The California Court of Appeal held that the Los Angeles County Assessor erred by failing to remove the value of certain nontaxable intangible assets when valuing a hotel for property tax purposes. Intangible assets are generally exempt from property tax in California. In valuing the hotel, the Assessor used the income valuation approach, which looks to the current and future income stream associated with the property in order to calculate its present, taxable value. The taxpayer argued that in calculating the income stream, the Assessor failed to remove income associated with three intangible assets: a subsidy from the City of Los Angeles valued at $80 million (directly tied to the City’s hotel tax collected on the rooms); a onetime upfront payment made by the hotel’s operators, Ritz Carlton and Marriott, of $36 million dollars for the right to operate the hotel; and “hotel enterprise assets,” including “flag and franchise, food and beverage, and assembled workforce,” valued at $34 million dollars. 

First, the Assessor argued that the $80 million subsidy was not exempt from tax because it “runs with the land and is associated with the ownership of the property.” Relying on Elk Hills Power, LLC v. Board of Equalization, 57 Cal. 4th 593 (2013), the Court rejected the Assessor’s argument, finding that the correct test is whether “the asset is directly necessary to the productive use of the property, whether it is intangible, and whether it can be valued.”  Because all three of these requirements were met, the Court found the subsidy was not taxable and must be removed from the income stream.

Second, turning to the $36 million dollars paid by Ritz Carlton and Marriott for the right to operate the hotel, the Court found that the Assessor erred by treating the payment as income attributable to the hotel. Rather, the Court concluded, it “was not income to the hotel; it was a price break the managers gave the hotel on payments from the hotel.” 

Third, the Court found that the income attributable to the “hotel enterprise assets” had to be removed from the income stream. The Assessor argued that the value of these assets, owned by the hotel’s operators, had already been removed from the income stream by deducting the fees paid to the operators under the so-called “Rushmore” approach.  Following SHC Half Moon Bay, LLC v. County of San Mateo, 226 Cal. App. 4th 471 (2014), the Court found that this method failed to account for the value of these assets, reasoning that if the “fee were so high as to account completely for all intangible benefits to a hotel owner,” the owner would have no reason to pay it.

Olympic & Georgia Partners, LLC v. County of Los Angeles, 2023 Cal. App. LEXIS 263 (2023).

The Washington Court of Appeals held that a company’s collection of data from electric and natural gas meters constituted data processing services exempt from the retail sales tax. The taxpayer collected data from meters used by an energy company’s customers, converted the data into a usable form, and transmitted the data to the energy company so that it could be used for customer billing.

Washington law defines data processing services (an exception from taxable digital automated services) as “primarily automated service[s]…where the primary object of the service is the systematic performance of operations by the service provider on data supplied in whole or in part by the customer to extract the required information in an appropriate form or to convert the data to usable information.”  The Department contended that the taxpayer’s services did not constitute exempt data processing because the primary purpose or true object of the services was the collection and transmission of data—not its processing. The taxpayer disagreed, arguing that the primary purpose of its services was the manipulation and conversion of the data into information usable for its customers, as opposed to the transmission of the data itself.

Relying on precedent, the Court of Appeals concluded that the company was primarily providing data processing services. The court focused on the distinction between services involving the mere transmission of data, versus those involving manipulation or conversion of the data. Because the company (1) converted the data into an appropriate form in a process that took several hours, (2) quantified the information, (3) identified patterns in the information, and (4) without the company’s conversion the data was useless to the customer, the court held that the manipulation and conversion of the data was the true purpose of the transaction. As a result, the court concluded that the company’s services met the statutory definition of data processing and were therefore exempt from retail sales tax. 

Landis+GYR Midwest Inc. v. Washington Department of Revenue, Case No. 56877-2-II, Wash. Ct. App. 2d  (March 28, 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: Which state recently held that taxpayers are not entitled to a set interest rate for their refund because no consistent interest rate has been provided on all refunds?

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!

This week on the SALT Shaker Podcast, Eversheds Sutherland Associate Jeremy Gove welcomes Chris Emigholz, Chief Government Affairs Officer at the New Jersey Business & Industry Association (NJBIA), to the show.

First, they cover Chris’ role at NJBIA and what NJBIA does for New Jersey taxpayers. They then dive into a meaty tax discussion of current issues and legislative proposals in the state, including corporate tax rate reduction, the state’s remote work tax policies, unemployment insurance payroll taxes, and proposed changes to how New Jersey taxes GILTI.

Jeremy picks his latest overrated/underrated question from a large menu – how do you feel about diners?

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

Listen now:

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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: During Georgia’s 2023 legislative session, which bill would have increased the tax on tobacco and vaping products by 20 cents?

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 a recent unreported decision, the Maryland Appellate Court held that taxpayers were not entitled to a 13 percent interest rate on a judgement after the legislature lowered the state’s refund interest rate during the pendency of the taxpayers’ appeal.

The taxpayers successfully challenged the limits that Maryland state law placed on the tax credit for income taxes paid to other states. The law authorized a tax credit against state income taxes but not county income taxes. While the taxpayers’ claim was pending, the state legislature lowered the interest rate for tax refunds from 13 percent to the 2015 prime lending rate. The court characterized the lower interest rate as “sound fiscal planning” because of the estimated $200 million in potential refund claims that would be paid if the taxpayers prevailed with their claim.

The court held that the legislature set up the tax refund interest rate on “shifting sands,” and that the state has never consistently provided interest on all refunds nor locked the interest rate in place. Accordingly, the taxpayers could not reasonably rely on or have a settled expectation of a specific rate.

The court also noted that this is the fourth appeal to reach an appellate court in this controversy, deeming it a “threequel.”

Wynne v. Comptroller of Maryland, Md. App. No. 1561 (March 15, 2023).

During the 2023 legislative session, the Georgia General Assembly passed significant tax legislation including decoupling from IRC § 174, imposing sales tax on certain digital goods, and revising eligibility for the pass-through entity tax election.

March 29, 2023 was “Sine Die” or the 40th and final legislative day of the 2023 session. Both chambers of the General Assembly passed the below bills before the end of the session. These bills are now transmitted to the Governor, who can sign or veto the legislation within 40 days after the end of the legislative session. If the Governor fails to take any action, the legislation becomes law upon the expiration of the 40-day period (May 8).

Read the full Legal Alert here.

In this week’s episode of the SALT Shaker Podcast, Eversheds Sutherland Associate Jeremy Gove welcomes a fellow New York resident to the show, Partner Todd Betor. Todd recently re-joined the SALT practice in January.

Jeremy and Todd delve into a key area of Todd’s practice, SALT issues arising as a result of mergers, acquisitions, or dispositions.

Jeremy and Todd’s conversation covers a few key reasons why it’s important for SALT advisors to be involved in a deal, such as the potential disconnect between state and federal tax treatment of certain transactions. In addition, they talk about why it’s important to review major SALT considerations that go into a deal, and how the consideration of SALT issues can affect tax savings.   

They conclude with this week’s overrated/underrated consideration – Nashville hot chicken.

As referenced in this week’s show, you can read more of Todd’s key takeaways from his presentation at TEI’s 2023 M&A Seminar here.

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

Listen now:

Subscribe for more:

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 Department of Revenue recently released guidance specifying that sales of “canned” computer software are taxable sales of tangible personal property regardless of the form in which the software is transferred or transmitted?

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!

On Wednesday, March 29, Eversheds Sutherland attorneys Eric Coffill and Chelsea Marmor will participate in the TEI Philadelphia Chapter’s virtual East/West Summit, covering SALT updates on both coasts.

In addition, on Thursday, March 30, Eversheds Sutherland Partners Michele Borens, Jeff Friedman and Tim Gustafson will present at the TEI Virginia Chapter’s SALT Day, covering a legislative update as well as use tax considerations for purchasing electronically delivered software, SaaS, digital services and digital content.

View and learn more about past and upcoming events and presentations.