 and administrative rules have been under consideration since 2011. The new rules specify the grounds for imposing a monetary fine when a cease and desist citation is issued and the amount of the fine. The rules also set forth the form of the cease and desist citation, requirements for issuing the citation, and constitutionally required procedural safeguards afforded to respondents including notice and opportunity for a hearing and appeal rights. III. JUDICIAL A. General Excise Tax and Transient Accommodations Tax Treatment of Online Travel Companies. On March 17, 2015, the Hawaii Supreme Court issued its unanimous decision in appeals filed by ten online travel companies (“OTCs”) challenging general excise tax (“GET”) and transient accommodations tax (Hawaii’s version of a hotel room tax, referred to as “TAT”) assessments for periods beginning between 1999 and 2001 and continuing until 2011. In Re Travelocity.com, L.P., SCAP-13-0002896 (March 17, 2015). (COST filed an amicus curiae brief in support of the OTCs as to the GET issue. At issue was the tax treatment of the OTCs’ receipts under a business model that involved two contractual relationships – first, a contract between the OTC and the hotel whereby the hotel delegates to the OTC various “day to day” responsibilities otherwise performed by the hotel and grants to the OTC the right to offer room occupancy to the public, and the hotel and the OTC negotiate the amount that the hotel will charge the OTC for a room (typically a floating rate tied to the hotel’s “best available rate” offered to the public and called the “net rate”); and second, a contract between the OTC and the traveler whereby the traveler is able to book a hotel room that is confirmed by the OTC and pays the OTC in advance of the hotel stay the price charged by the OTC which consists of the net rate, a markup and service fee, and taxes. The hotel does not know the total amount charged by the OTC to the traveler, and the traveler does not know the breakdown of the price charged by the OTC. The OTC pays the hotel the net rate owed to the hotel, plus the GET and TAT on the net rate amount that was passed through to the traveler and collected by the OTC which the hotel then pays to the Hawaii Department of Taxation (“DOT”) as its GET and TAT liability. The DOT asserted that the OTCs were liable for GET on all monies paid to the OTCs by travelers because the GET is a privilege tax that broadly covers virtually every economic activity in Hawaii, and the OTCs conduct business activities within the state and enjoy the protections and benefits provided by the state. The DOT also asserted that the OTCs owed GET on the entire amount collected, not only the markup and service fees retained by the OTCs, on the basis that they did not qualify for an apportionment (or gross receipts splitting) provision under the GET statute that allows a “travel agency” and a hotel operator who provides accommodations at “noncommissioned negotiated contract rates” to pay GET only on their respective portion of the amount paid by the traveler. The State Tax Appeal Court had ruled in favor of the DOT on the GET issue. After reviewing its prior decisions that addressed nexus for GET purposes, the Hawaii Supreme Court upheld the lower court’s ruling that the OTCs have sufficient business and other activities in the state so as to be subject to GET on their online business. The Court noted that Hawaii’s case law does not require the taxpayer to have a physical presence in the state. The Court held that the OTCs are not passive sellers of services to Hawaii consumers, but rather actively solicit customers for Hawaii hotel rooms and actively solicit Hawaii hotels to enable the OTCs to sell bookings, and the occupancy rights are wholly and solely consumable in the state. The Supreme Court also held, however, that the statutory apportionment provision did apply, so that the OTCs are subject to GET only on the markup and service fees amounts and the hotels are subject to GET on the net rate. The Supreme Court also upheld penalties assessed for failure to file GET returns and failure to pay GET. With respect to the TAT assessments, the State Tax Appeal Court had ruled in favor of the OTCs, finding that the OTCs were not operators subject to the TAT, and that the TAT only applied to receipts allocated or distributed to the operator. The Hawaii Supreme Court upheld the lower court’s ruling, based upon its 2 statutory interpretation that the reference to the “actual” furnishing of transient accommodations in the definition of an “operator” under the TAT statute means that there can only be a single operator involved in the furnishing of transient accommodations. Further, unlike the apportionment provision in the GET statute, the TAT apportionment provision only defines the portion of receipts allocated or distributed to the operator as the taxable amount, i.e., the hotel in these transactions. The DOT filed a motion for reconsideration on the GET apportionment ruling only which was denied by the Hawaii Supreme Court. B. Real Property Tax Treatment of Wind Turbines. In Kaheawa Wind Power, LLC v. County of Maui, No. CAAP-12-0000728 (Haw. Ct. App. Nov. 20, 2014), the Hawaii Intermediate Court of Appeals considered whether wind turbines at a wind farm should be treated as “improvements” or “fixtures” within the definition of “real property” under the Mau County real property tax ordinances. The wind turbines are affixed to concrete foundation slabs that are treated as improvements so as to be subject to real property tax. The Court ruled that the turbines were personal property and therefore should not be included in the assessed building value. The Court’s ruling did not take into account an amendment to the County’s real property tax ordinances that became effective after the tax years at issue in the appeal, which expressly included within the definition of “property” or “real property” wind energy conversion property that is used to convert wind energy to a form of useable energy. C. Real Property Tax Treatment of Omitted Property. In the Kaheawa Wind Power case, infra, the taxpayer challenged the retroactive assessment notices that were issued by Maui County in 2010 for the 2007, 2008, and 2009 tax years, on the basis that these assessments were untimely. The property involved was land owned by the State of Hawaii that became taxable when it was leased to the taxpayer in 2005. The County treated the property as “omitted property” and retroactively assessed real property tax. The court held that the retroactive assessments were valid because the County’s real property tax ordinances did not create an express or implied time limit in which the County must add “omitted property” to tax assessment lists and further held that issuance of the retroactive assessments for the three immediately preceding years did not violate the taxpayer’s constitutional due process rights. 5209190.2 3 IDAHO STATE TAX DEVELOPMENTS Spring 2015 Kirk Lyda JONES DAY 2727 North Harwood St. Dallas, TX 75201 1.214.969.5013 [email protected] http://www.jonesday.com/klyda/ Lawyerly Caveat: The views set forth herein are the personal views of the authors and do not necessarily reflect those of the law firm with which they are associated. I. TRENDS/OUTLOOK FOR 2015/2016 In 2014 Idaho Governor Otter called for a Idaho Tax Commission Study Task Force to recommend improvements in the Idaho tax system. Among other things, the Task Force recommended the creation of a Director of Revenue of the Idaho Tax Commission. The Director would be appointed by the Tax Commission with the consent of the Governor and could only be removed for just cause. Having a Director to head the Department of Revenue would free the Tax Commissioners to act in a quasi-judiciary role of hearing disputes between the Department and taxpayers, thus eliminating the need for the Board of Tax Appeals. Governor Otter has urged the legislature to make such changes. Idaho ended its June 2014 fiscal year end with a $44.4 million budget surplus heading into the 2015 legislative session. Governor Otter continues to call for tax cuts, specifically lowering the marginal income tax rates (from 7.4% to 6.9%). It remains to be seen what will be accomplished in the legislative session. II. FRANCHISE TAX A. Overview Idaho imposes a corporate franchise tax on domestic and foreign corporations engaged in business in, or deriving income from sources within, Idaho. The Idaho franchise tax rate is 7.4% of Idaho taxable income. Idaho law generally conforms to federal law. Federal taxable income is used as the base, which is then modified by adjustments prescribed by Idaho law to arrive at net business income. Net business income is subject to allocation and apportionment (three-factor, double-weighted sales) for multistate or multinational taxpayers. With limited exceptions, any corporation that is a member of a unitary business and is transacting business in Idaho must use combined reporting. Idaho municipalities have no power to levy local income taxes. B. Legislative Developments 2015 Legislative Session The 2015 legislative session began on January 12, 2015 and is expected to conclude on April 10, 2015. We will cover all significant legislative changes in our next edition. 2014 Second Regular Session 1. Calculation of NOL Following Recognition of Excess Inclusion Income from a Real Estate Mortgage Investment Conduit (eff. 1/1/14) H.B. 402 provides for the a calculation of net operating loss (“NOL”) and NOL carryforward for tax years in which a taxpayer recognizes excess inclusion income (“EII”) from a Real Estate Mortgage Investment Conduit (“REMIC”). The bill also sets forth the manner in which to determine the income of a corporation to be included in a combined report when one or more corporations included in the combined report have EII for a tax year. DLI-266524086v1 2. Enactment of Idaho Reimbursement Incentive Act (eff. 7/1/14) H.B. 546 enacted the Idaho Reimbursement Incentive Act, creating a refundable tax credit for qualified business entity applicants that meet certain job and revenue creation requirements. To qualify, the business entity must create at least 50 new jobs (20 in a rural community) over the term of the project, not to exceed 15 years. The entity must also generate an approved percentage (up to 30%) of “new state revenue;” defined as “the Idaho portion of state corporate income tax, personal income tax and use tax that is paid by the applicant in excess of those taxes paid at the date of the application and is attributable only to the new growth upon which the project is based.” 3. Federal Conformity (eff. 1/1/14) H.B. 375 generally conforms Idaho income tax law to the Internal Revenue Code (I.R.C.) as amended and in effect on January 1, 2014. 4. Bonus Depreciation Decoupling Clarified (eff. 1/1/13) H.B. 600 clarifies that the adjusted basis of depreciable property, depreciation, and gains and losses from the sale, exchange or other disposition of depreciable property acquired after December 31, 2009 is computed without regard to I.R.C. section 168(k). 5. Exempt Organizations (eff. 1/1/14) H.B. 374 provides that an entity that loses its federal exemption under I.R.C. 501 for failure to file federal form 990 will also lose its Idaho nonprofit status. 6. Pass-Through Entity Composite Returns (eff. 1/1/14) H.B. 377 clarifies that nonresident individual owners of pass-through entities transacting business in the state may elect to participate in a composite return filed by the pass-through entity. For this purpose, “individual” is defined to include natural persons, certain grantor trusts, certain qualified subchapter S trusts, and single member limited liability companies that are disregarded for federal income tax purposes. 2013 First Regular Session 1. Loss Recovery Deduction (eff. 1/1/13) H.B. 2 allows a deduction for a loss recovery included in taxable income, provided the taxpayer did not receive a deduction for the loss on a prior return. 2. Refund Claims/Credits for Pass-Through Entity Back-up Withholding; Technological Equipment Donations (eff. 1/1/13) H.B. 4 provides that refund claims or credits for amounts paid as back-up withholding by a pass-through entity, pursuant to Idaho Code § 63-3036B, must be filed within three years from the due date of the return. The bill also limits the deduction for technological equipment donations to taxpayer’s cost of the equipment. 3. Allocation and Apportionment of Partner’s Income (eff. 1/1/13) H.B. 139 provides that the amount of compensation in the form of guaranteed payments to a partner paid by a partnership doing business in Idaho attributed to the state in which the partner performed services may not exceed $250,000 in a calendar year. Amounts paid in excess of $250,000 must be sourced to Idaho based upon the partnership’s apportionment factor. 4. Net Operating Loss Carryback/Carryforward (eff. 1/1/13) H.B. 184 provides that the 2-year carryback for unused NOLs for tax years beginning January 1, 2013 is applicable only if an amended return carrying the loss back is filed within one year of the end of the tax year DLI- 266524086v1 -2- giving rise to the loss. The bill also removes the requirement that taxpayers check a specific box to elect to carryforward an unused NOL. 2012 First Regular Session 1. Reduction in Tax Rate (eff. 1/1/12) H.B. 563 reduced the franchise tax rate from 7.6% to 7.4%, retroactive to January 1, 2012.. 2. Passive Losses (eff. 1/1/12) H.B. 363 provides that passive losses incurred during years in which a taxpayer had no activity in Idaho are not deductible, consistent with Idaho’s treatment of net operating losses and capital losses. 3. Capital Investment Tax Credit Carryovers (eff. 1/1/12) H.B. 438 provides that a taxpayer is not required to prove that qualified investment property maintains an Idaho situs when claiming any portion of an unused credit in years after the close of the recapture period, so long as the qualified property for which the credit was originally granted otherwise remained a qualified investment throughout the recapture period. While a change in statutory requirement, the change conforms to the Idaho Tax Commission’s existing practices. 4. Treatment of Bonus Depreciation Gain and Loss Adjustments (eff. 1/1/12) H.B. 365 makes the treatment of gain or loss based on bonus depreciation adjustments for 2010 and forward identical to the period for September 10, 2001 through December 31, 2007. 5. Credit for Taxes Paid to Other States (eff. 1/1/12) H.B. 634 clarifies that the credit for taxes paid to other states is applicable to excise or franchise taxes for which a deduction is permitted on cost of goods or cost of services rendered with respect to revenue from sales or services rendered. C. Judicial (and Attorney General) Developments 1. Cable One, Inc. v. Idaho State Tax Comm’n, No. 41305-2013 (Id. 2014). Income-producing activity of multistate internet and cable corporation, for purposes of determining corporation’s Idaho taxable income, was activity that produced income received from providing internet services to customers located in Idaho, rather than activity that produced income from corporation’s 19-state system. The Court concluded that a greater proportion of such income-producing activity was performed in Idaho. 2. Idaho Attorney General Opinion 12-01 (May 24, 2012). Initiation of fee legislation in Idaho’s Senate is constitutionally defensible. In a lengthy analysis of numerous federal and state authorities, the Idaho Attorney General has concluded that the initiation of fee legislation in the Senate is constitutionally defensible. The opinion notes that Idaho Const., Art. III, sec. 14, which provides that revenue raising bills must originate in the House of Representatives, has generally been applied to legislation involving an increase or decrease related to a tax or taxing measure, but not to legislation involving a fee. While a challenge to a fee would be a case of first impression for Idaho courts, a reasonable legal defense could be advanced to support the origination in either chamber, though the defense would likely become factually specific and require a finding as to whether the fee is truly a fee or a tax disguised as a fee. The opinion recommends that if there is doubt as to whether legislation creates a tax or a fee, it should originate in the House. DLI- 266524086v1 -3- D. Administrative Developments 1. Commissioner Ruling No. 23824 (Dec. 9, 2013). Gain and loss from sale of functionally integrated subsidiaries classified as business income. The Commissioner upheld the Tax Division’s reclassification of gain and loss from the sale of Taxpayer’s subsidiaries as business income. The Commissioner relied on the Idaho Supreme Court’s decision in Union Pacific v. Idaho State Tax Commission, 28 P.2d 375 (2001), holding that an item of income is business income if it satisfies either the “transactional test” or “functional test.” Prior to 2001, the Taxpayer had filed two separate unitary group returns. Beginning with taxable year 2001, the Taxpayer had informed the Commission that it would begin filing as a single unitary group. Based on the Taxpayer’s determination that the two groups were part of a single unitary business from 2001 forward, the Commissioner held that the gain and loss from the sale of one business satisfied the functional test and constituted business income subject to apportionment. 2. Commissioner Ruling No. 25749 (Apr. 17, 2014). Taxpayer may not carry over another entity’s net operating loss following a merger where the company did not correctly file returns in prior years and the taxpayer did not continuously operate the business of the old loss corporation. Taxpayer was denied a net operating loss (“NOL”) carryover created by a wholly owned subsidiary that was merged into the parent corporation after the loss was created. The subsidiary was acquired by the Taxpayer in 2000, and merged into the parent in 2005. Prior to the merger, the subsidiary filed Idaho corporate income tax returns on a separate entity basis, reporting large Idaho NOLs. During a telephonic hearing, the Taxpayer was unable to explain why the subsidiary had been filing on a separate entity basis. Because the Commissioner was unable to determine whether the subsidiary should have been included in a combined return and, if so, what the combined group’s NOL would have been for such tax years, the Taxpayer was not entitled to carry over the loss after the merger. The Commissioner also found, based on the returns filed, that the Taxpayer did not continuously operate the business enterprise of the old loss corporation. 3. Commissioner Ruling No. 25612 (Mar. 28, 2014). S Corporation may subtract research expenses when calculating nonresident owners’ income tax liability. The Commission ruled that an S Corporation was entitled to subtract research expenses when calculating its nonresident owners’ income tax liability in 2009 and 2010, relying on amendments to Idaho Admin. r. 291.03 which no longer disallowed the use of separately stated pass-through deductions. Because the S Corporation took a reduced credit under I.R.C. § 280C(3), the full amount of the entity’s research expenses were available as an expense, and the nonresident owners were entitled to their distributive share of the federal credit for increasing research activities and the full deduction of the related expenses. 4. Commissioner Ruling No. 24989 (Mar. 4, 2013). Income from investment in related business was nonbusiness income allocable to taxpayer’s state of domicile. Taxpayer, a provider of professional services and business information to legal, financial, real estate, and governmental affairs sectors across the United States, filed an Idaho combined income tax return, including its 35 percent investment in a related entity (“Subsidiary”). Some elements of unity between Taxpayer and Subsidiary were present, including the entities being in the same line of business and the acquisition of Subsidiary fitting Taxpayer’s business strategy. However, the Commission ruled that Taxpayer’s ownership percentage indicated a lack of control, and thus the businesses were not unitary and Taxpayer’s income from the investment was nonbusiness income. DLI- 266524086v1 -4- 5. Commissioner Ruling No. 21626 (Dec. 20, 2012). Net cost of inventory exchanged in buy/sell agreement includable in sales factor. Taxpayer filed returns including the net cost of inventory traded under buy/sell agreements (the “Agreements”), in its sales factor, and later filed amended returns including the gross amounts of the transactions. Under the Agreements, Taxpayer agreed to deliver a certain grade, quality, and quantity of oil at a future date to a party and, in exchange, receive an equivalent grade, quality, and quantity of oil at that time or some other specified date. Taxpayer argued that the exchanges constituted sales and that the full value received constituted gross receipts appropriately included in the denominator of its sales factor. The Tax Division argued that the continuous buy/sell exchanges do not complete the earnings process, and Taxpayer’s proposed treatment in effect doubles the amount of gross receipts for the transactions. Under the Agreements, there was no recognition of gain or loss when product was exchanged. Any value or cost differential resulting from the exchange was treated as inventory and cost of goods sold adjustments. Any gain from the exchange was not recorded until the product was sold to a third party. Accordingly, the Commission ruled that the Agreements be included in the net cost of the inventory exchanged in calculating Taxpayer’s sales factor. 6. 2014 Legislative Approval of Administrative Rule Changes (eff. 3/20/14) The Legislature approved the following franchise tax administrative rule changes: Amended Idaho Admin. Code r. 35.01.01.105 incorporates prior legislation regarding addbacks for state and local taxes deduction for federal income purposes and passive losses deducted during a tax year in which the taxpayer did not transact business in Idaho. Amended Idaho Admin. Code r. 35.01.01.105, .180, and .254 incorporate prior legislation regarding loss recovery deductions and donations of technological equipment. Amended Idaho Admin. Code r. 35.01.01.263, .270, .280, and .291 contain partnership income sourcing provisions. Amended Idaho Admin. Code r. 35.01.01.714 clarifies that for purposes of the capital investment credit, qualifying property must remain in Idaho during the recapture period, not the entire credit carryover period. Amended Idaho Admin. Code r. 35.01.01.880 provides that claims for refund or credit of amounts paid as backup withholding by pass-through entities generally must be filed within three years of the due date of the return for the year for which the tax was withheld or paid. If the refund or credit claim relates to an overpayment attributable to an Idaho net operating loss carryback incurred on or after January 1, 2013, an amended return carrying the loss back must be filed within one year of the end of the tax year of the loss the results in the carryback. 7. 2013 Legislative Approval of Administrative Rule Changes (eff. 4/4/13) The Legislature approved the following franchise tax administrative rule changes: Amended Idaho Admin. Code r. 35.01.01.105, reflecting 2012 legislation providing that passive losses incurred during years in which a taxpayer had no activity in Idaho are not deductible. Amended Idaho Admin. Code r. 35.01.01.171, clarifying what constitutes non-qualifying property for purposes of the capital gain deduction. Amended Idaho Admin. Code r. 35.01.01.286, clarifying allocation and apportionment procedures used by an S corporation and its qualified subchapter S subsidiaries carrying on more than one unitary business. DLI- 266524086v1 -5- 8. 2012 Legislative Approval of Administrative Rule Changes (eff. at conclusion of 2012 Legislative session – 3/29/2012) The Legislature approved the following franchise tax administrative rule changes: III. Amended Idaho Admin. Code r. 35.01.01.756, informing employers of the requirements to qualify for the credit created by H.B. 297, 2011 1st Leg. Session. The Rule defines employer-provided healthcare benefits found in IDAPA 18.01.30, basing the definition of “employer-provided” on the national averages of the employer share of premium costs. The Rule had previously been adopted on an emergency basis. Amended Idaho Admin. Code r. 35.01.01.105, .120, .125, .253, and .245, reflecting 2011 legislation that decoupled Idaho from federal provisions extending and increasing amounts allowed for bonus depreciation for property placed in service after 2009. Amended Idaho Admin. Code r. 35.01.01.171, specify that gains treated as ordinary income in accordance with examples under I.R.C. § 1231 do not qualify for Idaho capital gains deductions. Amended Idaho Admin. Code r. 35.01.290, reflecting 2011 legislation that modified provisions regarding elections to have pass-through entities pay tax on owners’ or beneficiaries’ income. Amended Idaho Admin. Code r. 35.01.01.887, reflecting 2011 legislation that modified provisions governing back-up withholding by pass-through entities. SALES AND USE TAX A. Overview Idaho imposes a 6% sales tax on all sales at retail and certain services. Taxable services include producing, fabricating, processing, printing, or imprinting tangible personal property furnished directly or indirectly by the consumer; furnishing, preparing, or serving food, meals, or drinks and nondepreciable goods and services directly consumed by customers and included in the charge for such items; and intrastate transportation for hire on nonregularly scheduled flights. Idaho uses an essence of the transaction test for mixed sales. Certain resort cities, counties, and auditorium districts have a local sales tax option. The tax is imposed on the consumer, but the retailer is responsible for collection. Idaho follows destination-based sourcing for general retail sales. B. Legislative Developments 2015 Legislative Session The 2015 legislative session began on January 12, 2015 and is expected to conclude on April 10, 2015. We will cover all significant legislative changes in our next edition. 1. Exclusion For Non-Permanent Right To Use Software (eff. April 1, 2015) The Idaho sales tax on tangible personal property specifically includes computer software subject to certain exclusions. House Bill 209 provides that such exclusions do not apply to computer software that constitutes digital music, digital books, digital videos and digital games when the purchaser has a permanent right to use such software. If the right to use digital music, digital books, digital videos or digital games is conditioned upon continued payment from the purchaser it is not a permanent right of use and is thus excluded from the sales tax. DLI- 266524086v1 -6- 2014 Second Regular Session 1. Enactment of Idaho Reimbursement Incentive Act (eff. 7/1/14) H.B. 546 enacted the Idaho Reimbursement Incentive Act, creating a refundable tax credit for qualified business entity applicants that meet certain job and revenue creation requirements. To qualify, the business entity must create at least 50 new jobs (20 in a rural community) over the term of the project, not to exceed 15 years. The entity must also generate an approved percentage (up to 30%) of “new state revenue;” defined as “the Idaho portion of state corporate income tax, personal income tax and use tax that is paid by the applicant in excess of those taxes paid at the date of the application and is attributable only to the new growth upon which the project is based.” 2. Creation of Tax Relief Fund (eff. 7/1/14) H.B. 593 creates a Tax Relief Fund for sales tax collected and remitted from retailers who are not engaged in business in Idaho and would not have been required to collect Idaho sales tax. Monies in the account are directed to be used for tax relief. 3. Remotely Accessed Cloud Software Exempt (eff. 7/1/14) H.B. 598 clarifies that remotely accessed computer software is not considered tangible personal property, and therefore is not subject to sales tax. “Remotely accessed computer software” means computer software that a user accesses over the internet, over private or public networks, or through wireless media, where the user’s right to access the software is by means of a license, lease, subscription, service or other agreement. 4. Use Tax Exemption for Food and Beverages Donated to Individuals and Nonprofits (eff. 3/18/14) H.B. 530 provides a use tax exemption for food and beverages donated to individuals or nonprofit organizations registered with the secretary of state. 2013 First Regular Session 1. Cloud Computing Application Software not Taxable (eff. 4/3/13) H.B. 243 excludes application software accessed over the internet or through wireless media from the definition of tangible personal property. The exclusion applies to the right to use computer software accessed from a location owned or maintained by the seller or the seller’s agent and not loaded and left at the user’s location. The exclusion does not apply to software whose primary purpose is for entertainment use, nor does it apply if the vendor offers the same or comparable software through wholesale or retail channels in a storage media or by electronic download. 2. Definitions of “Primary” and “Primarily” Added (eff. 7/1/13) H.B. 15 defines the terms “primary” and “primarily” (both previously undefined) as the predominant or greatest use of property, for purposes of determining taxable and nontaxable use. 3. Exemption for Food and Beverage Tastings (eff. 3/21/13) H.B. 187 provides a use tax exemption for food and beverage tastings, including beer and wine. 2012 First Regular Session 1. Exemption for Parts Installed on Privately Owned Aircraft (eff. 3/9/12) H.B. 417 exempts parts installed on private aircraft owned by non-residents, consistent with the taxation of parts installed as components of aircraft manufactured in Idaho and sold to non-residents and parts installed on aircraft in commercial use. The exemption sunsets on June 30, 2016. DLI- 266524086v1 -7- 2. Interstate Trucks Registered Under the International Registration Plan (eff. 7/1/12) H.B. 361 modifies the claw-back period in which vehicles with a maximum gross registered weight over 26,000 pounds will be deemed to have been sold for use in Idaho if not substantially used in interstate commerce. The relevant period under the International Registration Plan is now any four fiscal year quarters beginning July 1, and ending June 30 of each year, consistent with the time period for filing International Fuel Tax Agreement returns and applications. 3. Free Beverage Samples Exempt From Use Tax (eff. 3/13/2012) H.B. 489 exempts beverages, including but not limited to wine and beer, from use tax if given as a free tasting to a potential customer. C. Judicial Developments 1. Gracie LLC v. Idaho State Tax Commission, 237 P.3d 1196 (Idaho 2010). Taxpayers’ purchase of tanning and spa equipment is not entitled to resale exemption because the equipment was not purchased for the purpose of rental to customers. Taxpayers filed a protest of a use tax assessment on tanning and spa equipment purchased out of state, arguing that the purchases qualified for the resale exemption because Taxpayers rented the equipment to their customers in the regular course of business. Whether a taxpayer is entitled to the resale exemption depends on whether the taxpayer purchases property for the purpose of reselling or renting to its customer or to provide taxable services as part of its business design. Taxpayers argued that they were renting equipment and not providing a service because the customers were charged a fee based solely on the type of tanning equipment being used. The court disagreed, finding that the tanning customer paid not only for the use of the tanning bed, but also for the package of services offered by Taxpayers, including expertise and assistance, an individual room providing privacy and security, the availability to purchase accessory items, and the cleaning and maintenance of the equipment. Further, many of Taxpayers’ customers received spa packages that included wellness, relaxation, UV therapy, and skin rejuvenation services involving more than the mere rental of a tanning bed. As the service component of the tanning salons was an integral and significant part of Taxpayers’ business, the equipment was subject to the use tax. D. Administrative Developments 1. Draft Cloud Computing Sales Tax Rule In July 2014, the Idaho State Tax Commission released a draft discussion of a sales and use tax rule on computer equipment, software, and data software reflecting 2014 legislation (H.B. 598) clarifying the exclusion for cloud computing software. The draft rule was discussed at the Sales Tax Rules Committee meeting on July 24, 2014, and a proposed rule will be published in the October Idaho Administrative Bulletin. 2. Commissioner Ruling No. 25620 (Jan. 1, 2014). Responsible person cannot be held liable for uncollected sales taxes. The Idaho State Tax Commission issued a notice of deficiency asserting responsible party liability for a sales tax deficiency, resulting from sales being treated as exempt from sales tax under the production exemption. The taxpayer was unable to provide substantiation documenting the exempt nature of the sales. However, the Commissioner ruled that Idaho Code § 63-3627, which imposes responsible person liability, does not apply to uncollected tax. Therefore, petitioners could not be held personally liable for the asserted tax. DLI- 266524086v1 -8- 3. Commissioner Ruling No. 25874 (Mar. 27, 2014). Resale certificate accepted where seller did not have unequivocal knowledge that buyer was not purchasing items for resale. Following an audit, the Tax Division assessed sales tax on items purchased under a resale certificate which the Division determined were for consumption by the buyer. The Division argued that the seller, being involved in the industry, should have known that the buyer would not resell the items and therefore the sales were taxable as a matter of law, in spite of the fact that the taxpayer had a valid exemption certificate from the buyer. The Commission held that the legislature intended a low threshold for acceptance of certificates by seller. Unless the facts show that the seller has unequivocal knowledge that the buyer’s purchase is taxable, or if the representations on the invoice and certificate disclose that the claim of exemption is invalid as a matter of law, the seller can rely on the representations of the buyer, even if the representations are not reasonable, and the seller has no duty to question or challenge the representations. 4. Commissioner Ruling No. 25851 (Feb. 11, 2014). Taxpayer liable for use tax on incidental materials used in repairing tangible personal property. Following a routine audit, the Audit Bureau assessed use tax on the Taxpayer’s use of materials in the repair process, but not itemized on the repair invoices. The Bureau identified these items as incidental materials, because they were being expensed by the Taxpayer at the time of purchase. The Commissioner held that the Taxpayer was liable for use tax on the materials if no sales tax was paid upon their purchase. 5. Commissioner Ruling No. 25946 (Jan. 1, 2014). Convenience fee charged for payment by credit card subject to sales tax. Taxpayer charged its customers a convenience fee for making monthly payments over the phone using a credit card, but did not charge a fee for customers opting to pay at the store or online. The Audit Bureau determined that the mandatory convenience fee was part of the sales price and, therefore, subject to sales tax. Taxpayer argued that the fee was the equivalent of a finance charge related to a payment option and should not be considered part of the final sales price. The Commissioner held that the fee was charged to the customer to cover the Taxpayer’s own labor costs, such as the time for an employee to talk to the customer, identify the account, enter the credit card information, verify payment and provide a receipt. As a result, the fee was for services rendered as part of the sale, and subject to sales tax. 6. Commissioner Ruling No. 25279 (Oct. 8, 2013). Separately stated freight and labor charges subject to tax. Taxpayer protested the assessment of sales tax on separately stated charges billed to its customers related to its own freight costs prior to the sale (freight in) and labor costs incurred in preparing the products for sale. Taxpayer charged sales tax on the sales price of the product, but not on these separately stated charges. Taxpayer argued these separately stated charges were not subject to tax as they are costs of doing business that are passed along to the customer without any markup. The Commission held that the fact that the charges did not result in a profit for the business was irrelevant to the question of whether they are included in the tax base. The definition of “sales price” is broadly inclusive, and specifically notes that the sales price should not be reduced for the cost of the item sold, labor or service costs, or any other expense. 7. Commissioner Ruling No. 25326 (July 10, 2013). Charges for installation of customized parts subject to tax. Taxpayer operates a motor vehicle retail and repair facility. Following audit, the Tax Division assessed sales tax on installation charges associated with sales of tangible personal property. The Commission held that installation labor is taxable when it is associated with the purchase of goods sold and packaged with other goods as a condition of the primary goods’ sale. Conversely, installation labor associated with contemporaneously purchased tangible personal property and incorporated into goods already owned by the customer is not subject to tax. DLI- 266524086v1 -9- 8. Commissioner Ruling No. 24442 (Mar. 22, 2013). Subcontractor liable for use tax on value of installed materials. Taxpayer was hired as a subcontractor by a general contractor constructing real property pursuant to a contract with a state agency. Materials installed by Taxpayer were purchased by the state agency and supplied to Taxpayer for the project. As a state agency can make purchases exempt from tax, no sales or use tax had been paid prior to Taxpayer taking possession and installing the materials. The Tax Division assessed Taxpayer use tax on the value of the materials consumed on the project, based on price information provided by the general contractor. Taxpayer argued that, because the general contractor entered into the contract with the state agency, and the contract explicitly outlined the use tax liability arising from installation of materials supplied by the agency, it could not be held liable for tax on its own use of the materials. Taxpayer also argued that, because the general contractor took possession of the materials prior to Taxpayer’s work on the project, the general contractor is the only one that exercised control over the material sufficient to incur a use tax liability. The Commission held that Taxpayer exercised power over the property in fulfilling its obligations as a subcontractor, and owed use tax regardless of the fact that the state agency’s purchase of the materials was not taxable. The Commission also acknowledged that the general contractor could have been held liable for use tax as well, but held that that did not preclude Taxpayer from also being held liable, provided the tax was only imposed once. 9. Commissioner Ruling No. 24874 (Mar. 12, 2013). Spray-on truck bedliners constitutes exempt repair work. Taxpayer owned and operated a business of selling and applying spray-on bedliner to truck beds. Taxpayer purchased the spray-on material as a sale for resale, and sold it to its customers, charging sales tax. Taxpayer did not charge tax on the labor costs, considering itself to be performing repair work. The Tax Division assessed tax, asserting that Taxpayer’s application of the spray-on material constituted taxable fabrication labor. The Commission held that the spray-on bedliner was not an accessory independent of the truck, but rather a component part of the underlying vehicle, similar to paint. Therefore, Taxpayer’s labor was repair work and not subject to tax. 10. Commissioner Ruling No. 24642 (Dec. 7, 2012). For-profit Partnership liable for tax on purchases made by exempt partner. Taxpayer was a for-profit partnership co-owned in equal shares by non-profit tax exempt partners. One of the partners made tax exempt purchases on behalf of Taxpayer, and the Tax Division assessed use tax against the Taxpayer on the price of such purchases. The applicable statute did not directly provide an exemption for joint-ventures of otherwise qualifying entities, and the Commission rejected Taxpayer’s argument that an exemption was implied. Accordingly, the assessment was upheld. 11. Commissioner Ruling No. 22235 (Apr. 17, 2012). Notice of Deficiency Determination approved following taxpayer’s failure to provide evidence. Taxpayer was issued a Notice of Deficiency (“Notice”) for sales and use tax, including interest, in the amount of $224,296. Taxpayer timely filed an appeal and petition for redetermination, and requested a hearing on June 18, 2010. After Taxpayer indicated that a bankruptcy proceeding would preclude collection of the liability on May 11, 2011, the Taxpayer was requested to provide such proof, under the assumption that there would be no need to discuss the substantive issues if collection were barred, When no response from the Taxpayer was received, another letter was sent to the Taxpayer extending the opportunity for a hearing. The Taxpayer asserted that because the Commission took no action for over 180 days from the date of the request for a hearing, the Notice was null and void by operation of law. The ALJ held that, because the Commission repeatedly extended the opportunity for a hearing, and the taxpayer did not provide evidence to establish that the amount asserted in the Notice was incorrect, the Notice was affirmed and made final. DLI- 266524086v1 -10- 12. Commissioner Ruling No. 24089 (Apr. 17, 2012). Passage of title to goods outside of Idaho is not a bar to collection of tax when goods come to rest in Idaho at the buyer’s location. The Commission denied Taxpayer’s adjustments on sales and use tax returns seeking a refund of purchases of goods to which Taxpayer took title out-of-state. The vendor sold tangible personal property to the Taxpayer, stored it at facilities rented to the Taxpayer, continued to apply labor to the goods, and subsequently delivered them to Idaho. Taxpayer claimed that, although the vendor was a registered Idaho dealer, the sale was not subject to tax because title to the goods was transferred from the seller to the buyer outside of Idaho. The ALJ held that tax was due when the Idaho delivery took place. Taxpayer’s reliance on the passage of title as the single determining factor for taxability was misplaced, as the definition of “sale” is inclusive of transactions where there is passage of title but is not restricted to it. The passage of title to goods outside of Idaho is not a bar to tax when the goods come to rest in Idaho at the buyer’s location. 13. 2014 Legislative Approval of Administrative Rule Changes (eff. 3/20/14) The Legislature has approved the following sales and use tax administrative rule changes: Amended Idaho Admin. Code r. 35.01.02.036 clarifies that certain signs, such as traffic and street signs, become real property after installation; however, business signs do not. For signs that become real property, the rule clarifies that the installer is acting as a contractor improving real property, and therefore owes sales or use tax on purchase or use of sign materials. Amended Idaho Admin. Code r. 35.01.02.037 adds examples of primary use when determining whether an aircraft is taxable or exempt. Amended Idaho Admin. Code r. 35.01.02.041 clarifies that if participants in a food or beverage tasting pay for participation, the charges are subject to sales tax. Amended Idaho Admin. Code r. 35.01.02.046 clarifies that all kinds of coatings, including paint, powder coating, chrome plating, and spray on bedliner, are treated consistently for sales and use tax purposes. Unless an exemption applies, the materials portion of the sale of coating is taxable. Amended Idaho Admin. Code r. 35.01.02.079 clarifies that sales or use of equipment primarily used to improve and install real property are subject to tax, even if the real property is used in production. Amended Idaho Admin. Code r. 35.01.01.130 clarifies the responsibilities of promoters regarding obtaining documentation from participants at promoter-sponsored events. 14. 2013 Legislative Approval of Administrative Rule Changes (eff. 4/4/13) The Legislature approved the following sales and use tax administrative rule changes: Amended Idaho Admin. Code r. 35.01.02.024, clarifying that rental of equipment with an operator provided by the equipment owner is a fully operated rental, regardless of whether the operator is an employee of the equipment owner. Amended Idaho Admin. Code r. 35.01.02.043, clarifying when fuel surcharges and environmental fees are included in the taxable sale price. Amended Idaho Admin. Code r. 35.01.02.072, clarifying the taxability of tangible personal property removed from inventory held for resale. Amended Idaho Admin. Code r. 35.01.02.109, defining “amusement device” to include machines operated by debit cards, credit cards, and prepaid arcade cards. DLI- 266524086v1 -11- 15. 2012 Legislative Approval of Administrative Rule Changes (eff. at conclusion of 2012 Legislative session – 3/29/2012) The Legislature approved the following sales and use tax administrative rule changes: IV. Amended Idaho Admin. Code r. 35.01.02.043, reflecting 2011 legislation related to sales and use tax on gratuities given for services provided as a supplement to the income of the service provider. Amended Idaho Admin. Code r. 35.01.01.109, requiring another amusement device permit to be obtained and affixed to the amusement device if the original permit is lost, stolen, or destroyed. PROPERTY TAX A. Overview Property tax is the major source of revenue for Idaho. While the state property tax has been suspended since 1965, the Idaho Legislature determines what property is exempt from local taxes, as well as any property that must be specially treated. Both real and personal property are subject to tax, unless specifically exempt. Valuation and assessment tasks are conducted by local authorities, although they are supervised by the Commission. Local boards of equalization review the assessed rates, as well as the assessor’s rulings on exemptions and special treatment. The Commission then equalizes the value of all property between counties. Rates are set by local boards of county commissioners, but the Idaho Legislature has set limits on the amount that a local taxing district’s revenues may increase, as well as rate limitations on special taxes. B. Legislative Developments 2015 Legislative Session The 2015 legislative session began on January 12, 2015 and is expected to conclude on April 10, 2015. We will cover all significant legislative changes in our next edition. 2014 Second Regular Session 1. Taxable Value Used to Determine Levy Rates (eff. 7/1/14) H.B. 383 deletes a provision that required the exempted value of personal property to be added back to the taxable value used to determine levy rates. 2. Electronic Transmittal of Notices (eff. 7/1/14) S.B. 1236 allows a county treasurer to transmit property tax notices electronically at the request of the taxpayer. 3. Taxable Improvements on Tax-Exempt Property (eff. 1/1/14) H.B. 441 provides that taxable improvements on tax-exempt land are not eligible for the personal property tax exemption under Idaho Code § 63-602KK. 4. Assessment of Electric Utility Operating Property (eff. 1/1/14) H.B. 440 establishes certain criteria to be used in assessing the operating property of rate-regulated electric utility companies. 5. Oil or Gas Well Exemption Automatic (eff. 1/1/14) S.B. 1213 provides that the exemption for wells drilled for oil, gas, or hydrocarbon condensate is automatic. The taxpayer does not need to file an exemption application or receive approval from the board of county commissioners. DLI- 266524086v1 -12- 2013 First Regular Session 1. Exemption for Oil, Gas, or Hydrocarbon Condensate Wells (eff. 1/1/13) H.B. 141 exempts wells drilled for production of oil, gas, or hydrocarbon condensate. 2. Exemption for Personal Property (eff. 1/1/13) H.B. 315 exempts the first $100,000 of a taxpayer’s personal property located in the taxing county and not otherwise exempt. The exemption does not apply to motor vehicles, boats, aircraft, or recreational vehicles that are not registered and for which required registration fees have not been paid. The bill also exempts any item of tangible personal property purchased after January 1, 2013, with an acquisition price of $3,000 or less. 3. Exemption for Site Improvements (eff. 1/1/13) H.B. 242 revises and clarifies the exemption provided by H.B. 519, 1st Regular Session, 2012, providing that the exemption applies to site improvements associated with land on property held by a land developer (either as the owner or vendee in possession under a land sale contract) until other improvements are begun or title to the land is conveyed from the developer. 2012 First Regular Session 1. Exemption for Site Improvements (eff. 1/1/12) H.B. 519 provides that site improvements made by developers (e.g., roads and utilities) will be considered exempt business inventory until other improvements are begun (e.g., buildings or structural components) or title to the land is conveyed from the land developer. 2. Forrest Land Valuation (eff. 1/1/12) H.B. 357 provides that all forest land valued based on timber productivity is floored at the 2011 valuation level for the next 10-year period. During the next 10-year period, the ceiling valuation for such land is capped at 30 percent above 2011 values. Annual changes are limited to a 5 percent annual increase or decrease from the immediate prior year. 3. Exemption Approvals and Appeals (eff. 7/1/12) H.B. 356 provides that claimed tax exemptions must be approved annually by the appropriate boards of county commissioners (previously counties or boards of equalization). The bill also repeals the boards of equalizations’ authority to grant, allow, or deny applications for exemption, and provides that taxpayers may file appeals of exemption decisions with county boards of equalization. C. Judicial Developments 1. Idaho Youth Ranch, Inc. v. Ada County Board of Equalization, Docket No. 41256 (Idaho, September 19, 2014). Property leased in its entirety by charitable organization does not qualify for exemption. In order to expedite loan approval and secure favorable financing for the purchase of real property, the Idaho Youth Ranch, Inc. (“Youth Ranch”) formed the Idaho Youth Ranch Nagel Center, LLC (the “LLC”), a single member limited liability company to purchase and hold the property. The sole member of the LLC was the Idaho Youth Ranch Foundation, Inc. (the “Foundation”). After acquiring the property, the LLC and the Youth Ranch entered into a twenty-five year commercial lease, with the LLC as the landlord and the Youth Ranch as the tenant. The Youth Ranch and the LLC applied for a property tax exemption, claiming that the property belonged to a charitable entity. The Idaho Board of Equalization denied the application, and the Board of Tax Appeals affirmed. On cross-motions for summary judgment, the District Court held that property leased by the LLC was not exempt from tax. The Youth Ranch and the LLC timely appealed. DLI- 266524086v1 -13- The Idaho Supreme Court held that the effect of Idaho Code section 63-602C is to treat properties leased in their entirety different than those that are leased only in part. Property owned by a charitable organization that is leased in part may still qualify for a property tax exemption with respect to the portion of the property not leased for commercial purposes. However, property leased in its entirety does not qualify for a charitable exemption under any circumstances. 2. Pacificorp v. State Tax Commission, 291 P.3d 442, (Idaho 2012). Tax Commission failed to include adjustments for functional and external obsolescence in its assessment. The Idaho State Tax Commission challenged Pacificorp’s deduction of certain obsolescence amounts from the cost value approach, arguing that the appraisal methodologies utilized by the taxpayer’s expert appraiser were so unreliable as to amount to incompetent evidence. The Supreme Court of Idaho held that the district court’s determination that external obsolescence was not sufficiently accounted for in the Commission’s valuation was not clearly erroneous. The Court further held that it was not clearly erroneous for the lower court to accept the taxpayer’s appraiser’s valuation, notwithstanding assumptions that the utility would always lose money and the failure to consider taxpayer’s deferred income taxes in the cost of capital projections. Nor was it clearly erroneous to find the taxpayer’s appraiser’s valuation reliable despite not utilizing the comparable sales or stock and debt approaches. Accordingly, the judgment of the district court was affirmed. 3. Thompson Development, LLC v. Bd. of Tax Appeals, 289 P.3d 48 (Idaho 2012). Zoning ordinance irrelevant in deciding whether property qualified for agricultural exemption. Thompson Development, LLC (“Landowner”) hired a contractor to install infrastructure improvements, including removing some topsoil, compacting soil, and installing a street, sidewalk and underground utilities. Landowner also asked the contractor to leave the ground in a condition sufficient to prepare for spring planting the following year, and spring wheat was planted on the property and later harvested. The following spring, the property was seeded for grass hay production. Landowner applied for agricultural exemptions for the farmed portion of the land. The district court upheld the denial of the application on the grounds that agricultural use of the property would violate city zoning ordinances. The Supreme Court of Idaho reversed, holding that the zoning ordinance was irrelevant to determining whether the property qualified for the exemption. 4. Lewiston Independent School District No. 1 v. City of Lewiston, 264 P.3d 907 (Idaho 2011). Stormwater utility assessment was unconstitutional property-related tax, not reasonablyrelated regulatory fee. The City of Lewiston (the “City”) enacted Ordinance No. 4512, creating a stormwater utility and stormwater fee for the operation and maintenance of the City’s stormwater system. Following suit for declaratory judgment that the fee was an unconstitutional tax requiring Legislative authorization, the City asserted the fee was a regulatory charge for a direct public service rendered to a particular customer, authorized pursuant to the City’s general police powers. The Idaho Supreme Court affirmed the lower court’s holding that, because the ordinance charged all property owners for the privilege of using the City’s preexisting stormwater system, regardless of whether the owner was using the system or not, the assessment was effectively a forced contribution enacted as a revenue-raising measure. Accordingly, Legislative authorization was required. D. Administrative Developments 1. 2014 Rejection of Administrative Rule Changes (eff. 3/25/14) The Legislature adopted H.C.R. 61, rejecting, nullifying, and voiding pending changes to Idaho Admin. Code r. 35.01.03.205, which would have clarified the exemption for personal property under Idaho Code § 63602KK(2). DLI- 266524086v1 -14- 2. Emergency Rule on Site Improvements (eff. 1/1/12) The Commission adopted, on an emergency basis, Idaho Admin. Code r. 35.01.03.620, to further define site improvements in relation to the recently enacted exemption provided by H.B. 519 (discussed above). Under the rule, site improvements associated with land (which may include developed access, grading, sanitary facilities, water systems, and utilities) which are made or caused to be made by the land developer and held by the land developer are exempt, provided the related property qualifies. The land developer must have filed the application by May 1, 2012 to qualify for the exemption for the 2012 tax year, and for all years thereafter the application must be filed by April 15. Multiple parcels may be included in one application, provided they are under the same ownership and described in sufficient detail. 3. 2013 Legislative Approval of Administrative Rule Changes (eff. 4/4/13) The Legislature has approved the following property tax administrative rule changes: Amended Idaho Admin. Code r. 35.01.03.608, reflecting 2012 legislation regarding applications required to be submitted to claim the new capital improvement exemption. 4. 2012 Legislative Approval of Administrative Rule Changes (eff. at conclusion of 2012 Legislative session – 3/29/2012) The Legislature approved the following property tax administrative rule changes: Amended Idaho Admin. Code r. 35.01.03.630, clarifying that the exemption for new capital investments provided by H.B. 13 (discussed above) may be granted only after a notification containing a description of the project and the qualifying period is received by the county. The rule also clarifies that the property eligible for taxation may be included on the new construction roll. Amended Idaho Admin. Code r. 35.01.03.312, affirming that real or personal property that has a change of status does not include federal or Idaho state property, so the proration of property tax to those properties is not appropriate unless specially authorized by the government entity. 5. Matter of Idaho Cattle Association, Appeal No. 10-A-1002 (Jan. 12, 2011). A nonprofit corporation’s lease of a building to a governmental agency qualifies for exemption because the building was used exclusively within the parameters of the corporation’s fraternal purposes. The Idaho Cattle Association (“ICA”), a nonprofit Idaho corporation and membership organization, owned a two-story office building in Boise that housed its business offices and a small meeting room. ICA leased the majority of the lower floor to the Idaho Beef Council (“IBC”), an Idaho governmental agency, and reinvested the proceeds into the property. The property was assessed in 2010 for $168,500, which reflected a 55% exemption. ICA’s request for a full 100% exemption was denied by Ada County, on the grounds that the lease was an excluded commercial-use lease. ICA protested the denial, and the Board of Equalization ruled for the county. On appeal, the Idaho Tax Appeals Board held that the entire value of the building was exempt, noting that: (1) the IBC was a “comped” member of the ICA and was considered a special supporter of ICA’s purposes; (2) the IBC was a nonprofit governmental agency; and (3) the purposes of the ICA and IBC overlapped and readily complemented each other. Accordingly, the lease was not an excluded commercial use. V. BIOGRAPHIES Kirk Lyda, attorney and CPA, is a partner in the Dallas Office of Jones Day. Kirk concentrates his practice on state tax litigation, controversies, and planning. For more than a decade, Kirk has handled state tax controversies ranging from elimination of audit risk via voluntary disclosures and letter rulings to field audits, administrative hearings, lawsuits, and appeals. He regularly advises clients on the state tax implications of restructuring their domestic business operations. He has helped companies identify and recover significant refunds. DLI- 266524086v1 -15- Kirk has represented taxpayers in cases such as Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App.–Austin 2000, pet. denied) (Texas franchise tax held unconstitutional as applied to a corporation without any substantial physical presence in Texas); Rylander v. Fisher Controls Int’l, 45 S.W.3d 291 (Tex. App.–Austin 2001, no pet.) (Texas Comptroller violated the “throwback rule” for Texas franchise tax apportionment purposes); and other reported cases (Sharp v. Park ’N Fly Of Texas, Inc., 969 S.W.2d 572, and Nabisco, Inc. v. Rylander, 992 S.W.2d 678). He has handled cases or hearings for Bongrain, Estée Lauder, General Motors, L’Oréal, Lowe’s, McKesson, Patrón, PotashCorp, Texas Instruments, Time Warner, Viacom/CBS, and others. Kirk speaks routinely at conferences throughout Texas and in other states on a variety of state tax topics. He coauthored Accounting and Finance for Lawyers, a Harcourt publication, and Business Purpose: What Is It? How Much Is Enough?, a publication of New York University’s 2004 Institute on State and Local Taxation. Admitted: Texas Education: The University of Texas at Austin (J.D. 1999; M.P.A. 1996; B.B.A. 1996) Caveat: Please consult your tax advisor on your specific facts. This outline does not offer, nor is it intended to offer, legal advice. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. DLI- 266524086v1 -16- IDAHO STATE DEVELOPMENTS Stoel Rives LLP Robert T. Manicke ([email protected]) Kris J. Ormseth ([email protected]) Dustin R. Swanson ([email protected]) 101 S. Capitol Blvd., Ste. 1900 Boise, ID 83702-7705 Phone: (208) 389-9000 Fax: (208) 389-9040 www.stoel.com The 2015 legislative session convened January 12 and adjourned April 3, 2015. Noteworthy legislative and other legal developments are summarized below. I. Income/Franchise Taxes Reconnect date updated from January 1, 2014 to January 1, 2015. Idaho updated its general federal conformity date to tie to the Internal Revenue Code as amended and in effect on January 1, 2015. See L. 2015, H77 (c. 13), effective retroactively to 1/1/2015. Idaho Supreme Court: Out-of-State Internet Service Provider’s Revenues Sourced to Idaho Under Traditional COP Statute. Although a corporation’s call centers, router, servers, and certain other equipment were located in Arizona, the Idaho Supreme Court affirmed a lower court’s judgment that revenue derived from providing Internet services to Idaho residents must be sourced to Idaho, applying a cost-of-performance method of apportionment. The company took the position that the revenue from Internet services provided to Idaho customers should be sourced to Arizona, though the court notes that the company also excluded such revenues from its Arizona income tax return “on the ground that they came from Idaho sales.” The Idaho statute at issue provides that sales are sourced to Idaho when a greater proportion of the income-producing activity is performed in Idaho than in any other state based on costs of performance. See I.C. § 63-3027(r)(2). The court noted three categories of costs: (1) Idaho employee and local office costs, (2) contractual payments to AT&T and Qwest to provide local service fiber optic connections, and (3) Arizona “back office” costs. In addition to sourcing category (1) to Idaho, the lower court sourced certain category (2) costs to Idaho based on a company profit and loss statement that showed “the amount that Cable One allocated to Idaho for the Internet backbone services that it purchased from AT&T and Qwest.” Based on this information, the court affirmed the lower court’s judgment that 68% of the costs for providing Internet service to Idaho customers was incurred in Idaho. See Cable One, Inc. v. Idaho State Tax Comm’n, 337 P3d 595 (Idaho 2014). Idaho charitable contribution deduction allowed with respect to NOL carryovers that reduce the deduction allowed on federal income tax returns. An Idaho taxpayer may deduct from taxable income the amount by which the taxpayer had to reduce the charitable contribution deduction for federal income tax purposes because IRC § 170(d)(1)(B) or IRC § 170(d)(2)(B)— for federal income tax purposes, these rules reduce a corporation’s or an individual’s charitable contributions carryover (but not the net operating loss carryover) to the extent the charitable contribution deduction, in computing taxable income in a later year, would increase the net operating loss carryover to a later year. This rule does not apply to the calculation for an individual who owns an interest in a pass-through entity or is a beneficiary of a trust or estate. See L. 2015, H37 (c. 19), effective retroactively to 1/1/2014. 78531263.1 0204683-00001 1 II. Claim-of-right income repayment adjustment. A refundable state income tax credit is allowed for a claim-of-right income repayment adjustment. The law provides that if a taxpayer claims such a credit pursuant to I.C. § 63-3029F, then any amount taken as a deduction pursuant to IRC § 1341 must be added to federal taxable income for the applicable tax year. See L. 2015, H13 (c. 21), effective retroactively to 01/01/2015. Property Taxes No business inventory exemption for land developer that had reorganized. Idaho allows a business inventory property tax exemption with respect to site improvements “on real property held by the land developer for sale or consumption in the ordinary course of the land developer’s business until . . . title to the land is conveyed[.]” I.C. § 63-602W(4). Jayo Construction, Inc. installed sidewalks, curbs, and other site improvement on 41 parcels of real property in 2008. The entity underwent reorganizations in 2008 and 2010. The land was transferred from the corporation to its sole shareholder (Mr. Jayo), then to Jayo LLC, then back to Mr. Jayo, and then to Jayo Development. Jayo Development filed a business inventory property tax exemption application in 2012. The county denied the application, and the Idaho Supreme Court ultimately affirmed the denial, finding that the plain language of the statute allowed only the land developer to claim the exemption and that Jayo Development was not the same entity as Jayo Construction. See Jayo Development, Inc. v. Ada County Bd. of Equalization, No. 41668, 2015 WL 798033 (Idaho Feb. 26, 2015). Idaho Supreme Court finds that city’s “sewer capitalization fee” violated Idaho statute. The City of Hayden provides sewer service to residents in and around the city, collecting a bimonthly maintenance fee and a one-time sewer capitalization fee for new structures or significant additions to commercial structures. Hoping to upgrade the sewer system, the city increased the sewer capitalization fee. However, Idaho statutory law requires that such fees be related to or for actual services provided by the city. See I.C. §§ 63-1311(1), 50-1030(f). The court found that nothing in the record showed that the fee increase was based on any calculation of the actual cost of providing sewer service or on the sewer service rendered to the new user. Therefore, the court vacated the judgment of the lower court, finding that the city’s fee increase violated Idaho statutory law. See North Idaho Building Contractors Association v. City of Hayden, No. 41316-2013, 2015 WL 797524 (Idaho Feb. 26, 2015). III. Sales & Use Taxes Statutory reference corrected. A code reference for the exemption of certain senior citizen meals is corrected to refer to sales of nutritional meals for aging individuals pursuant to Title III of the Older Americans Act, P.L. 109-365. See L. 2015, H11 (c. 17), effective retroactively to 01/01/2015. Added exceptions for UTVs and SOHVs used outside Idaho. Utility type vehicles (UTVs) and specialty off-highway vehicles (SOHVs) have been added to the types of vehicles exempt from sales tax if sold to nonresidents for use outside of Idaho. See L. 2015, H12 (c. 20), effective 07/01/2015. IV. General Administration Mandatory publication of new statutory changes and administrative rules may be satisfied electronically. The publication and printing requirements set forth in the Income Tax Act, with respect to amendments to the Income Tax Act and rules or regulations promulgated thereunder, are satisfied if the information is made available to the public in electronic form. 78531263.1 0204683-00001 2 See L. 2015, H10 (c. 16), effective 7/1/2015. About the Authors Robert T. Manicke: Mr. Manicke is head of Stoel Rives’ Benefits, Tax and Private Client group and also leads the state and local tax practice at the firm. He regularly represents clients before state and local tax tribunals in cases involving unitary taxation, Public Law No. 86-272 and other business tax matters. He also has written tax legislation and advises businesses on state tax incentives. Mr. Manicke graduated summa cum laude from the University of Illinois College of Law and is a member of the Oregon, California, Idaho and Washington State Bars. Kris J. Ormseth: Mr. Ormseth is managing partner of the Stoel Rives Boise office. He regularly handles mergers and acquisitions, financing arrangements, and other transactions for privately and publicly held clients in a variety of industries. He provides corporate counsel advice to clients on a wide range of legal and business issues. Mr. Ormseth received his B.A. from Stanford University and his J.D. from the University of California at Berkeley. He is a member of the Idaho State Bar. Dustin R. Swanson: Mr. Swanson is a member of Stoel Rives’ Tax Section. His practice focuses on federal, state and local income tax issues, including property, sales and use, excise, and employment taxes as well as all aspects of taxable and tax-free business transactions. Mr. Swanson graduated from Cornell University, the University of Montana School of Law, and the University of Florida (LL.M. in Taxation). He is a member of the Oregon and Montana State Bars. 78531263.1 0204683-00001 3 IDAHO STATE DEVELOPMENTS Robert (Bob) Mahon Perkins Coie LLP 1201 Third Avenue, Suite 4800 Seattle, WA 98101 Tel. (206) 359-6360 Fax (206) 359-7360 Email: [email protected] www.perkinscoie.com I. INCOME/FRANCHISE TAXES A. Legislative Developments IRC conformity. Idaho adopted legislation generally conforming Idaho's income tax to the Internal Revenue Code as amended and in effect on January 1, 2015. Idaho Laws of 2015, ch. 13. B. Judicial Developments Apportionment - sales factor - cost of performance. The Idaho Supreme Court affirmed a state district court holding that a taxpayer’s sales of internet access to Idaho customers were included in the numerator of the taxpayer’s Idaho sales factor. The court concluded that the taxpayer produced income from internet access service to Idaho customers by conducting activities in both Idaho and Arizona. The court found that the taxpayer’s Idaho activities included having employees and offices in Idaho and using “backbone” services provided by Qwest and AT&T and its Arizona activities included back office functions. Finally, the court held that the district court’s determination of costs associated with these activities was supported by substantial and competent evidence. Because 68% of the costs of performing the income-producing activities occurred in Idaho, all of the taxpayer’s sales of internet access service to Idaho customers were included in the numerator of the taxpayer’s Idaho sales factor. Cable One, Inc. v. Idaho State Tax Comm’n, 337 P.3d 595 (Idaho 2014). II. SALES AND USE TAXES Production exemption for hand tools. The Idaho Legislature has eliminated the exclusion for “hand tools” from the sales/use tax production exemption. As a result of the amendment, the purchase and use of hand tools in a qualifying production operation will be exempt from sales/use tax. Idaho Laws of 2015, ch. 85. III. PROPERTY TAXES Business inventory exemption for site improvements. The Idaho Supreme Court held that a developer’s site improvements were not exempt business inventory because the taxpayer was not the land developer that made the improvements. For the year at issue (2012), Idaho’s inventory exemption included “[s]ite improvements … on real property held by the land developer for sale or consumption … until … title to the land is conveyed from the land developer.” The court concluded that the statute unambiguously limited the exemption to the developer that made the site improvements and not subsequent transferees. In this case, the original developer had transferred the site improvements and real property to a related entity as part of a reorganization. Although a 2013 amendment allowed related entities to retain the site improvement exemption following a transfer, the court concluded that the amendment did not affect the meaning of the statute in 2012. Jayo Development, Inc. v. Ada County Bd. of Equalization, 2015 WL 798033 (Idaho Feb. 26, 2015). IV. AUTHOR'S BIOGRAPHY Robert (Bob) Mahon is a state and local tax partner in the Seattle office of Perkins Coie, a law firm with more than 1,000 lawyers in 19 offices in the United States and Asia. Mr. Mahon serves as Editor-in-Chief of the Journal of Multistate Taxation and Editor-in-Chief of the ABA Sales and Use Tax Deskbook. He also teaches state and local taxation as an adjunct professor at the University of Washington School of Law. Mr. Mahon is past president of the Washington State Bar Association Tax Section and is listed in The Best Lawyers in America for Tax Law and as Best Lawyers’ Seattle Tax Law Lawyer of the Year. Mr. Mahon received his B.A. with honors from Grinnell College (1992); his J.D. with high distinction from the University of Iowa (1995); and his LL.M. in Taxation from the University of Washington (1996). -2- NEVADA STATE TAX DEVELOPMENTS SPRING 2015 Kirk Lyda JONES DAY 2727 North Harwood Street Dallas, TX 75201 1.214.969.5013 [email protected] http://www.jonesday.com/klyda/ Lawyerly Caveat: The views set forth herein are the personal views of the authors and do not necessarily reflect those of the law firm with which they are associated. I. INCOME/FRANCHISE TAX Nevada does not currently impose a corporate income/franchise tax. A. Legislative Developments 1. Voter Rejection Of Proposed Margin Tax In the November 2014 general ballot, the voters rejected the initiative to adopt a state-level “margin tax.” 2. Governor’s Proposed Increase In The Business License Fee Nevada Governor Sandoval has proposed a significant increase in the business license fee, which currently is $200 per business per year regardless of industry or income. The Governor’s proposal would raise the fee to $400 for small businesses up to more than $4 million for larger businesses, depending on income. The proposal would vary the fee rates based on industry type. The bill is pending in the legislature. The Governor’s summary of the proposal is at http://gov.nv.gov/uploadedFiles/govnvgov/Content/News_and_Media/Press/2015_Images_and_Files/Business LicenseFeeFacts.pdf II. SALES AND USE TAX Nevada imposes sales tax on “all retailers at the rate of 2 percent of the gross receipts of any retailer from the sale of all tangible personal property sold at retail in [Nevada].” Nevada Revised Statutes (“NRS”) § 372.105. A complementary use tax is “imposed on the storage, use or other consumption in [Nevada] of tangible personal property purchased from any retailer . . . at the rate of 2 percent of the sales price of the property.” Id. § 372.185. A. Legislative Developments 1. 2015 Legislative Session The 2015 legislative session began on February 2, 2015. We will report on any significant sales tax changes that are ultimately enacted in our next edition. 2. 2013 Changes The Legislature made the following changes in 2013. 2.1 Food Comps Assembly Bill 506 (generally effective June 13, 2013) excludes complimentary food (other than alcoholic beverages and paper goods associated with complimentary food) from the sales tax. DLI-266523948v1 -1- 2.2 Modifications To Tax Abatement Requirements Assembly Bill 1 (special session, generally effective July 1, 2013) revises the provisions governing economic incentive abatements of sales tax, property tax, and other taxes. The bill revises the qualifications, the duration of abatements, and makes other changes. 2.3 Bad Debts Senate Bill 152 (eff. May 20, 2013) provides that the right of a retailer to claim a bad debt is not affected by the assignment of a debt by the retailer to an entity that is part of an affiliated group that includes the retailer. B. Judicial Developments 1. Harrah's Operating Co., Inc. v. Dep't of Taxation, No. 61521 (Nev. 2014). Aircraft purchased outside of Nevada and first used outside of Nevada were not subject to the Nevada use tax. 2. Dep’t of Taxation v. Masco Builder, 265 P.3d 666 (Nev. 2011) Tax Commission improperly substituted its own fact finder for that of administrative law judge; statute of limitations for taxpayer’s refund claim tolled due to reliance on incorrect advice from the Department Company that both manufactured and installed cabinets filed a refund claim seeking difference between remitted sales tax on sales price of cabinets and use tax due on company’s cost of acquiring the cabinets. An administrative law judge approved the refund claim, finding that the company was a construction contractor in the transactions in question (which would lead to use tax being due on a smaller tax base rather than the larger sales tax that was paid). Following an appeal by the Department, the Commission reversed the findings of the administrative law judge, holding that the company was a retailer and not a construction contractor. The Commission further held that the company’s refund claim was time-barred, even though the company delayed filing the claim in reliance on advice from the Department that the filing was not necessary. The company challenged the Commission’s decision in district court, which held that the refund claim should be granted and that the claim was not barred by limitations. The Nevada Supreme Court affirmed. The Court held that the Commission improperly substituted its judgment of the evidence for the judgment of the administrative law judge. The Court found that the fact findings of the administrative law judge were supported by substantial evidence and could not be substituted. The Court also held that the time for filing the refund claim was equitably tolled because the company had detrimentally relied on advice from the Department in failing to timely file the refund claim. C. Administrative Developments 1. Technical Bulletins As a result of legislation in 2013, the Department is now publishing technical bulletins on the Department’s website. 2. Limited Exemptions For Manufacturing The Department reminded companies about the limited sales tax exemptions afforded to manufacturers.1 A manufacturer can purchase items that are incorporated into the product for sale to the customer exempt under the resale exemption. Component parts of inventory being manufactured are thus exempt. Sales tax applies to purchases by a manufacturer for use by the manufacturer. Purchases of supplies, equipment, tools, chemicals (etc.) purchased by the manufacturer are subject to sales tax. The Nevada sales tax thus applies much more broadly to manufacturers than sales taxes of other states. 1 Nevada Tax Notes, April 2013 edition. DLI-266523948v1 -2- 3. Tax On Air The Department informed taxpayers of the Department’ position that sales tax applies to air, reasoning that air is perceptible to the senses, and thus taxable tangible personal property to the extent the air is sold for consideration.2 Tax would thus apply to pure oxygen sold in an oxygen bar. 4. Accrual Reporting / Bad Debts Retailers who make credit sales (sales other than cash on delivery) must report sales tax to the Department under the accrual method.3 The sales tax should be reported to the Department when the sale is made, even if the buyer has not fully paid. If the buyer does not pay the sales price, the retailer is generally entitled to a bad debt deduction when the account is written off. 5. Successor Liability The Department reminded taxpayers about the successor liability aspects of acquiring a business.4 When a person buys a business they may be held liable for any tax or fees owed by the business to the Department. A person buying a business should consider seeking a “Certificate of Amount Due” from the Department prior to paying the seller. If any amount is owed by the seller to the Department, the buyer can then withhold such amount from the purchase price and pay the amount to the Department. 6. Voluntary Disclosure The Department reminded companies about the Department’s voluntary disclosure program.5 Under the program, businesses meeting certain criteria that come forward and pay back taxes in good faith will generally receive abatement of penalties and interest. The forms related to the voluntary disclosure program are available on the Department’s website. 7. Construction Contractors The Department reminded taxpayers how the sales tax applies to construction contracts for the improvement to realty, whether the construction involves building or affixing a structure or other improvement to realty or remodeling or repairing an existing improvement to realty.6 Construction contractors are consumers of materials purchased to fulfill the contract. Contractors should pay sales tax to vendors (or accrue and remit use tax) and not charge sales tax to the customer. Contractors should not purchase such materials exempt as a sale for resale.7 8. Documenting Sales For Resale: Resale Certificates (not Sales Tax Permits) The Department reminded taxpayers about the differences between resale certificates and sales tax permits.8 The Department is receiving an increasing number of phone calls from Nevada sellers/retailers, stating that many vendors/wholesalers from whom they purchase inventory for resale, are requesting copies of purchasers’ Sales Tax Permits; not copies of purchasers’ Resale Certificates. This is not correct as Sales Tax Permits are not interchangeable with, and may not be used in lieu of, Resale Certificates. Nevada vendors/wholesalers selling tangible personal property for resale in Nevada must take care when obtaining Resale Certificates from customers claiming to be exempt from paying sales tax because the purchaser must 2 Nevada Tax Notes, January 2013 edition. 3 Nevada Tax Notes, January 2013 edition. 4 Nevada Tax Notes, October 2012 edition. 5 Nevada Tax Notes, October 2012 edition. 6 Nevada Tax Notes, April 2012 edition. 7 Nevada Tax Notes, July 2012 edition. 8 Nevada Tax Notes, April 2012 edition. DLI-266523948v1 -3- re-sell the merchandise/property on which sales tax is not paid. Blank Resale Certificate forms may be downloaded from the Department’s website by going to the Common Forms Link. Blank Resale Certificate forms/cards may also be purchased at most office supply or stationery stores. 9. Bundled Transactions The Department reminded taxpayers about the sales tax aspects of so-called “bundled transactions.”9 If a sale of tangible personal property includes taxable items and non-taxable items or a non-taxable service, the entire amount of the sales price is taxable if the items are not separately stated to the customer. This is called a bundled transaction pursuant to NAC 372.045. Businesses that typically make sales that qualify as bundled transactions include wedding chapels, caterers, event planners, and repairmen. There are some exceptions to this rule: If the true object of the transaction is really a service or the value of the taxable items is less than 10% of the entire transaction, then the retailer does not charge sales tax but pays sales tax on the cost of the taxable item to them. For example, you pay $200 dollars to get your wedding vows renewed and it comes with a photo (value $5) of the ceremony, the customer should not be charged sales tax on the $200, but tax is due on items used to produce the photo. If a non-itemized invoice is given on a transaction that includes food, drugs, or medical equipment and the value of the taxable items is less than 50%, then the transaction is also not considered a bundled transaction. 10. Animal Feed – Taxation Depends On Type Of Animal The Department reminded taxpayers (retailers) that not all sales of animal feed qualify for exemption.10 If the feed is intended for animals that do not ordinarily constitute food for human consumption, the exemption does not apply. 11. Taxation Of Printing As Sales Of Printed Material The Department reminded taxpayers that printing is not treated as a nontaxable service. Rather, the printer is treated as the retailer of the printed material and tax applies accordingly. 12. Drop Shipments And Streamlined Sales Tax Agreement In light of Nevada’s membership in the Streamlined Sales and Use Tax Agreement, the Department advised taxpayers of corresponding changes in the rules governing sales tax on drop shipments. Under the new rules, a third party drop shipper may accept an out-of-state resale certificate, or a Streamlined Sales Tax Exemption Certificate from a retailer in state or out-of-state who is selling to the end user in the State.11 13. Tax Applies To Dietary Supplements The Department advised taxpayers that the exemption for certain food products does not apply to dietary supplements.12 A product is a dietary supplement if it: 1. Contains one or more of the following dietary ingredients: (a) A vitamin; (b) A mineral; 9 Nevada Tax Notes, July 2012 edition. 10 Nevada Tax Notes, January 2012 edition. 11 Nevada Tax Notes, October 2011 edition. 12 Nevada Tax Notes, January 2012 edition. DLI-266523948v1 -4- (c) An herb or other botanical; (d) An amino acid; (e) A dietary substance for use by humans to supplement the diet by increasing the total dietary intake; or (f) A concentrate, metabolite, constituent, extract or combination of any ingredient described in paragraphs (a) to (e), inclusive; 2. Is intended for ingestion in the form of a tablet, capsule, powder, softgel, gelcap or liquid or, if not intended for ingestion in such a form, is not represented as conventional food and is not represented for use as a sole item of a meal or of the diet; and 3. Is required to be labeled as a dietary supplement in accordance with 21 C.F.R. § 101.36. 14. Delivery Charges – Not Taxable If Segregated and Separately Stated In light of prior (2009) legislation, the Department advised taxpayers on the taxation of delivery or transportation charges. These charges are not subject to tax provided the seller separately states and segregates such charges to the buyer. If these charges are bundled with other charges such as handling or packaging, the total charge is subject to tax.13 15. One Time Trade Show Attendance The Department reminded taxpayers on the rules applicable to attending a one time trade show in Nevada. A vendor attending such a trade show may obtain a “One-Time Permit” from the trade show promoter, which will facilitate remitting tax on sales at the one time trade show to (and essentially through) the trade show promoter.14 16. Security Deposit Requirements if Amount Exceeds $1,000 –Nev. Admin. Code § 372.825 (eff. Nov. 1, 2010) Businesses and individuals must register with the Department and post a security deposit prior to conducting resale or wholesale activities in Nevada. The Department amended the regulation regarding security deposits so that, effective November 1, 2010, newly registered businesses and individuals will be required to post a security deposit with the Department only if the amount of required security exceeds $1,000 (based upon estimated average tax due). If the Department determines that a person knowingly made false statements relating to sales volume to minimize the amount of security required under the regulation, the Department may increase the amount of security on the basis of the actual tax due quarterly, monthly, or annually. If a person becomes habitually delinquent in his or her tax obligations, the Department must require additional security. The Department interprets the term “habitually delinquent” to mean two or more delinquencies, late payments, returned checks, returns showing tax due that were filed without payment of the full tax due, or any combination thereof in the 12 consecutive months before the date on which it investigates the matter. 17. Penalty for Negligence In January 2011, the Department cited the following as examples of negligence in which the Department must impose a 10% negligence penalty (in addition to other penalties) pursuant to the Nevada Revised Statutes (“NRS”) § 360.330: (1) when a taxpayer fails to file more than one return; (2) when a taxpayer collects but (substantially) underreports sales tax; (3) when a taxpayer does not implement the changes recommended in an audit and the same reporting problems are revealed in a subsequent audit; (4) when a 13 Nevada Tax Notes, October 2011 edition. 14 Nevada Tax Notes, October 2011 edition. DLI-266523948v1 -5- taxpayer fails to keep records as required by NRS § 372.735; or (5) when a taxpayer improperly gives a resale card to a vendor so as to avoid payment of the tax. 18. Government Contractors Subject to Use Tax In July 2010, the Department reminded taxpayers that construction contractors performing work for the government “must pay Use Tax on building materials consumed in the performance of their contracts (NAC 372.190-210). The government’s exemption from Sales and Use Tax per NRS § 372.325 does not extend to contractors who do work for them.” Contractors considered to be a “constituent part of the governmental entity” under NRS § 372.340, however, are an exception to this rule. 19. In Re: Boyd Gaming Corporation Group (Nevada State Tax Commission, Feb. 14, 2012) – While sales tax applies to complimentary meals given to gaming customers provided there is sufficient consideration, sales tax abated in light of prior Department guidance The taxpayer operated resort casinos. The taxpayer allowed its gaming customers to redeem points to claim complimentary meals. Based on prior guidance from the Department, the taxpayer accrued and remitted use tax on the cost of the complimentary food and did not charge sales tax to its customers. The Department assessed sales tax on the value of the food. The taxpayer protested the assessment before the Commission, claiming that: (1) sales tax does not apply to complimentary food; and (2) in the alternative, the assessment should be abated under equitable estoppel principles. The Commission held that sales tax applied to the complimentary meals, reasoning that the amount spent to earn the gaming points established sufficient taxable consideration. The Commission, however, held that the additional tax (beyond the use tax that had already been paid) should be abated because of reliance on prior Department guidance. In 2013, the Nevada legislature enacted assembly bill 506, which excludes complimentary food (other than alcoholic beverages and paper goods associated with complimentary food) from the sales tax. D. Trends/Outlook for 2015/2016 1. Education Funding / Stabilizing Tax Revenues The prior effort to adopt a margin tax, and the Governor’s proposed increase in the business license fee, are generally aimed at two goals: (1) providing more funding to public education and (2) having a more stable tax system. These goals will continue until met. 2. Voter Approval Required for Certain Changes to Sales and Use Taxes On November 2, 2010, Nevada voters rejected Ballot Question 3, which would have allowed legislators to change tax laws “to resolve a conflict with any federal law or interstate agreement” dealing with collection of sales taxes. The proposal was intended to more easily permit Nevada to begin requiring out-of-state sellers to charge sales tax on internet purchases made by Nevada consumers if Congress were to legislatively overturn the United States Supreme Court’s decision in Quill Corp. v. North Dakota. Following the overwhelming defeat, the Nevada Legislature must continue to present such changes for voter approval. III. PROPERTY TAXES Nevada ad valorem property taxes apply to “all property of every kind and nature whatever within [Nevada]” at a rate of “35 percent of [the property’s] taxable value.” NRS §§ 361.045, .225. A. Legislative Developments 1. 2015 Legislative Session The 2015 legislative session began on February 2, 2015. We will report on any significant property tax changes that are ultimately enacted in our next edition. DLI-266523948v1 -6- 2. Prior Legislation 2.1 Modifications To Tax Abatement Requirements Assembly Bill 1 (special session, generally effective July 1, 2013) revises the provisions governing economic incentive abatements of sales tax, property tax, and other taxes. The bill revises the qualifications, the duration of abatements, and makes other changes. 2.2 Modifications To Partial Tax Abatement Of Energy-Related Incentives Assembly Bill 239 (generally effective July 1, 2013) makes various changes to the partial tax abatement for energy-related incentives. 2.3 Partial Tax Abatements For Capital Investments In Educational Institutions Assembly Bill 138 (generally effective July 1, 2013) provides that a business that makes a capital investment of at least $1 million in a program at the University of Nevada, Reno, the University of Nevada, Las Vegas, or the Desert Research Institute for the support of research, development or training related to the field of endeavor of the business and that meets certain other requirements is eligible to apply for a partial abatement of personal property taxes. The law also provides that a business that makes a capital investment of at least $500,000 in the Nevada State College or another smaller institution within the Nevada System of Higher Education in support of college certification or research or training related to the field of endeavor of the business and that meets certain other requirements is also eligible to apply for a partial abatement of personal property taxes. The abatements expire by limitation on June 30, 2023. 2.4 Modifications To Partial Tax Abatement For Buildings Meeting Energy Efficiency Standards Assembly Bill 33 (generally effective June 11, 2013) modifies the provisions related to partial tax abatements for meeting certain energy efficiency standards. B. Judicial Developments 1. Lowe v. Washoe County, 627 F.3d 1151 (9th Cir. 2010) Taxpayers filed a complaint under 42 U.S.C. § 1983, alleging that the valuation of their Nevada real property used to calculate their ad valorem property taxes for the 2008–09 taxable year violated both the Nevada Constitution and the Due Process Clause of the U.S. Constitution. The taxing authorities challenged the jurisdiction of the suit under the Tax Injunction Act. The Tax Injunction Act provides that a district court “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341. The Ninth Circuit held that Nevada’s administrative and judicial review process provides an effective and adequate means by which a dissatisfied taxpayer could contest a property valuation. The court relied on evidence that numerous taxpayers had previously been successful in challenging such valuations in Nevada courts. Accordingly, the court granted the defendant county’s motion to dismiss for lack of subject-matter jurisdiction. 2. Marvin v. Fitch, 232 P.3d 425 (Nev. 2010) The Nevada Supreme Court held that members of the State Board of Equalization qualify for absolute immunity in certain property tax matters because such immunity is granted to individuals performing quasi-judicial functions, which the board performs when determining whether to equalize property valuations. The court stated, “By concluding that the State Board’s equalization process is quasi-judicial, we honor the Legislature’s intent and safeguard every taxpayer’s right to meaningfully participate in the annual equalization process.” DLI-266523948v1 -7- C. Administrative Developments 1. County Officer Performance Audits The Department amended several current regulations (LCB File No. R039-10) to require the Department to audit the performance of county officers in carrying out specified responsibilities and to revise the provisions governing the contents of assessment rolls and the determination by county assessors of the taxable value of property. IV. OTHER TAXES A. Modified Business Tax (Payroll Tax) 1. Reporting MBT For Wages Paid To Nevada Employment Security Division The Department has reminded taxpayers that the wages required to be reported to the Nevada Employment Security Division (ESD) are also required to be reported for MBT purposes per NRS 363B.110.15 If a difference exists between the quarterly wages filed with ESD and those found in the Department of Taxation’s records, the company can expect a billing letter from the Department. 2. Exemption for First $62,500 $85,000 in Wages (eff. July 1, 2011 July 1, 2013) Prior to July 1, 2013, the first $62,500 or less in taxable wages per calendar quarter, after health-care deductions, was exempt from the Modified Business Tax on any “General Business.” The 1.17% rate for any taxable wages for a “General Business” above the $62,500 exemption remained. Any business reporting as a “General Business” still had to file a return, even if taxable wages were less than $62,500 and tax due is $0. AB 561 did not affect businesses classified as “Financial Institutions.” Effective July 1, 2013, SB 475 increased the exemption amount to $85,000 of taxable wages. V. OTHER NOTES OF INTEREST A. Offers In Compromise The Department recently reminded taxpayers of the Department’s OIC program.16 Pursuant to NRS 360.263, NAC 360.437, and NAC 360.438, the Tax Commission may enter into a compromise with a taxpayer concerning the liability of the taxpayer for any tax, contribution, premium, fee, interest, or penalty that the Department has determined is owed. This includes all taxes administered by the Department with the exception of property tax. A compromise is the acceptance of an amount that is less than the liability as full satisfaction of that liability. During the period of time the Department is processing the OIC, as long as the person signs a waiver of the statute of limitations, the Department will not take any further collection activity on the debt until the NTC has accepted or rejected the offer. The Offer in Compromise application form with further explanations is available on the Department’s website, along with the necessary financial forms that need to be completed. There are three reasons a liability may be compromised: Doubt as to Collectability -- These requests are from someone who feels they are unable to pay the full amount. The Personal Financial Statement and Business Financial Statement must be completed to process these requests. 15 Nevada Tax Notes, July 2012 edition. 16 Nevada Tax Notes, July 2012 edition. DLI-266523948v1 -8- Doubt as to Liability -- The person may request a compromise because they do not believe they owe the total amount of the liability. The person must describe in their written request why, in their judgment, they do not owe the tax liability and offer the correct amount of tax, penalty and interest owed instead. These do not have to do with whether or not the person has the ability to pay the liability. Consideration of Equity and Fairness -- These are typically hardship situations but not necessarily financial hardships. There may be exceptional circumstances present that either caused a person not to pay the correct amount of tax, or payment of the full amount of the tax would create a hardship or would be unfair and inequitable. The financial statements and verification may be required with these requests depending on the exceptional circumstances present. In all cases documentation must be presented to prove the circumstances. Acceptance of an OIC may depend on the person's history of compliance with all other applicable requirements. If the debt is due to an audit, the person must first exhaust their administrative petition rights before an offer is made. The Commission may accept an OIC that includes an installment agreement. Once a liability has been compromised, and the amount of the offer has been paid, that person's debt is considered paid in full, but the Commission may still be able to collect the rest of the liability from any other liable person not part of the OIC. B. Interest on Delinquent Taxes and Refunds (eff. July 1, 2011) AB 504 reduces the interest rate charged on deficient tax payments from 1.0% per month to 0.75% per month and the interest rate on refunds and credits on most taxes from 0.5% per month to 0.25% per month. C. Tax Administration (eff. July 1, 2011) SB 31 limits the liability of taxpayers who fail to collect or pay taxes to the willful failure to do so, extends waivers or reductions for interest and penalties to all taxes and fees paid to the Department of Taxation, and extends to four years the limitations period for bringing actions to collect delinquent taxes. D. Nevada Tax Comm’n v. American Home Shield of Nevada, Inc., 254 P.3d 601 (Nev. 2011) The Nevada Supreme Court has ruled that an insurance company’s refund request for insurance premium taxes erroneously paid on exempt service contracts in 2003 and 2004 was barred by the one-year limitations period, which applies to all overpayments regardless of whether they relate to exempt contract services. E. Notice of Appeal The Department has adopted regulations (LCB File No. R175-08), effective October 15, 2010, which require that a notice of appeal must identify the decision being appealed, the date on which the decision was rendered, and the basis for the appeal and must include an estimate of the amount of money at issue in the appeal. F. Installment Payments The Department has amended NAC § 360.456, effective October 15, 2010, to provide that the Director may, for good cause shown, upon the request of a taxpayer who satisfies the requirements set forth in NAC § 360.450, authorize the Department to enter into an agreement with the taxpayer which allows the taxpayer to pay taxes, interest, and penalties in installments over a period of more than 12 months. VI. BIOGRAPHIES Kirk Lyda, attorney and CPA, is a partner in the Dallas Office of Jones Day. Kirk concentrates his practice on state tax litigation, controversies, and planning. His experience includes representing taxpayers in cases such as Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App.–Austin 2000, pet. denied) (declaring the Texas franchise tax unconstitutional as applied to a foreign corporation without any substantial physical DLI-266523948v1 -9- presence in the state and awarding attorney’s fees to the taxpayer), and Rylander v. Fisher Controls Int’l, 45 S.W.3d 291 (Tex. App.–Austin 2001, no pet.) (holding that the Texas Comptroller violated the Texas Tax Code’s “throwback rule” for Texas franchise tax apportionment purposes). He assisted in the representation of the taxpayers in Sharp v. Park ’N Fly Of Texas, Inc., 969 S.W.2d 572 (Tex. App.–Austin 1998, pet. denied) (Texas sales tax lawsuit), and Nabisco, Inc. v. Rylander, 992 S.W.2d 678 (Tex. App.–Austin 1999, pet. denied) (Texas franchise tax lawsuit). He has represented taxpayers in numerous Texas franchise tax and Texas sales tax hearings before the Texas Comptroller of Public Accounts. More recently, he has represented taxpayers with intangible property management company tax cases pending before the courts or administrative agencies of Maryland, Massachusetts, and North Carolina. Kirk has extensive experience representing major online travel service companies in tax controversies and litigation and in related transactional and legislative work. He has advised clients on the state tax implications of restructuring their business operations throughout the United States. Kirk has spoken at seminars and conferences throughout Texas and in other states on a variety of state tax topics. He also coauthored Accounting and Finance for Lawyers, a Harcourt publication, and Business Purpose: What Is It? How Much Is Enough?, a publication of New York University’s 2004 Institute on State and Local Taxation. Admitted: Texas Education: The University of Texas at Austin (J.D. 1999; M.P.A. 1996; B.B.A. 1996) Caveat: Please consult your tax advisor on your specific facts. This outline does not offer, nor is it intended to offer, legal advice. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. DLI-266523948v1 -10- OREGON STATE DEVELOPMENTS Robert T. Manicke Eric J. Kodesch Stoel Rives LLP 900 SW Fifth Avenue, Suite 2600 Portland, Oregon 97204-1268 Ph: (503) 224-3380 Fax: (503) 220-2480 [email protected] [email protected] www.stoel.com I. INCOME/FRANCHISE TAXES A. Legislative Developments 2015 Legislative Session. The Oregon legislature meets each year, with a longer session in oddnumbered years. The 2015 session began on January 12, 2015 and is scheduled to adjourn in June 2015. Prior to the session, there was discussion of significant tax reform. This seems increasingly unlikely, especially given the resignation of Governor John Kitzhaber in February 2015. Nonetheless, several income tax bills have been proposed in the session, including: Disclosure of Tax Information. Pursuant to HB 2077, certain corporations would have to file annual statements with the Secretary of State. The requirement generally would apply to (1) public traded corporations, (2) all affiliates of publicly traded corporations, (3) financial corporations and insurers, and (4) any other corporation that either (a) employs at least 25 full-time equivalent employees in Oregon (this is apparently a scrivener’s error, as the proponents intended the number to be 250) as of January 1 of the reported year, or (b) has over $10 million of Oregon sales in the reported year. The statement would include tax information, such as computations for taxable income, certain deductions, and apportionment. The statement also would include details regarding credits and credit carryforwards. Additional “Tax Havens.” HB 2099 would add the Netherlands and other countries to the list of jurisdictions commonly referred to as “tax havens.” The original list was added to Oregon law in 2013, based on Montana’s statute. An Oregon corporation excise taxpayer must add to Oregon income the income or loss of an affiliate formed under the law of a listed jurisdiction. The 2013 law requires the Department of Revenue to issue a biennial report proposing updates to the list. The Department’s January 2015 report recommended adding the Netherlands, Switzerland, Hong Kong and Guatemala, among others. The bill has generated substantial opposition, including by COST, the Netherlands and significant Oregon employers with connections to foreign countries. The authors represent the Netherlands. Taxation of Marijuana: In the November 2014 election, Oregon voters approved Measure 91, which legalized recreational use of marijuana. HB 2147 would direct 78771635.1 0203241-00001 1 the Department to study taxation of marijuana and provide a report by September 15, 2015. B. Judicial Developments The Sale of Electricity Is the Sale of Tangible Personal Property for Apportionment Purposes. Under Oregon’s single-factor apportionment formula, business income is apportioned to Oregon based on the ratio of the taxpayer’s Oregon sales to the taxpayer’s total sales. Different rules apply in determining whether a sale is an Oregon sale, depending on whether the receipts arise from the sale of tangible personal property or from sales other than tangible personal property. In the Fall 2012 update, we discussed a decision by the Regular Division of the Oregon Tax Court that, for apportionment purposes, the sale of electricity is a sale other than a sale of tangible personal property. The Oregon Supreme Court has reversed, holding that electricity is tangible personal property for apportionment purposes. The court remanded the case to the Regular Division to determine whether the electricity was delivered or shipped to a purchaser in Oregon. The court also affirmed the Regular Division’s decision about natural gas at issue in the case – that the delivery of natural gas to a pipeline connection point in Oregon for transfer to a different pipeline for delivery outside of Oregon was not an Oregon sale. The court agreed that the connection point was a location at which tangible personal property was transferred from one common carrier to another on its way to the ultimate point of delivery. In fact, the court suggested that a similar analysis could apply to the electricity on remand. Powerex Corp. v. Dep’t of Rev., No. S060859, 2015 WL 1371031 (Or Mar. 26, 2015). The Department Must Pay Post-Judgment Interest If It Does Not Pay a Tax Court Judgment that it Unsuccessfully Appeals to the Oregon Supreme Court. In a case argued by the authors, the Regular Division of the Tax Court has held that the Department must pay enhanced interest that applies when a taxpayer or the Department fails to pay a judgment amount within 60 days of the judgment. The Department asserted that its appeal of the judgment at issue to the Oregon Supreme Court reset the 60-day period. In rejecting this argument, the court relied on the language of the judgment, which unambiguously required that the second tier of interest would apply. The court did not resolve the statutory interpretation disagreement between the parties. The court also held that the payment previously made by the Department, which was calculated using only the regular interest rate, was first applied to interest and then to principal. Accordingly, regular and post-judgment interest continued to apply to the shortfall. Tektronix, Inc. v. Dep’t of Rev., TC-RD 4951 (control); 5216 (Or Tax Reg Div Dec. 23, 2014). The Three Elements of Unity Are Required for Years Before 2007. For tax years starting on or after January 1, 1986 and ending before January 1, 2007, Oregon law provided that affiliates were engaged in a single trade or business if three elements were presents: (1) centralized management, (2) centralized administrative services or functions, and (3) functional integration. The Regular Division of the Oregon Tax Court has ruled that “and” as used in the statute is conjunctive, so that the presence of all three elements are needed. Dep’t of Rev. v. Rent-A-Center, Inc., TC-RD 5524 (Or Tax Reg 78771635.1 0203241-00001 2 Div Jan. 26, 2015). Effective for tax years beginning on or after January 1, 2007, the Oregon legislature amended the law to replace “and” with “or.” Accordingly, the holding in Rent-A-Center may have no impact on 2007 and later years. Business Income from Cable Television Is Apportioned Using the Special Rules for an Interstate Broadcaster. The Magistrate Division of the Oregon Tax Court has ruled that cable television involves interstate broadcasting so that the sales factor for cable operations is determined using the interstate broadcaster formula (based on audience), rather than Oregon’s UDITPA formula (based on income producing activity). The primary issue in dispute was whether cable television involved the transmission of a “one-way electronic signal,” which is part of the ORS 314.680(1) definition of “broadcasting.” The Department asserted that the term should be broadly construed, with any transmission from one person (e.g., a cable company) to another (e.g., the customer) being a one-way electronic signal, regardless of whether there is a transmission back to the cable company. The taxpayer, on the other hand, asserted that the ability of customers to communicate back to the cable company (e.g., the widespread use of ondemand services) meant that cable television involves a two-way electronic signal. The court rejected both assertions and instead focused on the word “signal.” The court held that the ORS 314.680(1) definition concerned whether the electronic signal (i.e., the sound, image, or other intelligible communication) moved in only one direction or involved movement back and forth. The court ruled that television is inherently one-way. The fact that a customer may communicate with the cable company about the one-way electronic signal the customer wishes to receive does not change this, just as a call to a radio station to request a song does not make radio a two-way signal. Comcast Corp. v. Dep’t of Rev., TC-MD 140214C (Or Tax Mag Div Dec. 10, 2014). C. Administrative Rules The Department has received approval from the Governor’s office to implement a Public Notification of Delinquent Taxpayers program to publicize the names of certain tax debtors. The Department plans to limit the disclosure to the taxpayers with the 25 highest recorded warrant balances for personal income tax, corporation excise and income tax, and payroll withholding tax. The Department intends to start the related rulemaking project this fall. D. Trends/Outlook for 2015 Oregon legislators are expressing increasing frustration with Congress’s failure to address issues perceived as tax expenditures and loopholes in the income tax system, as evidenced by the “transparency” and “tax havens” bills discussed above. At the same time, Oregon’s consistent opposition to consumption taxes makes the state radically dependent on income tax revenues for the vast majority of its general fund. As a result, any future changes are likely to include departures from the federal tax base, including rethinking of Oregon’s commitment to water'sedge taxation and potential addback of certain deductions. 78771635.1 0203241-00001 3 II. TRANSACTIONAL TAXES Oregon does not currently have a sales tax and has a long history of opposition to sales taxes. Discussion about establishing a statewide sales and use tax is ongoing. For example, in the current legislative session there are several bills concerning the creation of a sales tax. However, there has been no movement on any of these measures since they were introduced. III. PROPERTY TAXES A. Legislative Developments Modifications to Central Assessment of Communications Companies. In the Fall 2014 update we discussed an Oregon Supreme Court case that expands the types of companies treated as engaged in a communications business for central assessment purposes. The value of the property subject to Oregon property tax of a centrally assessed communications business generally can be derived from a unit that includes the value of the company’s intangible assets, including goodwill. Responding to concerns about this, the legislature based SB 611. The bill makes several changes to central assessment, including: Reduces the value of a centrally assessable unit to the greater of (1) 130% of the historical or original cost of real property and tangible personal property included in the unit or (2) 5% of the market cap value (i.e., the real market value of all real, tangible and intangible property included in the unit). Provides an exemption for a company that builds, maintains and operates in Oregon a qualified project. A qualified project generally is related to high-speed internet service, like Google Fiber. Modifies and expands the data center exemption we discussed in the Fall 2012 update. Governor Kate Brown signed SB 611 on April 2, 2015. B. Judicial Developments Purchase Price with Bank May Reflect the Real Market Value of Property. In previous updates we discussed a trend in property tax cases in which the Oregon Tax Court would not use the purchase price from a recent acquisition from a bank as the real market value of the property for property tax purposes. The court generally held that the bank was acting under a compulsion to sell, so that the purchase price did reflect an arm’s-length price. In a break with this trend, the Magistrate Division used the purchase price negotiated with a bank as the real market value of the property. Glorietta Bay, LLC. v. Lincoln County Assessor, TC-MD 140072C (Or Tax Mag Div Jan. 16, 2014). Importantly, the bank did not immediately sell the property upon foreclosure. Instead, the bank acquired the property at auction and then managed the property for almost two years. When this did not work, the bank sold the property. Further, the property owner submitted a detailed appraisal, including comparable sales, generally necessary for a property valuation dispute. 78771635.1 0203241-00001 4 IV. OTHER MATTERS – AWARD OF COSTS AND FEES Taxpayer Entitled to Costs and Fees When the Department’s Position Was Unreasonable. In the Fall 2014 update we discussed a case concerning the value of a convention center in which the Regular Division of the Oregon Tax Court held that the determination of the real market value of property in a property tax account (the convention center) takes into account only the property in the account, and no consideration is given for property in an adjacent account (a hotel). Following that decision, the property owner sought an award of costs and fees, which the court granted. The Department asserted that its position, although incorrect, was reasonably based on its administrative rule interpreting a statute. The Regular Division disagreed and found that the Department’s “position had no basis in fact in the record made by the [D]epartment.” The court also noted that the property owner had offered to settle the case for a property value at or near the valuation ultimately found. Dep’t of Rev. v. River’s Edge Investments, LLC, TC-RD 4962 (Or Tax Reg Div Mar. 24, 2015). No Need to Request a Conference or File A Written Objection to Receive an Award of Costs: Generally, when an Oregon audit results in the Department believing that there is unpaid tax, the Department issues a notice of deficiency. A taxpayer has 30 days from issuance of the notice to file a written objection or request a conference; otherwise, the Department will issue a notice of deficiency assessment. The taxpayer then has 90 days from issuance of the notice of deficiency assessment to file a petition in the Magistrate Division of the Oregon tax court to contest the matter. If the taxpayer prevails, the Tax Court rules give the court discretion to award the taxpayer costs and disbursements. The Magistrate Division has held that a taxpayer is entitled to this award, regardless of whether the taxpayer takes advantage of all available administrative review (i.e., a conference or a written objection) prior to initiating the litigation. Reedal v. Dep’t of Rev, TC-MD 140299N (Or Tax Mag Div Mar 6, 2015) Include Proof of Claimed Costs when Seeking an Award of Costs and Disbursements: In Kohl’s Department Stores v. Washington County Assessor, TC-MD 130220D (Or Tax Mag Div Jan. 14, 2014) (which concerned the 2012-13 property tax year) and Kohl’s Homeport Associates LLC, TC-MD 140171D (Or Tax Mag Div Jan. 14, 2014) (which concerned the 2013-14 property tax year), the Magistrate Division reduced the real market value of property to $10.9 million. Although the plaintiff requested a reduction to $8.77 million in both cases, the court held that the plaintiff nonetheless was the prevailing party for purposes of exercising the court’s discretion to award costs and disbursement. However, in seeking a $14,354.17 reimbursement of costs and disbursements, the plaintiff did not include proof of the claimed costs and disbursements, as required by the rules of the Magistrate Division of the Tax Court for items other than the filing fee. Accordingly, the court denied the request, except for the $252 filing fee. About the Authors Robert T. Manicke: Mr. Manicke heads the state and local tax practice at Stoel Rives. He regularly represents clients before the Oregon Department of Revenue and the Oregon Tax Court 78771635.1 0203241-00001 5 in cases involving unitary taxation, Public Law No. 86-272, property tax and other business tax matters. He also has written Oregon tax legislation and advises businesses on Oregon tax incentives. Mr. Manicke graduated summa cum laude from the University of Illinois College of Law in 1992 and is a member of the Oregon, California, Idaho and Washington State Bars. Eric J. Kodesch: Mr. Kodesch is a partner in the Stoel Rives Tax Section. His practice regularly involves representing clients before the Oregon Tax Court in cases concerning unitary taxation, Public Law No. 86-272, property tax and other business tax matters. Mr. Kodesch graduated from Columbia Law School in 2002 as a Harlan Fisk Stone Scholar and is a member of the Oregon and New York State Bars. 78771635.1 0203241-00001 6 2015 UTAH STATE TAX DEVELOPMENTS HOLLAND & HART, LLP 222 South Main Street, Suite 2200 Salt Lake City, Utah 84101 Tel: (801) 799-5800 Fax: (801) 799-5700 Website: www.hollandhart.com I. INCOME/FRANCHISE TAXES A. Legislative Developments First Substitute S.B. 94 Corporate Franchise and Income Tax Amendments. A recent decision from the Utah State Tax Commission held that the statute of limitations for obtaining a refund for a particular tax period and the statute of limitations to audit the same tax period is not the same. In that decision the Commission disallowed a refund request on grounds that it was beyond the statute of limitations even though the taxpayer had signed an extension allowing an audit for that period. This bill overrules that Commission decision by requiring the statute of limitations to be the same for requesting a refund as well as assessing a deficiency when an extension of the period authorized for assessing a deficiency has been agreed upon. While this bill passed almost unanimously through the Legislature, on April 1, 2015, Governor Herbert vetoed this bill. However, it is expected that this bill will be reconsidered soon in a special session. S.B. 14 Renewable Energy Tax Credit Amendments. This bill allows the solar panel tax credit, which passed into law in 2014, to be claimed by individual filers, including pass-through entities. Third Substitute S.B. 216 High Cost Infrastructure Tax Credits. This bill allows for an entity that enters into an agreement with the Office of Energy Development to be eligible for certain tax credits for high cost infrastructure projects that expand or create new industrial, mining, manufacturing, or agriculture activity in the state, not including retail, or new investment of at least $50MM in an existing entity. The project must require or be directly facilitated by infrastructure construction of greater than 10% of the total cost of the project or $10MM. The credit is also available to certain refineries that invest in new equipment to manufacture tier 3 gasoline. II. TRANSACTIONAL TAXES A. Legislative Developments S.B. 21 Sales and Use Tax - Molten Magnesium. This bill provides a sales and use tax exemption for the purchase or lease of molten magnesium. It arose out of an audit which assessed a large deficiency because of the unique structure of transactions dealing with molten magnesium which is used in producing titanium. 1 2015 Utah State Tax Developments S.B. 201 Sales and Use Tax Exemption Revisions. Under current law, purchases or leases of machinery and equipment used in performing qualified research are exempt from sales and use tax. The definitions used as the basis for determining whether the qualifications are satisfied are based upon section 41 of the internal revenue code, and an issue arose as to whether applying those definitions would deny the exemption to machinery and equipment that was being depreciated. This bill amends the qualifications for the exemption so that depreciable machinery and equipment may still qualify for the exemption. First Substitute S.B. 182 Amendments to Sales and Use Tax Exemptions. Utah has a manufacturing exemption from sales and use tax for purchases of normal operating items or repair replacement parts with an economic life of three years. This bill broadens that exemption slightly by allowing the exemption for purchases or leases of machinery, equipment, materials, and repair and replacement parts by a drilling equipment manufacturer which uses high pressure and high heat to produce diamond components used in drill bits and for which generally have an economic life of less than three years. H.B. 454 Prison Development Amendments. There has been a big discussion in Utah regarding potentially moving Utah’s state prison facility. This bill moves that one step further by appropriating some funds, authorizing bonds, and also authorizing a local option sales and use tax for a city or town wherein the new state correctional facility will be located. III. PROPERTY TAXES A. Legislative Developments S.B. 165 Property Tax and Assessment Modification. Centrally assessed taxpayers are allowed to appeal the assessment of their property. Prior to this bill, counties were equally able to appeal the assessments of centrally assessed properties. Thus, while a taxpayer may have been pleased with the value of its property, the county had authority to appeal, causing the taxpayer to have to litigate the assessed value of its property which it had not challenged. This bill removes the counties’ ability to file such an appeal unless the county reasonably believes the assessed value should be 50% greater than the current value or 50% greater than the prior year’s value. It also clarifies that the Commission may consult with counties prior to issuing the assessment of centrally assessed properties. Third Substitute S.B. 97 Property Tax Equalization Amendments. This bill raises property taxes by $75MM to equalize funding for school districts by amending the calculation of the school minimum basic property tax rate. B. Judicial Developments Alliant Techsystems, Inc. v. Salt Lake County Board of Equalization, Case No. 20130532-CA (Utah Ct. App) (oral argument, January 29, 2015). On January 29, 2015, the Utah Court of Appeals heard oral arguments in a case dealing with Utah’s privilege tax. Alliant Techsystems, Inc. (“ATK”) uses property belonging to the United States 2 2015 Utah State Tax Developments Navy in its business operations. Utah law imposes a privilege tax “on the possession or other beneficial use enjoyed by any . . . property which for any reason is exempt from taxation, if that property is used in connection with a business conducted for profit.” Thus, Salt Lake County imposed a privilege tax on the use of such property. However, the tax does not apply if the user does not have exclusive possession. The district court held that ATK does not have exclusive possession, but Salt Lake County appealed, arguing, among other things, that exclusive possession merely means use commensurate to that of a lessee. This case will finally decide the extent of the exclusive possession exclusion from Utah’s privilege tax. C. Administrative Developments Utah State Tax Commission Decision, Appeal No. 12-2091. The Utah State Tax Commission recently issued a decision upholding the taxpayer’s argument that personal property can be valued via a unitary approach. In Utah, personal property is assessed by applying a percent good factor as published in administrative rule R884-24P-33 (“Rule 33”) to the acquisition price of such property. The taxpayer disagreed with the assessed value of its personal property resulting from the application of Rule 33’s percent good tables. In challenging the assessment, the taxpayer submitted expert appraisals for all years using unitary approaches to demonstrate error in the assessments. The Taxpayer’s expert utilized income, sales comparison, and RCNLD cost approaches to demonstrate that the percent good tables did not account for functional and external obsolescence. The County argued that the use of such unitary approaches to value were violative of Utah law. Agreeing with the taxpayer, the Commission held that Utah law does not prohibit the use of unitary appraisal approaches to challenge the accuracy of the percent good tables, and that a taxpayer “should be allowed an opportunity to demonstrate that a valuation method other than the one set forth in Rule 33 would yield a more accurate estimate of the fair market value of its personal property.” 3 2015 Utah State Tax Developments IV. OTHER TAXES A. Legislative Developments Sixth Substitute H.B. 362 Transportation Infrastructure Funding. This bill increases Utah’s gas tax and changes it from a specific price, 24.5 cents per gallon, to an adjustable market based price of 12% of the statewide average rack price for a gallon of motor fuel with a floor of 29.4 cents per gallon and a ceiling of 40 cents per gallon. It also provides for a voter approved .25% local option sales and use tax for transportation. It is estimated that these changes will result in additional revenue to the state of roughly $25MM in 2016 and $76MM in 2017 to fund transportation projects. S.B. 250 Income Tax Revisions. This bill addresses issues related to data breaches in tax processing companies by requiring employers to submit certain tax forms related to their employees in electronic format and creates fairly significant penalties for failure to file such forms within the appropriate timeframe. B. Judicial Development Anadarko v. Tax Comm’n, 2015 UT 25. The Utah Supreme Court has ruled that, in calculating Utah severance taxes on oil and gas, the Utah State Tax Commission is required to deduct federal, state and Indian royalty interests for all purposes of the severance tax calculation. The Tax Commission historically allowed taxpayers to deduct such royalties from the tax base, but then would add the royalties back in when determining the tax rate to apply (Utah has graduated 3% and 5% rates). The Court overturned this practice, holding that the royalties must be removed for all purposes of the severance tax calculation. The decision is a substantial victory for oil and gas producers who pay federal, state or Indian royalties in Utah. V. GENERAL ADMINISTRATIVE DEVELOPMENTS During the 2014 legislative session, the Utah Legislature passed SJR 7 and SB 19, which were meant to ensure that Utah's Tax Commissioners are qualified for the job. The State of Utah has a Tax Commission which is comprised of four members and is charged to "administer and supervise the State's tax laws," including deciding tax disputes. Utah Const. art. XIII, § 6. By Utah’s Constitution, no more than two of the four members could belong to the same political party. The Legislature passed SJR 7 requesting an amendment to Utah's Constitution to remove that requirement and focus more on qualifications rather than political affiliation. In order for this constitutional amendment to take effect, a majority of voters must approve the amendment. However, in Utah’s general election last November, voters voted down the proposed amendment. Thus, when appointing Commissioners, political affiliation will still be considered as no more than two commissioners can be from the same political party. 4 2015 Utah State Tax Developments VI. PROVIDERS’ BRIEF BIOGRAPHY/RESUME MARK K. BUCHI is a partner with the law firm of Holland & Hart LLP in Salt Lake City, Utah. He concentrates his practice in government relations, state and local tax matters and administrative law. Mr. Buchi has been involved in much of Utah’s critical tax litigation for the past 25 years–first, as the Supervising Attorney for the Utah Attorney General’s Office, then as Chair of the Utah State Tax Commission. Mr. Buchi obtained his B.A. and M.B.A. degrees at the University of Utah and later obtained his law degree from that same institution. He is a registered lobbyist in Utah and works closely with various Government entities. His current tax practice includes several of Utah’s largest taxpayers, handling significant unitary corporate income tax apportionment, sales and use tax and property tax issues for them. Mr. Buchi currently serves on the Board of Directors of the Utah Taxpayers Association and the Utah Mining Association. He is a frequent lecturer and moderator at tax conferences around the country. Mr. Buchi currently serves as a member of Utah’s Tax Review Commission, which is recodifying all tax laws in the state. STEVEN P. YOUNG is a partner at the law firm of Holland & Hart LLP, Salt Lake City, Utah. His practice emphasis is on state and local taxation and government relations. He advises clients on sales, income, property, severance, and other state and local tax issues, and represents such clients before state and local administrative agencies and courts. He received his B.A., M.B.A. and J.D. degrees from the University of Utah. Mr. Young is a frequent lecturer on state and local tax issues. He is also an editor for the ABA Property Tax Deskbook and the Journal of Multistate Taxation, and publishes routinely in state and local tax publications, including the above-reference publications, the ABA State and Local Tax Lawyer, the ABA Sales and Use Tax Deskbook, the annual updates for the Committee on State Taxation, and the Institute for Professionals in Taxation. NATHAN R. RUNYAN is an associate at the law firm of Holland & Hart LLP in Salt Lake City, Utah. His practice emphasis is on state and local taxation, government relations, administrative law, and commercial litigation. Mr. Runyan received his B.A. in accounting from the Marriott School of Management at Brigham Young University and his J.D. from the J. Reuben Clark Law School at Brigham Young University. Prior to law school, Mr. Runyan was employed as a senior auditor in the Auditing Division for the Utah State Tax Commission. In 2007, Mr. Runyan was recognized as the employee of the year for the Auditing Division of the Utah State Tax Commission. He is admitted to practice in both the federal and state courts in Utah. 5 2015 Utah State Tax Developments JOHN T. DEEDS is an associate at the law firm of Holland & Hart LLP in Salt Lake City, Utah. His primary practice is in the area of state and local tax, including property, sales, and income tax matters. Mr. Deeds has been involved in the legislative effort when such action is required to further his clients’ needs. While in law school, he worked in the Tax and Revenue Division at the Utah Attorney General’s Office. He received an LL.M. from Georgetown University Law Center, graduating “With Distinction” and on the Dean’s List, he received his J.D. from the University of Utah’s S.J. Quinney School of Law graduating with High Honors, and he received his B.S. cum laude from the University of Utah. Mr. Deeds is admitted to practice before the Utah Supreme Court and the U.S. District Court for the District of Utah PAMELA B. HUNSAKER is of counsel at the law firm of Holland & Hart LLP in Salt Lake City, Utah. Her practice focuses on state and local tax issues and she has represented clients before Utah’s local taxing jurisdictions, the Utah State Tax Commission, and Utah’s appellate courts. She earned her J.D. from the J. Reuben Clark Law School of Brigham Young University and her B.A. in Public Relations from Brigham Young University. From 1989-1993, she served as a judicial clerk for Judge David Sam, United States District Court, District of Utah. She is admitted to practice before the Utah Supreme Court and the U.S. District Court for the District of Utah. 7075624_2 6 2015 Utah State Tax Developments WASHINGTON STATE DEVELOPMENTS Robert (Bob) Mahon Perkins Coie LLP 1201 Third Avenue, Suite 4900 Seattle, WA 98101 Tel. (206) 359-6360 Fax (206) 359-7360 Email: [email protected] www.perkinscoie.com I. Gregg Barton Perkins Coie LLP 1201 Third Avenue, Suite 4900 Seattle, WA 98101 Tel. (206) 359-6358 Fax (206) 359-7358 Email: [email protected] www.perkinscoie.com INCOME/FRANCHISE TAXES (BUSINESS AND OCCUPATION TAX) A. Legislative Developments High technology R&D credit expiration. Washington’s B&O tax credit for qualified research and development expenditures expired on January 1, 2015. The governor has proposed renewing the credit, but its status in the legislature is uncertain. B. Judicial Developments B&O tax deduction for residential mortgage interest - REMIC and CMO interest. The Washington Supreme Court held that interest income from real estate mortgage investment conduits (REMICs) and collateralized mortgage obligations (CMOs) was not deductible from gross income as “amounts derived from interest received on investments or loans primarily secured by first mortgages or deeds of trust on nontransient residential properties.” The court concluded that the deduction did not apply because REMICs and CMOs were not “primarily secured” by first mortgages or deeds of trust. Cashmere Valley Bank v. Wash. Dep't of Revenue, 334 P.3d 1100 (Wash. 2014). C. Administrative Developments Factor presence nexus – payroll threshold. The Department of Revenue held that a taxpayer had service B&O tax nexus based on $53,740.25 in Washington payroll in 2013 ($730.25 over the payroll threshold for 2013). The Department concluded that it was required to strictly apply the factor presence nexus thresholds. Wash. Dep’t of Revenue Det. No. 14-0306, 34 WTD 129 (2015). Intercompany services between related entities. The Department of Revenue issued an excise tax advisory regarding the application of Getty Images (Seattle), Inc. v. City of Seattle, 260 P.3d 926 (Wash. App. 2011) to intercompany services. The advisory confirms that arm’s length pricing for intercompany services is not required. Second, the Department will not recharacterize "bona fide" dividends, distributions, or fund transfers accomplished through a cash management account as compensation for services. Finally, the Department will not treat Getty as a change in the law when evaluating the validity of any letter rulings previously issued by the Department. Wash. Dep’t of Revenue Excise Tax Advisory No. 3194.2015 (January 22, 1015). II. SALES AND USE TAXES A. Judicial Developments Contribution of construction services to joint venture. The Washington Court of Appeals held that an LLC was subject to sales tax on construction services contributed by its member. The court reasoned that the member—and not the LLC—performed the construction services on land owned by the LLC. Further, the contribution of those services to the LLC was a sale because the services were provided in exchange for consideration in the form of a credit to the member’s capital account. Bravern Residential, II, LLC v. Wash. Dep’t of Revenue, 334 P.3d 1182 (Wash. App. 2014). This matter was settled while on appeal to the Washington Supreme Court. B. Administrative Developments Reward programs. The Department of Revenue advised that awards provided solely for enrollment in a rewards program, the passage of time, or for purchasing the seller’s products are bona fide discounts that are excluded from the sales price. In contrast, awards provided in exchange for property, service, credit, or cash are not bona fide discounts and are part of the selling price when redeemed. The Department has clarified that a member’s provision of contact information to the seller is not consideration. Wash. Dep’t of Revenue Excise Tax Advisory No. 3191.2014 (September 30, 2014). The Department has also advised that when a taxpayer commingles awards that are issued for consideration with those issued as bona fide discounts, the total value of the commingled rewards are taxable at the time of redemption for goods and services. However, the Department has created a prepayment option whereby taxpayers can avoid sales tax on the redemption of commingled awards by prepaying retailing B&O tax and retail sales tax on the taxable awards when they are issued. Wash. Dep’t of Revenue Interim Statement Regarding Reward Programs Commingling Reward Program Awards (November 12, 2014). Bad debt deduction - private label credit cards. The Department of Revenue held that a retailer was not entitled to a bad debt deduction for sales tax on customer purchases made using its private label credit cards because the retailer sold the accounts to a bank, which bore the credit risk. Wash. Dep’t of Revenue Det. No. 13-0178, 33 WTD 109 (2014). Nexus – trade show attendance. The Department of Revenue held that the taxpayer’s attendance at trade shows was sufficient physical presence to create retailing B&O and sales tax nexus. The Department noted that, unlike many states, Washington does not have a nexus safe harbor for trade show attendance. Wash. Dep’t of Revenue Det. No. 14-0062, 33 WTD 439 (2014). “Dark fiber.” The Department of Revenue treats the sale of “dark fiber” (i.e., access to an unlit fiber optic cable plus related services) as “competitive telephone service” and, therefore, subject to sales tax. Wash. Dep’t of Revenue Det. No. 13-0172R, 33 WTD 463 (2014). Sellers may source sales of dark fiber to the location of the buyer’s first use or, if the customer is concurrently using the service at multiple locations, may allocate the sale among multiple locations using a “reasonable and consistent” method. Wash. Dep’t of Revenue Excise Tax Advisory No. 3193.2014 (November 4, 2014). III. PROCEDURAL MATTERS A. Judicial Developments Retroactivity - legislation to reverse outcome of prior court decisions. The Washington Supreme Court held that the legislature’s retroactive amendment of the state estate and transfer tax to reach transfers that the supreme court had previously held were nontaxable did not violate the separation of powers doctrine, the due process clause, or several other federal and state constitutional provisions. The court concluded that the legislature’s amendment did not violate the separation of powers doctrine because the amendment was carefully drafted so that it “[did] not affect any final judgment, no longer subject to appeal, entered … before the effective date of [the legislation].” The supreme court concluded that the legislation did not violate the due process clause because the retroactive amendments served the legitimate purpose of preventing unanticipated and significant fiscal shortfalls resulting from the court’s prior decision and that the eight-year period of retroactivity was rationally related to that purpose. In re Estate of Hambleton, 335 P.3d 398 (Wash. 2014). City tax procedure – exhaustion of administrative remedies. The Washington Court of Appeals, applying Cost Management Services v. City of Lakewood, 310 P.3d 804 (Wash. 2013), held that a taxpayer’s superior court refund lawsuit was barred by the three year statute of limitations. The court concluded that the statute of limitations was not equitably tolled for the period that the -2- taxpayer’s refund claim was pending in the city’s administrative process because the taxpayer failed to exhaust those administrative remedies. New Cingular Wireless PCS LLC v. City of Bothell, 183 Wash. App. 1008 (2014) (unpublished). B. Administrative Developments New acting director of revenue. Carol Nelson resigned as director of the Washington Department of Revenue effective January 16, 2015. Vikki Smith is serving as acting director through at least the end of the state legislative session (April 2015). Virtual currency. The Department of Revenue confirmed that sales of goods and services for Bitcoin and other virtual currencies are subject to tax based on the value of the virtual currency in U.S. dollars. Taxes must be paid in U.S. dollars. Wash. Dep’t of Revenue Tax Topics, “Accepting Virtual Currency as Payment for Goods or Services” (January 28, 2015). IV. AUTHORS’ BIOGRAPHIES Robert (Bob) Mahon is a state and local tax partner in the Seattle office of Perkins Coie, a law firm with more than 1,000 lawyers in 19 offices in the United States and Asia. Mr. Mahon serves as Editor-in-Chief of the Journal of Multistate Taxation and Editor-in-Chief of the ABA Sales and Use Tax Deskbook. He also teaches state and local taxation as an adjunct professor at the University of Washington School of Law. Mr. Mahon is past president of the Washington State Bar Association Tax Section and is listed in The Best Lawyers in America for Tax Law and as Best Lawyers’ Seattle Tax Law Lawyer of the Year. Mr. Mahon received his B.A. with honors from Grinnell College (1992); his J.D. with high distinction from the University of Iowa (1995); and his LL.M. in Taxation from the University of Washington (1996). Gregg Barton is a partner in the Seattle office of Perkins Coie LLP, where he practices exclusively in the state and local tax area, concentrating principally in the states of Washington, Oregon and Alaska. Mr. Barton received his undergraduate degree from the University of Washington, his J.D. from the University of Oregon, and his Master of Laws in Taxation with distinction from Georgetown University Law Center. He is listed in The Best Lawyers in America for Tax and Tax Litigation & Controversy and as Best Lawyers’ Seattle Litigation and Controversy - Tax Lawyer of the Year. He is also listed in Washington Law & Politics as one of “Washington’s Super Lawyers.” He is a Fellow of the American College of Tax Counsel, and is Chair of the ABA Tax Section’s State and Local Taxes Committee through May 2015. -3-
