In this episode of the SALT Shaker Podcast, Eversheds Sutherland Partner Tim Gustafson joins Associate Jeremy Gove for a deep dive into California’s market-based sourcing regulation.

Together they discuss various interpretations of and proposed amendments to the regulation offered over the past six years, and how the interpretations and amendments might affect taxpayers.

They wrap with a series of underrated/overrated questions related to scents.

You can read Tim’s article on the topic for Tax Notes State here.

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

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On August 9, 2023, the New York State Department of Taxation and Finance (Department) submitted its draft corporate franchise tax regulations for publication in the State Register – a significant and necessary step in the State Administrative Procedure Act (SAPA) process to formally adopt regulations related to the sweeping reform of the state’s Corporation Franchise Tax that was enacted nearly a decade ago. 

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’s Court of Appeals recently held that a qualifying taxpayer could elect the alternative apportionment method for manufacturers for the first time on an amended tax return?

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 posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

In the pending-precedential decision Appeal of Southern Minnesota Beet Sugar Co-op., the California Office of Tax Appeals (OTA) ruled that payroll, property and sales that generated deductible agricultural cooperative income under Cal. Rev. & Tax. Code Section 24404 must be included in the taxpayer’s corresponding payroll, property and sales factors. 

The California Franchise Tax Board (FTB) argued that such payroll, property and sales should be excluded from both the numerator and denominator of the apportionment factors because the activities produced deductible income. The FTB relied on Legal Ruling 2006-01, which reflects the agency’s long-standing position that activities not resulting in net business income should not be reflected in the apportionment formula.  Despite the FTB’s request for deference to its interpretation, the OTA disagreed with the FTB’s position.  Looking to the plain language of the governing apportionment statutes, the OTA concluded that there were no grounds to exclude activities that give rise to apportionable business income whether or not deductible. Specifically, the OTA drew a distinction between income that is deducted, and income that is “exempted,” “excluded,” or “not recognized” under the terms of the Revenue and Taxation Code, the latter of which “generally do not enter into gross income (or gross receipts) to begin with.” 

In the Matter of the Appeal of Southern Minnesota Beet Sugar Co-op., 2023-OTA-342P (Cal. OTA March 17, 2023), petition for rehearing denied, 2023-OTA-343 (Cal. OTA June 6, 2023).

The Colorado Department of Revenue issued a private letter ruling concluding that a taxpayer’s income arising from the sale of Colorado real property is apportionable income because the property was used in the taxpayer property rental business. However, the proceeds from such sales are not “receipts” and thus not included in its Colorado apportionment factor calculation because the sale of the property did not occur in the regular course of the taxpayer’s business.  The taxpayer received receipts in the regular course of its business from property rentals, and disposed of its real property only on infrequent occurrences.  Thus, the Department concluded that proceeds for a sale of real property was apportionable income as it was “income arising from transactions and activity in the regular course of a taxpayer’s trade or business.” But, for purposes of determining the apportionment factor, receipts are included in the calculation only to the extent that they are “received from transactions and activity in the regular course of a taxpayer’s trade or business.”  The taxpayer’s business is property rental, not property sales, and thus the Department determined that the receipts received from the disposition of the real property are not “receipts” for purposes of determining the taxpayer’s Colorado apportionment factor.

Colo. Dept. of Rev., PLR 23-002 (Mar. 13, 2023).

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: The Washington DOR recently determined that an audio equipment rental company who rented and also operated the equipment was not entitled to an exemption from what state-level tax?

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 posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

The Wisconsin Supreme Court recently held that the state’s sales tax exemption for the sale of aircraft parts and maintenance does not apply to per-flight-hour aircraft lease charges for repairs and maintenance.

Under Wis. Stat. § 77.51(15b)(a), sales tax applies to the total amount of consideration that the taxpayer receives for leasing its aircraft, without any deduction for the taxpayer’s cost of materials used, labor or service cost, or any other expense of the taxpayer. Although the taxpayer’s purchase of aircraft repairs and engine maintenance from vendors is tax-exempt, tax applies when the taxpayer passes those costs along to its customers as part of the total amount of consideration in a lease.

The taxpayer sought to apply statutory exemptions related to aircraft: Wis. Stat. § 77.54(5)(a)3., which exempts the sale of “parts used to modify or repair aircraft,” and Wis. Stat. § 77.52(2)(a)10., which exempts the sale of “repair, service, … and maintenance of any aircraft or aircraft parts.” The court held that the taxpayer’s activities fell outside of the text of the exemptions because it was leasing aircraft to the lessees rather than re-selling aircraft repairs or engine maintenance services.  Further, the court found that the taxpayer was not incurring the repair and maintenance costs as the lessee’s agent.  The repairs and maintenance were cost of the taxpayer’s business that did not reduce the taxable sales price of the aircraft lease. 

Citation Partners, LLC v. Wisconsin Department of Revenue, 985 N.W.2d 761 (Wis. 2023)

Meet sweet Zita, our August Pet of the Month and rescue pup belonging to Jace Chevalier, Senior Tax Manager at T-Mobile. Named after the children’s book series “Zita the Spacegirl,” Zita joined the Chevalier family in 2021 by way of the Houston K-911 Rescue.

Jace and his family speculate that Zita is a Corgi and Pit Bull mix. They are one hundred percent certain, though, that she’s a good girl!

The five-year-old’s favorite munchies are bananas and sunflower seeds, and she also enjoys her two daily walks, chasing balls at the park and sunbathing on the deck.

Her morning routine of stretching, rolling around on her back, and making good morning sounds is pretty funny. It also didn’t take her long to figure out how to remove that sweater she’s wearing in the picture below!

We’re happy to have you, Zita!

On August 9, join Eversheds Sutherland attorneys Charles Capouet, Cyavash Ahmadi and Meriem El-Khattabi for a review of the long-standing SALT Scoreboard publication and the important state tax cases from the first half of 2023. In addition to recapping case opinions, Charles, Cyavash and Meriem will analyze case trends and compare 2023’s results to prior years’ case tallies.

Register to join us here.