Major reform is coming to the way California administers its tax laws. On June 27, 2017, the Taxpayer Transparency and Fairness Act of 2017 (A.B. 102 or the “Act”), was signed into law by Governor Jerry Brown after passing both the California Senate and Assembly with little resistance. The Act fundamentally alters the administration of California’s tax laws by divesting the California State Board of Equalization (“Board”) of several of its key functions and assigning them to two new government agencies established by the Act: (1) the California Department of Tax and Fee Administration (“Tax Department”); and (2) the Office of Tax Appeals.
An out-of-state corporation, whose sole connection to California was a 0.2% interest in a manager-managed California limited liability company, was not “doing business” in California for purposes of the California corporate franchise tax according to the California Court of Appeal for the Fifth Appellate District in its recently-issued decision, Swart Enterprises, Inc. v. Franchise Tax Board, Case No. F070922. The appellate court’s decision affirmed the judgment of the California Superior Court and overturned the rationale articulated by the Franchise Tax Board (“FTB”) in FTB Ruling 2014-01 (July 22, 2014), which was issued by the FTB while the Swart case was pending.
On December 31, 2015, the California Supreme Court issued its long-awaited opinion in Gillette Co., et al. v. Franchise Tax Board, 363 P.3d 94, addressing whether The Gillette Company and several other California corporate taxpayers (collectively, “Gillette”) were permitted to elect to use the Multistate Tax Compact’s evenly-weighted, three-factor apportionment formula comprised of property, payroll, and sales factors (“MTC Formula”) in lieu of the three-factor apportionment formula with a double-weighted sales factor (i.e., property, payroll, and double-weighted sales factors) subsequently enacted by the state (“Double-weighted Sales Formula”) in 1993. The California Supreme Court held that the California legislature not only had the power to override the Compact election contained in the California statutes, but that it also intentionally exercised that power when it statutorily mandated the use of the Double-weighted Sales Formula. This holding would result in a denial of the taxpayers’ refund claims of approximately $34 million, which were premised on the election and application of the MTC Formula to their franchise tax returns filed between 1993 and 2005.