State Tax Notes is pleased to announce its second annual awards edition. The magazine staff has compiled a list of the very best in our profession in five categories. The Person of the Year Award is given to the individual who had the most influence on state tax policy and practice. The Tax Lawyer of the Year Award is given to the attorney considered the most influential in forwarding a novel legal approach. The Organization of the Year is awarded to the group that is relied on the most for tax information by those inside and outside the profession. The Tax Administrator of the Year is awarded to an official who influences administration and collection nationwide. And the Tax Lawmaker of the Year is awarded to a legislator influential in developing new approaches in state tax law.
The award recipients were selected based on interviews, polling, and input from the State Tax Notes editorial staff. Neither State Tax Notes nor Tax Analysts endorses the agendas or policy positions maintained by any of the listed individuals or organizations.
Person of the Year: Michael Herbert
Michael Herbert is State Tax Notes' Person of the Year. Herbert originated the approach taken by taxpayers in The Gillette Co. & Subsidiaries v. California Franchise Tax Board.
Although the California Court of Appeal's decision in favor of the taxpayers in Gillette seemingly came out of nowhere in 2012, Herbert, a partner in the San Francisco office of PricewaterhouseCoopers LLP's State and Local Tax practice, began developing the approach used in the case a decade ago.
That approach, of course, is rooted in the history of the origins of the Multistate Tax Compact as a state response to perceived threats of federal preemption of their taxing authority. Herbert's argument is that a central purpose of the compact was to secure a baseline level of uniformity in state income tax systems, and that one of the ways the compact achieved that was by allowing multistate taxpayers to elect to apportion their income to member states using the compact's evenly weighted three-factor formula.
The compact allows those same taxpayers to choose instead to apportion their income to a member state using the state's own apportionment formula, but according to the argument developed by Herbert, a member state cannot unilaterally disallow the compact's election provision and mandate the use of its own apportionment formula.
The California court agreed that the controlling body of law at issue in Gillette -- a consolidated tax refund case -- involves interstate compacts and a state's rights and obligations once it has entered a compact. The court agreed that the election provision both is critical to the compact's central purpose and is mandatory. Compact law supersedes conflicting state law, the court said, and a member state is bound by the compact's provisions until it withdraws from the compact. The court ruled that the out-of-state corporate taxpayers had the right to elect to apportion their income under the compact's formula.
The potential implications of Herbert's compact approach are shaking the state tax world to its core. If the Gillette ruling holds, California alone stands to lose an estimated $534 million in refund claims for open years. Though Gillette has no precedential value outside California, legal challenges based on Herbert's approach have been filed in three more compact member states: Michigan, Oregon, and Texas.1
There also are potential implications in the fact that the compact's apportionment formula provisions are from the Uniform Division of Income for Tax Purposes Act -- not as they currently are but as they were drafted by the Uniform Law Commission. Legal minds wonder: Under the approach in Gillette, does that mean all of the original UDITPA provisions -- business and nonbusiness income definitions, sourcing based on costs of performance -- would apply?
And of course there is the question of the fate of the Multistate Tax Commission, the administrative body created by the compact. After oral arguments in Gillette but before the appellate court ruled in favor of the taxpayers, California -- the MTC's largest member -- withdrew from the compact. At this time it is unclear whether more compact member states will follow suit.
Developing the Approach
Both a CPA and a lawyer, Herbert is a graduate of the University of California at Berkeley's School of Business Administration and the UCLA Law School. His practice at PwC this past decade has been focused primarily on complex California tax matters.
Before joining PwC in 2002, Herbert was a partner in Arthur Andersen's Northern California state and local tax group. He started his career in the San Francisco office of the law firm Brobeck, Phleger & Harrison LLP.
Throughout his career, Herbert has originated or supported the development of several novel or constitutional approaches in state taxation, including:
- arguing before Farmer Bros. Co. v. FTB came out that California's treatment of interest income and dividends received discriminate against out-of-state corporations in violation of the U.S. Constitution;2
- predicting the fall of California Revenue and Taxation Code section 24402 in light of the Supreme Court's ruling in Fulton Corp. v. Faulkner;3
- assisting in filing the refunds in Appeal of Save Mart Supermarkets, the first case in California involving the manufacturers' investment credit; and
- originating the idea of including value added tax in the sales factor denominator, which led to an FTB audit pronouncement on it.
Herbert said it took him a long time to identify the issues and hit on the compact law approach now used in Gillette. For one thing, the election provision hadn't been the focus of litigation in part because states that had adopted the compact hadn't yet begun mandating the use of different apportionment formulas.
It all started when Herbert was looking at the sales factor provision in California Revenue and Taxation Code section 25128 for another reason. He sensed that he should read the entire statute, and during that research he became curious about what the phrase "notwithstanding section 38006" meant.
"And because I could not satisfy myself with an easy answer, I kept digging and digging and digging, and that's how this all came about," Herbert told State Tax Notes.
Herbert said that when he realized that section 38006 of the California tax code was the Multistate Tax Compact -- and then came to understand what a compact is -- he realized this was no ordinary tax matter.
"Once I got my head around the compact issue, and then consulted with compact experts and constitutional law experts, I knew that this was something special," he said.
Colorado for years served as a model state offering two apportionment formulas -- its own and the alternative compact formula -- but at least in California at that time, "many tax practitioners did not comprehend the possibility of two different apportionment regimes," Herbert said.
"So they thought the 'notwithstanding' language would be effective, and they did not understand the implications of it being a compact," Herbert said. "That's where I stuck with the approach over the naysayers."
Herbert started working on what would become the Gillette case in 2003. He had been looking for offsets on an assessment for a client and had been developing the compact argument to use it in a protest.
The first client that took the position didn't continue with it and is not part of the lead group litigating the matter today, Herbert said. In Gillette, the state's lawyers have been arguing that the refund claims at issue were filed many years after California's move to a double-weighted sales factor. But, according to Herbert, the first claim covered 1997, a mere four years after California's double-weighting provision took effect.
Herbert said that PwC California-based colleagues Jon Sperring, Derick Brannan, and Ben Muilenburg were supportive and influential in further developing the idea. So far, no other state court has taken up the compact argument like the California Court of Appeal did.
Unsurprisingly, Herbert said he believes the California Court of Appeal got it right. He said:
The states have to decide: Are we going to be compact members or not? If so, they should give taxpayers this election. If a member state wants to have only its own apportionment formula, then it should withdraw from the compact. Then it's not bound by the election and can do what it wants.
Herbert noted that one of the plaintiffs in U.S. Steel v. Multistate Tax Commission -- the case in which the U.S. Supreme Court ruled that the compact is valid and binding -- was Procter & Gamble Distributing Co., which now owns Gillette.
"And so Gillette is now asking that the compact, which was held valid in U.S. Steel against them, should be applied as a compact to allow them to make the Article III election," Herbert said.
There are more than 200 compacts in the United States, making a discussion of the historic origins of the Multistate Tax Compact highly relevant, Herbert said.
"Basically the argument of the Franchise Tax Board is 'We can unilaterally ignore the compacts we sign as a state,'" Herbert said. "That's the troublesome part, and that's the part I realized in 2003 was going to make this a unique and interesting case."
Herbert's clients attempted to reach a settlement with the FTB. When that didn't happen, Herbert recommended that the law firm Silverstein & Pomerantz litigate the case.
"And they have been fantastic to work with," Herbert said. "I've loved working with them and would welcome working with them again in the future." Herbert continues to assist in filing the claims before the California court, helping develop the issue for litigation, and working with counsel on Gillette.
Tax Lawyers of the Year:
The Gillette Litigating Team
The members of the Silverstein & Pomerantz LLP team litigating Gillette v. Franchise Tax Board are State Tax Notes' Lawyers of the Year.
Amy L. Silverstein, Edwin P. Antolin, Johanna W. Roberts, Charles E. Olson, and Lindsay T. Braunig are serving as counsel to the corporate taxpayers in Gillette out of the law firm's San Francisco office. The firm also has an office in Denver.
Silverstein & Pomerantz, formed in 2003, is a boutique law firm that specializes in state and local tax controversy and planning work on a national scale. During the first decade of its existence, the firm has developed a reputation for litigating cutting-edge, high-impact cases that typically involve a constitutional dimension.
"Gillette is highly representative of the types of cases we handle," said firm partner and founder Silverstein.
In Northwest Energetic Services LLC v. Franchise Tax Board, a prime example, Silverstein & Pomerantz successfully challenged the state's limited liability company fee as unconstitutional on the grounds that it is an unapportioned tax.
In response, the California State Legislature -- fearing that the state could lose over $1 billon in revenue if it must issue refunds -- enacted retroactive apportionment legislation, which Silverstein said the firm also believes is unconstitutional. "Now we are working on certifying a class to challenge the retroactive legislation and hopefully to secure full refunds to all LLCs that paid the unconstitutional LLC fee," she said.
That developing class action litigation is just one example of how the firm pushes the envelope not only substantively but procedurally. Silverstein & Pomerantz also challenged California's recent voluntary disclosure initiative, the large corporate understatement penalty, and the post-amnesty penalty.
The firm represented the California Taxpayers' Association when Cal-Tax challenged California's large corporate understatement penalty, arguing that the penalty violated the state constitution and procedural due process because it did not afford taxpayers an adequate pre- or post-payment review process. Although Cal-Tax v. FTB was not a taxpayer victory on the constitutional question, Silverstein noted that through the case the firm secured prepayment review of California's large corporate understatement penalty.
Silverstein & Pomerantz also is challenging the controversial 2008 extension of San Francisco's payroll tax to partnership profits.
The five attorneys on the Silverstein & Pomerantz team representing taxpayers in Gillette earned their law degrees between 1991 and 2005. All but one practiced at Morrison & Foerster LLP before founding or joining Silverstein & Pomerantz.
Silverstein regularly litigates constitutional issues in state taxation, including nexus, apportionment, and discrimination against interstate commerce; unitary combination questions; questions arising from transactions involving intangible property; and complex statutory questions. She advises multinational and domestic businesses about the nationwide state and local tax implications of mergers, acquisitions, asset dispositions, and other transactions and advises clients about state and local tax planning opportunities.
Silverstein received her law degree in 1991 from Stanford Law School, where she was a recipient of the Hilmer Oehlmann Jr. award for outstanding legal writing. She did her undergraduate studies at the University of California at Los Angeles. Before forming Silverstein & Pomerantz, she practiced at Morrison & Foerster, where she was elected to the partnership in 1999.
Antolin in 2003 joined Silverstein & Pomerantz, where he is a partner representing businesses and individuals in state and local tax cases before administrative tribunals and trial and appellate courts. At the U.S. Supreme Court level, he assisted in representing the taxpayer in Hunt-Wesson, Inc. v. California Franchise Tax Board, 120 S. Ct. 1022 (2000).
Antolin received his law degree in 1994 from the University of California, Hastings College of the Law. He received an undergraduate degree in finance from the University of Washington. Before joining Silverstein & Pomerantz, Antolin practiced with Morrison & Foerster LLP's state and local tax group.
Roberts is a litigator whose practice draws on a decade of complex civil litigation experience representing clients in antitrust, intellectual property, securities, consumer protection, and other matters, with an emphasis on class action practice. She also has substantial experience in mediation and alternative dispute resolution. She received her law degree from Harvard Law School in 1997 and her undergraduate degree from Dartmouth College. Before joining Silverstein & Pomerantz, Roberts was a complex civil litigation attorney with Morrison & Foerster.
Olson is a litigator whose areas of expertise include the Multistate Tax Compact and UDITPA, and constitutional challenges of state and local taxes on a variety of grounds. He received his law degree from New York University School of Law in 2003. He obtained a doctorate in philosophy from Oxford University, where he was a lecturer in logic at Queen's College. Olson did his undergraduate studies at U.C. Berkeley. Before joining Silverstein & Pomerantz, Olson was a complex civil litigation associate at Cleary Gottlieb Steen & Hamilton LLP in its New York and Paris offices; he also has litigated numerous matters with the Electronic Frontier Foundation on a pro bono basis.
Braunig is a litigator who joined Silverstein & Pomerantz in 2011. Her practice draws on years of complex civil litigation experience representing clients in intellectual property, securities, and other commercial matters. Before joining the firm, she was a civil litigation attorney with Morrison & Foerster. Braunig received her law degree from New York University School of Law in 2005 and her undergraduate degree from Davidson College.
Organization of the Year: The Tax Foundation
The Tax Foundation was State Tax Notes' Organization of the Year in 2011 in large part because it is routinely cited by both tax and nontax professionals as the organization they most rely on for state and local tax data and other information. In 2012 the foundation is once again State Tax Notes' Organization of the Year because it is a constant and reliable source of data, studies, and other fiscal information.
The foundation provides a wide range of information tools and data, including interactive data on tax rates and tax burdens and a Facts & Figures handbook, which compares the 50 states on 40 different measures of taxing and spending, including individual and corporate income tax rates, business tax climate, excise taxes, tax burdens, and state spending.
Business Climate Index
Perhaps most cited among the foundation's work is the annual state business tax climate index, which compares state tax structures. This year the index angered New York Gov. Andrew Cuomo (D) because New York was ranked dead last among all states. Cuomo aide Larry Schwartz went on a media blitz to downplay the index. He dismissed the Tax Foundation as a "right-wing think tank" and said the index was "based on ideology and not facts."
Nonetheless, the index is heavily relied on by the media, legislators, and state tax policy experts around the nation. It has been downloaded over 500,000 times and is referenced in hundreds of media reports. The rankings and the research and analysis provided in the report are used throughout the year in legislative efforts to reform state tax systems. Although some officials, like Cuomo, may disagree with the index, there is no question that it and the foundation are influential in shaping the state tax reform debate.
The foundation may be most relied on for its information tools and data projects; it is also active in giving presentations, making media appearances, and testifying before state legislatures and Congress on state tax and fiscal policy. Many of those appearances in 2012 were by Joe Henchman, the foundation's vice president of legal and state projects and the vice president of operations. Henchman has been a driving force behind the foundation's influence in the state and local tax world.
Scott Hodge, the foundation's president, said that although the foundation is a "Washington-based" organization, state policy is in its DNA. After its founding in 1937, the first tax debate the foundation engaged in was in Westchester County, N.Y. Hodge recalled that during World War II, "Tax Foundation staff barnstormed the country helping to set up state 'expenditure councils' to monitor state and local finances. Their motto was 'a dollar of government waste was a dollar that didn't go to the war effort.'" The Tax Foundation has been working ever since to "raise the tax IQ of lawmakers and guide them toward sound tax policy. Henchman and his team are just the latest contributors to this long tradition," Hodge said.
Tax Administrator of the Year: Cynthia Bridges
State Tax Notes' Administrator of the Year is California State Board of Equalization Executive Director Cynthia Bridges.
Accomplishments in Louisiana
Before being selected as the BOE's executive director, Bridges served as secretary of the Louisiana Department of Revenue for 12 years, spanning the administrations of three governors. Bridges has been praised for transforming the department into a leader in customer service. During her tenure as revenue secretary, Bridges implemented a new integrated tax system, on time and within budget, that replaced a 30-year-old legacy system, an accomplishment she said she is proud of. That system, Bridges told State Tax Notes, provided the staff with the flexibility and tools to carry out their work in the 21st century.
Bridges' accomplishments in Louisiana also include integrating private sector best practices into the agency to improve efficiency and services, expanding website services, reorganizing tax divisions, and working with other agencies and taxpayer groups to enable the Department of Revenue to better meet the needs of taxpayers and to increase voluntary compliance. "You can tell by her history she's a superb administrator," said Verenda Smith, deputy director of the Federation of Tax Administrators.
Despite her stellar record and reputation in the field, Bridges' resignation as Louisiana's revenue secretary did not come without controversy. Earlier this year, Bridges issued an emergency ruling that would have extended the state's alternative fuels tax credit to conventional flex-fuel vehicles. The estimated cost to the state was over $100 million a year. Shortly after Gov. Bobby Jindal (R) ended the expansion, Bridges submitted her resignation. Many believed, as one leader in the field told State Tax Notes, that her resignation looked like "standing on a principle in the face of the boss's disagreement." That position was respected among her colleagues and others in the field.
The Move to California
In August Bridges began her tenure as executive director of California's BOE. California is a larger state with a larger tax base, and Bridges said she believed her Louisiana experience positioned her well for the opportunity.
"California can count itself lucky that Cynthia was available when it needed a proven tax administrator," Gale Garriott, executive director of the Federation of Tax Administrators, told State Tax Notes. "Very few rise through the ranks of a revenue department like Cynthia did, which gave her a frontline understanding of the inner workings of a tax agency. That experience plus her ability to consistently develop a strong management team will serve California well."
BOE Chair Jerome E. Horton (D) called Bridges "an international and domestic leader with the demonstrated skills, experience, background and proven leadership instincts to help the board pave a new path of progressive leadership into the future." When State Tax Notes asked Bridges if she has yet identified any areas where she plans to direct her attention in terms of improvement at the BOE, she responded:
In my short time at the BOE, it is evident that through the leadership of the Members of the Board and executive team, and the hard work of staff, the agency is already proceeding on a path to provide effective education and convenient, easy tools for taxpayers to comply with the laws associated with the taxes and fees we administer. I want to utilize my experience to continue the innovation and responsiveness to meet taxpayer needs, enhance voluntary compliance and operational efficiency and effectiveness.
State Tax Notes' Lawmaker of the Year is Democratic Rep. Jay R. Kaufman of Massachusetts. Kaufman, a strategic planning consultant and educator by profession, has represented the 15th Middlesex District in the Massachusetts House of Representatives since 1995 and now serves as the House chair for the General Assembly's Joint Committee on Taxation.
State Tax Notes selected Kaufman because of his efforts to reform the Massachusetts revenue system and his state tax policy work at the federal level. Kaufman served on the Massachusetts Tax Expenditure Commission, which was formed by Gov. Deval Patrick (D) to study the effectiveness of, and make recommendations regarding, the numerous exemptions, deductions, and credits in the Massachusetts tax code.
In April the commission, which was then chaired by Jay Gonzalez, secretary of the Executive Office of Administration and Finance, issued its report recommending that the governor and legislature identify metrics for assessing the effectiveness of tax expenditures and periodically review all expenditures. Also, the commission recommended that the number of expenditures be reduced and that any new tax expenditure have a clearly specified public policy purpose.
Kaufman said the commission's existence was significant because it allowed policymakers to start asking questions about the use of tax credits and similar tax breaks. The "best news," Kaufman said, "is that we were able to take a look at a system that had been largely invisible." Kaufman added that change would be difficult: "What I realized is that every single tax break we had given had a constituency that was going to fight for it." Kaufman said the commission's work provides a good basis for making smarter decisions in the future.
Kaufman has also distinguished himself on the national stage, particularly in his work with the National Conference of State Legislatures. After co-chairing the budgets and revenue committee for two years, Kaufman is now a member of the executive committee.
NCSL staffers were quick to praise Kaufman's work with the conference. Mandy Rafool, program principal for nontax revenues, state revenues and tax policy at NCSL, described Kaufman as "very conscientious" and "one of the better chairs we've had."
NCSL Policy Associate Jeff Hurley agreed and called Kaufman "a model legislator." Hurley said Kaufman had done exemplary work on the deficit reduction task force, which advocated for state interests in federal deficit reduction activities, and in amending the committee's policy objectives for federal deficit reduction and its effect on the states. Rafool said that the latter project involved overhauling a considerable number of conference policies. "He took on a lot of that himself," Rafool added. Hurley described Kaufman as the "focal point" of the amendment efforts and said he was "extremely persistent." Those policies will provide the framework for the conference's efforts to work with the federal government to reduce the deficit while maintaining necessary support for state programs.
Kaufman also serves as the founding director of Northeastern University's Center for Leadership and Public Life at the School of Public Policy and Public Affairs. Kaufman said that the center, which describes itself as "resource for those eager to enhance leadership skills and be a powerful catalyst for the meaningful and positive changes we and our communities need," is important to his efforts to improve and cultivate political leadership.
Kaufman also has worked to improve the quality of political discourse in Massachusetts. Since 1995, he has hosted the monthly public policy television program Open House, which is broadcast locally. The program, which features discussions among community leaders on a range of topics, received a Beacon Award in 1997 and was named the best television series by the Massachusetts Cable Television Commission. Also, Kaufman operates an art exhibit at the State House that features artists from his district and around Massachusetts.
Kaufman is a committed public servant with a faith in community and government work whose commitment to tax policy is important not only for its own sake but also as a means to making government work effectively. "In the past two generations, government has been seen as something bad," Kaufman said. "But I think government can do good and must do good, and we have to find some way to pay for that."
1 On November 20 the Michigan Court of Appeals decided International Business Machines Corp. v. Dep't of Treasury. For the decision, see Doc 2012-23958 or 2012 STT 227-18 .
2 Michael D. Herbert and Mark J. Woodward, "Dividing the Pie: Is Your Dividend Deduction Slice Getting Bigger in California?" State Tax Notes, Apr. 14, 1997, p. 1175, Doc 97-10152, or 97 STN 73-14 .
3 Michael D. Herbert, Nancy T. Stanislawski, and Hal Kessler, "Defending the Castle Walls: California's Interest Offset, Dividends Received Deducation Should Crumble Soon," State Tax Notes, Oct. 27, 1997, p. 1055, Doc 97-29282, or 97 STN 209-3 .
END OF FOOTNOTES
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