BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 858| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 CONTINUED SB 858 Page 2 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 CONTINUED SB 858 Page 3 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 CONTINUED SB 858 Page 4 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. CONTINUED SB 858 Page 5 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 CONTINUED SB 858 Page 6 **** END **** CONTINUED