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Utah Tax Commission to Seek Transfer Pricing-Related Legislation

POSTED ON Dec. 6, 2018

The Utah State Tax Commission plans to seek legislative changes following its recent loss at the state high court in the See’s Candies transfer pricing litigation, according to Tax Commission Chair John Valentine.

Valentine, who also chairs the Multistate Tax Commission, first raised the possibility during the MTC’s fall committee meetings in November. During a roundtable discussion, Valentine touched on the Utah Supreme Court’s October 5 decision in Utah State Tax Commission v. See’s Candies Inc., in which the court concluded that a lower court correctly looked to IRC section 482 and its regulations in determining the disputed transactions to be at arm’s length.

“We may go to the Legislature and ask for some guidance as to whether they want us to continue that battle, or whether they want to give us some guidance — some principles they want us to follow as to things we look at that may be abusive as far as how taxpayers are structuring their affairs,” Valentine said at the time.  

While the Utah Supreme Court’s decision marks final resolution of the See's Candieslitigation, Valentine said there are more types of these cases on the tax commission’s docket.

In a follow-up email with Tax Notes, Valentine said he does not know the specific number of such appeals in the audit process, due to the conflicts wall established between the two divisions. But Valentine said that he has been advised by the commission’s audit division that “there are a number of cases which will be affected by this decision.”

“We have three cases on the appeals docket which could be the subject of transfer pricing battles similar to the ruling by the Utah Supreme Court in the See’s Candies case,” Valentine added.

The tax commission has not yet approached the Legislature with proposed statutory changes, in part because both the House and Senate are undergoing leadership changes following the election, Valentine said. But the tax commission anticipates doing so before the start of the 2019 legislative session, he said.

“It is premature to outline our approach until we have had a chance to meet with our legislative leadership and our governor,” Valentine said.

Were the tax commission to go broad, it might seek clarification of its discretionary authority, or explicit statutory reference to the standards and methods it is to use in applying its discretionary authority.

Practitioners have criticized the tax commission for overreaching in See’s Candies with its assertion that there is essentially no reviewable limitation on its discretionary authority to make related-party adjustments, and that it is not bound by section 482. While the state supreme court agreed with the tax commission that Utah’s statutory language grants the commission broad discretionary authority, the court said case law does not support the proposition that the discretionary authority is “untethered to any identifiable standard.”  

A narrow approach could involve legislative changes specifically addressing the type of intercompany arrangement or structure at issue in See’s Candies, which involved transfers of the See’s Candies trademark to an insurance company subsidiary — insurance companies are not subject to Utah franchise tax — and payment of a royalty for the use of that intellectual property. See’s Candies was deducting its royalty payments to the insurance company, which reduced its Utah corporate franchise tax by 82 percent per year for 1999 through 2007.