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The California Franchise Tax Board recently released Legal Division Guidance 2012-03-02, concluding that taxpayers may not simultaneously report tax under a single sales factor election and the standard three-factor formula to avoid application of the Large Corporate Understatement Penalty. For full details, read our legal alert, “Single Sales Factor Election May Create Exposure…

The California State Board of Equalization (BOE) has provided guidance regarding the application of sales and use tax to purchases of tangible property from retailers using certificates such as Groupon or LivingSocial coupons. Special Notice L-297, California State Board of Equalization (Nov. 2011). In particular, the BOE addressed transactions in which retailers contract with Internet-based…

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…

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

The Franchise Tax Board (FTB) recently issued guidance on California’s updated “doing business” provision for California corporate income tax purposes. FTB Notice 2011-06 (Oct. 12, 2011).  This guidance clarifies recent amendments that specify when the Chief Counsel may issue a ruling regarding whether a taxpayer is doing business in the state. 

Effective January 1, 2011…

California’s unique political system can be a mystery to those unfamiliar with its idiosyncrasies. However, a basic understanding of some important California political tenets can pay huge dividends. There are two key tools for protecting important policy interests in California: (1) the initiative measure; and (2) the referendum.

An initiative measure is a policy proposal that is placed on the ballot for public vote. An initiative measure is generally used when there are political barriers to legislation, but broad public support exists for the proposed policy. Initiatives have few legal restrictions, but generally they must only pertain to a single subject and comport with the United States Constitution.

A referendum measure is used to give voters an opportunity to approve or reject a recently enacted law. Proponents of a referendum are generally seeking repeal of recently enacted legislation. Thus, for a referendum to succeed, the statute being referred must have broad public opposition.Continue Reading The Tools of the Trade for Challenging California “Tax” Increases