On November 4, 2022, the Washington Department of Revenue adopted WAC 458-20-290, a regulation explaining the state’s workforce education investment surcharge on select advanced computing businesses. The regulation defines a select advanced computing business as “a person who is a member of an affiliated group with at least one member of the affiliated group engaging in the business of advanced computing, and the affiliated group had worldwide gross revenue of more than $25,000,000,000 during the immediately preceding calendar year.” Such businesses must report and pay the 1.22 percent surcharge on a quarterly basis, with the report due on the last day of the month following the end of the quarter.

The surcharge does not apply to hospitals and provider clinics and their affiliated organizations, or a business primarily engaged as a(n):

  • Financial institution;
  • Owner (or lessor) and operator of transmission facilities and infrastructure for the transmission of voice, data, text, sound, and video using wired telecommunications networks; or
  • Commercial mobile service provider.

Notably, the regulation imposes a requirement on businesses believed to be engaging in advanced computing, or affiliated with such a business, to disclose whether they are a member of an affiliated group and, if so, to identify all other members of the affiliated group. The regulation also imposes a 50 percent evasion penalty for those members of an affiliated group that intentionally fail to comply with the surcharge.

WAC 458-20-290 effective November 28, 2022.

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 state is the only state to designate its highest court as the “Court of Appeals?”

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

The prize for the first response to today’s question is a $25 UBER Eats gift card. Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

The U.S. Court of Appeals for the Ninth Circuit held that the City of Reno was not entitled to file a lawsuit against streaming video providers for franchise fee payments. Reno sought damages for the streaming services providers’ alleged failure to collect franchise fees under Nevada’s Video Service Law. The court held that the law does not create a private right of action for cities to sue for unpaid franchise fees. Reno therefore failed to state a claim against the streaming service providers. Additionally, Reno failed to state a claim under the federal Declaratory Judgment Act because it sought affirmative relief and lacked a cause of action under a separate statute. Because Reno lacked a cause of action, the court declined to address the substantive question of whether the streaming video providers met the definition of a “video service provider” under the law.

City of Reno v. Netflix, Inc. et al., No. 21-16560 (9th Cir. Oct. 28, 2022)

From November 14 through 17, the Multistate Tax Commission (MTC) held its annual Fall Meetings in Little Rock, Arkansas. The MTC’s Uniformity, Executive, Strategic Planning, Audit, Litigation, and Nexus Committees met during the week. The Uniformity Committee meeting included the following topics:

  • Digital products
  • Apportionment
  • Multistate Power of Attorney
  • Marketplace updates

Read the full Legal Alert here.

On August 31, 2022, the California Office of Tax Appeals (“OTA”), in the Matter of the Appeal of B. Housman and B. Pena, held that an Australian software company holder, Housman, and his wife are California residents and Housman is entitled to a stepped-up basis as a result of a valid check-the-box election to be classified as a partnership for federal and California income tax purposes.

Housman, an Australian citizen, formed an entity in Australia in 2000. In 2008, Housman and his wife moved to San Francisco, intending to stay for an indeterminate period of time. In 2009, Adobe Systems purchased Housman’s software-as-a-service company, a subsidiary of the entity, for $22.5 million. The California Franchise Tax Board (FTB) and the couple disagreed on how much tax was owed as a result of the sale.

The OTA denied the couple’s argument that they were entitled to a $4.7 million refund as they were California residents at the time the company was sold. The OTA found that, although the couple continued to own a house in Australia after moving to San Francisco in 2008 and contended that their presence in California was intended to be temporary, the couple remained in California for a relatively long or indefinite period of time and had significant connections in California which was not temporary or transitory in nature.

The OTA, however, did agree with Housman that he was entitled to a stepped-up basis from 2008 to offset the $1.4 million in capital gains resulting from the sale of the company to Adobe in 2009. The OTA determined that the company in question made a valid check-the-box election to be classified as a partnership for federal and state tax purposes that took effect on April 1, 2008. The OTA rejected the FTB’s argument that the partnership election did not qualify Housman for the stepped-up basis because the entity did not operate in the United States, stating that “the regulation does not address whether the entity itself is relevant, but whether the classification of the entity is relevant.” (emphasis added) The OTA further found that the appraisal, from which the basis was determined, is reasonable and consistent with revenue rulings.

As such, the OTA found that Housman is entitled to a stepped-up basis as result of a valid check-the-box and any additional penalties and interest were waived.

In re Housman, Cal. Office of Tax App., No. 18010200, 8/31/22

The California Office of Tax Appeals held that a taxpayer was a California resident and domiciliary when he redeemed shares of his Tennessee-based employer in 2012. Accordingly, the taxpayer was assessed additional state income tax on the value of the redeemed shares.

In 2008, the taxpayer moved from California to Tennessee and purchased a home. From 2008 – 2011, the taxpayer was domiciled in Tennessee and was involved in a Tennessee based business. In 2012, the taxpayer became engaged to a California resident, purchased a home in California to remodel, sold his Tennessee home, and paid a portion of his fiancé’s rent. The taxpayer argued that he was Tennessee resident during all of 2012 and only temporarily in California to visit his fiancé and remodel the California property. The OTA however found that the taxpayer’s strongest ties were to California at the time of the sale of the Tennessee business, based on a number of factors, such as the taxpayer maintained a permanent home in California, his fiancé was located in California and had no intention of moving, and the taxpayer spent more time in California than Tennessee. Additionally, the taxpayer did not file a Tennessee tax return during 2012 to report certain investment income subject to tax in Tennessee.

In the Matter of the Appeal of Beckwith, 2022-OTA-332P (Cal. Office of Tax Appeals 2022).

On the SALT Shaker Podcast this week, Eversheds Sutherland Associate Jeremy Gove invites fellow Associate Cyavash Ahmadi to the show for a discussion of the state taxation of cryptocurrency and digital assets. They begin with an overview of how state taxes have previously dealt with new technology, as well as a primer on the various terms that are used in the crypto space. They then take a deeper dive into the sales tax and income tax aspects of cryptocurrency and digital assets.

They wrap with an important, holiday-themed overrated/underrated question: stuffing.

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

 

 

 

 

 

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The Multistate Tax Commission (MTC) held its annual Fall Meetings in Little Rock, Arkansas (Eversheds Sutherland attorneys attended the meeting, and a full report of the meetings will be provided). On Thursday, November 17, the MTC Executive Committee dissolved the State Intercompany Transactions Advisory Service (SITAS) Committee. The Committee’s purpose of facilitating information sharing and dialogue among interested states, as well as sponsoring training with respect to intercompany transactions, will now be managed through the MTC’s Audit and Litigation Committees.

Read the full Legal Alert here.

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 state tax organization recently unveiled a new mentorship program?

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

The prize for the first response to today’s question is a $25 UBER Eats gift card. Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

On October 31, 2022, the Illinois Department of Revenue released new guidance providing clarity on the treatment of cryptocurrency. The Department’s guidance provides that Illinois conforms to the federal tax treatment of treating cryptocurrency as property. The new guidance also states that, for purposes of the applicability of Public Law 86-272 to an out-of-state company that sells cryptocurrency to customers in Illinois, the transaction will be treated as a sale of intangible property. In addition, the Department clarified that for apportionment purposes, the sale of cryptocurrency will be treated as a sale of intangible property for purpose of computing the sales factor. And, if an employee is paid with cryptocurrency, the fair market value of the cryptocurrency is subject to withholding and payroll taxes. A payment using cryptocurrency, however, is not subject to the same information reporting requirement as other payments made in property.

Illinois Dept. of Rev. General Information Letter IT 22-0010-GIL (July 15, 2022).