In this issue:
The U.S. Supreme Court handed Morrison & Foerster a victory in a significant case concerning the constitutional limitations on a State's power to tax multistate businesses.
Morrison & Foerster represented MeadWestvaco Corporation in a dispute over whether the Due Process and Commerce Clauses preclude a State from taxing a nondomiciliary business on a capital transaction that occurred outside of the State. The State of Illinois attempted to tax a portion of a $1 billion capital gain from MeadWestvaco's sale of its separate division Lexis/Nexis. The State appellate court sustained the tax, but the U.S. Supreme Court vacated that decision.
Recently, in Tate & Lyle Ingredients Americas, Inc., Alabama's Chief Administrative Law Judge Thompson held that a taxpayer's gain from its sale of its one-third interest in a foreign corporation - to its parent, which owned the other two-thirds of the foreign corporation, was not apportionable "business income" under the Alabama statute, and that Alabama is constitutionally barred from taxing the income "earned in the course of activities unrelated to the Taxpayer's business in Alabama."
Effective February 6, 2008, the California State Board of Equalization ("SBE") has adopted new Rules for Tax Appeals ("RTA"), which are found in Title 18 of the California Code of Regulations, beginning at section 5000. The new RTAs are intended to establish a comprehensive set of procedural regulations that cover all of the SBE's administrative review functions, including the SBE's appellate review authority with respect to appeals from actions of the California Franchise Tax Board ("FTB").
Last year, the Montgomery Circuit Court ("trial court") held that VFJ Ventures, Inc. ("VFJ") was entitled to claim the reasonableness exception to Alabama's add back statute with respect to royalty payments VFJ made to its affiliates. The trial court's decision concluded that VFJ was entitled to claim this exception because the add back statute would otherwise operate to deny VFJ a deduction for necessary costs of doing business in Alabama, and thus tax income fairly attributable to other states.
On January 31, 2008, the California Court of Appeal issued a decision in Northwest Energetic Services, LLC v. Franchise Tax Board ("Northwest"). As described below, the court of appeal upheld in part and reversed in part the trial court's decision, which struck down California's LLC Levy under Revenue and Taxation Code former Section 17942. Most importantly, the court of appeal affirmed the portion of the trial court's decision finding that the LLC Levy was an unconstitutional tax in violation of the Dormant Commerce Clause of the United States Constitution.
President George W. Bush signed into law on October 31, 2007 legislation (House Bill 3678, the Internet Tax Freedom Act Amendments Act of 2007) that extends for another seven years, until November 1, 2014, the moratorium precluding state and local taxes on Internet access and multiple and discriminatory taxes on electronic commerce. The new Internet Tax Freedom Act (hereinafter the "2007 ITFA") also amends the previous law in several significant ways. Among the most important changes are that the 2007 ITFA: (1) amends the definition of "Internet access" to help clarify the nature and scope of services protected from state taxation under the moratorium; (2) extends for seven years but clarifies, both retroactively back to November 1, 2003 and going forward, the provisions grandfathering certain states that have historically taxed Internet access; and (3) excepts certain general business gross receipts taxes from the scope of prohibited taxes on Internet access.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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