llinois enacted legislation on December 16, 2011, that includes several new tax provisions, some of which benefit only Illinois-based companies. SB397 gives two Illinois taxpayers—CME Group and Sears Holdings—a tax incentive to stay in the state after Illinois’s recent significant tax rate increases. SB397 also extends and broadens the Illinois research and development tax credit for five years, extends the Illinois Economic Development for a Growing Economy (EDGE) job creation program, and restores the corporate income tax operating loss deduction.

One of the most contentious aspects of SB397 is the revised sourcing provision for federally regulated exchanges. Federally regulated exchanges include securities and commodities exchanges and clearing agencies. The Illinois legislature crafted an elective regime that allows exchanges to source receipts using an alternate methodology. This provision includes two unique, potentially problematic aspects. First, the provision imposes a fixed percentage to source electronic trading receipts. The fixed percentage for tax years ending on or after December 31, 2013, is 27.54%. This fixed percentage appears to be arbitrarily determined, and is at a level that will likely benefit only exchanges based in Illinois. Most out-of-state exchanges likely have an Illinois apportionment factor much lower than 27.54%, while most in-state exchanges likely have an Illinois apportionment factor much higher than 27.54%. Second, the provision effectively eliminates the throw-out rule that applies to services. Some may question whether eliminating the often problematic throw-out rule only for electing exchanges—which will generally only be in-state exchanges—raises discrimination concerns.

On the other hand, most taxpayers are happy to hear that SB397 finally creates an independent tax tribunal. Beginning July 1, 2013, the Illinois Independent Tax Tribunal Board will assume responsibility for protests of all taxes administered by the Department of Revenue.

In an interesting procedural case, and important decision for online intermediaries, the Seventh Circuit Court of Appeals held that the City of Chicago may not require Internet intermediaries to collect and remit the City’s amusement tax on the difference between the original ticket price and resale price of tickets sold online. City of Chicago, Illinois v. StubHub!, Inc., Dkt. No. 09-3432 (7th Cir. Nov. 23, 2011); City of Chicago, Illinois v. eBay, Inc., Dkt. No. 10-1144 (7th Cir. Nov. 23, 2011).

Beginning in 1991, Illinois authorized ticket brokers to resell their tickets at a premium price, provided the broker registered with the State and collected local taxes. The City of Chicago took advantage of this opportunity to tax the incremental price of resold tickets until Illinois amended its ticket scalping laws in 2005. Following the 2005 amendments, an “Internet auction listing service” was relieved of the mandatory collection of local taxes, provided it met certain registration requirements and published a written notice on its website “inform[ing] the ticket reseller of the ticket reseller’s potential legal obligation to pay any applicable local amusement tax.” 720 ILCS 375/1.5(c).

Continue Reading Seventh Circuit Not Amused by Chicago’s Amusement Tax

We are pleased to announce that Carley Roberts and Prentiss Willson, nationally recognized for their leadership in California and multistate tax matters, have joined Sutherland’s State and Local Tax Practice. Carley (a partner as of February 9) and Prentiss (of counsel, effective March 1) join our other Sacramento-based lawyers – former CalTax Vice President and General Counsel Michele Pielsticker and leading property tax adviser Doug Mo, both of whom joined our SALT Team last year.

Read full details on our new team members in our press release, “Sutherland Expands State and Local Tax Practice; Grows Sacramento Office.”

Independent tax appeal forums go a long way toward ensuring effective and fair state tax administration. In the latest edition of A Pinch of SALT, Sutherland SALT’s Scott Wright, Jonathan Feldman and Andrew Appleby examine the features of independent tax forums that are fundamental to tax fairness and efficiency, and they identify many recent tax forum developments.

Read “Courting Independence: The Rise of Effective State Tax Courts and Tribunals,” reprinted with permission from the February 6, 2012 issue of State Tax Notes.

Calvin and Maggie.jpgMeet Calvin and Maggie, the playful new kittens of Sutherland Client & Practice Development Manager Katie O’Brien and her boyfriend, Scott. It has been just five days since the four-month-old pair was adopted from the Atlanta Humane Society, but they are already Sutherland SALT’s biggest fans: while Mom and Dad are away at work, the kittens’ favorite napping spot is on Katie’s fuzzy Sutherland SALT blanket.

Calvin (pictured with Scott) is quite the cuddly cat, preferring to nap every moment he can in Scott or Katie’s lap. Maggie (pictured with Katie) Katie and Maggie.bmpalso enjoys her naps, but she truly loves darting around, determined to capture the ever-elusive red dot of the laser pointer.

Scott and Calvin.bmpKatie and Scott could not be more in love with their new “kids” but hope the coming months bring fewer 4:00 a.m. wakeups by the furry pair purring loudly and batting Mom and Dad’s faces, letting them know it is time to play!

On December 1, 2011, the California Franchise Tax Board (FTB) approved Proposed Regulation 25136-2, which implements a market rule for sourcing receipts from sales of services and intangibles for those taxpayers electing a single sales factor apportionment formula. The Proposed Regulation now moves to the Office of Administrative Law to be finalized. The FTB’s decision follows a nine-month interested parties process and a regulatory process that began in June 2011.

Proposed Regulation 25136-2 applies a series of cascading rules, establishing separate rules for receipts from: 

  1. Sales of services to individual customers; 
  2. Sales of services to businesses; 
  3. Complete sales of intangibles; and 
  4. The licensing, leasing, rental, or other use of intangibles.

Continue Reading California Franchise Tax Board Decides Fate of Proposed Market Sourcing Regulation

On December 1, 2011, the Franchise Tax Board (FTB) decided to begin a formal regulatory process on numerous proposed regulations¸ including Proposed Regulation 25106.5, implementing the Finnigan Rule, codified in Cal. Rev. & Tax. Code § 25135(c); and Proposed Regulation 25106.5-1, modifying the rules governing Deferred Intercompany Stock Accounts (DISAs). The FTB staff’s request to begin a formal rulemaking process on these proposed regulations comes after numerous interested parties meetings in which stakeholders provided feedback to the FTB regarding the scope and language of necessary regulatory guidance.

The interested parties process surrounding Proposed Regulation 25106.5 (Finnigan Rule) did not generate debate. However, Proposed Regulation 25106.5-1 attracted debate regarding the extent to which California’s DISA rules should conform to the federal Excess Loss Account (ELA) regime. The federal ELA provisions allow gain from an intercompany distribution in excess of basis to be deferred leading to the creation of an ELA. The distributee may make a subsequent capital contribution to the distributor to eliminate the ELA.

Similarly, Proposed Regulation 25106.5-1 allows a subsequent capital contribution to cure a California DISA. However, the FTB has declined to agree that a liquidation can cure a DISA to the same extent that it can cure an ELA under the federal consolidated return rules. Hopefully, these issues and others will be resolved in the formal regulatory process that is expected to begin soon.

A recent Florida Department of Revenue Technical Assistance Advisement (TAA) applied costs-of-performance (COP) sourcing for corporate income tax purposes in a manner that is more akin to market sourcing. Tech. Asst. Adv. 11C1-008 (Sept. 15, 2011).   

The TAA applied to receipts from the Taxpayer’s two predominant revenue streams: receipts from subscription programming and advertising. The Taxpayer provided subscription content directly to distributors and had no direct contact with its customers’ customers (i.e., retail subscribers/customers). The Department of Revenue stated that the income producing activity is the Taxpayer’s delivery of programming content to distributors and that such delivery constitutes performance. Thus, the Department found that subscription revenue would be sourced to Florida when the distributor is located in Florida. The Taxpayer’s receipts from subscription services provided to out-of-state distributors would not be sourced to Florida, even if that distributor provided the content to Florida residents.

Continue Reading “Other Sales in Florida”: COP Sourcing in Regulation, Market in Application

Many interstate taxpayers are frustrated with how the Multistate Tax Commission conducts its audit program. In our latest A Pinch of SALT column, Sutherland SALT attorneys Steve Kranz, Diann Smith and Michael Colavito examine the Multistate Tax Compact as it relates to current state tax law and explore the possible implications of how the Commission conducts its activities, particularly its audit program.
Read “To Be or Not to Be…the MTC,” reprinted with permission from the January 2, 2012 issue of State Tax Notes.

In a reminder that there are limits on the retroactive application of tax laws, a California Superior Court rejected the Franchise Tax Board’s attempt to impose retroactive penalties on a tax shelter promoter. Quellos Fin. Advisors, LLC v. Franchise Tax Bd., Case No. CGC-09-487540 (San Francisco Super. Ct., Tentative Statement of Decision, Oct. 31, 2011).

Quellos was promoting the allegedly abusive tax shelter in 2001. California law tied the amount of the applicable penalty to that in I.R.C. § 6700, which established a maximum penalty of $1,000. Cal. Rev. & Tax Cd. § 19177. In 2003, California amended section 19177 to substantially increase the promoter penalty from $1,000 to 50% of the income derived by the promoter from the tax shelter promotion activity. The FTB assessed the 50% promoter penalty against Quellos in November 2009 for its promotion activities alleged to have occurred in 2001. Quellos argued that the pre-2003 law imposed a maximum penalty of $1,000 and the 2003 amendment could not be applied retroactively to Quellos’s 2001 activities.

Continue Reading Promoter Finds Shelter in California Court: Court Rejects FTB’s Retroactive Imposition of Tax Shelter Promoter Penalty