BILL ANALYSIS Ó
SB 79
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SENATE THIRD READING
SB 79 (Budget and Fiscal Review Committee)
As Amended March 23, 2011
2/3 vote. Urgency
SENATE VOTE :Vote not relevant
SUMMARY : Makes various changes to state laws to implement
revenue provisions of the 2011-12 Budget agreement.
Specifically, this bill :
1)Establishes mandatory Single Sales Factor income apportionment
for purposes of California's corporation tax 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 this income to California and other jurisdictions
based on prescribed formulas. California has two principal
methods of apportioning income for corporation tax
purposes:
i) Single Sales Factor apportionment requires that a
corporation compute its California income by multiplying
its total income everywhere by the proportion California
sales are of total sales; and,
ii) 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 Ýweighted once], property and
payroll).
Under current law, for tax years beginning January 1, 2011,
apportioning corporations (except for the specific industries
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noted above) are allowed to annually elect Single Sales Factor
apportionment or, alternatively, remain on the Four Factor
formula. The statutory change in this bill would eliminate the
option of remaining on the Four Factor Formula and require all
corporations (except for those specific industries noted
above) to use Single Sales Factor apportionment for tax years
beginning on and after January 1, 2011.
b) Apportioning corporations are required to assign sales
to California and to other jurisdictions based on certain
criteria. Under current law, corporations which do not
elect or are not eligible to elect Single Sales Factor
under the corporation tax for purposes of income
apportionment, assign sales of services and intangibles
based on cost of performance. Thus, under current law,
corporations which remain on the Three Factor formula or
Four Factor formula would assign sales of other than
tangible personal property 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. This bill
would remove the cost of performance criterion for the
assignment of sales. Instead, these sales would be assigned
to California based on the following market-based criteria:
i) Sales of services would be assigned to California if
the benefits of the service were received in this 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 this 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.
The mandatory Single Sales Factor provision and the change in
the rules for the assignment of sales are estimated to
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generate additional revenues of $468 million in 2010-11 and
$942 million in 2011-12.
2)Repeals all tax credits and other income tax incentives
available for certain types of expenditures in designated
areas through both the personal income tax and the corporation
tax. California currently provides an array of tax incentives
to businesses and their employees located in designated
Enterprise Zones (EZs), Targeted Tax Areas (TTAs),
Manufacturing Enhancement Areas (MEAs), and Local Agency
Military Base Recovery Areas (LAMBRAs) as outlined below:
a) For EZs, available incentives include: tax credit for
sales and use tax paid on qualified machinery and
equipment; tax credit for wages paid to qualified employees
working in the zone; employee tax credit for wages received
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% net operating
loss (NOL) carryover to offset zone income;
b) For TTAs, available incentives include: tax credit for
sales and use tax paid on qualified machinery and
equipment; tax credit for wages paid to qualified employees
working in the area; expensing of all or part of qualified
property; 15-year, 100% NOL carryover to offset area
income;
c) For MEAs, the available incentive is tax credit for
wages paid to qualified employees working in the area; and,
d) For LAMBRA, available incentives include: tax credit for
sales and use tax paid on qualified machinery and
equipment; tax credit for wages paid to qualified employees
working in the area; expensing of all or part of qualified
property; 15-year, 100% NOL carryover to offset area
income.
The tax incentives are available for the 15 year life of the
EZ, TTA or MEA and for the eight year life of LAMBRA. This
bill would eliminate these incentives for tax years beginning
on and after January 1, 2011. Under the proposal, these tax
benefits would be eliminated for newly earned credits and
deductions and for credits that had been earned in prior years
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and carried-forward because of the inability to deduct from
current income. This provision of the bill is estimated to
generate revenues of $343 million in 2010-11 and $581 million
in 2011-12.
3)Authorizes the 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.
4)Continues the gross premiums tax on managed care plans. AB
1422 (Bass), Chapter 157, Statutes of 2009 extended the gross
premium tax on insurers to Medi-Cal Managed Care Plans for the
purpose of raising additional revenue for the State's Healthy
Families Program. Current law includes a sunset of July 1,
2011 and this bill extends that sunset to January 1, 2014.
5)Specifies that this bill will take effect immediately upon
enactment.
FISCAL EFFECT : The total combined fiscal impact of all the
provisions (1) and (2) noted above would result in estimated
additional revenues of $811 million in 2010-11 and $1,523
million in 2011-12. Item (4) would result in annual revenues of
approximately $194 million.
Analysis Prepared by : Mark Ibele / BUDGET / (916) 319-2099
FN: 0000136
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