State & Local Tax

On May 30, 2012, the State Board of Equalization (“SBE”), approved pro-posed amendments to the California Code of Regulations, Title 18, section 1684 (“Proposed Regulation”). The Proposed Regulation attempts to provide guidance as to the meaning of the broadened statutory definition of “retailers engaged in business in this state.” The statutory definition now includes retailers who are members of “commonly controlled groups,” as well as retailers who enter into agreements with “a person or persons in this state” who meet certain minimum thresholds.

The Franchise Tax Board (“FTB”) will begin implementing California’s recently-enacted Voluntary Compliance Initiative for reporting Abusive Tax Avoidance Transactions (“ATATs”) and certain offshore financial arrangements (“OFAs”) on August 1, 2011.¹

On August 31, 2010, the New Jersey Tax Court issued a memorandum decision in Beneficial New Jersey, Inc. v. Director, Division of Taxation,¹ concluding that the taxpayer satisfied one of the enumerated exceptions to the interest addback statute under N.J.S.A. 54:10A-4(k)(2)(I), and was thus entitled to its interest expense deductions.

On June 22, 2010, the three-member Franchise Tax Board (“FTB”) authorized its legal staff to proceed with the formal process to adopt final regulations governing the recently enacted annual single-sales factor apportionment formula election available to most corporate taxpayers. However, the existence of the single-sales factor election is at risk of repeal by several pending bills that propose to make the single-sales factor method of apportionment mandatory. Additionally, Proposition 24, if approved by the voters this November, would repeal the single-sales factor method of apportionment altogether, along with other corporate tax provisions enacted in 2009.

As tax season reaches its zenith, Pillsbury partner Jeffery Yablon's latest edition of "As Certain as Death—Quotations About Taxes" (2010: Tax Analysts), provides a welcome respite from paperwork and number crunching. Featuring more than 1,500 quotations from some of history's most colorful and successful figures—from Emperor Constantine and Al Capone to Henry David Thoreau to Miss Manners—Yablon's book offers a light-hearted look at taxes which Fortune reviewer Allan Sloan describes as “chicken soup for the tax-weary.”

The common law “economic substance doctrine” would be codified as a mandatory two-prong test should the reconciliation bill to the new health care legislation be enacted. In general, the doctrine denies federal income tax benefits to a transaction that does not have economic substance or lacks a business purpose, even though the transaction may literally comply with the Internal Revenue Code (the “Code”) and its interpretations. The reconciliation bill would also impose a strict liability penalty standard, and possibly also increase penalties, for federal income tax benefits disallowed because a transaction flunks the new test.

Effective January 1, 2010, California will require any entity undergoing a merger, acquisition or other transaction constituting a Proposition 13 change in ownership under Revenue and Taxation Code (“R&TC”) section 64(c) or 64(d) to file an appropriate change in ownership statement (BOE Form 100-B) within 45 days of the transaction or face a 10% penalty. Cal. SB 816, 2009 Stats. Chap. 622. The new provisions also tighten penalty enforcement, as described below. Currently, no penalties are imposed unless the disclosure statement is not filed within 45 days after California State Board of Equalization (“BOE”) requests the filing.

On November 5, 2009, two ballot initiatives to remove certain Proposition 13 property tax protections for California commercial property were filed with the state’s Attorney General.

Gov. Schwarzenegger and the state legislature tasked the Commission on the 21^st Century Economy (“COTCE” or the “Commission”) with suggesting major reforms of the state's tax structure aimed at solving California’s budgetary problems. Specifically, COTCE was told to come up with solutions that would reduce the volatility of California’s revenue, as well as improve the ability to compete with other states and countries for jobs and investments.

Effective September 1, 2009, resellers will become responsible for New York City's Hotel Occupancy Tax on the net amount paid for any hotel room booked by a "room remarketer."

After protracted negotiations, California has enacted a budget for the 2009-2010 fiscal year. Many recently enacted tax provisions, including a net operat­ing loss carryback deduction, credit sharing among unitary affiliates, and an annual single sales factor election were considered for repeal, but were ultimately left intact.¹

• 2009 presents a unique opportunity for property tax savings for many investors, building owners, and tenants.
• Property tax payments may be lowered by as much as 50% in 2009.
• The key is to file a timely property tax appeal in 2009 — the deadline is September 15 in many counties and November 30 in others.

Businesses that own or lease real property in California need to know that declining property values could entitle them to substantial property tax savings this year. The current fair market values on many properties have fallen below such properties' base year values, as established under Proposition 13. State tax law provides that the tax assessment for the current year is to be based on the lower of these two values. Property owners—especially those with large holdings of commercial, industrial or investment properties—should move quickly to seek relief in April or May—i.e., before July 1, when the assessed values will be placed on the tax roll. Challenging assessments after July 1 requires the filing of a formal appeal before September 15, 2009 (or November 30 in some counties).

The Franchise Tax Board ("FTB") announced its intention to reject the position of the IRS set forth in Notice 2008-83, and instructed legal staff to draft regulations specifying that banks will continue to be subject to post-acquisition loss limitations for California tax purposes.

The Franchise Tax Board ("FTB") held an interested parties meeting on Friday, December 5, to elicit public comments on the implementation of California's new understatement penalty. The new penalty applies to corporations with an understatement of tax in excess of $1 million for taxable years beginning on or after January 1, 2003. For taxable years 2003 through 2007, taxpayers can file an amended return and pay the tax shown on the amended return by May 31, 2009 to reduce or eliminate any potential understatement of tax.

The Franchise Tax Board (FTB) has announced that it will hold an interested parties meeting on December 5, 2008 to discuss California’s new 20 percent understatement penalty on corporate taxpayers. The new penalty applies to corporations with an understatement of tax in excess of $1 million for taxable years beginning on or after January 1, 2003.

On July 22, 2008, the San Francisco Board of Supervisors voted 10-1 to place Supervisor Aaron Peskin’s proposal to increase the city’s Real Property Transfer Tax on the November ballot. The proposal expands the definition of “realty sold” and increases the tax on real estate transfers of $5 million and above, applying a tax of 1.5% on the full amount of the purchase.

On July 22, 2008, the San Francisco Board of Supervisors voted 10-0 to place a proposal to increase the tax on “pass through entities” under the Payroll Expense Tax Ordinance on the November ballot. The proposal seeks to tax profits paid to owners of pass through entities—including trusts, partnerships, limited liability companies and limited liability partnerships and S Corporations—who perform work or render services within the city.

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