On February 22, 2024, a California Court of Appeal held that the Digital Infrastructure and Video Competition Act of 2006 did not provide the City of Lancaster with a private right of action to pursue franchise fees from non-franchise holder streaming video providers.

The Act regulates all “video service providers” and directs the Public Utilities Commission to issue state franchises authorizing the provision of video services in California.  The Act requires video service providers to pay a franchise fee to local governments for use of the public rights-of-way to construct and maintain their networks.  The City argued that the streaming video providers are video service providers under the Act and must obtain a franchise and pay the resulting franchise fees.

The Court of Appeal held that the Act did not provide a right of action for local governments to pursue franchise fees from non-franchise holders.  The court found that the Act only expressly authorizes a local government to bring an action concerning the underpayment or nonpayment of franchise fees against franchise holders.  Additionally, the court held that the legislative intent did not indicate the creation of an implied right to bring a legal action against any company the City believes should, but does not, hold a franchise.  Thus, the Court of Appeal concluded that the City was not authorized, expressly or impliedly, to bring action against the streaming video providers because they were not franchise holders.

City of Lancaster v. Netflix, Inc., et al., 99 Cal.App.5th 1093 (Cal. Ct. App. 2024).

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 a Cavalier King Charles Spaniel and 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.

The Washington Court of Appeals upheld the constitutionality of a county document recording surcharge that financed affordable housing, eviction prevention, and housing stability services. A trade association of homebuilders challenged the surcharge as a property tax that violates the uniformity requirement of the Washington Constitution. The court held that the surcharge was a tax because its primary purpose was to raise revenue for a desired public benefit. However, the surcharge was not subject to the uniformity requirement because it was an excise tax, not a property tax. The document recording surcharge was not a property tax because it is not levied on property ownership, but rather on “the exercise of rights in and to property or the exercise of a privilege.”

Bldg. Indus. Ass’n of Washington v. State of Washington, No. 57502-7-II, (Wash. Ct. App. 2024).

On February 15, 2024, a New York state administrative law judge concluded that a winery “used” its property and qualified as a New York manufacturer under the state’s Qualified New York Manufacturer (QNYM) provisions, even though it had no employees at the winery and outsourced its land management operations to an independent land management contractor. 

The New York State Department of Taxation and Finance issued an assessment to the winery, asserting that it did not qualify as a QNYM. The QNYM program provides multiple benefits to corporate taxpayers in New York, including a 0% corporate franchise tax rate.  In order to qualify, taxpayers must satisfy at least one of two tests. The first test – at issue in this case – requires that taxpayers (1) be “principally engaged” in the production of goods by manufacturing, viticulture, etc., (2) owned at least $1,000,000 of qualifying property in New York, and (3) principally used the property in the production of goods by manufacturing, viticulture, etc. 

The Department argued that the winery was not entitled to the QNYM benefits on the basis that it did not principally use its qualifying property in the production of goods. But the ALJ rejected the Department’s argument that the taxpayer’s use of the third-party contractor was impermissible because nothing in the QNYM provisions suggested that property is not “used by” its owner if the owner contracts with a third-party to perform labor on or related to the property. The ALJ also rejected the Department’s argument that the property was not used in late December 2016 (and that the benefits were thus unavailable for that year). While the grapes were in a dormancy period at that time, it is still a “crucial part of the annual growth cycle for grapes.” 

In the Matter of the Petition of E. & J. Gallo Winery, DTA Nos. 830277, 850146 (N.Y. Div. Tax App. Feb. 15, 2024).

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: A Chancery Court in which state recently held that software licenses are intangible property, therefore the gross receipts from the sale of software licenses are not subject to tax under the state’s Business Tax Act?

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!

On February 14, 2024, the California Office of Tax Appeals (OTA) denied the California Franchise Tax Board’s (FTB) request for rehearing in the Appeal of Microsoft Corporation and Subsidiaries (OTA Case No. 21037336). Microsoft is allowed to include 100 percent of its foreign dividend income in its sales factor denominator. This is a huge opportunity for similarly situated California water’s-edge taxpayers. 

Read the full Legal Alert here.

On January 25, 2024, the New York State Supreme Court Appellate Division ruled against the taxpayer, finding that the taxpayer’s equipment did not qualify for exclusion from real property tax. Taxpayer, SLIC Network Solutions, provides internet, telephone and cable television services via fiber-optic cables to customers throughout New York State. Under the State’s real property tax law, this type of equipment is taxed as “local public utility mass real property” “when owned by other than a telephone company.” Taxpayer argued that its fiber-optic cables are excluded from the definition of public utility mass real property because the cables are used in the “transmission of . . . cable television signals.” The Hearing Officer rejected this argument and the Supreme Court upheld the determination.

Real property equipment “used in the transmission of news or entertainment radio, television or cable television signals” is excluded from the definition of local public utility mass real property, however courts have interpreted the exclusion as applying to fiber-optic installations only if they are “primarily or exclusively used” for one of the excluded purposes. Accordingly, the taxpayer argued that the primary use of the fiber-optic cables was to provide cable television services and that its provision of internet and telephone services did not undermine that primacy. To support its argument, the taxpayer produced testimony and affidavits asserting the taxpayer’s extensive use of the cables for transmitting television signals as well as the significant company costs attributable to the television business. The Appellate Division agreed with the trial court that the taxpayer had not demonstrated its entitlement to the exclusion, since the taxpayer had not provided evidence showing the “ancillary nature” of the internet and phone services, or comparing the use of fiber-optic cables for cable television signals to the level of usage of the same lines for internet and telephone services.

Matter of SLIC Network Sols., Inc. v. N.Y. State Dep’t of Taxation & Fin., 2024 NY Slip Op 00342, (App. Div.).