Eversheds Sutherland SALT releases the eighth edition of its SALT Scoreboard, a quarterly publication that tracks significant state tax litigation and controversy developments. This edition of the SALT Scoreboard includes our year-end observations for 2017, a discussion of the Pennsylvania Supreme Court’s decision in Nextel, and a spotlight on apportionment cases. For 2018, we will reset our tallies and track the latest developments as they are issued in the new year.

View our Eversheds Sutherland SALT Scoreboard results from the fourth quarter of 2017!

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On January 10, 2017, California Assembly member Phil Ting introduced and read Assembly Bill (“AB”) 102 for the first time. Introduced as a placeholder bill, AB 102 consisted of a single section and sentence: “SECTION 1. It is the intent of the Legislature to enact statutory changes relating to the Budget.” 

Then, in less than two weeks in June 2017, the California Legislature gutted and amended this innocuous bill into a 19-page plan to drastically alter the landscape of California’s tax system. As signed by the governor, AB 102 stripped the California State Board of Equalization of all but its constitutional powers, created a new agency named the California Department of Tax and Fee Administration, and created a second new agency named the Office of Tax Appeals. Three months later, clean-up legislation in AB 131 made further changes. 

In his article for the January 2018 edition of the Journal of Multistate Taxation and Incentives, Eversheds Sutherland attorney Eric Coffill discusses the history and events leading up to those changes and provides a glimpse of the (somewhat uncertain) California tax landscape going forward.

View the full article.

The New Mexico Administrative Hearings Office affirmed the Taxation and Revenue Department’s assessment to Agman Louisiana Inc. based on the taxpayer’s gain from the sale of stock of a corporation in which the taxpayer owned less than a 50% interest. The Hearings Office ruled that such gain was apportionable business income subject to New Mexico corporate income tax. Agman argued that the gain was non-business income and must be allocated to its commercial domicile. The Hearings Office disagreed and determined that Agman met New Mexico’s three-prong business income test in NMSA 1978 § 7-4-2(A). Under the first prong of that statutory test, the Hearings Office summarily concluded that Agman met the threshold “transactional test” because the sale arose from “transactions and activity” in the “regular course of the taxpayer’s trade or business.” Agman met the second prong “disposition test” because the income from the stock sale arose from the disposition of a business. The company also met the third prong “functional test” because the income from the sale of the stock provided the taxpayer with an “operational benefit integral to [its] business.” Finally, the Hearings Office ruled that characterizing the gain as apportionable business income did not offend the US Constitution because the stock that generated the gain served an “operational rather than investment function,” as explained in the Supreme Court’s Allied Signal and MeadWestvaco decisions. In the Matter of the Protest of Agman Louisiana Inc. v. Taxation & Revenue Dep’t, N.M. Admin. Hearings Office, Decision and Order No. 17-47 (Dec. 5, 2017).

By Sam Trencs and Open Weaver Banks

The New Jersey Tax Court held that New Jersey could not impose corporation business tax on a foreign corporation’s foreign source income that was not included in the federal tax base because of a treaty benefit. Although New Jersey is permitted to adopt a legislative addback for exempt foreign source income, it did not, and therefore, it is presumed that federal taxable income is the starting point for computing New Jersey entire net income for purposes of the New Jersey corporation business tax. Infosys Limited of India, Inc. v. Director, Division of Taxation, Dkt No. 012060-2016 (N.J. Tax Nov. 28, 2017).

This installment of A Pinch of SALT examines the comptroller of Maryland’s practice of attributing in-state operating companies’ apportionment factors to affiliated out-of-state holding companies. This article posits that this type of attribution violates the internal consistency test reflected in the US Supreme Court’s dormant commerce clause doctrine.

View the full article.

By Liz Cha and Eric Coffill

The Superior Court of Washington for King County held that Seattle’s new income tax on “high income residents” violates a provision of Washington state law which prohibits a city from levying a tax on net income.

On July 14, 2017, Seattle Mayor Ed Murray signed Seattle Ordinance No. 125339, which would impose an income tax on “high-income residents.” This tax would impose an additional tax of 2.25% on the amount of total income in excess of $250,000 for individuals and the amount of total income in excess of $500,000 for married taxpayers filing jointly.

Plaintiffs raised multiple arguments against the tax regarding Seattle’s authority to levy the tax such as whether the tax was an income tax or an excise tax, whether state law prohibited cities from enacting income taxes, and whether the tax violates the Washington Constitution. The court considered each argument but ultimately decided the case on the issue of whether the tax violated state law prohibiting cities from levying a tax on net income.

Wash. Rev. Code Sec. 36.65.030 provides that a “county, city, or city-county shall not levy a tax on net income.” The court rejected the city’s challenge that Wash. Rev. Code Sec. 36.65.030 was invalid because it violated the Single Title Rule and Subject in Title Rule provisions of the Washington State Constitution. Instead, to determine whether this statute applied to the tax, the court analyzed the meaning of the term “net income.” Notwithstanding the dictionary definitions cited by the city, the court determined that there could only be one conclusion—that the city’s income tax is tax on net income. Thus, the court concluded that the city did not have the authority to impose the new income tax because it applied to the net income of high income residents. Kunath v. City of Seattle, No. 17-2-18848-4 (Wa. Sup. Ct. Nov. 22, 2017).

Under notice dated December 26, 2017, the California Office of Tax Appeals (OTA) released its Final Draft Emergency Regulations on the Rules for Tax Appeals (Emergency Regulations), which will be submitted to the Office of Administrative Law for review in the coming days.

  • The Emergency Regulations are largely based on the Board of Equalization’s prior Rules for Tax Appeals but contain some notable differences.
  • For example, the OTA is authorized to remove the precedential status of BOE opinions and designate its own opinions as precedential if the opinion establishes a new interpretation of law, resolves an apparent conflict in the law, or makes a significant contribution to the law, among other reasons.
  • The Emergency Regulations also outline procedures for requesting a closed hearing and/or sealed records in appeals from both the California Department of Tax and Fee Administration and the California Franchise Tax Board.

View the full Legal Alert.

There has been no shortage of state tax controversies this year. States and taxpayers looked to state courts seeking guidance on some of the most contentious state tax issues.

In their article for Law360, Eversheds Sutherland attorneys Jeffrey Friedman and Stephanie Do look back at some of the most interesting decisions of 2017, which highlight critical developments all taxpayers should watch out for, especially attacks on the physical presence nexus requirement, aggressive application of economic nexus principles and continued uncertainty around the applicability of related party addback exceptions and retroactive tax legislation.

View the full article. 

By Charles Capouet and Charlie Kearns
 
On November 6, 2017, the Minnesota Department of Revenue issued a Revenue Notice advising taxpayers that it acquiesces to the Minnesota Tax Court’s decision in Sinclair Broadcast Group, Inc. v. Commissioner of Revenue. As a result, the Department now takes the position that Minnesota’s version of the I.R.C. § 382 net operating loss limitation is “calculated in the same manner as the federal section 382 limitation, and is not apportioned for franchise tax purposes.” For the years at issue in Sinclair, I.R.C. § 382 imposed an annual limitation on an acquiring corporation’s use of the net operating losses of an acquired corporation in the amount of approximately 5% of the acquired corporation’s stock value. The Minnesota Tax Court rejected the Commissioner’s position that Minnesota’s version of the limitation must be applied twice, both on a pre-apportioned and, subsequently, a post-apportioned, basis. Revenue Notice No. 17-09: Corporate Franchise Tax – Net Operating Loss Carryforwards – Sinclair Broad. Grp., Inc. v. Comm’r of Revenue, No. 8919-R, 2017 (Minn. Tax Ct. Aug. 11, 2017), Minn. Dep’t of Revenue (Nov. 6, 2017).

By Mike Le and Tim Gustafson 

On December 8, 2017, the Alabama Supreme Court issued an order without opinion in Thomas v. Elbow River Marketing Ltd. Partnership, affirming a lower court’s decision that a Canada-based seller of hydrocarbon products did not engage in or carry on a business in the City of Birmingham and thus was not subject to the city’s business license tax. The taxpayer had no physical operations, place of business, employees, agents or representatives in the city. Further, the taxpayer did not solicit sales or otherwise conduct sales or advertising activities in the city. Its only contact with the city consisted of sales of hydrocarbon products to two Alabama-based customers. The products were delivered into the city by third-party rail or trucking carriers, and the taxpayer retained title to some of the products while in the possession of the carriers. The lower court concluded, and the Alabama Supreme Court agreed, that under Alabama law, a product seller cannot be subjected to the city’s business license tax if it does nothing more than deliver its goods into the city by common carrier. Thomas v. Elbow River Marketing Ltd. Partnership, No. 1160678 (Ala. Dec. 8, 2017).