In recent years, many have openly criticized California for its income tax litigating position involving out-of-state companies that hold passive, minority interests in pass-through entities doing business in California. The state argues these out-of-state companies are doing business in California solely by virtue of their passive, minority investment in pass-throughs that conduct business in California. This practice is troublesome not only to the impacted out-of-state companies that must file returns and pay California’s annual or minimum tax but potentially to the states where the out-of-state companies are based. In a recent United States Supreme Court filing, Arizona has alleged that California’s “aggressive” nexus assertions and related imposition and collection of its annual and minimum taxes impact Arizona by decreasing the state’s annual revenue every time an Arizona-based company pays the annual or minimum tax to California and deducts that amount from its Arizona taxable income. If California’s recent losses at the administrative and judicial levels on this nexus issue are any indication, Arizona’s concerns may have some basis.
Source: Law360, Carley Roberts and Huy “Mike” Le