On May 10, California Governor Gavin Newsom introduced his “May Revise” of the state budget. In addition to net operating loss deduction suspensions and tax credit usage limitations, one particularly concerning corporate tax-related proposal is a so-called “clarification” related to the apportionment factor. Specifically, the Governor seeks a:
This proposal comes on the heels of the Office of Tax Appeal’s (OTA) decision in Appeal of Microsoft, wherein OTA ruled that California’s sales factor includes dividends that are subject to the water’s-edge dividend received deduction. OTA designated the Microsoft decision as non-precedential, and has since been inundated with requests by the taxpayer community to designate it as precedential.
It is not clear whether the Governor’s proposed “clarification” would apply retroactively. Even if prospective only, though, taxpayers seeking to include in the sales factor receipts related to otherwise deductible income – whether water’s-edge dividends subject to a 75 percent deduction as in Microsoft or other income excluded from the tax base as in OTA’s precedential Appeal of Southern Minnesota Beet Sugar Co-op decision – may be in doubt. Worse still, if this proposal becomes law, then all taxpayer victories at OTA may be short-lived, as the Legislature could simply undermine an OTA decision with another “clarification.”
It is also worth noting that the proposal’s projected impact on the state’s General Fund revenues (an increase of $216 million) does not include the hundreds of millions of dollars in refunds that the state would have to pay out to taxpayers should the rulings in the Appeal of Southern Minnesota Beet and Microsoft decisions stand.
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