On July 28, 2020, the D.C. Council approved the Fiscal Year 2021 Budget Support Act of 2020 (“BSA”), which establishes the budget’s tax provision changes.  The prior week, the D.C. Council approved the Fiscal Year 2021 Local Budget Act of 2020, which sets the budget’s expenditures.  This year’s most notable event was the advertising service tax near miss.  But the budget still contains numerous less-discussed tax changes, including amendments to personal property tax exemptions, the sales tax base, and the Qualified High Technology Company program incentives.  And beyond this year’s budget, taxpayers should expect further changes later this year to account for the ongoing COVID-19-sized revenue gap.

What’s In the Budget?

This year’s substantial tax changes include:

  • Greatly limiting Qualified High Technology Company incentives, including: (1) repealing the personal property tax exemption; (2) requiring QHTCs to have 10 (increased from 2) or more qualified employees in the District; and (3) repealing the reduced corporate franchise tax rate;
  • Imposing sales tax on off-premises sales of spirituous or malt liquors, beers, and wine at the rate of 9%;
  • Exempting from personal property tax certain computer software;
  • For the unincorporated business franchise tax, including in “taxable income” “gain from the sale or other disposition of any assets, including tangible assets and intangible assets, including real property and interests in real property, in the District, even when such a sale or other disposition results in the termination of an unincorporated business”;
  • Delaying the FAS 109 deduction until 2025;
  • Imposing a tax and a local transportation surcharge on motor vehicle fuels sold or otherwise disposed of by an importer or by a user, or used for commercial purposes;
  • Providing income tax benefits to taxpayers that invest in a Qualified Opportunity Fund (“QOF”), including the deferral of a capital gains tax payment for investing in a QOF, reduction of capital gains tax liability through a 10% step-up in basis, and abatement of capital gains tax on an investment of capital gains in a QOF;
  • Abating real property tax for affordable housing in high-need affordable housing areas;
  • For a decedent whose death occurs after December 31, 2020, reducing the amount of the unified credit for the estate tax to $1,545,800 (previously $2,185,800), increased annually, beginning with the year commencing on January 1, 2022, by the cost-of-living adjustment; and
  • For a decedent whose death occurs after December 31, 2020, reducing the estate tax zero bracket amount to $4 million (previously $5.6 million), increased annually, beginning with the year commencing on January 1, 2022, by the cost-of-living adjustment.

 What’s Out of the Budget?

On July 28th, the D.C. Council formally eliminated the advertising service and personal information sales tax proposal.  Since this tax expansion became public on July 6th and voted on for the first time on July 7th, it faced massive scrutiny from the business community.  Ultimately, the D.C. Council opposed the tax because of its deleterious impact on small, local newspapers.

What’s Next for the Budget?

The BSA will next be sent to the Mayor for approval or veto.  It will then be sent to Congress for a 60-day period of passive review.  But the D.C. Council expects to revisit the budget in a couple of months after it understands the full impact of the COVID-19 pandemic.  It is an open question which tax changes the D.C. Council might propose at that time.  Given the strong opposition to the advertising services tax, it is unlikely that it would resurface for so long as it impacts local media.  But there is a risk that the D.C. Council would pursue personal income tax rate increases (which Councilmember Allen had proposed as an amendment to the BSA on July 7th).

The Eversheds Sutherland SALT Team will continue to track the District of Columbia’s tax changes this year, as the D.C. Council may soon need to choose between tax increases, budget cuts, or both.

In a forthcoming article in State Tax Notes, Eversheds Sutherland SALT partner Jeff Friedman and associate Dennis Jansen explore the issues with A.B. 2570 – California’s latest attempt to extend the state’s whistleblower statute to tax claims.

The bill is purportedly designed in increase revenues by targeting tax fraud. However, instead of exposing tax cheats, this proposal likely will primarily benefit a cottage industry of law firms that specialize in filing predatory shakedown lawsuits against unsuspecting businesses.

A.B. 2570, would amend the California False Claims Act (CFCA) to allow private parties to bring lawsuits on behalf of the state alleging tax violations, known as qui tam actions. These types of lawsuits are ripe for abuse because businesses will be coerced to settle or face the prospect of the CFCA’s financially devastating penalties and the legal costs associated with responding even to frivolous claims. A similar bill, A.B. 1270, failed last year after widespread opposition from California’s business community.

Lawmakers say that A.B. 2570 will increase tax collections, citing $470 million collected by New York after it extended its whistleblower statute to tax claims in 2010, and revenues generated by the IRS’s whistleblower program. However, for the reasons explored in this article, A.B. 2570 is unlikely to meet its lofty revenue projections. Similar measures in other states have failed to generate meaningful revenues while miring both businesses and the state in costly litigation.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This Week’s Question: 

The Supreme Court recently determined that the eastern half of this state primarily consists of Native American reservations, which could have significant SALT implications.

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $20 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

This is the second edition of the Eversheds Sutherland SALT Scoreboard for 2020. Since 2016, we have tallied the results of significant taxpayer wins and losses and analyzed those results. This edition of the SALT Scoreboard includes a discussion of the Mississippi Supreme Court’s decision on agency deference, insights regarding the First Amendment’s application to Cincinnati’s billboard tax and a spotlight on New York cases.

 View our Eversheds Sutherland SALT Scoreboard results from the second quarter of 2020 now!

Meet Burrito! This adorable pup belongs to Kelly Moriarty, Product Manager at Stripe. Almost eight years old, Burrito is a mixed-breed pup with all the fixings. Some of those ingredients include chicken, veggies, rice, black beans, guac, sour cream and salsa – or wait, maybe that was lunch…

But seriously, Burrito’s heritage is still unknown. A DNA test came back inconclusive, and the company had no answers for Kelly and Burrito. So Kelly likes to consider her a mix, between a German Shepherd, a Corgi, and a bat (she has GIANT ears!).

It would be easy to assume that Burrito’s favorite type of food is Mexican, but that would be wrong. She loves all food, but her absolute favorite is Brazilian BBQ. Kelly’s partner is Brazilian, so Burrito often reaps the spoils when he grills!

In addition to eating, Burrito loves to play fetch, and no area is too small for her to run after a ball. She also enjoys doing tricks, and is great at “roll over,” and finding a ball or hidden toy that is out of sight using only her nose.

Not only is she great at finding hidden objects, Burrito also excels at hiding items too. She loves to steal and bury Kelly’s socks around the house. She won’t tear any holes or destroy them, but Burrito loves to hide Kelly’s socks in the most random places. Maybe it’s her way of getting Kelly back for hiding her balls and toys.

In this episode we discuss the top ten issues that should be considered when evaluating and implementing marketplace collection laws. It is excerpted from the third in our series of webcasts on marketplaces. In the prior two webcasts, we talked about marketplace collection legislative changes in the first one and the marketplace litigation cases and other developments in the second one.

Webcasts:

Listen to the hour-long version of this third episode in our webcast series here.

Episode One: “Behind the Eight Ball – A Look at the Past and Present State of Marketplace Laws”

Episode Two: “Stuck in the Middle Again: Latest Developments in Online Marketplace Litigation

 

Listen Now:

Subscribe to our Podcast for more: 

  

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This Week’s Question:
Which Founding Father was granted a tax incentive from New Jersey—a 10-year property tax exemption—to establish his manufacturing company in the state?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $20 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

The Pennsylvania Commonwealth Court issued its much-anticipated decision on July 24 in Synthes USA HQ Inc. v. Commonwealth of Pennsylvania.

  • The Court upheld the Department of Revenue’s position that under the State’s pre-2014 costs-of-performance (COP) statute, service providers were required to apportion their receipts based on where customers received the benefit of the services, rather than where the costs of performing the service were incurred.
  • In so holding, the court rejected the Attorney General’s position that the Department’s benefits-received interpretation was incorrect and ordered the Department to issue a refund to the taxpayer.
  • Although the Pennsylvania legislature amended the COP statute to expressly require a benefits-received sourcing methodology effective with the 2014 tax year, this decision has implications for service providers that have open years prior to 2014 or businesses with certain other receipts, such as receipts from licensing intangibles, that continue to be sourced in accordance with the pre-2014 COP statute.

Read the Full Legal Alert

The California Court of Appeal held that California income tax applies to the entire amount of trust income that is derived from California sources, even though a trust is managed in part by a non-resident trustee. The taxpayer had requested a refund on income taxes paid on capital gains, claiming that the income was incorrectly sourced to California. The taxpayer argued that under Section 17743 of the Revenue and Taxation Code, the gain should be sourced to California based on the proportion of trustees that were resident in California, without regard to the source of the income. Taxpayer also argued that Section 17041, subdivision (i) of the Revenue and Taxation Code, which provides that gross income of nonresident taxpayers are subject to tax if such income is derived from sources within California, did not apply to trusts because the term “resident” did not include trusts.

The California Court of Appeal disagreed with the taxpayer, holding that the Revenue and Taxation Code requires treating individuals and trusts similarly. The Court cited to section 17743 of the Revenue and Taxation Code, which incorporates the trust provisions of the federal Internal Revenue Code, and Section 17041, subdivision (e) of the Revenue and Taxation Code, which mandates that a trust’s taxable income must be calculated in the same way as if the trust were an individual. Further, the Court cited to the condition of Section 17743 of the Revenue and Taxation Code that it only apply where taxability “depends on the residence of the fiduciary.” The Court concluded that, according to Section 17041, subdivision (i), the taxability of gross income only depends on the residence of the taxpayer or fiduciary when the income is derived from a source outside of California. This case represents one of several recent state tax cases, many with different outcomes, ruling on the sourcing of income from trusts.

Steur v. Franchise Tax Board, No. A154692 (Cal. Ct. App. June 29, 2010).


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The California Department of Tax and Fee Administration adopted an emergency regulation to clarify and resolve specified issues with the California Marketplace Facilitator Act (CMFA), as amended. The regulation clarifies, among other things, the registration requirements for marketplace facilitators and marketplace sellers and provides definitions for terms left undefined by the CMFA and relevant examples. As an emergency regulation, it will remain in effect for two years following its June 29, 2020 effective date.