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In a non-precedential, summary decision released May 3, 2012, the California State Board of Equalization (the Board) held that a foreign corporation with only one employee in California was “doing business” in the state and thus was subject to California’s corporation franchise tax. Appeal of Warwick McKinley, Inc., Cal. Bd. of Equal., Jan. 11, 2012 (released May 3, 2012). While California recently expanded its statutory definition of “doing business” in California Revenue and Taxation Code (CRTC) section 23101(b) to include a factor presence nexus test, the Board in Appeal of Warwick McKinley, Inc. focused on CRTC section 23101(a), which defines “doing business” to mean “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”Continue Reading California Nexus: Not in My House!

On August 21, the California State Senate passed AB 2323, requiring the State Board of Equalization (BOE) to issue written opinions in cases where the amount in controversy exceeds $500,000. If the Governor signs the legislation as expected, the BOE will be required to publish written, formal memorandum or summary opinions on its website within…

For the first time in 50 years, the California Supreme Court is revisiting the issue of the proper application of the property tax to intangible assets. In Elk Hills Power, LLC v. California State Board of Equalization, Case No. S194121, the court will address whether the California State Board of Equalization (the Board) may assess Elk Hills’ intangible Emission Reduction Credits (ERCs). In Elk Hills, the Board treated the ERCs as “necessary” to put a power plant to “beneficial or productive use” and thus taxable for property tax purposes. Because many businesses use intangible assets that are “necessary” to the conduct of their businesses (e.g., trademarks, trade names, franchises, licenses, customer relationships, patents, and copyrights), the case has attracted attention across a broad spectrum of the California business community.Continue Reading California Supreme Court Considers Case to Allow Property Tax on Intangible Assets

In the latest edition of A Pinch of SALT, Sutherland SALT’s Carley Roberts, Prentiss Willson and Maria Todorova discuss the California Franchise Tax Board’s recent chief counsel ruling stating that California’s alternative apportionment provisions do not apply to the combined group’s intrastate apportionment results.

Read “Intrastate Apportionment: Ripe for Equitable Relief?”…

The California State Board of Equalization (BOE) held an interested parties meeting on July 17, 2012, to discuss whether to amend its Regulation 1507 (Technology Transfer Agreements (TTA)) to clarify how the TTA statutes (Cal. Rev. and Tax Code §§ 6011(c)(10) and 6012(c)(10)) should apply to transfers of computer programs on tangible storage media. Under California law, the value of intangible property transferred under a TTA is excluded from the sales or purchase price under the Sales and Use Tax Law.

At the outset of the meeting, the BOE discussed the background of the TTA statutes and identified key issues for discussion. The background and key issues, as well as the comments from interested parties, are summarized below. Written comments will be accepted until August 1, and the BOE Business Taxes Committee will receive an update on the interested parties process at its meeting on August 21-23. A second interested parties meeting currently is scheduled for September 6.

  1. The Legal Department does not read Nortel v. State Bd. of Equalization as exempting all prewritten software. It believes Nortel is limited to its facts. Nortel held that the right to “use a process” subject to a patent, when combined with the transfer of tangible personal property, qualifies as a TTA even when the “process” is prewritten computer software.
  2. The TTA statutes only provide TTA treatment to agreements where the holder of the copyright or patent transfers a patent or copyright interest to third parties. Thus, the holder of the patent or copyright interest must be the transferor. Nonetheless, the BOE indicated that it would be open to considering whether the “holder” requirement has been met through a licensing entity in a group of entities.
  3. The Legal Department believes prewritten and canned computer programs transferred on TPP are TPP. Thus, software development costs should be included within the value of the taxable tangible personal property transferred under a TTA.
  4. The Nortel court did not invalidate the provision of Regulation 1507 that requires patented processes to be external to the tangible personal property, necessarily excluding embedded software from TTA treatment.
  5. If a TTA is created based on the transfer of a copyright interest, the copyright interest must provide the right to make and sell a product subject to the copyright interest for TTA treatment.
  6. The Nortel case did not address the measure of tax related to the TTA because the parties stipulated to the value of the tangible personal property. Thus, there was no guidance on which costs to include in determining the value of the tangible personal property based on the statutory test of 200% of the cost of labor and materials used to produce the tangible personal property.
  7. The BOE does not intend to change its position that software development costs are included in the value of the tangible personal property transferred under a TTA because that would be compromising its position in Lucent, which is at the superior court.

Continue Reading California BOE Holds Interested Parties Meeting on TTA Regulation

The California Supreme Court reversed the appellate court’s decision regarding the Franchise Tax Board’s (FTB) authority to conduct an audit to determine whether a taxpayer is entitled to an enterprise zone hiring credit. DiCon Fiberoptics, Inc. v. Franchise Tax Bd., Case No. S173860 (Apr. 26, 2012).

California’s Enterprise Zone Act (the Act) permits a taxpayer that employs a “qualified employee” in an enterprise zone to claim a tax credit for five years. To be a “qualified employee,” at least 90% of the employee’s services must “directly relate[ ] to the conduct of the taxpayer’s trade or business located in an enterprise zone,” and the employee must perform at least 50% of his or her services in the enterprise zone. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A). In addition, the employee must fall within one of several categories that demonstrate the employee is disadvantaged or endures some form of employment barrier. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A)(iv). To claim the credit, taxpayers are required under the Act to: (1) obtain from the local zone government authority a certification (or “voucher”) that provides the qualified employee meets the eligibility requirements; and (2) retain a copy of the certification and provide it upon request to the FTB. Cal. Rev. & Tax. Code § 23622.7(c).Continue Reading Franchise Tax Board’s Broad Audit Authority to Review Returns and Ascertain Correct Amount of Tax Underscored in Enterprise Zone Hiring Credit Decision by California Supreme Court