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Constitutional Issues

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In City & County of San Francisco v. All Persons Interested in the Matter of Proposition C, Dkt. A158645 (Cal. App., June 30, 2020), the California Court of Appeal upheld Proposition C—a voter initiative that created a new local business tax in San Francisco.  The court upheld the initiative that was enacted by a simple majority of electors.  This ruling answers a question that was been heavily debated since the California Supreme Court’s decision in California Cannabis Coalition v. City of Upland, 3 Cal. 5th 924 (Cal. 2017).  That is, do special taxes proposed by voter initiative require a supermajority of voters to pass?  This decision expressly narrows the supermajority requirement to only those tax measures proposed directly by local governments and will likely trigger more tax initiatives proposed and passed by citizen groups.

Several states continue to move forward with the taxation of digital advertising and new tax proposals have entered the fray.  We last updated you on the attempts by Maryland, Nebraska, and New York.  Nebraska had a hearing on its sales tax bill in February, with relatively little movement after that.  In contrast, Maryland and New York have continued their move towards imposing taxes on digital advertising in some form and West Virginia has entered the mix.

Over the years, too many corporations doing business in Illinois have had the unfortunate experience of receiving a notice of delinquency from the Office of the Secretary of State of Illinois (the “Secretary of State”) demanding immediate payment of additional franchise tax, penalties, and interest. Not to be confused with the Illinois corporate income tax, which is administered by the Illinois Department of Revenue, the Illinois franchise tax is codified in the Business Corporate Act of 1983, 805 ILCS 5/1.01, et seq. (the “BCA”), and is administered by the Secretary of State. The franchise tax is considered a fee for the privilege and protections of “incorporation”, and therefore only applies to “corporations” and not other business entities (e.g., LLCs, LLP, GPs, etc.). The Illinois franchise tax base is measured by a corporation’s Illinois “paid-in capital” — meaning, funds generated by corporations by issuing stock, plus additional cash/equity contributed by shareholders.

Continuing the unpleasant theme of aggressive state tax proposals, a bill has surfaced in the New York Assembly (following a companion bill that was introduced in the New York Senate last Spring) that seeks to impose a five percent tax on the “gross income . . . [from] every corporation that derives income from the data individuals of this state share with such corporations.” The new data tax is being proposed for inclusion in Section…