BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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                              UNFINISHED BUSINESS


          Bill No:  SB 858
          Author:   Senate Budget and Fiscal Review Committee
          Amended:  10/6/10
          Vote:     27 - Urgency

           
          PRIOR VOTES NOT RELEVANT 

           ASSEMBLY FLOOR  :  Not available


           SUBJECT  :    Revenues Budget Act of 2010

           SOURCE  :     Author


           DIGEST  :    Assembly Amendments delete the Senate version of  
          the bill which expressed the intent of the legislature to  
          enact statutory changes relating to the Budget Act of 2010.

          This bill now suspends the ability of taxpayers under the  
          personal income tax and the corporation tax to use set  
          operating losses in the 2010 and 2011 taxable years and  
          extend carryforward periods to account for the suspension  
          period, exempts specified taxpayers from 2008 and 2009 net  
          operating loss suspension, modifies the large corporate  
          understatement penalty, allows taxpayers not electing  
          sales-factor only apportionment to source sales of  
          intangibles to states with highest cots of performance,  
          reauthorizes taxpayers to report use tax on California's  
          income tax form, reauthorizes taxpayers to report use tax  
          on California's income tax form, and authorizes the Board  
          of Equalization to assess a cost recovery fee on any person  
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          that fails to pay accounts due and owing.

           ANALYSIS  :    This bill does the following:

          1.  Net Operating Loss (NOL) Suspension  .  This bill suspends  
             the ability of taxpayers under the personal income tax  
             and the corporation tax to use NOLs in the 2010 and 2011  
             taxable years, and extends carryforward periods to  
             account for the suspension period.  The bill also delays  
             for two years the above listed NOL carrybacks.  This  
             bill also makes technical and conforming changes.  

             This bill alters the exemption for the 2010 and 2011 NOL  
             suspensions to personal income taxpayers with less than  
             $300,000 in modified adjusted gross income or corporate  
             taxpayers with less than $300,000 in preapportioned  
             income (net business and nonbusiness income before  
             apportionment and allocation).  This exemption will  
             exempt over 90 percent of corporations.

             According to the Franchise Tax Board (FTB), this  
             provision is expected to generate approximately $1.2  
             billion in the budget year.  This figure reflects the  
             net impact of the exemptions.

          2.  Exempts Specified Taxpayers from 2008 and 2009 NOL  
             Suspension  .  This bill provides that the suspension does  
             not apply to a taxpayer:

             A.    That ceased to do business and had a final taxable  
                year prior to August 28, 2008.

             B.    That sold or transferred substantially all of its  
                assets resulting in a gain on sale during a taxable  
                year ending prior to August 28, 2008.

             C.    The gain generated by the sale or transfer could  
                be offset with existing NOLs.

             D.    The sale or transfer occurred pursuant to a plan  
                of reorganization under Chapter 11 of Title 11 of the  
                United States Code.

             This bill provides that an amended return claiming a net  

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             operating loss allowed pursuant to this section shall be  
             treated as a timely filed original return.  The measure  
             also provides a public purpose statement asserting that  
             this provision provides necessary tax relief for a  
             taxpayer affected by its contents by ensuring that these  
             taxpayers are not permanently denied the NOL.

             According to FTB's  analysis they were unable to  
             estimate this provision because doing so would violate  
             FTB taxpayer confidentiality laws. However, for every  
             $100 million inNOLS that the taxpayers would use to  
             offset income. There would be a revenue loss of  
             approximately $8.8 million.  Those interested in this  
             provision indicate a $30 million loss.

          3.  Modifies Large Corporate Understatement Penalty  .   
             Existing law penalizes taxpayers filing under the  
             corporate tax 20 percent of any understatement that  
             exceeds $1 million of the tax shown on an original  
             return (or amended return filed on or before the  
             extended due date of the original return) for taxable  
             years beginning on or after January 1, 2003 (SBx1 28,  
             Committee on Budget, 2008).  

             This bill modifies the penalty for taxable years  
             beginning on or after January 1, 2010, to apply only to  
             understatements that exceed the greater of:

              A.    $1 million, or

              B.    20 percent of the tax shown on an original return  
                or shown on an amended return filed on or before the  
                original or extended due date of the return for the  
                taxable year.

            According to FTB, this provision is expected to reduce  
            revenues by $45 million in the budget year and  
            approximately $100 million in 2011-12.

          4.  Allows Taxpayers not Electing Sales-Factor Only  
             Apportionment to Source Sales of Intangibles to States  
             with Highest Costs of Performance  .  This bill requires  
             taxpayers electing three-factor, double-weighted sales  
             formula to use the costs of performance method to source  

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             sales.  If the section of law allowing sales factor-only  
             apportionment is repealed, all taxpayers must use the  
             cost of performance method to source sales.  This bill  
             applies to the 2011 taxable year, and allows FTB to  
             issue regulations.

            According to FTB, this provision is expected to reduce  
            revenues by $29 million in the budget year and  
            approximately $100 million in 2011-12.


          5.  Reauthorizes Taxpayers to Report Use Tax on California's  
             Income Tax Form  .  This bill allows taxpayers to make an  
             irrevocable election to report and remit use tax on an  
             acceptable tax return, defined as a personal income tax  
             or corporate tax return.  Taxpayers cannot use the  
             income tax forms to report use tax due on mobile homes,  
             commercial coaches, vehicles, vessels, aircraft,  
             tangible personal property leases, and cigarettes and  
             tobacco products.  

             This bill clarifies that total sale prices of items  
             subject to the use tax reported by taxpayers on the  
             income tax form need not be reported on the taxpayer's  
             sales tax returns.  This bill applies penalties and  
             interest provisions, mechanisms for claiming refunds and  
             credits, qualifications for timely filed returns,  
             determinations of understatements, and ordering rules  
             that apply to use tax returns filed directly with the  
             Board of Equalization (BOE) to use tax reported on  
             income tax forms. 
             This bill directs FTB to revise forms and instructions  
             to allow a person to report and pay use tax in a form  
             and manner approved by BOE starting with the 2010 tax  
             year.  This bill provides specified procedures for BOE  
             to approve the changes to the form and instructions.   
             Tax payments must first be applied to the personal  
             income and corporation tax before the use tax.  FTB must  
             transfer use tax payments and information to BOE within  
             60 days of processing the return.

             According to the BOE, this provision is expected to  
             generate $9.2 million General Fund in the budget year.


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          6.  Authorizes BOE to Assess a Cost Recovery Fee  .  This  
             bill: 

             A.    Authorizes the BOE to impose and collect a  
                collection cost recovery fee on any person that fails  
                to pay amounts due and owing.

             B.    Specifies that the collection fee shall be in an  
                amount equal to the BOE's costs for collections, as  
                reasonably determined by the BOE. 

             C.    Specifies that the collection fee is operative  
                with a demand notice for payment which is mailed to  
                the taxpayer on or after January 1, 2011.

             D.    Specifies that the BOE may relieve the taxpayer of  
                the fee under specified conditions. 

             This bill amends Sections 6833 (Sales and Use Tax Law),  
             9035 (Use Fuel Tax Law), 11534 (Private Railroad Car  
             Tax), 30354.7 (Cigarette and Tobacco Products Tax Law),  
             32390 (Alcoholic Beverage Tax Law), 38577 (Timber Yield  
             Tax), 40168 (Energy Resources Surcharge Law), 41127.8  
             (Emergency Telephone Users Surcharge Law), 43449  
             (Hazardous Substances Tax Law), 45610 (Integrated Waste  
             Management Fee Law), 46466 (Oil Spill Response,  
             Prevention, and Administration Fees Law), 50138.8  
             (Underground Storage Tank Maintenance Fee Law), 55211  
             (Fee Collection Procedures Law), and 60495 (Diesel Fuel  
             Tax Law) of the Revenue and Taxation Code to provide for  
             the cost recovery fee for all of these programs.

             According to the BOE, this bill generates approximately  
             $20 million ($13 million General Fund) in the budget  
             year.


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

          DLW:do  10/6/10   Senate Floor Analyses 

                       SUPPORT/OPPOSITION:  NONE RECEIVED

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