BILL ANALYSIS Ó
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THIRD READING
Bill No: AB 103
Author: Assembly Budget Committee
Amended: 3/14/11 in Senate
Vote: 27
SENATE BUDGET & FISCAL REVIEW COMMITTEE : 11-5, 03/16/11
AYES: Leno, Alquist, DeSaulnier, Evans, Liu, Lowenthal,
Rubio, Simitian, Wright, Hancock, Wolk
NOES: Huff, Emmerson, Fuller, Anderson, La Malfa
ASSEMBLY FLOOR : Not relevant
SUBJECT : Budget Act of 2011: Taxes/Revenues trailer
bill
SOURCE : Author
DIGEST : This bill (1) establishes a mandatory single
sales factor for apportionment of corporate income tax
across states and changes the manner in which the location
of sales of service and intangibles are assigned, and (2)
eliminates the enterprise zone tax credits.
Senate Floor Amendments of 3/24/11 make clarifying changes
concerning the due date relative to the vehicle license
fee.
Senate Floor Amendments of 3/17/11 add provisions relating
to the Vehicle License Fee (VLF) administration procedure
(does not affect the VLF rate) and extends AB 1422 of 2009,
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the Medi-Cal provider gross premium tax, until January 1,
2014.
Senate Floor Amendments of 3/14/11 deleted the Assembly
version of the bill and inserted language concerning single
sales factor for apportionment of corporate income tax and
enterprise zones.
ANALYSIS : This bill does the following:
1.Mandatory Single Sales Factor and Market Sourcing of
Intangibles. This bill establishes a mandatory single
sales factor for apportionment of corporate income tax
across states and changes the manner in which the
location of sales of services and intangibles are
assigned for purposes of the corporation tax, as
described below:
A. Corporations that have income attributable to
sources both inside and outside of California must
divide or apportion income to California and other
jurisdictions based on prescribed formulas. Starting
with the 2011 tax year, California has two methods of
apportioning income for corporation tax purposes: (i)
Single Sales Factor apportionment that requires a
corporation to compute its California income by
multiplying its total income everywhere by the
proportion California sales are of total sales; and
(ii) a "double-weighted" three factor formula that
requires a corporation to compute the proportion
California sales, property, and payroll are of total
sales, property, and payroll, respectively (with the
sales factor weighted twice).
Under current law, starting with the 2011 tax year,
corporations will be able to annually elect the
formula they want to use to apportion income to
California for tax purposes. This bill would change
that law to require that all corporations (except
those noted below) use the Single Sales Factor
apportionment system to apportion income to California
for tax purposes.
Under existing law, certain corporations that derive
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50 percent or more of gross business receipts from
agriculture, extractive industries, savings and loan
activity, or banking and financial business activity
are required to use a three factor apportionment
formula (equal weight on sales, property, and
payroll). This bill would not make any changes to the
income apportionment rules for these industries.
B. Current law allows corporations that do not elect
or are not eligible to elect Single Sales Factor for
income apportionment to assign sales of services and
intangibles based on cost of performance. Cost of
performance allows corporations to apportion no
revenue from the sales of intangibles or services in
California if a firm incurs a plurality of costs
associated with developing the intangibles or services
outside of California.
This bill would remove the cost of performance
criterion for the assignment of sales. Instead, sales
would be assigned to California based on the following
market criteria: (i) sales of services would be
assigned to California if the benefits of the service
were received in the State; (ii) sales of intangible
property would be assigned to California if the
property were used in this state; (iii) sales of the
sale, lease, rental, or licensing of real property
would be assigned to California if the real property
were located in the State; and (iv) sales from the
rental, lease, or licensing of tangible personal
property would be assigned to California if the
property were located in this State.
According to the Franchise Tax Board, the provisions to
switch to a mandatory single sales factor and market
sourcing of intangibles is expected to generate
approximately $468 million in 2010-11 and $942 million in
the budget year.
1.Eliminates State Tax Benefits in Enterprise Zones . This
bill repeals all tax credits and other tax incentives
available to individuals and corporations for certain
types of expenditures in designated areas through both
the personal income tax and the corporation tax. This
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bill would also eliminate credits that have been earned
in prior years, but not used.
California currently provides an array of tax incentives to
businesses and their employees located in four
state-defined geographically targeted economic development
areas. The four types of economic development areas
include Enterprise Zones, Local Agency Military Base
Recovery Areas (LAMBRAs), Manufacturing Enhancement Areas
(MEAs), and Targeted Tax Areas (TTAs). The tax benefits
for these economic development areas are listed below:
A. For Enterprise Zones, available incentives include:
tax credits for sales and use tax paid on qualified
machinery and equipment; tax credits for wages paid to
qualified employees working in the zone; deduction for
net interest income on loans made to businesses
located in the zone; expensing of all or part of
qualified property; 15-year 100 percent net operating
loss (NOL) carryover to offset zone income.
B. For LAMBRAs, available incentives include: tax
credits for sales and use tax paid on qualified
machinery and equipment; tax credits for wages paid to
qualified employees working in the area; expensing of
all or part of qualified property; 15-year 100 percent
NOL carryover to offset area income.
C. For MEAs, the available incentives are tax credits
for wages paid to qualified employees working in the
area.
D. For TTAs, available incentives include: tax
credits for sales and use tax paid on qualified
machinery and equipment; tax credits for wages paid to
qualified employees working in the area; expensing of
all or part of qualified property; 15-year 100 percent
NOL carryover to offset area income.
This bill eliminates all of the tax benefits listed above
earned in 2011 and in future years and terminates the
entities' ability to carry forward credits that had been
earned in prior years. The Department of Finance has
estimated that these provisions to eliminate the State tax
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benefits in enterprise zones would generate approximately
$343 million in 2010-11 and $581 million in the budget
year.
1.Vehicle License Fee (VLF) - DMV Car Registration
Administrative Procedures . Authorizes the Department of
Motor Vehicles (DMV) to make changes to its procedures
related to car registration for a limited period ending
January 1, 2012. The new authority is related to an
anticipated vote of the people in June 2011, on the
question of whether the tax rates for the Vehicle License
Fee (VLF) should be maintained at current levels for a
five-year period. Depending on the outcome of the
election, the VLF rates may, or may not, change on July
1, 2011. To avoid erroneous billing, multiple billing,
or other confusion, this bill would allow DMV to reduce
the time between the mailing of the car registration
bill, and the due date of that bill. However, in no case
would the bill be due less than 30-days from when the
notice is mailed by DMV. This bill does not affect the
VLF rate, only the administrative procedures at DMV
related to billing and mailing notices.
2.Medi-Cal: Extension of AB 1422, Statutes of 2009 . The
Medi-Cal provider gross premium tax, authorized by AB
1422, Statutes of 2009, establishes a funding source for
essential preventative and primary health care services
provided through the Healthy Families Program and
Medi-Cal Program by adding Medi-Cal Managed Care Plans to
the list of insurers subject to California's gross
premiums tax of 2.35 percent. Existing statute sunsets
as of June 30, 2011.
This bill extends the sunset to January 1, 2014. The
Budget Bill appropriates a total of $194.4 million from
this special fund, including $97.2 million for the Medi-Cal
Program and $97.2 million for Healthy Families.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
The combined fiscal impact of all the provisions of this
bill is additional General Fund revenue of $811 million in
2010-11 and $1,717 million in
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2011-12.
DLW:nl 3/25/11 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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