In a technical advice memorandum (California FTB Technical Advice Memorandum No. 2016-01, 01/12/2016), the California Franchise Tax Board (FTB) concluded that a taxpayer could not claim California's other state tax credit for payment of the revised Texas franchise tax. In reaching this conclusion, the FTB noted that: (1) the credit only applies to "net income taxes" paid to another state; and (2) the revised Texas franchise tax does not qualify as an income tax under California law because it is based on gross receipts. Although the conclusion that the Texas tax is a tax on gross receipts may be challenged from a technical perspective when, for example, the taxpayer takes the compensation deduction in Texas, the FTB's position is not meritless and it has denied the credit on audit.

While not formal, citable authority, the memo may be of interest to law firms whose partners are liable for both California income taxes and the revised Texas franchise tax. An FTB legal ruling on credits and deductions for taxes paid to other states, which will include a more complete discussion and analysis of this issue, is expected before the third quarter of 2016.

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