MOFO SALT 2018 YEAR IN REVIEW: CONTINUED SUCCESS IN A CHANGING STATE TAX WORLD -

Following the enactment of the Federal Tax Cuts and Jobs Act in late 2017, many interesting state tax issues emerged concerning states’ responses—or lack thereof—to federal tax reform. The past year also saw the U.S. Supreme Court decide a small case involving a company by the name of Wayfair, Inc. While the tax news cycle in 2018 may have been dominated by these emerging issues, states remained active over the past year on the enforcement front in both audits and litigation and we are happy to report that our clients secured many public and non-public victories.

In Colorado, the Supreme Court granted the Department of Revenue’s request to appeal from a Court of Appeals decision in favor of Agilent Technologies, Inc. (“Agilent”). The Court of Appeals had held that the Department could not force Agilent to file a combined tax return with a subsidiary holding company that earned all of its income from foreign subsidiaries that operated solely outside of the United States and that had no property or payroll of its own. Colorado law provides that corporations with 80% or more of their property and payroll located outside the United States cannot be included in a combined return and that corporations with more than 20% of their property and payroll located in the United States are required to be included in a combined report. Since Agilent’s subsidiary was a holding company with no property or payroll of its own, the Court of Appeals held that the subsidiary was properly excluded from Agilent’s combined return. This result was supported by the Department’s own regulation, which provided explicitly that a corporation with no property and payroll cannot, by definition, meet the statutory standard of having more than 20% of its property and payroll in the United States. The Court also held that the subsidiary could not otherwise be combined under the Department’s authority to allocate income and deductions among related corporations to avoid abuse or under the economic substance doctrine.