An online discussion of various state tax issues for companies and individuals doing business in California. Our panelists cover recent developments in California income and sales tax, tax credits and incentives, multi-state tax issues for technology companies and state residency planning for individuals. Our panel of speakers includes: Roger Royse, Royse Law Firm Monika Miles, Miles Consulting Group David Wittrock, Price, Wittrock CPA LLP David Spence, Royse Law Firm

1. IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
Roger Royse
Royse Law Firm, PC
Palo Alto, San Francisco, Los Angeles
rroyse@rroyselaw.com
www.rogerroyse.com
www.rroyselaw.com
Skype: roger.royse
Twitter @rroyse00
CALIFORNIA HOT TOPICS

2. Health Insurance Deduction
• Self-employed health insurance deduction
– The California tax system does not properly conform with the Affordable
Care Act with regards to the application of the tax credits
• Under the ACA, taxpayers can elect to receive an “advanced tax credit” to
reduce monthly health insurance premiums or pay the entire premium and
receive a “premium tax credit” on their federal tax return
• Self-employed taxpayers can take a deduction for health insurance premiums
• Broadly, the amount of the health insurance deduction at the federal level
should be the net amount paid after any ACA tax credits (either the advanced
tax credit or the premium tax credit)
– When calculating their California tax liability, self-employed taxpayers can
deduct the amount “paid” for health insurance in the year
• The FTB previously stated that the amount paid: (1) for Advanced tax credit
taxpayers = the net amount of the insurance premiums; or (2) for Premium tax
credit taxpayers = the gross amount without adjustment for the premium tax
credit
• California conforms to the federal SE health insurance deduction
(Regulation §1.162(l)-1T(a)(1)) under R&TC §17201.1

3. California Tax Non-Conformity
• Cancellation of indebtedness and reacquisition of debt
– Under federal tax law, taxpayers could defer and spread out certain
cancellation of indebtedness income from 2009 and 2010 (relating to the
reacquisition of debt instruments) over a five year period commencing in
2014
– California did not comply with this provision and therefore the income
would have been taxed in full in 2009 or 2010
– Any federal income relating to this adjustment for 2014 and beyond can be
excluded for California tax purposes
• Tax Depreciation
– For C Corporations only, California does not comply with the accelerated
deductions available under MACRS and ACRS (§ 168)

4. California Tax Non-Conformity
• Federal Tax Extenders
– In December, Congress extended certain tax provisions that had expired on
December 31, 2013 (inc. energy efficient tax credits, work opportunity tax
credit, and tax free distributions from IRAs for charitable purposes) to
cover the 2014 calendar year
– California does not automatically conform to Congress’ extension of the
following tax provisions: (1) exclusion of discharge of indebtedness income
on principal residences (§ 108); (2) asset expense elections (§ 179); (3)
bonus depreciation (§ 168(k)); and (4) reduced built-in gain holding
periods for S Corps (§ 1374)

5. California Hot Topics
• “Doing Business” in California
– Swart Enterprises, Inc. v FTB:
• An out-of-state corporation held a 0.2% membership interest in a California LLC
• The membership interest was held as an investment and the corporation had
no right to manage the affairs of the LLC
• The FTB assessed the $800 minimum tax on the corporation alleging that it was
“doing business in California” due to its interest in a California LLC
• The Court held that the corporation only had a passive interest in the LLC and
as such was not doing business in California
• The corporation was more akin to a limited partner than a general partner and
therefore the general partnership rules (dictating that if the partnership was
doing business in California then all the partners were considered to be as well)
did not apply here

6. California Hot Topics
• Like-kind exchanges
– From January 1, 2014, taxpayers need to file an information return (Form
3840) with the FTB if they complete a like-kind exchange of California
property for property located outside California
– The form must be filed in the year of the exchange and for each
subsequent year until the entire gain has been recognized
• Administrative dissolutions of non-profits
– A.B. 1529 would have allowed for administrative dissolution of non-profit
entities that either the FTB had suspended for a period of at least 48
months or had not filed a statement of information for a period of at least
48 months
– Any California tax liabilities (together with interest and penalties) would
have been wiped-out with the exception of unpaid taxes relating to
unrelated business income
– The Governor vetoed the bill because it would have required
reprogramming of a computer system that is due to be replaced soon

7. California Hot Topics
• Asset sales in bankruptcy reorganizations
– A recent ruling from the FTB stated that a series of asset sales made over a
period of two years as part of a company’s post-Chapter 11 bankruptcy
reorganization were not “occasional sales” for the purposes of
apportionment under the California sales factor
• Motion Picture Credit
– A new motion picture credit will come into effect on January 1, 2016
– Increases annual funding from $100 million to $330 million
– Introduces a competitive system that allocates money based on type of
production and the number of jobs created
– The credit is now available for one-hour television series and television
pilots

8. California Hot Topics
• Medical marijuana
– From August 2015, marijuana dispensaries in the City of Berkeley must
donate a minimum of 2% of their product to residents of low-income
cities.
– Applicable residents are those with annual income below $32,000 (or
$46,000 per family) and a prescription for marijuana
– This will result in a loss of the sales tax ordinarily collected on that 2% of
marijuana
– Marijuana dispensaries are still having problems opening bank accounts
due to their activities being illegal under federal law
• Without a bank account, these businesses are forced to pay IRS liabilities in
cash which results in a 10% penalty each time
– Legislation prohibiting the IRS from imposing this penalty for businesses
that legally sell marijuana passed the House but has not passed the
Senate

9. RoyseLink: Connecting founders with investors and service partners.
Royse University: Providing business, tax, technology and personal
finance ideas to founders and executives.
Royse Law Legal Wizard: Offering legal document templates and
more.
Royse Law Incorporator: Incorporate your company the Silicon Valley
way.
15
RoyseLawIncorporator.com
RoyseUniversity.com
RoyseLink.com
RoyseLaw Legal Wizard

10. PALO ALTO
1717 Embarcadero Road
Palo Alto, CA 94303
LOS ANGELES
11150 Santa Monica Blvd.
Suite 1200
Los Angeles, CA 90025
SAN FRANCISCO
135 Main Street
12th Floor
San Francisco, CA 94105
Palo Alto Office: 650-813-9700
CONTACT US
www.rroyselaw.com
@RoyseLaw

11. © Miles Consulting Group, Inc., 2015
California Credits and
Incentives: Go-Biz Programs
Presented in conjunction with:
Royse Law Firm
January 6, 2015
Monika Miles
Miles Consulting Group, Inc.

12. © Miles Consulting Group, Inc., 2015
Presenting Today - Monika Miles
Founder - Miles Consulting Group
Website: MilesConsultingGroup.com
Email: Monika@milesconsultinggroup.com
Honored To Be Recognized As:
 “25 Most Powerful Women in Accounting” by CPA Practice Advisor
(2012, 2013, and 2014)
 “Women of Influence” by San Jose Silicon Valley Business Journal
(2014)
Professional Affiliations:
AICPA, Texas Society of CPAs, Vistage International,
NAWBO - Silicon Valley, AFWA (Past National President)

13. © Miles Consulting Group, Inc., 2015
• Manufacturers’ Partial Sales Tax Exemption
• California Competes Tax Credit
• New Hiring Credit
Today’s Topics

14. © Miles Consulting Group, Inc., 2015
Manufacturers’ Exemption
• What is it?
– Partial exemption (4.1875%) of CA
sales tax for placing into service
qualified machinery & equipment
• Who Qualifies?
– Companies in NAICS codes 3111-
3399 and 541711-541712

15. © Miles Consulting Group, Inc., 2015
Manufacturers’ Exemption
• What Qualifies?
– Qualified equipment used in
manufacturing and R&D
– Used 50% or more in qualified
use
– First $200M in a year

16. © Miles Consulting Group, Inc., 2015
Manufacturers’ Exemption
• Considerations:
– Qualify under “establishment”
rules?
– Proper documentation of
machinery’s use today
– Audit will be in the future

17. © Miles Consulting Group, Inc., 2015
Manufacturers’ Exemption
• Considerations:
– Overstatement (and ultimately
lack of documentation) can
create financial statement
distortion.
– Big 4 auditors will review for
this during f/s audits
– Difficult to recover retroactively

18. © Miles Consulting Group, Inc., 2015
Manufacturers’ Exemption
• By the numbers:
– $1,000,000 of qualified
investment = $41,875
– $10,000,000 of QI = $418,750

19. © Miles Consulting Group, Inc., 2015
Manufacturers’ Exemption
• Our recommendations for
success:
– Qualification
– Documentation of Process
– Contemporaneous substantiation
– Selected asset testing
– Create “auditable deliverable”

20. © Miles Consulting Group, Inc., 2015
California Competes Tax Credit
• What is it?
– Income tax credit for
companies moving to or
expanding within CA
• How does it Work?
– Competitive application
process for limited funds
– Periodic application periods

21. © Miles Consulting Group, Inc., 2015
California Competes Tax Credit
• Evaluation Factors:
- Job Retention
- Opportunity for Future Growth and Expansion
- Economic Impact/Benefit to California
- Incentives available in/out of state
- Benefits/Fringe Benefits Provided to Employees
- Strategic Importance to the State, Region, or
Locality
- Unemployment/Poverty in Business Area

22. © Miles Consulting Group, Inc., 2015
California Competes Tax Credit
• Considerations
– 25% set aside for small
business
– Increasing annual benefit
pool
– “Ratio management” is key

23. © Miles Consulting Group, Inc., 2015
California Competes Tax Credit
• By the numbers
– Available $$:
• $151M for FYE 06/15
• $200M for each FYE thru 06/18
– Companies awarded $$
– Next application dates:
• 1/5/15-2/2/15 - $75 million
• 3/9/15-4/6/15 - $31 million

24. © Miles Consulting Group, Inc., 2015
California Competes Tax Credit
• Miles Consulting Can Help
– Initial “go/no-go” evaluation
– Assistance with Phase 1
application
– Ratio analysis
– Assistance with Phase 2

25. © Miles Consulting Group, Inc., 2015
New Hiring Credit
• What is it?
• Who Qualifies?
• Employee Qualifications

26. © Miles Consulting Group, Inc., 2015
New Hiring Credit
• What is it?
– Tax credit for hiring certain “disadvantaged”
workers in specific geographic areas. Can be
up to $56K in benefit per employee.
• Who Qualifies?
– Nobody….(just kidding)

27. © Miles Consulting Group, Inc., 2015
New Hiring Credit
• Who Qualifies (Companies)?
– Location in a Designated Geographic Area
– Manufacturing, Biotech, etc. (not retail,
restaurants)
– Net increase in jobs over base year

28. © Miles Consulting Group, Inc., 2015
New Hiring Credit
• Employee Qualifications?
– Wages between $13.50 -$31.50
– Hired after 1/1/14
– Previously unemployed (6 months prior to
hire), veteran (last12 months), recipient of EIC
or CalWORKS, ex-offenders

29. © Miles Consulting Group, Inc., 2015
New Hiring Credit
• Example:
– Light Manufacturer in an EZ
– Hiring 80 people
– Starting wages at $14.00 - $15.00/hr
– Benefit was estimated to be:
• Less than $20K over 3 years (assuming 10% qual)

30. © Miles Consulting Group, Inc., 2015
Estimated XYZ Co Benefit
Hire 80 People Who Start On 7/1/2015
Assume 10% Qualify
(Minimum wage is $9.00 as of 7/1/2014 and will raise to $10.00 as of 1/1/2016. Therefore, only
qualified employees with wages above $13.50 in 2015 and above $15.00 in 2016 will generate
benefit.)
Year: Wages: Est. Benefit:
2015 14.00 $1,400
2016 16.00 $5,800
2017 17.00 $11,600
Total Est. $18,800

31. © Miles Consulting Group, Inc., 2015
New Hiring Credit
• How to Succeed…
• Initial evaluation and
preliminary calculations
• Develop client processes
• Prepare qualification support
• Prepare calculations
• Maintain Annual support

32. © Miles Consulting Group, Inc., 2015
CA Benefits Summary
Partial Manufacturers’ Exemption
California Competes Tax Credit
Hiring Credit

33. © Miles Consulting Group, Inc., 2015
Some Final Thoughts…
Miles Consulting is a resource for you:
• Monthly Newsletter
• Weekly Topical Blog
• Complimentary Individual Consultation

34. © Miles Consulting Group, Inc., 2015
Questions

35. © Miles Consulting Group, Inc., 2015
Thank You!
Monika Miles
(408) 266-2259
Monika@milesconsultinggroup.com
http://www.milesconsultinggroup.com

36. Digital Goods and Services–
Sales Tax Today
David Wittrock
Price, Wittrock CPA LLP
January 6, 2014
1

37. Digital Goods and Services
 SAAS/PAAS/IAAS – Salesforce
 Social Media Marketing – Groupon
 Sharing Economy – Airbnb
 Marketplaces – Etsy
 Cloud computing services – Box
 Digital content - Itunes
2

38. Some States Taxing Digital G&S
 IN, KY, MS, NE, NJ, NC, SD, TN, UT. VT,
WA, WI, WY
 Some states tax data processing and/or
information services- NY, DC, OH, TX
3

39. Tax and Product Manager
Collaboration
 What triggers the tax ?
 Tax on ‘hotel stay’ or on ‘providing hotel’
 “Transferred” electronically or “Delivered”
electronically
 “Use” of software or “access” to software
 “Database” or “Software”
4

40. What Questions To Ask
① Can the State force collection - Nexus
② What is the customer buying, how is it used
③ Who is buying
④ Is the intermediary responsible for tax
⑤ How is it transferred
⑥ Where is it used
⑦ How is it paid for
⑧ Are there exemptions
⑨ How much $ is involved
5

41. Nexus
 Click through nexus
 Affiliate nexus
 Independent contractor
 Trade show
 Drop shipments
6

42. What is Customer Buying,
How is it Used
 Data processing
 Information
 Professional services
 Music, news, images
 E-books
 Permanent rights, temporary license
7

43. Who is Buying
 End user
 Business
 Reseller
 Government
8

44. Is the Intermediary Responsible
 Marketplace that also handles payments
might be an agent to collect tax
 If there is tax on the underlying transaction
 Is there tax on the commission / fee
9

45. How is it Transferred
 Physical media
 Download the software
 Download key for remote access
 ASP, SAAS
 Plugins
 Streaming
 Terminology is important – “Transfer”, “Deliver”,
“Access”
10

46. Where is it Used
 Buyer’s corporate HQ
 Bill to address
 Access point
 Where buyer’s customers are
11

47. How is it Paid For
 One time up front license
 Annual fees
 Subscription
 Per use
12

48. Exemptions ?
 Interstate use
 Resale
 Exempt buyer
 Exempt use
13

49. How much $ is Involved
 Past periods tax – statute of limitations ?
 State + many local rates
 Penalties, interest
 Gross up of tax base
 If imports involved and ESS, could be VAT and
sales tax on VAT
14

50. Nonfinancial Costs
 Administrative cost of filing
 Frightening registration information –
officers bank accounts and home addresses
15

51. What do Customers Think
 Often they prefer that the tax be charged
– So they don’t have to self assess
 Competitive disadvantage often overstated
 Some taxes are surprise but mostly the
customers know already
16

52. Broader Perspective
 Tax as a compromise to the regulatory
barriers
 Board philosophy
 Due diligence preparedness
 Public opinion
 Federal law and SST proposals to simplify
and make uniform
17

53. What to Do ?
 Make policy early on re collecting tax- revenues
of $10MM
 Get VP Sales involved to gauge customer reaction
 Budget for administrative cost
 Good language in click licenses online – short
term protection but customer friction
 At some point, collect in high risk states – but plan
ahead now
18

54. Thank You
David Wittrock
Price, Wittrock CPA LLP
January 6, 2014
19

55. Individuals Seeking Refuge From California
C. David Spence
Attorney at Law
Estate, Trust and Wealth Strategies Practice
Royse Law Firm, PC
Palo Alto, California
dspence@rroyselaw.com

56. Individuals Seeking Refuge From California
Key California Issues:
Q. How Can I Leave California?
Q. How Can I Make My Income Leave
California?

57. Leaving California
California Taxes Nonresidents:
California Income Tax =
CTI x (California tax “as if resident”/ CTI “as if resident”)

58. Leaving California
How Do I Become a Nonresident?
1. Safe Harbor:
a) Outside CA 546 consecutive days, AND
b) Intangibles-based income <$200K, AND
c) Principal purpose is not tax avoidance.

59. Leaving California
How Do I Become a Nonresident?
2. If You’re not in the Safe Harbor, Resort to:
The Dreaded: Facts and Circumstances Test:
Do you have California ties?
No, I mean, are your closest ties to California or another place?

60. Leaving California
How Do I Become a Nonresident?
Where do you have your closest ties?
Time spent, Location of family/children, location of principal
residence, driver’s license, vehicle registration, professional and
business licenses, voter registration, banking contacts, origination of
financial transactions, location of health care, social ties, clubs,
churches, real property ownership and investments, etc.

61. Shifting Assets in Advance of Liquidity
One Idea:
“Delaware Incomplete Non-grantor Trust”
“DING” (or “WING” or “NING”)
Moving Your Income Out of California

62. Moving Your Income Out of California
Shares in Company
Take care of
this stock for
the kids.
Non-California
Trustee
Beneficiary
Trust
Instrument
(The Rules)
DING TrustIndependent Delaware Trustee

63. Leaving California
Beware the DING/WING/NING Strategy
1. Relatively untested in California.
2. Lawyer-created technique (not specifically contemplated
by the statute).
3. California has a “Throwback Rule”--Taxes distributions back to
California Beneficiaries for 5 years