The California Court of Appeal, Second Appellate District ruled that the franchise fee, including a surcharge imposed by electric utility Southern California Edison (SCE) on its customers in Santa Barbara, pursuant to SCE’s agreement with the city, was not a tax requiring voter approval under Proposition 218. Dating back to 1959, SCE has had franchise agreements with Santa Barbara, allowing SCE the ability to distribute electricity to customers in the city through equipment running along, under and over the city’s streets in exchange for a franchise fee.  SCE and Santa Barbara agreed to a new franchise agreement in 1999, after five years of negotiations. Under the prior agreement, SCE was required to pay the city a fee equal to one percent of its gross annual receipts from the sale of electricity within Santa Barbara. Under the 30-year agreement entered into in 1999, SCE was required to continue paying the one percent franchise fee based on its gross receipts for the first two years, and for the remaining 28 years, include an additional one percent surcharge on customers’ bills, for a total franchise fee of two percent.

Customers initiated a class action following the imposition of the one percent surcharge, alleging that it was a tax imposed in violation of Proposition 218, which generally requires taxes imposed by local governments be subject to voter approval.  The plaintiffs filed suit in 2011 and the trial court ruled on cross-motions for summary adjudication that the surcharge was not a tax subject to Proposition 218. The Court of Appeal reversed in 2015, reasoning that because the primary purpose was to raise revenue, the surcharge was a tax.  In 2017 the California Supreme Court reversed the Court of Appeal, ruling that while all franchise fees raise revenues, only those that are not reasonably related to the services provided are taxes. The Supreme Court further found that the plaintiffs had alleged sufficient facts to overcome summary adjudication, but had not established their own right to summary adjudication, so the case was remanded to the trial court for further fact-finding. On remand, the trial court determined that Santa Barbara met its burden of proof by showing that the two percent franchise fee had a “reasonable relationship” to the value of the property interest Santa Barbara transferred to SCE.

In affirming the trial court’s decision, the appellate court determined that for purposes of analyzing Proposition 218 compliance, the entire two percent charge must be analyzed, and ruled that both the initial one percent included in the rates customers pay and the additional separately stated one percent surcharge, is a payment made in exchange for the property interest that SCE needs in order to provide electricity. The court went on to rule that Santa Barbara met its burden of establishing a reasonable relationship between the two percent charge and the franchise rights SCE paid for, and thus the fee was not a tax subject to Proposition 218.  In reaching that conclusion, the court noted there is no requirement of an actual relationship between the franchise right and the fee amount, only that two percent reasonably approximates the value of the franchise rights provided to SCE. In finding there was a reasonable relationship, the court noted the best indicator of market value are negotiations, which in this case were lengthy, conducted at arm’s length, and yielded the two percent fee in dispute. Ultimately, the court found that the plaintiffs made “virtually no effort” to rebut the trial court’s factual findings supporting the reasonable relationship between the franchise right and franchise fee, and thus, the franchise fee was not a tax subject to Proposition 218 protection.

Jacks et al. v. City of Santa Barbara, 2d Civ. No. B299297 (Cal. Ct. App. Aug. 19, 2021).

In this episode of the SALT Shaker Podcast policy series, host and Eversheds Sutherland Partner Nikki Dobay is joined by Rob Gutierrez, President and CEO of the California Taxpayers Association (CalTax).

Rob provides an overview of CalTax and its mission, and then expands the discussion to California’s latest legislative session and how it was impacted by COVID-19. He and Nikki also discuss legislation that didn’t pass, as well as legislation taxpayers should have on their radar. He then provides further detail on California’s upcoming governor recall. Finally, he takes part in the fun of a surprise non-tax question – what’s your favorite fair food? Stay tuned for part II of their conversation!

The Eversheds Sutherland State and Local Tax team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on state and local tax policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

Questions or comments? Email SALTonline@eversheds-sutherland.com.

 

 

 

 

 

 

 

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On September 2, 2021, the Colorado Department of Revenue issued private letter ruling PLR 21-005 concluding that subscription fees for an online learning platform are subject to sales tax. The taxpayer operates an online learning platform offering on-demand digital courses comprised of streaming video lessons covering academic subjects and vocational license preparation courses. Each subscription also provides a written transcript of the classes the user registered and access to an automated online tutor. The taxpayer offers various subscription plans that provide transferrable college credit and additional tutor access. The Department concluded that while Colorado only taxes tangible personal property and enumerated services, and the service in question is not an enumerated service, under the true object of the transaction test each learning plan is a mixed transaction “more analogous” to tangible personal property. Thus, the subscription fees are treated as the taxable sale of tangible personal property. The Department also determined that the taxpayer’s provision of internet advertising services, which include creating web content for an advertising company on a “pay-per-click” model, are not taxable because advertising services are not taxable in Colorado.

In a world and state already riddled with uncertainty, California holds a recall election. Through it all, however, taxes remain a constant.

On September 15, join Eversheds Sutherland attorneys Tim Gustafson and Eric Coffill as they cover key tax events that occurred in California during the first three quarters of 2021 and how the recall election may affect the state’s outlook for the remainder of the year. In addition, they will identify recent, significant tax legislation, regulatory, and controversy activity and developments, as well as highlight current hot-button issues at the state’s various tax agencies.

Register here. View the presentation slides 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: The Washington Department of Revenue recently released informal guidance. Which topic did it cover?

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!

While state and local governments have ended or relaxed mandatory work-from-home orders and are trying to bring back the in-person workforce, some employees remain hesitant to return to in-office work for numerous reasons. This trend may result in unanticipated tax obligations for employers and employees because many of the pandemic-related hold-harmless protections from withholding and other state tax obligations caused by remote workers have ended or will send soon. Understanding that the workforce likely has shifted in the long term, a number of states have attempted to address remote work issues by adopting legislation to provide clarity to employers and employees alike.

In this SALT@Work column for the Journal of Multistate Taxation and Incentives, Eversheds Sutherland attorneys Charlie Kearns, Chelsea Marmor and Fahad Mithavayani examine the shift towards remote work, the associated tax implications for companies and developments as employers, employees, and tax administrators react to this new work style.

The New York Department of Taxation and Finance recently published advisory opinion TSB-A-20(66)S regarding the taxability of photographs provided to purchasers either digitally or through a tangible medium for less than permanent use. The Department held that the electronic transfer of photographs is not taxable in New York because a digital photograph is not considered tangible personal property and thus, the transfer is not taxable regardless of whether the transfer is permanent or temporary. Transferring a photograph via a tangible medium (CD, paper, slide, negative, etc.), is generally taxable because the method of transfer is a taxable tangible medium. However, if the transfer of a photograph via tangible medium is only temporary as suggested by the requesting taxpayer, the Department determined that is not a taxable sale as long as (i) the customer only takes possession of the photograph for the purpose of making a reproduction, and (ii) the payment is in the nature of a royalty.

In this episode of the SALT Shaker Podcast, host and Eversheds Sutherland Associate Jeremy Gove is joined by Associate Charles Capouet to discuss the SALT Scoreboard. Each quarter, the SALT team tallies the results of what we deem to be significant taxpayer wins and losses – i.e., those developments that have the greatest impact on our clients, the industries that we serve, and the overall SALT landscape – and analyze those results to identify trends by issue, state and forum.

Jeremy and Charles dive in to the origin of the SALT Scoreboard, the types of taxes the team follows, trends from years past and more.

Questions or comments? Email SALTonline@eversheds-sutherland.com.

 

 

 

 

 

 

 

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