BILL ANALYSIS
AB 15 X3
Page 1
( Without Reference to File )
CONCURRENCE IN SENATE AMENDMENTS
AB 15 X3 (Krekorian)
As Amended February 14, 2009
Majority. Tax levy
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|ASSEMBLY: | |(January 12, |SENATE: | |February 14, |
| | |2009) | | |2009 |
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(vote not relevant) (vote not available)
Original Committee Reference: RLS.
SUMMARY : Enacts the fiscal stimulus revenue provisions of the
2009-10 Special Session Budget Agreement.
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Provide a temporary tax incentive to small businesses to hire
full-time employees. This bill, for taxable years beginning
on or after January 1, 2009, allows a qualified employer to
claim an income tax credit of $3,000 for each additional
full-time employee hired by the employer during the taxable
year. The credit will be subject to a cap, as explained below.
The amount of credit is prorated if the employee works fewer
than 12 months during the employer's tax year. The credit is
only available to a business that has 20 or fewer employees on
the first day of the taxable year. The credit is allowed only
if it is claimed by the employer on a timely filed original
return received by the Franchise Tax Board (FTB) on or before
any cut-off date established by the FTB. The cut-off date for
claiming the credit will be the last day of the calendar
quarter within which the FTB estimates that the aggregate
amount of credit claimed pursuant to this bill, under both the
Personal Income Tax and the Corporation Tax laws, will have
reached $400 million. The FTB is required to notify taxpayers
periodically by posting a notice on its website regarding the
amount of the credit claimed on returns received by the board.
Credits claimed prior to the cut-off date, that exceed the
qualified employer's tax liability in that year, may be
carried over to reduce the tax in the following eight taxable
years, if necessary.
AB 15 X3
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2)Allow most multi-state businesses to apportion income to
California using only their percentage of sales in California
as an alternative to using the current apportionment
methodology, which averages a business's proportion of sales,
property, and payroll in California (with the sales factor
double-weighted). This provision will be effective starting in
tax year 2011 and is permanent. Businesses that derive more
than 50% of their gross receipts from agriculture, extractive
business, savings and loans, or banks and financial activities
currently are limited to a single-weighted sales factor and
will continue to use three-factor apportionment. This measure
also includes provisions that the ability to apportion based
solely on the sales factor will reduce California taxes for
firms with significant employment and property in the state,
but most of whose sales are outside the state. The estimated
annual revenue loss will be approximately $700 million,
eventually growing to $1.5 billion. The measure also includes
the following provisions necessary to clarify and
appropriately apply apportionment of business income using
only sales:
a) Economic Nexus. Since sales is the easiest factor for
firms to manipulate for tax purposes (by choosing the
location of the transaction or setting up shell buyers, for
example). The bill amends Revenue and Taxation Code Section
23101 to clarify and specify that companies that operate in
the state or make sales in the state are doing business in
California and subject to California tax. The amendment
also includes de minimus exemptions. However, because of
federal law, nexus does not currently, and would not under
this measure, extend to companies whose only connection is
that they sell tangible property in the state;
b) Clarify the Term Gross Receipts. As used in the
calculation of the sales factor, this term will include all
gross amounts received for goods or services, or for use of
property to produce business income, but will explicitly
exclude purely financial corporate transactions (such as
corporate Treasury function or hedging transactions to
reduce the taxpayer's risk on its own operations);
c) Clarify Treatment of Unitary Groups. Requires the sales
factor to include all sales of a unitary group (the
Finnegan rule) and to include sales of the group that are
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not subject to apportionment to any other state (known as
the "throwback" rule). This prevents gaming by structuring
sales among related entities or manipulating the location
of sales to places without tax; and
d) Apportion Sales of Services Based on the Extent of
Benefit Provided in California. This provision provides
fair treatment of companies that provides accounting,
engineering, or any other services. Currently, the location
at which the service is performed is used in the
calculation of the sales factor. The measure also provides
similar treatment for sales of intangible property.
3)Establish a motion picture production tax credit. The measure
requires the California Film Commission (CFC) to administer a
motion picture production tax credit allocation and
certification program:
a) Qualifying taxpayers would claim the credit on their tax
return filed with the Franchise Tax Board (FTB) under
either the Personal Income Tax or Corporation Tax.
Taxpayers will first apply to the CFC for a credit
allocation, based on a projected project budget. Upon
receiving an allocation, the project must be completed
within 30 months. The taxpayer must then provide the CFC
with verification of completion and documentation of actual
qualifying expenditures. Based on that information, the
CFC will issue the taxpayer a credit certificate up to the
amount of the original allocation;
b) The tax credit is equal to 20% of the qualified
expenditures attributable to the production of a qualified
motion picture, or 25% of the qualified expenditures
attributable to the production of a television series that
relocated to California, or an independent film, which is
defined as a film with a budget between $1 million and $10
million produced by a non-publicly traded company which is
not more than 25% owned by publicly traded companies.
Qualified motion pictures must be produced for general
distribution to the public, and include feature films with
budgets between $1 million and $75 million; Movies of the
Week with a minimum budget of $500,000, and new television
series with a minimum production budget of $1 million. To
be eligible, 75% of the production days must take place
within California or 75% of the production budget is
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incurred for payment for services performed within the
state and the purchase or rental of property used within
the state. The credit would not be available for
commercial advertising, music videos, motion pictures for
noncommercial use, news and public events programs, talk
shows, game shows, reality programming, documentaries, and
pornographic films;
c) The bill specifies that the commission will allocate
$100 million of credit authorizations each year during the
period 2009-10 through 2013-14 on a first-come,
first-served basis, with 10% of the allocation reserved for
independent films. Any unallocated amounts and any
allocation amounts in excess of certified credits may be
carries over and reallocated by the commission; and,
d) Taxpayers may use certified credits in a number of ways.
They may claim it directly, they may assign it to another
member of their unitary group, they may sell the credits to
other taxpayers, or they may elect to apply the credit
against their sales and use tax liability.
4) Take immediate effect as a tax levy.
FISCAL EFFECT : As shown in the table below, this bill would
result in an estimated General Fund revenue loss of $2.5 billion
over the five-year period from 2008-09 through 2012-13, with
additional and growing losses in subsequent years.
Revenue Impact of SB 15 X3
(Millions of dollars)
---------------------------------------------------------
| Tax | Effective |2008-0|2009-1|2010-11|2011-12|2012-1|
|Provisio| Date |9 |0 | | |3 |
| n | | | | | | |
|--------+-----------+------+------+-------+-------+------|
|Elective|Permanent | $0| $0| -$50| -$650| -$750|
| single |beginning | | | | | |
|sales |in tax | | | | | |
| |year 2011 | | | | | |
|--------+-----------+------+------+-------+-------+------|
|Film |Allocated | | | -60| -175| -120|
|credit |2009-10 | | | | | |
AB 15 X3
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| |through | | | | | |
| |2013-14, | | | | | |
| |claimed | | | | | |
| |beginning | | | | | |
| |in 2011 | | | | | |
| |tax year | | | | | |
|--------+-----------+------+------+-------+-------+------|
|Hiring |Tax years | -15| -330| -50| -25| -15|
|credit |2009 and | | | | | |
| |2010 | | | | | |
|--------+-----------+------+------+-------+-------+------|
|Total | | -$15| -$330| -$160| -$850|-$885 |
| | | | | | | |
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To the extent that these tax provisions have positive effects on
employment and investment, a portion of these revenue losses may
be offset.
COMMENTS :
1)Small business jobs credit.
a) Existing state law provides four distinct programs
offering tax incentives to taxpayers that employ qualified
individuals within geographically targeted economic
development areas (Enterprise Zones, Local Agency Military
Base Recovery Areas, Manufacturing Enhancement Areas, and
Targeted Tax Areas). Specifically, state law provides
employers a hiring credit equal to 50% of qualified wages
in the first year of employment, 40% in the second year,
30% in the third year, 20% in the fourth year, and 10% in
the fifth year. Federal law, in turn, provides a "work
opportunity credit" for wages paid by employers who hire
from certain targeted groups of hard-to-employ individuals.
Generally, the federal credit is equal to 40% of the first
$6,000 in qualified wages paid to each member of a targeted
group during the first year of employment.
b) This measure creates a temporary tax credit of $3,000
for each new full-time job created by a business with 20 or
fewer employees. In this way, it differs significantly
from the state hiring credits described above. First, the
proposed credit is specifically limited to small businesses
(those with 20 or fewer employees). Second, the credit is
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available statewide and is not limited to employers located
in specific geographic regions. Third, the credit is not
contingent upon hiring employees from certain targeted
groups. Finally, the credit is specifically tied to net
job creation. Proponents of similar hiring credits argue
that the credits promote economic development by
encouraging businesses to hire. Opponents, on the other
hand, argue that these credits have little or no impact on
hiring decisions and simply provide a tax break for hiring
individuals that would be hired without the credit, while
failing to address the issue of job retention.
2)Business Income Apportionment. California may only tax a
portion of the income earned by businesses that also operate
in other states (or nations) in addition to California. That
amount is determined by an apportionment formula. California
currently uses a three-factor formula that is based on the
proportion of a company's sales, payroll, and property that is
located in California. For example, if one-third of a
company's sales, one-third of its payroll, and one-third of
its property are in California, then one-third of its total
earnings are subject to California Corporation Tax.
a) Double-Weighted Sales Factor. For most types of
businesses, the sales factor is double-weighted-given twice
the importance of the other two factors. For example,
assume that a company has 75% of its property and of its
payroll in California, but only makes 10% of its sales in
this state. Under equal weighting of the three factors,
53.3% of this company's income would be subject to
California tax, but the double-weighted sales factor
reduces this to 42.5%. Double-weighting of the sales
factor does not apply to businesses in agriculture,
extractive industries (e.g., oil and as producers), or
banks or other financial businesses.
b) Companies with substantial employment and facilities in
California, but which primarily sell their products
nationally or internationally argue that the current
apportionment method penalizes them for expanding in
California by increasing their California tax
apportionment, but rewards them for expanding outside the
state because doing so reduces their California property
and payroll factors without necessarily changing their
sales factor. In particular, California high-tech and
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biotech companies have made this argument. The argument has
gained weight as approximately 20 other states have
converted to using sales as the only apportionment factor
(called the "Single Sales Factor" approach).
c) This Bill Addresses the Issue by Establishing Sales as
the Sole Apportionment Factor (Single Sales Factor) for
California. The change would be effective starting with the
2011 tax year. This change will reduce taxes for companies
that have significant payroll and facilities in California,
but make the bulk of their sales outside the state.
Companies doing business only in California will see no
change in their taxes. Companies that have few employees or
facilities in California, but that make substantial sales
here will pay more tax. The overall impact will be a
revenue loss to the General Fund. Over time, proponents
would argue, this loss may be offset by additional revenue
from employment and property due to improved business
retention, expansion and location in the state. Around 20
states have now adopted single-sales-factor apportionment
(or something similar).
3)The motion picture production credit language includes a
provision that any reduction in the $100 million annual credit
authorization provided to the CFC shall be deemed a tax
increase under Article XIIIA of the California Constitution.
AS PASSED BY THE ASSEMBLY , this bill expressed the intent of the
Legislature to make statutory changes relating to the Budget Act
of 2008.
Analysis Prepared by: Daniel Rabovsky / BUDGET / (916) 319-2099
FN: 0000149