BILL NUMBER: AB 1178 AMENDED
BILL TEXT
AMENDED IN ASSEMBLY JANUARY 25, 2010
AMENDED IN ASSEMBLY JANUARY 13, 2010
AMENDED IN ASSEMBLY JANUARY 6, 2010
AMENDED IN ASSEMBLY JANUARY 4, 2010
INTRODUCED BY Assembly Member Block
( Coauthors: Assembly Members
Blumenfield, Nava, and Ruskin )
FEBRUARY 27, 2009
An act to amend, repeal, and add Section 25110 of, and to add
Section 6361.7 of to , the Revenue and
Taxation Code, relating to taxation, to take effect immediately, tax
levy.
LEGISLATIVE COUNSEL'S DIGEST
AB 1178, as amended, Block. Sales, use, and corporation taxes.
The Sales and Use Tax Law imposes a tax on retailers measured by
the gross receipts from the sale of tangible personal property sold
at retail in this state, or on the storage, use, or other consumption
in this state of tangible personal property purchased from a
retailer for storage, use, or other consumption in this state. That
law provides various exemptions from those taxes.
This bill would provide a partial exemption from those taxes, on
and after July 1, 2011, and before January 1, 2015, for the sale of,
and the storage, use, or other consumption of, textbooks and
supplies, as defined, purchased by a student enrolled in an
institution of higher education, as defined to mean the University of
California, the California State University, or a California
community college.
The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes
counties and cities to impose local sales and use taxes in conformity
with the Sales and Use Tax Law, and existing law further authorizes
various local governmental entities to levy transactions and use
taxes in accordance with the procedures and requirements of the
Transactions and Use Tax Law.
Exemptions from state sales and use taxes are incorporated in
these laws. Section 2230 of the Revenue and Taxation Code provides
that the state will reimburse counties and cities for revenue losses
caused by the enactment of sales and use tax exemptions.
This bill would specify that this exemption does not apply to
local sales and use taxes, transactions and use taxes, and specified
state sales and use taxes.
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 apportionment formula based on the
property, payroll, and sales within and without this state, except as
otherwise provided. That law allows corporations to elect whether
their income is determined on a water's-edge basis or on a worldwide
unitary basis. In general, a corporation that makes a water's-edge
election is subject to tax on income only from sources within the
United States but is required to take into account the income and
apportionment factors of certain specified affiliated entities.
This bill would expand the list of specified affiliated entities
for taxable years beginning on or after July 1, 2011, and before July
1, 2014, to include a corporation that is incorporated,
headquartered, or located in a country that is a tax haven, as
defined, and would make related legislative findings and
declarations.
This bill would also require the Legislative Analyst, in
consultation with the Franchise Tax Board, to conduct a study
regarding the jurisdictions identified as tax havens and to report to
the Legislature, no later than January 1, 2012, as to whether the
definition of the term "tax haven" should be revised.
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. (a) The Legislature finds and declares all of the
following:
(1) The sheltering of income in offshore tax haven countries has
been a major means of tax avoidance for multinational corporations.
(2) In many cases the sheltering occurs because income that should
be properly attributed to activities in the United States is being
attributed to those tax haven countries.
(3) The water's-edge election provisions enacted by California
addressed these concerns by requiring that some foreign incorporated
entities be included within a corporate taxpayer's water's-edge
combined report. However, additional strategies have been developed
by multinational corporations to assign income to foreign
incorporated entities that perform limited economic activity in those
countries and are not included within the water's-edge combined
report.
(b) It is the intent of the Legislature, therefore, in amending
Section 25110 of the Revenue and Taxation Code by this act, to
further limit the ability of multinational corporations to use tax
haven countries to exclude income from the water's-edge combined
report as a means of domestic tax avoidance, to the extent that such
income is not derived from, or attributable to, substantial
economic presence or significant economic activity the
active conduct of a trade or business in the tax haven
country.
(c) In granting regulatory authority to the Franchise Tax Board
with regard to a determination of whether a corporation has
established a substantial economic presence or conducts
significant economic activity the active conduct of a
trade or business in a tax haven country, the Legislature
intends that the Franchise Tax Board examine whether economic
factors, including payroll and property, are located in the tax haven
in a manner proportionate to the income attributable to the tax
haven.
SEC. 2. Section 6361.7 is added to the Revenue and Taxation Code,
to read:
6361.7. (a) On and after July 1, 2011, and before January 1,
2015, there are exempted from the taxes imposed by this part, the
gross receipts from the sale in this state of, and the storage, use,
or other consumption in this state of, textbooks or supplies that are
purchased by a student enrolled in an institution of higher
education, and the textbooks or supplies are recommended or required
for a course in which the student is enrolled.
(b) For purposes of this section, the following definitions apply:
(1) "Institution of higher education" means the University of
California, the California State University, or a California
community college.
(2) "Supplies" means pens, paper, blue books, notebooks, art
supplies, uniforms, safety equipment, tools, computer paper, and
flashdrives necessary for the course of study in which a student is
enrolled at the institution of higher education. Supplies shall not
include computers, printers, or related hardware and software.
(3) "Textbooks" means any published material that is principally
designed for use by a student at an institution of higher education
as a source of instructional material and includes, but is not
limited to, any book or edition of a book that is directed or
recommended by an instructor at an institution of higher education to
a student to purchase for use as a basis for a course of study in
which that student is enrolled at that institution.
(c) (1) (A) Notwithstanding subdivision (a), on and after July 1,
2011, and before July 1, 2012, the exemption provided by this section
shall not apply with respect to any tax levied pursuant to Section
6051.2, 6051.5, 6201.2, or 6201.5, pursuant to Section 35 of Article
XIII of the California Constitution, or with respect to that portion
of the tax levied at a rate of 2 percent pursuant to Section 6051 or
6201.
(B) Notwithstanding subdivision (a), on and after July 1, 2012,
the exemption provided by this section shall not apply with respect
to any tax levied pursuant to Section 6051.2, 6051.5, 6201.2, or
6201.5, or pursuant to Section 35 of Article XIII of the California
Constitution.
(2) Notwithstanding any provision of the Bradley-Burns Uniform
Local Sales and Use Tax Law (Part 1.5 (commencing with Section 7200))
or the Transactions and Use Tax Law (Part 1.6 (commencing with
Section 7251)), the exemption established by this section shall not
apply with respect to any tax levied by a county, city, or district
pursuant to, or in accordance with, either of those laws.
SEC. 3. Section 25110 of the Revenue and Taxation Code, as added
by Section 2 of Chapter 22 of the Statutes of 2006, is amended to
read:
25110. (a) Notwithstanding Section 25101, a qualified taxpayer,
as defined in paragraph (2) of subdivision (b), that is subject to
the tax imposed under this part, may elect to determine its income
derived from or attributable to sources within this state pursuant to
a water's-edge election in accordance with the provisions of this
part, as modified by this article. A taxpayer, that makes a water'
s-edge election on or after January 1, 2006, shall take into account
that portion of its own income and apportionment factors and the
income and apportionment factors of its affiliated entities to the
extent provided below:
(1) The entire income and apportionment factors of any of the
following corporations:
(A) Domestic international sales corporations, as described in
Sections 991 to 994, inclusive, of the Internal Revenue Code and
foreign sales corporations as described in Sections 921 to 927,
inclusive, of the Internal Revenue Code.
(B) Any corporation (other than a bank), regardless of the place
where it is incorporated if the average of its property, payroll, and
sales factors within the United States is 20 percent or more.
(C) Corporations that are incorporated in the United States,
excluding corporations making an election pursuant to Sections 931 to
936, inclusive, of the Internal Revenue Code.
(D) Export trade corporations, as described in Sections 970 to
972, inclusive, of the Internal Revenue Code.
(E) (i) Subject to clause (ii), for taxable years beginning on or
after July 1, 2011, and before July 1, 2014, any corporation that,
for any portion of the taxable year, was doing business in, or had
income derived from or attributable to, a tax haven. For purposes of
this subparagraph, "doing business in a tax haven" means
in" or "doing business within" means being
engaged in activity that is sufficient for a tax haven
jurisdiction to impose a tax under United States
constitutional standards.
(ii) If the application of clause (i) would result in the
inclusion of the income and apportionment factors of a corporation
engaged in the active conduct of trade or business, within the
meaning of Section 367(a)(3)(A) of the Internal Revenue Code and the
regulations thereunder, in a tax haven, the taxpayer may petition the
Franchise Tax Board to treat the corporation as not doing business
within, or having income derived from or attributable to, the tax
haven. The procedure to petition as described in this clause
shall be developed in a form and manner determined by the Franchise
Tax Broad and in accordance with Section 25137. The determination of
the Franchise Tax Board may be appealed to the State Board of
Equalization in the form and manner described in Article 3
(commencing with Section 19031) of Chapter 4 of Part 10.2.
(iii) The Franchise Tax Board shall prescribe any regulations that
may be necessary or appropriate to carry out the purposes of the
amendments made to this section by the act adding this clause,
including regulations prescribing the extent to which an activity in,
or income derived from or attributable to, a tax haven will be
presumed to be from the active conduct of a trade or business in the
tax haven, and the extent to which income will be presumed to be not
derived from or attributable to a tax haven.
(2) (A) With respect to a corporation that is not described in
subparagraphs (A), (B), (C), (D), and (E) of paragraph (1), as
provided in either one or both of the following clauses:
(i) The income and apportionment factors of that corporation to
the extent of its income derived from or attributable to sources
within the United States and its factors assignable to a location
within the United States in accordance with paragraph (3) of
subdivision (b). Income of that corporation derived from or
attributable to sources within the United States as determined by
federal income tax laws shall be limited to, and determined from, the
books of account maintained by the corporation with respect to its
activities conducted within the United States.
(ii) The income and apportionment factors of that corporation that
is a "controlled foreign corporation," as defined in Section 957 of
the Internal Revenue Code, to the extent determined by multiplying
the income and apportionment factors of that corporation without
application of this subparagraph by a fraction not to exceed one, the
numerator of which is the "Subpart F income" of that corporation for
that taxable year and the denominator of which is the "earnings and
profits" of that corporation for that taxable year.
(B) For purposes of this paragraph, both of the following apply:
(i) "Subpart F income" means "Subpart F income" as defined in
Section 952 of the Internal Revenue Code.
(ii) "Earnings and profits" means "earnings and profits" as
described in Section 964 of the Internal Revenue Code.
(3) The income and apportionment factors of the corporations
described in this subdivision shall be taken into account only to the
extent that they would have been taken into account had no election
under this section been made.
(4) The Franchise Tax Board shall prescribe regulations to
coordinate implementation of subparagraph (A) of paragraph (2) to
prevent multiple inclusion or exclusion of income and factors in
situations where the same item of income is described in both
clauses.
(b) For purposes of this article and Section 24411, all of the
following definitions apply:
(1) An "affiliated corporation" means a corporation that is a
member of a commonly controlled group as defined in Section 25105.
(2) A "qualified taxpayer" means a corporation that does both of
the following:
(A) Files with the state tax return, on which the water's-edge
election is made, a consent to the taking of depositions, at the time
and place most reasonably convenient to all parties, from key
domestic corporate individuals and to the acceptance of subpoenas
duces tecum requiring reasonable production of documents to the
Franchise Tax Board, as provided in Section 19504, by the State Board
of Equalization, as provided in Section 5005 of Title 18 of the
California Code of Regulations, or by the courts of this state, as
provided in Chapter 2 (commencing with Section 1985) of Title 3 of
Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title
4 of Part 4 of, the Code of Civil Procedure. The consent relates to
issues of jurisdiction and service and does not waive any defenses
that a taxpayer may otherwise have. The consent shall remain in
effect as long as the water's-edge election is in effect, and shall
be limited to providing that information necessary to review or
adjust income or deductions in a manner authorized by Section 482,
861, Subpart F of Part III of Subchapter N, or similar provisions, of
the Internal Revenue Code, together with the regulations adopted
pursuant to those provisions, and for the conduct of an investigation
with respect to any unitary business in which the taxpayer may be
involved.
(B) Agrees that, for purposes of this article, dividends received
by any corporation whose income and apportionment factors are taken
into account pursuant to subdivision (a) from either of the following
are functionally related dividends and shall be presumed to be
business income:
(i) A corporation of which more than 50 percent of the voting
stock is owned, directly or indirectly, by members of the unitary
group and which is engaged in the same general line of business.
(ii) Any corporation that is either a significant source of supply
for the unitary business or a significant purchaser of the output of
the unitary business, or that sells a significant part of its output
or obtains a significant part of its raw materials or input from the
unitary business. "Significant," as used in this subparagraph, means
an amount of 15 percent or more of either input or output.
All other dividends shall be classified as business or nonbusiness
income without regard to this subparagraph.
(3) The definitions and locations of property, payroll, and sales
shall be determined under the laws and regulations that set forth the
apportionment formulas used by the individual states to assign net
income subject to taxes on, or measured by, net income in that state.
If a state does not impose a tax on, or measured by, net income or
does not have laws or regulations with respect to the assignment of
property, payroll, and sales, the laws and regulations provided in
Article 2 (commencing with Section 25120) shall apply.
Sales shall be considered to be made to a state only if the
corporation making the sale may otherwise be subject to a tax on, or
measured by, net income under the Constitution or laws of the United
States, and shall not include sales made to a corporation whose
income and apportionment factors are taken into account pursuant to
subdivision (a) in determining the amount of income of the taxpayer
derived from or attributable to sources within this state.
(4) "The United States" means the 50 states of the United States
and the District of Columbia.
(5) (A) For purposes of this section, a "tax haven" means any
jurisdictions identified in Table 1 of Appendix I to the December
2008 Report of the United States Government Accountability Office on
International Taxation (GAO-09-157) as a jurisdiction
for which a United States District Court order granted
leave for the federal Internal Revenue Service to serve a "John Doe"
summons.
(B) An additional jurisdiction shall be considered a "tax haven"
for purposes of this section if the Secretary of the Treasury of the
United States issues notice after January 1, 2011, declaring that the
jurisdiction is recognized as a tax haven by the United States. A
jurisdiction shall not be considered a "tax haven" for purposes of
this section if the Secretary of the Treasury of the United States
issues notice after January 1, 2011, declaring the jurisdiction is no
longer recognized as a tax haven by the United States.
(B)
(C) The Franchise Tax Board shall annually
issue a notice identifying the jurisdictions that are tax havens for
purposes of this section for that tax year .
(C) The Legislative Analyst, in consultation with the Franchise
Tax Board, shall conduct a study regarding the jurisdictions
identified in subparagraph (A) as tax havens and shall report to the
Legislature, no later than January 1, 2012, as to whether the
definition of the term "tax haven" should be revised.
(c) All references in this part to income determined pursuant to
Section 25101 shall also mean income determined pursuant to this
section.
(d) This section shall remain in effect only until June 1, 2015,
and as of that date is repealed.
SEC. 4. Section 25110 is added to the Revenue and Taxation Code,
to read:
25110. (a) Notwithstanding Section 25101, a qualified taxpayer,
as defined in paragraph (2) of subdivision (b), that is subject to
the tax imposed under this part, may elect to determine its income
derived from or attributable to sources within this state pursuant to
a water's-edge election in accordance with the provisions of this
part, as modified by this article. A taxpayer that makes a water'
s-edge election on or after January 1, 2006, shall take into account
that portion of its own income and apportionment factors and the
income and apportionment factors of its affiliated entities to the
extent provided below:
(1) The entire income and apportionment factors of any of the
following corporations:
(A) Domestic international sales corporations, as described in
Sections 991 to 994, inclusive, of the Internal Revenue Code and
foreign sales corporations as described in Sections 921 to 927,
inclusive, of the Internal Revenue Code.
(B) Any corporation (other than a bank), regardless of the place
where it is incorporated if the average of its property, payroll, and
sales factors within the United States is 20 percent or more.
(C) Corporations that are incorporated in the United States,
excluding corporations making an election pursuant to Sections 931 to
936, inclusive, of the Internal Revenue Code.
(D) Export trade corporations, as described in Sections 970 to
972, inclusive, of the Internal Revenue Code.
(2) (A) With respect to a corporation that is not described in
subparagraphs (A), (B), (C), and (D) of paragraph (1), as provided in
either one or both of the following clauses:
(i) The income and apportionment factors of that corporation to
the extent of its income derived from or attributable to sources
within the United States and its factors assignable to a location
within the United States in accordance with paragraph (3) of
subdivision (b). Income of that corporation derived from or
attributable to sources within the United States as determined by
federal income tax laws shall be limited to, and determined from, the
books of account maintained by the corporation with respect to its
activities conducted within the United States.
(ii) The income and apportionment factors of that corporation that
is a "controlled foreign corporation," as defined in Section 957 of
the Internal Revenue Code, to the extent determined by multiplying
the income and apportionment factors of that corporation without
application of this subparagraph by a fraction not to exceed one, the
numerator of which is the "Subpart F income" of that corporation for
that taxable year and the denominator of which is the "earnings and
profits" of that corporation for that taxable year.
(B) For purposes of this paragraph, both of the following apply:
(i) "Subpart F income" means "Subpart F income" as defined in
Section 952 of the Internal Revenue Code.
(ii) "Earnings and profits" means "earnings and profits" as
described in Section 964 of the Internal Revenue Code.
(3) The income and apportionment factors of the corporations
described in this subdivision shall be taken into account only to the
extent that they would have been taken into account had no election
under this section been made.
(4) The Franchise Tax Board shall prescribe regulations to
coordinate implementation of subparagraph (A) of paragraph (2) to
prevent multiple inclusion or exclusion of income and factors in
situations where the same item of income is described in clauses.
(b) For purposes of this article and Section 24411, all of the
following definitions apply:
(1) An "affiliated corporation" means a corporation that is a
member of a commonly controlled group as defined in Section 25105.
(2) A "qualified taxpayer" means a corporation that does both of
the following:
(A) Files with the state tax return, on which the water's-edge
election is made, a consent to the taking of depositions, at the time
and place most reasonably convenient to all parties, from key
domestic corporate individuals and to the acceptance of subpoenas
duces tecum requiring reasonable production of documents to the
Franchise Tax Board, as provided in Section 19504, by the State Board
of Equalization, as provided in Section 5005 of Title 18 of the
California Code of Regulations, or by the courts of this state, as
provided in Chapter 2 (commencing with Section 1985) of Title 3 of
Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title
4 of Part 4 of, the Code of Civil Procedure. The consent relates to
issues of jurisdiction and service and does not waive any defenses
that a taxpayer may otherwise have. The consent shall remain in
effect as long as the water's-edge election is in effect, and shall
be limited to providing that information necessary to review or
adjust income or deductions in a manner authorized by Section 482,
861, Subpart F of Part III of Subchapter N, or similar provisions, of
the Internal Revenue Code, together with the regulations adopted
pursuant to those provisions, and for the conduct of an investigation
with respect to any unitary business in which the taxpayer may be
involved.
(B) Agrees that, for purposes of this article, dividends received
by any corporation whose income and apportionment factors are taken
into account pursuant to subdivision (a) from either of the following
are functionally related dividends and shall be presumed to be
business income:
(i) A corporation of which more than 50 percent of the voting
stock is owned, directly or indirectly, by members of the unitary
group and which is engaged in the same general line of business.
(ii) Any corporation that is either a significant source of supply
for the unitary business or a significant purchaser of the output of
the unitary business, or that sells a significant part of its output
or obtains a significant part of its raw materials or input from the
unitary business. "Significant," as used in this subparagraph, means
an amount of 15 percent or more of either input or output.
All other dividends shall be classified as business or nonbusiness
income without regard to this subparagraph.
(3) The definitions and locations of property, payroll, and sales
shall be determined under the laws and regulations that set forth the
apportionment formulas used by the individual states to assign net
income subject to taxes on, or measured by, net income in that state.
If a state does not impose a tax on, or measured by, net income or
does not have laws or regulations with respect to the assignment of
property, payroll, and sales, the laws and regulations provided in
Article 2 (commencing with Section 25120) shall apply.
Sales shall be considered to be made to a state only if the
corporation making the sale may otherwise be subject to a tax on, or
measured by, net income under the Constitution or laws of the United
States, and shall not include sales made to a corporation whose
income and apportionment factors are taken into account pursuant to
subdivision (a) in determining the amount of income of the taxpayer
derived from or attributable to sources within this state.
(4) "The United States" means the 50 states of the United States
and the District of Columbia.
(c) All references in this part to income determined pursuant to
Section 25101 shall also mean income determined pursuant to this
section.
(d) This section shall become operative on July 1, 2014, and apply
to taxable years beginning on or after July 1, 2014.
SEC. 5. This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.