Current Corporate Income Tax Developments (Part II)

By Karen J. Boucher, CPA; and Shona Ponda, J.D

Executive Summary   

  • Two California Supreme Court decisions address whether the entire gross proceeds of certain treasury activities should be included in the sales factor.

  • A lawsuit has been filed in New Jersey challenging the Constitutionality of the throw-out rule.

  • Texas legislation modified the state’s franchise tax to provide a margins tax.

During 2006, numerous state statutes were added, deleted or modified; court cases were decided; regulations were proposed, issued and modified; and bulletins and rulings were issued, released and withdrawn. Part I of this article, in the March 2007 issue, focused on nexus, Internal Revenue Code (IRC) Sec. 338(h)(10) transactions, allocable/apportionable income and tax base. Part II, below, covers some of the more important developments in apportionment formulas, unitary groups/filing methods, administration and other significant corporate state tax issues.


A multistate corporation’s business income is apportioned among the states using an apportionment percentage for each state having jurisdiction to tax the corporation. To determine the apportionment percentage, a ratio is established for each of the factors included in the state’s formula. Each ratio is calculated by comparing the corporation’s level of a specific activity in the state to the total corporation activity of that type everywhere; the ratios are then summed, weighted (if required) and averaged to determine the corporation’s apportionment percentage for the state. The apportionment percentage is then multiplied by total corporation business income.

While apportionment formulas vary, many states use a three-factor formula that includes sales, payroll and property. Because use of a higher-weighted sales factor generally provides tax relief for in-state corporations, most states accord more weight to the sales factor than to the other factors. Changes in the apportionment formula may also be used to provide relief or tax benefits to specific industries or to reflect properly the operations of a particular industry. Recent apportionment developments are summarized below.

Increased Weighting of Sales Factor
  • Indiana

Among other provisions, HB 1001, Laws 2006, provided for a transition to a single-factor formula for tax years beginning after 2010. The sales factor will be weighted at 60% for 2007; 70% for 2008; 80% for 2009; 90% for 2010; and 100% starting in 2011.

  • Pennsylvania

HB 859, Laws 2006, increased the corporate income tax sales-factor weighting from 60% to 70%.

  • South Carolina

For tax years beginning after 2006, HB 4874, Laws 2006, provided a single-sales-factor apportionment for taxpayers whose principal business in the state is manufacturing or any form of collecting, buying, assembling or processing goods and materials within the state, or selling, distributing or dealing in tangible personal property within the state. Qualifying taxpayers can take advantage of any resulting tax savings on a phased-in basis for tax years 2007–2010, relative to their tax liabilities owed under the previous standard four-factor double-weighted sales-factor apportionment formula.

Apportionment Factors
  • Alabama

An administrative law judge (ALJ) ruled 52 that an interstate pipeline company could include in its payroll factor compensation paid to a parent for personnel that performed operational and administrative functions for the company. The ALJ explained that the “payroll factor” statute does not require that compensation be paid to direct employees and can include amounts paid for “loaned” nonemployees that perform the same services as direct employees, because both contribute to income production.

In another ruling, an ALJ held 53 that a truck manufacturer had to source to Alabama (i.e., include in the numerator of the sales factor) sales from trucks/parts that were ultimately delivered to customers in the state, even though initial physical delivery and title passage occurred at its out-of-state facility, when third-party carriers retrieved the products on behalf of the Alabama customers.

  • California

The most significant apportionment developments during 2006 were the California Supreme Court’s decisions addressing whether the entire gross proceeds generated by certain treasury activities should be included in the sales factor. The state supreme court affirmed 54 the court of appeal to hold that the entire gross proceeds received by Microsoft Corp. on redemption of marketable securities at maturity constituted “gross receipts” under (1) the state’s definitional provisions, (2) the legislative history behind the Uniform Division of Income for Tax Purposes Act (UDITPA) and (3) prior decisions of the State Board of Equalization (SBE). However, the court held that “in this instance,” the Franchise Tax Board (FTB) met its burden of proving by “clear and convincing evidence” that the standard apportionment formula did not fairly represent the extent of Microsoft’s business activity in California. Under the facts, Microsoft’s income from marketable securities constituted 2% of total income and 73% of gross receipts.

Similarly, in General Motors Corp., 55 the state supreme court affirmed in part and reversed in part a court of appeal decision, remanding the case for further proceedings consistent with its Microsoft decision. Specifically, the state supreme court held that a repurchase agreement is more closely analogous to a secured loan than a sale for UDITPA purposes; thus, only the interest received under the agreement should be treated as a gross receipt. With regard to marketable securities held until maturity, the court stated that the conclusion in Microsoft applied equally to the marketable securities held to maturity by General Motors. Because neither the trial court nor the appeals court had occasion to address the FTB’s alternative apportionment- formula arguments, the state supreme court remanded the case for further proceedings, to allow the FTB to make this case. The court of appeal then remanded the case to the trial court for examination of the distortion issue. With respect to the application of the research credit issue in General Motors, the court held that only the taxpaying corporation that performed the research is entitled to the credit.

The state supreme court declined to review two other “gross versus net sales factor” cases (Toys “R” Us, Inc., 56  and The Limited Stores, Inc. 57) that it had previously accepted and put on hold, sending them back to the courts of appeal with instructions to vacate their prior decisions and reconsider in light of the court’s recent rulings in Microsoft and General Motors.

In response to the Microsoft and General Motors decisions, FTB Notice 2006-3 58 provides accuracy-related penalty protection for a taxpayer that reports in its sales factor only the interest income and net gains (and not gross receipts) from “the redemption of marketable securities as part of its treasury function.”

In other sales-factor developments, the FTB issued two legal rulings. In the first, 59 it explained how to calculate the apportionment formula for taxpayers that generate both taxable and exempt nonbusiness income, excluding activities that give rise to income not included in the tax base from the apportionment formula. In the second, 60 the FTB explained how to assign receipts derived from sales of other than tangible personal property when a taxpayer-member of a combined reporting group pays another group member to perform activities related to the sale. The FTB stated:

[d]ue to the effects of combined reporting when the contractor and the subcontractor are in a unitary relationship and are members of the same combined reporting group, the activities of the subcontractor in performance of the contract will be considered income-producing activities directly engaged in by the contractor for purposes of the sales factor in order to more accurately assign the receipt to the place where the services were performed. (Emphasis in original.)

The FTB also proposed regulations section 25137-14, providing detailed rules on the apportionment of income earned by mutual fund service providers. In general, the proposed regulation addresses the types of services performed by these businesses and offers rules on the corresponding sales-factor assignment of receipts derived from these services. The proposed regulation adopts a shareholder-location sales factor, under which the sales factor is as-signed using a ratio of shares owned by shareholders in California to shares owned by shareholders located everywhere.

  • Idaho

Amended Income Tax Rule 35.01.550 provides exceptions to the general rule that income-producing activity for purposes of the sales factor generally does not include transactions and activities performed on behalf of the taxpayer. The amendments provide that income-producing activity includes transactions and activities performed on behalf of a taxpayer when (1) the taxpayer sells its product exclusively through independent contractors; (2) the independent contractors can work only for the taxpayer; or (3) excluding the transactions and activities of the independent contractors would lead to an unreasonable result. The amendments also provide that only the direct costs paid by the taxpayer are considered.

  • Indiana

The DOR ruled that an in-state insurance company selling policies nationwide must source the receipts to Indiana for adjusted-gross-income-tax purposes based on its ratio of time spent performing such services in Indiana relative to everywhere. 61

The DOR also ruled 62 that an out-of-state manufacturer was required to source to Indiana the sales of goods shipped from its out-of-state location to Indiana through customer-arranged common carrier, because the state adheres to the destination rule under statute, regardless of the ruling in Miller Brewing Co. 63

  • Kentucky

The DOR issued amended rules 64 addressing activities that result in the assignment of gross receipts to the state for purposes of the apportionment-formula sales factor; how to calculate the payroll and property factors; and apportionment and allocation for financial organizations and loan companies.

  • Louisiana

The DOR clarified 65 that goods, merchandise or property imported from outside the U.S. and received in a Louisiana foreign-trade zone are deemed received outside of the state and are excluded from the numerator of the revenue ratio.

  • Maryland

Amended Reg. Sec. provides that the items in both the numerator and denominator of each factor must be adjusted by the applicable statutory addition and subtraction adjustments.

  • Massachusetts

The Appellate Tax Board (ATB) held 66 that electricity is not tangible personal property for purposes of computing the sales factor. Based on this decision, the DOR explained 67 that receipts from the sale of electricity will be sourced as “other than sales of tangible personal property,” and that this apportionment method will be applied to all tax years within the statute of limitations (SOL) for assessment or abatement.

In another development, the DOR amended Reg. 830 CMR 63.38.7, regarding the sales-factor calculation for mutual fund sales corporations, to address the assignment of mutual fund sales to Massachusetts in related-party transactions.

  • Michigan

The Department of Treasury (DOT) provided guidance and standardized its policy on the application of the “costs of performance” method as it pertains to the single-business-tax (SBT) sales factor. 68 This guidance applies to the provision of services, the sale of intangible and real property and the rental of property.

  • New Hampshire

The DOR readopted, with numerous amendments, rules that clarify definitions, apportionment and sales-factor sourcing as they relate to services for purposes of the state business-profits tax. 69

  • New Jersey

Amended rule NJAC 18:7-8.11 clarified that, if a trademark licensee is authorized to sell a trademarked product both in and outside the state, the licensor is considered to be using the product in New Jersey for apportionment purposes based on the same ratio as the licensee’s in-state revenue relative to revenue from all sources.

In another development, an out-of-state company filed a lawsuit against the Division of Taxation, claiming that the sales-factor throw-out rule is unconstitutional. 70

  • Oregon

The state tax court awarded a full refund for insurance excise taxes paid by an out-of-state insurance company, because income attributed to the state under the standard formula was “out of all appropriate proportion” to the business it transacted in Oregon, and neither the DOR nor the court had statutory authority to apply a discretionary alternative apportionment method to “insurance companies.” 71

  • Pennsylvania

The state supreme court affirmed 72 that a subsidiary without employees could not impute a payroll factor based on the use of affiliated-company employees or independent contractors, for either corporate franchise or net income tax purposes. The subsidiary had paid for the imputed services using intercompany accounts, booking these costs as payroll expenses.

  • Texas

Amended Rules 34 TAC 3.549 and 34 TAC 3.557 provide that, for reports due after April 20, 2006, receipts from the servicing of loans secured by real property are apportioned to the location of the real property that secures the loan being serviced. Membership or enrollment fees paid for access to benefits are receipts from the sale of an intangible asset and are apportioned to the payer’s legal domicile.

  • Virginia

The DOT explained 73 that, for corporate income tax purposes, capital gain from the sale of stock earned by an out-of-state-headquartered affiliate included in an in-state combined corporate income tax return should be sourced to Virginia for sales-factor purposes, because the affiliate’s income-producing activity resulting in the capital gain occurred in the state based on costs of performance.

In another development, the DOT ruled 74 that a perishable food-products manufacturer had to source sales ultimately shipped to out-of-state wholesaler distribution hubs or unrelated distribution centers to Virginia, because they were held at in-state refrigerated loading docks rented by the purchasers for two to three days prior to their ultimate transportation outside the state.

  • Wisconsin

The DOR adopted apportionment provisions for financial institutions, broker-dealers, investment advisers, investment companies and underwriters for tax years beginning in 2006. 75

In another development, the state tax appeals commission held 76 that the sale of telephone directory advertising constitutes the sale of a service, rather than the sale of tangible personal property, because its purchasers are the advertising customers, not the directory recipients.

Filing Methods

  • Alabama

An ALJ held that a subsidiary serving as the central internal lender for AT&T Corp. and its subsidiaries did not qualify as a financial institution subject to the financial institution excise tax, because it was not in competition with the business of national banks. Accordingly, because the lending subsidiary was part of AT&T’s Alabama affiliated group for the years at issue, it had to be included in the state consolidated corporate income tax return. 77

  • Arizona

A DOR hearing officer ruled 78 that a taxpayer was required to include four subsidiaries (a holding company, financing company, trademark company and real estate investment trust (REIT)) in its combined corporate income tax return, because the group was under common ownership and common management; had reconciled accounting systems; and exhibited substantial interdependence, integration and ties at its basic operational levels. In addition, the company could not claim a deduction for dividends received from the REIT, because such intercompany transactions had to be eliminated on the state combined income tax return.

  • California

SB 663, Laws 2006, clarified that a controlled foreign corporation that is a California taxpayer or has effectively connected income (income earned in the U.S.) must include subpart F income in its water’s-edge income base. 79

In another development, the SBE ruled 80 that a company filing state corporate franchise/income tax returns could not include insurance company subsidiaries in a state combined report, despite claims that their exclusion resulted in distortion of noninsurance-company income attributable to California sources.

  • Georgia

The DOR adopted amended Rule 560-7-3-.13 on the filing of consolidated returns.

  • Idaho

Although the taxpayers filed income tax returns on a water’s-edge basis, the state tax commission ruled 81 that the election was barred, because the taxpayer had not filed water’s-edge election Form 14, Idaho’s Water’s Edge and Consent Form.

In another decision, the state tax commission determined that for an insurance company to be excluded from a unitary combined group, it must pay a premiums tax to the state. 82

  • Indiana

The DOR ruled 83 that a retailer was required to file a combined adjusted-gross-income tax return with its two wholly owned royalty and management subsidiaries, to better reflect its Indiana-source income.

The DOR similarly ruled 84 that a group of affiliate banks and credit card companies that were deemed to be operating as one interdependent unitary business was required to file a combined financial institutions tax return.

The DOR also required 85 a company to file a combined return with various affiliates that sold similar products or operated as procurement companies, to more fairly reflect the overall income earned in the state by the unitary business.

In the legislative area, HB 1001, Laws 2006, required a corporation that files combined income tax returns to petition the DOR within 30 days after the end of the taxpayer’s tax year for permission to discontinue filing combined returns.

  • Kentucky

The court of appeals reversed the trial court to hold 86 that 2000 legislation retroactively prohibiting refund claims based on unitary return filings for years prior to 1996 exceeded Constitutional limits and violated the taxpayers’ due process rights. Accordingly, the previous summary judgment in the DOR’s favor was reversed, and the case was remanded to determine whether, on its merits, the taxpayers were entitled to their pending refund claims. Unitary filing was formally prohibited in the state in 1996.

In another development, the DOR issued amended rules addressing the consolidated return election. 87

  • Michigan

The DOT explained 88 its new policy that, beginning in 2006, requires re-
quests to file a consolidated or combined return to be received prior to the date set for filing the SBT (or the extended due date) by the proposed consolidated or combined group’s parent.

  • Minnesota

The state supreme court reversed 89 a tax court decision to hold that a multinational firm did not have to include its 99% distributive share of net income and apportionment factors from its French-organized and operating partnership (MPF) in determining its in-state unitary taxable income. When the MPF’s shareholders subsequently invoked the Federal “check-the-box” regulations to treat the MPF as a partnership, it did not alter that entity’s foreign nationality.

  • Mississippi

A state chancery court held 9 0 that the state consolidated return provisions, requiring that each member of an affiliated group carry on all of its business activities solely in the state to be eligible to file on a combined basis, violated the Commerce Clause.

  • New York

An ALJ found 91 that a distribution company successfully demonstrated arm’s-length intercompany pricing with its parent and, thus, was not required to file a combined report for Article 9-A state franchise tax purposes.

  • Oregon

State rules were amended 92 to provide that taxpayers in a unitary group including both financial organizations and nonfinancial corporations must file a single unitary combined return.

  • Vermont

The Department of Taxes adopted regulations section 1.5862(d), addressing unitary combined reporting requirements, effective for tax years beginning after 2005.

  • Virginia

The DOT consolidated the income of a parent with three of its out-of-state trademark and/or intercompany-loan management subsidiaries; the facts showed that the subsidiaries lacked economic substance and the various intragroup transactions were not at arm’s length. 93

Flowthrough Entities

  • Alabama

For tax years beginning after 2004, HB 31, Laws 2006, generally conformed state law to the Federal income tax rules for taxation of trusts, estates and their beneficiaries, and conformed state law to the Federal tax classification of business trusts.

  • California

Twice during 2006, the San Francisco county superior court held that the annual limited liability company (LLC) fee is unconstitutional. In Northwest Energetic, it held 94 that the fee was unconstitutional when applied to an LLC that had registered to do business in the state, but had never actually commenced any activities there. In Ventas Finance I, 95 the court went further, and held that the fee cannot be reformed to add an apportionment mechanism. Following the Northwest Energetic decision, the FTB provided guidance on filing related protective refund claims for the LLC fee. 96 Both cases have been appealed. In the meantime, the FTB is required to enforce the statute until the appellate court issues a final determination that it is unconstitutional. LLCs that have paid such fees may file protective refund claims for any years open under the SOL.

In another development, the FTB announced 97 that each series within a Delaware series LLC is a separate business entity for franchise tax purposes.

  • Connecticut

For tax years beginning after 2005, SB 638, Laws 2006, eliminated the optional group income tax returns that partnerships, S corporations, trusts or estates or other passthrough entities previously were allowed to file on behalf of their nonresident individual owners. The new law requires all such businesses to pay income taxes at the highest marginal rate (currently, 5%) on each nonresident member’s share of income from the business, if the income is at least $1,000. The new law also clarifies that S corporations, LLCs, limited liability partnerships and limited partnerships are subject to the $250 business entity tax, whether they are formed under the laws of Connecticut or another jurisdiction.

  • Idaho

New Income Tax Rule clarified that LLCs and members will be treated according to their Federal classification and that the income tax administrative rules apply in accordance with that classification, even though the LLC and member may not be specifically mentioned in a rule.

  • Kentucky

Effective for tax years beginning after 2005, HB 403, Laws 2006, provided that a disregarded entity doing business in the state can be included in its parent’s return; S corporations can be included in a state consolidated return; and Kentucky income tax credits from lower-tiered passthrough entities can flow through to the ultimate individual owners.

In another legislative development, HB 1, Laws 2006, replaced the alternative minimum calculation with a new limited liability entity tax that will be imposed on corporations and limited liability passthrough entities (except those entities specifically exempted), effective for tax years beginning after 2006.

In the regulatory area, the DOR issued amended rules addressing the election to pay a member’s, partner’s or shareholder’s proportionate share of a passthrough entity’s tax liability and the passthrough entity income tax calculation. 98

In an August 22, 2006 letter to the Kentucky Society of Certified Public Accountants, 99 the DOR explained that withholding from nonresident individuals is allowed only for nonresident individual partners in a general partnership for calendar years ending Dec. 31, 2005 or Dec. 31, 2006. Additionally, recently enacted HB 1 eliminates entity-level income taxation on passthrough entities and restores provisions that require nonresident withholding from individual partners, members and shareholders for tax years beginning after 2006.

  • Maryland

SB 319, Laws 2006, clarified that for tax years beginning after 2005, business trusts not taxed as corporations for state purposes are taxed as pass-through entities and subject to the passthrough entity (PTE) tax. The business trust will pay the PTE tax based on the share of income distributed to the beneficiary of the business trust that is a nonresident or nonresident entity.

  • Massachusetts

An LLC that purchased all of the assets of a manufacturing corporation as a successor-in-interest was required to reapply for “manufacturing corporation” classification with the DOR, as the LLC was a successor to and distinct entity from the original corporation, with a different Federal identification number. 100

  • New York

Amended 20 NYCRR section 1-2.6 and Parts 3 and 4 provide guidance on the computation of tax under Article 9-A for corporations that are partners in partnerships or members of LLCs treated as partnerships under Article 9-A.

  • North Carolina

SB 1741, Laws 2006, provided that, for tax years beginning after 2006, the corporate franchise tax will be imposed on LLCs that elect to be taxed as C corporations for Federal income tax purposes.

  • Pennsylvania

SB 300, Laws 2006, generally granted automatic S corporation state tax treatment for corporations that elect S status for Federal income tax purposes beginning in 2006.

  • Tennessee

The DOR ruled 101 that, when computing a corporation’s excise tax base, the portion of income or loss that has been passed through to the taxpayer, but reported on the Tennessee excise tax return of a second-tier limited partnership, should be deducted from (or added to, in the case of a loss) the taxpayer’s Federal taxable income or loss before the net operating loss and special deductions.


Tax Shelters
  • California

The FTB announced 102 that it will follow the IRS tax-shelter-settlement initiative as outlined in IRS Ann. 2005-80, 103 effectively creating the California Tax Shelter Resolution Initiative to run alongside the Federal initiative. The FTB also released a list of frequently asked questions and answers on the state’s tax-shelter-resolution initiative, which can be found on the FTB’s webpage. 104

  • Louisiana

The DOR explained 105 that, because the state’s income tax policy “piggybacks” that of the IRS, tax shelters that are listed and deemed abusive by the Service will be considered abusive for Louisiana income tax purposes.

  • Massachusetts

The DOR explained 106 the enactment of new penalty provisions applicable to taxpayers, return preparers and promoters of abusive tax shelters and the manner of their enforcement.

  • New York

The Department of Taxation and Finance adopted rule 20 NYCRR Part 2500.1, providing a definition of a New York reportable transaction and the disclosure requirements for participating in one.

  • North Carolina

During 2006, the DOR undertook a settlement initiative that ended Dec. 15, 2006 and was directed at certain transactions that created tax benefits, deductions or losses that the DOR considered eligible. The settlement agreement required taxpayers to (1) waive all rights to appeal or refund of any amounts paid pursuant to the initiative, except for refunds due as the result of Federal changes or mathematical or computational errors; and (2) unwind transactions or dissolve entities involved in “eligible transactions” and “ineligible transactions” (if any) or adjust methodology for filing as prescribed by the DOR for all future years.

  • Utah

SB 139, Laws 2006, required taxpayers and material advisers to disclose a reportable transaction, allowed the tax commission to identify state-specific listed transactions and, in addition to other penalties, imposed a 10% penalty on tax underpayments attributable to reportable transactions.

Further, taxpayers are required to attach a disclosure statement for any listed transactions from 2004, 2005 and 2006, to their 2007 Utah income tax returns.

  • West Virginia

HB 4630, Laws 2006, required disclosure of certain tax shelters; imposed penalties for participating in or promoting abusive tax-shelter transactions and failing to report listed transactions; and increased the SOL on assessments for failure to disclose a listed transaction. Emergency Rule 110 C.S.R. 10J provides guidance on the disclosure and regulation of tax shelters created to avoid paying state income taxes.

  • California

The SBE clarified that the extended state SOL on a refund claim after a Federal Revenue Agent Report is limited to the Federal adjustment items. 107

  • Massachusetts

Amended rule 830 CMR 62C.30.1 explains how taxpayers must report and adjust state tax due after a change in Federal taxable income, tax credits or taxable estate.

  • North Carolina

The DOR explained 108 that, for purposes of tolling the state’s general three-year SOL for assessments and refunds, the extension due date is used, rather than the original due date.

In another development, HB 1892, Laws 2006, reduced from two years to six months the period within which a taxpayer is required to report its Federal taxable income changes determined by the Federal government.

  • Ohio

The tax commissioner ruled 109 that when a taxpayer has a Federal change made to its taxable income as a result of a transfer-pricing adjustment, it may file an application for refund (and an amended state return) with the state generally no later than one year after the adjustment has been agreed to or finally determined for Federal income tax purposes, even if this timeframe is beyond the state’s general three-year SOL.

  • Virginia

SB 583, Laws 2006, extended from 90 days to one year the period within which taxpayers must file an amended return when the IRS changes the taxpayer’s Federal taxable income or the taxpayer files an amended Federal return.

  • Georgia

The state court of appeals ruled that a taxpayer that was ineligible for state corporate income tax refunds, due to filing the claims beyond the applicable three-year SOL, could not alternatively refile for the same refunds using a state extension statute reserved for amended Federal returns. 110 Specifically, the court explained that the state’s extension for filing an amended state corporate income tax return applies only to returns filed within 180 days of a final Federal determination; it does not apply to situations, as in this case, in which the amended Federal return was based on the company’s choice to amend, rather than as a result of an IRS review and examination process.

  • Maryland

SB 484, Laws 2006, increased to seven months the period for which the comptroller may extend the time for a corporation to file an income tax return; it applies to tax years after 2005.

  • Massachusetts

TIR 06-21 111 permits an automatic six-month extension to file a tax return, without the need for application, for certain taxpayers. This TIR does not apply to financial institutions, insurance companies, utility companies, urban redevelopment companies or any other corporation required to file Form 355-7004 Misc., Application for Extension of Time to File Certain Massachusetts or Foreign Corporate Excise Returns, to request an extension of time to file a tax return.

In another development, HB 4169, Laws 2006, contained numerous state tax law changes, including new penalties for taxpayers and preparers that fail to disclose “inconsistent positions” with respect to returns filed in other states, or positions resulting in understatements if there is no substantial authority for the treatment.

  • Michigan

Legislation enacted in 2006 provided taxpayer-friendly administrative procedural changes that include (1) the right to an informal conference on a credit audit or refund denial; (2) requiring the DOT to notify taxpayers of refunds owed that have been identified on audit and their right to an appeal; (3) allowing taxpayers to convert assessment appeals into refund claims during informal conference; (4) allowing taxpayers to appeal disputed issues if the DOT does not issue an order and determination within 180 days after notice to begin an informal conference; (5) an increased 60-day period to request an informal conference after receipt of a notice of intent to assess; and (6) reliance on DOT bulletins and letter rulings issued after Sept. 30, 2006, until formally revoked. 112

  • Montana

The state supreme court ruled that the public does not have the right to Federally protected information contained on state corporation tax re-
turns. 113

  • Virginia

The DOT provided new administrative appeal guidelines 114 for tax assessments; the guidelines will be formally adopted by the DOT as a regulation.

  • Wisconsin

In a case involving whether a company was engaged in a unitary business with a partnership in which it owned a 50% interest, the tax appeals commission held 115 that the DOR could obtain a copy of the company’s consolidated Federal income tax return for the tax year at issue as part of discovery.


Tax Rates
  • Connecticut

Among other provisions, H 5845, Laws 2006, eliminated the 2007 15% corporate surcharge that otherwise would have applied to all corporations that pay more than the $250 minimum tax.

  • New Jersey

A 4706, Laws 2006, imposed a 4% surcharge on the corporate business tax for periods ending after June 30, 2006 and before July 1, 2009. Starting with calendar-year 2006, the new law also increased the minimum tax from $500 to $2,000, depending on New Jersey gross receipts.

  • West Virginia

SB 2005, Laws 2006, reduced the corporate tax rate from 9% to 8.75% for tax years beginning after 2006.

  • California

A state superior court dismissed 116 a suit challenging the validity of the additional 50% amnesty penalty imposed on taxpayers that failed or declined to participate in the state’s two-month 2005 amnesty program. The court agreed with the FTB that the case was not ripe for judicial decision, because the tax years at issue were still in protest status, and there is no amnesty penalty to contest until the protested assessment is sustained and a final deficiency assessment made.

  • Michigan

Through an initiative petition that was immune from veto by the governor, the state legislature voted to repeal the SBT at the end of 2007. 117

  • Ohio

The U.S. Supreme Court held 118 that state and municipal taxpayers lacked standing to challenge the validity of Ohio’s franchise tax investment credit. Subsequently, the Court let stand the decision of the U.S. Court of Appeals, Sixth Circuit, 119 holding that an Ohio personal property tax exemption was Constitutional.

The DOT issued a number of rules on the new commercial activities tax. 120

  • Texas

HB 3, Laws 2006, modified the franchise tax (previously based on capital or earned surplus) to provide a tax based on taxable margin (the margins tax), applicable to reports originally due after 2007. An entity’s margin is computed by subtracting from total revenue either cost of goods sold or compensation, at the taxpayer’s election. The resulting margin cannot be greater than 70% of total revenue. Taxpayers with 80% common ownership and a unitary relationship will report on a consolidated water’s-edge basis. The tax base is apportioned using a single gross-receipts factor. The tax rate is 1%; businesses classified as “wholesale or retail” are taxed at 0.5%. 121

For more information about this article, contact Ms. Boucher at


52 Plantation Pipe Line Co. v. AL Dep’t of Rev. (DOR), AL DOR, Admin. Law Div., Dkt. No. CORP. 05-948 (5/23/06).

53 Paccar, Inc. v. AL DOR, AL DOR, Admin. Law Div., Dkt. No. CORP. 04-715 (1/11/06).

54 Microsoft Corp. v. CA FTB, 39 Cal.4th 750 (2006).

55 General Motors Corp. v. CA FTB, 39 Cal.4th 773 (2006), rev’g and rem’g CA Ct. App., 2d Dis. (6/30/04).

56 Toys “R” Us, Inc. v. CA FTB, No. S143422 (transferred after hold 11/15/06).

57 The Limited Stores, Inc. v. CA FTB, No. S136922 (transferred after hold 11/15/06).

58 CA FTB, Notice No. 2006-3 (9/28/06).

59 CA FTB, Legal Ruling No. 2006-01 (4/28/06).

60 CA FTB, Legal Ruling No. 2006-02 (5/3/06).

61 IN DOR, Rev. Rul. No. 2006-02IT (2/22/06).

62 IN DOR, Ltr. of Finding No. 01-0358 (8/23/06).

63 Miller Brewing Co. v. IN DOR, 831 NE2d 859 (IN Tax Ct. 2005).

64 103 KAR 16:270, 16:090, 16:290 and 16:150 (effective 8/7/06).

65 LA DOR, Rev. Rul. No. 06-018 (11/3/06).

66 EUA Ocean State Corp. v. Comm’r, MA ATB, Dkt. Nos. C258405-406, C258424-425, C258882-883, C259158-159, C259653 and C262566-568 (4/24/06).

67 MA Taxpayer Info. Rel. (TIR) No. 06-9 (6/12/06).

68 Internal Policy Directive (IPD) 2006-8, MI DOT (9/29/06).

69 NH DOR, Amended Rev 301, 302, 303.01 and 303.02 (effective 8/25/06).

70 General Engines Co., Inc. v. Div. of Tax’n, NJ Tax Ct. (lawsuit filed 12/8/06).

71 Stonebridge Life Insurance Co. v. Dep’t, OR Tax Court, TC No. 4705 (2/22/06).

72 UPS Worldwide Forwarding, Inc. v. Comm’th, 890 A2d 368 (PA 2005).

73 VA Pub. Doc. No. 06-130 (10/25/06).

74 VA Pub. Doc. No. 06-86 (8/30/06).

75 WI DOR, Tax 2.49 and 2.495 (effective 7/1/06).

76 Ameritech Publishing, Inc. v. WI DOR, WI Tax App. Comm., Dkt. No. 01-I-227(P) (8/22/06).

77 AT&T Corp. v. DOR, AL DOR, Admin. Law Div., Dkt. No. CORP. 05-403 (6/30/06).

78 AZ DOR, Hearing Officer Case No. 200600035-C (9/15/06).

79 The new law is operative for tax years starting after 2005, except that for taxpayers that made a water’s-edge election prior to 2006, the provisions do not apply until the end of the current election period.

80 Appeal of Argonaut Group, Inc., CA SBE, Case No. 287738 (6/28/06).

81 ID State Tax Comm. Ruling Nos. 18901 and 18902 (5/26/06).

82 ID State Tax Comm. Ruling No. 18612 (9/29/05).

83 IN DOR, Ltr. of Finding No. 05-0512 (9/13/06).

84 IN DOR, Ltr. of Finding No. 02-0278 (6/1/06).

85 IN DOR, Ltrs. of Finding Nos. 05-0318 and 05-0319 (11/1/06).

86 Johnson Controls, Inc., v. KY Rev. Dep’t, KY Ct. App., Case No. 2004-CA-001566-MR (5/5/06).

87 103 KAR 16:200 (effective 8/7/06).

88 IPD 2006-3, MI DOT (5/8/06).

89 Manpower, Inc. v. Comm’r, MN S.Ct., A06-468 (12/7/06).

90 AT&T Corp. v. State Tax Comm’n, MS Chancery Ct., Hinds Cty, No. G-2000-31 S/2 (5/26/06).

91 In the Matter of Hallmark Marketing Corp., NY Div. of Tax App., No. 819956 (1/26/06).

92 OR DOR, amended OAR 150-314.280-(N) and 150-317.710(5)(b) (effective 7/31/06).

93 VA Pub. Doc. No. 06-52 (4/28/06).

94 Northwest Energetic Services, LLC v. CA FTB, CA Super. Ct., San Fran., No. CGC-05-437721 (4/13/06); for a discussion, see Dickerson, Hayes and Thomas, Tax Clinic, “California Superior Rules LLC ‘Fee’ Unconstitutional,” 38 The Tax Adviser (March 2007).

95 Ventas Finance I, LLC v. CA FTB, CA Super. Ct., San Fran., No. CGC-05-44000I (11/7/06).

96 This guidance can be found at

97 See CA FTB, “Ask the Advocate,” March/April 2006 Tax News.

98 A103 KAR 15:020 (effective 9/1/06); 103 KAR 16:210 (effective 8/7/06).

99 The letter can be found at

100 MA DOR, Ltr. Ruling No. 06-6 (4/24/06).

101 TN DOR, Ltr. Ruling No. 06-06 (3/14/06).

102 CA FTB, Notice No. 2006-1 (1/11/06). This initiative ended on March 31, 2007.

103 Ann. 2005-80, IRB 2005-46, 967.

104 See

105 LA DOR, Rev. Ruling No. 06-009 (6/29/06).

106 MA TIR No. 06-5 (4/13/06).

107 In the Matter of ICI Americas, Inc., Cal. SBE, Case No. 312753 (11/20/06).

108 NC DOR, Directive No. CD-06-1 (10/25/06).

109 Opin. of the Tax Comm’r No. 06-0001, OH Dept. of Tax’n (4/20/06).

110 Graham v. McKesson Information Solutions, LLC, GA Ct. App., Case Nos. A06A033 and A06A0334 (5/12/06).

111 MA TIR No. 06-21 (12/7/06).

112 HB 5356, 5357, 5358, 5359, 5360, 5361, 5362 and 4244 (signed by the governor 2/3/06).

113 Elliott v. Montana DOR, Mont., Case No. 05-336 (10/24/06).

114 VA Pub. Doc. No. 06-140 (11/29/06).

115 Louis Dreyfus Petroleum Products Corp. v. DOR, WI Tax App. Comm., Dkt. No. 03-I-132(P) (6/15/06).

116 General Electric Co. v. CA FTB, Cal. Super. Ct., San Fran., No. 449157 (8/30/06).

117 Journal No. 73, MI Senate, and Journal No. 71, MI House of Representatives (8/9/06).

118 DaimlerChrysler Corp. v. Cuno, S.Ct., 5/15/06.

119 Cuno v. DaimlerChrysler Corp, 6th Cir., 10/19/04, cert. den.

120 The commercial activities tax is a gross receipts tax and, thus, is beyond the scope of this article; for a discussion, see Tapia, Tax Clinic, “Beware Ohio’s CAT,” 37 The Tax Adviser (August 2006).

121 For more details, see Brookner and Brown, State and Local Taxes, “Sweeping Texas Franchise Tax Changes: The Margins Tax,” 37 The Tax Adviser (September 2006).


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