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An out-of-state company that rented graduation caps and gowns in Alabama with the assistance of representatives from a separate in-state company had nexus with Alabama for sales tax purposes. Although there was no written agency agreement between the taxpayer and the in-state company's representatives, the facts established that the in-state representatives were de facto or implied agents of the taxpayer. The in-state representatives measured the students for the caps and gowns. They also provided the students (or the schools) with the taxpayer's order forms. They collected the completed order forms and submitted them to the taxpayer. The in-state representatives were clearly acting on behalf of the taxpayer when performing those duties. The in-state representatives' actions were also tacitly approved by the taxpayer because approximately 95% of the taxpayer's rentals in Alabama were made through the in-state representatives. The in-state representatives were also compensated for their activities or services on behalf of the taxpayer in the form of a commission. Ultimately, the in-state representatives were acting as agents of the taxpayer, and their actions on behalf of the taxpayer in Alabama allowed the taxpayer to establish and maintain its business of renting caps and gowns in Alabama. Thus, the taxpayer had nexus with Alabama.
Even if the in-state company's representatives were not deemed to be de facto or implied agents of the taxpayer, the taxpayer still had nexus with Alabama because it owned caps and gowns that were being rented in Alabama, and it derived substantial income from the presence of the caps and gowns in Alabama. The physical presence of the taxpayer's income-producing property in Alabama established substantial nexus. Thus, the taxpayer was doing business in and was subject to Alabama's taxing jurisdiction.
Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007, ¶201-244
Other References:
Explanations at ¶60-025
The December issue of the California Franchise Tax Board's (FTB's) Tax News summarizes corporation franchise and income tax and personal income tax legislation enacted in 2007, answers questions regarding the new state tax-exemption application procedures for IRC Sec. 501(c)(3) organizations, discusses a directive send to FTB audit staff regarding a corporate taxpayer's treasury function receipts, explains the differences in federal and California law regarding the adjusted gross income (AGI) phase-out limits for traditional individual retirement accounts (IRAs), announces the launch of an alimony audit project, and reports the findings of a pilot project utilizing self-compliance letters to verify car and truck expenses reported on a personal income taxpayer's Schedule C. In addition, the FTB reminds taxpayers about the proper procedures to file refund claims for corporation franchise and income tax and personal income tax purposes.
Finally, the FTB's "View Payment and Balance Due" online service will be temporarily unavailable from 5:00 p.m. Monday, December 24, through 7:00 a.m. Wednesday, December 26, and from 5:00 p.m. Friday, December 28, through 7:00 a.m. Wednesday, January 2. However, when service resumes additional features will allow taxpayers to view California wage and withholding information.
State Exemptions for IRC Sec. 501(c)(3) Organizations
Effective January 8, 2008, changes made by A.B. 897, Laws 2007, expedite the state exemption application process for organizations that have obtained a federal exemption under IRC Section 501(c)(3). Organizations that possess a federal determination letter under IRC Sec. 501(c)(3) can request a California affirmation of tax exemption by submitting a new Form 3500A, Affirmation of Internal Revenue Code 501(c)(3), to the FTB along with a copy of the federal exemption determination letter. A $25 application fee is not required. The Affirmation request should be submitted at least 90 days before an organization needs exempt status approval to provide the FTB adequate time to process the request.
IRC Sec. 501(c)(3) organizations must still fulfill California's exemption law requirements to receive the FTB's affirmation of federal tax exemption. This new law does not change any of California's filing requirements for FTB Form 199, California Exempt Organization Annual Information Return; FTB Form 109, California Exempt Organization Business Income Tax Return; or FTB Form 100, Corporation Tax Return. Furthermore, an inactive organization is not entitled to exemption. Organizations seeking to obtain and retain California exempt status must meet requirements that they are organized and operating for nonprofit purposes within the provisions of their exempt code section.
For state income tax purposes, the effective date of an organization's tax-exempt status will be no later than the federal effective date. An organization that incorporated prior to receiving its federal exempt status and that wants to receive state-exempt status retroactively in order to avoid the imposition of the minimum franchise or annual tax should file FTB 3500, Exemption Application, and not Form FTB 3500A, to request exemption retroactive to its date of incorporation.
Treasury Function Receipts
The FTB has issued Technical Advise Memorandum (TAM) 2007-3 to direct its audit staff to continue to collect information with respect to all treasury activities undertaken by multistate corporations so that the circumstances of each case can be compared to the analysis and metrics (measuring tools) provided in Microsoft, General Motors, and other cases, which held that treasury function receipts are required to be included in the sales factor but may be excluded upon a showing of distortion. However, those cases do not establish bright-line tests, or limit the approaches that can be used. Consequently the FTB needs to continue to collect information regarding all treasury function receipts, including information concerning repurchase agreements.
AGI Phase-Out Limits for Traditional IRAs
Although California conforms to the federal Roth IRA AGI phase-out amounts, California does not conform to federal law that indexes the AGI phase-out limits for traditional IRAs beginning in 2008 for taxpayers who are active participants in their or their spouses' employer-sponsored retirement plan. Therefore, taxpayers participating in their or their spouses' employer-sponsored retirement plan could potentially have a different federal basis than state basis if they fall between the phase-out limits, and are contributing to a traditional IRA beginning in the 2008 taxable year.
For 2008, the phase-out range for federal purposes for single taxpayers is between $52,000 and $62,000, whereas the range for California personal income tax purposes remains between $50,000 and $60,000. The AGI phase-out range for joint federal returns is $83,000 to $103,000, as compared to the California phase-out range of between $75,000 and $85,000. Finally, for individuals who are not an active participant, but whose spouse is an active participant, the phase-out range is between $156,000 and $166,000 on the federal return and between $150,000 and $160,000 on the California return.
Alimony Audit Project
The FTB is launching a new audit project to examine alimony payments deducted or received by California personal income taxpayers. The alimony audit project was initiated by a pilot study that indicated a 40% noncompliance rate, affecting multiple years in most cases.
Under federal law as incorporated by California, alimony payments are only deductible by the payer spouse if they are taxable to the recipient spouse. If the divorce or separation agreement designates such payments as not includable in the recipient's income, then the ex-spouse making the payments cannot deduct them. For example, property settlements are not includable as alimony income and are not deductible.
The FTB's analysis indicates that many taxpayers mistakenly consider all payments, including child support payments, made to their ex-spouses as deductible alimony payments. Conversely, many alimony recipients do not consider the payments from their ex-spouses as taxable income, and do not report it. Frequently, taxpayers fail to report income designated as "family support" by the divorce decree even though this type of support is considered taxable alimony income in most cases.
Under the new audit program, the FTB will mail a "Tax Liability Discrepancy" letter to the taxpayer if the FTB feels an audit adjustment is required rather than conducting a complete and time-consuming audit. If the taxpayer agrees with the FTB's audit determination, the taxpayer can pay the tax and interest, and be finished with the process. If the taxpayer disagrees, the FTB will request substantiation from the taxpayer supporting the taxpayer's position. The FTB will be developing a Frequently Asked Questions (FAQ) brochure, which will be included in the letters sent to taxpayers with alimony issues to help taxpayers understand the tax implications regarding alimony payments, as well as address penalties that may be imposed.
Self-Compliance Letters for Car and Truck Expenses
A self-compliance pilot project initiated by the FTB's audit unit to verify car and truck expenses claimed on taxpayers' Schedule Cs filed with their personal income tax returns indicated that taxpayers incorrectly reported their car and truck expenses on more than 80% of returns selected. Although taxpayers can deduct expenses incurred while driving from their homes to a client's place of business while conducting business or between one place of business and another place of business if they are business-related, taxpayers can not deduct transportation expenses incurred between their homes and their business or regular place of work, as those are personal commuting expenses. Under the pilot project, the FTB sent self-compliance letters to taxpayers who claimed the car and truck expense. The letters included FAQs, the applicable law, and a simplified auto expense worksheet(s) for taxpayers to determine the allowable amount of their car and truck expense deductions. Due to the success of the project the FTB will consider the self-compliance letters for future use.
Refund Claims
Claims for refunds must be in writing, signed by the taxpayers or their agents, and must specify the grounds on which the claims are based. The taxpayer must also affirmatively establish the right to a refund of the taxes by a preponderance of the evidence. Taxpayers must include a sufficient level of support for their refund when they file their refund claims. Sufficient support includes forms, calculations, or schedules used in determining the amount of refund, as well as detailed explanations for the change. For example, in a claim for refund to report an Enterprise Zone credit, documentation would include relevant accounting or financial records, such as payroll records, fixed assets journals, invoices, hiring credit vouchers, tax credit studies or other key documents required to substantiate the basis of the claim for refund.
Tax News, California Franchise Tax Board, December 2007, ¶404-503
Other References:
Explanations at ¶11-525
Explanations at ¶15-610
Explanations at ¶15-805
For Virginia corporate income tax purposes, construction in progress was removed from the numerator and denominator of the property factor because property under construction must be excluded from the property factor until it has been used. The corporate income tax return at issue was also adjusted to reflect the value of certain other property as reported for federal income tax purposes.
Ruling of Commissioner, P.D. 07-189, Virginia Department of Taxation, November 14, 2007, ¶204-697
Other References:
Explanations at ¶11-530
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