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On December 1, 2011, the California Franchise Tax Board (FTB) approved Proposed Regulation 25136-2, which implements a market rule for sourcing receipts from sales of services and intangibles for those taxpayers electing a single sales factor apportionment formula. The Proposed Regulation now moves to the Office of Administrative Law to be finalized. The FTB’s decision follows a nine-month interested parties process and a regulatory process that began in June 2011.

Proposed Regulation 25136-2 applies a series of cascading rules, establishing separate rules for receipts from: 

  1. Sales of services to individual customers; 
  2. Sales of services to businesses; 
  3. Complete sales of intangibles; and 
  4. The licensing, leasing, rental, or other use of intangibles.

Continue Reading California Franchise Tax Board Decides Fate of Proposed Market Sourcing Regulation

On December 1, 2011, the Franchise Tax Board (FTB) decided to begin a formal regulatory process on numerous proposed regulations¸ including Proposed Regulation 25106.5, implementing the Finnigan Rule, codified in Cal. Rev. & Tax. Code § 25135(c); and Proposed Regulation 25106.5-1, modifying the rules governing Deferred Intercompany Stock Accounts (DISAs). The FTB staff’s…

In a reminder that there are limits on the retroactive application of tax laws, a California Superior Court rejected the Franchise Tax Board’s attempt to impose retroactive penalties on a tax shelter promoter. Quellos Fin. Advisors, LLC v. Franchise Tax Bd., Case No. CGC-09-487540 (San Francisco Super. Ct., Tentative Statement of Decision, Oct. 31, 2011).

Quellos was promoting the allegedly abusive tax shelter in 2001. California law tied the amount of the applicable penalty to that in I.R.C. § 6700, which established a maximum penalty of $1,000. Cal. Rev. & Tax Cd. § 19177. In 2003, California amended section 19177 to substantially increase the promoter penalty from $1,000 to 50% of the income derived by the promoter from the tax shelter promotion activity. The FTB assessed the 50% promoter penalty against Quellos in November 2009 for its promotion activities alleged to have occurred in 2001. Quellos argued that the pre-2003 law imposed a maximum penalty of $1,000 and the 2003 amendment could not be applied retroactively to Quellos’s 2001 activities.Continue Reading Promoter Finds Shelter in California Court: Court Rejects FTB’s Retroactive Imposition of Tax Shelter Promoter Penalty

The Franchise Tax Board (FTB) recently issued guidance on California’s updated “doing business” provision for California corporate income tax purposes. FTB Notice 2011-06 (Oct. 12, 2011).  This guidance clarifies recent amendments that specify when the Chief Counsel may issue a ruling regarding whether a taxpayer is doing business in the state. 

Effective January 1, 2011…

California’s unique political system can be a mystery to those unfamiliar with its idiosyncrasies. However, a basic understanding of some important California political tenets can pay huge dividends. There are two key tools for protecting important policy interests in California: (1) the initiative measure; and (2) the referendum.

An initiative measure is a policy proposal that is placed on the ballot for public vote. An initiative measure is generally used when there are political barriers to legislation, but broad public support exists for the proposed policy. Initiatives have few legal restrictions, but generally they must only pertain to a single subject and comport with the United States Constitution.

A referendum measure is used to give voters an opportunity to approve or reject a recently enacted law. Proponents of a referendum are generally seeking repeal of recently enacted legislation. Thus, for a referendum to succeed, the statute being referred must have broad public opposition.Continue Reading The Tools of the Trade for Challenging California “Tax” Increases

Thomas Jefferson once described jury trials as “the only anchor yet imagined by man by which a government can be held to the principles of its constitution.” Jefferson would likely be disappointed by the California Supreme Court’s recent decision holding that taxpayers have no right to demand a jury trial in California income tax refund…

With all the drama and suspense of a Hollywood movie, California Governor Jerry Brown signed AB X1 28 on June 29—more than two weeks after the bill originally passed the California legislature. AB X1 28 has been controversial because it significantly expands California’s sales and use tax collection requirements by substantially incorporating all of the provisions of former AB 153 (click-through nexus), AB 155 (affiliate nexus), and SB 234 (constitutional nexus). Together, these changes combine California’s recent efforts to force remote sellers to collect California sales tax. To further complicate matters, AB X1 28 provides that these changes become effective immediately.

AB X1 28 amends California’s definition of “retailer engaged in business” for sales and use tax collection purposes, as set forth in Cal. Rev. & Tax Code § 6203, to include three new groups of “retailers” as follows.Continue Reading Nexus Explosion: California Governor Signs Bill Expanding California Sales Tax Collection Requirements

California’s Fourth Appellate District ruled that taxpayers must include the value of intangible emissions reduction credits (ERCs) when they determine the fair market value of an independent power plant’s property. Elk Hills Power, LLC v. Bd. of Equalization, No. D056943 (May 10, 2011). Elk Hills sets a disturbing precedent regarding the taxation of intangibles…