Harley-Davidson thumps California’s Franchise Tax Board

June 4, 2015

harleyBy STEW JENKINS

A California appeals court ruled last week, in a lawsuit brought by the Harley-Davidson Motorcycle Company against the California Franchise Tax Board, that part of California’s statutory income tax scheme is unconstitutional because it discriminates against out of state businesses, such as Harley-Davidson.

The ruling forbids California’s tax policy from discriminating against out of state businesses. As a result, the cost of purchasing out of state products such as Harley-Davidson motorcycles in California could be reduced.

This discrimination violates the United State Constitution’s commerce clause, unless the different treatment “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives,” the justices determined.”

The court explained that levying a higher tax on out of state businesses as a way to favor California industry was illegitimate under the U.S. Constitution.

Based in Milwaukee, Harley-Davidson owns and operates a collection of subsidiaries which operated together in the motorcycle business making and selling the company’s quintessentially American motorcycles.  Harley-Davidson also operates a financing business based outside of California.

Attorney Stew Jenkins

Attorney Stew Jenkins

Harley-Davidson had properly reported the income from their California sales of motorcycles between 2000 and 2002 and paid the California income taxes due.  However, the out of state financing company’s income had not been reported with the manufacturing and sales companies.

California’s Revenue and Taxation Code required out of state businesses to report the income of both the motorcycle and the financing businesses on a combined tax return as a “unitary business.”  Similar California businesses, working together, are allowed by California statute and Franchise Tax Board regulations to file tax returns separately for each separate business as a way to reduce the overall income tax liability from these business consortiums.

After auditing Harley-Davidson, the Franchise Tax Board sent the company a demand that a unitary tax return be filed for all their businesses combined, with a bill for an additional $1.8 million. Harley-Davidson paid the $1.8 million under protest, but promptly sued the Franchise Tax Board for a refund, claiming that its different treatment violated the U.S. Constitution’s commerce clause.

The Court of Appeal reversed the trial judge who had thrown out Harley-Davidson’s suit after on the motion of Attorney General Kamala Harris.

The Court of Appeal sent the case back to the Superior Court, directing the lower court to apply “strict scrutiny” to California’s income tax scheme discrimination against out of state businesses, and to hold California’s income tax discrimination unconstitutional unless some new evidence demonstrated a “legitimate purpose” that could not be served by some reasonable alternative.  Favoring California businesses over businesses in other parts of the United States was held not to be a legitimate purpose.

The unanimous opinion of Harley-Davidson, Inc. v. Franchise Tax Board was issued by Justice Benke on May 28, and unless appealed to the California Supreme Court, will be final at the end of June.

Stewart Jenkins is an Attorney practicing in San Luis Obispo since 1978.  Mr. Jenkins’ handles Tax Payer Suits, Municipal Law, Estate Planning and Family Law.  You can contact Stewart Jenkins at (805) 541-5763.


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14 Comments

  1. r0y says:

    This year, I was notified by the IRS that I might have had my ID stolen and used for a fraudulent tax return. Turned out to be true, and the IRS and I caught it (they asked me to call, many questions, etc).

    Fast forward to the CA FTB: I got a huge return check (almost 3x what I was supposed to get) within weeks from filing. I called them, explained the ID was stolen and it was very obvious if they had looked at this return vs. 30+ years of other ones. They were a bit like a deer in the headlights, but a week or so later, I got a demand letter telling me to return the check and if it was cashed to pay it all back PLUS pay a fine! Nice. Professional.

    I still have the check, with VOID sharpied across it. Sitting with their letter. What tools. So glad they are on top of their game. Makes me wonder how much they gave away to scam artists.

    (24) 26 Total Votes - 25 up - 1 down
    • justbeware says:

      Every once in a while you can get a nice, sensible agent on the phone. If by chance you are fortunate enough to do so, keep their name and ID number. You will need it for the next few years to get the matter resolved. Good luck!

      (13) 13 Total Votes - 13 up - 0 down
    • obispan says:

      A few years ago I paid the State 400 some bucks that I owed in taxes. I soon after received demand letters for the money with serious threats. I had all the documentation that I’d paid the money but they would not listen or stop with the letters. I has to take time off of work to sit on hold with these a-holes during business hours. I gave them them all the info about the payment but they couldn’t find it. One email to Katcho’s office and guess what? They found the money. If your bank did this they wouldn’t be in business long. Kamala Harris is not a state’s Attorney General but rather a activist and political hack with no regard for the law.

      (9) 11 Total Votes - 10 up - 1 down
  2. ironyman2000 says:

    Had a problem a few years ago where I had to deal with both the IRS and the Franchise
    Tax Board. Compared to the FTB the IRS is the sweetheart of the rodeo. The IRS worked
    with me and the issue was resolved relatively painlessly. The FTB could not have cared
    less the pain it was inflicting.

    (25) 25 Total Votes - 25 up - 0 down
    • catdude says:

      Absolutely correct about the FTB. They will take the bread out of your mouth and the clothes off your back without a care. If no bread or clothes, they’ll cut your heart out. Makes the IRS look like angels. The california tax people are monsters.

      (15) 17 Total Votes - 16 up - 1 down
  3. Maxfusion says:

    Excellent, and won by Harley Davidson makes it just a wee bit sweeter. But alas, they’ll be back at them from another angle. Although inept, lazy, and rapacious, they are are persistent in the pursuit of spoils.

    (27) 33 Total Votes - 30 up - 3 down
  4. Theo P. Neustic says:

    Always glad to see the people win against the parasites.

    (56) 66 Total Votes - 61 up - 5 down
  5. TaxMeAgain says:

    Nice job Stewart. The California Franchise Tax Board is totally out of control people.

    (47) 59 Total Votes - 53 up - 6 down
  6. agag1 says:

    California- – -is it any wonder we now own the #50 spot for business friendly states?
    I think NOT!

    (59) 71 Total Votes - 65 up - 6 down
  7. Rich in MB says:

    Money grubbing bastards….its about time someone stood up to the State!

    (57) 67 Total Votes - 62 up - 5 down

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