The California Franchise Tax Board (FTB) administers the state’s corporate franchise and income taxes. The California Legislature authorized the FTB to promulgate regulations in order to implement and interpret the governing statutes. Beyond issuing formal guidance, however, the FTB historically, and routinely, has issued informal guidance on a broad array of topics and issues for the purported benefit of taxpayers, tax practitioners, and FTB staff alike.

While taxpayers and tax practitioners have disagreed with certain conclusions presented in the FTB’s informal guidance over the years, the materials by and large have provided valuable insight into the agency’s varied positions and interpretations, particularly for taxpayer reporting purposes. Regarding the points of disagreement, a question until recently remained as to what effect, if any, was to be given to the FTB’s informal guidance by a tribunal adjudicating a corporate tax controversy matter.

Two 2023 decisions, Appeal of Minnesota Beet and American Catalog Mailers Association, offered differing answers to this question that may affect current informal guidance and the issuance of guidance in 2024 and beyond.

In this installment of A Pinch of SALT in Tax Notes State, Eversheds Sutherland attorneys Tim Gustafson and Sharon Kaur examine the two decisions closely and identify their potential fallout.

Read the full article here.

While providing a new revenue opportunity for college athletes, name, image, and likeness (NIL) deals have exposed recipients to potential risks—including tax liability—outside the university bubble.

Since the US Supreme Court’s 2021 NCAA v. Alston ruling, college athletes have become eligible for paid endorsements and can monetize their athletic success outside of their school-funded scholarships and benefits.

In this article published by Bloomberg Tax, Eversheds Sutherland Partners Tim Gustafson and Baird Fogel, US sports practice lead, explain the complicated tax issues college athletes face when they sign lucrative NIL deals.

Eversheds Sutherland attorneys Charlie Kearns, Eric Coffill and Alla Raykin will speak during the 2024 ABA/IPT Advanced Tax Seminars held March 11 – March 15 in New Orleans, LA.

Their panel presentations will cover a variety of income and sales and use tax topics, including how to effectively work with the California FTB, navigate the expansion of sales and use tax bases to include digital goods and services, and sales tax technology through automation.

You can view the seminars’ program here and register here.

The Virginia General Assembly passed the 2024-2026 Biennium Budget (House Bill 30) that would expand the sales and use tax to “digital personal property” and certain digital “taxable services” as of January 1, 2025.

The General Assembly’s conference report resolved differences between the House and Senate budgets, respectively, on the sales tax treatment of business-to-business transactions. The House wanted a full exemption for business purchases of certain digital “taxable services,” but the Senate wanted to fully tax all purchases of such services. The conference committee reached consensus on the issue by sending Governor Glenn Youngkin a partial exemption for business purchases, where only business purchases of “software application services” would be subject to tax.

The legislation now goes to the governor for his 30-day review period, where he may approve the legislation as-is, offer amendments to the legislation, or veto or line-item veto the legislation. If the governor offers amendments, the legislation may be approved by the General Assembly by simple majority. Any veto or line-item vetoes by the governor would need to be approved super (two-thirds) majority of the General Assembly. The Eversheds Sutherland SALT team will continue to monitor the Virginia budget process at it continues to move forward.

On February 26, 2024, the Alabama Tax Tribunal (Tribunal) held that Huhtamaki Inc. (Huhtamaki), a packaging manufacturer, is not required to add back interest payments indirectly made to foreign affiliates through a U.S. parent company.

Under Alabama’s add-back statute, a corporation must add back otherwise deductible interest expenses directly or indirectly paid to a related member unless an exception applies. One such exception is the subject-to-tax exception, which allows a corporation to avoid adding back income if the corresponding item of income is subject to tax based on the related member’s net income by a foreign nation that has an income tax treaty with the United States. The statute further provides: “[t]hat portion of an item of income which is attributed to a taxing jurisdiction having a tax on net income shall be considered subject to a tax even if no actual taxes are paid on such item of income in the taxing jurisdiction by reason of deductions or otherwise.” Ala. Code § 40-18-35(b).

During the tax years at issue, Huhtamaki made several interest payments to its U.S. parent company, which then made payments to foreign affiliates in countries with an income tax treaty with the United States—a portion of such interest income was deductible in the foreign counties. The Alabama Department of Revenue (DOR) argued Huhtamaki failed to prove the exclusion to the add-back statute claimed for the interest deductions taken for the foreign affiliates on the Alabama return.

Citing to its 2022 decision in State of Alabama v. Pfizer., CV.-2022-901481-00, in which the Tribunal held that a corporation is not required to add back interest paid to a related entity as the recipient was subject to tax on that income in a foreign nation, the Tribunal rejected the DOR’s argument. Agreeing with Huhtamaki, the Tribunal held that the fact the foreign affiliates were allowed to deduct a portion of the interest payments in calculating their net income does not defeat Huhtamaki’s entitlement to the subject-to-tax exception. The Tribunal further noted that the DOR did not cite any legal authority, other than a European Commission letter, to dispute Huhtamaki’s entitlement to the exception. The Tribunal also rejected the DOR’s request to reconsider the holding in Pfizer.

Huhtamaki Inc. v. Ala. Dept. Rev., Ala. Tax Tribunal,Dkt. No. BIT. 19-890-JP (Feb. 26, 2024).

This year’s Georgia’s legislative session is quickly progressing, with some major tax legislation moving towards passage. Last Thursday, February 29, 2024 was “Crossover Day”—the 28th legislative day of 40 total legislative days—the day by which all bills must have passed one legislative chamber to cross over for consideration by the other chamber. Although there is an opportunity for tax provisions to be added to other bills later, bills that have not passed one chamber prior to Crossover Day are generally dead for this session. Georgia’s Constitution requires that all revenue related bills originate in the House, so the majority of bills still alive for the year now go over to the Senate Finance Committee for final passage by the Senate before the end of the session. The final (40th) legislative day, Sine Die, is on March 28, 2024.

Read the full Legal Alert 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: Which state recently enacted an expansion to an income tax credit program that is used to encourage purchases of goods and services from vendors that hire workers with disabilities?

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. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

The California Court of Appeal for the Third Appellate District held that the purchase of “discounted” cell phones bundled together with wireless services requires payment of sales tax based on the cell phone’s full price.

Plaintiffs purchased cell phones at a reduced cost, together with wireless services, in a “bundled transaction.” The bundled transaction included the taxable sale of tangible personal property, as well as non-taxable sale of wireless services. The Department imposed tax on the non-discounted value of the cell phone. In response, the plaintiffs challenged Regulation 1585 on the grounds that it (1) violated the Revenue and Taxation Code, and (2) was not adopted in compliance with the Administrative Procedures Act.

  • Compliance with the California Revenue and Taxation Code
    The parties agreed that only the purchase of the cell phone was taxable (and the wireless services were nontaxable), but disagreed on how to measure the payment (i.e., on the validity of Regulation 1585). Regulation 1585 defines “bundled transaction” as the retail sale of a wireless telecommunication device which contractually requires the retailer’s customer to activate or contract with a wireless telecommunications service for periods greater than one month as a condition of that sale. The court found that the regulation filled the gap of how to measure the portion attributable to the tangible personal property versus the service by “effectively attributing the portion of the contract price that is equivalent to the unbundled sales price to the cell phone, and the rest to the service.” Therefore, the court held, the regulation was not contrary to the California Revenue and Taxation Code.

    The court also looked at Regulation 1585’s history, noting that a regulation is likely correct if it has “consistently maintained the interpretation in question, especially if [it was] longstanding.” In supporting its conclusion in favor of the regulation’s validity, the court discussed how Regulation 1585 became operative in 1999 and had not been amended since.
  • Procedural Challenge to Regulation 1585
    The plaintiffs also contended that the regulation’s promulgation did not satisfy the requirements under the Administrative Procedure Act because the Department did not thoroughly discuss the economic impact the regulation would have on businesses. Nonetheless, the court concluded that the Department was not required to discuss the economic impact of retailers because there was substantial evidence in place to support that Regulation 1585 would not adversely impact businesses and individuals. And, the court held that the Department met all other procedural requirements set forth by the Administrative Procedures Act when promulgating Regulation 1585.
  • Application of Regulation 1585
    In applying the regulation, the court concluded that the carrier-retailers were not truly offering a discount on the cell phones because they were being compensated by the monthly payments in the bundled transaction. Therefore, the court held that sales tax should be applied on the full price of the cell phone.

Ultimately, the Court of Appeal held for the Department, finding that (1) the Department could allocate a portion of the contract price in a bundled transaction based on the full price of the cell phone, and (2) the regulation was adopted in compliance with the Administrative Procedures Act.

Bekkerman v. Cal. Dep’t of Tax & Fee Admin., No. C093763, 2024 Cal. App. LEXIS 128 (Ct. App. Feb. 27, 2024).

Introducing Winston, our esteemed SALT Pet of the Month for March! Named after former UK Prime Minister Winston Churchill, Winston is the beloved mate of Kevin Reddick, Senior Director of Tax at Home Depot.

Winston’s senior age and wardrobe full of bow ties may signal a calm, distinguished demeanor; however, this is mistaken! Winston has regular episodes of the “zoomies” and is able to jump to chest height on his humans. He will always bark hello to his canine neighbors and is enthusiastic about playing long games of fetch.

Although he’s a lively lad, Winston also enjoys snuggling. He will lay with his humans as they read, and take naps in his cozy dog chair that fits him perfectly. Winston also likes to paw-trol Kevin’s walk to his home office, ensuring he’s set up for success on work-from-home days. What a good boy!

It’s an honor to welcome you to the SALT Pet of the Month family, Winston!

Where do we go from here? Capital University Law School will host a symposium on March 6 to address the tax issues arising from increased remote work. Eversheds Sutherland Partner Charlie Kearns will help address the challenges from withholding for hybrid workforces and the revenue impact as individuals now routinely work outside the office.

Register here.