BILL NUMBER: AB 1591 AMENDED
BILL TEXT
AMENDED IN ASSEMBLY JULY 18, 2007
AMENDED IN ASSEMBLY JUNE 14, 2007
AMENDED IN ASSEMBLY JUNE 7, 2007
AMENDED IN ASSEMBLY APRIL 10, 2007
INTRODUCED BY Assembly Member Ma
(Coauthors: Assembly Members De Leon, Garcia, and Mullin)
FEBRUARY 23, 2007
An act to amend, repeal, and add Section 25128 of the Revenue and
Taxation Code, relating to taxation, to take effect immediately, tax
levy.
LEGISLATIVE COUNSEL'S DIGEST
AB 1591, as amended, Ma. The Corporation Tax Law: allocation and
apportionment.
The Corporation Tax Law imposes taxes measured by income and, in
the case of a business with income derived from, or attributable to,
sources both within and without this state, apportions the income
between this state and other states and foreign countries in
accordance with a specified 4-factor formula, except as otherwise
provided.
This bill, for taxable years beginning on or after January 1, 2008
and before January 1, 2022, would allow a taxpayer that is a member
of the apportioning trade or business , or a subgroup
thereof, to elect, by contracting with the Franchise Tax
Board, as provided, to apportion its business income to this state by
utilizing one of the revised apportionment formulas, as specified.
This bill would take effect immediately as a tax levy.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 25128 of the Revenue and Taxation Code is
amended to read:
25128. (a) Notwithstanding Section 38006, all business income
shall be apportioned to this state by multiplying the business income
by a fraction, the numerator of which is the property factor plus
the payroll factor plus twice the sales factor, and the denominator
of which is four, except as provided in subdivision (b) or (c).
(b) (1) If an apportioning trade or business derives more than 50
percent of its "gross business receipts" from conducting one or more
qualified business activities, all business income of the
apportioning trade or business shall be apportioned to this state by
multiplying business income by a fraction, the numerator of which is
the property factor plus the payroll factor plus the sales factor,
and the denominator of which is three.
(2) For purposes of this section
subdivision , a "qualified business activity" means the
following:
(A) An agricultural business activity.
(B) An extractive business activity.
(C) A savings and loan activity.
(D) A banking or financial business activity.
(c) (1) Notwithstanding any other provision of law, for taxable
years beginning on or after January 1, 2008, and before January 1,
2022, a taxpayer that is a member of an apportioning trade or
business may, on behalf of the apportioning trade or business
or a subgroup thereof , elect, as provided in
paragraph (3), to adjust the fraction described in subdivision (a) or
(b), as applicable, by utilizing one of the following alternative
methods:
(A) (i) In calculating its business income apportioned to this
state, the apportioning trade or business , or a subgroup
thereof, may add an additional sales factor to the
numerator of the fraction described in subdivision (a) or (b),
whichever is applicable, and may increase the denominator of that
fraction by one for every two hundred fifty million dollars
($250,000,000) of qualified expenditures made
incurred by the apportioning trade or business during a
taxable year beginning on or after January 1, 2008.
(ii) The apportioning trade or business, or a subgroup thereof,
must submit and certify, with each tax return filed with the
Franchise Tax Board, a summary of the qualified expenditures.
(ii) In any one taxable year, in adjusting the fraction as
described in clause (i) of this subparagraph, the apportioning trade
or business may add to the numerator of that fraction not more than
two additional sales factors as compared to the number of sales
factors added to the numerator of that fraction by the apportioning
trade or business in the immediately preceding taxable year. Any
remaining additional sales factors shall be used by the apportioning
trade or business in the following taxable year in which the
apportioning trade or business incurs qualified expenditures that
will qualify the apportioning trade or business for fewer than two
additional sales factors, until the additional sales factors are
fully utilized.
(B) (i) The apportioning trade or business , or a
subgroup thereof, may adjust the property factor and the
payroll factor used in the fraction described in subdivision (a) or
(b), whichever is applicable, as follows:
(I) (ia) The value of real and tangible personal property in this
state owned or rented by the taxpayer in a taxable year that is in
excess of the value of the taxpayer's real and tangible personal
property owned or rented and used in this state in the base year and
otherwise includable in the computations of the property factor, as
defined in Section 25129, shall be excluded from the numerator of
that property factor until the election is terminated.
(ib) For purposes of this section, if real and tangible personal
property acquired or rented by a taxpayer in this state in a taxable
year is disposed of by the taxpayer in the following taxable year and
that disposition occurs within one year or less of the date the
property was first placed in service, then the value of that property
shall be included in the numerator of the taxpayer's property factor
for that period. If the return for such period has already been
filed, an amended return is required to be filed.
(II) (ia) The amount of compensation paid in this state by the
taxpayer, in a taxable year that is in excess of the amount of total
compensation paid in this state in the base year and otherwise
includable in the computations of the payroll factor, as defined in
Section 25132, shall be excluded from the numerator of that payroll
factor.
(ib) For purposes of this section, "compensation in the base year"
does not include extraordinary events such as deferred compensation
payouts or stock option exercises.
(ii) The apportioning trade or business, or a subgroup thereof,
must submit and certify, with each tax return filed with the
Franchise Tax Board, a summary of the new investment made in this
state.
(2) For purposes of this subdivision, all of the following apply:
(A) Sales or other transactions among members of an apportioning
trade or business shall not be taken into account for purposes of
determining the amount of qualified expenditures incurred, or new
investments made, by the trade or business, or a subgroup thereof, in
this state.
(B) Amounts paid to acquire stock or other equity interests in a
corporation or other business entity or an asset acquisition of an
entire ongoing business operation are excluded from qualified
expenditures.
(C) A subgroup making an election under paragraph (3) is
prohibited from doing either of the following:
(i) Adding an additional sales factor under subparagraph (A) if
the apportioning trade or business incurs a reduction in the level of
the qualified expenditures compared to the prior year qualified
expenditures certified by the subgroup.
(ii) Modifying its property or payroll factor, or both, under
subparagraph (B), unless the amount of the apportioning trade or
business' property or payroll, or both, in this state exceeds the
amount of its property or payroll, or both, in this state in the
immediately preceding taxable year.
(D) Only one subgroup of an apportioning trade or business may
make an election allowed by paragraph (1).
(3) (A) On or after January 1, 2007, a taxpayer may elect to
adjust the fraction described in subdivision (a) or (b), whichever is
applicable. The election shall be made by attaching a statement to
the original, timely filed return identifying the apportioning trade
or business, or a subgroup thereof, specifying the method of
adjusting the apportionment factor as described in subdivision (a) or
(b), and designating the member of the apportioning trade or
business, or a subgroup thereof, that will be required to submit and
certify the information, as required by paragraph (1).
(B) The election may be terminated without the consent of the
Franchise Tax Board after it has been in effect for at least 84
months. The termination shall be made on an original, timely filed
return for the first year in which the election is to be terminated.
(C) The election may be terminated before the 84-month period
described in subparagraph (B) has elapsed either by the taxpayer,
with the permission of the Franchise Tax Board, or by the Franchise
Tax Board, if the taxpayer fails to submit a certification signed by
an officer, as required by paragraph (1).
(D) The election shall remain in effect until terminated.
(E) This subdivision shall not be construed to terminate the water'
s-edge election made by a taxpayer pursuant to Section 25113, nor
shall it be construed to allow any change in, or adjustments to, that
election.
(F) (i) In the event the termination of the election occurs within
the 84-month period, with the permission of the Franchise Tax Board,
an apportioning trade or business, or subgroup thereof, shall be
prohibited from making an election for the following 84 months and
any adjustment reported pursuant to paragraph (1) shall remain in
effect for the years prior to termination.
(ii) In the event the termination of the election occurs after the
84-month period, the adjustments reported by the apportioning trade
or business, or a subgroup thereof, pursuant to paragraph (1), may be
carried over until January 1, 2022. If an apportioning trade or
business, or subgroup thereof, terminates an election after 84
months, and then makes a new election, the prior adjustments reported
pursuant to paragraph (1) remain in effect until January 1, 2022.
(G) (i) If a new affiliate member is formed or acquired by an
apportioning trade or business, or a subgroup thereof, or the
apportioning trade or business, or a subgroup thereof is acquired,
then the election made by the apportioning trade or business, or a
subgroup thereof, pursuant to subparagraph (A), shall remain in
effect unless the value of the new affiliate members' total business
assets exceeds the value of the electing members' total business
assets.
(ii) If the election is terminated as a result of either a
formation or an acquisition, as described in clause (i), the
provisions of subparagraph (F) shall not apply.
(H) The Franchise Tax Board may prescribe any regulations that may
be necessary or appropriate to implement the provisions of this
subdivision.
(I) (ia) The value of real and tangible personal property in this
state owned or rented by a taxpayer member of the apportioning trade
or business, in a taxable year, that is in excess of the value of the
taxpayer member's real and tangible personal property owned or
rented and used in this state in the base year and otherwise
includable in the computations of the numerator of the property
factor, as defined in Section 25129, shall be excluded from the
numerator of that taxpayer member's property factor.
(ib) Any real or tangible property acquired from other members of
the taxpayer member's apportioning trade or business shall be
included in the numerator of the property factor, regardless of
whether or not, as the result of this inclusion, the value of real
and tangible personal property in this state owned or rented by a
taxpayer member would exceed the base year value.
(ic) If real and tangible personal property is acquired or rented
in this state by a taxpayer member of the apportioning trade or
business, and is disposed of by the taxpayer member in a following
taxable year, the value of that property shall be included in the
numerator of the taxpayer member's property factor for the year in
which the property was acquired or rented if the disposition occurs
within one year or less of the date the property was first acquired
or rented. If the return for that period has already been filed, an
amended return shall be filed.
(II) (ia) The amount of compensation paid in this state by
taxpayer members of the apportioning trade or business, in a taxable
year, that is in excess of the amount of total compensation paid in
this state by the taxpayer members in the base year and otherwise
includable in the computations of the payroll factor numerator, as
defined in Section 25132, shall be excluded from the numerator of
that payroll factor.
(ib) This subparagraph shall not apply until the apportioning
trade or business invests over fifty million dollars ($50,000,000) in
a qualified facility during a taxable year. If, in subsequent
taxable years, the amount invested in qualified facilities fails to
exceed the value of qualified facilities in the year the election
becomes applicable, the apportioning trade or business shall utilize
the fraction, described in subdivision (a) or (b), whichever is
applicable, without adjustment.
(ic) The apportioning trade or business is prohibited from
modifying its property or payroll factor, or both, under this
paragraph unless the amount of the apportioning trade or business
property and payroll in this state exceeds the amount of its property
and payroll in this state in the immediately preceding taxable year.
(ii) The adjustment described in this subparagraph may not result
in the California apportionment percentage of the apportioning trade
or business that is less than the apportioning trade or business'
California sales factor percentage.
(iii) Sales, transfers, or other transactions between members of
the apportioning trade or business shall not be taken into account
for purposes of this subparagraph.
(2) (A) On or after January 1, 2008, an apportioning trade or
business may elect to adjust the fraction described in subdivision
(a) or (b), whichever is applicable, in accordance with this
subdivision. The election shall be made by attaching a statement to
the original, timely filed return of the apportioning trade or
business specifying which method of adjusting the apportionment
factor under this subdivision the apportioning trade or business will
utilize and designating the member of the apportioning trade or
business that will be required to submit the aggregate information to
substantiate the qualifications for the adjustments authorized under
this subdivision.
(B) If the apportioning trade or business chooses to elect the
method in subparagraph (A) of paragraph (1) of this subdivision, all
changes made to the sales factor in subsequent years will remain in
effect for all subsequent taxable years.
(C) If the apportioning trade or business chooses to elect the
method in subparagraph (B) of paragraph (1) of this subdivision, the
base line year chosen by the apportioning trade or business shall
remain the same for all subsequent taxable years.
(D) The apportioning trade or business may only switch between the
method described in subparagraph (A) of paragraph (1) and the method
described in subparagraph (B) of the same paragraph after the
election has been in place for 84 months, unless permission is
granted by the Franchise Tax Board prior to the expiration of that
84-month period.
(E) If the termination of the original election occurs, with the
permission of the Franchise Tax Board, within the 84-month period, an
apportioning trade or business shall be prohibited from making a new
election for the following 84 months, but any adjustment pursuant to
subparagraph (A) of paragraph (1) shall remain in effect.
(F) If a new affiliate member is formed or acquired by an
apportioning trade or business, or the apportioning trade or business
is acquired, then the election made by the apportioning trade or
business, pursuant to this paragraph, shall remain in effect unless
the value of the new affiliate member's total business assets exceeds
the value of the electing member's total business assets.
(G) If the election is terminated as a result of either a
formation or an acquisition, as described in subparagraph (E), a new
election may be made.
(d) For purposes of this section:
(1) "Gross business receipts" means gross receipts described in
subdivision (e) of Section 25120 (other than gross receipts from
sales or other transactions within an apportioning trade or business
between members of a group of corporations whose income and
apportionment factors are required to be included in a combined
report under Section 25101, limited, if applicable, by Section
25110), whether or not the receipts are excluded from the sales
factor by operation of Section 25137.
(2) "Agricultural business activity" means activities relating to
any stock, dairy, poultry, fruit, furbearing animal, or truck farm,
plantation, ranch, nursery, or range. "Agricultural business activity"
also includes activities relating to cultivating the soil or raising
or harvesting any agricultural or horticultural commodity,
including, but not limited to, the raising, shearing, feeding, caring
for, training, or management of animals on a farm as well as the
handling, drying, packing, grading, or storing on a farm any
agricultural or horticultural commodity in its unmanufactured state,
but only if the owner, tenant, or operator of the farm regularly
produces more than one-half of the commodity so treated.
(3) "Extractive business activity" means activities relating to
the production, refining, or processing of oil, natural gas, or
mineral ore.
(4) "Savings and loan activity" means any activities performed by
savings and loan associations or savings banks which have been
chartered by federal or state law.
(5) "Banking or financial business activity" means activities
attributable to dealings in money or moneyed capital in substantial
competition with the business of national banks.
(6) "Apportioning trade or business" means a distinct trade or
business whose business income is required to be apportioned under
Sections 25101 and 25120, limited, if applicable, by Section 25110,
using the same denominator for each of the applicable payroll,
property, and sales factors.
(7) "Base year" means the year immediately preceding the
year of election. taxable year immediately preceding
the first taxable year for which an election made pursuant to
paragraph (2) of subdivision (c) is applicable.
(8) "Value of real and tangible personal property" in
this state means the value of owned and rented property
in this state as described in Section 25130.
(9) "Amount of compensation" means compensation in this
state, as described in Section 25132.
(10) "Subgroup" means a distinct group of affiliated corporations
whose total business assets equal or exceed $one billion dollars
($1,000,000,000).
(11) (A) "Qualified expenditures" means any of the following
expenditures that are incurred on or after January 1, 2008:
(i) Capital expenditures, including maintenance costs, for real
and tangible personal property located in this state.
(ii) Expenses incurred to acquire, develop, or license
intellectual property in this state.
(iii) Research and development expenses, as defined in Section 174
of the Internal Revenue Code, incurred in this state.
(iv) Capitalized rent paid in this state in excess of the prior
year.
(v) The total amount of compensation and benefits paid to
employees in this state and the payments to independent contractors
and payroll companies for work performed in this state in excess of
the amount paid during the prior year.
(vi) Training costs incurred in this state.
(vii) Costs incurred in providing a basic level of health care to
employees in this state, as defined in the Knox-Keene Act, in excess
of the prior year.
(viii) Expenditures incurred in connection with funding research
at a four-year public or private college or university located in
California.
(10) "Qualified facility" means a new facility, acquired or
constructed in this state, or an existing facility, expanded or
rehabilitated in this state, provided that the total amount of
capitalized expenditures, leasehold improvements, tangible personal
property incurred for the qualified facility, and compensation paid
to new employees for services performed at the qualified facility of
the apportioning trade or business for the taxable year is at least
fifty million dollars ($50,000,000).
(11) (A) "Qualified expenditures" means any of the following
expenditures that are incurred on or after January 1, 2008:
(i) Capital expenditures for real and tangible personal property
located in this state.
(ii) Expenses incurred to acquire, develop, or license
intellectual property in this state.
(iii) Research and experimental expenditures, within the meaning
of Section 174 of the Internal Revenue Code, incurred in this state.
(iv) Capitalized rent paid in this state in excess of the prior
year.
(v) The total amount of compensation and benefits paid to
employees in this state, as defined in Section 25132 and the
regulations pursuant thereto, in excess of the amount paid during the
prior taxable year. "Total amount of compensation and benefits" also
includes any modifications to the payroll factors contained in the
regulations promulgated under Section 25137.
(B) An expense that qualifies as an eligible expenditure under two
or more categories of qualified expenditures, as listed in
subparagraph (A), may be taken into account only under one category
of qualified expenditures for purposes of satisfying the two hundred
fifty million dollars ($250,000,000) requirement described in
subparagraph (A) of paragraph (1) of subdivision (c).
(C) Sales, transfers, or other transactions between members of the
apportioning trade or business shall not be taken into account for
purposes of determining the amount of qualified expenditures made in
this state.
(12) In any case where the income and apportionment factors of two
or more savings associations or corporations are required to be
included in a combined report under Section 25101, limited, if
applicable, by Section 25110, both of the following shall apply:
(A) The application of the more than 50 percent test of
subdivision (b) shall be made with respect to the "gross business
receipts" of the entire apportioning trade or business of the group.
(B) The business income of the apportioning trade or business
, or a subgroup thereof, shall be apportioned in
accordance with subdivision (a), (b), or (c), as applicable.
(e) For purposes of subparagraphs (A) and (B) of paragraph (1) of
subdivision (c), qualified expenditures and investment in a qualified
facility do not include purchased or otherwise acquired stock or
other equity interest in a corporation or other business entity. In
addition, in any case where a member purchases or otherwise acquires
all or any portion of the assets of an existing trade or business,
irrespective of the form of entity, that is doing business in this
state, within the meaning of Section 23101, the purchased assets
shall not be treated as a qualified expenditure or new investment for
purposes of subparagraph (A) or (B) of paragraph (1) of subdivision
(c).
(e)
(f) The provisions of this section are severable. If
any provision of this section or its application is held invalid,
that invalidity shall not affect other provisions or applications
that can be given effect without the invalid provision or
application.
(f)
(g) The amendments made to this section by the act
adding this subdivision shall apply to taxable years beginning on or
after January 1, 2008.
(h) The Franchise Tax Board may prescribe any regulations that may
be necessary or appropriate to implement the provisions of this
section.
(g)
(i) This section shall remain in effect until December
1, 2002 2021 , and as of that date is
repealed. Any adjustments made pursuant to subdivision (c) shall
remain in effect for all subsequent taxable years.
SEC. 2. Section 25128 is added to the Revenue and Taxation Code,
to read:
25128. (a) Notwithstanding Section 38006, for taxable years
beginning on or after January 1, 2022, all business income shall be
apportioned to this state by multiplying the business income by a
fraction, the numerator of which is the property factor plus the
payroll factor plus twice the sales factor, and the denominator of
which is four, except as provided in subdivision (b) or (c).
(b) If an apportioning trade or business derives more than 50
percent of its "gross business receipts" from conducting one or more
qualified business activities, all business income of the
apportioning trade or business shall be apportioned to this state by
multiplying business income by a fraction, the numerator of which is
the property factor plus the payroll factor plus the sales factor,
and the denominator of which is three.
(c) For purposes of this section, a "qualified business activity"
means the following:
(1) An agricultural business activity.
(2) An extractive business activity.
(3) A savings and loan activity.
(4) A banking or financial business activity.
(d) For purposes of this section:
(1) "Gross business receipts" means gross receipts described
in subdivision (e) of Section 25120 (other than gross receipts from
sales or other transactions within an apportioning trade or business
between members of a group of corporations whose income and
apportionment factors are required to be included in a combined
report under Section 25101, limited, if applicable, by Section
25110), whether or not the receipts are excluded from the sales
factor by operation of Section 25137.
(2) "Agricultural business activity" means activities relating to
any stock, dairy, poultry, fruit, furbearing animal, or truck farm,
plantation, ranch, nursery, or range. "Agricultural business activity"
also includes activities relating to cultivating the soil or raising
or harvesting any agricultural or horticultural commodity,
including, but not limited to, the raising, shearing, feeding, caring
for, training, or management of animals on a farm as well as the
handling, drying, packing, grading, or storing on a farm any
agricultural or horticultural commodity in its unmanufactured state,
but only if the owner, tenant, or operator of the farm regularly
produces more than one-half of the commodity so treated.
(3) "Extractive business activity" means activities relating to
the production, refining, or processing of oil, natural gas, or
mineral ore.
(4) "Savings and loan activity" means any activities performed by
savings and loan associations or savings banks which have been
chartered by federal or state law.
(5) "Banking or financial business activity" means activities
attributable to dealings in money or moneyed capital in substantial
competition with the business of national banks.
(6) "Apportioning trade or business" means a distinct trade or
business whose business income is required to be apportioned under
Sections 25101 and 25120, limited, if applicable, by Section 25110,
using the same denominator for each of the applicable payroll,
property, and sales factors.
(7) Paragraph (4) of subdivision (c) shall apply only if the
Franchise Tax Board adopts the Proposed Multistate Tax Commission
Formula for the Uniform Apportionment of Net Income from Financial
Institutions, or its substantial equivalent, and shall become
operative upon the same operative date as the adopted formula.
(8) In any case where the income and apportionment factors of two
or more savings associations or corporations are required to be
included in a combined report under Section 25101, limited, if
applicable, by Section 25110, both of the following shall apply:
(A) The application of the more than 50 percent test of
subdivision (b) shall be made with respect to the "gross business
receipts" of the entire apportioning trade or business of the group.
(B) The entire business income of the group shall be apportioned
in accordance with either subdivision (a) or (b), as applicable.
(e) This action shall become operative on or after January 1,
2022.
SEC. 3. This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.
SEC. 4. It is the intent of the Legislature that Section 1 of this
act does not modify the sales factor, as defined in Section 25134 of
the Revenue and Taxation Code, used in any special apportionment
formulas contained in the regulations promulgated by the Franchise
Tax Board pursuant to Section 25137 of the Revenue and Taxation Code.