Archive for the ‘California’ Category

FTB Wins Gillette Appeal

Friday, January 1st, 2016

California’s Franchise Tax Board won the appeal of Gillette v. Franchise Tax Board. This opinion covers taxation of multi-state entities in California prior to 2012.

Gillette (and several other companies) argued that the FTB’s weighing of the “sales” factor higher than other factors was discriminatory based on a multi-state compact. (California specifically withdrew from the compact for years after 2011.) The California Supreme Court decided that the FTB’s interpretation of the California legislature is accurate.

Gillette and the other appellants can file a writ of certiorari to the US Supreme Court; however, this does not appear to be the kind of case that the US Supreme Court would take.

My Love/Hate Relationship with the FTB

Tuesday, December 1st, 2015

For those who don’t know, I used to reside in California. I prepare more California tax returns than any other state’s returns (though it is no longer a majority–or even close to a majority–of my clients). I have a lot of experience in dealing with California’s income tax agency, the Franchise Tax Board.

The FTB, like the IRS, has a practitioner priority service. And you actually get through to humans when you call the number. Though not available on the FTB’s practitioner line, several FTB numbers have “call back” service. The recording tells you how long the average wait time is (e.g., between 45 minutes and 72 minutes), and you can elect to wait on hold or enter your phone number and the system will call you back when it’s your turn to be first in the queue. The system has one “flaw”: I’ve been called back faster than the average wait time.

The FTB also has an annual meeting with the California Society of Enrolled Agents (CSEA). The FTB posted in its December Tax News how to deal with partial year dispositions and late partial disposition elections for tax years 2012-2014.

Yet for all the excellence in how the FTB communicates some of the FTB’s practices leave a lot to be desired. Back in 2013, the FTB invented law related to qualified small business stock. The FTB was convicted of committing fraud and intentional infliction of emotional distress in the Gilbert Hyatt matter. This case will be heard for the second time at the US Supreme Court next week. The Hyatt case is just one example of what appears to me to be the normal FTB strategy: Delay cases and make things as expensive as possible for litigants.

And the FTB has also been persnippity and literal at times. You definitely want your paperwork to be exactly right when dealing with them. So you have to take the bad with the good when dealing with the FTB.

The Turf Monster Striketh

Friday, November 20th, 2015

Every so often the turf monster trips a player in a football or baseball game. Here’s one example:

This post deals with a very different kind of turf monster. Back in September I wrote about Southern California’s Metropolitan Water District issuing “rebates” to homeowners for replacing lawns (turf) with xeriscapes. It’s clear that such “rebates” are taxable for federal tax purposes. (California law specifically exempts such “rebates” for California tax purposes.)

Apparently, the Electric and Gas Industries Association (EGIA), which ran the program for the MWD, just discovered this. A correspondent sent me an email he received:

Dear Soon to be Taxed Homeowner:
Our records indicate that you received a rebate that exceeded $600 from SoCal Water$mart in 2015. In order to comply with Internal Revenue Service requirements you must complete and sign a W-9 form with your Social Security number or Tax ID. This form is available within the online application, and may be accessed by logging into your online account at and editing the application with the required tax information changes. The name on the W-9 form submitted for review must match the name that was on the rebate check…

Please log back into your online account at, download and complete the W-9 form and upload the completed form back into the application. The W-9 will be reviewed, and a 1099 will be issued to you for tax and accounting purposes. If you have any concerns regarding whether your rebate is considered taxable income, please contact a qualified tax professional.

There are two obvious implications of this. First, the EGIA realizes that they must issue 1099s to any impacted taxpayers. It’s another case of substance over form: These may be called “rebates” but they’re really an economic incentive to remove turf and replace it with something else. And that results in what is clearly taxable income.

Second, there will probably be an issue with some taxpayers ignoring the email. The email notes that you’re going to be issued tax paperwork; how many taxpayers will want that? Of course, whether or not the 1099 is received does not change that the income is taxable (it is). Still, I suspect EGIA will have quite a bit of work on their hands to obtain all the taxpayer identification numbers.

UPDATE: My correspondent told me that the EGIA is requesting that impacted taxpayers email their taxpayer identification numbers to the agency. If you are an impacted taxpayer, do not do this. Email is fast but it is not secure. EGIA is allowing you to mail the Form W-9 to the agency; that is a far more secure means of transmitting your social security number.

To the EGIA, what were you thinking in these days of identity theft?

Yes, Two States Rank Lower than California

Tuesday, November 17th, 2015

It’s not all bad news in the Tax Foundation’s 2016 State Business Tax Climate Index for California. You could always be in New York or New Jersey. Still, it’s better to be elsewhere.

Two excerpts from the article note why states rank at the top of the list or at the bottom:

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, South Dakota, and Texas have no corporate or individual income tax (though Nevada and Texas both impose gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax…

The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.

So who are the winners and the losers? Here are the top ten states:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Texas

Here are the bottom ten states:

41. Maryland
42. Ohio
43. Wisconsin
44. Connecticut
45. Rhode Island
46. Vermont
47. Minnesota
48. California
49. New York
50. New Jersey

My home state, Nevada, does very well (ranking fifth overall). It ranks first in individual income tax (there isn’t one), fourth in corporate tax (there is no a gross receipts tax on businesses, but only large businesses and the tax rate is low), seventh in property tax, but 39th in sales tax and 42nd in unemployment insurance tax.

Note that it is possible to have every major tax and still rank highly (Indiana and Utah manage that) if the taxes are broad with low rates. Of course, you can be like New Jersey, New York, and California: have broad taxes at high rates. If you do that, you end up on the bottom.

I should point out that it is possible that New York will rise in the rankings. As the Tax Foundation noted, New York enacted corporate tax reform which should improve its standing. Meanwhile, California is apparently considering more and higher taxes for the future. That, combined with the regulatory environment in the Bronze Golden State, should give legislators pause…but probably won’t.

Wrong Font Size Costs 30 Employees Their Jobs in Chico, California

Tuesday, November 17th, 2015

I had never heard of Woof & Poof. The company makes handcrafted baby products, but apparently not for long in their home of Chico, California. According to this news story, the company is stopping production.

Why? The CEO, Roger Hart, said, “The high cost of doing business in California coupled with ridiculous regulatory environment makes it virtually impossible to do business.” The news story contains the following:

A recent visit by an inspector with the Department of Consumer Affairs set the company back. The inspector from Sacramento cited him for having the wrong size font on the decorative pillow labels. He was told to take the labels out, or they would have his inventory seized.

My next story (above) notes California’s low standing on the 2016 State Business Tax Climate Index. California’s standing in the regulatory realm is even lower.

About 9,000 Businesses Left California During Good Economic Times

Tuesday, November 10th, 2015

Yesterday a friend sent me a link to Joseph Vranich’s report on businesses leaving California. I should know: I’m one of the 9,000 businesses that did so.

Mr. Vranich analyzed business relocations from 2008-2014. He identified 1,510 “disinvestment events”–companies leaving the Bronze Golden State for brighter horizons. Mr. Vranich notes that for every one company that publicly leaves, at least five others have left. Mr. Vranich also excluded all but primary employers,

…[W]hose customers are nationwide or worldwide (such employers bring wealth into a community.) All “secondary employers” (which exchange wealth already in a community) such as retail stores, restaurants, dry cleaners, beauty salons, nurseries – an inexhaustible list of enterprises – are excluded.

While some of these business closings and relocations are local businesses that just service locally, today with the Internet a business in Nevada and elsewhere can service clients anywhere in the world. Yes, you can only go to a restaurant locally or get your hair done where you are, but many other service businesses are no longer geographically constrained. This, too, likely causes an understatement of the impact of business relocations.

And things aren’t likely to get better for California:

Finally, California is considering imposing a broad set of new taxes, tax extensions and fees on businesses in 2016 and 2017 – a “tsunami” that may trigger the worst demands on private-sector finances ever organized by the state’s politicians. It is highly likely that one result will be an increasing number of disinvestments in California in favor of greener domestic or international pastures.

A factor that Mr. Vranich didn’t consider is what will happen during the next economic downturn? California today relies largely on capital gains taxes from very wealthy individuals (and individuals receiving stock options) for state revenues. The next time there’s an economic downturn, that source of income will decline, almost certainly very substantially. Given the mindset in Sacramento, that’s likely to result in even higher taxes and regulations rather than starting to actually make California a place that businesses want to locate in.

California DMV Deliberately Overcharging on Sales Tax

Thursday, October 29th, 2015

When you purchase a car in California, you owe sales tax based on where the car is registered. The California DMV uses a table based on ZIP Codes to determine what that should be. For 90% or more of California, it works fine; the sales tax rate in a ZIP Code is uniform.

However, California has numerous sales tax rates based on cities, counties, and special districts. Two individuals living in the same ZIP Code might have two different sales tax rates. The DMV has apparently programmed its computer to charge the higher of the two sales tax rates when registering a car purchase. An impacted consumer has to then apply for a refund (if he becomes aware of the issue).

Yet California’s Board of Equalization, the agency responsible for sales tax collection in California, developed an online tool to accurately show the sales tax rate for a location. Unfortunately, the DMV refuses to use it and told George Runner, a member of the BOE, that it would be several years before the problem is fixed.

Mr. Runner expresses surprise at the situation.
I am anything but surprised. I suspect the DMV likes the current procedure because they show higher revenue generation (which will presumably increase their budget) and because of pride of ownership. ‘We can’t use a tool developed by the BOE,’ the DMV may be thinking. ‘It’s not ours, so how can we trust it? And it doesn’t directly interface with our computer system. We don’t want our clerks overriding a sales tax rate (even when it’s wrong). Let the consumer just apply for a refund.’

This is yet another reason why trust has fallen in government and regulators.

Gilbert Hyatt Goes to Washington…Again

Sunday, October 11th, 2015

The Franchise Tax Board sent out a release on Friday noting that oral arguments in California Franchise Tax Board v. Hyatt will take place on December 7th. This is the second time this case has reached the US Supreme Court. Back in 2002, the Supreme Court ruled that Gilbert Hyatt could sue the Franchise Tax Board in Nevada. That was after the FTB rummaged through his trash. The FTB was then hit with over $400 million in damages. However, the Nevada Supreme Court threw out much of the decision, though the court upheld that the FTB committed fraud against Mr. Hyatt.

The ever-wonderful SCOTUSBLOG has links to the amicus curiea briefs that have been filed (and the FTB’s brief). Mr. Hyatt’s counsel was granted an extension until October 23rd to file his brief.

It will be interesting if this case–decided unanimously in its first Supreme Court iteration–is decided differently on the second iteration. In any case, a decision should come as early as March.

Are Turf Rebates Taxable?

Wednesday, September 23rd, 2015

The Los Angeles Times has an article asking this question. Because of the drought in California, the Metropolitan Water District had a $340 million incentive program so that homeowners would replace grass (which takes a lot of water) with bark, rocks, and other drought tolerant (xeriscape) landscapes. (The Southern Nevada Water Authority has a similar program.) The MWD has no idea if they have to issue 1099s to rebate recipients under federal law. (It is exempt from California taxation, though.) The article notes that the MWD suggests talking to a tax professional, so I’ll helpfully give an answer.

Any accession to wealth is taxable unless Congress has exempted that from taxation. One such exception are rebates on purchases. If you buy, say, a new car for $25,000 and receive a $1,000 rebate, you really bought the car for $24,000. A car rebate isn’t taxable income. Is the MWD (or SNWA) program a rebate?

No, it’s not. There’s nothing being purchased from the water agency. Instead, you’re tearing out grass, and replacing it with something else. The agency paying the “rebate” isn’t the same agency that’s doing the work. You might do it yourself, or you might higher a landscaping firm to do the work. The landscaping firm isn’t giving you a rebate.

If this isn’t a rebate (for tax purposes), then what is it? Well, the IRS could rule it’s not taxable since it is a lowering of the cost of doing the grass replacement and this is good for the environment. However, that’s not likely. There’s nothing in the Tax Code that says if something is done that’s good for the environment it’s not taxable. Instead, this looks like income–“Other Income” that would be reported on line 21 of Form 1040. You’re receiving a reward (income) for doing something. It’s not a rebate of a purchase. It’s not exempt from taxation under any other of the exemptions under the Tax Code. Thus, it’s taxable income.

Kiplinger’s Tax-Friendly and Least Tax-Friendly States: Bring Me (Mostly) the Usual Suspects

Monday, September 21st, 2015

Kiplinger has come out with their list of most tax-friendly and least tax-friendly states. There aren’t many surprises on the list, and readers of this blog definitely won’t be shocked with the least friendly state. The most friendly state was a little different. Do note that Kiplinger looked at all the taxes in a state, not just income tax.

Most Tax-Friendly States:
1. Delaware
2. Wyoming
3. Alaska
4. Louisiana
5. Alabama
6. Mississippi
7. Arizona
8. New Mexico
9. Nevada
10. South Carolina

Why Delaware? It has a relatively low income tax, no sales tax, low property taxes, and low a excise tax on alcohol. My state, Nevada, is noted for its non-existent income tax.

Here is Kiplinger’s least tax-friendly states:

1. California
2. Connecticut
3. New Jersey
4. Hawaii
5. New York
6. Rhode Island
7. Vermont
8. Maine
9. Minnesota
10. Illinois

Why California?

If you’re moving to the Golden State, plan to take short showers (to conserve water) and to pay the highest state income tax rates in the U.S. Worse, capital gains are taxed as regular income.

California also has the highest statewide sales tax, at 7.5% (it’s scheduled to drop to 7.3% at the end of 2016). The average state and local combined rate is 8.4%; in some cities, the combined rate is as high as 10%.

There’s actually more bad news about California’s taxes noted in the short article.

Kiplinger also has a tax map so you can find your state and whether it is tax-friendly or not.