The California Court of Appeal ruled that nonresident shareholders were subject to California tax on their pro rata shares of intangible income from an S corporation’s sale of shares in a subsidiary. This sale of intangibles (goodwill of a business) was sourced as business income apportioned at the S corporation level, not as intangible income to a nonresident under the personal income tax law. In its first holding, the court ruled for the Franchise Tax Board, affirming the trial court’s decision that the shareholders’ intangible business income from the multistate unitary S corporation is sourced under Code of Regulations, Title 18, Section 17951-4.  This regulation requires business income to be apportioned at the S corporation level using UDITPA. The gain realized by the S corporation passes to the shareholders in the same form as received by the S corporation – here, as business income, some of which is apportioned to California.

In its second holding, the court found that the goodwill at issue had acquired a business situs in California. The shareholders asserted that the income should be treated as intangible income sourced to the state of the nonresident shareholders’ domiciles under the personal income tax law, Revenue and Taxation Code 17952.  The court rejected this argument in its first holding, finding that instead Regulation 17951-4 governs here. But, in its second holding, the court explained that even if Section 17952 applied, the income would still be taxable by California because the goodwill had acquired a “business situs” in the state. According to the court, the goodwill acquired a business situs because the S corporation apportioned a percentage of its business income to California using UDITPA and this meant that the management and disposition of the intangible property was an integral part of the S corporation’s regular trade or business operations. Once the business situs rule is applied, income from intangibles of a multistate enterprise is apportioned, rather than allocated 100% to the state.

The 2009 Metropoulos Family Trust et al. v. Franchise Tax Bd., No. D078790, 2022 Cal. App. LEXIS 464 (Ct. App. May 27, 2022)

In this episode of the SALT Shaker Podcast policy series, Eversheds Sutherland Partner and host Nikki Dobay speaks with Brad Scott, Director of Finance of Halstead Bead. Brad has become an advocate for sales tax simplification post Wayfair.

Listen as Brad and Nikki discuss the compliance challenges businesses face following Wayfair, as well as Brad’s ongoing advocacy efforts to obtain greater simplification.  They also discuss Halstead Bead’s recent Federal court battle in Louisiana, and the work of the FAIR Coalition, which is working to reform the Tax Injunction Act.  In light of the upcoming Wayfair hearing, Brad also offers his thoughts for policy makers.

They conclude with Nikki’s surprise nontax question for the week — you’re on a road trip, what do you eat?

The Eversheds Sutherland State and Local Tax team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on state and local tax policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

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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Maryland H.B. 791 clarifies that the definition of “digital product” for sales and use tax purposes does not include certain digital inputs or enterprise software. Specifically, H.B. 791 excludes from taxable digital products the following: (i) products having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities where the purchaser has a copyright or similar interest in the product and the product is used solely for commercial purposes, including advertising or other marketing activities; and (ii) computer software or SaaS purchased or licensed solely for commercial purposes in an enterprise computer system, including operating programs or application software for the exclusive use of the enterprise software system, that is housed or maintained by the purchaser or on a cloud server, whether hosted by the purchaser, the software vendor, or a third party. The legislation takes effect July 1, 2022.

Oklahoma enacted S.B. 1339 which amends the definition of “marketplace facilitator” to include a person that facilitates not only retail sales of tangible personal property but all retail sales. S.B. 1339 also provides that the marketplace facilitator’s tax collection obligation applies to any other taxes administered by the Oklahoma Tax Commission which are levied by a local jurisdiction on the retail sale of a product. These changes are effective January 1, 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 tax court recently ruled that a separately stated surcharge covering credit card processing fees was subject to sales 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. Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

This week, Eversheds Sutherland attorneys Eric Tresh and Liz Cha will present during the 2022 TEI Region 8 Annual Conference in Hilton Head Island, SC. Eric and Liz will present a State Tax Controversy session.

For more information and to register, click here.

View and learn more about past and upcoming events and presentations for the SALT team.

Hello, miss Molly! Our June Pet of the Month is an adorable rescue pup named Molly, who made a trek from Denver, Colorado to Arlington, Virginia to make a home with Jeremy Abrams, Director of Controversy and Policy at Nike.

This four-year-old cutie was believed to be half Swiss Mountain Dog and half Doberman. But, a doggy DNA test revealed she had neither breed. She has Rottweiler, Chow Chow, German Shepherd, Siberian Husky and Pit Bull in her genetic makeup. Either way, she’s still “Swiss Mix Molly” to her family!

Molly loves to stay active, hiking in the mountains with her humans and swimming in the ocean. She likes staying on the run so much that she once got loose and was gone for five hours. A police station in Washington, DC notified Jeremy that they had found her, and it took him over an hour to get to her. She’s one fast pup, and her journeys must have been a heck of an adventure for her!

In addition to munching on Greenies dental treats and steak, she loves to greet any house guest with a shoe or toy and will make you chase her around before finally dropping it and welcoming you with kisses.

We’re happy to welcome Molly to the SALT Pet of the Month club!

 

In this episode of the SALT Shaker Podcast, Eversheds Sutherland Associate Jeremy Gove teams up with Associate Cyavash Ahmadi to discuss the complexities of combined reporting, specifically comparing and contrasting the combined reporting regimes in New York and California. They discuss several of the nuances of both states’ systems and even debate what “Joyce v. Finnigan” really means!

Jeremy’s overrated/underrated question deals with a “wannabe” video game – what do you think of pinball machines?

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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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 two states recently proposed expansions to their False Claims Acts?

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. Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

 

 

Until recently, it was generally assumed that a two-thirds vote was required for the passage of all local taxes imposed to fund a specific purpose, or special taxes, in California under the state Constitution. The 2017 California Supreme Court decision in California Cannabis Coalition v. City of Upland called this into doubt by holding in another context that a tax placed on the ballot by voter initiative was not subject to the same constitutional restrictions as a tax placed on the ballot by a local governing body.

At the time, many predicted that the decision could have a far-reaching impact on the local tax landscape, including California Supreme Court Justice Leondra Kruger in a dissenting opinion. Common sense dictates that more taxes will pass when it is easier to do so.

A flurry of litigation in San Francisco, Oakland and Fresno ensued shortly thereafter concerning new special taxes that passed by a simple majority but not a supermajority vote. Trial courts came down on both sides of the issue. The appellate courts, however, uniformly found that special taxes proposed through a voter initiative only require a simple majority vote to pass. When the California Supreme Court denied review of those appellate decisions, the die was cast.

Today, localities up and down the state are embracing the voter initiative process for imposing special taxes, and taxpayers are left dealing with the fallout. In their article published by Law360, Eversheds Sutherland attorneys Tim Gustafson and John Ormonde recap the history of the simple versus supermajority vote saga and discuss what the result means for California taxpayers going forward.

Read the full article here.