In 2012, much of the focus in state and local taxation (SALT) turned from groundbreaking legislative enactments to regulatory developments and court cases interpreting those enactments. Significant changes to the SALT landscape included the development of new combined reporting rules in the District of Columbia, challenges to the Revised Texas Franchise Tax (RTFT) and the New York payroll tax, and novel market-based sourcing provisions. While the year was not completely devoid of innovative SALT legislation, it seemed as if many state legislatures did not take the opportunity to completely reform or change their tax systems. Perhaps this relative inaction was a function of continuing uncertainty in the economy, and the recognition that from a state budget perspective, things are getting incrementally better, at least for the time being.

Whether that state of affairs will continue is going to depend on the national economy, which could, of course, be impacted by an event that may or may not occur in the coming days. The federal "fiscal cliff" is scheduled to take effect on January 1, 2013. If the "fiscal cliff" comes to pass, a variety of federal income tax provisions will expire, resulting in massive tax increases and spending cuts through the sequestration process. While the additional federal income tax revenue could result in an overall increase in state income tax revenue, the economic slowdown which may result from the tax increases and sequestration could adversely impact state budgets. Even if the "fiscal cliff" is averted, the resultant compromise could put a damper on state budgets and other aspects of SALT.

Depending upon how negotiations between political leaders play out, the deduction for state and local taxes on federal income tax returns may be in jeopardy, as well as the beneficial tax treatment for state and local municipal bonds. Also, significant financial aid provided to states by the federal government for many vital state functions and services may be diminished. Thus, the modest gains in state budgets since 2008 may be at risk in the coming year, regardless of whether the "fiscal cliff" is averted.1

While the resolution of the "fiscal cliff" will be interesting to watch and could have a substantial impact on states in 2013, we will save any further detailed analysis until something definite occurs in Congress. Rather, we will look back at the top ten SALT stories of 2012, and the first two stories highlight a case that dominated the SALT headlines, particularly in the second half of the year.

1. The Gillette Decision Causes Shockwaves in California

Featuring many moving parts, interested parties and far-reaching implications, it is not difficult to come to the conclusion that the decision in The Gillette Co. v. Franchise Tax Board was the most significant development of the year from a state and local tax perspective.2 The Gillette case interpreted whether a taxpayer could elect to apportion income under a standard equally-weighted apportionment formula consisting of property, payroll and sales factors under the Multistate Tax Compact (as ratified by California in 19743), in lieu of using California's property, payroll and double-weighted sales factor apportionment formula applicable for tax years beginning on or after January 1, 1993.4 Following the denial of tax refunds on the issue by the California Franchise Tax Board (FTB), a group of taxpayers initiated litigation, and appealed an adverse decision by a California trial court to the California Court of Appeal.

On June 27, in contemplation of a decision adverse to the state at the Court of Appeal and as a means to limit tax refunds that the state might be required to pay for open tax years, California enacted legislation, S.B. 1015, repealing the Compact and retroactively clarifying that the Compact election could not be made since 1993.5 In addition, S.B. 1015 stated more generally that an election that affects the computation of tax must be made on an original timely filed return for the taxable period for which the election is to apply.6

On July 24, the Court of Appeal reversed the trial court decision and agreed with the taxpayers that California was bound by the provisions of the Compact and could not override and eliminate the taxpayers' ability to elect the equally-weighted three-factor apportionment formula. In reaching its decision, the Court rejected the FTB's argument that the plain language of the California apportionment statute required the exclusive use of the double-weighted sales apportionment formula. According to the Court, California could only eliminate the right of a taxpayer to make an election to use the equally weighted three-factor formula by completely withdrawing from the Compact. California could not enact a statute that repealed the provisions of the Compact to the extent necessary to impose a mandatory apportionment formula on taxpayers. In support of its decision, the Court explained that interstate compacts, such as the Compact at issue, are binding and enforceable contracts between states. Also, the Court held that states cannot unilaterally repeal compact terms. The original decision did not address S.B. 1015.

On August 9, the Court of Appeal surprisingly vacated its own decision, and for nearly two months, taxpayers and practitioners parsed the meaning of this development – could a full reversal of the Court's own decision possibly be in store? On October 2, the Court of Appeal issued a revised decision, which restored the result and only made slight technical revisions to the previously issued opinion. The revised decision acknowledged S.B. 1015, and stated that since the legislation repealing the Compact was enacted after the years involved in the case, the legislation did not change the Court's holding.

What happens next in the Gillette case and the associated legislation pursuant to S.B. 1015?

Well, to begin, given the significance of the decision and expected fiscal impact, the California Supreme Court is likely to have the final say. The California Supreme Court could move in one of several distinct directions: (i) a simple affirmance of the Court of Appeals' decision; (ii) a more complex endorsement of the decision with guidance on how a taxpayer can make the election; (iii) a qualified reversal of the decision disallowing the election for amended period returns (as the Court of Appeal's decision did not specifically address whether the Compact election could be made on an amended return); (iv) a complete reversal of the decision; or (v) something completely different. As for S.B. 1015, since the bill passed the legislature with only a simple majority rather than the two-thirds required for any tax increase, the bill may be subject to challenge as an unauthorized tax increase.7 In the interim, taxpayers will continue to wrestle with whether they should make protective refund claims8 and/or take the position on original returns.

2. Gillette's Impact on Other Compact States

The novel aspect of Gillette is the fact that the issue of the Compact election to use the equally-weighted apportionment formula impacts nearly twenty other states which have adopted the Compact. In Michigan, Texas and Oregon, three of the states that signed the Compact, litigation on the issue has commenced. Further, it appears inevitable that as taxpayers decide to take the Compact election position in states like Alabama, Colorado, Minnesota and states which use heavily weighted sales factors and/or market-based sourcing of the sale of items other than tangible personal property, litigation will ensue in these jurisdictions as well.

Following the California Court of Appeal's decision in Gillette, the Michigan Court of Appeals held in International Business Machines Corp. v. Department of Treasury that a taxpayer was not allowed to elect to use the Multistate Tax Compact's three-factor apportionment formula for purposes of the Michigan Business Tax (MBT).9 Concluding that the MBT apportionment statute repealed by implication the apportionment election provision found in the Compact, the Michigan Court of Appeals also held that the Compact is not a binding contract that prevents the state from enacting modifications to the state tax base and apportionment statutes. This ruling, which directly conflicts with the analysis in Gillette, is expected to be appealed to the Michigan Supreme Court, though it is uncertain as to whether the Michigan Supreme Court will hear the case.

As for whether the Compact election is available for taxpayers subject to the RTFT, the Texas Comptroller of Public Accounts has issued several letter rulings on the matter, stating that the use of the Compact's apportionment formula is prohibited under the RTFT, which specifically requires single sales factor apportionment.10 The use of the Compact election is also currently being challenged in the Oregon Tax Court.11

Overall, the Compact election issue arguably threatens the vitality of the Compact, and raises a number of questions that may take years to resolve. Will a number of the Compact states decide to withdraw from the Compact if the Compact election is ultimately upheld in California? In a state where the Compact election is allowed, what regulations does a taxpayer use to interpret the Compact provisions – the model MTC regulations, state regulations in effect when the Compact was enacted, current regulations, or nothing at all? Will state courts be inclined to follow them Gillette or IBM conception of the Compact, and will the U.S. Supreme Court ultimately be required to consider the issue? Will California's withdrawal from the MTC negatively impact the future of the MTC as an organized body able to influence its membership? With several hundred million dollars potentially at stake, it would not be surprising to see the evolving story currently playing out in Gillette and other cases contained in next year's list of top SALT stories.

3. State Ballot Initiatives Continue to Shape State Tax Policy

Voters in California adopted two major tax propositions in November, Proposition 30, "The Schools and Local Public Safety Protection Act of 2012," and Proposition ,

"Income Tax Increase for Multistate Businesses." Voter approval of Proposition 30 retroactively increased 2012 personal income tax (PIT) rates and also increases PIT rates for the 2013 through 2018 tax years in high-income tax brackets from 9.3 percent to as much as 12.3 percent.12 In addition, the state sales and use tax rates will increase 0.25 percent from January 1, 2013 to December 31, 2016. The approval of Proposition 39 requires most multistate businesses to apportion income using a single sales factor method of apportionment for taxable years beginning on or after January 1, 2013. As a result of the approval of Proposition 39, taxpayers will also be required to source sales other than sales of tangible personal property based on a market approach rather than the location where the greater cost of performing the income producing activity occurs.

Oklahoma's three-year experiment with the Business Activity Tax (BAT) is about to end as a result of voter approval of a ballot measure that exempts all intangible personal property from state property taxes beginning with tax years after 2012. This ballot measure amends the Oklahoma Constitution so that all, not only some, intangible personal property would be exempt from ad valorem property taxation, and also results in the expiration of the BAT for tax years after 2012.13 However, companies doing business in Oklahoma should be aware that the Oklahoma franchise tax, which is currently subject to a three-year moratorium, will be reinstated for tax years beginning on or after July 1, 2013.14

Other state ballot initiatives resulted in the adoption of a sales tax rate increase in Arkansas, and the rejection of sales tax rate increases in Arizona and South Dakota.15 Finally, Michigan and Washington both addressed the question of supermajorities and tax increases. Michigan voters rejected an initiative that would have required a two-thirds majority vote of the state legislature, or a majority of statewide voters, for the state to impose new taxes, additional taxes, tax base expansion, or tax rate increases.16 Washington voters approved an initiative confirming that tax increases require either two thirds legislative approval or voter approval, and fee increases require a simple majority vote.17

4. District of Columbia Struggles with Combination

As 2012 began, taxpayers and practitioners expected that the District of Columbia Office of Tax and Revenue (OTR) would quickly issue regulations explaining the combined reporting statute that had been passed the previous year, particularly as the combined reporting requirement applied for all tax years beginning on and after January 1, 2011. After the OTR released proposed regulations early in the year, the business community and practitioners peppered the OTR with numerous substantive comments. Following more than six months of waiting, the OTR released the revised regulations in late August, and finalized the regulations on September 14, one day prior to the extended filing due date for the first batch of combined reports for calendar year taxpayers.18 Ultimately, the District provided an additional one-month extension for these taxpayers to file returns.

The final regulations addressed several combined reporting issues, including the composition of the combined group, worldwide reporting election, determination of taxable income or loss, computation of net operating losses, adoption of the Joyce rule for apportionment, treatment of partnerships, FAS 109 deduction and the aforementioned automatic filing extension for the first combined return. Out of all of these new provisions, the issue that caused the most consternation related to the treatment of partnerships in the combined group and the interplay between the District's unincorporated business tax and the new combined reporting requirements. The final regulation (and associated guidance on the OTR's Web site, including complex spreadsheets) purports to prevent the double taxation of partnerships and other unincorporated businesses, though only time will tell as to whether this aim truly has been achieved.19

Perhaps realizing that many of these substantive provisions in the regulation should have been contained in the combined reporting statute, the City Council soon passed clarifying legislation retroactive to the 2011 tax year.20 The clarifying legislation transfers enforcement of the combined reporting requirements from the Mayor to the Chief Financial Officer, and amends statutory provisions concerning key definitions, treatment of partnerships and other unincorporated business entities, composition of the water's edge group, automatic extension of the worldwide election and the FAS 109 deduction. It is clear that after the first filing season for calendar year taxpayers, the District's combined reporting regime is still a work in progress, and that taxpayers should expect additional guidance from the OTR that may require amended filings and/or result in audit challenges down the road.

5. New York Payroll Tax Ruled Unconstitutional, For Now

One of the more unlikely stories of the year took place in New York, where a trial court concluded that the metropolitan commuter transportation mobility tax (MCTMT) violated the New York State Constitution because the New York State legislature did not follow proper procedures in enacting the law.21 New York adopted the MCTMT in 2009, which is imposed on certain employers and self employed individuals22 that engage in business within the 12 counties comprising the Metropolitan Commuter Transportation District (MCTD).23 Depending on the amount of a taxpayer's payroll expense for the calendar quarter, the tax rate ranges from 0.11 percent to 0.34 percent of the payroll expense for that quarter.24

The municipalities in the MCTD, led by Nassau County, claimed that the MCTMT impinged on its home rule powers guaranteed by the New York State Constitution by reason of the MCTMT's status as a special law relating to the property, affairs or government of any local government. The New York State Constitution requires that a special law cannot be enacted without: (i) a "home rule message" from the municipalities affected by the law (a two-thirds vote from the local legislative body or a request by the head of the municipality supported by a majority vote); or (ii) a certificate of necessity by the governor and a two-thirds vote by each house of the legislature. The trial court agreed with the county that the special law requirements were not met, and then considered whether the special law requirements served a substantial state concern. In finding that the substantial state concern test was not met, the trial court determined that the MCTMT only affected the residents within the MCTD.

In response to the decision, the New York State Department of Taxation and Finance announced that taxpayers that have been paying the MCTMT should continue to pay and file returns.25 Refund claims will be accepted but held for processing until further notice. It is intriguing that the trial court determined that the "substantial state concern" test was not met, as the health of the MCTD's transit systems is legitimately important to ensuring that the region's economy (and by extension, the state's economy) remains stable. The impact of Superstorm Sandy to the region late in the year only proved the point that when the MCTD transit system goes down for an extended length of time, such an event is a substantial state concern requiring hands-on involvement of the governor and other state officials. While taxpayers should consider filing protective refund claims on the basis that the MCTMT is unconstitutional, it would not be surprising in the least if an appellate court reverses the trial court's determination.

6. More Market-Based Sourcing Developments

Much like last year, the trend towards requiring market-based sourcing of the sale of services (and items other than tangible personal property) for purposes of the sales factor continued to gather momentum. In addition to the adoption of Proposition 39, which will require market-based sourcing in 2013 and beyond in California, Nebraska adopted market-based sourcing for sales of services, application services, and intangibles, beginning in 2014.26 Arizona adopted legislation that will allow multistate service providers to make an election to use market-based sourcing to apportion income to Arizona for corporate income tax purposes, again beginning in 2014.27 Finally, Alabama recently proposed regulations on its recently adopted market-based sourcing statute.28

As states continue to adopt the market-based sourcing concept, at least three issues are coming to the forefront. First, can a state tax authority decide to implement regulations retroactively in this area? For example, in late 2011, Utah finalized its regulation clarifying and interpreting Utah's statutory adoption of market-based sourcing for service revenue for tax years beginning January 1, 2009.29 While the regulation did not come into effect until late 2011, it is possible that Utah could retroactively enforce the policies continued in the regulation back to 2009, which may be contrary to taxpayers' actual filing positions on 2009 and 2010 returns. The same issue is likely to arise in Alabama, which will not be finalizing its proposed regulation until 2013, more than two years after the statute first came into effect. Perhaps Nebraska and Arizona will develop their regulations prior to the effective date of their prospective statutes on the subject to avoid the potential retroactivity issue.

Second, can a state tax authority implement market-based sourcing via regulation or its own audit policy when a statute explicitly calls for a cost of performance methodology? Market-based sourcing has become so popular that states using cost of performance sourcing as their general rule are trying to utilize market-based sourcing pursuant to audit methodology or formal policies on the subject. For example, the Indiana Department of Revenue recently released a letter of findings concluding that an out-of-state taxpayer selling audience profile information to Indiana customers was required to source such sales to Indiana, despite the fact that Indiana is a cost of performance state.30 According to the letter of findings, the "income producing activity took place in Indiana because Indiana is the place where services were provided to Indiana customers and the place where Taxpayer derived this income." In our experience, we have seen Florida and Pennsylvania take similar market-based sourcing positions at audit, particularly when an answer utilizing pure cost of performance principles would markedly lower a taxpayer's apportionment factor.

Third, what will be the result of uniformity efforts in this area? Charged with promoting uniformity between the states, the MTC has pursued an effort to amend Article IV of the Compact, and at a recent meeting endorsed the application of market-based sourcing of the sale of items other than tangible personal property.31 The statute would require sourcing of services based on the location where the service is delivered.32 With respect to sourcing of intangibles, property rented, leased or licensed would be sourced to the location where the intangible is used.33 Intangible property utilized in marketing a good or service to a consumer is used at the location of the customer.34 As for intangibles that are sold, contract rights, government licenses or similar intangibles authorizing the holder to conduct a business activity in a specific geographic area are deemed to be used in the geographic area covered by the intangible.35 Receipts from intangible property sales contingent on the productivity, use or disposition of the intangible are treated as receipts from the rental, lease or licensing of such property.36 Other receipts from sales of intangibles are excluded from the apportionment factor.37 A reasonable approximation rule is provided in case the above rules are inconclusive.38 If the taxpayer is not taxable in a state to which a sale is assigned, or no reasonable approximation can be made, then the sale is excluded from the denominator of the sales factor.39 The amended statute, which is similar in scope to the newly adopted Alabama market-based sourcing statute, will be the subject of an MTC public hearing in the near future. Given many states' adoption of a location of customer benefit rule (rather than location of delivery) for the sourcing of services in the last few years, it seems unlikely that the MTC's action will result in more uniformity among the states that pick up the Compact's market-based sourcing concept.

7. Revised Texas Franchise Tax Continues to Inspire Challenges

Taxpayers continued to challenge the RTFT on a number of fronts, with varying levels of success. In In re Nestle USA, Inc., the Texas Supreme Court upheld the RTFT against a constitutional challenge under both the Texas and U.S. Constitutions.40 The taxpayer, a manufacturer and distributor of food and beverages that only engages in wholesale activities in Texas (which if viewed in isolation would be subject to a 0.5 percent RTFT rate), attempted to challenge its classification as a manufacturer subject to the higher 1 percent RTFT rate.41 However, the Court found that the RTFT did not violate the Equal and Uniform Clause of the Texas Constitution because the structure of the RTFT classifications was reasonably related to the object of the tax, or the privilege of doing business in Texas. The Court also found that the taxpayer failed to show that the RTFT violated the Equal Protection, Due Process or Commerce Clauses of the U.S. Constitution.

While the taxpayer in Nestle was unsuccessful in its rate classification battle, another taxpayer obtained relief from an administrative law judge (ALJ) decision (affirmed by the Texas Comptroller). The taxpayer, which sold and installed automobile parts and accessories primarily to automobile dealers, was eligible for the 0.5 percent RTFT rate that applies to retailers and wholesalers, rather than the 1 percent RTFT rate applicable to service enterprises.42

Finally, in the continuing controversy between what qualifies as costs of goods sold (COGS) and what does not, a Texas district court held that an oilfield service business was entitled to receive an RTFT refund on the basis that certain costs attributable to comprehensive oilfield services were includible in the COGS deduction, though such decision has been appealed.43

The Texas Comptroller provided perhaps the most interesting development of the year in RTFT matters when it unilaterally changed its policy on amending the election to use the COGS or compensation deduction. Historically, the Comptroller had taken the position that while the decision to claim the compensation or COGS deduction is elective, that election must be made on or before the extended due date of the return.44 As a result, the Comptroller denied taxpayers the opportunity to amend their franchise tax reports to change their election or to make an election when no election was made on the originally filed return.45 In its announcement, the Comptroller determined that taxpayers may make the election to claim either the COGS or compensation deduction on an originally-filed return or on an amended return.46 Accordingly, taxpayers may amend their RTFT reports still open under the statute of limitations to change their election, or make an election if an election had not been made on the originally filed RTFT report.

8. Illinois Courts Weigh In On Amnesty Program

Two cases currently in the Illinois judicial pipeline address challenges to significant penalties imposed by the state following an amnesty program. In MetLife Insurance Co. v. Hamer, the Illinois Appellate Court held that a taxpayer's additional income tax liability for tax years 1998 and 1999 did not constitute "all taxes due" that were required to be paid under the state's tax amnesty program in order to avoid the imposition of a double interest penalty.47 The additional tax liability was determined by federal and state audits which began before the state's 2003 tax amnesty program, but were completed well after the end of the program. Neither the Illinois Department of Revenue nor the taxpayer had knowledge of the additional liability during the amnesty period. As a result, the additional liability was not "eligible" for the amnesty program and the taxpayer could not be penalized for failure to take advantage of the program.

In Marriott International Inc. v. Hamer, a different panel of the Illinois Appellate Court of the same district held that a taxpayer's additional income tax liability for tax years 2000 and 2001, resulting from a federal audit conducted after the conclusion of the state's 2003 amnesty program, was subject to a double interest penalty because of the taxpayer's failure to participate in the program.48 The justices concluded that even though the taxpayer had no knowledge of the additional liability during the amnesty period, the liability was "due" and required to be paid during the program and thus, subject to the double interest penalty. This Appellate Court decision expressly rejected the reasoning in MetLife that reached the opposite result.

In comparing the cases, it appears that the taxpayer in Marriott actually had stronger facts (despite the outcome) because the taxpayer was not under audit during the tax amnesty period and had less reason to believe that it might have additional tax liability than the taxpayer in MetLife. There are sufficient factual distinctions to warrant the Illinois Supreme Court considering both cases, though the Illinois Supreme Court could consolidate the cases for judicial economy.

If the Illinois Supreme Court decides to hear the cases, it will most likely need to address whether the Department's emergency regulations addressing the amnesty program exceeded its statutory authority. The Department's emergency regulations state that a taxpayer "pay the entire liability for a tax type and tax period, irrespective of whether that liability is known to the Department or the taxpayer."49 This statement does not seem to be supported by the tax amnesty statute. Similarly, the tax amnesty statute does not provide authority for the requirement that a taxpayer under audit during the amnesty period "make a good faith estimate of the amount of the liability."50 Note that emergency regulations are effective for 150 days from the date of promulgation and must be replaced with permanent regulations in order to be enforced after the expiration of the 150-day period.51 The Department never adopted permanent regulations for the 2003 tax amnesty. Therefore, there was no regulation in effect at the time the Department attempted to invoke the emergency regulations as the basis for asserting the double interest penalty against the taxpayers in MetLife and Marriott.

Even if the Illinois Supreme Court agrees with the Department's regulations, taxpayers would still be able to challenge the double interest penalty on due process and/or equal protection grounds. In MetLife, the dissent rejected the taxpayer's due process argument and determined that the statutory scheme was not "arbitrary or unreasonable." Taxpayers are unlikely to have much success with this argument. As noted above, however, the emergency regulations that supported the Department's position were never permanently adopted. In addition, a taxpayer could argue that the emergency regulation that relieves taxpayers of the double interest penalty for federal changes that were not final at the time of the amnesty program but does not provide similar treatment for state audit determinations violates equal protection. An argument could be made that there is not a rational basis for this disparate treatment, but courts rarely rule in favor of taxpayers on equal protection grounds.

Overall, the imposition of the double interest penalty on tax liabilities that are unknown to the taxpayer and the Department during the tax amnesty period is a questionable approach. The inequity of this approach is particularly true in Marriott, in which the taxpayer was not under federal audit until after the tax amnesty period concluded.52 In our view, the double interest penalty should not be imposed on taxpayers that make a good faith effort to comply with Illinois tax law and are unaware of additional tax liability.

9. Discretionary Combination in North Carolina

For many years, taxpayers subject to the North Carolina corporation income tax have been subject to the threat of combination by the state's Department of Revenue, without the parallel right to request the same treatment when it might be beneficial to them. A continuing exchange between the North Carolina state legislature and the Department of Revenue on the issue of the Department's unilateral power to require combination is playing out. Last year, the state enacted legislation53 that repealed the Secretary's existing statutory authority54 to adjust a corporation's net income or require a combined return and replaced it with new statutory authority.55 Three separate developments occurring in 2012 attempted to clarify when the Department could require combined reporting.

In April 2012, the Department published a directive explaining the Secretary's statutory authority to redetermine a corporation's net income by adjusting the corporation's intercompany transactions or requiring a corporation to file a combined income tax return for tax years beginning on or after January 1, 2012.56 In response to the directive, the state adopted legislation generally preventing the Department from requiring a taxpayer to file on a combined basis until an administrative rule is adopted and becomes effective (which could be applied to taxable years beginning on or after January 1, 2012).57 The legislation prevents the Department from interpreting the statute in the form of a directive or bulletin.

As a means to satisfy this new statutory requirement, the Department recently proposed a regulation specifying that the taxpayer has the burden of proof that the transaction has economic substance (which term is explained in detail). The proposed regulation addresses "reasonable business purpose" and "economic effects," and confirms that state tax benefits can be included in the consideration of whether a transaction has reasonable business purpose and economic substance. The proposed regulation also provides rules on the use of fair market value for determining whether a transaction is being made at arm's length, the types of net income adjustments that can be made by the Department, and combined return methodology and procedures for filing combined returns. This wide-ranging regulation arguably helps taxpayers understand the combination process, and how specific transactions will be examined for the purpose of determining whether economic substance exists. Left unsaid in the regulation is when the Department will use the combination option versus making other types of adjustments to intercompany transactions.

10. Mobile Workforce Tries to Cross Finish Line

The Mobile Workforce State Income Tax Simplification Act58 became noteworthy this year as being the first bill dealing with state income tax matters to pass the House of Representatives in many years when it was approved by the House on May 15, via voice vote. The bill would permit states to tax a non-resident employee's income only if the employee has been present and performing employment duties in the state for more than 30 days during the calendar year. The bill is substantially similar to legislation introduced during the previous two Congressional terms to establish a national framework governing when states may require employers to withhold tax from nonresident employees' wages, as well as such employees' return filing obligations.59

While passage of the bill in the House was a significant achievement, the final days of the Congressional session are now close at hand, and to date, the Senate has not taken action on the bill. The ability of the bill to make it through the second step of the Congressional gauntlet and onto the President's desk for signature has depended in part on a quick resolution of the "fiscal cliff," so that other items could be taken up by the Senate prior to the end of the year. Clearly, nothing has happened on that front to date. One other approach by which the bill potentially could be moved through the Senate as the "fiscal cliff" debate continues is by attaching the bill to other legislation that already has the complete support of the Senate. For example, supporters of the Marketplace Fairness Act, federal legislation regulating interstate sales and use tax compliance requirements for remote sellers, attempted to do this in recent weeks.60 If the Mobile Workforce bill does not pass the Senate in the next couple of weeks, the momentum gained over the past two years on this issue will need to be reignited in the incoming Congress.

Footnotes

1 It is somewhat ironic that some of the high-profile issues confronting federal policymakers are issues that many states have been required to consider in recent years because of balanced budget requirements. For example, several states have closed budget deficits by imposing temporary (and in some cases permanent) income tax increases on higher-income individuals and making painful cuts to core services, including education, police protection and transportation.

2 California Court of Appeal, First District, No. A130803, Oct. 2, 2012.

3 CAL. REV. & TAX. CODE §§ 38001 to 38021.

4 CAL. REV. & TAX. CODE § 25128(a). Note that there are certain industry exceptions to the standard apportionment formula, including agriculture business, extractive business, savings and loan activities, and banking and financial businesses. These entities continue to use an equally-weighted three-factor formula. CAL. REV. & TAX. CODE § 25128(b), (c).

5 Ch. 37 (S.B. 1015), Laws 2012.

6 S.B. 1015, § 4(a). 7 Pursuant to Proposition 26, all tax increases must be approved by a two-thirds margin in the state Assembly and Senate. As the state legislature did not pass the legislation by the required supermajority margins, it can be argued that California's withdrawal from the Compact was ineffective.

8 Taxpayers may file protective claims for refund on this issue by following guidance released by the Franchise Tax Board in the wake of the Gillette decision. See FTB Notice 2012-01, California Franchise Tax Board, Oct. 5, 2012.

9 Michigan Court of Appeals, No. 306618, Nov. 20, 2012 (unpublished).

10 Decision, Hearing No. 106,298, Texas Comptroller of Public Accounts, Sep. 6, 2012, among several other Comptroller decisions. This issue currently is being considered by a Texas trial court. Graphic Packaging Corp.v. Combs, District Court of Travis County, Texas, 353rd Judicial District, No. D-1-GN-12-003038, complaint filed Sep. 27, 2012.

11 Health Net, Inc. v. Department of Revenue, Oregon Tax Court, No. 120649D, complaint filed July 2, 2012. Note that the Oregon Department of Revenue has posted information on its Web site concerning protective refund claims under the Compact's apportionment election. For further information, see http://www.oregon.gov/dor/BUS/Pages/corp-tax_main.aspx .

12 Note that an additional 1 percent personal income tax is imposed on the portion of any taxpayer's income in excess of $1 million, so the top tax rate can rise as high as 13.3 percent.

13 Oklahoma State Questions for General Election Nov. 6, 2012, State Question No. 766, Legislative Referendum No. 363; Oklahoma Senate Bill No. 1436, effective Nov. 1, 2012.

14 OKLA. STAT. tit. 68, § 1212.1.

15 AZ Proposition 204; SD Initiated Measure 15.

16 MI Proposal 5.

17 WA Initiative 1185.

18 D.C. MUN. REGS. tit. 9, §§ 156 to 176. These regulations became final in the District of Columbia Register, Vol.

59 – No. 37, Sep. 14, 2012.

19 D.C. MUN. REGS. tit. 9, § 170.

20 Act 19-537 (D.C.B. 19-947), approved by Mayor Vincent Gray on Nov. 16, 2012. This temporary legislation applies to taxable years beginning after December 31, 2010 and takes effect following approval by the Mayor, a 30-day Congressional review period and publication in the District of Columbia Register. The temporary legislation expires 225 days after it takes effect. This temporary legislation is virtually identical to emergency legislation, Act 19-482 (D.C.B. 19-946), approved by Mayor Vincent Gray on Oct. 12, 2012. This emergency legislation applies to taxable years beginning after December 31, 2010 and is effective on a temporary basis until January 10, 2013. The purpose of continually passing legislation is to ensure that some version of the combined reporting statute will always have effect even if permanent adoption of a statute is delayed for a significant period of time because Congress is out of session (only days in which Congress is technically in session count towards the 30-day Congressional review period), or because of delays in full City Council approval of permanent legislation. Temporary legislation is intended to be effective during the period after the emergency legislation expires and before the permanent legislation becomes effective.

21 Mangano v. Silver, New York Supreme Court, Nassau County, No. 14444/10, Aug. 22, 2012.

22 This includes partners in partnerships and members of limited liability companies that are treated as partnerships.

23 N.Y. TAX LAW §§ 800 to 806; TSB-M-12(1), New York State Department of Taxation and Finance, Jan. 26, 2012. The MCTD includes the counties of New York (Manhattan), Bronx, Kings (Brooklyn), Queens, Richmond (Staten Island), Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess and Westchester. Metropolitan Commuter Transportation Mobility Tax, New York State Department of Taxation and Finance.

24 If the payroll expense for the calendar quarter is over $312,500 but not over $375,000, the tax is 0.11 percent of the payroll expense for that quarter. If the payroll expense for the calendar quarter is over $375,000 but not over $437,500, the tax is 0.23 percent of the payroll expense for the quarter. If the payroll expense for the calendar quarter is over $437,500, the tax is 0.34 percent of the payroll expense for that quarter. N.Y. TAX LAW § 801(a).

25 Metropolitan Commuter Transportation Mobility Tax (MCTMT) Updates, New York State Department of Taxation and Finance, Aug. 24, 2012. The Department administers the tax for the Metropolitan Transportation Authority. For additional information, see http://www.tax.ny.gov/bus/mctmt/default.htm .

26 L.B. 872, Laws 2012, effective for tax years beginning on or after Jan. 1, 2014.

27 Ch. 2 (S.B. 1046), Laws 2012.

28 ALA. ADMIN. CODE r. 810-27-1-4-.17.01 (proposed).

29 Ch. 105 (S.B. 136), Laws 2008; UTAH ADMIN. CODE R. 865-6F-8(10)(g).

30 Indiana Letter of Findings: 02-20120316, Nov. 28, 2012.

31 MTC Executive Committee meeting, Dec. 6, 2012.

32 UDITPA § 17(a)(3) (proposed).

33 UDITPA § 17(a)(4)(i) (proposed).

34 Id.

35 UDITPA § 17(a)(4)(ii)(A) (proposed).

36 UDITPA § 17(a)(4)(ii)(B) (proposed).

37 UDITPA § 17(a)(4)(ii)(C) (proposed).

38 UDITPA § 17(b) (proposed).

39 UDITPA § 17(c) (proposed).

40 Texas Supreme Court, No. 12-0518, Oct. 19, 2012.

41 The RTFT is imposed at either a 1 percent rate (applicable to most taxpayers, including taxpayers engaging predominately in manufacturing operations) or a 0.5 percent rate (applicable to taxpayers engaging predominantly in wholesale or retail operations). TEX. TAX CODE ANN. § 171.002(a), (b).

42 Decision Hearing Nos. 105,553, 105,554, 105,555, Texas Comptroller of Public Accounts, Oct. 2, 2012 (released Nov. 2012).

43 Newpark Resources, Inc. v. Combs, District Court of Travis County, Texas, 353rd Judicial District, No. D-1-GN-

11-002205, July 2, 2012.

44 34 TEX. ADMIN. CODE § 3.584(d)(1).

45 Id.

46 Announcement, Texas Comptroller of Public Accounts, June 6, 2012. The announcement can be viewed at http://window.state.tx.us/taxinfo/franchise/cog_compensation.html .

47 Appellate Court of Illinois, First District, No. 1-11-0400, March 5, 2012.

48 Appellate Court of Illinois, First District, No. 09 L 051411, Aug. 22, 2012.

49 ILL. ADMIN. CODE tit. 86 § 521.105(j), effective Sep. 11, 2003 for a period of 150 days.

50 ILL. ADMIN. CODE tit. 86 § 521.105(k), effective Sep. 11, 2003 for a period of 150 days.

51 5 ILL. COMP. STAT. 100/5-45; ILL. ADMIN. CODE tit. 1 § 100.640.

52 Note that Illinois instituted another tax amnesty program in 2010, under which the Department's emergency regulation provides that the double interest penalty does not apply to a payment made pursuant to a federal change that was not final at the time of the amnesty. The inclusion of this provision in the 2003 amnesty program emergency regulations could have eliminated the issue being challenged in MetLife and Marriott.

53 Ch. 390 (H.B. 619), Laws 2011.

54 The legislation repealed N.C. GEN. STAT. §§ 105-130.6, 105-130.15, 105-130.16.

55 The new statutory authority is provided by N.C. GEN. STAT. § 105-130.5A.

56 Directive No. CD-12-02, North Carolina Department of Revenue, April 17, 2012. This directive was issued pursuant to N.C. GEN. STAT. § 106-264.

57 Ch. 43 (S.B. 824), Laws 2012. Taxpayers relying on the directive that had less North Carolina income as a result for the 2012 taxable year could rely on the directive for that year.

58 H.R. 1864 (passed by voice vote May 15, 2012), S. 3485.

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