Aftershocks, or Warning Signs? How the California Tax Landscape Looks Heading into the New Year February 16, 2021 Tim Gustafson Partner Eric Coffill Senior Counsel
2021 Eversheds Sutherland (US) LLP
Fiscal Outlook Legislation State Tax Agencies
Franchise Tax Board Office of Tax Appeals Department of Tax and Fee Administration Board of Equalization
Litigation Local Taxes
Discuss key California tax events of 2020 and how they affect the state's outlook for 2021.
Identify significant California tax legislative and regulatory activity already underway in 2021.
Understand the current hot-button issues at California's various tax agencies.
What do the numbers say?
Budget projections ($54B deficit) EOY revenues ($26B windfall)
2021: Budget projections A Golden State exodus?
2020 Hits and (Many) Misses
2020-2022 NOL suspension and $5M credit cap enacted (AB 85)
Tax voucher program enacted (AB 107) FCA applied to taxes failed (AB 2570) Corporate taxpayer confidential information disclosure
requirement failed (SB 972) Corporate tax rate increase failed (SB 37) Net worth tax failed (AB 2088) Additional tax on high-income earners failed (AB 1253)
2021 Early Bills to Watch & Other Considerations
Corporate tax rate increase Tax on GILTI and IRC 965 repatriated income for water's-edge
taxpayers (without corresponding factor representation)
SB 288: foreign corporate conversions
SB 104: SALT cap work-around for pass-through entities
Another FCA push? Appetite for new taxes? Governor recall effort?
State Tax Agencies: FTB
Ongoing regulation projects
Market sourcing regulation: FTB Reg. 25136-2 (held fifth IPM in July)
Alternative apportionment petition regulation: FTB Reg. 25137 (held fourth IPM in August)
Chief Counsel Rulings 2020-01, 2020-02 FAQs on teleworking nexus Chief Counsel discussion of carried interest
More/continued regulation projects?
Informal: FTB Reg. 25136-2 and another IPM? Formal: amendments to FTB Reg. 25137 to Office of
Administrative Law (20-day notice given on Dec. 29, 2020)
More cases resolved at audit/protest?
Settlement program changes?
FTB Notice 2020-03 (Dec. 22, 2020) Raise all issues/arguments in request for consideration
("complete and full analysis")? Prohibited from providing additional facts?
State Tax Agencies: CDTFA
Annual Report to Legislature
For FY 2018-2019 (released June 2020) Three highest areas of taxpayer noncompliance:
Unsupported sales for resale (disallowed "due to lack of supporting information")
Unreported sales (sales on books not on tax return) Out-of-state vendor purchases (failure to collect use tax)
Appeals volume up slightly (close to 1,000 in FY 2018-2019)
Emergency marketplace regulation promulgated: CDTFA Reg. 1684.5
Proposed amendments to drop shipment regulation: CDTFA Reg. 1706 (IPM held in September)
Movement on technology transfer agreements?
Stalled regulation project: CDTFA Reg. 1507 Activity in CDTFA Settlement Bureau
More regulation projects?
State Tax Agencies: OTA
Appeal of Swat-Fame Inc., 2020-OTA-046P (Precedential)
Research credit Followed federal law with regard to "process of experimentation"
Appeal of C.R. Pino and C. Pino, 2020-OTA-376P (Precedential)
Research credit Uncorroborated study insufficient to show qualified research
Appeal of Micelle Laboratories, Inc., 2020-OTA-290P (Precedential)
Establishing price of tangible assets upon sale of business CDTFA must follow its regulation (CDTFA Reg. 1595), not audit
2020 Decisions (cont.)
Appeal of IMAGE 2000, 2020-OTA-272P (Precedential)
Reliance on prior written CDTFA advice/CRTC 6596 relief
Appeal of L. Mazer and M. Mazer, 2020-OTA-263P (Precedential)
California domicile/residence under CRTC 17041
Appeal of L. Conacher and J. Dea, 2020-OTA-365 (Nonprecedential)
Which jurisdiction's law applies?
2021 Decisions and Developments
Appeal of Thomas Conglomerate, 2021-OTA-030P (Pending precedential)
Prenatal imaging services (i.e., ultrasounds) Applied "true object" test to determine taxability
Appeal of Q-Mobile, Inc., 2021-OTA-011 (Nonprecedential)
CDTFA applied "safe harbor" in Reg. 1585 to establish sales price of unbundled sales of cell phones
Revising Rules for Tax Appeals
Clarifying grounds for petitions for rehearing Process and requirements for closed hearing requests
More weighty business tax decisions?
State Tax Agencies: BOE
2020 Property Tax Activity
Prop 15 (split roll initiative)
Would have required reassessment of commercial property at FMV at least once every three years
Defeated at polls 52% to 48%
Prop 19 (Constitutional amendment)
Allows primary residence base year value transfer for certain individuals
Changes provisions governing family transfer exclusions
COVID-related working groups
Assessment appeals relief CRTC 170 disaster relief claims Proposition 8 decline in value claims
Implement Prop 19
BOE backing county assessors' draft legislation
Prop 8 decline in value claims
Temporary reduction when market value falls below base value as of January 1 lien date
Owner provides data to support a lower value
Bekkerman v. CDTFA, Case No. 34-2015-80002242 (Sacramento trial court held CDTFA Reg. 1585 invalid as applied to carrier-retailers)
CDTFA v. Superior Court (2020) 48 Cal.App.5th 922 (taxpayer must pay tax before seeking a declaration that the regulation underlying assessment is invalid)
Zolly v. City of Oakland (2020) 47 Cal.App.5th 73 (Oakland's waste management franchise fees are "taxes")
2020 Cases (cont.)
731 Mkt. St. Owner, LLC v. City & Cty. of San Francisco (2020) 50 Cal.App.5th 937 (San Francisco cannot impose documentary transfer tax on existing leasehold interest with 35-year remaining term)
Prang v. Amen (2020) 56 Cal.App.5th 246 (change of ownership exception where proportional ownership interests as represented by stock remain the same considers all classes of stock, not just voting stock)
2009 Metropolous Family Trust v. FTB (sourcing sale of goodwill) Handelman-CEG v. FTB (research credit case) Residency cases Penalty cases
CDTFA: EMA Design Automation v. CDTFA (reliance on prior written advice)
Majority vs. super-majority vote requirement cases
0-3 at Court of Appeal Supreme Court has declined review thus far
New San Francisco taxes
Repeal Payroll Expense Tax and increase GRT (Prop F) Real property transfer tax (Prop I) Parcel tax (Prop J) CEO pay ratio tax (Prop L)
Last chance in majority vs. super-majority vote dispute Jobs & Housing Coalition, et al., v. City of Oakland
Pending before First Appellate District Different facts, additional legal argument
Budget issues Expand tax base
Apply current taxes to new businesses/industries Example: apply communications users tax definition of
"telecommunications service" to software, streaming/OTT, and other services
Tim Gustafson Partner Eversheds Sutherland (US) LLP 916.844.2826 [email protected]
Eric Coffill Senior Counsel Eversheds Sutherland (US) LLP 916.844.2821 [email protected]
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