BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                    SB 79|
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                              UNFINISHED BUSINESS


          Bill No:  SB 79
          Author:   Senate Budget and Fiscal Review Committee
          Amended:  3/14/11
          Vote:     27

           
          PRIOR SENATE VOTES NOT RELEVANT

           ASSEMBLY FLOOR  :  Not available


           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.

           Assembly Amendments  delete the prior version of the bill 
          and insert the current language relative to taxes and 
          revenues.

           ANALYSIS  :    This bill:

          1.  Establishes a 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 
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             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 changes 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 will 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 

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                California if a firm incurs a plurality of costs 
                associated with developing the intangibles or 
                services outside of California.

                This bill removes 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 $468 million in 2010-11 and $942 
             million in the budget year.  

          2.  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 (PIT) and the corporation tax 
             (CT).  This bill also eliminates 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 

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                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; and 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; and 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; and 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 benefits in enterprise zones would generate 
             approximately $343 million in 2010-11 and $581 million 
             in the budget year. 

           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 $1,523 million in 2011-12.


          DLW:nl  3/15/11   Senate Floor Analyses 

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