California Multistate Tax Compact Election

On December 31, 2015, a California Supreme Court decision ended a 6 year long debate regarding the State’s Multistate Tax Compact (“Compact”) election (Gillette Company v. Franchise Tax Bd., No. S206587, Dec. 31, 2015).  While Gillette has indicated it will appeal to the United States Supreme Court, the professional community is mixed on whether the Court will grant certiorari.  The full California Supreme Court ruling can be found here: http://www.courts.ca.gov/opinions/documents/S206587.PDF

By way of background, the Multistate Tax Compact was originally drafted as a model law in 1966 by a widely representative group of state officials, including tax administrators, attorneys general, state legislators and a Special Committee of the Council of State Governments.  The Compact became effective, under its terms, on August 4, 1967. The Compact is an advisory compact, in that actions taken under its authority have only an advisory or recommendatory effect on its member states. California enacted and became a member of the Compact in 1974.

Prior to 1993, California law required the use of an evenly weighted three-factor apportionment formula (same as per the Compact). In 1993, the California Legislature decided to replace the three-factor formula with a double-weighted sales-factor formula.

In 2010, The Gillette Company (and others) sued and argued that California’s enactment of the double-weighted sales-factor apportionment formula did not override or repeal the Compact’s formula and that they were permitted to elect to use the Compact formula.  They asked for $34 million in refund claims for prior taxable years, basing its calculations on an evenly weighted three-factor apportionment formula.

The trial court dismissed Gillette’s suit for refund, stating that the Compact’s apportionment formula was repealed. In October 2012, (after some interesting procedural matters occurring in the months prior) the California Court of Appeal reaffirmed its prior opinion while clarifying that California’s requirement to use the double-weighted sales factor was an “unconstitutional impairment of contract” during the tax years at issue to the extent it sought to override and disable California’s obligation under the Compact.

Now, the California Supreme Court has reversed the Court of Appeals.  With its unanimous decision, the Court held that the Compact is not a binding contract among its members and California was not bound by its provisions.

Similar cases have been brought forth and are at various stages of appeal in Michigan, Minnesota, Oregon and Texas.  

 

State of California Franchise Tax Ruling

California reminds us that occasional sale exclusions don’t exist only in the sales tax world!  Chief Counsel Ruling 2015-01 discusses how Cal. Code Regs. 25137(c)(1)(A) can work to exclude certain substantial and occasional receipts from the sales factor for corporate franchise tax purposes.  Having a good understanding of how a significant sale of assets can impact the state apportionment formula is critical, especially when numerous jurisdictions are concerned.  Learn more.

 

Tax News Flash: CA Competes Tax Credit

The California Competes Tax Credit is an income or franchise tax credit available to businesses that come to California or stay and grow in California.

Applications for the California Competes Tax Credit will be accepted at calcompetes.ca.gov from March 9, 2015, until April 6, 2015.

Go to business.ca.gov for more information on the California Competes Tax Credit.

California Issues Legal Rulings Addressing Nexus and

The California Franchise Tax Board (FTB) has recently issued its first legal rulings in
almost 24 months, dealing with complex nexus and apportionment concepts. In the first
ruling, the FTB concluded through a series of examples that a business entity with a
membership interest in a multiple-member limited liability company (MMLLC) that is
classified as a partnership for tax purposes may have California return filing requirements
and may be subject to the LLC tax and fee based solely upon the actions of the MMLLC.1
In the second ruling, the FTB concluded that proceeds from asset sales transactions which
took place during a Chapter 11 bankruptcy plan of reorganization were not “occasional
sales” and were includible in the taxpayer’s sales factor.2

Click here to continue reading…CA-Legal-Rulings-2014-01-and-02-9-9-14

Increased Payroll Scrutiny

The frequency of payroll audits has surged over the last five years and businesses are facing increased payroll scrutiny.

Most payroll audits have traditionally focused on whether or not a business is misclassifying an employee as an independent contractor, thus avoiding Social Security, Medicare and other payroll taxes. According to an article published last March by the Wall Street Journal entitled Payroll Audits Put Employers on Edge, “local businesses misclassify anywhere from 10% to more than 60% of their workers as independent contractors.”

Since the 2008 economic meltdown states have been springing into action to audit payroll taxes as a way to increase revenue. States are assessing hefty fines for misclassification. For example, Colorado passed House Bill 1301, which allows the Colorado Department of Labor and Employment to fine a business up to $5,000 for the first misclassification offense and up to $25,000 for subsequent offenses (Payroll audits increase as government seeks added revenue, Heather Draper, Denver Business Journal).

The increase in payroll audits has also been intensified by the Federal government. The U.S. Department of Labor has issued partnership agreements with California, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington to collaboratively investigate more than 6,000 employers for misclassifying employees. The U.S. Treasury estimates that if all employers were forced to properly classify employees it would result in $8.71 billion in added federal tax revenue over the next decade.

If an employer is misclassifying employees then they can take advantage of a voluntary disclosure program. The IRS is offering a Voluntary Clarification Settlement Program (VCSP) that allows employers to reclassify employees while minimizing look back, and waiving penalties and interest. Similar agreements may be negotiated at the state level.

California Franchise Tax Board Ponders New Federal Income Tax Changes

The California FTB has released a document summarizing how the new federal tax laws correspond to California law. It also details whether or not the new laws will have any effect on California’s revenue.

Read the report:

Summary of Federal Income Tax Changes 2013

State and Local Tax Amnesty Programs for 2014

Now that 2013 has come to a close, a large number of state and local tax amnesty program have expired; however, a couple still remain in effect. Vermont, Delaware, Louisiana, and to a lesser degree California, Tennessee, and Ohio still have programs in place to waive certain penalties and interests. The Sales and Use Tax Institute and the Council on State Taxation both keep pretty good tabs on amnesty programs as they become active. To make sure that you are up-to-date on new and upcoming amnesty programs keep a close eye on these two sites.