Corporate Tax Law Upheld
California’s Supreme Court dealt a one-two punch Thursday to out-of-state companies trying to limit their exposure to the Golden State’s taxes.
In back-to-back rulings in cases involving Microsoft Corp. and General Motors Corp., the court upheld state formulas for determining what non-California corporations pay in taxes.
A ruling against the state would have cost California’s treasury $500 million in refunds and $100 million annually in lost revenue, state officials said.
“This was a very big victory for the state,” said Tom Dresslar, a spokesman for the California attorney general’s office. “If the state had lost these cases, we would have had to give back more than a half-billion dollars.”
The current state budget was bolstered by a surge in unanticipated revenue, but lawmakers expect a deficit topping $3 billion for the fiscal year beginning in July 2007.
Both rulings focus on the state’s unitary tax, which taxes out-of-state corporations based on the amount of revenue they generate in California.
In separate suits, Microsoft and General Motors had challenged the state’s assessment, saying they were overcharged.
The state contended that the companies sought to reduce their taxes by inflating their revenues from outside California, which would result in lower taxes. That’s because the rate is based in part on how big a share of companies’ revenues come from California.
For example, if a company had $3 billion in total income and $1 billion was generated in the Golden State, one-third of its income would be included in the calculation of what is taxable in California. But if the company claimed revenue of $5 billion, only one-fifth of its income would be part of the formula.
State tax authorities had claimed that Microsoft and GM were improperly boosting their revenue figures by investing their excess cash and counting the amount of money invested -- rather than just the investment return -- in the total.
Microsoft did this with marketable securities while GM used financial instruments known as repurchase agreements. In addition, General Motors had wanted its subsidiaries to be able to share research and development tax credits earned at one subsidiary to reduce tax obligations at another.
The state’s Franchise Tax Board said the companies’ accounting distorted the true numbers, and the court agreed. The court also rejected GM’s bid to share tax credits.
A spokesman for General Motors could not be reached for comment late Thursday.
In a statement, Microsoft said: “While we are disappointed with the court’s decision in this case, we’re still in the process of reviewing it and weighing our options. In the meantime, we do not believe that this decision will have a material impact on the company.”
Dresslar said the ruling should lead to dismissal of dozens of other suits filed by out-of-state companies challenging the state’s tax assessments.
“Fortunately, the court saw things our way, so the state’s budget situation is not going to be worsened,” he added.
