BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 103|
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THIRD READING
Bill No: AB 103
Author: Assembly Budget Committee
Amended: 6/12/11 in Senate
Vote: 27
PRIOR VOTES NOT RELEVANT
SUBJECT : Budget Trailer Bill: Revenue and Taxation
SOURCE : Author
DIGEST : This bill: (1) establishes a mandatory single
sales factor for apportionment of corporate income tax
across the state, as specified, (2) reforms enterprise
zones law, (3) enacts a partial sales and use tax exemption
for manufacturing equipment, and (4) expands the jobs tax
credit.
Senate Floor Amendments of 6/12/11 delete the previous
version of the bill concerning taxes and revenues and
places current language with modification of the previous
version and some new provisions.
ANALYSIS : The 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
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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
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
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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 (FTB), the provisions
to switch to a mandatory single sales factor and market
sourcing of intangibles is expected to generate
approximately $470 million in 2010-11 and $950 million in
the budget year.
1.Reform Enterprise Zones. This bill eliminates the
existing Geographically Targeted Economic Development
Areas (GTEDA), including enterprise zones, manufacturing
enhancement areas, the targeted tax area, and the Local
Agency Military Base Recovery Areas, hiring credit for
any employee that first commences employment in a taxable
year that begins on or after January 1, 2011. Qualified
employees that commence employment in a taxable year
beginning before January 1, 2011, would remain eligible
to generate credits during the initial 60 months of
employment.
This bill requires that an employer request certification
of an employee's eligibility for the existing GTEDA
hiring credit no later than the later of the date that is
30 days after an employee first commences employment or
90 days after July 1, 2011 (the cure period). This
change would apply to employees that first commence
employment in a taxable year beginning before January 1,
2011.
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This bill prohibits the GTEDA hiring credit for employees
whose certification was requested after the 30 day, or 90
day cure period, as applicable, has expired.
This bill eliminates the existing certification
requirement for employees that first commence employment
in a taxable year beginning on or after January 1, 2011.
This bill creates a GTEDA hiring credit of $5,000 for
each net increase in qualified full-time employees. This
change would apply to employees that first commence
employment in a taxable year beginning on or after
January 1, 2011.
This bill requires that a taxpayer that relocates to a
GTEDA from a non-GTEDA location within the state must
provide a written offer of continued employment to each
existing employee, in order for that taxpayer to be
eligible for a GTEDA hiring credit upon relocation into a
GTEDA. This change would apply to relocations that
occurred in a taxable year that begins on or after
January 1, 2011.
This bill limits the GTEDA hiring credit to the lesser of
the increase in qualified full-time equivalent employment
in the GTEDA or the increase in full-time equivalent
employment in the state during the year. This change
would apply to taxable years beginning on or after
January 1, 2011.
This bill utilizes a look-back period for purposes of
determining the net increase in qualified full-time
equivalents used to determine the amount of the credit.
A three year look-back period would be used unless a
one-year look-back is triggered by a decrease in the
state's average annual non-farm employment, as determined
by the Franchise Tax Board, in either, or both, the
second or third calendar year preceding the beginning of
the current taxable year. This change would apply to the
GTEDA hiring credit applicable to employees that first
commence employment in a taxable year that begins on or
after January 1, 2011.
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This bill limits the carryover period for existing and
future GTEDA credits to five years from the year the
credit was generated. This change would be effective on
January 1, 2011.
According to the Department of Finance, these provisions
to reform enterprise zones will generate $23 million in
2010-11 and $70 million in 2011-12.
2.Sales & Use Tax Exemption on Manufacturing. Existing law
provides no special tax treatment to entities engaged in
manufacturing or software production for purchases of
equipment and other supplies. Business entities engaged
in manufacturing, research, and development, and software
producing activities that make purchases of equipment and
supplies for use in the conduct of their manufacturing
and related activities are required to pay sales and use
tax on their purchases to the same extent as any other
person engaged in business in California.
The state sales and use tax rate is 8.25 percent as
detailed below. Cities and Counties may increase the
sales and use tax rate up to 2 percent for either
specific or general purposes with a vote of the people.
Beginning July 1, 2011, the base statewide sales and use
tax rate will be 7.25 percent, with additional district
taxes levied by various local districts. The Governor
has proposed a constitutional amendment to maintain this
rate for five additional years, including bridge
financing to maintain the rate until the voters can vote
on the constitutional amendment.
This bill would, contingent upon the sales and use tax
rate not falling below a specified rate, enact a partial
sales and use tax exemption for purchases of machinery
and equipment to be used by manufacturers and software
producers primarily in their manufacturing or software
producing activities.
For new entities, the exemption rate would be five
percent, and for the others, the exemption rate would be
one percent.
The proposed exemption would expire by July 1, 2016, or
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earlier if the sales and use tax rate falls below a
specified rate.
3.Jobs Credit. The February, 2009 Budget Agreement
included a Jobs Tax credit beginning in the taxable year
2009 of $3,000 per full time employee hired for an
employer that employs fewer than 20 employees (AB 3x 15,
Chapter 10, Statutes of 2009 and SB 3x 15, Chapter 17,
statutes of 2009). The credit is capped at $400 million
for all taxable years and allocated by the FTB. The
credit remains in effect until the total amount is
exhausted. The bill requires the FTB to disallow credits
claimed on returns filed after the end of the calendar
quarter in which the FTB believes the cap will be
reached. Any credits not used in the taxable year may be
carried forward up to eight taxable years.
Current law also contains anti-abuse laws that prevent a
company from qualifying as "first commencing business in
the state" if the company only changes structures. For
example, if Gracie Mae Kids Clothes changes from a sole
proprietorship to an S-Corporation, it would not be
considered a new business.
This bill, for taxable years beginning on or after
January 1, 2011, changes the definition of "qualified
employee" to include those employees who were previously
excluded because they were "certified" as a qualified
employee for other credits, such as the Enterprise Zone
Hiring Credit.
This bill would repeal the credit as of December 31,
2013.
The remainder of the language in this bill related to
this credit is unchanged and for taxable years beginning
on and after January 1, 2011, would do the following:
Allow fiscal year taxpayers to claim the credit
for their entire 2012 taxable year or until the $400
million cap is reached, whichever is first.
Increase the amount of the credit from $3,000
per increase in full-time equivalent employee to
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$4,000 per increase in full-time equivalent
employee.
Change the definition of qualified employer
from one that as of the last day of the preceding
taxable year employs 20 or fewer employees to one
that as of the last day of the preceding taxable
year employs 50 or fewer employees.
Repeal duplicate code sections.
Correct two obsolete cross references.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
The bill would have the following fiscal impact:
Single Sales Factor and Market Sourcing of Intangibles :
This provision of the bill would generate $1.4 billion in
additional General Fund revenues in the 2010-11 and 2011-12
fiscal years.
Enterprise Zones : These provisions of the bill would
generate $93 million in additional General Fund revenues in
2010-11 and 2011-12 fiscal years.
Partial Sales and Use Tax Exemption for Manufacturing
Equipment : These provisions would not have any fiscal
effect in the 2010-11 and 2011-12 fiscal years, but would
cost the state approximately $228 million starting in
2012-13.
Expand Jobs Credit : These provisions of the bill would
cost an additional $94 million in General Fund in the
2010-11 and 2011-12 fiscal years.
DLW:nl 6/13/11 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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