California OTA Ruling Favors Microsoft on Foreign Dividend Sales Factor Treatment | Insights | Holland & Knight

The California Office of Tax Appeals (OTA) denied a request to rehear a July 2023 OTA opinion favorable to Microsoft that could have wide-ranging impacts for a waterfront taxpayer in California, particularly one that has included only 25 percent of foreign dividends. in its sales factor denominator.

Background of the case

The main issue at issue was whether Microsoft – a multinational filing on the water’s edge – could include 100 percent of its overseas dividends in its denominator sales factor while excluding 75 percent of the dividends from its tax base. The California Franchise Tax Board (FTB) argued that because Microsoft included only 25 percent of dividends received from its foreign subsidiaries (income repatriated under the federal Tax Cuts and Jobs Act of 2017 (TCJA)) In your California tax base, you should only be allowed to include 25 percent of dividends as the denominator of the sales factor.

The OTA ultimately held that the FTB lacks authority to treat deducted income the same as excluded or exempt income and that Microsoft can include 100 percent of its foreign dividends in its sales factor denominator, which would result in a multimillion-dollar refund. While the OTA has yet to decide whether to propose that the opinions take precedence (and apply to contributors other than Microsoft), that decision should be known soon.

Importance of the decision

OTA's inclusion of gross foreign dividends versus net foreign dividends in the denominator of the sales factor reduces the general California tax owed by a taxpayer in circumstances similar to Microsoft's.

Refund Opportunity

Customers who are borderline taxpayers in California and have been excluding 75 percent of their foreign dividends from their California sales factor denominators should evaluate whether they should file a refund claim.

The information contained in this alert is for the education and general knowledge of our readers. It is not designed to be, nor should it be used as, the sole source of information when analyzing and resolving a legal problem, and it should not substitute legal advice, which is based on specific factual analysis. Additionally, the laws of each jurisdiction are different and constantly changing. This information is not intended to create, and its receipt does not constitute, an attorney-client relationship. If you have specific questions about a particular factual situation, we recommend that you consult the authors of this publication, your Holland & Knight representative, or other competent legal counsel.

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