Voters headed to the polls (or mailboxes) this Election Day not only to choose the next president of the United States but also to make decisions on a range of significant tax issues across the country.

Although voters in California and the Portland-Metro area struck down significant business tax increases and the voters of Illinois rejected a graduated income tax, San Francisco voters hammered the business community with a slew of new local taxes and changes to the City’s already existing taxes.  In addition, high-earners taxes have been approved in the Portland-area and likely Arizona, and app-based rideshare drivers will remain independent contractors for certain purposes in California. These are just a few of the measures that were on the ballot this Election Day.

Please read a full list in our Legal Alert here.

Voters in California headed to the polls (or mailboxes) this Election Day not only to choose the next president of the United States but also to make decisions on a range of tax policy questions.  From removing property tax protections for commercial properties to imposing new and increased business gross receipts taxes in San Francisco, voters weighed in on a range of significant tax measures in the Golden State.  Below is a summary of the significant tax ballot measures and the latest results.

Property Taxes

Behind in early returns.  California Proposition 15 proposed a split-roll property tax system by carving out commercial and industrial property worth more than $3,000,000 from the state constitution’s property tax limitations.  The initiative would not have changed the way residential property is valued and assessed for property tax purposes.  Commercial and industrial property, however, would have been reassessed at least once every three years at full market value (with certain exceptions) regardless of whether there was a change of ownership.  Revenues generated by the measure would have been used to fund local governments and schools.

Results: may fail but too close to officially call.  Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results as follows:

  • 48.3% yes votes (5,593,236)
  • 51.7% no votes (5,993,478)

Fiscal Impact: proposed to raise up to $11.5 billion annually for local governments and schools and increase California property tax collections by about 20%.

This initiative proposed to remove commercial and industrial properties from property tax limitations established by Proposition 13 in 1978, which essentially froze property taxes in place throughout the state until an owner sold their land or property.  The measure is meant to apply to large commercial and industrial properties, as businesses with less than $3 million in aggregate real estate holdings in the state would not be subject to the new valuation method.  In addition to the significant opposition this measure received from the business community, the California Assessors’ Association also opposed the measure (talk about strange bedfellows), stating that county assessors are not equipped to handle the change in methodology from the historic approach under Proposition 13 to valuing commercial and industrial properties at fair market value on a regular basis.

Will likely pass.  California Proposition 19 amends the state constitution to allow California property owners who are over the age of 55, severely disabled, or victims of a wildfire or natural disaster to transfer their base-year value to replacement properties without regard for the replacement property’s location or value.  The proposition also limits the parent-child and grandparent-grandchild exclusion from change-in-ownership reassessment, thus increasing property tax revenues in the state.  The net revenue gain generated by this property tax increase is earmarked for fire services and reimbursement of counties with “negative gain” resulting from the amendment.

Results: will likely pass.  Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results being as follows:

  • 51.5% yes votes (5,850,160)
  • 48.5% no votes (5,500,719)

Fiscal Impact: while some parts of the measure increase property taxes and others decrease property taxes, it is estimated that overall, the measure would result in a net gain and that property taxes for local governments and schools would increase by tens of millions of dollars each year and grow to a few hundred million dollars per year.

Worker Classification

Passed.  California Proposition 22 considers app-based drivers for rideshare and delivery companies to be independent contractors and not employees or agents and adopts labor and wage policies specific to app-based drivers and companies, including requiring rideshare and delivery companies to provide minimum hourly earnings guarantees, healthcare contributions, and occupational and accident insurance for drivers.  This initiative was proposed in response to legislation passed last year that extended employee classification to gig workers.

Results: passed. Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results being as follows:

  • 58.4% yes votes (6,720,240)
  • 41.6% no votes (4,780,140)

Fiscal Impact: the initiative’s analysis states that there will be “[m]inor increases in state income taxes paid by rideshare and delivery company drivers and investors.”

Local Ballot Measures

Passed.  San Francisco, California Proposition F repeals the City’s Payroll Expense Tax and increases the Gross Receipts Tax rates applicable to various business activities.  The proposition also creates two “backstop” taxes, which would be imposed if pending judicial decisions invalidate certain taxes enacted by ballot initiative in 2018.  The proposition also amends the Charter of the City and County of San Francisco to reduce the annual registration fee for businesses with $1,000,000 or less in gross receipts.  Lastly, the charter amendment also expands the small business exemption to include businesses with $2,000,000 or less in gross receipts, but increases the registration fee for businesses with $1,500,000.01 to $2,000,000 in gross receipts who benefit from the small business exemption.

Results: passed (approximately 76% reporting)

  • 68.27% yes votes (219,205)
  • 31.73% no votes (101,885)

Fiscal Impact: estimated to generate approximately $97 million annually once fully implemented.

San Francisco is currently litigating the validity of two local ordinances passed by a simple majority in 2018 – the Homelessness Gross Receipts Tax Ordinance and the Early Care and Education Commercial Rents Tax Ordinance.  See our prior coverage here.  In the event the City loses these law suits, the backstop taxes under Proposition F are meant to provide sufficient additional general fund revenue for the City to refund businesses as necessary and provide ongoing revenue.  One backstop tax would increase the gross receipts tax on certain taxpayers for 20 years if the Homelessness Gross Receipts Tax Ordinance is invalidated in court.  The other backstop tax would impose a new general tax on the gross receipts from the lease of certain commercial space for 20 years if the Early Care and Education Commercial Rents Tax Ordinance is invalidated in court.

Passed.  San Francisco, California Proposition I amends the Business and Tax Regulations Code to double the real property transfer tax rate from 2.75% to 5.5% on transfers of property with a consideration or value of at least $10,000,000 and less than $25,000,000.  The initiative also doubles the real property transfer tax rate from 3% to 6% on transfers of property with a consideration or value of at least $25,000,000.

Results: passed (approximately 76% reporting)

  • 57.97% yes votes (187,900)
  • 42.03% no votes (136,233)

Fiscal Impact: estimated to generate tax revenues of approximately $196 million a year.

Passed.  San Francisco, California Proposition J repeals the parcel tax included in the Living Wage for Educators Act of 2018 (Proposition G) – which is the subject of pending litigation – on July 1, 2021 and replaces it with a $288 parcel tax to be spent by the San Francisco Unified School District for educators’ compensation and educational improvements.

Results: passed (approximately 76% reporting)

  • 74.97% yes votes (239,977)
  • 25.03% no votes (80,100)

Fiscal Impact: estimated to generate tax revenues of approximately $48.1 million a year.

Passed.  San Francisco, California Proposition L (CEO Tax) amends the Business and Tax Regulations Code to impose an additional gross receipts tax (between 0.1% – 0.6% of gross receipts) or an administrative office tax (between 0.4% to 2.4% of payroll) on businesses with a greater than a 100:1 ratio of the compensation of the business’s highest paid managerial employee to the median compensation paid to the business’s employees based in San Francisco.  Additionally, the ordinance increases San Francisco’s appropriations limit by the amount collected under the additional tax for four years beginning November 3, 2020.

Results: passed (approximately 76% reporting)

  • 65.18% yes votes (212,464)
  • 34.82% no votes (113,510)

Fiscal Impact: estimated revenue between $60 million and $140 million a year.  The revenue impact varies due to the volatility of the tax (e.g., narrow base of expected payers, fluctuations and variances in executive compensation, etc.).

In addition to increasing a business’ tax liability, this measure is likely to create significant compliance challenges as it involves calculating a compensation ratio required for no other state or local tax filing.  Consequently, businesses affected by this tax likely will question their presence in San Francisco and evaluate the benefits of relocation.  Even the San Francisco Controller’s analysis for Proposition L notes the risk of potential relocation by businesses associated with the tax increase from the CEO Tax.  Considering the compliance burden and based on how the additional tax ultimately impacts business, legal challenges are also possible.

 Please check back for our full alert on the tax-related ballot initiatives results across the country.

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 municipal net profit tax recently lapsed for what centuries-old Ohio community?

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!

Two significant tax ballot measures were on the ballot for voters in the Portland area this Election Day.  Here’s a look at what measures passed and which ones failed.

Failed.  The Portland Metro Council Measure 26-218 proposed authorizing a payroll tax on employers for workers in the metropolitan Portland areas to fund transit improvements and transportation programs along transit corridors in portions of Clackamas, Multnomah, and Washington counties.  The measure proposed allowing the Metro Council to set the payroll tax at a rate not to exceed 0.75% for employers with over 25 employees beginning in 2022.  Employers with 25 employees or less would have been exempt from this payroll tax.

Results: Failed (81.63% reporting)

  • 46.16% yes votes (195,543)
  • 53.84% no votes (228,068)

 Fiscal Impact:  it was projected that the payroll tax would have raised approximately $250 million each year for the proposed transit improvements and transportation programs using current employment numbers.

Passed.  Multnomah County, Oregon Preschool for All Program Measure 26-214 imposes a new personal income tax at a rate between 1.5% and 3.8% on residents of Multnomah County.  Beginning January 1, 2021, the measure imposes a 1.5% income tax on single filers with taxable income derived within the county over $125,000 and an additional 1.5% on taxable income over $250,000.  For joint filers, the measure imposes a 1.5% income tax on taxable income derived within the county over $200,000 and an additional 1.5% on taxable income over $400,000.  Beginning in January 1, 2026, the base income tax rate imposed by the measure increases from 1.5% to 2.6%.  Revenue generated by this measure would be used to fund tuition-free preschool and compensate teachers.

Results: Passed (81.63% reporting)

  • 64.14% yes votes (278,533)
  • 35.86% no votes (155,720)

Fiscal Impact: estimated to raise $133 million each year.

Local businesses and individuals are also still preparing to absorb tax increases imposed through past ballot measures.  During the May primary, Portland Metro voters approved Measure 26-210, which supports homeless services and imposes a business profits tax beginning in 2021 on the net income of each person doing business in the Portland Metro District (which combines three counties in the greater Portland area) that have total annual gross receipts over $5 million.  This measure also contained a personal income tax component, imposing an additional one percent personal income tax on taxable income over $200,000 for joint filers and over $125,000 for single filers on income over these thresholds. With the passage of the new County-wide personal income tax, Multnomah County, which includes Portland, will have a combined state and local personal income tax rate in the country of 14.6%. These tax increases are in addition to the new state Commercial Activities Tax that businesses also face.

Please check back for our full alert on the tax-related ballot initiatives results across the country.

In Private Letter Ruling 2020-14, the North Carolina Department of Revenue determined that an information technology company’s managed services – maintaining and monitoring its clients’ network equipment and software – were subject to sales and use tax. The taxpayer’s Terms of Use, which sets the scope of its services, qualified as a taxable service contract.

The Louisiana Supreme Court unanimously held that the Louisiana Tax Commission did not act in an arbitrary and capricious manner when it rejected a property tax assessor’s valuation for ad valorem taxes.  In 2012, D90 Energy, LLC purchased several wells.  For tax years 2013 through 2016, D90 Energy appealed assessments by a Jefferson Davis Parish assessor who refused to consider the purchase price of the wells when determining the fair market value – instead exclusively using valuation tables which account for the age, depth, type, and production of the wells.  Based on evidence and testimony presented to the Tax Commission by the taxpayer and applying a regulation which states that “[s]ales, properly documented, should be, considered by the assessor as fair market value,” the Tax Commission reduced the valuations.  On appeal to the state supreme court, the assessor argued he had “the exclusive right to determine fair market value” and that the Tax Commission may only review evidence already submitted to the assessor.  However, the Court determined that the Tax Commission is permitted to review new evidence submitted by taxpayers to the Tax Commission and that recent sales should be considered by the assessor when determining fair market value.  Accordingly, the Court found that “relying upon that express directive as a valuation standard cannot be arbitrary and capricious.”

D90 Energy LLC v. Jefferson Davis Parish Bd. of Review, No. 2020-C-00200 (La. Oct. 20, 2020).

The Mississippi Supreme Court ruled that an affiliated group of telecommunications companies properly computed the Broadband Investment Credit in determining their franchise and income tax liabilities.  The Broadband Credit may be used by a taxpayer to offset up to 50% of the taxpayer’s tax liabilities in a given year.  The taxpayers filed separate Mississippi franchise tax returns and a single combined corporate income tax return.  On their separate franchise tax returns, each taxpayer calculated its allowable Broadband Credit by applying the 50% credit cap to the affiliated group’s aggregate tax liability.  The Mississippi Department of Revenue contended that the 50% credit cap should be applied against each taxpayer’s separate taxable income included in the combined return.  Agreeing with the taxpayers, the Supreme Court concluded that for purposes of the 50% credit cap, each taxpayer’s “tax liability” is the “sum of the taxpayers’ separate franchise tax liability and the total combined income tax liability of the affiliated group.”  The court explained that filing a combined return made each member jointly and severally liable for the entire tax liability.

 

Miss. Dep’t of Revenue v. SBC Telecom, Inc., No. 2019-CA-00917-SCT (Miss. Aug. 13, 2020).

Effective July 1, 2020, Iowa law permits utility companies to utilize an inflow-outflow billing method for eligible distributed generation facilities. Under the inflow-outflow method, a generation customer is responsible for paying for the inflow kWh energy charge (sales to customer), while the amount of outflow kWh energy charge is credited to the customer (purchases from customer).

The Iowa Department of Revenue ruled that for sales tax purposes, inflow (sales to customers) and outflow (purchases from customers) of energy are considered a “trade-in” of energy for credit in dollars (outflow), rather than separate transactions.  As a result, the portion of the sales price credited to the customer is exempt from sales tax.  The Department explained that in determining the applicable sales tax, the taxpayer could either: (1) take into consideration prior months’ activity by offsetting the current month’s billing with credits accumulated from prior months; or (2) offset the current month energy inflows only by the current month energy outflows, which requires computing the sales tax on the difference when the inflow is greater than the outflow for the current month.  The Department also noted that the utility is not required to provide an exemption certificate to its customers when claiming the sales tax exemption.  In the Matter of MidAmerican Energy Company, No. 2020-300-2-0299 (Dec. Order July 10, 2020).

A recent letter ruling from the Tennessee Department of Revenue concludes that the ownership of mortgages backed by Tennessee property was insufficient to subject a foreign investment fund (“Fund”) to the state’s franchise and excise taxes.

Tennessee broadly applies its franchise and excise tax to the extent permitted by the U.S. and state constitutions.  A limited partnership is subject to franchise and excise taxes if it is doing business in Tennessee and has a substantial nexus with the state.  Further, Tennessee has a rebuttable presumption that a financial institution is doing business in Tennessee if the sum of its assets and the absolute value of its deposits attributable to Tennessee sources equals or exceeds $5 million.

There are a variety of exceptions to Tennessee’s broad statutory definition of “doing business in Tennessee” for financial institutions. Specifically, a financial institution is not considered to be “conducting the business of a financial institution” in Tennessee if:

  1. the only activity of the financial institution in Tennessee is holding an ownership interest in a loan, lease, note or other assets attributed to Tennessee, and,
  2. the payment obligations were solicited and entered into by a person that is independent and not acting on behalf of the owner.

The Fund was a limited partnership formed and domiciled outside of the U.S. The Fund’s general partner was also domiciled outside of the U.S. and did not have any presence in the country. The Fund’s only activity was receiving payments from the mortgages it owned, which qualified it as a “financial institution” for Tennessee purposes. The Fund’s mortgages were obtained through a third-party investment manager and the Fund’s only involvement in the mortgage procurement process was the closing, which took place outside of Tennessee. Additionally, the Fund’s sole connection with Tennessee was that occasionally some of the mortgages owned by the Fund were located in Tennessee and some of the borrowers could possibly also be located within the state.

The Department of Revenue determined that the Fund’s activities squarely fell within the statutory safe harbor whereby a financial institution is not considered to be “conducting the business of a financial institution” within the state. The Fund was therefore not subject to Tennessee franchise and excise taxes despite otherwise satisfying other elements of the state’s economic nexus test.

Tenn. Dept. Rev. Ruling No. 20-07 (Oct. 8, 2020).

Breen Schiller recently joined the SALT team as a partner based in the Chicago office and we reached out to her family to get the scoop on Marlin, their two-year old “double doodle.”

Breen’s kids remember exactly what inspired his name. “We named him after that fish movie…Finding Nemo! It is Nemo’s dad.”

When asked when and how Marlin joined the family. Breen’s son (Sullivan, 5), says, “We got him in the summer from people.”

Marlin is usually found playing tug-of-war, fetch or going on walks, but his favorite thing to do is scoop up table scraps thanks to Breen’s daughter Quinn, (7). After all, what better way to get rid of your gross veggies than to hand them off to the pup?

All cuteness aside, he still likes to stir up trouble! He absolutely loves to bark, and he sits by the front window to make sure every passing neighbor knows he is the dog in charge.

 

 

 

 

 

 

 

 

 

One of the biggest surprises up Marlin’s sleeve was his ability to change colors after going to the groomer. “When we dropped him off he was brown, and when we picked him up, he was white!” says daughter Avery (7). Thanks to this magic, Marlin is an adorable mix of both brown and white.

We are so excited to introduce Marlin to the SALT family as our October Pet of the Month!