A California Court of Appeal found that because the taxpayer did not file proper notice with the California Board of Equalization (BOE), the limitation on the number of years the county assessor can levy retroactive escape assessments did not apply. The taxpayer’s 2006 merger constituted a change in ownership triggering reporting requirements to the BOE.   Shortly after the merger, the taxpayer filed the Delaware certificate of merger with the county Recorder’s Office but did not file the change in ownership statement with the BOE until 2013.  Pursuant to Proposition 13, county assessors may reassess property when there is a triggering event such as a change in ownership, and when there is a delay between the event and its discovery by the assessor, the assessor may levy retroactive “escape assessments” to collect any underpayment for the years in between the triggering event and discovery. By statute, California limits the retroactive escape assessment to four years, however, this cap does not apply if the taxpayer fails to file a change in ownership statement with the BOE. The court rejected the taxpayer’s argument that the filing of a certificate of merger with the county recorder’s office satisfied the requirement to file a change in ownership statement with the BOE and held that without strict compliance with the statutory notice requirements, the four year limitation on escape assessment did not apply.

Prang v. Los Angeles Cnty. Assessment Appeals Bd., Case No. B301194 (Cal. Ct. App. Aug. 27, 2020)

 

On September 10, the Colorado Department of Revenue promulgated four sets of regulations related to remote sellers and marketplace facilitators. One set, adopts a special rule that establishes the sales tax requirements and conditions for sales made through a marketplace facilitator’s marketplace. A second set updates Rule 39-26-102(3) to clarify when a retailer is doing business in the state for state sales and use tax purposes. The other two published rules made conforming amendments to related administrative provisions, including an updated provision regarding the sales tax license requirement.

The Illinois Department of Revenue recently proposed regulations implementing their remote seller and marketplace facilitator legislation. The guidance adds Ill. Admin. Code tit. 86, § 131.101 et seq. to provide updated definitions, explain the determination of remote retailer status, and explain when the gross receipts and separate transaction thresholds are met.

The Minnesota Supreme Court held that the gain from a corporation’s sale of its majority interest in a limited liability company (LLC) was apportionable business income subject to Minnesota corporate income tax. The Court explained that the corporation conducted its business through operating subsidiaries that were owned by the LLC, and that the corporation and the subsidiaries formed a unitary business at the time of the sale. The Court rejected the corporation’s argument that Minnesota did not have a sufficient connection with the gain at issue. The Court stated that the “undisputed facts showed that the operating subsidiaries – the asset – had a sufficient connection to Minnesota,” that the business received one percent of its revenue from transactions with Minnesota customers, and that the value of the operating subsidiaries was based, in part, on the success of the corporation’s business operations, which included the revenue generated from Minnesota sales. The Court also rejected the corporation’s argument that the gain constituted nonbusiness income under the Minnesota statutes because it was “derived from a capital transaction that solely serves an investment function.” The Court stated that if “a taxpayer and the corporation that was the source of the income do not have a unitary business relationship, and if the income from the sale serves an investment function, rather than an operational function, Minnesota cannot apportion the income.” The Court concluded that the provision did not apply to the corporation and the operating subsidiaries because it was undisputed that they formed a unitary business.

YAM Special Holdings, Inc. v. Comm’r of Revenue, No. A20-0021 (Minn. Aug. 12, 2020)

On September 9, US Congressmen Dan Kildee (D-MI) and Ron Estes (R-KS) introduced a House Resolution condemning foreign digital services taxes. H.Res. 1097 expresses “strong opposition to the imposition of digital services taxes by other countries that discriminate against United States companies” and called “on all other countries to cease and desist from implementing any DST, and to immediately stop unfairly targeting United States companies” while the OECD continues its work. Congressman Estes said “France led the charge in implementing DSTs, which only prompted others to seek profit from American ingenuity.”

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: Earlier this month, the Massachusetts Appeal Court held that the Internet Tax Freedom Act (ITFA) preempted sales taxes on Internet access charges because the Internet service provider satisfied ITFA’s requirement for this type of software.

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!

On July 7, 2020, the California Office of Tax Appeals (OTA) held that a foreign LLC was subject to the state’s $800 LLC tax because it held a 0.7830849% ownership interest in an LLC that owned property in San Diego. In addition to a more traditional nexus test based on an entity’s business activities in the state, California has a bright-line nexus test tied to threshold sales, property, and payroll amounts. In particular, a corporate entity is doing business in California if its real and tangible personal property in California exceeds the lesser of $50,000 – adjusted for inflation – or 25% of its total real and tangible personal property. In making this determination, California takes into account the entity’s pro rata share of California property owned by pass-through entities in which it held an interest. The OTA concluded that because the foreign LLC’s pro rata share of the California LLC’s property – valued at over $60 million – exceeded this threshold, the foreign LLC had nexus for purposes of the $800 LLC tax.

The OTA rejected the taxpayer’s comparison to Swart Enterprises, Inc. v. Franchise Tax Board (2017) 7 Cal.App.5th 497, in which the California Court of Appeal held that an out-of-state corporation was not doing business in California despite its passive holding of a 0.2% ownership interest in a manager-managed LLC that did business in the state. The OTA concluded that Swart was inapplicable because that case was decided under California’s historical “doing business” test, and not the bright-line factor presence test. The OTA also determined that the bright-line tests do not distinguish between active versus passive ownership interests, or general versus limited partnerships.

In the Matter of the Appeal of Aroya Inv. I, LLC, 2020-OTA-255P (Cal. Office of Tax Appeals Jul. 7, 2020) (pending precedential).

The Illinois Department of Revenue (IDOR) recently announced an expansion of its audit resolution program as it braces for a wave of litigation over amendments to the state’s marketplace facilitator law. The department expands its Audit Fast Track Resolution (FTR) Program to all sales and miscellaneous tax audits except for Motor Fuel Use Tax. The newly-expanded FTR program could become an efficient method of settling some sales tax disputes, but disagreements involving the state’s amended marketplace facilitator law will ultimately need to be resolved by legislature or courts.

In this article published by Bloomberg Tax, Eversheds Sutherland Partner Breen Schiller and Associate Dennis Jansen explain why the program won’t stop litigation.

In this marketplace webcast, we discuss ongoing worker classification disputes in California, as well as other states, and the SALT implications resulting from those disputes. We will also discuss SALT issues that teleworking may create for marketplaces with various business models, and provide tips on how to best position your business for the new normal of permanent remote work.

Listen to the full webcast here.

Virginia’s peer-to-peer vehicle sharing tax, passed in April, takes effect on October 1. Generally, vehicle owners with up to ten shared vehicles will be subject to a 6.5% gross tax. The law obligates vehicle sharing platforms to collect the tax on behalf of the owners if the platform has established sufficient contact with the state. This week, the Virginia Department of Taxation published informal guidance on the new tax.

A platform is required to collect the tax if it meets the marketplace facilitator thresholds of $100,000 in annual Virginia revenue or 200 Virginia transactions. Additionally, a platform is required to collect the tax if, among other things it performs the activities of: owning or operating the infrastructure or technology that brings buyer and seller together; listing vehicles for sharing; payment processing; branding transaction as those of the platform, or providing customer assistance. Vehicle owners are obligated to certify to sharing platforms, and sharing platforms are obligated to ask vehicle owners, whether the owner owns more or less than ten vehicles.