The California Supreme Court reversed the appellate court’s decision regarding the Franchise Tax Board’s (FTB) authority to conduct an audit to determine whether a taxpayer is entitled to an enterprise zone hiring credit. DiCon Fiberoptics, Inc. v. Franchise Tax Bd., Case No. S173860 (Apr. 26, 2012).
California’s Enterprise Zone Act (the Act) permits a taxpayer that employs a “qualified employee” in an enterprise zone to claim a tax credit for five years. To be a “qualified employee,” at least 90% of the employee’s services must “directly relate[ ] to the conduct of the taxpayer’s trade or business located in an enterprise zone,” and the employee must perform at least 50% of his or her services in the enterprise zone. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A). In addition, the employee must fall within one of several categories that demonstrate the employee is disadvantaged or endures some form of employment barrier. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A)(iv). To claim the credit, taxpayers are required under the Act to: (1) obtain from the local zone government authority a certification (or “voucher”) that provides the qualified employee meets the eligibility requirements; and (2) retain a copy of the certification and provide it upon request to the FTB. Cal. Rev. & Tax. Code § 23622.7(c).