BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 40X1|
|Office of Senate Floor Analyses | |
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THIRD READING
Bill No: AB 40X1
Author: Fuentes (D) and Fletcher (R), et al.
Amended: 9/8/11 in Assembly
Vote: 27
ASSEMBLY FLOOR : 54-15, 9/8/11 - See last page for vote
SUBJECT : Taxation
SOURCE : Author
DIGEST : This bill makes various changes regarding the
apportionment of income, assignment of sales, and the
minimum franchise tax under the corporation tax; institutes
specified reductions in the tax rate applied to certain
income for purposes of the corporation tax and the personal
income tax; establishes a tax exemption for certain
purchases under the sales and use tax; and, sets up a
process to adjust the sales and use tax exemption amount
under certain conditions.
ANALYSIS :
This bill:
1. Establishes mandatory Single Sales Factor income
apportionment for purposes of California's corporation
tax. Corporations that have income attributable to
sources both inside and outside of California are
required to divide or apportion this income to
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California and other jurisdictions based on prescribed
formulas.
A. California has two principal methods of
apportioning income for corporation tax purposes:
(1) Single Sales Factor apportionment requires a
corporation to compute its California income by
multiplying its total income everywhere by the
proportion California sales are of total sales.
(2) Four Factor apportionment requires a
corporation to compute the proportion California
sales, property and payroll are of total sales,
property and payroll, respectively. The
arithmetic average of the factors (with the sales
factor weighted twice) is then multiplied by the
corporation's total income to arrive at California
income. Certain corporations with most of their
business receipts from agricultural, extractive,
savings and loan, banking and financial activities
must use a Three Factor formula based on sales
(weighted once), property and payroll.
B. Under current law, for tax years beginning January
1, 2011, apportioning corporations (except the
specific industries noted above) are allowed to
annually elect Single Sales Factor apportionment or,
alternatively, remain on the Four Factor
apportionment formula; and
C. The statutory change in this bill would eliminate
the option of remaining on the Four Factor formula
and require all corporations (except for the specific
industries noted above and those electing to use the
Four Factor formula, as set forth below), to use
Single Sales Factor apportionment for tax years
beginning on and after January 1, 2012. An election
to use the Four Factor formula would only be
available if it would result in a greater amount of
before-credit tax than would the Single Sales Factor
method. This provision would result in revenue gains
of $460 million in 2011-12, $926 million in 2012-13
and $1.0 billion in 2013-14.
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2. Changes the manner in which sales are assigned for
purposes of the corporation tax. Apportioning
corporations are required to assign sales to California
and to other jurisdictions based on specified criteria.
A. Under current law, corporations that use Single
Sales Factor apportionment must assign sales of
services and intangibles to California based on where
the benefits of the service were received or the
property was used or accepted (market rule).
Corporations which do not elect or are not eligible
to elect Single Sales Factor under the corporation
tax for purposes of income apportionment, must assign
sales of services and intangibles based on "cost of
performance." In other words, corporations that
remain on the Three Factor formula or Four Factor
formula would assign sales of services and
intangibles 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 of California, if a greater proportion of
the income producing activity is produced in
California than in any other state, based on cost of
performance.
B. This bill establishes that all taxpayers use the
market rule for the assignment of sales of services
and intangibles for tax years beginning on or after
January 1, 2012. This bill allows cable or network
services companies under the Single Sales Factor, and
with minimum qualified expenditures for the taxable
year of at least $250 million (such as tangible
property or payroll services), to assign only 50% of
their sales to California of what would otherwise be
assigned under the market rule. This provision would
result in revenue reductions of $15 million in
2011-12, $32 million in 2012-13, and $36 million in
2013-14.
3. Specifies that a corporation tax rate of 8.34 percent
would apply to the first $50,000 and the current rate of
8.84 percent would apply to income above this threshold.
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The reduction would not apply to corporations whose
income and apportionment factor data are required to be
included in a combine report, such as large multistate
and multinational corporations. (Combined reporting is
required of multistate companies and groups of
affiliated corporation that operate as one integrated
business, and results in treating the operation as a
single taxpayer.) This provision is estimated to result
in revenue losses of $9 million in 2011-12, $18 million
in 2012-13, and $20 million in 2013-14.
4. Reduces the minimum franchise tax under the corporation
tax from the current level of $800 to $750 annually for
tax years beginning on or after January 1, 2012. The
minimum franchise tax is paid by all corporations with
an otherwise computed corporation tax liability of less
than this amount. This provision is estimated to result
in revenue losses of $28 million in 2011-12, $59 million
in 2012-13, and $67 million in 2013-14.
5. Excludes from personal income for tax purposes an amount
equal to 10 percent of up to $50,000 of the business
income of a taxpayer for tax years beginning on or after
January 1, 2012. Thus, the maximum amount that could be
excluded under this provision is $5,000. Business
income is income of a taxpayer from a trade or business
whether conducted by the taxpayer or by a passthrough
identity in which the taxpayer is a shareholder. This
provision is estimated to result in revenue losses of
$149 million in 2011-12, $255 million in 2012-13, and
$269 million in 2013-14.
6. Increases the standard deduction for taxpayers who do
not itemize deductions under the personal income tax.
This bill increases the standard deduction by $1,000 for
single filers and $2,000 for joint filers for tax years
beginning on and after January 1, 2012. Thus, the
amount of the standard deduction would rise to
approximately $4,780 for single filers and $8,540 for
joint filers. (The standard deduction is annually
computed based on changes in the cost of living and 2012
levels have not yet been established.) This provision
is estimated to result in revenue losses of $180 million
in 2011-12, $306 million in 2012-13, and $317 million in
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2013-14.
7. Establishes a partial exemption from the sales and use
tax for purchases of manufacturing equipment beginning
March 1, 2012. Current law levies a sales and use tax
on tangible personal property purchased or used in the
state, unless the property is specifically exempted.
Tangible personal property subject to taxation includes
items of capital equipment used in the manufacturing
process. The sales and use tax is composed of rates
that generate revenues for the state General Fund and
realignment, various special funds, and local
government. Currently, the rates are: state 5%;
special funds 1%; local government 1%; fiscal recovery
bonds 0.25%. In addition to this composite statewide
rate of 7.25 percent, local governments may have various
add-on rates.
A. Under the proposal, the purchase of manufacturing
equipment would be exempted from a portion of the
application of the state sales tax. In general,
manufacturing firms would be eligible for a 1 percent
exemption from state sales and use tax on equipment
purchases. Start-up firms would be eligible for a
3.94 percent exemption from the state portion of the
sales and use tax. Start-up firms are defined as
firms conducting activities in the state for three or
fewer years, after accounting for acquisitions and
changes in business structure;
B. The exemption would be available to manufacturing
firms and software publishers. Qualified businesses
are those in manufacturing industries such as food
and beverage; textiles and apparel; wood and paper
products; chemicals, plastics and rubber; metal
fabrication and machinery; transportation and
related, and computer, electronics and software. The
exemption is available only to corporations that
which are allowed to elect single sales factor for
purposes of income apportionment.
C. Equipment that would qualify for the exemption
includes equipment when used primarily (50 percent or
more):
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(1) In any stage of manufacturing, processing,
refining, fabricating, or recycling of any
tangible personal property;
(2) For research and development;
(3) To maintain, repair, measure or test
tangible personal property; and,
(4) In the performance of construction conducted
in connection with manufacturing or research and
development.
(5) The tax exemption would result in revenue
reductions of $91 million in 2011-12, $299 million
in 2012-13, and $323 million in 2013-14.
8. Directs the Franchise Tax Board and the Board of
Equalization to report to the Department of Finance
(DOF) whether the bill resulted in a revenue change
during the 2012-13 fiscal year relative to the amount of
revenue that would have been raised absent the enactment
of the bill. The Director of DOF would adjust the
general sales and use tax exemption in a manner that
would result in no gain or loss in state tax revenue in
2015-16 due to this act.
Comments
Purpose of the bill . This bill is one of Governor Brown's
"California Jobs First plan" intended to create jobs in
this state. The Governor stated: "Boosting job growth in
California is a top priority, and this proposal is a
critical step in making sure the state does everything it
can to support local job creation,? Our state has added
116,000 jobs since January, but we must do more to build
economic momentum. This legislation would expand a
currently existing job credit to make it more effective
while adding new tax incentives for growth in the
manufacturing sector."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
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The net impact of all the provisions of the bill would be a
reduction in revenues in each of the next three years of
$12 million in 2011-12, $44 million in 2012-13, and $31
million in 2013-14. Total revenue losses over the
three-year period are estimated to be $87 million.
According to the Department of Finance, AB 40X1 would have
the following revenue impact:
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| Revenue Impact of Jobs Proposal - |
| all Provisions Operative for 1/1/12 except SUT equipment |
| exemption |
| (Dollars in Millions) |
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|--------------------------------+------+------+------+-----|
| |2011-1|2012-1|2013-1|3-yea|
| | 2 | 3 | 4 | r |
| | | | |total|
| | | | | |
|--------------------------------+------+------+------+-----|
|8.34% Corporate tax rate for | -$9| -$18| -$20| -$46|
|the first $50,000 of SNI - No | | | | |
|lower rate for combined report | | | | |
|returns | | | | |
|--------------------------------+------+------+------+-----|
|PIT 10% exemption of first | -$149| -$255| -$269|-$673|
|$50,000 of positive business | | | | |
|income | | | | |
|--------------------------------+------+------+------+-----|
|Decrease Minimum Tax from $800 | -$28| -$59| -$67|-$154|
|to $750 | | | | |
|--------------------------------+------+------+------+-----|
|Increase Standard Deduction by | -$180| -$306| -$317|-$804|
|27% | | | | |
|--------------------------------+------+------+------+-----|
|Mandatory SSF - with Cable | $445| $894| $964|$2,30|
|Carve out and option to use | | | | 3|
|double-weighting if it results | | | | |
|in higher tax | | | | |
|--------------------------------+------+------+------+-----|
|SUT manufacturer's equipment | -$91| -$299| -$323|-$713|
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|exemption 1% (3.9735% for | | | | |
|start-ups), operative 3/1/12 | | | | |
|--------------------------------+------+------+------+-----|
|Total | -$12| -$44| -$31|-$87 |
| | | | | |
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SUPPORT : (Verified 9/9/11)
QUALCOMM
ASSEMBLY FLOOR : 54-15, 9/8/11
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Charles Calderon, Campos, Carter, Cedillo,
Chesbro, Davis, Dickinson, Eng, Feuer, Fletcher, Fong,
Fuentes, Furutani, Galgiani, Gatto, Gordon, Hall,
Hayashi, Roger Hern�ndez, Hill, Huber, Hueso, Huffman,
Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning,
Pan, Perea, V. Manuel P�rez, Portantino, Skinner, Smyth,
Solorio, Swanson, Torres, Wieckowski, Williams, Yamada,
John A. P�rez
NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly,
Grove, Halderman, Harkey, Jones, Knight, Logue, Morrell,
Nielsen, Norby, Silva
NO VOTE RECORDED: Beth Gaines, Garrick, Gorell, Hagman,
Jeffries, Mansoor, Miller, Nestande, Olsen, Valadao,
Wagner
DLW:mw 9/9/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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