BILL ANALYSIS
AB 1591
Page 1
Date of Hearing: June 11, 2007
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles Calderon, Chair
AB 1591 (Ma) - As Amended: June 7, 2007
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Corporation tax: Income allocation and apportionment
SUMMARY : Allows a corporation that is a member of an
apportioning group, on behalf of the apportioning trade or
business, or a subgroup, thereof, to elect an alternative
apportionment formula. Specifically, this bill :
1)Provides an elective, alternative allocation formula for a
member of an apportioning trade or business, or subgroup, by
using one of the two following methods:
a) Allows an electing taxpayer to include an additional
sales factor in the apportionment formula for every $250
million of qualified expenditures made on or after January
1, 2007. Specifically , this bill:
i) Defines "qualified expenditures", in whole or in
part, to include all of the following:
(1) Capital expenditures for real and tangible
personal property located in California;
(2) Expenses incurred to acquire, develop, or
license intellectual property in California;
(3) Research and development expenses incurred in
California;
(4) Expenses incurred to develop, enhance, or
maintain real property and tangible personal property
located in California;
(5) Capitalized rent paid in California in excess
of the prior year;
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(6) Compensation and benefits paid to employees in
California in excess of the prior year;
(7) Payments to independent contractors and
payroll companies for work performed in California in
excess of the prior year;
(8) Training costs incurred in California;
(9) Costs incurred in providing a basic level of
health care to employees in California, as defined in
the Knox-Keene Act, in excess of the prior year; and
(10) Expenditures incurred in connection with
funding research at a four-year public or private
college or university located in California.
(11) "Qualified expenditures" specifically does not
include amounts paid to acquire stock or other equity
interests in a corporation or other business entity.
ii) Requires the electing taxpayer to submit and certify
a summary of the qualified expenditures with each tax
return filed with the Franchise Tax Board (FTB).
b) Allows an electing taxpayer to adjust the payroll and
property factors for new investment as follows:
i) Excludes the value of real and tangible personal
property acquired or rented by the taxpayer on or after
January 1, 2007, to the extent it exceeds the value of
real and tangible personal property owned or rented and
used in California in the base year and otherwise
includable in the computation of the property factor,
from the numerator of the property factor. Specifically:
(1) Defines "value of real and tangible personal
property" as the value of owned and rented property
described in Revenue and Taxation Code (R&TC) Section
25130.
(2) Provides that the disposition of real and
tangible personal property acquired or rented in
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California within one year shall cause the value of
the property to be included in the numerator in the
taxpayer's property factor. Specifically:
(3) Applies until the election for the alternate
valuation is terminated.
ii) Excludes the amount of compensation paid in
California in a taxable year that is in excess of the
compensation paid in the base year and otherwise included
in the computation of the payroll factor, from the
numerator of the payroll factor.
(1) Defines "amount of compensation" as
compensation described in R&TC Section 25132.
(2) Excludes from "compensation in the base year"
any extraordinary events such as deferred compensation
payouts or stock option exercises.
iii) Defines "base year" as the year immediately
preceding the year of election.
iv) Requires an electing taxpayer to submit and certify
a summary of the new investment with each tax return
filed with FTB.
c) Provides that sales or other transactions between
members of an apportioning trade or business shall not be
considered a qualified investment or new investment made in
California.
2)Allows a taxpayer to elect to adjust the apportionment factor
fractions consistent with:
a) The election is made by a statement on an original
timely-filed return that identifies the apportioning trade
or business, or subgroup, that will be required to submit
and certify the information to FTB.
b) The election may be terminated without the consent of
FTB after it has been in effect for at least 84 months.
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The termination is 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 lapses by the taxpayer, with the permission of FTB,
or by FTB, if the taxpayer fails to submit a required
certification signed by an officer.
d) The election remains in effect until terminated.
e) An election under this subdivision shall not be
construed to terminate the water's edge election made by a
taxpayer pursuant to R&TC Section 25113 and shall not be
construed to allow any change in, or adjustment to, that
election.
f) FTB may prescribe any regulations that may be necessary
to implement the provisions of this subdivision.
3)Contains a severability clause, thereby providing if any
provision or its application is held invalid, it will not
affect other provisions that can be given effect without the
invalid provision or application.
4)Applies to taxable years beginning on or after January 1,
2007.
5)Takes effect immediately as a tax levy.
6)States legislative intent that this bill does not modify the
sales factor used in any special apportionment formulas set
forth in FTB regulations promulgated to address the issue of
distortion.
EXISTING LAW uses an apportionment formula to determine the
amount of the business income of a corporation that is
attributable to California. The apportionment formula is an
average of the payroll, property and sales factors. The payroll
factor is a fraction, the numerator of which is payroll in
California and the denominator of which is total payroll
everywhere. The property factor is a fraction, the numerator of
which is tangible property owned or rented in California and the
denominator of which is total tangible property owned or rented
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everywhere. The sales factor is a fraction, the numerator of
which is sales in California and the denominator of which is
total sales everywhere.
Most corporations apportion income to California using a
four-factor formula consisting of one payroll factor, one
property factor, and a double-weighted sales factor. Certain
corporations are required to use a three-factor formula
consisting of one payroll factor, one property factor and one
sales factor.
FISCAL EFFECT : FTB estimates that this bill will result in
revenue losses of $550 million in fiscal year (FY) 2007-08, $1.3
billion in FY 2008-09 and $1.95 billion in FY 2009-10.
Proposition 98 Fiscal Effect : Under the current baseline Budget
forecast for FY 2007-08, committee staff estimate a loss in
funding for K-14 schools of $297 million in FY 2007-08, $-0-in
FY 2008-09, and $30 million in FY 2009-10.
COMMENTS :
1)The author states, "The competitive dynamics among states are
shifting" and notes that the California tax code penalizes
in-state investment, thus encouraging out-of-state investment
as other states alter their tax strategies to obtain
technology leadership and job growth. According to
Assemblymember Ma, "AB 1591 is a responsible step toward
leveling the playing field for CA", and makes California more
competitive with other states for pending growth and expansion
of California companies.
2)Proponents state that AB 1591 will provide an incentive to
create new jobs, locate facilities and make capital
investments in California through either of the following two
methods: a) By removing the disincentive of increased payroll
and property factors that normally result from such
investment; or b) By rewarding significant investment in
California (at least $250 million) with an additional sales
factor in the apportionment formula. Proponents state that AB
1591 rewards taxpayers' investment in California rather than
changing to a single sales factor for every apportioning trade
or business. As AB 1591 moves toward leveling the playing
field for companies that would like to expand in California,
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it rewards only those companies that actually invest in
California. Proponents state that California is losing
competitive advantage as more states move towards use of
either a single sales factor or hyper-weighted sales factor to
apportion income to California. Proponents state that AB 1591
might encourage out-of-state taxpayers or multistate companies
to relocate to California.
3)Opponents state that AB 1591 provides elective alternatives
for apportionment of income, which leads to manipulation and
abuse of the system with little in the way of commensurate
benefits to the state. Opponents state this violates the
principles of treating taxpayers with an even-handed approach.
Opponents state that this bill might create an incentive for
companies wholly within California to move outside of this
state for new investment in order to take advantage of reduced
apportionment factors. Opponents state that inclusion of real
estate companies, which are driven entirely by location, would
permit them to exclude their property factor and lower their
tax burden without any change in behavior. Opponents state
concerns with specific elements of this bill; for example -
rewarding incremental payroll expenditures without requiring
creation of additional jobs; or - including increased payments
to independent contractors which might result from laying off
employees and having their work performed by independent
contractors; or - including all of routine expenses such as
maintenance and training costs. Opponents question the
benefit of providing taxpayers with a complex menu of choices,
with complex accounting procedures, in order to minimize tax
liability.
4)Committee staff note various unresolved issues including:
a) Failure to identify a maximum number of subgroups that
may be formed within each apportioning trade or business.
b) Silence whether an electing subgroup must qualify as a
unitary group standing alone or, if not, any requirements
regarding members of a unitary group that might form a
subgroup.
c) Uncertain impact on factors following the close of the
84-month election period, whether or not the election
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continues in effect. Does the taxpayer, or subgroup, that
elected to increase the number of sales factors return to
the standard apportionment factors? What happens if the
electing taxpayer, or subgroup, switches between the two
alternatives?
d) Lack of a sunset date for this bill; a term longer than
that for the general tax incentives (five to seven years)
should be considered to enable businesses to introduce the
new alternative apportionment provisions into their
business plans. Also, in order to evaluate the
effectiveness of this bill, there should be reports
provided to the Legislature describing the amount of
investment in California claimed by taxpayers under both
alternatives provided in this bill.
5)Committee staff note technical and implementation concerns
that include the following:
a) Definition of the term "qualified expenditures" includes
the phrase "in whole or in part" that brings into question
whether the enumerated items constitute the entire list of
expenditures that qualify for inclusion in the aggregate
investment in California for purposes of increasing the
number of sales factors used in the apportionment formula.
b) Language used to describe excluded items from the
property factor creates an effect only for acquisitions or
investments made once the value of cumulative investment
made after the election exceeds the value of the property
owned or used by the electing taxpayer, or subgroup, prior
to the election.
c) This bill requires the numerator of the property factor
to be increased for property that initially was excluded
from the numerator if that property is disposed of within
one year of acquisition. It is unclear whether this
requires the taxpayer to file an amended return for the
preceding year (when the property had been excluded from
the numerator) or to increase the numerator for the current
year. Further, use of the term "disposed of" may be
interpreted to limit the application.
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d) The "compensation" included in qualified expenditures or
excluded from the numerator payroll factor refers to
compensation paid in this state rather than paid for
services rendered in this state.
e) This bill takes immediate effect as a tax levy and
applies as of January 1, 2007. However, additional
guidance is likely to be needed from FTB for purposes of
election, reporting, etc., so the author may consider
making the effective date January 1, 2008.
6)Committee staff note policy considerations including the
following:
a) The definition of qualified expenditures includes
expenses in the nature of maintenance rather than new
investment, or growth, in California. Some listed items
include only the incremental investment over the prior
year's expenditures, while other categories include every
dollar expended during the current year. Because the
author's goal is to stimulate investment and new jobs in
California, she may consider revising the items listed as
qualified expenditures to include only those related to a
growth in number of jobs or additional capital investment.
b) Allowance of elections for a subgroup of an apportioning
trade or business rather than requiring the apportioning
trade or business to be treated as one. It is unclear if
the election by a subgroup or subgroups will create two or
more apportioning trades or businesses. Further, the
manner by which the income would be split between the
electing subgroup or subgroups and the remainder of the
apportioning group is not set forth. Specific methods have
been suggested, but none is reflected in this bill.
c) Ability for members of an electing subgroup to change
during the period for which the election is in effect. If
this will be permitted, the author may consider amendments
that require new members to restate their apportionment
factors as if they had been members from the election date.
Also, the language is silent regarding the impact of new
members added to a unitary group.
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d) This bill provides that the term "qualified
expenditures" does not include amounts paid to acquire
stock or equity interests, and does not address deemed
asset acquisitions that occur in the form of stock
purchases or tax-free acquisitions property.
e) Some items listed as qualified expenditures also qualify
for other targeted tax benefits. It is unclear if the
author wants to make an expenditure available for only one
tax incentive, or permit the expenditure to qualify for
more than one (examples are expenditures that qualify for
the research credit, or expenditures that are afforded
targeted tax benefits because they are made in an
enterprise zone). The author may consider amendments that
require a taxpayer to irrevocably elect to use the
expenditure for one purpose or the other.
7)Committee staff note the elective nature of this bill ensures
taxpayers will only opt in when it is beneficial to them.
Consequently, the factors will continually increase the
erosion of the percentage of income apportioned to California.
Notwithstanding these observations, committee staff also
note that there is a direct correlation between investment in
California and the reduced income allocation percentages.
This bill will either allow investment in California to
increase the weight of the sales factor or treat investment in
California, for purposes of the payroll and property
apportionment factors, as if it had occurred outside of
California
REGISTERED SUPPORT / OPPOSITION :
Support
AeA
Apple, Inc.
BayBio
BIOCOM
BioMarin Pharmaceutical Inc.
California Chamber of Commerce
California Healthcare Institute
California State Association of Electrical Workers
California Taxpayers' Association
Chevron
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Cisco Systems, Inc.
Coalition of Utility Employees
Elevator Constructors Union
Genentech, Inc.
Health Net
Intel Corporation
Johnson & Johnson
Motion Picture Association of America, Inc.
Novartis Pharmaceuticals
Nuvelo, Inc.
Paramount Pictures
Prospect Venture Partners
Roche Palo Alto LLC
Sagamore Bioventures Fund Management, LLC
Solectron
Symantec
TechNet
The California State Pipe Trades Council
The Walt Disney Company
Warner Bros. Entertainment Inc.
Western States Council of Sheet Metal Workers
Opposition
California Tax Reform Association
Analysis Prepared by : Kimberly Bott / REV. & TAX. / (916)
319-2098