State & Local Tax Insights -- Spring 2008
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.
MoFo Attorney News
Morrison & Foerster’s State and Local Tax Group would like to welcome the following new attorneys to the firm:
- Gary W. Maeder joins us as a partner in the Los Angeles
- Michael J. Duffy joins us as of counsel in the New York office
- Aaron Russell joins us as an associate in the New York office
- Jason M. Satterfield joins us as an associate in the San Francisco office
The State and Local Tax Group would also like to congratulate Andres Vallejo on becoming a partner. Andres resides in the
San Francisco office.
Upcoming 2008 Conferences
Following is a list of SALT conferences through November 2008, in which Morrison & Foerster attorneys will be participating.
May 9
American Bar Association
Tax Section
Washington, D.C.
Hollis L. Hyans
May 15-18
Georgetown Advanced State &
Local Tax Institute
Washington, D.C.
Paul H. Frankel, Hollis L. Hyans,
Craig B. Fields, Carley A. Roberts
May 20
Tax Executives Institute State Tax Day,
Dallas Chapter
Dallas, Texas
Eric J. Coffill, Hollis L. Hyans
May 20
Tax Executives Institute
Chief Tax Officers Conference
Chesapeake, Maryland
Mitchell A. Newmark
May 21
Tax Executives Institute State Tax School, Houston Chapter
Houston, Texas
Craig B. Fields
Mitchell A. Newmark
May 22
Council on State Taxation
Income Tax Conference
Portland, Oregon
Paul H. Frankel
May 29
MoFo Palo Alto
Palo Alto, California
Eric J. Coffill, Thomas H. Steele, Andres Vallejo, Carley A. Roberts, Pilar M. Sansone
May 30
Tax Executives Institute New Jersey
State Tax Day
Morristown, New Jersey
Paul H. Frankel
June 9
Federation of Tax
Administrators Conference
Philadelphia, Pennsylvania
Paul H. Frankel
June 19
University of Wisconsin/Deloitte
Tax Conference
Milwaukee, Wisconsin
Paul H. Frankel
July 14
Southeastern Association of Tax Administrators Conference
Williamsburg, Virginia
Paul H. Frankel
July 31 - August 1
Council on State Taxation
“Great Issues” Conference
Beaver Creek, Colorado
Paul H. Frankel, Thomas H. Steele,
Hollis L. Hyans, Trevor James and
Andres Vallejo
November 6-8
California Tax Policy Conference
San Francisco, California
Carley A. Roberts
Paul H. Frankel
*****
To ensure compliance with requirements imposed by the IRS, Morrison & Foerster LLP informs you that, if any advice concerning
one or more U.S. Federal tax issues is contained in this publication, such advice is not intended or written to be used, and
cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or
recommending to another party any transaction or matter addressed herein. For information about this legend, go to http://www.mofo.com/Circular230.html.
