Taxpayers involved in state tax controversy matters often request information and documentation from state tax authorities to analyze audit adjustments. Some of those requests are thwarted by state tax authorities’ assertions of the deliberative process privilege to prevent the disclosure of information or documentation that may compromise the state tax authorities’ legal position.
The remainder of this article can be accessed in the December 10, 2012 edition of State Tax Notes.
With the significant rise of third-party enforcement actions—especially consumer class actions and qui tam actions involving state tax questions—corporate taxpayers are being forced to assess a significant set of risks in connection with their compliance obligations.
The California Franchise Tax Board has issued a chief counsel ruling stating that a registered broker-dealer must include the entire sales price received from the sale of securities—including the return of capital—in the sales apportionment factor. Interestingly, the chief counsel determined that California’s alternative apportionment provisions do not apply to the combined group’s intrastate apportionment result.
On May 30, 2012, the State Board of Equalization (SBE), approved pro-posed amendments to the California Code of Regulations, Title 18, section 1684. 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.
Introduction
As a result of discussions between Gov. Arnold Schwarzenegger and the California Legislature as part of the funding of the fiscal 2005 Budget Act, language to implement a tax amnesty program was included in Senate Bill (SB) 1100, which was written by the Senate Budget and Fiscal Committee. Amnesty bills have been pending in the California Legislature for the last several sessions, but none had been enacted until SB 1100. On August 2, 2004, the Legislature passed SB 100, which was signed by the Governor on August 16, 2004, as Stats. 2004, Chapter 226. The bill was classified as an “urgency statute,” which went into immediate effect when signed by the Governor. According to SB 1100, “tax amnesty is an innovative and responsible way to increase state revenue to preserve vital state programs without proposing new tax burdens on business and working families, as well as to expose tax evaders operating in the underground economy.”
(The remainder of this article can be accessed in the Nov.-Dec. 2004 edition of The Tax Executive.)
California generally conforms to the federal provisions regarding net operating loss (NOL) deductions. However, California’s seemingly endless battle with budget deficits has resulted in periodic suspensions of California taxpayers’ ability—both personal and corporate—to take NOL deductions. For example, California suspended NOL deductions for the 2002 and 2003 taxable years. More recently, California generally suspended NOL deductions for the 2008 through 2011 taxable years.
Beginning August 1, California income taxpayers that used a tax shelter or that have unreported income from the use of an offshore financial arrangement for tax years beginning before January 1, 2011, will have the opportunity to pay tax and interest on income related to those transactions and avoid a barrage of penalties under California’s new voluntary compliance initiative (VCI 2). According to the California Franchise Tax Board, VCI 2 is aimed at “tax schemes that serve no significant purpose other than reducing tax.” Taxpayers may recall California’s first voluntary compliance initiative (VCI 1), which was enacted in 2003 as part of the state’s initial deluge of antitax shelter legislation and in response to what the FTB claimed to be a steady loss of revenue because of tax shelter transactions. Although VCI 2 mirrors its predecessor in many ways, as explained in greater detail below, there are significant differences worth consideration. Moreover, VCI 2 follows closely on the heels of the latest round of FTB notices aimed at identifying some transactions as abusive tax avoidance transactions for purposes of California’s widening penalty provisions. Clearly, a storm is on the horizon; however, refuge under cover of voluntary compliance should be taken only after careful consideration of the pros and cons associated with participating in VCI 2.
California has enacted a budget for the 2010-2011 fiscal year. The income and franchise tax provisions of the budget provided in Senate Bill (“SB”) 858, expected to be signed by the Governor, extend the suspension of net operating loss deductions, relax the 20-percent corporate understatement penalty, and remove recently enacted market-based sourcing rules for taxpayers that do not elect the single sales factor method of apportionment.
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.
California Sales and Use Tax Regulation 1698.5, which sets forth comprehensive procedures for sales and use tax audits, has been approved by the California Office of Administrative Law. The new regulation, which was proposed by the California Board of Equalization (BOE), goes into effect August 18, 2010. According to the BOE, the regulation was necessary to clearly establish taxpayers’ and BOE staff’s responsibilities and duties during the audit process in order to ensure that BOE staff completes audits in a timely and efficient manner and to help taxpayers better understand and avoid confusion regarding the BOE audit process.
