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State & Local Tax Bulletin (August 2001)

State and Local Tax
Update – Western Region

By Jeffrey M. Vesely, a tax partner in the San Francisco office of Pillsbury Winthrop Shaw Pittmsan LLP. If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our August 2001 State & Local Tax Bulletin (a 604K pdf file), containing a printed version of this article and also available via ftp at ftp.pmstax.com/state/bull0007.pdf.

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 matters is part of the Pillsbury Winthrop Shaw Pittman Tax Page, a World Wide Web demonstration project, no portion of which is intended and cannot be construed as legal or tax advice. Comments are welcome 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.


  1. Corporation Franchise Tax

    1. Unity.

      1. Major issue in majority of multinational audits continues to be whether a unitary business exists and if so, what is its configuration.

        1. Allied Signal (SBE, 2000).

          1. Summary decision.

          2. 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.

          3. The SBE held for the taxpayer, notwithstanding its apparent lack of cooperation on audit and at protest.

          4. The SBE chastised both the taxpayer and the Franchise Tax Board (FTB) for the way they handled the case.

        2. Edison International (SBE, 2000).

          1. Summary decision.

          2. 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 separate.

          3. Unity was found despite the fact that Mission's financial activities involved not only power plants, but also low-income housing and jet airplanes.

        3. Mitsubishi Cement Corporation (SBE, 2000).

          1. Summary decision.

          2. 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.

        4. Yoshinoya West (SBE, 2000).

          1. Summary decision.

          2. 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 its parent.

      2. Instant Unity/Pre-Acquisition Earnings and Profits.

        1. Dividend elimination issues under Revenue and Taxation Code Section (RTC §) 25106.

          1. 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.

        2. Distributions in excess of basis result in current or deferred recognition of the gain, not elimination.

          1. 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.

    2. Business vs. Non-Business Income.

      1. Are there one test or two tests under California law?

        1. Hoechst Celanese Corporation v. FTB, 76 Cal. App. 4th 914 (1999), opinion vacated, review granted by California Supreme Court (No. S0805091).

          1. 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.

          2. 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 not met.

          3. 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.

          4. Argued before California Supreme Court on March 7, 2001.

          5. On May 14, 2001, the California Supreme Court reversed the Court of Appeal and concluded that the gain was business income.

            1. 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.

            2. The Court's interpretation of the functional test is quite expansive.

        2. Citicorp North America, Inc. v. FTB, 83 Cal. App. 4th 1433 (2000).

          1. 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.

          2. Finnigan vs. Joyce issue discussed below.

          3. Petition for writ of certiorari filed by the taxpayer with United States Supreme Court in April 2001.

        3. Consolidated Freightways, Inc. (SBE, 2000).

          1. 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.

        4. Esprit de Corp. (SBE, April 18, 2001).

          1. Summary decision.

          2. 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 of Esprit.

          3. 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 California.

          4. 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.

          5. Esprit's position was the same as that asserted by the FTB in Power-Line Sales and in Legal Ruling 374.

    3. Interest Offset.

      1. Hunt-Wesson, Inc. v. FTB, 528 U.S. 458 (2000).

        1. 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 nonbusiness income.

      2. FTB Notice 2000-9.

        1. At its December 2000 meeting, the FTB adopted a policy for dealing with the interest offset issue for other taxpayers.

        2. 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.

          1. 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.

    4. Deductibility of Dividends.

      1. Ceridian Corporation v. FTB, 85 Cal. App. 4th 875 (2000).

        1. Court of Appeal held that RTC § 24410 which allows for a dividend received deduction for dividends received from an insurance company, was unconstitutional under the Commerce Clause of the U. S. Constitution.

          1. RTC § 24410 allows a deduction only where the payee is commercially domiciled in California.

          2. Under RTC § 24410, the deduction is further limited by the payor's presence in California as determined by its apportionment factors.

            1. This same restriction appears in RTC § 24402 which applies to dividends from non-insurance companies.

        2. The Court held that both restrictions noted above violated the Commerce Clause since they favored domestic corporations over their foreign competitors.

        3. 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 taxpayers.

          1. Should everyone get a full deduction or should no one get any deduction?

          2. RTC 19393 was not applied by the Court to disallow the refund to Ceridian.

            1. RTC 19393 provides that when a deduction is found to be discriminatory, the remedy is to recover the tax from those who benefited from the discrimination.

            2. RTC 19393 appears on its face to be limited to banks.

      2. FTB February 9, 2001 Draft Notice Regarding Post-Ceridian.

        1. FTB Staff proposes bifurcated treatment.

          1. 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.

          2. 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.

        2. The Draft Notice has not yet been approved by the FTB board members.

      3. Farmer Bros. v. FTB, LASC No. BC237663.

        1. Challenging the constitutionality of RTC § 24402.

    5. Apportionment Factors.

      1. Property Factor.

        1. Kimberly-Clark Corporation (SBE, 2001) (Kimberly-Clark II).

          1. 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.

            1. Series of adverse decisions against the FTB in which this Regulation has been applied–Union Carbide I (SBE, 1984), Proctor and Gamble (SBE, 1989), Union Carbide II (SBE, 1993), Kimberly Clark I (SBE, 1994).

            2. 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.

          2. 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.

            1. 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.

          3. 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.

      2. Sales Factor.

        1. Regulation 25137(c)(1)(A) amended.

          1. 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.

          2. Regulation formerly was limited to sales of fixed assets. It now applies to sales of intangibles (e.g., stock, patents, etc.).

          3. 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.

          4. A sale is defined as occasional if the transaction is outside the taxpayer's normal course of business and occurs infrequently.

            1. 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 business").

          5. Applies to sales on or after January 1, 2001.

        2. Gross receipts from treasury function.

          1. Toys-R-Us (SBE, 2000)

            1. 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 factor denominator.

          2. Fuji Bank (SBE, 2000).

            1. 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.

      3. Distortion.

        1. Key Industries, Inc. (SBE, 2000).

          1. 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 formula.

          2. Taxpayer whose only contact with California was rented warehouse space, unsuccessfully argued for a special apportionment formula.

          3. The SBE compared apportionment percentages under the standard formula and the taxpayer's special formula in concluding that no distortion existed.

    6. Joyce vs. Finnigan

      1. The never-ending saga of who is the taxpayer for unitary business purposes continues.

        1. Is it the unitary group (Finnigan) or the separate corporate entities (Joyce)?

      2. Huffy vs. Citicorp vs. Deluxe vs. Regulation 25106.5.

        1. Huffy (SBE, 1999).

          1. 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).

        2. Citicorp v. FTB, 83 Cal. App. 4th 1433 (2000).

          1. Court of Appeal sustained the FTB's position that Finnigan should apply.

          2. 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 to tax.

          3. Taxpayer recently filed a petition for writ of certiorari with the U. S. Supreme Court.

        3. Deluxe Corporation v. FTB, SFSC No. 991237.

          1. Trial court sustained the FTB's position that Finnigan should apply in a typical in-bound sales case.

          2. (Case on appeal.

        4. Regulation 25106.5.

          1. The FTB recently promulgated its combined report regulations in which it has applied Joyce principles.

        5. Reader's Digest Association, Inc. v. FTB, Sacramento Superior Ct. No. 98AS03483.

          1. 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.

          2. 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.

          3. Case on appeal.

    7. Credits

      1. Separate but unitary.

        1. Guy F. Atkinson Co. of California v. FTB, No. A085075, June 12, 2000.

          1. 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.

      2. Manufacturers' Investment Tax Credit.

        1. 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.

          1. Save Mart Supermarkets pending at the SBE.

            1. Case involves the issue of who is a qualified taxpayer for MIC purposes.

        2. FTB Legal Ruling 2000-1.

          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.

    8. Water's Edge Elections

      1. Yamaha Motor Corp. (SBE, 2000).

        1. 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.

        2. The SBE refused to follow either Publication 1061 (Instructions for Filing Combined Reports), or FTB Notice 89-601.

        3. Taxpayer was permitted to use a stepped-up basis in the inventory.

        4. 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.

        5. The FTB has filed a petition for rehearing.

      2. Amdahl Corporation (SBE, 2000).

        1. Summary decision.

        2. 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 company.

        3. 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.

    9. Protest Regulations

      1. Proposed Regulations 19041 and 19044 blocked by Governor

        1. Will they be resurrected?

        2. What is the impact on the Proposed Audit Regulation?

      2. Key elements of Proposed Regulations 19041 and 19044

        1. 24-month protest period

        2. No reaudits

        3. Deemed denial of protest

    10. Proposed Audit Regulation 19032

      1. 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 audit process.

      2. Proposed Regulation 19032 has been recently amended (March 15, 2001) in response to taxpayer comments.

      3. Staff is to present a final draft of Proposed Regulation 19032 to the Board Members by May 31, 2001.

  2. Personal Income Tax

    1. Apportionment Rules for Non-Corporate Entities

      1. Proposed amendments to Regulation 17951-4.

        1. Apportionment rules of RTC §§ 25128 through 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 shareholder.

        2. 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 shareholder.

        3. 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.

          1. Valentino v. FTB, 87 Cal. App. 4th 1284 (2001)

            1. Non-resident S Corporation shareholder subject to tax on California source income of the S Corporation.

    2. Covenants Not To Compete

      1. Milhous (SBE, 2000).

        1. 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 California.

        2. Three-factor apportionment formula was applied.

      2. Proposed Regulation 17951-6 sets forth rules for the treatment of covenants not to compete.

  3. Sales And Use Tax

    1. Tangible vs. Intangible Property

      1. Preston v. SBE, 25 Cal. 4th 197 (2001).

        1. 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 taxable.

        2. 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 components.

        3. Dissent contended none of the proceeds should be taxable under the author's manuscript exception in Regulation 1501.

        4. How does this decision square with Navistar Int'l Transportation Corp. v. SBE, 8 Cal. 4th 868 (1994)?

    2. Nexus

      1. Assembly Bill No. 81 (Migden) – similar to last year's vetoed AB 2412.

        1. 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.

        2. 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.

        3. Pits independent booksellers against Barnes & Noble.com., Borders.com., etc.

    3. Drop Shipments

      1. Regulation 1706 adopted December 28, 2000.

        1. Governs sales and use taxation of drop shipments to California consumers.

        2. Regulation defines the relationship of parties to a drop shipment; describes a drop shipment transaction; provides mark-up rules.

        3. Rules are being further refined by the State Bar Tax Section and the SBE staff.

    4. Occasional Sales

      1. Regulation 1595 was amended to exempt a service enterprise's first two sales during any 12-month period.

    5. Annotations

      1. Regulation 5200 promulgated to explain the application and precedential value of annotations.

    6. Sales For Resale

      1. Modern Paint and Body Supply, Inc. v. SBE, 87 Cal. App. 4th 703 (2001).

        1. Auto paint and body supplier liable for sales tax on supplies sold to auto paint and body shops.

    7. Gifts

      1. Hewlett Packard Company (SBE, 2000).

        1. 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.

        2. Yamaha Corp. of America v. SBE, 73 Cal. App. 4th 338 (1999) distinguished based on the evidence.

    8. Bad Debts

      1. WFS Financial (SBE, 2000).

        1. 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.

      2. RTC § 6055 amended to specifically allow for lenders to claim bad debt deductions under certain circumstances.

      3. Regulation 1642 is being amended in accordance with the new provisions in RTC § 6055.

  4. Property Tax

    1. Update on RTC § 469 Cases.

      1. 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.

      2. Heavenly Valley Ski Resort v. El Dorado County, 84 Cal. App. 4th 1323 (2000).

        1. 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.

      3. Apple Computer, Inc. v. County of Santa Clara, et al., (Santa Clara County Superior Court Docket No. CV 786738, March 2001).

        1. 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 audit correctly.

      4. IBM v. County of Santa Clara, et al. (Santa Clara County Superior Court Docket No. CV 774632, March 2001).

        1. 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.

  5. City Tax

    1. Union Oil Company v. City of Los Angeles, 79 Cal. App. 4th 383 (2000).

      1. 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.

    2. General Motors Corporation, et al. v. City and County of San Francisco

      1. San Francisco's gross receipts and payroll expense taxes held to be unconstitutional in a series of appellate and trial court decisions.

      2. Tentative settlements have been reached.

  6. Miscellaneous

    1. Geneva Towers Limited Partnership v. City and County of San Francisco, Supreme Court No. S090136

      1. 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.

      2. 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 limitations period.

      3. 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.

      4. Both the FTB and SBE support the taxpayer's position before the California Supreme Court.

    2. 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.

    3. 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.

      1. AB 49 is a prime example.

    4. Senate Revenue and Taxation Committee passed electricity windfall profit tax (SB 1).

    5. FTB and SBE Members may be changing.

      1. 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.

    6. Practitioner-Client Communications

      1. 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).


  1. Corporate Income Tax

    1. State of Alaska, Department of Revenue v. DynCorp, 14 P. 3d 981 (2000)

      1. 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.

      2. 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 Alaska.

      3. 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 unanticipated workload.

    2. State of Alaska v. Louisiana-Pacific Corporation, Supreme Court No. S-09198

      1. Suit for erroneous refund pending before the Alaska Supreme Court.

      2. Case involves the question whether under Alaska law a claim for refund is timely if filed within a federal waiver period.

      3. 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.

      4. There is Alaska case law allowing for the issuance of assessments on unitary issues within the federal waiver period.

      5. 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.

      6. Alaska statutes incorporate by reference the IRC waiver provisions for both assessments and refunds.

      7. The trial court ruled in favor of the State.

      8. Case was argued before the Supreme Court in April 2000.

      9. On May 4, 2001, the Alaska Supreme Court handed down its decision.

        1. Federal waivers extend the state statute of limitations for assessments and claims with respect to issues which are purely state issues (e.g., allocation and apportionment).

        2. Restricted federal waivers only extend the state statute of limitations for the designated issues in the federal waivers.

  2. Personal Income Tax

    1. House Republican Proposes Personal Income Tax

      1. 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 a hearing.

  3. Sales Tax

    1. Anchorage Tax Rejected.

      1. 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 voters.


  1. Procedures

    1. Pay to Play Repealed.

      1. 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.

      2. Applies to appeals of income, general excise, use, fuel, liquor, tobacco and conveyance taxes.

  2. Legislation

    1. Gross Income Tax.

      1. 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.

    2. Corporate Rates.

      1. 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 taxpayers.

    3. Lawmaker Proposes Income-for-Excise Tax Swap

      1. 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.

  3. Rulings

    1. Corporate Income Tax.

      1. Tax Information Release No. 2001-1, Hawaii Department of Taxation, January 17, 2001.

        1. 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 specifically exempted.


  1. Rulings

    1. Corporate Income Tax.

      1. AIA Services Corp. v. State Tax Commission (Supreme Court, May 4, 2001).

        1. Insurance company not required to be combined with its parent (noninsurance) company.

        2. Insurance company paid gross premiums tax to Idaho.

        3. 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 statute.

        4. The Court rejected constitutional arguments raised by the taxpayer because they were being raised for the first time on appeal.

      2. Decision No. 13772, Idaho State Tax Commission, January 21, 2000.

        1. 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.

        2. 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 laws.

        3. 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.

      3. Decision No. 14379, Idaho State Tax Commission, January 24, 2001.

        1. 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 election.

  2. Legislation

    1. Income Tax.

      1. 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 individual.

      2. 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.

      3. 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%.

      4. 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.

    2. Sales and Use Tax.

      1. 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 would:

        • 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 claims; and

        • delete excess language and correct a cross-reference.

  3. Regulations

    1. Corporate Income Tax.

      1. 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.

      2. 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.

      3. 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.

      4. 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.

      5. The foregoing regulations (rules) were generally effective April 5, 2000.

  4. Miscellaneous

    1. Opinion of the Idaho Attorney General, No. 00-1, September 21, 2000

      1. 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.

      2. 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.

      3. 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 reduced rate.


  1. Legislation

    1. HB 636

      1. 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.

      2. 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%.

      3. If approved by the Senate and signed by Governor Judy Martz (R), the bill would be sent to the electorate in November.

    2. B. SB 39

      1. 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.

    3. Governor Would Eliminate Tax on Business Equipment

      1. 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.

  2. Regulations

    1. ARM 42.2.103, 42.2.104, and 42.2.106, Montana Department of Revenue, effective May 26, 2000.

      1. 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.


  1. Legislation

    1. AB 455 – The Uniform Sales and Use Tax Administration Act

      1. The product of the Streamlined Sales Tax Project was referred to Assembly committee on March 19, 2001.

    2. AB 53

      1. Proposed legislation would repeal business tax under certain conditions.

    3. S.J.R. 20

      1. 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.

      2. 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;

          "(b) Restricts the eligibility for the exemption solely to the intended beneficiaries of the exemption;

          "(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 pledged; and

          "(e) Ensures that the requirements for claiming the exemption are as similar as practicable for similar classes of taxpayers.

        "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."

  2. Litigation

    1. Business License Tax

      1. Rogers et al. v. Heller, 18 P. 3d 1034 (2001)

        1. 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.

        2. 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.

        3. 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.

    2. Sales and Use Tax

      1. Nevada Tax Commission v. Nevada Cement Co., 8 P. 3d 147 (2000).

        1. 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.

        2. 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 proceedings.


  1. Litigation

    1. Corporate Excise Tax

      1. Williamette Industries, Inc., et al., 15 P. 3d 18 (2000).

        1. 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 "business income."

        2. 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.

        3. 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.

        4. 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.

      2. AT&T v. Department of Revenue, Oregon Tax Court, CCH ¶ 400-341, August 31, 2000

        1. 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.

        2. 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 denominator.

        3. 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.

        4. 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 constitutional rights.

        5. 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 applicable.

        6. 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.

      3. Pennzoil Co. and Subsidiaries v. Department of Revenue, 15 Or. Tax 101 (2000)

        1. 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 tax.

        2. The Tax Court applied both a transactional test and a functional test to determine whether the settlement proceeds were business income apportionable to Oregon.

        3. 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.

        4. 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.

        5. 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.

        6. 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.

      4. Terrace Tower U.S.A., Inc. v. Department of Revenue, 15 Or. Tax 168 (2000)

        1. 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.

        2. 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 tax.

    2. Procedures

      1. Preble v. Department of Revenue, 19 P. 3d 335 (2001).

        1. 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 Prebles appealed.

        2. 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.

      2. IBM Corp. v. Department of Revenue, 15 Or. Tax 162 (2000)

        1. 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.

        2. 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.

      3. Lowry v. Department of Revenue, Oregon Tax Court, CCH ¶ 400-346, October 5, 2000

        1. 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.

    3. City Tax

      1. City of Portland v. Vernon Cook, 12 P. 3d 70 (2000).

        1. 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.

        2. 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 violation.

  2. Legislation

    1. Maximum Credit Must Be Taken Each Tax Year

      1. 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, Laws 2001)


  1. Legislation

    1. Sales and Use Tax

      1. SB 74 – The Uniform Sales and Use Tax Administration Act

        1. Governor Leavitt signed SB 74 on March 15, 2001, giving the legislation immediate effect.

      2. Ch. 303 (HB 242), Laws 2001, effective April 30, 2001

        1. 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 repealed.

    2. Income Tax

      1. HB 158

        1. 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.

      2. HB 127

        1. The Utah House of Representatives on February 13, 2001 approved a 1 percentage point reduction in the state capital gains tax.

    3. Interest Rates

      1. Tax Bulletin, No. 14-00, Utah State Tax Commission, January 2001

        1. 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%).


  1. Litigation

    1. Business and Occupation Tax

      1. General Motors v. City of Seattle (Court of Appeal, May 7, 2001).

        1. 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 the City.

        2. Each had independent dealers in Seattle.

        3. Substantial nexus found to exist due to the following:

          1. Companies directed national advertising to Seattle.

          2. Companies sent sales, service and parts managers to Seattle on a regular basis.

          3. Companies employed Seattle dealers to market warranties that serves an important marketing function.

        4. 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 separately.

      2. Simpson Investment Co. v. State of Washington, Dept. of Revenue, 3 P. 3d 741 (2000)

        1. 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.

        2. 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.

        3. 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 subsidiaries.

        4. 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.

        5. 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.

        6. 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 financial business.

      3. Kalama Chemical, Inc., et al. v. State of Washington, Dept. of Revenue, 9 P. 3d 236 (2000)

        1. 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. Constitution.

        2. 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 unlawfully collected.

        3. 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 exemption unconstitutional.

        4. 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 compensation.

      4. The Stroh Brewery Co. v. State of Washington, Department of Revenue, 15 P. 3d 692 (2001)

        1. 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 representative.

        2. 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 establishment.

        3. 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.

      5. Brooks Sports, Inc. v. State of Washington, Dept. of Revenue, Washington Board of Tax Appeals, CCH ¶ 202-281, June 6, 2000

        1. 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 gain.

        2. 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 payments.

        3. 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.

      6. Foster Pepper & Shefelman v. State of Washington, Dept. of Revenue, Washington Board of Tax Appeals, CCH ¶ 202-287, July 12, 2000

        1. 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.

        2. 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.

        3. 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.

        4. 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.

      7. Cimlinc, Inc. v. State of Washington, Dept. of Revenue, Washington Board of Tax Appeals, CCH ¶ 202-296, September 5, 2000

        1. 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.

        2. 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.

        3. 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.

      8. Det. No. 00-027 (2000)

        1. 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 occupation tax.

    2. Sales and Use Tax

      1. Dynamic Information Systems Corp. v. State of Washington, Dept. of Revenue, Washington Board of Tax Appeals, CCH ¶ 202-318, December 28, 2000

        1. 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.

        2. 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 California.

        3. 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.

      2. Det. No. 00-103 (2001)

        1. 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.

    3. Property Tax

      1. Woodward Canyon Winery v. Larry Shelley, Washington Board of Tax Appeals, CCH ¶ 202-314, February 1, 2001

        1. 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."

  2. Legislation

    1. Study of Tax System

      1. Substitute SB 6098

        1. 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, 2002.

        2. 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.

  3. Interest Rates

    1. Research Report No. 2000-2, Washington Department of Revenue, October 18, 2000

      1. 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%.


  1. Legislation

    1. Sales and Use Tax

      1. HB 259 (enacted March 1, 2001)

        1. 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 transaction.

    2. Procedures

      1. HB0148 – proposed legislation to amend W.S. 39-11-102.1(c)(x)

        1. 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.

  2. Litigation

    1. Property Tax

      1. RT Communications Inc., et al. v. State Board of Equalization, et al., 11 P. 3d 915 (2000)

        1. 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 values.

        2. 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.

        3. 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.

    2. Sales and Use Tax

      1. Wyoming Department of Revenue v. Buggy Bath Unlimited, et al., 18 P. 3d 1182 (2001)

        1. 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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