California tax decisions tell us how a dispute ended. Briefs give us an earlier look at the questions taxpayers and the state are asking, the arguments they are making, and the issues that could become tomorrow’s important decisions.
At Hodgson Russ, we receive quarterly releases of briefs from California’s Office of Tax Appeals (OTA). With this post, we’re launching a recurring California Tax Pulse update on what those releases reveal about the disputes working their way through the OTA. This installment covers the third-quarter 2026 collection. Additional posts will follow as future quarterly releases become available.
One important distinction: this is a look at arguments, not outcomes. The collection includes taxpayer and agency briefs, supplemental submissions, and appeal requests and related correspondence. Some documents concern older tax years or carry dates preceding the quarter. The discussion below describes positions reflected in this release, not new OTA holdings or a complete inventory of the OTA’s pending docket.
The big picture: familiar disputes, with some important questions underneath
Franchise and Income Tax
On the franchise and income tax side, the collection ranges from individual refund claims to substantial corporate disputes. Recurring issues include refund limitations periods, late-filing and late-payment penalties, interest abatement, estimated assessments, and whether reasonable cause exists when taxpayers relied on advisers, experienced personal hardships, or encountered payment and filing problems. Disaster-relief deadlines and the treatment of misdirected payments also appear.
There is plenty of substance beyond procedure. The submissions address residency and nonresident income sourcing, stock compensation, business versus nonbusiness income, alternative apportionment, water’s-edge elections, and nexus. Other disputes involve real-estate exchanges and basis, charitable deductions and valuation, research credits, and pass-through entity (PTE) elective-tax elections and payments. The PTE matters are particularly practical: several turn on whether a payment went to the right account or tax year, or whether an adviser’s or software’s mistake supports penalty relief.
Business Tax
On the business tax side, many disputes concern the mechanics of sales and use tax audits: reconstructed sales, markup methods, bank deposits, credit-card data, claimed exemptions, and the records needed to substantiate adjustments. The collection also raises retailer identity, bad-debt refunds, successor and responsible-person liability, use tax on equipment and other property, delivery charges, and substantial penalties. Not everything is sales tax: hazardous-waste fees and an exemption claimed by a remediation contractor also feature in the release.
Cases to Watch
A handful of matters deserve a closer look.
- Santa Fe Natural Tobacco: a major foreign-intangibles dispute
Santa Fe Natural Tobacco Company, Inc. challenges the denial of a roughly $69.6 million refund for 2016. The dispute stems from the approximately $5 billion sale of non-U.S. rights to the Natural American Spirit brand and associated trademarks. Santa Fe retained the U.S. rights.
Santa Fe’s primary argument is that the gain from the non-U.S. trademarks is nonbusiness income that California cannot apportion. Its submission emphasizes the separation between the foreign and U.S. businesses and argues that the foreign trademark value was developed outside the United States. Alternatively, if the gain is business income, Santa Fe argues that including it in taxable income while excluding it from the sales-factor denominator produces distortion. It seeks denominator inclusion as the alternative remedy.
For companies contemplating a sale of intellectual property or a foreign business, the issues worth watching are how the transaction’s income is characterized and whether the apportionment calculation fairly accounts for the activity that generated it.
- Mann + Hummel and Kohl’s: distortion takes different forms
Mann + Hummel Filtration Technology Group Inc. & Subsidiaries presents another transaction-driven distortion claim. Its appeal concerns a 2016 internal reorganization involving the sale of a foreign subsidiary’s stock. The taxpayer argues that approximately $496 million of gain, representing nearly 95% of its taxable income, was included in the apportionable base while the transaction receipts were excluded under the substantial-and-occasional-sale rule.
Mann + Hummel seeks separate apportionment of the gain using the sold subsidiary’s California activity as a proxy. According to its submission, that subsidiary had no California customers or operations. The brief invokes Microsoft and General Mills and expressly cites the April 2026 Smithfield Packaged Meats decision. Importantly, the brief itself describes Smithfield as neither final nor precedential. That citation shows how taxpayers are deploying the decision in their arguments, not that it settles the issue.
Kohl’s, Inc. raises a different distortion theory: it argues that California stores generated minimal operating profit while the single-sales-factor formula attributed hundreds of millions of dollars of taxable income to the state. Kohl’s proposes separate accounting or a modified sales factor and separately disputes the exclusion of vendor allowances and the California sourcing of credit-card servicing receipts.
Together, these matters illustrate two settings in which taxpayers are seeking relief from the formula: an extraordinary transaction and an alleged persistent mismatch between California operating results and apportioned income. Neither argument has been resolved by the submissions we reviewed.
- Moving out, but still vesting: the RSU question
Olson and S. Walinga challenge the sourcing of restricted stock unit compensation after their moves to Colorado. Their argument is not simply that moving eliminates California taxation. Instead, they contend that applying a grant-to-vest workday formula to successive quarterly vesting tranches repeatedly counts the same pre-move California workdays and overallocates later compensation to California.
They propose alternative earning-period and post-move workday methods. The submission expressly frames the substantive dispute as compensation sourcing, not the accuracy of their reported residency dates. For executives and employees with equity awards, this is an interesting challenge to how an allocation method operates across multiple vesting periods.
- P.L. 86-272 and service-receipt sourcing
World Outdoor Resources LLC invokes P.L. 86-272, asserting that its California activities were limited to protected solicitation of orders for tangible personal property and that it had no other in-state business activity. Its appeal is brief, but the claim is worth flagging for businesses selling across state lines. The submission does not establish that the asserted protection applies to every tax, fee, or penalty included in the assessment.
For service providers, Mira Dx, Inc. offers a different sourcing question. It challenges sourcing all receipts from its COVID-19 testing services to California. Mira Dx argues that the testing served a nationwide public-health response and that the U.S. population is a reasonable approximation of where the benefit was received. The FTB, as described in the submission, treated the benefit as received entirely in California. The issue could interest providers whose services arguably benefit more than the immediate contracting customer or location.
- Business tax highlights: who is the retailer, and who gets the refund?
Teleflora, LLC disputes whether it was the retailer responsible for tax on consumer-direct flower orders delivered in California. Teleflora emphasizes its asserted inability to transfer title or possession and invokes the later Marketplace Facilitator Act. The CDTFA responds that Teleflora set prices, collected payments, and arranged delivery, making it the retailer under the rules applicable to the earlier periods. For businesses that connect customers with third-party fulfillment providers, the parties’ competing descriptions of the transaction are worth watching.
AT&T Mobility Next Operations, LLC concerns bad-debt refund claims arising from financed device purchases. The CDTFA argues that customers paid sales-tax reimbursement upfront, that AT&T did not finance that reimbursement, and that AT&T cannot retain a refund that would constitute excess tax reimbursement without an agreement permitting it. The broader question is how bad-debt relief interacts with tax reimbursement already collected from customers.
What we’ll be watching
The collection is a useful reminder that both the legal theory and the factual record matter. The highlighted submissions put the spotlight on foreign gains, the fit between income and apportionment factors, workday records, equity-award terms, service benefits, and the commercial arrangements behind a sales-tax transaction.
We’ll continue using future quarterly OTA releases to identify emerging arguments and issues relevant to our clients. And when the OTA issues decisions in these matters, we’ll have a different question to answer: which arguments carried the day?
