BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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                                 THIRD READING


          Bill No:  AB 2671
          Author:   Cook (R), et al
          Amended:  7/15/10 in Senate
          Vote:     21

           
           SENATE REVENUE & TAXATION COMMITTEE :  3-0, 6/23/10
          AYES:  Wolk, Alquist, Padilla
          NO VOTE RECORDED:  Walters, Ashburn
           
          SENATE APPROPRIATIONS COMMITTEE  :  11-0, 8/12/10
          AYES:  Kehoe, Ashburn, Alquist, Corbett, Emmerson, Leno,  
            Price, Walters, Wolk, Wyland, Yee
           
          ASSEMBLY FLOOR  :  72-0, 5/20/10 (Consent) - See last page  
            for vote


           SUBJECT  :    Corporation taxes:  minimum franchise tax:   
          Armed Forces

           SOURCE  :     Author


           DIGEST  :    This bill exempts, until taxable years beginning  
          on or after January 1, 2018, a corporation and a limited  
          liability company that are small businesses solely owned by  
          a deployed member of the United States Armed Forces, as  
          specified, from paying the minimum franchise tax, or the  
          annual tax, for the privilege of doing business in this  
          state if the corporation ceases operation or operates at a  
          loss, as defined.
           
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           ANALYSIS  :    Corporations and limited liability companies  
          (LLCs) must annually pay to the state a minimum franchise  
          tax of $800.  This liability exists regardless of whether  
          the corporation is earning income.  Businesses  
          incorporating after January 1, 2000 are not subject to the  
          minimum franchise tax for their first taxable year. 

          This bill exempts corporations and LLCs that are small  
          businesses solely owned by a deployed member of the United  
          States Armed Forces from the minimum franchise tax and the  
          annual LLC tax, respectively, if the corporation or LLC  
          ceases operation or operates at a loss.  This bill requires  
          the Franchise Tax Board (FTB) to promulgate regulations to  
          provide for a definition of "ceases operation" for purposes  
          of this bill.  

          This bill provides the following definitions:

           "Deployed" means being called to active duty or active  
            service during a period when a Presidential Executive  
            order specifies that the United Sates in engaged in  
            combat or homeland defense.  "Deployed" does not include  
            temporary duty for the sole purpose of training or  
            processing or a permanent change of station.

           "Operates at a loss" means negative net income as defined  
            in Section 24341 of the Revenue and Taxation Code.

           "Small business" means a corporation or LLC with total  
            income of $250,000 or less.

           Background  

          The minimum franchise tax was enacted to ensure that all  
          corporations pay at least a minimum amount of franchise tax  
          for the privilege of doing business in this state,  
          regardless of the corporation's income or loss.  Thus, the  
          minimum franchise tax is not technically an "income tax",  
          but rather it is a tax on the right to exercise the powers  
          granted to a corporation doing business in California.   
          Even when a corporation earns no income, it still receives  
          the benefits of its corporate status, including the limited  
          liability protection under the laws of this state. 








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          California's minimum tax was increased from $100 to $200 in  
          1972.  It was increased to $300 in 1987, to $600 in 1989,  
          and to $800 in 1990.  Limited exceptions exist with respect  
          to imposition of the minimum franchise tax.  For instance,  
          credit unions and nonprofit organizations are not subject  
          to the minimum franchise tax and a corporation is not  
          subject to the minimum franchise tax for its first taxable  
          year.  However, even though a corporation is not subject to  
          the minimum tax in its first taxable year, it will be  
          subject to franchise tax in its first taxable year based on  
          its taxable income.  

          Limited partnerships and limited liability partnerships  
          that are doing business in California, registered or  
          qualified to do business in California, or formed in this  
          state are also subject to the $800 annual tax.  Like LLCs  
          and S-corporations, these are "pass-through" entities and  
          are not subject to any tax based on their taxable income.   
          Rather, the items of income, gain, loss, deduction and  
          credit are passed-through to the owners and reported on  
          their respective income or franchise tax returns.  However,  
          by definition, partnerships cannot be "solely owned" small  
          businesses and subsequently are excluded from this bill.  

           Comments  

          The purpose of this bill is to provide tax relief to  
          members of the United States Armed Forces called to service  
          to defend the nation. 

           Minimum tax in other states  .  According to the Franchise  
          Tax Board, the following states currently impose a minimum  
          franchise tax: 

          1. Illinois has a minimum one percent tax based on  
             "paid-in" capital (calculated using the shares of stock  
             issued by the corporation as disclosed in the annual  
             statement reported to the Illinois Secretary of State).   
             The tax ranges from a minimum of $25 to a maximum of $1  
             million. 

          2. Massachusetts imposes the greater of a corporate excise  
             tax of 9.5 percent based on taxable income or a minimum  
             tax equal to $456. 







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          3. Beginning January 1, 2008, Michigan taxpayers are  
             subject to the Michigan Business Tax. The Michigan  
             Business Tax is composed of two taxes:  a business  
             income tax of 4.9 percent on every taxpayer with  
             business activity in the state, and a modified gross  
             receipts tax of 0.80 percent on every taxpayer having  
             nexus with Michigan. 

          4. Minnesota imposes a franchise tax on a corporation's  
             taxable income at the rate of 9.8 percent.  In addition,  
             a minimum franchise tax, ranging from $0 to $5,000, is  
             imposed based on the sum of the property determined by  
             property, payroll, and sales in the state. 

          5. New York imposes a franchise tax of 7.1 percent based on  
             net income plus a fixed dollar minimum tax based on  
             gross payroll.  The fixed dollar minimum tax ranges from  
             $100 to $1,500. 

          The author states, "The Franchise Tax Board's minimum  
          annual tax for all corporations, including S-corps,  
          C-corps, partnerships, and LLC's is set at $800 per fiscal  
          year.  Regardless of the profitability of the business  
          entity, this annual tax is a 'cost of doing business in  
          California' fee, no matter the circumstance.  Present law  
          does not account for the unique situations that arise from  
          deployments of service members answering the call of duty  
          to country.  Military service members on active or reserve  
          duty who are either major share holders of these business  
          entities, are self employed by the corporation but are  
          deployed and cease to do business, or operate in the  
          negative during the span of their deployment, or any  
          combination thereof, are equally (and unfairly) required to  
          pay the $800 minimum franchise tax fee. "

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

          Senate Appropriations Committee staff notes that the fiscal  
          impact of this bill depends upon the number of small  
          business owners who are deployed in a given year, and whose  
          business either operates at a loss or ceases operation in a  
          taxable year.  FTB estimates that approximately 60 small  







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          corporations and LLCs owned by deployed United States Armed  
          Forces members would either cease operation or operate at a  
          loss in a given year, which would result in an annual  
          revenue loss of $48,000.  Actual losses are indeterminable,  
          based on available data, and could be somewhat higher.

           SUPPORT  :   (Verified  8/17/10)

          American Legion, Department of California
          AMVETS, Department of California
          Vietnam Veterans of America, California State Council


           ASSEMBLY FLOOR  : 
          AYES:  Adams, Ammiano, Anderson, Arambula, Bass, Beall,  
            Bill Berryhill, Tom Berryhill, Blakeslee, Block,  
            Blumenfield, Bradford, Brownley, Buchanan, Caballero,  
            Charles Calderon, Carter, Chesbro, Conway, Cook, Coto,  
            Davis, De Leon, DeVore, Emmerson, Eng, Feuer, Fong,  
            Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,  
            Gilmore, Hagman, Hall, Hayashi, Hernandez, Hill, Huber,  
            Huffman, Jeffries, Jones, Knight, Lieu, Logue, Bonnie  
            Lowenthal, Ma, Mendoza, Miller, Monning, Nestande,  
            Niello, Nielsen, Norby, V. Manuel Perez, Portantino,  
            Ruskin, Salas, Saldana, Silva, Skinner, Smyth, Solorio,  
            Audra Strickland, Swanson, Torlakson, Torres, Torrico,  
            Tran, Yamada
          NO VOTE RECORDED:  De La Torre, Evans, Fletcher, Harkey,  
            Nava, Villines, John A. Perez, Vacancy


          DLW:mw  8/17/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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