Reed Smith's State Tax Group’s California team consists of lawyers engaged in cutting-edge multistate cases involving apportionment (such as alternative apportionment issues and market-based sourcing), treatment of dividends, business and nonbusiness income, and taxation of banks and financial corporations. The California team is known for taking novel approaches to issues such as the calculation and preservation of various deductions and credits and also for challenging the imposition of penalties such as accuracy-related penalties and the large corporate understatement penalty. Our team has also secured large sales tax refunds for clients, involving issues such as technology tax agreements.
Our California lawyers are deeply connected with California’s taxing agencies and use these connections to proactively approach California tax law by participating in the regulatory process, often commenting on proposed regulations and providing testimony concerning regulatory and policy efforts.
In addition to our lawyers’ deep California tax experience, they are also involved in local tax matters, such as business taxes (for example, the San Francisco Gross Receipts Tax), property taxes, and transfer taxes.
Here is a brief summary of a few of the California issues and opportunities we are working on for our clients:
Factor Representation for Manufacturing Companies
Manufacturers are entitled to use an evenly weighted three-factor apportionment formula to fairly reflect business activity in California. This view, that capital and workforce are necessary for fair apportionment, was stated by the Franchise Tax Board (FTB).
Sales Tax on Software
Companies that paid sales or use tax on purchases of software may be entitled to a refund of tax they paid – even if the software is canned and even if it was delivered on tangible media.
We have experience with California’s written and unwritten apportionment rules and policies. Our experience ranges from sourcing receipts from services and sales of tangible personal the property to developing creative approaches to apportionment under section 25137, which is California’s version of UDITPA section 18.
We have experience unlocking additional research credits for businesses. For example, we believe that the Constitution requires businesses to determine California qualified research expenses by apportioning the expenses to California based on the business’s California apportionment factor.
Net Operating Losses (NOLs)
We have experience assisting clients in maximizing the value of tax attributes, such as NOLs. For example, we are representing clients in challenges to the FTB’s position that California NOLs generated by a unitary group are “siloed” in certain members of the group based on their relative contribution to the unitary group’s California apportionment factor in the year of the loss, and can only be used to offset the income of those members going forward. Instead, we believe that the statute allows such NOLs to be used by the unitary group on a combined group basis. Corporate taxpayers may also be able to “revive” expired NOLs by extending the carryforward period for NOLs that were suspended in 2002-2003, 2008-2011, and 2020-2021 by up to six years – setting aside the artificial and extra-statutory limitations imposed by the FTB under Legal Ruling 2011-04.
California State Tax Intelligence
As part of our full service for clients with California tax issues, we maintain a unique, fully searchable database of unpublished authority, including decisions of the California State Board of Equalization and the California Office of Tax Appeals, unpublished trial court decisions, and unpublished legal briefs. We also maintain regular and direct lines of communication with high-level state officials involved in all areas of California taxation.