BILL ANALYSIS SB 858 Page 1 SENATE THIRD READING SB 858 (Budget and Fiscal Review Committee) As Amended October 7, 2010 2/3 vote. Urgency SENATE VOTE :Vote not relevant SUMMARY : Makes various changes to state laws to implement revenue provisions of the 2010-11 Budget Agreement. Specifically, this bill : 1)Suspends the net operating loss (NOL) deduction under the personal income tax (PIT) and the corporation tax (CT) for the 2010 and 2011 tax years. The NOL was last suspended for tax years 2008 and 2009. Taxpayers with NOLs incurred prior to January 1, 2008, will still have a full ten years during which to utilize their NOL deductions. Thus, for taxpayers with NOLs incurred prior to January 1, 2008, their carry forward period will be tolled for the years of suspension and allow for the full remainder of their NOL deduction. This provision delays the authorization of NOL carrybacks, and applies carrybacks for NOLs incurred during tax years beginning on and after January 1, 2013, which shall not be applied to tax years beginning prior to January 1, 2011. Thus, the carryback will be available to offset taxable income in each of the prior two tax years. The carryback provision will phase-in, with 50% of any 2013 NOLs available for carryback, 75% of any 2014 NOLs, and full carryback for NOLs in subsequent years. The suspension would not apply to CT taxpayers with $300,000 or less of pre-apportioned income (net business and nonbusiness income before apportionment and allocation) and PIT taxpayers with $300,000 or less of modified adjusted gross income (AGI). This provision is expected to result in additional revenues of $1.2 billion in 2010-11 and $410 million in 2011-12. 2)Allows for an exemption from the application of the Large Corporate Understatement Penalty (LCUP) for corporation taxpayers whose understatement is below a specified percentage threshold of their total tax liability. In addition to the current requirement that the tax liability understatement exceed $1 million for the LCUP to apply, this provision would require the understatement to exceed 20% of their total tax liability for the penalty to apply. Under this safe harbor provision taxpayers whose understatement is less than 20% of SB 858 Page 2 their total tax liability would not be subject to the penalty. The LCUP would thus apply to corporations whose understatement of tax is in excess of 20% of their total tax liability and exceeds $1 million. The LCUP would be applied to the total amount of the understatement. The provision is estimated to result in reduced revenues of $105 million in 2010-11 and $105 million in 2011-12. 3)Provides that taxpayers who do not elect or are not eligible to elect single sales factor under the corporation tax for purposes of income apportionment would use cost of performance in the assignment of sales of other than tangible personal property. Under this provision, corporations which remain on the three-factor or four-factor income apportionment method would assign sales of other than tangible personal property to California if the income-producing activity is performed in this state or, in cases where the income-producing activity occurs both in and outside this state, if a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance. This provision is estimated to result in reduced revenues of $28 million in 2010-11 and $95 million in 2011-12. If single sales factor election is not available to any taxpayer, due to the passage of Proposition 24 in November, the 2010-11 revenue reduction would be approximately $10 million, with annual losses of approximately $30 million thereafter. 4)Provides that persons that are required to report and remit the use tax on the purchase of tangible personal property may elect to report and remit the tax on an acceptable tax return. This provision continues the inclusion of a use tax line on income tax returns and allows taxpayers of income taxes to fill-in the amount due in use tax on their return. Any amounts due may be remitted together with the income tax remittance. This provision is estimated to result in increased revenues due to tax compliance with existing law of $10 million in 2010-11 and 2011-12. 5)Establishes that the Board of Equalization (BOE) shall assess a collection cost recovery fee for their costs associated with collecting various fees and taxes from business and individuals who have been non-compliant. The collection cost fee will be imposed only if the BOE has mailed its demand notice that advises that continued failure to pay the amount SB 858 Page 3 due may result in collection action, including the imposition of a collection cost recovery fee. The amount of the fee will be determined by the BOE and may not exceed the actual costs associated with any collection efforts engaged in by the agency. The fee is expected to result in fee revenues of $4.8 million in 2010-11 and $18 million in 2011-12. 6)Declares this bill take effect immediately as an urgency statute. FISCAL EFFECT: The total combined fiscal impact of all the provisions noted above would result in additional revenues of $1.2 billion in 2010-11 and $240 million in 2011-12. Analysis Prepared by : Mark Ibele / BUDGET / 916-319-2099 FN: 0007193