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(This article was originally published by Law360 on April 16, 2019.)

In recent years, many have openly criticized California for its income tax litigating position involving out-of-state companies that hold passive, minority interests in pass-through entities doing business in California. The state argues these out-of-state companies are doing business in California solely by virtue of their passive, minority investment in pass-throughs that conduct business in California. The state has lost the issue twice in the last two years. Most recently in September 2018 before an administrative appellate body in a nonprecedential decision involving a 25% passive ownership interest and the other in 2017 at the California Court of Appeal in a published decision involving a 0.2% passive ownership interest.

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(This article was originally published by Law360 on March 18, 2019.)

When challenging a state tax assessment outside the tax agency that issued the assessment, taxpayers face a variety of obstacles. One is the presumption of correctness that often attaches to a tax agency’s determination. Judicial deference to a tax agency’s interpretation of a tax statute or regulation makes the taxpayer’s task even more difficult.

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Three years ago, the U.S. Supreme Court invalidated a portion of Maryland’s personal income tax scheme on grounds that it violated the dormant commerce clause of the U.S. Constitution. In Comptroller of the Treasury of Maryland v Wynne, the Court held that Maryland’s credit mechanism for income taxes paid to other states impermissibly discriminated against interstate commerce because it allowed a credit against state taxes paid but not county taxes, resulting in double taxation on some income earned outside the state.

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Despite the narrow issue it originally addressed, the August 2017 decision by the California Supreme Court in California Cannabis Coal. v. City of Upland has sparked a much larger debate regarding whether local special taxes introduced by voter initiative are subject to the long-standing requirement in the California Constitution that local special taxes must be passed with a two-thirds supermajority vote by the electorate

In “The Sequel to Upland: A Calif. Supermajority Tax Showdown,” an article that originally appeared in Law360 Robert P. Merten III and Richard E. Nielsen recap the pertinent Upland background, identify the local special taxes currently at issue and discuss an important consideration courts will need to address when deciding these cases: the over 40-year history of California’s two-thirds supermajority voting requirement for the passage of local special taxes.