Detailed Steps Required: Follow CA FTB’s specific procedures for reapplying mistaken payments to meet compliance.
Avoid Penalties: Reapplying payments incorrectly can lead to penalties and interest; seek professional guidance.
Early Action Recommended: Submit requests before filing the entity’s return to streamline the correction process.
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Good news for tax professionals who mistakenly made an estimated tax payment on behalf of the entity instead of a passthrough entity elective tax payment: These payments can be reapplied — but you must follow the detailed steps below.
Ordinarily, the passthrough entity elective tax payment would only be recognized if paid with Form 3893 via Web Pay as a “passthrough entity elective tax payment” or by electronic funds withdrawal when using tax software.
California Franchise Tax Board (CA FTB) Procedure:
All requests must be submitted in writing and sent to the following address:
California Franchise Tax Board, PO Box 942857, Sacramento CA 94257-0500
The submission must include an acknowledgment from the business representative that reapplying the erroneous estimated payment to another liability may result in penalties and interest in the tax year where the payment was originally applied.
The requests can be submitted through a MyFTB account. Tax professionals may also contact the Tax Practitioner Hotline (916-845-7057) and speak with a representative to adjust the payment. However, a written request will still be required.
The written request to reapply the estimated tax payment should be done prior to the entity filing its return.
This process is available only for an erroneous estimated tax payment made by an entity. It is not available for erroneous estimated payments made on behalf of an individual owner since that involves two different taxpayers.
How MGO Can Help
We can assist you by offering detailed guidance on the tax payment reapplication process, confirming compliance with the CA FTB’s procedures, and helping to mitigate potential penalties. With MGO’s support, taxpayers can efficiently navigate the complexities of passthrough entity elective tax payments, leading to accurate filing and optimal tax outcomes. Reach out to our State and Local Tax team today.
Vineyards and wineries often navigate sales and use tax requirements in multiple jurisdictions, with different rules, rates, and exemptions in each state.
Promotional activities, such as “buy one, get one free” offers, hosting wine tastings, and online advertising can unknowingly create use tax exposure.
Sales tax compliance software often doesn’t address excise and gross receipts taxes, such as Washington’s B&O tax and Ohio’s CAT.
Various excise, sales and use, and gross receipts taxes can apply in different jurisdictions. Not following the complex web of tax rules and regulations can lead to audits, penalties, and even the loss of your license. Fortunately, with the right guidance, you can follow the various state and local tax requirements and even reduce your tax burden.
Understanding Sales and Use Tax Registration and Licensing
Sales and use tax registration and licensing requirements vary by state and depend on whether you ship products directly to consumers. Not all states allow direct-to-consumer shipping, adding another layer of complexity.
Evaluating your sales and use tax exposure requires answering several questions:
In which state and local jurisdictions do you have nexus? Sales tax nexus is a connection between your business and a tax jurisdiction that allows the state or local government to impose sales tax on your business. Most states levy a sales tax, and some, including California, Louisiana, and Tennessee, allow localities to impose their own taxes. You can have physical nexus in a jurisdiction by having employees or a location in the area or economic nexus by meeting a threshold for gross receipts or number of transactions.
Are you properly registered and paying taxes in that jurisdiction? Some industries might gamble on the cost-benefit analysis of registering and paying sales tax in multiple jurisdictions, but vineyards and wineries must prioritize compliance to maintain their licenses. If your winery has a license or distributes alcohol products in a state, it has nexus and should comply with all relevant tax obligations — regardless of economic thresholds.
Are you taking advantage of sales and use tax exemptions in each jurisdiction? Exemptions differ by state. For example, California offers a partial sale and use tax exemption for winery equipment used in manufacturing — such as grape crushers, de-stemmers, presses, bottling equipment, and fermentation tanks. Many states also offer resale exemptions, allowing winemakers to purchase tax-free raw materials like citric acid.
Do you have the proper documentation in place? If you take advantage of exemptions, you must have the right documentation. Without proper records, selling the business or facing a sale and use tax audit can be complicated and costly.
A reverse sales tax audit can help you answer these questions. During a reverse sales tax audit, a professional reviews your invoices and purchase orders, researches applicable laws, and thoroughly documents your exemptions. A reverse sales tax audit can also help assess whether you have overpaid sales tax due to missing available exemptions. If that is the case, you can review prior returns, find potential overpayments, and file amended returns to secure refunds.
Unique Vineyard and Winery Sales Tax Issues
The nature of the wine business brings some unique challenges to sales and use tax compliance. Here are a few issues to consider:
Promotions and Use Tax
Many wineries conduct “buy one, get one free” offers without realizing they must pay use tax on the free item and remit it to the state.
Often, a simple change of wording in the promotion, like changing it to “Buy 2 and get 50% off the total,” can eliminate use tax exposure.
Store Displays
Another area of concern is giving displays to stores. If the winery doesn’t sell the display to the store, the winery IS the final customer. If the winery didn’t pay sales tax on the display purchase, it must report and pay use tax on the item.
Event Marketing and Advertising
Many vineyards and wineries deploy sales representatives to host events without realizing this can create physical nexus in many states.
Examples include hosting wine tastings, holding educational events, and participating in festivals and music events.
Even online advertising can unintentionally establish nexus, so it’s crucial to work with an advisor who understands the industry and can help you find potential sales and use tax exposures.
Excise Taxes and Gross Receipts Taxes
Sales and use taxes aren’t the only taxes vineyards and wineries need to consider. Many states also levy excise taxes and/or gross receipts taxes. These are often more aggressive than sales tax because they’re levied on gross receipts with minimal exemptions. Some examples include:
Washington’s business & occupation (B&O) tax
Ohio’s commercial activity tax (CAT)
Texas franchise tax
Tennessee business tax
While excise and gross receipts taxes often have low rates, they can add up over time if not addressed promptly.
Don’t assume full compliance because you use sales tax compliance software. Some popular tax compliance solutions do not cover gross receipts taxes like Washington’s B&O tax, leading to potential oversights.
How We Can Help
From compliance with sales and use tax requirements to identifying and documenting relevant exemptions, MGO’s State and Local Tax team can review if your vineyard or winery still is compliant and doesn’t overpay your state and local tax liability.
Contact us today for help determining compliance and identifying potential tax-saving opportunities.
Tennessee recently repealed the franchise tax property measure, enabling taxpayers to request refunds for overpayments from tax years ending on or after March 31, 2020.
Franchise tax filers may qualify for refunds for up to three years; refund claims must be filed between May 15 – November 30, 2024.
Taxpayers using the property measure to calculate estimated payments should contact their tax advisor for further guidance.
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On May 10, 2024, the Tennessee legislature signed into law Public Chapter 950 (2024), which repeals the property measure (“minimum measure”) of the franchise tax for tax years ending on or after January 1, 2024. For a limited time, Tennessee taxpayers who used the property measure to calculate tax liabilities for tax years ending on or after March 31, 2020, may request a refund to the extent those liabilities exceeded the amount of tax that would have been calculated using the net worth measure.
What to Consider…
Refund Claims
Refund claims must be filed between May 15, 2024, and November 30, 2024.
You may request a refund if you paid franchise tax using the property measure for tax years ending on or after March 31, 2020 (“FT-13 – Property Measure Repeal – Tennessee Department of Revenue”).
The amount of tax you may be refunded is based on the portion of taxes paid using the property measure that exceeds the amount you would have owed under the net worth measure.
Any credits (e.g., jobs tax credit) in excess of the amounts allowed on the amended returns will be reinstated with applicable carryforward rules and will not be refunded.
A completed Report of Debts should also be included with the refund claim if you are requesting a refund of $200 or more.
Refund claims must include a statement waiving the right to file a suit alleging that the franchise tax is unconstitutional for failing the internal consistency test.
If you would like to address other issues outside of Public Chapter 950, those issues should be handled through separate filings.
The Department strongly encourages taxpayers to file refund claims using TNTAP, Tennessee’s online website for filing taxes, to expedite the refund process.
Public Disclosure of Taxpayer Information
The Tennessee Department of Revenue must publish the names of taxpayers who receive refunds and the applicable range of refunds received. Specific refund amounts are not published. The refund ranges will be the following:
$750 or less,
more than $750 but less than or equal to $10,000, and
more than $10,000
The information will be published May 31, 2025, and remain on the website through June 30, 2025.
Estimated Payments
If you are a taxpayer who has been using the property measure to calculate 2024 estimated payments, you should adjust your remaining estimated calculations and payments to account for a lower apportioned net worth base.
Alternatively, the state allows taxpayers to make an annual election to continue to use the minimum property measure if it results in a higher tax. Taxpayers with credit carryforwards should consider this election if there is a risk the credits will expire. If the election is made, the taxpayer waives any claim that the minimum property measure base is unconstitutional by failing the internal consistency test.
How MGO Can Help
Our State and Local Tax (SALT) Team can help submit your refund claim in accordance with state guidelines and procedures, in a timely manner. Need assistance requesting your Tennessee franchise tax refund? Reach out to our team today.
State tax authorities are escalating audits of intercompany transactions, as transfer pricing crackdowns in several states are generating millions in tax revenue.
These state initiatives indicate growing regulatory emphasis on transfer pricing, which may encourage more aggressive audits (especially if budgets tighten).
Companies operating across state borders should take proactive steps, like conducting transfer pricing studies to validate policies and strengthen defenses before audits strike.
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A recent Bloomberg article affirms state tax authorities are ramping up audits of intercompany transactions at multistate corporations. The report points to an increase in audits in three “separate-reporting” states following transfer pricing settlement initiatives as a beacon of audit activity to come across other states that take this approach.
While not ideal for multistate operators, this development may not come as a surprise to companies with international operations who have dealt with a myriad of cross-border tax issues in recent years. Close observers of state and local tax (SALT) developments have been predicting for many years the potential that states will be adopting similar positions with respect to transfer pricing. In a 2022 article focused on SALT transfer pricing enforcement, we highlighted several key indicators that more state transfer pricing audits could be on the horizon – including state budget deficits, a surge in auditor and consultant hirings, and renewed interest among states in collaborating on multistate audits.
With confirmation that state-driven transfer pricing audits are on the rise, it is imperative for corporations operating across state borders to assess your transfer pricing risks and fortify your documentation and audit defense strategies.
Surge of Transfer Pricing Audits in Separate-Reporting States
According to the Bloomberg Tax report, the recent spike in transfer pricing audit activity has predominantly affected Southeastern states categorized as separate-reporting states. Currently, there are 17 separate-reporting states in the United States. With the exception of a handful of states like Indiana, Pennsylvania, Iowa, and Delaware, most separate-reporting states are located in the Southeast region.
How separate-reporting states differ from other states in their taxation approach to corporations:
In separate-reporting states, each corporation within an affiliated group is required to file its individual tax return. This treatment considers them as separate entities with independent income, recognizing intercompany transactions, and allowing for varying tax liabilities.
In contrast, combined-reporting states require or allow affiliated corporations within a corporate group to file a single tax return, treating them as a unitary business with shared income, often eliminating intercompany transactions.
Notably, two Southeastern states, Louisiana and North Carolina, have recently concluded audit resolution programs that significantly boosted their state revenues. Louisiana’s program generated nearly $38 million, while North Carolina’s efforts resulted in more than $124 million. Meanwhile, New Jersey, a Mid-Atlantic state that abandoned separate reporting in favor of combined reporting in 2019, is in the midst of a transfer pricing resolution program that has already collected almost $30 million. The success of these programs in collecting tax revenue is likely to motivate other states to explore similar initiatives.
The success and subsequent expansion of these programs signify a growing emphasis on transfer pricing at the state tax authority level. State tax agencies are enhancing their knowledge and enforcement activities in this domain, giving auditors more confidence to adjust returns in transfer pricing disputes. This increasing competency may be viewed as a valuable tool by states – both those requiring separate and combined reporting – that are seeking ways to augment revenue streams.
Strengthen Your Transfer Pricing Defenses Before State Audits Strike
To preemptively safeguard your business from a state transfer pricing audit, a proactive approach to validating pricing policies is essential – and a comprehensive transfer pricing study is your primary defense.
Here are three key advantages of conducting a transfer pricing study:
Document Your Transfer Pricing Policy: A transfer pricing study provides robust documentation that can counter inflated tax assessments by identifying key intercompany transactions, referencing benchmark data, and highlighting any deviations that necessitate policy adjustments. Even if your company has undertaken prior studies, annual updates are indispensable to align with evolving business landscapes and provide tax penalty protection.
Mitigate Your Risk: Beyond reducing audit risks and potential liabilities, these studies also play a pivotal role in supporting major corporate events like mergers and acquisitions (M&A). By demonstrating pricing compliance, they ensure that domestic affiliates have robust documentation and effective cost allocation analysis, thus preventing over-taxation or under-taxation.
Ensure Consistency: Minimize uncertainty by achieving uniform entity-specific compensation across state agencies and affiliated entities. Swift collaboration with advisors when audits arise enhances dispute resolution capabilities.
As states continue to gain confidence in challenging transfer pricing, multistate corporations must take proactive measures to ensure the resilience of their intercompany transactions under intensified scrutiny.
Get Ahead of the Game with a Transfer Pricing Study
If your company engages in substantial intercompany transactions across state lines, initiating a review of your current pricing policies, preparing your transfer pricing policies, and ensuring compliance with U.S. transfer pricing rules should be a top priority. Proactive measures can help you stay ahead of potential issues before state auditors come knocking. We have a robust transfer pricing team that works closely with our State and Local (SALT) Tax and Tax Controversy practices. Through a combined effort we can support you through every stage of managing a transfer pricing audit. Talk to our transfer pricing professionals today to find out how we can help you minimize your exposure to transfer pricing audits.
Now that a recession seems imminent, it’s important to prepare by adopting state and local tax planning techniques now.
These techniques include performing a nexus analysis to lower your effective tax rate; getting ahead of sales tax collection so that you’re not left holding the bag; coming clean on your own to avoid penalties; and being ready to win in case you “win” the audit lottery.
Right now, you should be taking proactive measures to avoid overexposure and capitalize on opportunities that limit your overall tax burden.
Despite a seemingly robust economic recovery from the COVID-19 downturn, we are now looking down the barrel of another recession. When polled for a Wall Street Journal survey, more than three in five economists predicted a recession will occur over the next year due to a variety of reasons: inflation has hit a 40-year record high, the Fed has raised interest rates to the highest levels in more than 15 years, and several Fortune 500 companies have implemented mass layoffs. In addition, market volatility prompted by the implosion of Silicon Valley Bank and Credit Suisse has sent regulators around the globe into damage control.
While no one can predict the future — and if the COVID-19 pandemic has taught us anything, it is that the economy won’t follow the course of even the most prescient prognosticators. To prepare for the proverbial rainy day, in the following our State and Local Tax team details state and local tax planning techniques you can adopt now.
Technique #1: Perform a nexus analysis to lower your effective tax rate
Typically, a nexus analysis is performed “defensively” when you’re under the threat of an audit or to identify potential tax exposure … and that usually means an increase in state tax. But you should also consider performing a nexus analysis “offensively” as a method for lowering your effective tax rate – either by capturing net operating losses (NOLs) in states where you haven’t previously filed or by lowering apportionment in high-tax jurisdictions.
This first idea rests on the principle that you can’t claim NOL deductions on returns you never filed. If your company historically operated at a loss (for tax purposes), a nexus analysis might not have been on your radar; or maybe you had a nexus analysis done, but then decided not to file returns where there wasn’t a material exposure. But if in 2022 or later years, you were or expect to be profitable and you’ve been doing business online or in multiple states, identifying potential prior year state income or franchise tax filings may allow you to claim the benefits of the federal NOLs on your state returns by carrying the losses forward to offset current or future taxes.
Note, current federal rules allow you to carry NOLs forward indefinitely until the loss is fully recovered, but they are limited to 80% of the taxable income in any one tax period. States do not always follow these rules, and moreover, state apportionment rules will affect how much of the NOL is allocated to a given state. Therefore, you’re not likely to see a “one-to-one” application, and you may still owe some taxes, but under the right circumstances, this technique will go a long way towards mitigating exposure for state income taxes that you may owe in the future.
Another way that increasing your state tax filings may decrease your state tax liability is by taking advantage of “economic nexus” developments to “spread out” your state tax liability across jurisdictions where rates may be lower (i.e., reducing your “effective tax rate”). Many states impose “throw-back” rules that require you to treat sales to states where you don’t pay taxes as if those sales should be sourced to your home state. But if, under economic nexus, you should or could be paying tax in those jurisdictions, you may be able to reduce the payment in your home state. Similarly, differences can arise between state’s rules for sourcing sales of services or intangibles that may be particularly helpful when considering how to treat a large item of gain from a sale of a business asset (e.g., stock in a subsidiary, or a valuable piece of intellectual property).
A few example scenarios illustrate these techniques:
SoftDev Corp. started developing a SaaS product in 2019 and then testing its prototype apps online. They have employees that work remotely from home offices in five states. While SoftDev had potential nexus due to the economic activity in several states and payroll in the other five states, they only filed in their state of corporate domicile because sales were not significant, they had losses on their federal return, and the cost to prepare the other returns exceeded their compliance budget. In 2022, SoftDev expanded its product offering and began seeing significant sales in all 50 states. For federal tax purposes, they have accrued a large NOL that will reduce taxable income for the year (and probably several years to come). It would be wise to perform a nexus analysis at this point to identify whether SoftDev can capture any NOLs in other states – the key qualification being whether there is significant apportionment in the prior years as this will drive the amount of NOL available.
Cal Widget Co. sells widgets (tangible personal property) it manufactures in California to customers all along the west coast and all its operations, including its one warehouse, are in California. Historically, Cal Widget only files a return in California, where it has 100% apportionment because of the throwback rule, and thus pays 8.84% on all its taxable income. However, by filing in additional states, the throwback rule would not apply to those sales, and thus they wouldn’t be “thrown back” to the California numerator of the apportionment formula. Even without paying tax to the other state, if Cal Widget could show that they would have owed tax under California’s rules, but for the fact that the state does not apply tax under those circumstances, the sales could still be removed from the California numerator. For example, if 50% of sales were to California customers, 25% went to customers in Oregon (average rate = 7%), and the remaining 25% went to Washington (no corporate income tax), using this method, Cal Widget could reduce its effective state income tax rate from 8.84% to 6.17%.
Big Apple Co. has found a buyer for its signature logo and is anticipating a major gain event in 2023, and they realize that based on prior years, they’ll be paying New York State and City tax on the entire amount of gain because it’s the only state in which they’ve ever filed state income tax returns. If they are proactive, though, they can identify multiple states in which they have received revenue and can justify filing based on “economic nexus” and “market-based” sourcing principles – this won’t change New York’s tax rate, but it will provide a reason to apportion more of the income to source outside of the state and could save significantly on their tax bill.
Oftentimes, businesses are reluctant to really dig deep into nexus issues because they’re afraid of what they might find. And they end up waiting to take action until after they receive notices or their auditors (or worse, potential buyers) start asking about uncertain tax positions and accruals. But a slow-down in business due to the recession may offer you the opportunity to catch up on these nexus issues proactively.
Technique #2: Get ahead of sales tax collection so that you’re not left holding the bag
In a perfect world, when a company is properly accounting for, collecting, and remitting sales tax, there should be no (or at least very little) effect on revenue. Sales tax shouldn’t cost the business anything – instead, the business’ customers should be economically liable for the cost, while the business itself is only responsible for reporting and remitting the tax to the appropriate tax authority.
Problems arise when the business fails to account for sales tax and then only discovers the liability after the transactions have occurred and when it is no longer feasible to collect the individual sales tax amounts from customers. Then a cost that you could have passed through to your customers becomes your cost.
If you’re not currently collecting sales tax, you might consider a few of the “red flags” below:
Your business generates revenue online through a website, Software-as-a-Service, or another cloud-based product.
Many states treat SaaS (and similar cloud-based products) as they would other types of software, which are generally taxable.
What’s more, since you’re selling online, you may be subject to “economic nexus” without ever creating a physical presence in the location.
2. Your business processes payments online on behalf of other businesses making retail sales.
Since you are the party processing the transaction, you may be required to collect sales tax as a “marketplace facilitator,” even though you’re really just a company providing services to other businesses.
3. Your business provides services, so you haven’t really been concerned about sales tax in the past because you know it generally only applies to tangible personal property (TPP) … but consider whether:
You make some related sales of TPP when you are providing services (e.g., you design custom web infrastructure and occasionally sell specialized hardware to meet your client’s specifications);
The services you sell are computer programming and the end-product is typically custom software;
One division of your business is leasing goods from another division; or
Your services are taxable because they are dependent on, or related to, sales of TPP (e.g., third party software maintenance).
You can avoid this pitfall and ultimately save money by being proactive about identifying potential sales tax requirements and implementing systems to ensure you are properly collecting the tax.
Technique #3: Come clean on your own and avoid paying penalties
If your business sells products or services in multiple states, you could face unexpected tax liabilities for failing to comply with each state’s various income, franchise, gross receipts, sales and use, property, or other taxes. You may already be aware of the issue, and maybe you even have an accrual for the liability. And compounding any such liability are the interest and penalties that could be asserted if the state eventually discovers the business activity. But you don’t have to wait for the state to come after you, and if you’re proactive, you’ll probably be able to mitigate or remove all the penalties.
Virtually every state has a Voluntary Disclosure Program, under which you can execute a voluntary disclosure agreement (VDA) between your business and the tax authority to limit your liability for back-taxes. One benefit is that the VDA will limit the “lookback” period (otherwise a state can look back as far as the business had activity); this will often reduce the potential tax liability itself. Another benefit of a VDA is that any penalties that might have applied for late filing or payment are waived (though interest usually still applies). Finally, by going through the VDA process you are put in contact with a tax authority representative who can help you to determine precisely what rules apply to the business – they won’t exactly be a “tax adviser” but sometimes simply getting a hold of someone who will address your questions is challenge. And the certainty you will get from the process will give you comfort that your tax compliance process going forward is correct.
On top of state VDA programs, many states will offer amnesty programs. They usually are only available for a brief period (e.g., six months), have similar terms to a VDA, but are more relaxed in terms of eligibility. Let’s say you’ve been filing for five years, and you stop doing business in a certain state. You receive penalties and notices, and you ignore them — you aren’t doing business there anymore. But during the recession, you need to expand back into that state for additional customers. If you want to resume your business there, an active amnesty program may allow you to set up shop without having to pay penalties on the missed filings.
With the country entering a recession, business profits are likely to decrease, and so too will state revenues; under these circumstances, state governments are more likely to offer these amnesty programs as they seek to expand the tax rolls. Be on the lookout if a VDA isn’t an option for you.
Technique #4: Be ready in case you “win” the audit lottery
Not only do state governments seek out delinquent taxpayers through amnesty and VDA programs during a recession, but they may also seek out additional tax revenue through audits. For state income taxes, we’re likely to see a surge in audits surrounding online work and remote workers because of increased popularity in remote work over the last few years. In addition, states perennially test a business’ “unitary” status (i.e., whether a given item of income should be apportioned between several states or allocated to the corporate domicile) and therefore any significant sales of business assets in the last couple of years may make you a target.
Ultimately, this is the time to be more introspective: look back on your last few years and figure out if you had any gaps in recording. If there are opportunities to capture NOLs or other additional savings, bookmark those too. It’s best to be prepared, because while there’s no guarantee you’ll be met with an audit, there’s no question that state governments increase their audit activity during a recession.
How MGO can help
A recession affects everyone, and state and local governments are no exception — which, in turn, affects you and your business. These techniques can help you prepare for whatever’s coming, ensuring you’re ready for potential audits and losses along the way. MGO’s State and Local Tax team provides experienced guidance to help you avoid overexposure and capitalize on opportunities that limit your overall tax burden.
The California Franchise Tax Board (FTB) recently announced a one-time penalty abatement program for California resident and non-resident individual taxpayers.
Here’s what you need to know to claim it:
It’s a one-time abatement of any “timeliness” penalties incurred on individual income tax returns (Form 540, Form 540NR, Form 540 2EZ) for tax years beginning on or after January 1, 2022.
It’s only available to individual taxpayers subject to personal income tax law (so estates, trusts, and fiduciaries aren’t eligible).
It can be requested verbally or in writing starting on April 17, 2023.
For California taxpayers who qualify for an extended 2022 income tax return due date because of the California Winter Storms (i.e., most California taxpayers), the “timeliness” penalties that would be abated through this program should not start being imposed until after the new extended due date for that tax year – October 16, 2023.
Which penalties are eligible?
Both the Failure to File Penalty (i.e., you did not file your tax return by the due date nor did you pay by the due date of your tax return) and the Failure to Pay Penalty (i.e., you did not pay the entire amount due by your payment due date) on California individual income tax returns for tax years beginning on or after January 1, 2022 are eligible for the one-time penalty abatement.
How do I qualify?
How do I request a one-time penalty abatement?
You can mail in a completed Form FTB 2918 or call the FTB at +1 (800) 689-4776 to request penalty abatement.
What if I can provide that I had reasonable cause for late filing or late payment?
If you can demonstrate that you exercised ordinary care and prudence and were nevertheless unable to file your return or pay your taxes on time, then you may qualify for penalty relief due to reasonable cause. Reasonable cause is determined on a case-by-case basis and considers all the facts of your situation.
You may request penalty abatement based on reasonable cause by mailing in a completed Form FTB 2917 or by filling out a reasonable cause request on your MyFTB online account. Penalty abatement based on reasonable cause may – depending on the circumstances – be preferable to using up your one-time penalty abatement request.
How we can help
If you need help with relief for your “timeliness” penalties or if you need help with any other state and local tax matters, please reach out to our experienced State and Local Tax team.
California now has a new tax credit called the High-Road Cannabis Tax Credit (HRCTC) available for eligible cannabis retailers and microbusinesses.
The credit is available for tax years starting after January 1, 2023, through December 31, 2027, and can be applied against current year (and future) income taxes.
To claim it, you must make a “tentative credit reservation.”
Expenditures that qualify include wages for full-time employees; safety-related equipment, training, and services; and workforce development and safety.
While the cannabis industry in California has been struggling on many levels, tax credit relief has come in the form of excise tax changes for distributors and has now arrived for retailers. The High-Road Cannabis Tax Credit is a new tax credit from the California Franchise Tax Board (FTB) available for cannabis retailers or microbusinesses for taxable years beginning January 1, 2023, through December 31, 2027. In order to capitalize on this opportunity, eligible calendar-year taxpayers must make a tentative credit reservation during the month of July to claim the credit on their 2023 CA income tax return.
Who qualifies for the HRCTC
To be eligible, you would need to meet three basic requirements.
Which expenditures qualify for the HRCTC
There are several types of expenditures eligible for the credit with specific parameters that you would need to meet to qualify for them. Qualified expenditures are amounts that you have paid or incurred for any of the following expenses.
Wages for full-time employees
Not every employee has to meet these requirements — but for those that do, their wages count as a qualified expenditure. First, full-time employees must be paid for no less than an average of 35 hours per week — or they must be a salaried employee paid compensation for full-time employment.
In addition, full-time employees must be paid no less than 150% ($23.25) but no more than 350% ($54.25) of the state minimum wage. To meet the 150% minimum wage requirement, you may include the following employee benefits in qualified wages: group health insurance, childcare support, employer contributions to employer-provided retirement plans, or contributions to employer-provided pension benefits. But if you pay employees wages that surpass more than 350% of the state minimum wage, those wages are not considered a qualified expenditure.
Safety-related equipment, training, and services
Expenditures related to safety, training, and providing services can also qualify if they meet the following criteria:
Equipment primarily used by the employees of the cannabis licensee to ensure personal and occupational safety, or the safety of the business’s customers.
Training for nonmanagement employees on workplace hazards. (This includes safety audits, security guards, security cameras, and fire risk mitigation.)
Workforce development and safety
Qualified training for your employees includes:
Joint labor management training programs
Membership in a joint apprenticeship training committee registered by the Division of Apprentice Standards, and a state-recognized “high-road training partnership” (as defined in Section 14005 of the Unemployment Insurance Code).
Available credit
The amount of available credit is equal to 25% of qualified expenditures. The aggregate credit that can be claimed by each taxpayer (as determined on a combined reporting basis) is a maximum of $250,000 per year. Any unused credit can be carried over to the following eight taxable years. Availability is limited as the total cumulative amount of HRCTC available to all taxpayers is $20 million.
To claim the HRCTC on your California tax return, you must reduce any deduction or credit otherwise allowed for any qualified expenditure by the amount of the HRCTC allowed.
How do I make a tentative credit reservation — and when?
You must make a tentative credit reservation (TCR) with the FTB to claim the credit. This reservation must be made online and once you’ve done so, you’ll receive an immediate confirmation. FTB currently reports that the system will be up and running by July 1, 2023, but you can start preparing now.
How we can help
The HRCTC is a valuable tax credit opportunity for any commercial cannabis business operating in California. Determining if you qualify and calculating how much you can save could be complex. Our extensive experience in cannabis, cannabis tax, and state and local tax enables us to help you take advantage of this tax credit so you can stay focused on thriving in this ever-growing, culture-shaping industry.
Reach out to MGO’s State and Local Tax team to find out whether you qualify for this tax credit opportunity and determine how much you could potentially save.
California Governor Newsom strives to amend the personal income tax laws to prevent wealthy taxpayers from utilizing Incomplete Gift Non-Grantor trusts.
California residents use this by transferring assets into trusts held by nonresident trustees in states without income tax.
If this legislation passes, taxpayers will no longer be able to take advantage of the strategy.
If you reduce California income tax with an ING, Newsom is onto you
Californian legislators propose to amend the personal income tax laws to close a little-known-but-effective loophole for the wealthy by targeting Incomplete Gift Non-Grantor (ING) trusts set up in other states with more favorable income tax rules. To date, California residents have had the opportunity to transfer assets into these trusts held by nonresident trustees in states without income tax, utilizing the state’s sourcing rules to avoid the tax. If approved, this new legislation will put a stop to this tax planning strategy.
Taxing the rich in California
As it stands, the ING trust is not commonly used. There are about 1,500 California residents with this trust in states without income tax — and if implemented, California would see a minimal revenue increase (about $30 million in the first year and $15 million in the following years). However, this would put an end to a tax planning strategy the wealthy have been using to their benefit for about 20 years.
Because California is home to more billionaires than any other state at the same time as it also has the highest rate of poverty in the U.S., the concept of taxing the rich holds a certain appeal. In the past, Newsom has opposed proposals to raise taxes — but this proposal was included in the governor’s $223.6 billion budget plan for the next fiscal year, which begins in July. Whether the item survives the legislative process remains to be seen, but if New York’s passage of a similar law in 2014 is any indication, we are likely to see the end of this tax planning strategy for California’s ultra-rich.
Moreover, this proposal has a retroactive element, differentiating it from New York’s and opening it up to potential lawsuits (New York trust holders had a five-month period to move their accounts to a different type of trust without incurring the tax). Newsom is pushing for the measure to begin the calendar year after its implementation.
How the ING works (worked)
What is an ING, and why is Newsom trying to prevent its use? California taxpayers can transfer their assets into out-of-state, incomplete, non-grantor trusts (INGs), which constitute separate, taxable entities under state and federal tax law, and this move avoids California income tax on any appreciation or gains from those assets because it is “sourced” to another state based on the location of the trustee (i.e., the bank or whatever financial institution offers the trustee services in the other state). The non-grantor aspect comes into play when the taxpayer establishing the trust (the “grantor”) gives up control over managing investments or distributing assets to the trustee (contrast with a “grantor trust” in which the grantor continues to control how money is invested/distributed within the trust during their lifetime). For the trust to be deemed “incomplete,” the grantors specify how the money can be used.
Some of the states where these trusts are typically established include Florida, Wyoming, Delaware, Nevada, Tennessee, and South Dakota. For example, a California resident (TP) may decide to transfer stock in their business into an ING established in South Dakota. If TP held the stock directly, then as a resident, all the dividends (or if he sold it, the gain) would be taxable by California on their personal income tax return. But since TP doesn’t hold the asset – the ING does – the ING recognizes the income relating to the stock. California’s current rules provide that the income is sourced to (and thus taxable in) the state where the trustee is domiciled, and for this ING that location is South Dakota, which, incidentally, does not tax this sort of income.
Newsom is hoping that by eliminating this tax-free option, the state of California will be able to increase tax revenue in a way that will not alienate a large number of voters.
How MGO can help
If you are a California resident and currently use an ING as a tax strategy, there are steps to take now to avoid a negative impact. MGO’s experienced Private Client Services team can help you identify and implement an effective response.
On May 18, 2021, the House of Representatives passed the State and Local Cybersecurity Improvement Act (SLCIA) to address cybersecurity vulnerabilities and promote additional cybersecurity collaborative efforts between the Department of Homeland Security (DHS) and state, local, tribal, and territorial governments. The bipartisan bill was received in the Senate on July 21, 2021, read twice, and then referred to the Committee on Homeland Security and government affairs, where it has been sitting since. Once it passes, it will go to the President’s desk, where it will then immediately provide incentives to address the increasing danger of malicious cyberattacks on state and local IT infrastructure.
Giving state and local governments the resources to protect against hackers
This collaboration will encourage conducting cybersecurity exercises and hosting trainings meant to address current or future cyber risks or incidents. It will also provide operational and technical assistance to state and local governments to implement security resources, tools, and procedures to improve overall protection against attacks. The goal is to provide state and local governments with the support they need to defend themselves from hackers.
Resources to bolster government security capabilities
The SLCIA establishes a $500 million DHS grant program that will empower government institutions to increase their focus on cybersecurity. The bill also:
Requires CISA to develop a strategy to improve cybersecurity of state, local, tribal, and territorial governments, enabling them to identify federal resources to capitalize on as well as set baseline objectives for their efforts;
Indicates state, local, tribal, and territorial governments must develop a comprehensive cybersecurity plan to guide their usage of any grant money they receive;
Establishes a state and local cybersecurity resiliency committee made up of representatives from state, local, tribal, and territorial governments to provide awareness of cybersecurity needs; and
Enjoins CISA to assess the feasibility of a rotational program for the detail of approved government employees holding cyber positions.
The bill gives state and local governments the push they need to begin defending their networks. This can include the development of new strategies to boost their cybersecurity capabilities and acquisition of the funding needed to ensure their implementation. By investing in cybersecurity ahead of an attack, an entity is more likely to save money and protect its data.
Assessing eligibility for cybersecurity grants
Cybersecurity grants are available to municipalities of all sizes — but it’s important to start strategizing now by considering your IT infrastructure and cybersecurity frameworks. By applying for the grants, you indicate that you are taking your entity’s security seriously and taking the proper steps to qualify.
The State and Local Cybersecurity Improvement Act will provide up to $1 billion in grants for state, local, tribal, and territorial governments, allowing them to directly address their cybersecurity threats and risks. The program’s funding starts at $2 million for 2022, $400 million for 2023, $300 million for 2024, and $100 million for 2025.
To be eligible, an entity must:
Maintain responsibility for monitoring, managing, and tracking its information systems, applications, and those user accounts owned and operated by the government;
Show it has a process of continuously prioritizing the assessment of its cybersecurity vulnerabilities and threat mitigation practices; and
Have a tangible plan that outlines:
How to manage and audit network traffic.
How the government plans to use the information to improve its systems’ resiliency and strength.
Our perspective
While the bill is still waiting on the Committee on Homeland Security and Governmental Affairs there are some things you can do to make sure you are ready. State and local governments should focus on building teams that can handle the grant application process — and be prepared to implement once awarded. This bill indicates that governments are past the point of merely updating a firewall or running a generic virus program — things like multifactor authentication and zero-trust architecture are viewed as the next steps (which was required for federal agencies in a 2021 executive order).
How we can help
Prior to starting the grant application process, your IT leaders should start thinking about how to handle security gaps with various procedures and consistent tests. MGO can help. Our Technology and Cybersecurity team can provide guidance as you prepare for the future.
About the authors
Francisco Colon is a Partner at MGO with extensive experience in external audit, fraud examinations, litigation support, operational and internal controls reviews, and buyer/seller due diligence. He specifically focuses on assisting organizations with evaluating and updating their internal controls with a focus on strategic alignment and fraud litigation deterrence management in a variety of industries, including tribal government, gaming, technology, cannabis, hospitality, government contracting, distribution, manufacturing, and private equity. Contact Francisco at [email protected].
Once primarily an international tax issue, transfer pricing has become increasingly important at the state and local tax (SALT) level. With states experiencing financial pressures from multiple sources, including the COVID-19 pandemic, businesses — especially multistate taxpayers with significant domestic intercompany transactions — should expect increased state tax authority scrutiny and audit activities. Many states that use both separate and combined filing methods recognize transfer pricing as a substantial potential source of revenue. State efforts in transfer pricing audits have also increased because of heightened awareness from the OECD’s base erosion and profit-shifting project and the recent global and domestic tax reforms related to intercompany transactions. Taxpayers with domestic intercompany transactions, who may have never needed to consider transfer pricing in the past, should proactively plan for these audits and seek out potential opportunities.
State and local enforcement is increasing and states are hiring
The number of state transfer pricing audits has significantly increased in the past few years, and state tax authorities are adding transfer pricing resources, including auditors and outside consultants, even throughout the COVID-19 pandemic.
As a result of the potential for increased revenue, there has been renewed interest in collaboration among state tax authorities on transfer pricing. The State Intercompany Transactions Advisory Service (SITAS) of Multistate Tax Commission (MTC) was established in 2014 to unite those states interested in transfer pricing, encourage information sharing among them, and train groups for transfer pricing audits. With little interest at the time, the group stopped convening in 2016, but in 2021, it has re-emerged with renewed state interest in information sharing when it comes to multi-state audits. MTC is working on multiple initiatives for transfer pricing collaboration among states. It promotes the exchange of taxpayer information, which permits the states to collaborate on audit, compliance, enforcement, and litigation activities. MTC is also drafting a proposed white paper on the taxation of digital products and processes.
Indiana, North Davidina, and Louisiana are among the states that are leading efforts in state transfer pricing dispute resolution. Indiana introduced an advance pricing agreement (APA) program in 2020 to offer taxpayers an avenue for resolving existing and potential transfer pricing disputes with the state directly. An Indiana APA covers two three-year audit cycles. The Indiana Department of Revenue (DOR) also goes to pre-audit years if net operating losses are involved — not to make assessments for those years but to adjust the NOL carryover deduction that comes into the audit years. In July 2021, Indiana DOR officially proposed bilateral APAs in separate-reporting states.
In 2020, North Davidina announced an amnesty program for taxpayers to voluntarily disclose state transfer pricing positions and reach agreements with the state on intercompany pricing without facing additional penalties. This effort resulted in roughly $100 million in tax revenue collected from more than 100 participating taxpayers through the program. Similarly, in October 2021, the Louisiana Department of Revenue invited eligible taxpayers to participate in a voluntary initiative, the Louisiana Transfer Pricing Managed Audit Program, which aims to resolve transfer pricing disputes. It is anticipated that other state tax authorities will also develop similar programs to those in Indiana, North Davidina, and Louisiana to boost their tax revenues.
Transfer pricing issues can arise when there are transactions between two or more members of a unitary group. While most states require or permit “combined” reporting, under which affiliated entities conducting a unitary business file a group return that includes entities with out-of-state activities (and eliminates many intercompany transactions), seventeen states use “separate” reporting, which finds each entity filing its own return regardless of corporate affiliation. In both “combined” and “separate” reporting jurisdictions, transfer pricing can become an issue, but particularly in separate reporting states, the taxpayer’s separate-company taxable income can be directly affected by the pricing of transactions between the taxpayer and any domestic or foreign affiliates with out-of-state activities. And even in “combined” jurisdictions, state tax authorities may review the transfer price of transactions between related companies – both domestic and sometimes even foreign entities, depending on the state’s “water’s-edge” rules for including non-U.S. affiliates – to identify potential abuse of intercompany pricing (e.g., by overvaluing expense deductions or under-reporting income).
What the state and local tax authorities are looking at
At the federal level, transfer pricing is governed by the regulations promulgated under Internal Revenue Code (IRC) section 482 based on the rules of the arm’s length standard, which requires that the results of intercompany transactions be consistent with the results of comparable transactions between unrelated entities. Most states have adopted some form of the federal transfer pricing rules under IRC section 482. For example, Utah and Indiana have codified the language of IRC section 482 in the state statute.
State and local tax authorities are not bound solely to the arm’s length standard and are free to assert their own transfer pricing requirements. Intercompany transactions are often scrutinized at the SALT level in accordance with concepts like economic substance and business purpose, and in key focus areas such as royalties, debt, management or franchise fees, insurance, expense deductions, and allocations. The concepts are either derived from base erosion and profit shifting (BEPS) or incorporated into the state regulations.
The tools available to the state tax authorities to tackle transfer pricing issues include adopting IRC section 482, forced combination, alternative apportionment, related party expense addback, and asserting nexus with the out-of-state entities.
Under audit, states generally have the authority to require taxpayers to file on a combined basis on audit, or to use an alternative apportionment methodology. In addition, some states disallow certain deductions for expenses between related parties and require businesses to add back the deductions to their income.
When state tax authorities have deviated from IRC section 482, they have faced resistance to their transfer pricing approaches. Some recent court cases have sided with taxpayers and determined that state lacked sufficient support to claim that separate returns do not accurately reflect taxpayer income or that transactions lack economic substance. State revenue authorities have also been required to adhere to more standardized transfer pricing rules and practice when applying the state versions of IRC section 482. As a response, state tax authorities are actively engaging transfer pricing economists and professionals to boost their efforts against tax losses from intercompany pricing.
How to defend your transactions: taxpayer best practices
For transfer pricing among domestic affiliates, transfer pricing documentation is the best defense to support intercompany transactions. Companies anticipating significant intercompany transactions should prepare a transfer pricing study to document those transactions. The transfer pricing study should be completed contemporaneously with the completion of the tax return to provide penalty protection in case of transfer pricing adjustments.
Companies should closely examine their operations and determine the amount and details of all current and anticipated intercompany transactions, as well as try to avoid any single entity over- or under-paying taxes in any given state by valuing and compensating each affiliated entity for its relative contribution to the success of the business. Appropriate cost allocation analysis helps to ensure that revenue and expenses are allocated to the correct entities based on the contribution of each entity to the business.
Consistency is key for companies preparing a transfer pricing study and should ensure consistency across state revenue agencies. It is also crucial for taxpayers to ensure consistency in intercompany agreements, transfer pricing policies, and documentation to minimize audit risks. Businesses should have intercompany agreements in place and keep them up to date. It is important to incorporate transfer pricing as an integral part of the company’s business and tax planning process. Appropriate transfer pricing policies and documentation must be reviewed/updated periodically to reflect the new economic and business environment.
When facing state audits related to intercompany transactions, companies should work closely with their tax advisors to actively respond to requests from tax authorities to avoid prolonged audit processes and mitigate adjustment and penalties. Companies should also explore dispute resolutions such as state APA and voluntary disclosures for existing and future intercompany transactions to reduce tax uncertainties and associated costs.
How we can help
This area is complicated and filled with potential pitfalls. We are here to guide you – whether it’s to review your intercompany transactions and determine arm’s length pricing, help establish your transfer pricing policy, or represent you in an IRS audit. MGO’s SALT and Transfer Pricing teams are highly experienced and can guide you through best practices in these various areas. Reach out to our team of professionals to help protect your business.
