2023 Tax Season Toolkit
• Read product descriptions ;
• Select items for purchase ;
• Choose delivery options ;
• Request to buy items . Cookies on a customer ’ s computer do not , by themselves , disqualify a business from the PL protections if they are only used in California by that business to :
• Remember items in a cart ;
• Store customer information so it doesn ’ t need to be re-entered ;
• Remind customers of items they previously considered . Notably , California ’ s TAM states that merely posting static FAQs on the business website , even if California customers access that information , stays within the public law ’ s protections .
Application to Outbound and Inbound Transactions The TAM applies the same standards to outbound and inbound transactions and speaks broadly in terms of destination state and origin state , rather than limiting itself to California specifically . This suggests California ’ s guidance on the applicability of PL 86-272 could be beneficial for certain businesses and detrimental to others .
For example , by actively working to remove the protections provided by PL 86-272 on goods shipped from California , a corporate taxpayer could reduce its California apportionment factor by reducing its California-sourced throwback receipts . Alternatively , by actively working to remove the protections provided by PL 86-272 , an out-of-state taxpayer could have a filing and tax obligation in California .
Although not explicit in the language of the memorandum , the TAM has been applied retroactively by the agency . As such , the application of this new guidance could , depending on a business ’ s fact pattern , either reduce its California tax expense or result in an unreported tax liability .
California ’ s Interpretation The application of PL 86-272 to a specific set of facts is a complex undertaking and is subject to uncertainty . The TAM outlines California ’ s interpretation of a federal law , though California ’ s interpretation may or may not align with the intent of the US Congress . FTB ’ s interpretation of a federal statute is unlikely to be given the same weight as an interpretation of the state ’ s own statute .
However , taxpayers that have historically claimed they don ’ t have an income tax filing obligation in California because of the protections provided by PL 86-272 should re-examine their activities to determine if that still applies in light of the new guidance .
Legislative and Judicial Update for Income Tax
In late 2022 , the American Catalog Mailers Association ( ACMA ) filed a request for declaratory and injunctive relief against the FTB on the basis that TAM 2022-01 was invalid , specifically because it was inconsistent with federal law protecting sellers of tangible goods and violated the United States Constitution .
In addition , ACMA also alleged that the FTB ’ s new guidance was
“ Financial assets left inactive by a legal owner beyond a set deadline — which varies depending on the property type — are transferable to the state .”
an improper “ underground regulation ,” and that the FTB did not follow the required rule making process for a regulation in California prior to publishing TAM 2022-01 .
The trial court has denied ACMA ’ s motion for summary judgment , but it also communicated a willingness to determine that the TAM was effectively an underground regulation and , thus , was impermissible on FTB ’ s part .
Appeal of L . Smith and California ’ s Increasing Reach on Income of Nonresident Individuals In a recent precedential decision by the California Office of Tax Appeals ( OTA ), a nonresident individual was determined to be liable for personal income taxes on a distributive share of gain from the sale of a partnership interest due to that gain constituting California source income .
In the precedential decision of Appeal of L . Smith , 2023-OTA-069P , appellant was a California nonresident who owned an indirect membership interest in an LLC ( Holdco ). That LLC sold its own membership interest in another entity ( Shell ), classified as a partnership for California income tax purposes . Holdco realized a net gain on the sale of Shell . In turn , Holdco passed on its share of the gain to appellant .
Appellant contended that the gain passed through to them via Holdco was a gain from the sale of an intangible asset ( a partnership interest ), and that this gain should be sourced to their ( appellant ’ s ) state of residency under long standing authority , California Revenue and Taxation Code Section 17952 and the Appeals of Ames , et al ., ( 87- SBE-042 ) ( Ames ).
The OTA rejected appellant ’ s position and affirmed FTB ’ s position , which was that the gain should be sourced at the entity level , as opposed to the individual level , thus making the gain business income subject to apportionment . As such , the business ’ level of California activity is ultimately the determinative means of assessing whether a nonresident partner or shareholder is subject to tax on the gain .
This Appeal of L . Smith decision only further increases California ’ s ability to tax income of nonresident individuals , as highlighted in the earlier matter of Metropoulos Trust . However , it is worth noting that the OTA also has recently held that Ames may still be relied upon ( see the Appeal of Buehler , 2023-OTA-215P ).
As such , how a nonresident individual holds an interest in a pass-through entity ( directly versus indirectly ) may be relevant in determining how a gain they recognize upon the sale of that interest is sourced for California personal income tax purposes . Taxpayers with such transactions on the horizon should consult with their tax professionals .
Disaster Loss Deductions
California taxpayers may deduct losses in any event declared a disaster by any United States president or California governor .
In this regard , the state generally follows federal law regarding the treatment of losses incurred as a result of a casualty or disaster ( ftb . ca . gov / file / business / deductions / disaster-loss . html ), though relevant nonconforming provisions still apply . www . calcpa . org DECEMBER 2023 CALIFORNIA CPA 13