JULY 2017 SALT SHAKER
Major changes to California’s tax agencies were recently enacted as part of the Taxpayer Transparency and Fairness Act of 2017 (Act) which was signed into law on July 1, 2017 as part of the California state budget.
The Act divests the California State Board of Equalization (“BOE”) of several key functions and creates two new government tax agencies—
- the California Department of Tax and Fee Administration
- the Office of Tax Appeals
The new agencies will perform many of the BOE’s previous duties.
Under existing law, the BOE administers various tax and fee programs, including the sales and use tax; adopts rules and regulations to clarify tax laws; acts as an appellant body for the review of property, business and income tax assessments; and oversees the property tax assessment practices of all 58 counties.
Effective July 1, 2017, the Act confers all of the BOE’s collection and administrative responsibilities related to various taxes and fees onto the California Department of Tax and Fee Administration, including tobacco taxes, cannabis taxes, and sales and use tax.
The Act also grants the Office of Tax Appeals the authority to perform the BOE’s appellate duties. The BOE would maintain its duties as provided in the California Constitution, which include reviewing and adjusting certain property tax assessments and setting certain tax rates.
The Act represents a major change in California tax policy that has been considered many times over the last century. California is the only state where elected officials decide taxpayers’ appeals. The Act changes California law to be more consistent with other jurisdictions. The Act retains certain practices, such as the Franchise Tax Board’s inability to appeal a taxpayer-favorable decision.
The New Jersey Tax Court has ruled that payments made by a subsidiary for obtaining the license to use and distribute the parent’s prewritten software qualified as an intangible expense/cost for purposes of the addback provisions but were excepted from the addback statute because the facts showed that the payments were substantively equivalent to payments made by either the parent or the subsidiary to unrelated third parties under transactions involving the same subject and object (sale of prewritten computer software license and service contracts). (BMC Software v. Director, Division of Taxation, N.J. Tax Ct., Dkt. No. 000403-2012, 05/24/2017.)
The issue was whether the Subsidiary’s payments to the Parent: (1) qualify as intangible costs and expenses for purposes of N.J. Rev. Stat. § 54:10A-4.4(b); and (2) if so, whether those payments qualify for an exception from the addback rules provided by N.J. Rev. Stat. § 54:10A-4.4(b).
Personal Income Taxes
An administrative law judge (ALJ) has issued an opinion reversing the Division of Taxation’s determination that the taxpayer had not demonstrated that he changed his domicile from New York City to Paris, France, during the 2011 and 2012 tax years.
The ALJ found that the taxpayer’s credible testimony established that he considered Paris to be his home after reuniting with his high school sweetheart who lived in Paris. The taxpayer moved to Paris after his retirement in 2011 and then purchased an apartment there. The ALJ noted that while the taxpayer’s children and grandchildren live in the United States, this fact does not prove that the taxpayer retained a New York City domicile. The ALJ rejected the Division’s contention that the taxpayer had not changed his domicile, because he failed to abandon his New York City apartment in addition to the time he continued to spend in New York City finding that the Paris apartment had undergone substantial renovations, the taxpayer obtained a French driver’s license, and he also paid French resident taxes since moving there. While the ALJ acknowledged that the taxpayer did spend a substantial amount of time in New York City during the periods under review, the basis for the time was related to treatment for a serious medical problem, and using the New York City apartment as a stopover on his way to visiting his children or attending board meetings in Colorado. Also, the ALJ found that after his retirement in 2011, the taxpayer had no business ties to New York City. (In the Matter of the Petition of Patrick, N.Y.S. Division of Tax Appeals, ALJ, Dkt. Nos. 826838; 826839, 06/15/2017.)
Sales and Use Tax Nexus
The Virginia Department of Taxation determined that a taxpayer maintaining tangible personal property for sale in a Virginia fulfillment center has sufficient activity to require it to register to collect and submit sales and use tax on sales to Virginia customers. The taxpayer at issue runs an online business and maintains a fulfillment center with resale inventory in Virginia. The taxpayer makes no deliveries within Virginia and has no employees or real property in Virginia. Effective July 1, 2017, Va. Code Ann. § 58.1-612(C)(9) provides that a dealer will have sufficient activity to require registration if the dealer owns any tangible personal property for sale located in the state of Virginia. The Department advises taxpayers to review Virginia Tax Bulletin No. 17-3, 05/03/2017 for additional detail on the recent law change on this issue and for information on the registration process. (Virginia Public Document Ruling No. 17-71, 05/23/2017.)
Following an unfavorable court decision, state legislatures have been able to effectively reverse a decision by retroactively changing the law. Several taxpayers have challenged the validity of retroactive state tax changes by arguing that the retroactive laws violate the U.S. Constitution’s Due Process Clause, which requires that no state may “deprive any person of life, liberty, or property without due process of law.”
The U.S. Supreme Court last addressed the constitutionality of retroactive tax legislation in 1994 in United States v. Carlton, 512 U.S. 26 (1994). In Carlton, the Court upheld retroactive tax legislation because it was enacted for a “legitimate legislative purpose furthered by rational means” and the legislature “acted promptly and established only a modest period of retroactivity.” Carlton involved a one-year retroactive effective date. The standard provided in Carlton, however, does not give clear guidance on a constitutionally acceptable length of time for retroactive tax changes and what is considered a “modest period of retroactivity.”
On May 22, 2017, the U.S. Supreme Court declined two opportunities to clarify what is an acceptable length of time: (1) Dot Foods Inc. v. Wash. Dep’t of Revenue, 372 P.3d 747 (Wash. 2016), where the taxpayer challenged Washington’s retroactive application of tax law changes going back 27 years; and (2) six cases, including Gillette Comm. Ops. N. Am. v. Mich. Dep’t of Revenue, 878 N.W.2d 891 (Mich. Ct. App. 2015), denying appeal, 880 N.W.2d 230 (Mich. 2016), challenging Michigan’s retroactive repeal of an alternative apportionment method going back six years. Both cases involve decisions upholding a statutory amendment applied retroactively after the statute had been reviewed by the states’ supreme courts in favor of the taxpayers. In the absence of additional guidance by the U.S. Supreme Court, victorious taxpayers may find their hard-fought successful litigation undone by a retroactively applied tax law.
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