BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1500|
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THIRD READING
Bill No: AB 1500
Author: John A. Pérez (D)
Amended: 8/24/12 in Senate
Vote: 27 - Urgency
SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 8/16/12
AYES: Wolk, DeSaulnier, Hernandez, Kehoe, Liu, Yee
NOES: Dutton, Fuller, La Malfa
SENATE APPROPRIATIONS COMMITTEE : 5-2, 8/16/12
AYES: Kehoe, Alquist, Lieu, Price, Steinberg
NOES: Walters, Dutton
ASSEMBLY FLOOR : 54-25, 8/13/12 - See last page for vote
SUBJECT : Corporation taxes: apportionment: single
sales factor:
Middle Class Scholarship Fund
SOURCE : Author
DIGEST : This bill makes the single sales factor (SSF)
apportionment formula mandatory, revises the rules for
assignment of sales, and requires that revenue derived from
those changes less $90 million deduction to be used for
costs associated with forest fire protection be deposited
in the newly established Middle Class Scholarship Fund
(Fund).
Senate Floor Amendments of 8/24/12 set aside $90 million
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from the annual revenue increase from the mandatory single
sale factor apportionment formula in this bill with the
intent of using for costs associated with forest fire
prevention.
ANALYSIS : The Corporation Tax Law imposes taxes measured
by income and, in the case of a business with income
derived from or attributable to sources both within and
without this state, apportions the income between this
state and other states and foreign countries in accordance
with a specified 4-factor formula based on the property,
payroll, and sales within and without this state, except
that in the case of an apportioning trade or business that
derives more than 50% of its gross business receipts from
conducting one or more qualified business activities, as
defined, business income is apportioned in accordance with
a specified 3-factor formula. That law, for taxable years
beginning on or after January 1, 2011, allows a taxpayer to
apportion its income in accordance with a single sales
factor formula, except as provided, pursuant to an
irrevocable annual election, as specified. That law also
provides that sales of tangible personal property and sales
of other than tangible personal property are in this state
in accordance with specified criteria.
Fire Prevention Fee. AB 29x (Blumenfield), 2011, as part
of the budget imposed an annual $150 fire prevention fee on
structures located in the State Responsibility Areas (SRA).
The bill required fee revenues to be available to the
Board of Forestry and California Department of Forestry and
Fire Protection, upon appropriation by the Legislature, for
fire prevention and protection activities in SRAs. SRAs
are very broadly defined to include rural areas where the
state has responsibility for putting out fires.
This bill:
1.Revises the provisions of the Corporation Tax Law that
currently allow a corporation to make an annual election
to use either a SSF or a double-weighted sales factor
formula in apportioning its business income to
California. Specifically, this bill:
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A. Repeals the annual election and mandates that, for
taxable years beginning on or after January 1, 2012,
corporations use the SSF formula in apportioning
business income to California, except those that:
Derive more than 50% of their gross receipts
from conducting an agricultural, extractive, savings
and loan, or banking or financial business activity
(a 'qualified activity').
Make an election to use the four-factor
formula, which is available only if it would result
in a greater amount of tax, before credits, than
would the SSF formula.
A. Requires all taxpayers, in assigning their sales of
other than tangible personal property (i.e., services
and intangible property) to the sales factor, to use
the following rules:
The "cost of performance" rule for assigning
sales for taxable years beginning before January 1,
2011.
The "market rule" for assigning sales for
taxable years beginning on or after January 1, 2011,
and before January 1, 2012, but only for those
taxpayers that elected the SSF apportionment
formula. Taxpayers that did not elect to use the SSF
must use the "cost of performance" rule.
The "market rule" for assigning sales for all
taxpayers, including those businesses that are
engaged in a qualified activity, for taxable years
beginning on or after January 1, 2012.
A. Allows a cable or network services company that is
a "qualified taxpayer" to assign only 50% of their
sales to California of what would otherwise be
assigned under the "market rule."
B. Defines "qualified taxpayer" as a member of a
combined reporting group that is also a qualified
group, which satisfies both of the following
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conditions:
Has a minimum investment of $250 million in
California for the taxable year.
For the taxable year beginning in calendar year
2006, derived more than 50% of its United States
(U.S.) network gross business receipts from
operations of one or more cable systems.
A. Defines "minimum investment" as qualified
expenditures of not less than $250 million, i.e.,
expenditures for tangible property, payroll, services,
franchise fees, or any intangible property
distribution or other rights, by a combined reporting
group during the calendar year that includes the
beginning of the taxable year.
B. Defines the terms "qualified group," "cable
system," "network," "gross business receipts,"
"qualified partnership," and "qualified sales".
1.Requires the Franchise Tax Board (FTB) to report to the
Department of Finance, pursuant to a time schedule
prescribed by the Director of Finance, the following
information:
A. The preliminary estimated increase in revenues for
the 2012-13, 2013-14, 2014-15, and 2015-16 fiscal
years (FYs), as the result of changes in the SSF
apportionment and assignment of sales rules made by
this bill (preliminary estimated increase).
B. On and after January 1, 2016, the final estimated
increase in revenues for the FY 2012-13 and each of
the three subsequent FYs, as the result of changes to
the SSF apportionment and assignment of sales rules
made by this bill (final estimated increase). The
final estimated increase, other than the one for the
2012-13 FY, shall be computed by multiplying the final
estimated increase for the 2012-13 FY by a specified
ratio.
C. The estimated increase in revenues for the FY
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2016-17 and each FY thereafter, as the result of
changes in the SSF apportionment and assignment of
sales rules made by this bill (estimated increase).
The estimated increase for each FY shall be computed
by multiplying the final estimated increase in
revenues for the FY 2012-13 by a specified ratio.
1.Establishes the Fund and requires the money in the Fund
to be allocated, upon appropriation by the Legislature,
for the purpose of increasing the affordability of higher
education.
2.Requires that the Director of Finance direct the State
Controller to deposit in the Fund the following amounts:
A. On or before September 1 of each FY, beginning with
the 2012-13 FY and until FY 2016-17, an amount equal
to the preliminary estimated increase in revenues for
that FY, as reported by the FTB, less $90 million.
B. On or before September 1, 2016, and each September
1 thereafter of each FY until FY 2020-21, an amount
equal to the estimated increase in revenues for that
FY, less $90 million, plus an additional amount, as
specified. The "additional amount" is the difference
between the preliminary estimated increase and the
final estimated increase in revenues for the FY ending
four years before.
C. On or before September 1, 2020, and each September
1 thereafter, an amount equal to the estimated
increase in revenues for the FY, less $90 million in
which each September 1 occurs.
1.Provides intent language that the $90 million annual
deduction is to be used for costs associated with forest
fire prevention.
2.Specifies that this bill will become operative only if AB
1501 (J.Perez) of the 2011-12 Regular Session, which
establishes a middle-class scholarship program, is
chaptered.
3.States that the urgency is necessary to provide needed
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financial aid to California public postsecondary students
in time for the beginning of the 2012-13 academic year.
Senate Governance and Finance Committee indicates, the
estimates work as follows: The FTB shall annually report a
preliminary estimate of the amount of revenue expected to
be generated by these tax changes to the Department of
Finance (DOF), on a schedule that DOF determines, for the
2012-13 through 2015-16 fiscal years. FTB would use a
different specified method for estimating revenues for
subsequent years. DOF would then direct the State
Controller to deposit an amount equal to FTB's estimate,
less $90 million annually through the 2020-21 fiscal year,
into the newly-established Middle Class Scholarship Fund,
by September 1 each year, beginning in 2012. Funds
deposited into this new special fund would be available,
upon appropriation by the Legislature, for the purpose of
increasing the affordability of higher education through
the middle class scholarship provisions contained in AB
1501 (J. Pérez). The $90 million is intended to be used
for costs associated with forest fire prevention.
Related Legislation
AB 1501 (J. Perez) establishes the Middle Class Scholarship
Program, to be administered by the California Student Aid
Commission, to provide scholarships for mandatory
systemwide fees at the University of California and
California State University systems, and to fund grants for
fees, books, and other educational costs at the California
Community Colleges. AB 1501 is contingent upon the
enactment of AB 1500. Currently, the bill is on the Senate
Third Reading File.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
FTB estimates that this bill would result in tax revenue
gains of $1.2 billion in 2012-13, $950 million in
2013-14, and $950 million in 2014-15 (General Fund). The
bill requires the transfer of an equivalent amount to the
Middle Class Scholarship Fund from the General Fund.
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Potential additional General Fund impact in the hundreds
of millions of dollars annually if the new revenue
generated by the bill is subject to Proposition 98
minimum funding guarantees, and net revenues generated by
the bill's tax changes, after deduction of amounts
dedicated to Proposition 98, are insufficient to offset
amounts annually transferred to the Middle Class
Scholarship Fund.
Potential substantial cashflow deficits to the extent
that revenues are transferred to the Middle Class
Scholarship Fund on September 1 exceed amounts available
to cover various mandated state payments. This could
also create additional General Fund impacts related to
short term borrowing costs.
SUPPORT : (Verified 8/29/12)
AFSCME
AFT Local 1931
Alhambra Unified School District Board of Education
Associated Students of Chico State
Associated Students of Sacramento State
Associated Students of University of California
Associated Students of University of California, Davis
Associated Students of University of California, Merced
Associated Students of University of California, San Diego
Associated Students of Ventura College
BayBio
BIOCOM
California Communities United Institute
California Community Colleges Chancellor's Office
California Conference Board of the Amalgamated Transit
Union
California Conference of Machinists
California Faculty Association
California Hospital Association
California Labor Federation
California Medical Association
California Professional Firefighters
California State Association of Electrical Workers
California State Conference of the NAACP
California State Pipe Trades Council
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California State Student Association
California State University
California Teachers Association
California Young Democrats
California YouthBuild Coalition
Centinella Valley Union School District
Cisco
Cities of Berkeley, Carson, Long Beach, and Sacramento
Coalition of California Utility Employees
Community College League of California
Congress of California Seniors
Engineers and Scientists of California, IEPTE Local 20
Equality California
Faculty Association of Rancho Santiago Community College
District
Hacienda La Puente Unified School District
Inglewood Unified School District
International Longshore and Warehouse Union
International Longshore and Warehouse Union Southern
California District Council
International Union of Elevator Constructors
Jockeys' Guild
Los Angeles City Controller Wendy Greuel
Los Angeles City Council
Los Angeles Councilmember Bill Rosendahl, 11th District
Los Angeles Councilmember Dennis Zine, 3rd District
Los Angeles Councilmember Dr. Robert Garcia, 1st District
Los Angeles Councilmember Eric Garcetti, 13th District
Los Angeles Councilmember Herb Wesson, 10th District
Los Angeles Councilmember Joe Buscaino, 15th District
Los Angeles Councilmember Jose Huizar, 14th District
Los Angeles Councilmember Paul Koretz, 5th District
Los Angeles Councilmember Paul Krekorian, 2nd District
Los Angeles Councilmember Richard Alarcón, 7th District
Los Angeles Councilmember Steven Neal, 9th District
Los Angeles Councilmember Tony Cardenas, 6th District
Los Angeles County Democratic Party
Los Angeles County Sheriff Lee Baca
Los Angeles County Sheriff's Department
Los Angeles Labor Federation
Los Angeles Mayor Antonio R. Villaraigosa
Los Angeles Unified School District
Los Angeles Unified School District School Board Member
Nury Martinez
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Los Angeles Unified School District Superintendent Deasy's
office
Los Rios Community College District
Montebello Unified School District Board of Education
National Police Clergy Council
Professional and Technical Engineers, IEPTE Local 21
Professional Engineers in California Government
Qualcomm
Region VI Student Senate for Community Colleges
Sacramento County Board of Supervisors
San Francisco Youth Commission
Santa Barbara County Supervisor, Salud Carbajal-1st
District
Santa Monica/Malibu Unified School District
Santiago Canyon College Associated Student Government
Shasta College Student Senate
Student Senate for California Community Colleges
Teamsters
Tri-Counties Central Labor Council
UAW Local 2865
UAW Local 4123
UAW Local 5810
UFCW Western States Council
UNITE-HERE, AFL-CIO
University of California
University of California Student Association
University of California, Riverside Graduate Student
Association
Western Association for College Admission Counseling
Western States Council of Sheet Metal Workers
OPPOSITION : (Verified 8/29/12)
Alliance of Automobile Manufacturers
California Asian Pacific Chamber of Commerce
California Chamber of Commerce
California Manufacturers & Technology Association
CalTax
Chrysler
General Motors
Howard Jarvis Taxpayers Association
International Paper
Kimberly-Clark
Procter & Gamble
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Southwest California Legislative Council
ARGUMENTS IN SUPPORT : Proponents of this bill state that
"the ability to elect each year how to apportion income to
California is the weakest and least justifiable loophole in
the tax code" since the election "allows corporations to
allocate more income to California when they takes losses
and less income when they make profits." The proponents
assert that the repeal of the "elective" component of the
SSF "would remove the competitive advantage that
out-of-state corporations have over California employers,"
would "end the practice of rewarding companies that have
minimal jobs in California from collecting a larger tax
break," and would be "a significant improvement in the tax
system." Finally, the proponents state that savings from
"closing this tax break for out-of-state corporations will
fund the Middle Class Scholarship Fund to make higher
education affordable and accessible for middle-class
families in California," will "assure that financial
challenges do not prevent qualified students from attending
universities, and will reverse the devastating impact of a
decade of fee increases."
ARGUMENTS IN OPPOSITION : Opponents of this bill state
that "Ýt]he bi-partisan agreement in February 2009 allowed
use of SSF to help stimulate investment and hiring in the
state for companies who might otherwise invest elsewhere."
They argue that the repeal of the elective single sales
factor would punish "taxpayers who neither supported SSF
nor ever planned to use it," thus adding "new uncertainty
and unpredictability to the tax climate in the state." The
opponents are concerned that "in many situations, a
mandatory single sales factor approach does not accurately
estimate the level of business income to be apportioned to
California, and could lead to double taxation of business
income that is earned in other states." The elective
nature of a SSF formula, on the other hand, ensures that
different types of businesses would be able "to more
accurately report their portion of taxable income in
California, rather than using a one-size-fits-all
approach." The proponents conclude that "requiring the new
apportionment methodology to be mandatory is nothing short
of a massive tax increase on an existing group of taxpayers
already contributing to the California economy through one
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of the highest corporate tax rates in the nation and are
struggling to maintain operations in the state."
ASSEMBLY FLOOR : 54-25, 8/13/12
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 Hernández, Hill, Huber, Hueso, Huffman,
Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning,
Nestande, Pan, Perea, V. Manuel Pérez, Portantino,
Skinner, Solorio, Swanson, Torres, Wieckowski, Williams,
Yamada, John A. Pérez
NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly,
Beth Gaines, Garrick, Gorell, Grove, Hagman, Halderman,
Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Miller,
Morrell, Nielsen, Norby, Olsen, Silva, Smyth, Wagner
NO VOTE RECORDED: Valadao
AGB:n 8/29/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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