Recently, the California Supreme Court ruled that Apple Inc. would receive a $920,000 state tax refund. However, after the favorable decision, Apple went further by asking the court to overrule an appellate judgment from September. That ruling required the state Franchise Tax Board to return to Apple $231,000 in taxes paid in 1989, plus $689,000 in interest. The San Francisco appeals panel had ruled that the Franchise Tax Board should have let Apple, in 1989, deduct interest on loans the company had received to fund domestic operations.
The high court's decision not to review the appellate court's judgment has specific ramifications for U.S. multinational companies with offshore assets. Pending the high court's decision, those companies might have avoided paying millions of dollars in California taxes on income from foreign subsidiaries. Had Apple gotten its way, the court might have changed the tax status of income that companies receive as dividends from foreign subsidiaries.
In 1989, California reduced taxes on the foreign holdings of multinationals. According to Apple, its foreign dividends from 1989 should be attributed to income from previous years that had already been taxed. Apple's attorney in the case indicated that the high court's decision not to review the appellate court's ruling may set a costly precedent for future cases involving multinationals. "It creates some potential issues for companies that want to repatriate earnings from overseas," he said.
The California Taxpayers Association and the Council on State Taxation in Washington, D.C., also tried to convince the state Supreme Court to review the appellate court's decision, but to no avail.
In the present economy, multinational companies have been urging Congress and the Obama administration to offer a federal tax "holiday." These companies argue that such a holiday would provide incentives for companies to bring back assets that remain outside of the country. The effects of federal taxes on multinational companies have certainly received more attention than the effects of California state taxes. However, had Apple's request in the state Supreme Court been granted, multinational companies might have seen major tax breaks.
For his part, the deputy attorney general representing the Franchise Tax Board claimed that Apple was "attempting to avoid, or at least indefinitely defer, the payment of tax on its remaining foreign-source income."
If California residents are facing similar tax issues, the best first step to achieving a favorable result may be to consult with legal professionals who are familiar with the ins and outs of state and federal tax laws. Those laws also relate to international taxes, and individuals and businesses will likely want to do what they can to ensure full compliance with the IRS.
Source: San Francisco Chronicle, "State's top court refuses to hear Apple's tax case," Bob Egelko, Jan. 6, 2012