State & Local Tax Bulletin (August 2001)
State and Local Tax
M. Vesely, a tax partner in the
San Francisco office of Pillsbury Winthrop
Shaw Pittmsan LLP.
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Mr. Vesely presented this paper as part of the Georgetown
University Law Center 24th Annual Advanced State &
Local Tax Institute held May 17-18, 2001.
This bulletin concerning state
and local tax
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on the design or content of this material.
As always, California is the key
state in the area of state
and local taxation in the Western Region. There
continues to be a flood of litigation, both administrative
and judicial, in virtually all of California's major taxes.
Regulatory changes encompassing both substantive and
procedural issues abound. Tax legislation continues nonstop.
While this presentation will focus on some of the
more important recent developments in California
taxation, it will bring you up to date on developments
throughout the entire Western Region.
- Corporation Franchise Tax
- Major issue in majority of multinational audits
continues to be whether a unitary business exists
and if so, what is its configuration.
- Allied Signal (SBE, 2000).
- Summary decision.
- Multinational conglomerate held to be
nonunitary. The State Board of Equalization
(SBE) agreed with the taxpayer that its oil and
gas operations were not unitary with its various
manufacturing activities based in large part on
13 declarations submitted by the taxpayer on
appeal and the live testimony of the CEO of the
oil and gas operations.
- The SBE held for the taxpayer, notwithstanding
its apparent lack of cooperation on audit and at
- The SBE chastised both the taxpayer and the
Franchise Tax Board (FTB) for the way they
handled the case.
- Edison International (SBE, 2000).
- Summary decision.
- The SBE agreed with the taxpayer, the parent of
Southern California Edison (SCE), that it was
unitary with its financial subsidiary, Mission First
Financial. The SBE rejected the FTB's argument
that Mission, which was created by SCE in 1987,
was unitary upon creation but later became
- Unity was found despite the fact that Mission's
financial activities involved not only power
plants, but also low-income housing and jet
- Mitsubishi Cement Corporation (SBE, 2000).
- Summary decision.
- The SBE agreed with the taxpayer (MCC) that it
was not engaged in a unitary business with its
Japanese parent, Mitsubishi Mining & Cement
Company, Ltd. MCC was formed by the parent
in 1988 to acquire the assets of Kaiser Cement
Company, then owned by Hanson PLC. Evidence
was presented that the Kaiser management
remained in place. Case involved 1989 and 1990.
- Yoshinoya West (SBE, 2000).
- Summary decision.
- The SBE rejected taxpayer's position that it was
not engaged in a single unitary business with its
Japanese parent, Yoshinoya D&C Co., Ltd. (YDC).
YDC, one of the largest fast food chains in Japan,
operates a chain of beef bowl restaurants. The
taxpayer operates beef bowl restaurants in
California. The SBE rejected the taxpayer's
arguments that it operated independently from
- Instant Unity/Pre-Acquisition Earnings and
- Dividend elimination issues under Revenue and
Taxation Code Section (RTC §) 25106.
- Willamette Industries, Inc. v. FTB,
33 Cal. App. 4th
1242 (1995). Dividends paid from earnings and
profits generated by the payer before acquisition
by the payee were not eliminated even though
when dividend was paid the entities were unitary.
- Distributions in excess of basis result in current or
deferred recognition of the gain, not elimination.
- Regulation 25106.5-1(f) provides for creation of
a deferred income stock account (DISA) as
opposed to an excess loss account as provided
for under federal law.
- Business vs. Non-Business Income.
- Are there one test or two tests under California
- Hoechst Celanese Corporation v. FTB,
76 Cal. App. 4th
914 (1999), opinion vacated, review granted by
California Supreme Court (No. S0805091).
- Court of Appeal held that gain realized on the
termination of an ERISA retirement plan
constituted nonbusiness income under both the
transactional and functional tests.
- The Court held that the pension reversion was
an unusual event and that the gain was derived
from the transaction, not the operation of the
pension plan. Thus, the transactional test was
- With respect to the functional test, the Court
concluded that the trust assets were not integral
to the business operations because the employer
did not own them.
- Argued before California Supreme Court on
March 7, 2001.
- On May 14, 2001, the California Supreme Court
reversed the Court of Appeal and concluded that
the gain was business income.
- The Court held that there are two tests and
that while the income was nonbusiness under
the transaction test, it was business income
under the functional test.
- The Court's interpretation of the functional
test is quite expansive.
- Citicorp North America, Inc. v. FTB, 83 Cal. App. 4th
- Gains from the sale of four office buildings by
the corporate realty services group of Citicorp
was held to be business income under both the
transactional and functional tests. The regular
business operations of the group included
managing, leasing and selling real estate.
- Finnigan vs. Joyce issue discussed below.
- Petition for writ of certiorari filed by the taxpayer
with United States Supreme Court in April 2001.
- Consolidated Freightways, Inc. (SBE, 2000).
- Freight transportation company's interest and
dividend income from long-term investment
funds were business income because the funds'
intended use for a corporate acquisition similar
or complementary to the company's unitary
business was a reasonable business need.
- Esprit de Corp. (SBE, April 18, 2001).
- Summary decision.
- Interest expense incurred in connection with the
leveraged buyout of the stock of the co-owners
of Esprit was held to be nonbusiness, wholly
allocable to California, the commercial domicile
- The SBE relied upon Robert Half International,
Inc. v. FTB, 66 Cal. App. 4th 1020 (1998) in which
the Court of Appeal held that under the
functional test, the acquisition and cancellation
of a warrant, which entitled the holder to
purchase shares of the taxpayer's stock, was a
nonbusiness expense/loss wholly allocable to
- The SBE distinguished Citicorp based upon the
evidence in the two cases and the fact that the
LBO was an extraordinary, once-in-a-corporate
lifetime event for Esprit which severely hampered
the continuing viability of the Company.
- Esprit's position was the same as that asserted by
the FTB in Power-Line Sales and in Legal Ruling
- Interest Offset.
- Hunt-Wesson, Inc. v. FTB, 528 U.S.
- The United States Supreme Court unanimously
held that the interest offset provision of RTC
§ 24344 was unconstitutional under the Due Process
and Commerce Clauses of the U. S. Constitution.
The Court held that the statute's mechanical
reduction of a nondomiciliary corporation's
business interest expense deduction by the amount
of nonbusiness interest and dividend income the
corporation has received was in fact the
impermissible taxation by California of that
- FTB Notice 2000-9.
- At its December 2000 meeting, the FTB adopted a
policy for dealing with the interest offset issue for
- Under the policy, the FTB will allow the full
deduction of interest expense for both domiciliaries
and nondomiciliaries without reduction under
Regulation 25120(d) with minor exceptions.
- Nonbusiness gains from the sale of stock by a
nondomiciliary will not result in interest expense
being attributed to those gains under Regulation
25120(d) and thus rendered nondeductible
against business income.
- Deductibility of Dividends.
- Ceridian Corporation v. FTB, 85
Cal. App. 4th 875 (2000).
- Court of Appeal held that RTC § 24410 which
for a dividend received deduction for dividends
received from an insurance company, was
unconstitutional under the Commerce Clause of the
U. S. Constitution.
- RTC § 24410 allows a deduction only where the
payee is commercially domiciled in California.
- Under RTC § 24410, the deduction is further
limited by the payor's presence in California as
determined by its apportionment factors.
- This same restriction appears in RTC § 24402
which applies to dividends from
- The Court held that both restrictions noted above
violated the Commerce Clause since they favored
domestic corporations over their foreign
- Case also raises the retroactive versus prospective
remedy issue. While Ceridian was allowed a full
deduction and accordingly obtained its refund, the
Court left open the remedy with respect to other
- Should everyone get a full deduction or should
no one get any deduction?
- RTC § 19393 was not applied by the Court to
disallow the refund to Ceridian.
- RTC § 19393 provides that when a deduction
is found to be discriminatory, the remedy is to
recover the tax from those who benefited from
- RTC § 19393 appears on its face to be limited
- FTB February 9, 2001 Draft Notice Regarding
- FTB Staff proposes bifurcated treatment.
- For years ended prior to January 1, 1997,
taxpayers will be allowed a full deduction for
insurance company dividends if the insurance
company pays California gross premiums tax.
However, the expense attribution provision of
RTC § 24425 will be applied.
- For years beginning after December 31, 1996, no
deduction will be allowed for insurance company
dividends. The FTB will attempt to identify all
taxpayers who have claimed a deduction under
RTC § 24410 and will disallow that deduction.
- The Draft Notice has not yet been approved by the
FTB board members.
- Farmer Bros. v. FTB, LASC No. BC237663.
- Challenging the constitutionality of RTC
- Apportionment Factors.
- Property Factor.
- Kimberly-Clark Corporation (SBE, 2001)
- Case involves Regulation 25137(b)(1)(B) and the
inclusion of government owned property
(Canadian timberlands) in the property factor.
Under that Regulation, if a taxpayer uses in its
unitary business property owned by another and
pays nominal or no rent, a reasonable market
rental rate for that property shall be included in
the property factor.
- Series of adverse decisions against the FTB in
which this Regulation has been appliedUnion
Carbide I (SBE, 1984), Proctor and Gamble
(SBE, 1989), Union Carbide II (SBE, 1993),
Kimberly Clark I (SBE, 1994).
- Regulation 25137(b)(1)(B) is not limited in its
application to timber companies. Oil
companies and other taxpayers that use
property owned by others and pay nominal
rent fall within its terms.
- In May 2000, the SBE concluded (CCH
¶ 403-101) that Kimberly-Clark's payment of
area charges of $.07-$.09/acre was not nominal
rent and thus Regulation 25137(b)(1)(B) did not
apply. The SBE allowed Kimberly Clark to
include as rent in the property factor the
$.07-$.09/acre over the entire productive acreage.
- The SBE rejected the application of FTB Legal
Ruling 97-2 which would limit the rent in these
circumstances to the royalties paid for
stumpage (actual timber cut). The effect of
Legal Ruling 97-2 is that it only includes a value
for the acreage on which timber is cut in a given
year and fails to include a value for the entire
productive acreage on which the taxpayer may
have cutting rights.
- On January 3, 2001, the SBE granted
Kimberly-Clark's petition for rehearing and
reversed itself on the nominal rent issue and held
that Regulation 25137(b)(1)(B) was applicable.
The SBE concluded that a reasonable market
rental rate must be determined for the entire
productive acreage, not just the acreage on which
timber was cut in a given year. The SBE asked
for further briefing on which appraisals should
be followed. The case has now settled.
- Sales Factor.
- Regulation 25137(c)(1)(A) amended.
- Where substantial amounts of gross receipts arise
from the occasional sale of fixed assets and any
other property held or used in the taxpayer's
unitary business, such gross receipts shall be
excluded from the sales factor.
- Regulation formerly was limited to sales of fixed
assets. It now applies to sales of intangibles (e.g.,
stock, patents, etc.).
- A sale is defined as substantial if its exclusion
results in a 5% or greater decrease in the sales
factor denominator of the taxpayer, or if the
taxpayer is part of a combined reporting group,
a 5% or greater decrease in the sales factor
denominator of the group as a whole.
- A sale is defined as occasional if the transaction
is outside the taxpayer's normal course of
business and occurs infrequently.
- Compare the business income transactional
test language in RTC § 25120(a) ("income
arising from transactions and activity in the
regular course of the taxpayer's trade or
- Applies to sales on or after January 1, 2001.
- Gross receipts from treasury function.
- Toys-R-Us (SBE, 2000)
- Summary decision in which the SBE
concluded that the gross receipts from the
treasury function of an out-of-state
corporation were not includible in the sales
- Fuji Bank (SBE, 2000).
- Summary decision in which the SBE
concluded that the gross proceeds from
securities transactions engaged in by Fuji
Securities should be included in the
denominator of the sales factor.
- Key Industries, Inc. (SBE, 2000).
- Summary decision in which the SBE concluded
that the gain from the sale of all of the business
assets of the taxpayer should be apportioned to
California under the standard apportionment
- Taxpayer whose only contact with California was
rented warehouse space, unsuccessfully argued
for a special apportionment formula.
- The SBE compared apportionment percentages
under the standard formula and the taxpayer's
special formula in concluding that no distortion
- Joyce vs. Finnigan
- The never-ending saga of who is the taxpayer for
unitary business purposes continues.
- Is it the unitary group (Finnigan) or the separate
corporate entities (Joyce)?
- Huffy vs. Citicorp vs. Deluxe vs. Regulation
- Huffy (SBE, 1999).
- In an in-bound sales case, the SBE readopted the
Joyce rule on a prospective basis (i.e., for income
years beginning on or after April 22, 1999).
- Citicorp v. FTB, 83 Cal. App. 4th 1433 (2000).
- Court of Appeal sustained the FTB's position that
Finnigan should apply.
- The FTB included the California sales and
property of Citibank (South Dakota) N.A., an
entity immune from California taxation, in the
numerator of the sales and property factors of
the plaintiff and its affiliates which were subject
- Taxpayer recently filed a petition for writ of
certiorari with the U. S. Supreme Court.
- Deluxe Corporation v. FTB, SFSC No. 991237.
- Trial court sustained the FTB's position that
Finnigan should apply in a typical in-bound sales
- (Case on appeal.
- Regulation 25106.5.
- The FTB recently promulgated its combined
report regulations in which it has applied Joyce
- Reader's Digest Association, Inc. v. FTB, Sacramento
Superior Ct. No. 98AS03483.
- Trial court sustained the FTB's position that a
parent corporation with no contacts in California
can be subject to the franchise tax based on the
presence of its wholly owned subsidiary with
offices in California.
- The FTB argued that the in-state subsidiary acted
as the agent for the out-of-state parent by
soliciting sales of advertising to be placed in the
magazines which the parent sold in California.
- Case on appeal.
- Separate but unitary.
- Guy F. Atkinson Co. of California v. FTB, No.
A085075, June 12, 2000.
- In an unpublished opinion, the Court of Appeal
issued a decision rejecting the taxpayer's
contention that a solar tax credit should be
applied against the tax liability of the unitary
group, or in the alternative, should be "intra-state
apportioned" against the tax liability of each of
the taxpayers of the unitary group.
- Manufacturers' Investment Tax Credit.
- The first assessments are being issued. There is a
tension between the statute and the FTB's
regulations. Numerous issues abound regarding
who is a qualified taxpayer; what is qualified
property; and what are qualified costs.
- Save Mart Supermarkets pending at the SBE.
- Case involves the issue of who is a qualified
taxpayer for MIC purposes.
- FTB Legal Ruling 2000-1.
- Addresses the issue to what extent may capitalized
labor costs paid or incurred by a qualified
taxpayer to a third-party contractor for the
construction, modification or installation of
qualified property constitute qualified costs for
purposes of the MIC.
- Water's Edge Elections
- Yamaha Motor Corp. (SBE, 2000).
- Taxpayer made intercompany sales of inventory
during a year in which it filed on a worldwide basis
and eliminated those sales on its return. Taxpayer
then elected water's edge the next year. The
inventory was sold to third parties outside the
group. The FTB sought to include the profits from
the intercompany sales in the water's edge report.
The SBE rejected the FTB's attempt on the basis that
since the FTB did not have any final regulations on
the subject, the taxpayer's action was reasonable.
- The SBE refused to follow either Publication 1061
(Instructions for Filing Combined Reports), or FTB
- Taxpayer was permitted to use a stepped-up basis
in the inventory.
- The FTB has now released final intercompany
transaction regulations. Regulation 25106.5-1 sets
forth detailed rules applicable to intercompany
transactions between members of a combined
reporting group. The FTB has adopted a policy of
deferral, not elimination, of intercompany gains.
While the Regulation conforms in many ways to
Treasury Regulation § 1.1502-13, there are
significant differences, including, in particular,
events which trigger the recognition of gains.
- The FTB has filed a petition for rehearing.
- Amdahl Corporation (SBE, 2000).
- Summary decision.
- Case involves the interaction of RTC §§ 25106,
24411 and 25110(a)(7) and the pass-through of
dividends from second tier subsidiaries to first tier
subsidiaries and finally to an intermediate holding
- The SBE concluded that the ratio of each second
tier subsidiary's Subpart F income to its earnings
and profits applied against the dividends each
respective second tier subsidiary distributed,
determined apportionable income. This amount,
not the sum total of second tier subsidiary income,
was excluded from the unitary group's taxable
income. The group was then allowed to deduct 75%
of the difference between these two amounts.
- Protest Regulations
- Proposed Regulations 19041 and 19044 blocked
- Will they be resurrected?
- What is the impact on the Proposed Audit
- Key elements of Proposed Regulations 19041 and
- 24-month protest period
- No reaudits
- Deemed denial of protest
- Proposed Audit Regulation 19032
- The FTB has conducted a series of symposiums
and town hall meetings to have an exchange of
ideas concerning "Best Audit Practices" that
taxpayers would like to see incorporated into the
- Proposed Regulation 19032 has been recently
amended (March 15, 2001) in response to
- Staff is to present a final draft of Proposed
Regulation 19032 to the Board Members by
May 31, 2001.
- Personal Income Tax
- Apportionment Rules for Non-Corporate Entities
- Proposed amendments to Regulation 17951-4.
- Apportionment rules of RTC §§ 25128
25139 apply at entity level in determining the source
of business income of a multistate sole
proprietorship, partnership or S Corporation for
purposes of taxing a proprietor, partner or
- Personal Income Tax sourcing rules apply at the
individual level in determining the source of
nonbusiness income of a multistate sole
proprietorship, partnership or S Corporation for
purposes of taxing a proprietor, partner or
- Sets forth rules for unitary combination based upon
the ownership interest of the partner or S
Corporation shareholder. If 20 percent or more,
unitary combination applies. If less than 20 percent,
unitary principles will not normally be applied.
- Valentino v. FTB, 87 Cal. App. 4th 1284 (2001)
- Non-resident S Corporation shareholder
subject to tax on California source income of
the S Corporation.
- Covenants Not To Compete
- Milhous (SBE, 2000).
- A portion of income from a covenant not to
compete in the U.S., Canada and Mexico, earned in
connection with the sale of a California-based
business by its nonresident owners, was sourced to
- Three-factor apportionment formula was applied.
- Proposed Regulation 17951-6 sets forth rules for
the treatment of covenants not to compete.
- Sales And Use Tax
- Tangible vs. Intangible Property
- Preston v. SBE, 25 Cal. 4th 197 (2001).
- The California Supreme Court ruled that only the
proceeds from agreements that transfer rights to
artwork that are attributable to the tangible artwork
itself are subject to sales tax. The portion of the
proceeds attributable to the transfer of the
intangible property rights (i.e., copyright) was not
- The Court relied on RTC §§ 6011(c)(10) and
6012(c)(10) (technology transfer agreements) and
applied those provisions to transactions which
occurred before the enactment of those provisions.
RTC §§ 6011(c)(10) and 6012(c)(10) permit the
bifurcation of the sales price of technology transfer
agreements into taxable and nontaxable
- Dissent contended none of the proceeds should be
taxable under the author's manuscript exception in
- How does this decision square with Navistar Int'l
Transportation Corp. v. SBE, 8 Cal. 4th 868 (1994)?
- Assembly Bill No. 81 (Migden) similar to last
year's vetoed AB 2412.
- This bill seeks to expand collections of sales and
use taxes by out-of-state retailers by "clarifying" that
the processing of orders electronically, by fax,
telephone, the Internet or other electronic ordering,
does not relieve a retailer of responsibility for
collection of the tax from the purchaser if the retailer
is engaged in business in this state.
- This bill also presumes that a remote retailer has an
agent within the state, if the remote retailer is
related, as specified, to an in-state retailer
maintaining sales locations within this state,
provided similar products are sold under a similar
name or if the remote retailer's products are
promoted by the in-state retailer.
- Pits independent booksellers against
Barnes & Noble.com., Borders.com., etc.
- Drop Shipments
- Regulation 1706 adopted December 28, 2000.
- Governs sales and use taxation of drop shipments
to California consumers.
- Regulation defines the relationship of parties to a
drop shipment; describes a drop shipment
transaction; provides mark-up rules.
- Rules are being further refined by the State Bar Tax
Section and the SBE staff.
- Occasional Sales
- Regulation 1595 was amended to exempt a
service enterprise's first two sales during any
- Regulation 5200 promulgated to explain the
application and precedential value of
- Sales For Resale
- Modern Paint and Body Supply, Inc. v. SBE, 87
Cal. App. 4th 703 (2001).
- Auto paint and body supplier liable for sales tax on
supplies sold to auto paint and body shops.
- Hewlett Packard Company (SBE, 2000).
- Gifts of computer and scientific equipment shipped
by common carrier from donor's California plant
to out-of-state universities were not subject to use
tax because donor demonstrated that the gifts were
completed outside California.
- Yamaha Corp. of America v. SBE, 73 Cal. App. 4th
338 (1999) distinguished based on the evidence.
- Bad Debts
- WFS Financial (SBE, 2000).
- Lenders to motor vehicle dealers may obtain a bad
debt deduction in connection with defaults on
automobile loans that the lenders purchased
without recourse from the dealers.
- RTC § 6055 amended to specifically allow for
lenders to claim bad debt deductions under
- Regulation 1642 is being amended in accordance
with the new provisions in RTC § 6055.
- Property Tax
- Update on RTC § 469 Cases.
- There have been several recent cases dealing with
RTC § 469. This statute provides that if the result
of an audit for any year discloses property subject
to an escape assessment, then the original
assessment of all property of the assessee at such
location for such year shall be subject to
equalization by the Assessment Appeals Board.
- Heavenly Valley Ski Resort v. El Dorado County,
84 Cal. App. 4th 1323 (2000).
- The assessor found certain escape assessments in
the four audit years totaling roughly $3 million, and
the taxpayer asserted substantially larger negative
escape assessments (i.e., $20 million reductions in
value for each of the four years). The assessor chose
to accept one of the negative escape assessments for
one year in the amount of $3 million, which offset
the positive escape assessments, producing a net
increase in value for all the years combined of less
than $5,000. The assessor then relied upon RTC
§ 155.20, which allows a County to ignore de
minimis assessments, and the assessor therefore
made no escape assessments at all. The trial court
and court of appeals found that RTC § 469 is
triggered when the audit "discloses" the escape
assessment for any year, whether or not the assessor
enrolls such escape assessment. In a second issue,
the court of appeals reversed the trial court and held
that the Assessment Appeals Board had not violated
the RTC § 1604(c) rule that applications must be
decided within two years of filing.
- Apple Computer, Inc. v. County of Santa Clara, et
al., (Santa Clara County Superior Court Docket
No. CV 786738, March 2001).
- The auditor began an audit of the years 1994
through 1997. After examining some records and
learning that the taxpayer planned to assert large
decreases in assessed values for the years 1994
through 1996, the auditor determined no changes
for those three years and found escape assessments
for only 1997. The assessor asserted that a
stipulation filed with the Assessment Appeals Board
on certain issues as to the 1994-1995 years and a
Board decision on certain issues as to the 1996 tax
year precluded further audit and/or appeals as to
those three years. The trial court found that the
assessor had a duty to audit each of the four years
and that the Board stipulation and prior Board
decision did not have the preclusive effect asserted
by the assessor. Although the taxpayer had asked
that the matter proceed to hearing before the
Assessment Appeals Board, the court instead
directed the assessor to go back and complete the
- IBM v. County of Santa Clara, et al. (Santa Clara
County Superior Court Docket No. CV 774632,
- This case involved a complicated set of facts. The
assessor had conducted an "inquiry"which the
assessor felt did not rise to the level of an
"audit"of the taxpayer's basic operational software. The
assessor issued a notice of proposed escape
assessment at the conclusion of that work. In the
meantime, however, the SBE adopted Property Tax
Rule 152, which made those software escape
assessments erroneous. A number of assessors filed
a declaratory relief suit against the SBE to invalidate
Rule 152 (in a case entitled Hahn v. SBE), and the
assessors eventually lost. Thus, the proposed
software escape assessments were eventually
withdrawn. The taxpayer asserted that the software
inquiry was actually an audit and that its
applications filed while Hahn was pending were
timely. The trial court determined that no audit
had been performed and that the applications were
not timely. The taxpayer has decided not to appeal.
- City Tax
- Union Oil Company v. City of Los Angeles, 79 Cal.
App. 4th 383 (2000).
- Court of Appeal concluded that the Los Angeles
business license tax and payroll expense tax
ordinances violated the U.S. and California
Constitutions because they imposed a
discriminatory burden on gross receipts from the
sale of products manufactured in the city and
sold elsewhere. In addition, the ordinances
violated internal consistency that because
identical ordinances could not be applied by
other jurisdictions without impermissibly
interfering with free trade.
- General Motors Corporation, et al. v. City and County
of San Francisco
- San Francisco's gross receipts and payroll expense
taxes held to be unconstitutional in a series of
appellate and trial court decisions.
- Tentative settlements have been reached.
- Geneva Towers Limited Partnership v. City and
County of San Francisco, Supreme Court No.
- Case involves the deemed denial of refund claim
provisions common throughout California state
and local taxes. Under those provisions, a
taxpayer may, but is not required to, deem its
claim for refund denied if the taxing agency fails
to issue a notice of action on the claim within
six months of filing the claim. The taxpayer can
then pursue a suit for refund or other
administrative appeal. If no notice of action is
ever issued, it was believed (before Geneva) that
the taxpayer would have an open statute of
limitations for pursuing these next steps.
- Court of Appeal decided that where the Tax Code
is silent on the limitations period, the Code of
Civil Procedure (CCP) can be looked to for a
- Court of Appeal also concluded that the cause
of action accrued within six months from the
filing of the claim. The CCP statute of limitations
began running from that date.
- Both the FTB and SBE support the taxpayer's
position before the California Supreme Court.
- California Commission on Tax Policy in the New
Economy created effective January 1, 2001 until
January 1, 2004 in order to recommend prudent
public policy for the taxation of the Internet with
respect to sales and use tax, telecommunications
taxes, income/franchise taxes, and property tax.
- Numerous bills pending providing incentives in
one form or another for local governments to site
power plants by changing the allocation of property
tax revenues derived from new and repowered
power plants to give more revenues to the locality
in which the plant is located.
- AB 49 is a prime example.
- Senate Revenue and Taxation Committee passed
electricity windfall profit tax (SB 1).
- FTB and SBE Members may be changing.
- SBE Members Dean Andal and Johan Klehs are
being term limited out and are considering
running for Controller. Controller Kathleen
Connell just made an unsuccessful attempt at
becoming Mayor of Los Angeles. Businessman
Steve Westly, an eBay executive, is reportedly
exploring the possibility of running for
Controller. A number of individuals are
considering running for slots on the SBE,
including Assemblywoman Carole Migden,
Senator Jim Brulte and Senator Pete Knight.
- Practitioner-Client Communications
- Legislation was passed extending the
confidentiality protections afforded under the
attorney-client privilege to communications
between taxpayers and tax practitioners who
provide advice on California sales and use tax,
personal income and corporation franchise tax.
(Ch. 438 (AB 1016) Laws 2000, effective
January 1, 2001).
- Corporate Income Tax
- State of Alaska, Department of Revenue v.
14 P. 3d 981 (2000)
- A penalty imposed on a corporation for the filing
of amended Alaska corporate income tax returns
more than 60 days after the IRS issued changes
to its federal returns was upheld by the Alaska
Supreme Court because the corporation knew
for over a year that it would have to file amended
state tax returns and, therefore, the corporation
did not have a reasonable cause for delay.
- The corporation knew the consequences for
filing a late return since it had previously paid a
penalty for late filing in a similar situation in
- The fact that the corporation was required to file
300 tax returns in Alaska and other taxing
jurisdictions and the fact that the IRS has made
similar adjustments to the corporation's returns
prior to this adjustment indicated that the
corporation was not under an unusual or
- State of Alaska v. Louisiana-Pacific Corporation,
Supreme Court No. S-09198
- Suit for erroneous refund pending before the
Alaska Supreme Court.
- Case involves the question whether under Alaska
law a claim for refund is timely if filed within a
federal waiver period.
- Taxpayer filed claims for refund based on the
inclusion in the sales factor of gross receipts from
its treasury function which was located in
Oregon. The claims were granted and refunds
paid. The State then requested the taxpayer to
return the refunds. The taxpayer refused and the
State sued for erroneous refund contending that
the claims were untimely.
- There is Alaska case law allowing for the issuance
of assessments on unitary issues within the
federal waiver period.
- In addition, the evidence showed that it has been
the State's administrative practice to rely on
federal waivers to issue assessments on unitary
issues, not just federal adjustments.
- Alaska statutes incorporate by reference the IRC
waiver provisions for both assessments and
- The trial court ruled in favor of the State.
- Case was argued before the Supreme Court in
- On May 4, 2001, the Alaska Supreme Court
handed down its decision.
- Federal waivers extend the state statute of
limitations for assessments and claims with respect
to issues which are purely state issues (e.g., allocation
- Restricted federal waivers only extend the state
statute of limitations for the designated issues in
the federal waivers.
- Personal Income Tax
- House Republican Proposes Personal Income Tax
- Representative Bill Hudson (R) has introduced
a bill that would impose a flat state personal
income tax at the rate of 15% of a person's taxable
federal income. In January, Representative Carl
Moses (D) introduced another bill to impose an
income tax, with brackets from 10% to 20% of
federal taxable income. That proposal, which
targeted nonresidential workers by providing a
credit for local property taxes, has not yet received
- Sales Tax
- Anchorage Tax Rejected.
- Anchorage voters on April 4 overwhelmingly
rejected a proposed 2% city sales tax meant to
provide revenues that would allow a reduction
in property tax. What would have been the city's
first-ever sales tax was opposed by 71.45% of
- Pay to Play Repealed.
- SB 2946, signed into law as Act 199 (2000). This
administration-sponsored proposal will allow
taxpayers to appeal an assessment before state
boards of tax review without first having to pay
the amount of taxes assessed. Under prior law,
taxpayers could not appeal an assessment made
by the Department of Taxation until the amount
of the assessed taxes was paid.
- Applies to appeals of income, general excise, use,
fuel, liquor, tobacco and conveyance taxes.
- Gross Income Tax.
- HB 114 would replace all state taxes except
alcohol, cigarette, tobacco and fuel with a
comprehensive gross state income tax with a
single rate for all taxpayers. Deductions would
be allowed only for purchases made by one
business from another that pays the tax on the
goods or services purchased or traded.
- Corporate Rates.
- SB 1271 would lower corporate tax rates to
stimulate Hawaii's economy and to encourage
capital investment in the State. Specifically, this
Act would provide corporate tax relief to
corporations, regulated investment companies,
real estate investment trusts, and franchise
- Lawmaker Proposes Income-for-Excise Tax Swap
- Hawaii state Representative Dennis Arakaki (D),
chair of the House Health Committee, has
introduced HB 283, which would repeal the
individual income tax and increase the state's
general excise tax rate from 4% to 8%. Food
purchases and the provision of health care
services would be exempted from the general
excise tax under the proposal. As of January 1,
2002, the net income tax would no longer apply
to individuals. However, beginning July 1, 2001,
the general excise tax rate would soar to 8%, with
exceptions noted above.
- Corporate Income Tax.
- Tax Information Release No. 2001-1, Hawaii
Department of Taxation, January 17, 2001.
- For Hawaii corporate income tax purposes, Hawaii
allows S corporations to treat a wholly owned
corporation as a qualified subchapter S subsidiary
(QSub) in the same way as the S corporation would
be treated under IRC §1361(b). However, each
entity must have its own Hawaii general excise
(sales) tax license number and intercompany
transactions between S corporations and QSubs are
subject to general excise (sales) tax, unless
- Corporate Income Tax.
- AIA Services Corp. v. State Tax Commission
(Supreme Court, May 4, 2001).
- Insurance company not required to be combined
with its parent (noninsurance) company.
- Insurance company paid gross premiums tax to
- Supreme Court disallowed any deduction for
dividends paid by the insurance company, since it
did not pay more than 50 percent of its gross
premiums taxes to Idaho, which was required under
- The Court rejected constitutional arguments raised
by the taxpayer because they were being raised for
the first time on appeal.
- Decision No. 13772, Idaho State Tax
Commission, January 21, 2000.
- Dividends, Gains, Other Income Constituted
Business Income. Dividend income received by a
multinational pharmaceutical manufacturer from
a 50%-owned corporation was classified as business
income subject to apportionment because the two
companies were in the same line of business and
had a marketing arrangement by which the taxpayer
had earned business income over the years.
- The taxpayer's share of income from two
partnerships that were in the same line of business
as the taxpayer was also classified as business income
because the partnerships were vertically integrated
with the taxpayer. Information published in the
taxpayer's annual reports to shareholders supported
business income treatment of the dividend and
partnership income and was presumed to be correct
because of the requirements of federal securities
- Gains on the taxpayer's sale of stock in two offshore
insurance companies constituted business income
because the taxpayer had an operational connection
with the companies. However, gain from the
taxpayer's sale of a subsidiary of a company that
the taxpayer had recently acquired was nonbusiness
income because the subsidiary was in a different line
of business, i.e., plastic manufacturing; the taxpayer
owned the subsidiary for a only short time prior to
selling it; and there was no evidence of functional
integration between the two companies.
- Decision No. 14379, Idaho State Tax
Commission, January 24, 2001.
- A manufacturer that received dividends from a
foreign subsidiary was required to include the
dividends in its apportionable income subject to
Idaho corporate franchise (income) tax and to
delete the subsidiary's income and apportionment
factors from its combined report because it failed
to include the subsidiary in its required list of
affiliated corporations when it filed its return and
made the water's edge election. Idaho rules require
the submission of the list of affiliated corporations
with the return, and the corporation's failure to
comply with this procedural requirement gave the
Tax Commission authority to determine the
taxpayer's income without regard to the water's edge
- Income Tax.
- HB 377, awaiting the governor's signature, is an
income tax and property tax relief bill, with most
of the provisions effective from January 1, 2001.
It permanently reduces all individual income tax
rates by 0.4 percentage points, and permanently
reduces the corporate income tax rate by the
same amount. It provides for an income tax
credit for research and development
expenditures for five years. The new jobs credit
is for one year only. The broadband
communications investment credit is for five
years. It further provides for a onetime incentive
for investing in economically depressed counties.
It allows an income tax deduction for individual
health insurance, which is ongoing. Finally, it
increases the grocery tax credit by $5 per eligible
- Ch. 457 (HB 800), Laws 2000, effective
retroactively to January 1, 2000. Unused
investment credits against Idaho corporate
income tax may be carried forward 14 (formerly
7) succeeding tax years.
- Ch. 479 (HB 802), Laws 2000, effective
retroactively to January 1, 2000. The capital
investment tax credit against Idaho corporate
income tax is increased from 45% to 50%.
- HB 120, sponsored by the State Tax Commission,
signed by the governor on 3/19/01 (Ch. 56).
Changes the law relating to refunds of income
tax withholding to suspend the statute of
limitations on refund claims for withholding
during the pendency of administrative or judicial
review of income tax cases. Strikes language
relating to withholding refunds of less than $1, a
provision made obsolete by the
whole-dollar-rounding statute. It also moves
language relating to the time to claim refunds of
withholding or estimated payments from several
different sections to one section.
- Sales and Use Tax.
- HB 113, sponsored by the State Tax Commission
would update and clarify the statute of
limitations on claiming refunds of overpayments
of sales and use taxes. More specifically, the bill
- extend the SOL for refunds when the Tax
Commission asserts additional liability;
- provide for written waiver of the SOL by the
taxpayer and the Tax Commission;
- clarify that taxes erroneously collected from a
purchaser must be refunded to the purchaser;
- specify procedures for review of denied refund
- delete excess language and correct a
- Corporate Income Tax.
- For Idaho corporate franchise (income) tax
purposes, NOL carryback and carryover
provisions were revised to reflect statutory
amendments that change the number of years
for NOL carryback periods to two years
(formerly, three years) and the carryforward
periods to 20 years (formerly, 15 years), effective
after 1999. Corporations that have an NOL and
are part of a unitary group are limited to a
maximum carryback of $100,000.
- Sales factor provisions were amended to adopt
Multistate Tax Commission (MTC) regulations
that address net gains from liquid assets and the
calculation of the sales factor. The rules provide
that net gains on the sale of liquid assets are
included in the sales factor if the assets are held
in connection with a treasury function and the
assets produce business income when sold. The
term "liquid assets" means assets, other than
functional currency or funds held in bank
accounts, held to provide an immediate source
of funds to meet the liquidity needs of a trade or
business. "Treasury function" means the pooling
and management of such assets in order to meet
the cash flow needs of a trade or business.
- Rules governing the treatment of dividends were
amended to specify the calculation of the
dividend elimination for foreign sales
corporations (FSCs) when a water's edge election
is made. Further, provisions concerning
combined reports including foreign country
operations are deleted.
- Rules regarding Idaho corporate income tax and
personal income tax notice of deficiency protest
procedures were amended to specify that the
Idaho State Tax Commission may issue a decision
after 42 days from the date the right to request a
hearing notification is mailed to the taxpayer if
no hearing is requested, a hearing is requested
but no hearing date is scheduled, or a scheduled
hearing is canceled and not rescheduled.
- The foregoing regulations (rules) were generally
effective April 5, 2000.
- Opinion of the Idaho Attorney General, No. 00-1,
September 21, 2000
- The Idaho insurance premiums tax and
retaliatory tax provisions would not be
unconstitutional under the Commerce Clause of
the U.S. Constitution because the Commerce
Clause does not apply to Idaho's regulation and
taxation of insurance.
- Further, any attack on the insurance premiums
tax based upon equal protection, due process, or
uniformity issues would likely be unsuccessful
because the insurance premium tax statutes do
not effect express discrimination against foreign
insurers. Likewise, the retaliatory tax provision
would not be unconstitutional because the
purpose of the statute is to promote Idaho's
insurance industry by deterring barriers to
interstate business, a legitimate state purpose.
- Finally, due to various decisions of various courts,
the constitutionality of the insurance premiums
tax reduced rate provision, either standing alone
or its combined effect with the retaliatory tax
provision, is uncertain. For example, the
insurance premiums tax reduced rate provision
might be deemed unconstitutionally
discriminatory in effect, even though it does not
expressly differentiate between foreign and
domestic insurers, because currently only
domestic insurers are taking advantage of the
- HB 636
- Introduced by Representative Dan Duchs (R),
passed the House by a vote of 53 to 47. The bill
was tabled in the Senate Taxation Committee on
April 9. This bill would abolish the state's
individual income tax, and imposes a tax on all
sales of goods and services except for those
specifically exempted. The rate would be 4%
starting November 1, 2002. HB 636 would repeal
the state's individual income tax effective
January 1, 2003.
- Not all of the state's current income taxpayers
would be eliminated from the tax rolls, however.
The bill would change the definition of
"corporation" to include limited liability
companies, limited liability partnerships,
partnerships, sole proprietorships, and
small-business corporations. Currently, these
passthrough entities allocate net income to
individual partners or shareholders, who then
must include their gains and losses in income for
individual income tax purposes. Under this bill,
these entities would be subject to the corporation
license tax and would pay tax on any net income
at a flat rate of 6.7%.
- If approved by the Senate and signed by
Governor Judy Martz (R), the bill would be sent
to the electorate in November.
- B. SB 39
- Legislation introduced at the request of the
Department of Revenue and intended to clarify
that certain investment income of insurance
corporations is subject to tax; providing that
insurance companies that derive income from
investment activities unrelated to the issuance of
insurance are subject to the corporation license
tax on the income derived from those activities.
- Governor Would Eliminate Tax on Business
- In her January 25, 2001 State of the State Address,
Governor Judy Martz restated that she would not
support Montana tax increases. Also, she
proposed eliminating the personal property tax
on business equipment.
- ARM 42.2.103, 42.2.104, and 42.2.106, Montana
Department of Revenue, effective May 26, 2000.
- The Montana Department of Revenue has
adopted several procedural rules for petitioning
the Department for a declaratory ruling as to the
applicability of Montana corporate income tax,
personal income tax, sales and use tax, or other
tax to the petitioner's activity or proposed
activity. A petition must be typewritten or
printed and contain certain information,
including the petitioner's name and address, a
detailed statement of the facts, propositions of
law asserted by the petitioner, and the specific
relief requested. A petition must be acted upon
by the Department within 60 days of receipt. A
declaratory ruling is binding on the Department
and the petitioner.
- AB 455 The Uniform Sales and Use Tax
- The product of the Streamlined Sales Tax Project
was referred to Assembly committee on
March 19, 2001.
- AB 53
- Proposed legislation would repeal business tax
under certain conditions.
- S.J.R. 20
- Senate Joint Resolution proposes to amend the
Constitution of the State of Nevada to provide
requirements for the enactment of property and
sales tax exemptions.
- New section, designated section 6, is proposed
to be added to article 10 of the Constitution of
the State of Nevada to read as follows:
"Sec. 6. 1. The Legislature shall not enact
an exemption from any ad valorem tax on
property or excise tax on the sale, storage, use or
consumption of tangible personal property sold
at retail unless the Legislature:
"(a) Determines that the exemption will
achieve a bona fide social or economic purpose;
"2. The Legislature shall review any
exemption from any tax on property or on the
sale, storage, use or consumption of tangible
personal property sold at retail at least once every
6 years to determine whether the purpose of the
exemption is still valid and that the exemption is
being used effectively."
"(b) Restricts the eligibility for the
exemption solely to the intended beneficiaries of
"(c) Determines that the exemption will not
have a material adverse effect on the finances of
the state or any local government that would
otherwise receive revenue from the tax from
which the exemption would be granted;
"(d) Determines that the exemption will not
impair adversely the ability of the state or a unit
of government to pay, when due, all interest and
principal on any outstanding bonds or any other
obligations for which revenue from the tax from
which the exemption would be granted was
"(e) Ensures that the requirements for
claiming the exemption are as similar as
practicable for similar classes of taxpayers.
- Business License Tax
- Rogers et al. v. Heller, 18 P. 3d 1034 (2001)
- An initiative petition that would impose a 4%
Nevada business license tax to raise funds and
increase state funding for public schools was found
by the Nevada Supreme Court to be void because
the initiative violated the Nevada Constitution.
- The initiative did not comply with the constitutional
requirement that a proposed initiative that makes
an appropriation or otherwise requires an
expenditure of money, must impose a tax sufficient
to support the new appropriation or expenditure.
The initiative set the appropriation for the state's
basic support to schools at a minimum of 50% of
the state's total revenue and prevented the legislature
from setting or diminishing the funding amount.
However, the proposed 4% tax was insufficient to
cover the initiative's 50% appropriation amount
and, therefore, did not meet the constitutional
threshold funding requirement.
- Finally, the organization that proposed the initiative
argued that, even if the initiative's appropriation
requirement was invalid, the appropriation
provision should be severed from the rest of the
initiative. However, the Court concluded that
severing the initiative's appropriation provision,
which was the central component of the initiative,
would not keep the initiative substantively intact,
as the one that was signed by thousands of voters
in April 2000.
- Sales and Use Tax
- Nevada Tax Commission v. Nevada Cement Co.,
8 P. 3d 147 (2000).
- The Nevada Supreme Court ruled that purchases
of materials used in the manufacturing of cement
are subject to sales or use tax. The Supreme Court
agreed with the Tax Commission and concluded
that the language of NRS 372.105 is properly
interpreted to exempt from taxation only those
items purchased for the express purpose of resale.
- In this case, Nevada Cement purchased the
machinery parts at issue both for use in the
manufacture of portland cement and for the
contribution of ingredients to the raw mix. This is
a dual purpose, and under a primary purpose test
the items would be subject to taxation. Accordingly,
the court held that the district court erred by
applying a physical ingredient test and remanded
the case to the district court for further
- Corporate Excise Tax
- Williamette Industries, Inc., et al., 15 P. 3d 18
- The Oregon Supreme Court held that royalty
income received by an Oregon timber products
company from oil and gas production on land it
owned in Louisiana and Arkansas was not business
income subject to Oregon corporate excise tax. The
regulation that purported to subject the royalties
to tax had gone beyond the statutory definition of
- The Court concluded that oil and gas production
was not an integral part of the taxpayer's regular
business operations. The governing statute
provided that income from property was business
income if the activity that produced the income was
integral to the taxpayer's regular trade or business.
Therefore, the Court held that the regulation that
subjected royalty income to the corporate excise tax
if the use of the property was incidental to the
taxpayer's trade or business was invalid and an
improper exercise of agency rule-making authority.
- The Court held that the royalty income did not
satisfy the transactional test for business income
since the taxpayer's business was growing timber
and making wood products, rather than producing
oil and gas.
- The income was also not business income under
the functional test since the timber producing
property was not disposed of, but was merely
allowed to be used for oil and gas production.
- AT&T v. Department of Revenue, Oregon Tax
Court, CCH ¶ 400-341, August 31, 2000
- Gross receipts from the sale of investment securities
by a New York telecommunications company doing
business in Oregon were correctly included in the
denominator of the sales factor for the years 1985
through 1989 in order to determine Oregon
corporate excise tax liability because those amounts
were part of business income.
- The company regularly invested in short-term
securities in order to earn income on otherwise idle
cash and the sale of those securities resulted in gross
receipts that were required to be included in the sales
- The taxpayer, as it had statutory authorization to
do as a public utility, used the apportionment
method of reporting rather than the segregated
method and invoked the Oregon Supreme Court's
decision in Sherwin-Williams Co., 996 P.2d 500
(2000), that allowed gross receipts from the out-ofstate
sales of intangibles to be included in the
denominator of the sales factor and thus it reduced
its Oregon tax liability.
- The Department of Revenue attempted to exclude
the gross receipts from the sales denominator based
upon regulatory authority that allowed it to require
a taxpayer to employ a reporting method that more
accurately reflected the taxpayer's business activities
in the state if the usual method used did not fairly
represent the taxpayer's business activities in the
state and the result violated the taxpayer's
- Since the taxpayer's constitutional rights were not
violated in this case, the Tax Court found that the
regulation relied upon by the Department was not
- The Court also concluded that even if the inclusion
of the gross receipts in question distorted the
taxpayer's apportionable income, the Department
could not rewrite its own rules and unilaterally
decide to exclude those amounts.
- Pennzoil Co. and Subsidiaries v. Department of
Revenue, 15 Or. Tax 101 (2000)
- Proceeds received by an out-of-state oil company
with operations in Oregon in settlement of an action
alleging improper interference with a contract were
unitary business income apportionable to Oregon
and, therefore, subject to Oregon corporate excise
- The Tax Court applied both a transactional test and
a functional test to determine whether the
settlement proceeds were business income
apportionable to Oregon.
- The settlement met the transactional test because
it arose from transactions and activities in the
regular course of the oil company's business. The
contract between the parties that led to the
settlement income would have resulted in the
company adding oil reserves to its inventory after
merging with another oil company.
- The functional test was met because the income
arose from intangible property, the contract
between the parties, the acquisition, management,
use or rental, and disposition which of constituted
an integral part of the oil company's business. The
contract was an integral part of the oil company's
business because it was created as a result of the
company's unitary business activities and was not
property acquired from outside the business that
had to be integrated into the unitary operation.
- The Tax Court held that taxation of the settlement
proceeds did not violate the U.S. Constitution.
Oregon had nexus with the settlement proceeds
because the income from the settlement arose from
a contract that was part of the oil company's regular
trade or business.
- Finally, the Tax Court determined that the proceeds
should be included in the sales factor of the threefactor
apportionment formula consistent with the
holding in Sherwin-Williams Co.
- Terrace Tower U.S.A., Inc. v. Department of
Revenue, 15 Or. Tax 168 (2000)
- Gain realized from the sale of trust capital units that
was used to purchase commercial real estate in
Oregon was not apportionable business income
subject to Oregon corporate excise tax, even though
the taxpayer, an out-of- state entity that redeemed
the units, filed a consolidated return with the
Oregon corporation that was formed to own and
operate the property.
- The Tax Court concluded that the investment was
for the benefit of the taxpayer and not the unitary
business. In fact, the business was not unitary until
after the gain had been realized and the property in
Oregon had been purchased. Therefore, the
investment did not serve an operational function
of the business. There was no flow of value between
the investment and the business activities the state
sought to tax and, therefore, the gain realized from
the sale of the investment was not subject to Oregon
- Preble v. Department of Revenue,
19 P. 3d 335 (2001).
- A notice of tax deficiency is not valid if it is not
certified, as required by statute. For tax years
1977-1979, the Prebles timely filed their state tax
returns. They subsequently litigated their federal
tax liability for those years. The federal tax litigation
was not resolved until 1991. In 1994, after
notification from the IRS, the Department of
Revenue sent the taxpayers three notices of
deficiency. In May 1997, the Prebles filed a
complaint in the Tax Court, contending that the
notices were invalid because they lacked a certificate
required by ORS 305.265. The Tax Court granted
summary judgment for the Department. The
- Before the Oregon Supreme Court, the Prebles
contended that a notice of deficiency is invalid if it
lacks the certification required by ORS
305.265(2)(c). The court concluded that the text
and context of the statute clearly reveal the
legislature's intent to make certification a necessary
condition for a valid notice of deficiency. The
department argued that any error here was
harmless. The court rejected that argument, noting
that the certification assures the taxpayer that the
department is acting in good faith.
- IBM Corp. v. Department of Revenue, 15 Or. Tax
- The Oregon Tax Court concluded that the
Department of Revenue's notices of deficiency of
Oregon corporate excise tax issued in 1995 for
returns filed prior to 1985 were barred by the statute
of limitations because the notices were not issued
within three years and the taxpayer did not enter
into any time extension agreements with the
Department for issuing notices of deficiency.
- Although the taxpayer entered into time extension
agreements with the IRS that extended the period
for assessing various pre-1985 deficiencies to 1993
and 1994, the agreements did not extend the time
for the Department to issue notices of deficiency
because the notices were not mailed within six
months after the date of the expiration of the
extension period under the IRS agreement. The time
extension allowed when the IRS makes a federal
correction resulting in a change in tax for state tax
purposes did not apply because although the IRS
did make a correction, the correction did not occur
within the original limitation period.
- Lowry v. Department of Revenue, Oregon Tax
Court, CCH ¶ 400-346, October 5, 2000
- Taxpayers were not allowed to file an Oregon
personal income tax appeal with the Oregon Tax
Court because they failed to pay the tax, penalties,
and interest on or before the attempted filing.
- City Tax
- City of Portland v. Vernon Cook, 12
P. 3d 70 (2000).
- The City of Portland prohibits persons from doing
business within the city unless they have a business
license and have paid a license fee. The annual fee
for a business license is the greater of $100 or 2.2%
of the adjusted net income that the licensee derives
from business within the city. Vernon Cook is an
attorney whose office is located outside the city.
Between 1992 and 1996, Cook appeared at various
hearings, took depositions, and took other steps
within the city. During those years, Cook's
unadjusted net annual income varied from $91,528
to $125,904. Cook's activities within the city
account for at least 5% of his income during those
years. In 1997, the city initiated an action to recover
unpaid business license fees from 1992-1996, along
with penalties and interest.
- The Oregon Court of Appeal pointed out that the
Portland City Council specifically defined what the
phrase "doing business" means, and determined that
the definition can rationally be applied to Cook's
activities within the city of Portland even if his
principal place of business is elsewhere. The Court
also stated that the business license fee is not a head
or poll tax. It is not assessed per capital, but only
on those persons or corporations who choose to
do business within the city; therefore, it does not
violate Article IX, section 1a of the Oregon
Constitution. The court also found no due process
- Maximum Credit Must Be Taken Each Tax Year
- Effective January 1, 2001, taxpayers claiming a
credit against Oregon corporate excise (income)
tax or personal income tax must claim the
maximum amount allowable for the tax year in
question. The maximum amount allowable,
however, is limited by the extent of the tax
liability of the taxpayer. (H.B. 2271,
- Sales and Use Tax
- SB 74 The Uniform Sales and Use Tax
- Governor Leavitt signed SB 74 on March 15, 2001,
giving the legislation immediate effect.
- Ch. 303 (HB 242), Laws 2001, effective April 30,
- The Utah Tax Review Commission must review the
state's sales and use tax exemptions at least once
every eight years. After its review, the Commission
must report its findings concerning the cost,
consistency with policy, purpose, effectiveness, and
benefit of each exemption, as well as its evaluation
of the criteria for granting or extending business
incentives, to the Governor and the Revenue and
Taxation Interim Committee. The Commissioner's
report must include a recommendation of whether
an exemption should be continued, modified, or
- Income Tax
- HB 158
- Signed by the governor. This act modifies the
Individual Income Tax act to provide that interest
on certain indebtedness of other states, the District
of Columbia, or a possession of the United States is
subject to tax.
- HB 127
- The Utah House of Representatives on February 13,
2001 approved a 1 percentage point reduction in
the state capital gains tax.
- Interest Rates
- Tax Bulletin, No. 14-00, Utah State Tax
Commission, January 2001
- Effective January 1, 2001, the Utah State Tax
Commission has increased the calendar year simple
interest rate applicable to underpayments and
overpayments of Utah taxes and fees administered
by the Commission to 8% (previously 7%).
- Business and Occupation Tax
- General Motors v. City of Seattle
(Court of Appeal, May 7, 2001).
- Court of Appeal held that General Motors and
Chrysler were subject to the Seattle business and
occupation tax even though they had no offices in
- Each had independent dealers in Seattle.
- Substantial nexus found to exist due to the
- Companies directed national advertising to
- Companies sent sales, service and parts managers
to Seattle on a regular basis.
- Companies employed Seattle dealers to market
warranties that serves an important marketing
- Tax was fairly apportioned since the gross receipts
from wholesaling activities is inherently
apportioned and because manufacturing is a
separate and distinct activity that can be taxed
- Simpson Investment Co. v. State of Washington,
Dept. of Revenue, 3 P. 3d 741 (2000)
- Investment income earned by a parent holding
company of timber industry- related subsidiaries
was subject to Washington business and occupation
tax because the parent company was a financial
business as defined under common law.
- The holding company provided an array of shared
administrative services for its subsidiaries, including
finance and accounting, credit, and human
resources. The company did not charge the
subsidiaries for the services it provided, but instead
received the majority of its revenue in the form of
subsidiary dividends, which were statutorily exempt
from the business and occupation tax. In addition
to the subsidiary dividends it received, the company
derived investment income from interest on bank
deposits, stock dividends, and profits from market
hedging and futures trading. The investment
income from these sources made up only a small
percentage of the company's gross income for the
years at issue.
- A deduction statute allows all persons not engaged
in banking, loan, security, or other financial
businesses to deduct investment income from their
tax base. Under case law precedent, a financial
business, for business and occupation tax purposes,
is a business having the primary purpose and
objective of earning income through the utilization
of significant cash outlays. The holding company
argued that its primary purpose and objective was
not to earn income in this manner, but rather was
to provide managerial and support services to its
- However, the Washington Supreme Court found
that the company's investment in its subsidiaries was
itself a significant cash outlay, and the company's
primary purpose and objective was to receive a
return on that investment. The holding company
did not manufacture a tangible product and,
although it did provide services, the services were
provided free of charge as a means of increasing
the value of the holding company's initial
investment. Accordingly, the Court held that the
company was properly characterized as a financial
business, and its investment income could not be
deducted for business and occupation tax purposes.
- The Court also concluded that under principles of
statutory construction, the holding company was
comparable to a banking, loan, or security business
and therefore was a financial business. The company
was comparable to these types of businesses because
it received income from the same sources they did,
i.e., cash outlays that generated income.
- Finally, an analysis of the statutory exemption from
business and occupation tax for subsidiary
dividends led the Court to conclude that the
legislature intended that subsidiary dividends be
taken into account in determining if a business is a
- Kalama Chemical, Inc., et al. v. State of
Washington, Dept. of Revenue, 9 P. 3d 236 (2000)
- Washington manufacturers of products sold in
other states were entitled to credits, not refunds, of
Washington business and occupation tax after the
multiple activities exemption from the tax was held
to be unconstitutional under the U.S. Commerce
Clause because collection of the tax did not
constitute a taking without just compensation
under the Fifth Amendment of the U.S.
- At the time the manufacturers paid the taxes, a
taxpayer could sue for a refund of taxes wrongly
collected. However, in 1987, after the multiple
activities exemption from the tax was declared
unconstitutional, the Washington legislature
enacted the multiple activities credit to be applied
retroactively in lieu of a refund for the taxes
- The manufacturers' taking without just
compensation argument was based on the
assumption that the tax as it existed before 1987
was a nullity as a result of the decision holding the
- However, the Washington Court of Appeal held that
the tax was not nullified by that decision because
the constitutional flaw was not a lack of state
authority to impose the tax. The constitutional
defect with the multiple activities exemption before
1987 was that it could discriminate against interstate
manufacturers that might be subject to a
comparable tax on goods sold in another state.
Enactment of the 1987 credit eliminated this defect.
The state was entitled to collect the tax as long as
the manufacturers were not subject to out-of-state
taxation on the same activity. Due to the retroactive
application of the multiple activities credit, the
manufacturers suffered no discriminatory double
taxation. Therefore, the state did not take the
manufacturers' property without just
- The Stroh Brewery Co. v. State of Washington,
Department of Revenue, 15 P. 3d 692 (2001)
- A brewing company did not qualify for exemption
from business and occupation taxes as an
out-of-state manufacturer that distributes
consumer goods through a direct seller's
- The Stroh Brewery Co. produces beer and other
alcoholic beverages out of state and sells the
products to Washington distributors that resell the
products to various retail outlets. Stroh petitioned
the Department of Revenue for a refund of the B&O
taxes paid between December 1991 and June 1996,
contending that it qualified for a statutory
exemption as an out-of-state manufacturer that
distributes consumer goods only to or through a
"direct seller's representative." For a direct seller's
representative that buys for resale to qualify for the
exemption, neither the representative nor any other
person may resell the products in a permanent retail
- Stroh argued that a seller qualifies for the exemption
so long as the direct seller's representative does not
sell the products in permanent retail establishments.
The Department contended that a seller qualified
for the exemption only if no one ever sells its
products in permanent retail establishments. The
Washington Court of Appeal concluded that when
a direct seller sells through a wholesaler, the seller
can qualify for the exemption only if its products
are never sold in permanent retail establishments.
- Brooks Sports, Inc. v. State of Washington, Dept.
of Revenue, Washington Board of Tax Appeals,
CCH ¶ 202-281, June 6, 2000
- Royalty income received by a corporation, after it
became commercially domiciled in Washington,
from licensing contracts executed in the
corporation's former state of domicile was subject
to Washington business and occupation tax because
the income was derived from the corporation's
business of selling athletic shoes, a business in which
it was engaged in Washington with the object of
- The Board of Tax Appeals held that the situs of the
transactions establishing the rights to the later
payments did not determine which jurisdiction
could exert its taxing authority over the resulting
- The Board also concluded that royalties paid to the
corporation by foreign purchasers of the
corporation's shoes could not be characterized as a
component of the sales price paid for the shoes, and
thus be exempted from business and occupation tax,
because the corporation failed to present evidence
that would form the basis for questioning the
Department of Revenue's analysis of the terms of
the contracts. Therefore, royalty payments received
from the foreign purchasers were includible in the
corporation's gross income for business and
occupation tax purposes.
- Foster Pepper & Shefelman v. State of Washington,
Dept. of Revenue, Washington Board of Tax
Appeals, CCH ¶ 202-287, July 12, 2000
- For Washington B&O tax purposes, a law firm
domiciled in Washington could not apportion its
gross income derived from services rendered in
other jurisdictions because the firm did not
maintain a place of business outside Washington.
- The Board of Tax Appeals concluded that the firm
also did not demonstrate that the out-of-state
services it rendered were more than incidental.
Although the firm's attorneys did a significant
amount of work outside the state, for clients based
both in Washington and in other states and
countries, the firm did not show that it maintained
a place of business in the out-of- state locales to
which it wanted to apportion its income.
- Under the applicable regulation, the term "place of
business" did not include transient lodging such as
a hotel room. Further, the regulation specifically
stated that business and occupation tax applied to
income received by an attorney from persons
outside the state, even though a portion of the
attorney's services were necessarily performed
outside the state.
- Additionally, while the Department of Revenue had
previously held that maintenance of a place of
business outside the state was not a prerequisite for
apportionment if the services rendered were more
than incidental, in this instance the record presented
by the taxpayer did not contain sufficient facts for
such a determination.
- Cimlinc, Inc. v. State of Washington, Dept. of
Revenue, Washington Board of Tax Appeals, CCH
¶ 202-296, September 5, 2000
- A software company performing research and
development services under contract for a
Washington customer was allowed take a credit
against its Washington business and occupation tax
based on 80% of the compensation it received, even
though the company accomplished a majority of
its contracted services through paid subcontractors.
- The Board of Tax Appeals held that the software
company was qualified to take a credit because its
research and development spending during the year
in which the credit was claimed exceeded the
statutory threshold of 0.92% of its taxable amount
during that year. Although the statute allowed a
contractor or subcontractor to assign its credit to
the person contracting for the services performed,
the statute did not condition a contracting person's
claim of the credit on an assignment of the credit
rights of the contractor or subcontractor. The
statute therefore permitted inclusion of amounts
that the software company paid its subcontractors
in the threshold calculation.
- The credit allowed equals the greater of either the
amount of qualified expenditures or 80% of the
amount received in compensation for qualified
research and development performed under
contract. If the taxpayer elects to base its credit
calculation on expenditures, it may not include
amounts it has paid to subcontractors. However, in
this case, the software company elected to calculate
its refund claim on the 80% of compensation
alternative. Under this alternative, the software
company's use of subcontractors was irrelevant
because the calculation involves only the income of
the contractor claiming the credit. Therefore, the
software company was entitled to claim the credit
based on 80% of its compensation without
adjustment for amounts paid to its subcontractors.
- Det. No. 00-027 (2000)
- An administrative law judge has ruled that an
out-of-state corporation that manages real property
must include reimbursements for employee
expenses in its gross income for business and
- Sales and Use Tax
- Dynamic Information Systems Corp. v. State of
Washington, Dept. of Revenue, Washington Board
of Tax Appeals, CCH ¶ 202-318, December 28,
- The Board of Tax Appeals held that the Commerce
and Due Process Clauses of the United States
Constitution do not prohibit Washington from
requiring the taxpayer to collect the state's use tax
with respect to sales made in Washington where its
employees were present in the state for 95 days
during the six-year audit period.
- The taxpayer develops and sells computer software.
The taxpayer's primary offices and operations are
located in Boulder, Colorado. The taxpayer had no
employees in Washington, nor any office or storage
facility in the state. The taxpayer accomplished most
of its sales to Washington customers through
nonresident representatives or other employees
based in Boulder, Colorado, or in Southern
- According to the Board, the purpose of the
taxpayer's physical presence in the state was to make
sales. Its personnel made more than five trips per
year to Washington on average, each lasting one to
four days, trips that can only be characterized as
sales trips, intended primarily to produce sales. The
trips were not regular in the sense of occurring at
fixed intervals, but they were regular in the sense
that they recurred over a significant period of time,
whenever the need presented.
- Det. No. 00-103 (2001)
- An administrative law judge has determined that
two laptop computers used for testing and
diagnostics are used directly in the manufacturing
process and therefore were exempt from sales tax.
- Property Tax
- Woodward Canyon Winery v. Larry Shelley,
Washington Board of Tax Appeals, CCH
¶ 202-314, February 1, 2001
- Oak barrels used to flavor and age wine are business
inventory not subject to the personal property tax,
even though such barrels can be used for storage
after the flavoring process is complete. The Board
of Tax Appeals held that items of personal property
introduced into the production process need not
be used up completely in either a physical or
functional sense in order to meet the statutory
definition of "business inventories."
- Study of Tax System
- Substitute SB 6098
- The Washington House Finance Committee voted
6 to 2 to approve Senate-passed Substitute SB 6098,
which calls for a study of potential improvements
in the state's tax system. The House Finance
Committee made two important changes in the
Senate version of the bill. It eliminated the
restriction that most of the alternatives to be
presented by the tax study committee should
contain no income taxes. The other change made
by the committee was to accelerate the schedule for
the study's completion. The study committee would
be required to submit a preliminary report in
January 2002, with the final report due on June 30,
- Based on the Washington Supreme Court's prior
decisions, an income tax would require amendment
of the state's constitution. This requires a two-thirds
vote in both houses of the Legislature and approval
by the people.
- Interest Rates
- Research Report No. 2000-2, Washington
Department of Revenue, October 18, 2000
- The interest rate charged on assessments
(underpayments) of Washington taxes due is
increased from 7% to 8% for 2001. The interest
allowed on refunds and credits (overpayments)
made in 2001 is also increased from 7% to 8%.
- Sales and Use Tax
- HB 259 (enacted March 1, 2001)
- Wyoming was the first state to enact the Uniform
Sales and Use Tax Administration Act, the product
of the Streamlined Sales Tax Project. The Wyoming
Department of Revenue is directed to join with
other states in entering into the Agreement and
establishing standards for certification of a certified
service provider, an agent certified by the states to
perform all of a seller's sales tax functions, a certified
automated system and software certified by the
states to calculate the tax imposed, determine the
amount to remit, and maintain a record of the
- HB0148 proposed legislation to amend W.S.
- Adds language limiting State Board of Equalization's
review of allegations regarding fraudulent,
improper or unequal assessment or other violations
of the law to those petitions for review filed within
5 years from the date the taxes were paid or should
have been paid, or where fraud is alleged in the
petition for review.
- Property Tax
- RT Communications Inc., et al. v. State Board of
Equalization, et al., 11 P. 3d 915 (2000)
- In 1994, three telephone companies, RT
Communications Inc., TCT West Inc., and Union
Telephone Co. purchased telephone exchanges
located throughout Wyoming. The costs for the
exchanges were significantly higher than the book
value for the exchanges. The cost difference, called
the "acquisition adjustment," reflected the value of
the purchases above and beyond the physical
components of the exchanges. In 1995, the
Department of Revenue commenced its annual
appraisal of the telephone companies. The
department's appraisals utilized the unitary
valuation method, which values a company as a
whole working unit rather than looking at each
individual asset separately and simply adding the
- The telephone companies filed objections to the
final assessment of the department on the ground
that the department improperly included
acquisition adjustments and failed to account for
economic obsolescence of the systems purchased
by TCT West and RT Communications.
- The Wyoming Supreme Court agreed with the
telephone companies that the acquisition
adjustments are intangible personal property.
However, the court explained that although
intangible personal property is exempt from
taxation, it may add value to taxable, tangible
property, and to that extent, it should be included
in any assessment in order to properly reflect the
true value of the property. But the court noted that
in utilizing the unitary method, to the extent that
intangible personal property has value beyond any
enhancing effect of tangible property and is
separable from those assets, it must be excluded.
The court concluded that substantial evidence
supports a finding that the acquisition adjustments
were properly considered by the department for the
value they added to the telephone companies. As
for the obsolescence argument, the court noted that
the telephone companies failed to provide any
information that allowed for such calculations.
- Sales and Use Tax
- Wyoming Department of Revenue v. Buggy Bath
Unlimited, et al., 18 P. 3d 1182 (2001)
- The Wyoming Supreme Court held that any refund
of overpaid sales taxes must be made to the vendor
rather than the purchaser. However, the court also
addressed an issue not briefed by the parties. The
court made it clear that proper filing of appeals from
the Board of Equalization should be made to the
district court of the county in which the property,
or some part thereof, is located. There is no need
for duplicative filings when property is located in
multiple jurisdictions. One jurisdiction will provide
adequate access for judicial review.
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