Just days before the scheduled hearing, the California Franchise Tax Board (FTB) conceded that an out-of-state lender does not owe franchise tax on credit card interest and fees derived from California card holders. The case, In re Appeal of 1FB.Net Inc., Office of Tax Appeals (OTA) Case ID No. 220410086, centered on activities exempt from doing business found in California Corporations Code Section 191(d).
Appellant 1FB.Net, a subsidiary of 1st Financial Bank (“1st Financial”), argued that the FTB erred by including 1st Financial’s credit card interest and fees in 1FB.Net’s California sales factor numerator. The bank claimed that Section 191(d) excludes “making loans” from the definition of transacting business in California. Accordingly, an out-of-state bank whose only activity in the state was making credit card loans would not owe California franchise tax.
Section 191(d) contains several specific exempt activities from the definition of transacting business in California for out-of-state lenders. Among them are purchasing loans; owning and enforcing loans; modifying, renewing, extending, transferring, or selling loans; and serving loans. A catchall provision also exempts any activities necessary or appropriate to carry out the listed exempt activities.
The FTB argued that the text and legislative history of Section 191(d) purposefully omitted “making loans” because the provision was designed to insulate the secondary mortgage market from California tax responsibilities. Out-of-state banks would be incentivized to purchase mortgages from California lenders to bring additional money into the state. This goal would not be met by out-of-state banks issuing loans directly. Furthermore, allowing out-of-state banks to issue loans without paying tax would put them at a competitive advantage over California lenders.
The case was set for hearing at the OTA on September 17, 2024. However, on September 13, 2024, the OTA issued an updated agenda noting that during its review the “FTB conceded the entire amount at issue.”
FTB withdraws a significant number of cases from the OTA but does not advise the OTA of the reasons. “The state concession in this case likely is one of risk management, where conceding a five-figure tax liability to this taxpayer is dwarfed by the potential risk of a decision that could benefit many large foreign banks,” said Josh Booth, Principal at Ryan. Further, according to Gina Rodriquez, also a Principal at Ryan, “The fact this case made it all the way through OTA briefing and was scheduled for hearing before the FTB’s withdrawal highlights the procedural costs for both the state and taxpayers when disputes are not resolved at the lowest administrative level.”
If you have questions about your corporate tax responsibilities and enforcement trends in California or any other state, contact the experts at Ryan today.
TECHNICAL INFORMATION CONTACTS:
Mark L. Nachbar
Principal
Ryan
630.515.0477
mark.nachbar@ryan.com
Jonathan Geiger
Manager
Ryan
425.440.2333
jonathan.geiger@ryan.com
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