BILL NUMBER: SB 116	INTRODUCED
	BILL TEXT


INTRODUCED BY   Senator De León
   (Coauthors: Senators DeSaulnier, Hancock, Hernandez, Leno,
Lowenthal, Price, Steinberg, and Wolk)

                        JANUARY 19, 2011

   An act to amend Sections 25113, 25128, and 25136 of, to add
Section 25128.7 to, and to repeal Section 25128.5 of, the Revenue and
Taxation Code, relating to taxation, to take effect immediately, tax
levy.



	LEGISLATIVE COUNSEL'S DIGEST


   SB 116, as introduced, De León. Income taxes: single sales factor.

   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 business
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. Existing law, for
taxable years beginning on or after January 1, 2011, authorizes a
taxpayer required to apportion its business income in accordance with
the 4-factor formula to make an annual election to have that
business income apportioned in accordance with a single sales factor
formula.
   This bill would eliminate the authorization for specified
taxpayers to elect to have business income apportioned in accordance
with a single sales factor formula and instead require those
taxpayers to apportion their business income in accordance with a
single sales factor formula for taxable years beginning on or after
January 1, 2011, and would make related changes.
   This bill would constitute a change in state statute that would
result in a taxpayer paying a higher tax within the meaning of
Section 3 of Article XIII A of the California Constitution, and thus
would require for passage the approval of 2/3 of the membership of
each house of the Legislature.
   This bill would take effect immediately as a tax levy.
   Vote: 2/3. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  Section 25113 of the Revenue and Taxation Code, as
added by Section 4 of Chapter 657 of the Statutes of 2003, is amended
to read:
   25113.  (a) Except as provided in subdivision (f), for taxable
years beginning on or after January 1, 2003, the election provided
for in Section 25110 shall be made on an original, timely filed
return for the year of the election. The election will be considered
valid if both of the following conditions are satisfied:
   (1) The tax is computed in a manner consistent with a water's-edge
election.
   (2) A written notification of election is filed with the return on
a form prescribed by the Franchise Tax Board. Pursuant to
regulations promulgated under this section, the Franchise Tax Board
may accept the filing of other objective evidence that supports the
conclusion that a water's-edge election was intended in lieu of
notification on the designated form.
   (b) Except as otherwise provided, a water's-edge election shall be
effective only if made by every member of the self-assessed combined
reporting group that is subject to taxation under this part.
   (1) An election made on a group return of a self-assessed combined
reporting group shall constitute an election by each taxpayer member
included in that group return, unless one of those taxpayers files a
separate return in which no election is made and paragraph (2) does
not apply.
   (2) A taxpayer that fails to make an election on its own timely
filed original return shall be deemed to have elected if either of
the following applies:
   (A) It has a parent corporation that is an electing taxpayer that
included the income and apportionment factors of the nonelecting
taxpayer in the self-assessed combined reporting group reflected in
the electing parent's timely filed original return, including a group
return.
   (B) The income and apportionment factors of the nonelecting
taxpayer are reflected in the self-assessed combined reporting group
of a timely filed original return of an electing taxpayer, and the
notification of election filed by the electing taxpayer pursuant to
paragraph (2) of subdivision (a) is signed by an officer or other
authorized agent of either a parent corporation of the nonelecting
taxpayer or another corporation with authority to bind the
nonelecting taxpayer to an election.
   (3) For purposes of this subdivision, a "parent corporation" of
the taxpayer is a corporation that owns or constructively owns stock
possessing more than 50 percent of the voting power of the taxpayer
as determined under subdivisions (e) and (f) of Section 25105.
   (4) If a corporation that is a member of a combined reporting
group is not itself subject to taxation under this part in the year
for which the water's-edge election is made, but subsequently becomes
subject to taxation under this part, that corporation shall be
deemed to have elected with the other taxpayer members of the
combined reporting group.
   (5) A taxpayer that is engaged in more than one apportioning trade
or business as defined in paragraph  (6)   (2)
 of subdivision  (d)   (c)  of Section
25128 may make a separate election for each apportioning trade or
business.
   (c) A water's-edge election shall remain in effect or be
terminated in accordance with this subdivision.
   (1) Except as otherwise provided in this subdivision, if one or
more electing taxpayer members of a combined reporting group later
become disaffiliated or otherwise cease to be included in the
combined reporting group, the water's-edge election shall remain in
effect as to both the departing taxpayer members and any remaining
taxpayer members.
   (2) If an electing taxpayer and a nonelecting taxpayer become
members of a new unitary affiliate group, the nonelecting taxpayer
shall be deemed to have elected if the value of the total business
assets of the electing taxpayer, and its component unitary group, if
any, is larger than the value of the total business assets of the
nonelecting taxpayer, and its component unitary group, if any.
Otherwise, the water's-edge election shall be automatically
terminated at the time the electing members become part of the
combined report. For purposes of applying paragraphs (9) and (10),
the commencement date of the deemed election shall be the same as the
commencement date of the electing taxpayers.
   (3) If taxpayers filing under water's-edge elections with
different commencement dates become members of a new unitary
affiliate group, the earliest election date shall be deemed to apply
to all electing taxpayers if the total business assets of the earlier
electing taxpayer, and its component unitary group, if any, is
larger than the value of the total business assets of the later
electing taxpayer, and its component unitary group, if any.
Otherwise, the later election commencement date shall apply to all
electing taxpayers.
   (4) (A) If a taxpayer with an election that has been terminated
under paragraph (9) or (10) becomes a member of a new unitary
affiliate group that includes another electing or nonelecting
taxpayer not affected by those paragraphs, any water's-edge election
of the other taxpayer member, if applicable, shall terminate, and any
restrictions on making a new water's-edge election, relating to an
election terminated under those paragraphs, shall apply to all
taxpayer members of the new unitary affiliate group if the total
business assets of the taxpayer with the terminated election, and its
component unitary group, if any, is larger than the other taxpayer,
and its component unitary group, if any. Otherwise, paragraph (2)
shall apply, if applicable. If paragraph (2) does not apply, all
taxpayer members of the new unitary affiliate group will be treated
as nonelecting taxpayers that are not subject to any restrictions on
making a new water's-edge election.
   (B) If two nonelecting taxpayers with different termination dates
under paragraph (9) or (10) become members of a new unitary affiliate
group, the earliest termination date shall be deemed to apply to all
nonelecting taxpayers, as well as any restrictions on making a new
water's-edge election relating to that termination, if the total
business assets of the earlier terminating taxpayer, and its
component unitary group, if any, is larger than the value of the
total business assets of the later terminating taxpayer, and its
component unitary group, if any. Otherwise, the later termination
date, and the related restrictions on making a new water's-edge
election, shall apply to all taxpayer members of the new unitary
affiliate group.
   (5) (A) Except as provided in subparagraph (B), if one or more
electing taxpayers did not report their income and apportionment
factors as members of a combined reporting group with one or more
nonelecting taxpayers, and, pursuant to a Franchise Tax Board audit
determination, the nonelecting taxpayers, are properly in the same
combined reporting group as the electing taxpayers, the water's-edge
election of the electing taxpayers shall remain in effect and the
nonelecting taxpayers shall be deemed to have made a water's-edge
election. The commencement date of the deemed water's-edge election
shall be the same as the commencement date of the electing taxpayers.

   (B) Subparagraph (A) may not apply if the value of total business
assets of the electing taxpayers does not exceed the value of total
business assets of the nonelecting taxpayers. In that event, the
water's-edge election of each electing taxpayer is terminated as of
the date the nonelecting taxpayers are, pursuant to the audit
determination described in subparagraph (A), properly included in the
same combined reporting group as the electing taxpayers.
   (C) For purposes of applying the business asset test of this
paragraph, the term "business assets" shall have the same meaning as
subparagraph (A) of paragraph (6), except that the business assets of
other members of the unitary affiliate group that are not taxpayers
shall not be taken into account.
   (D) Notwithstanding subparagraph (A), nonelecting taxpayers may
not be deemed to have made a water's-edge election if the Franchise
Tax Board audit determination described in subparagraph (A) is
withdrawn or otherwise overturned.
   (6) For purposes of paragraphs (2) to (5), inclusive, the
following shall apply:
   (A) "Business assets" are assets, including intangible assets,
other than stock of a member of the unitary affiliate group, which
are used in the conduct of the business of the unitary affiliate
group or would produce business income to the unitary affiliate
group, if an election were not in place, if the assets were sold.
Business assets shall be valued at net book value.
   (B) The phrase "unitary affiliate group" refers to all of those
corporations that would constitute a unitary group if a water's-edge
election were not made.
   (C) The phrase "new unitary affiliate group" refers to a unitary
affiliate group that is created by a new affiliation of two or more
corporations, or by the addition of one or more new members to an
existing unitary affiliate group.
   (D) The phrase "component unitary group" means that portion of a
group of corporations that have become members of a new unitary
affiliate group that were members of their own respective unitary
affiliate group prior to entering the new unitary affiliate group,
disregarding any corporations that did not become part of the new
unitary group.
   (7) In the application of paragraphs (2) to (4), inclusive, a
series of acquisitions as steps of a single transaction shall be
aggregated as a single change of membership.
   (8) In the event of a merger or consolidation, the water's-edge
status and election commencement date or termination date of the
surviving corporation shall be consistent with the result that would
have been obtained under paragraphs (2) to (4), inclusive, if the
surviving corporation had acquired the stock of the transferor
corporation.
   (9) A water's-edge election may be terminated without the consent
of the Franchise Tax Board after it has been in effect for at least
84 months. The termination shall be made on an original, timely filed
return for the first year in which the water's-edge election is to
be terminated. To be effective, the termination shall be made by
every taxpayer that is a member of the water's-edge group in the same
manner as the election provided under subdivisions (a) and (b).
   (10) A water's-edge election may be terminated before the 84-month
period described in paragraph (9) has elapsed, but only with the
consent of the Franchise Tax Board. A request for termination shall
be made at the time and in the manner specified by the Franchise Tax
Board.
   (A) The request may be granted for good cause. For purposes of
this section, good cause shall have the same meaning as specified in
Treasury Regulations Section 1.1502-75(c).
   (B) The Franchise Tax Board shall consent to a termination
requested by all members of a water's-edge group, if the purpose of
the request is to permit the state to contract with an expatriate
corporation, or its subsidiary, pursuant to paragraph (2) of
subdivision (b) of Section 10286 of the Public Contract Code. A water'
s-edge election terminated pursuant to this subparagraph shall,
however, be effective for the year in which the expatriate
corporation, or its subsidiary, enters into the contract with the
state.
   (11) Except for deemed elections as provided in paragraphs (2),
(4), and (5), if a water's-edge election is terminated under
paragraph (9) or (10), another election may not be made under this
section for any taxable year that begins within the 84-month period
following the last day of the election period that was terminated.
The Franchise Tax Board may waive the application of this prohibition
period for good cause.
   (12) A water's-edge election shall remain in effect until
terminated.
   (d) For purposes of this section, the following shall apply:
   (1) A "combined reporting group" means those corporations whose
income and apportionment factors are properly considered pursuant to
this chapter in computing the income of the individual taxpayer that
is derived from or attributable to sources within this state, taking
into account a valid water's-edge election.
   (2) A "group return" refers to the single return which taxpayer
members of a combined reporting group may elect by contract to file,
in the form and manner prescribed by the Franchise Tax Board, in lieu
of filing their own respective returns.
   (3) A "self-assessed combined reporting group" means that group of
corporations whose income and apportionment factors are reflected in
a combined report prepared pursuant to this chapter in a timely
filed return, taking into account the effects of a purported water'
s-edge election, whether or not the membership of the corporations in
that combined report was correctly determined.
   (e) The Franchise Tax Board may prescribe any regulations as may
be necessary or appropriate to carry out the purposes of this
section.
   (f) To the extent that a taxpayer would have been required to file
on a water's-edge basis in its first taxable year beginning on or
after January 1, 2003, pursuant to a water's-edge election made in a
prior year under Section 25111, the terms of Section 25111 may not
apply and the election shall be deemed to have been made under the
terms of this section. However, the commencement date of the election
made in a prior year under Section 25111 shall continue to be
treated as the commencement date of the water's-edge election period
for purposes of applying this section.
  SEC. 2.  Section 25128 of the Revenue and Taxation Code is amended
to read:
   25128.  (a) Notwithstanding Section 38006, all business income
shall be apportioned to this state by multiplying the business income
by a fraction, the numerator of which is the property factor plus
the payroll factor plus twice the sales factor, and the denominator
of which is four, except as provided in subdivision (b)  or
(c)  .
   (b) If an apportioning trade or business derives more than 50
percent of its "gross business receipts" from conducting one or more
qualified business activities, all business income of the
apportioning trade or business shall be apportioned to this state by
multiplying business income by a fraction, the numerator of which is
the property factor plus the payroll factor plus the sales factor,
and the denominator of which is three.
   (c) For purposes of this section  , a "qualified business
activity" means the following  : 
   (1) "Agricultural business activity" means any activity relating
to any stock, dairy, poultry, fruit, furbearing animal, or truck
farm, plantation, ranch, nursery, or range. "Agricultural business
activity" also includes any activity relating to cultivating the soil
or raising or harvesting any agricultural or horticultural
commodity, including, but not limited to, the raising, shearing,
feeding, caring for, training, or management of animals on a farm as
well as the handling, drying, packing, grading, or storing on a farm
of any agricultural or horticultural commodity in its unmanufactured
state, but only if the owner, tenant, or operator of the farm
regularly produces more than one-half of the commodity so treated.
 
   (2) "Apportioning trade or business" means a distinct trade or
business whose business income is required to be apportioned under
Sections 25101 and 25120, limited, if applicable, by Section 25110,
using the same denominator for each of the applicable payroll,
property, and sales factors.  
   (3) "Banking or financial business activity" means any activity
attributable to dealings in money or moneyed capital in substantial
competition with the business of national banks.  
   (4) "Extractive business activity" means any activity relating to
the production, refining, or processing of oil, natural gas, or
mineral ore.  
   (5) "Gross business receipts" means gross receipts described in
subdivision (e) or (f) of Section 25120 (other than gross receipts
from sales or other transactions within an apportioning trade or
business between members of a group of corporations whose income and
apportionment factors are required to be included in a combined
report under Section 25101, limited, if applicable, by Section
25110), whether or not the receipts are excluded from the sales
factor by operation of Section 25137.  
   (6) "Qualified business activity" means any of the following:
 
   (1) 
    (A)  An agricultural business activity. 
   (2) 
    (B) An extractive business activity. 
   (3) 
    (C)  A savings and loan activity. 
   (4) 
    (D)  A banking or financial business activity. 
   (7) "Savings and loan activity" means any activity performed by
savings and loan associations or savings banks which have been
chartered by federal or state law.  
   (d) For purposes of this section:  
   (1) "Gross business receipts" means gross receipts described in
subdivision (e) or (f) of Section 25120 (other than gross receipts
from sales or other transactions within an apportioning trade or
business between members of a group of corporations whose income and
apportionment factors are required to be included in a combined
report under Section 25101, limited, if applicable, by Section
25110), whether or not the receipts are excluded from the sales
factor by operation of Section 25137.  
   (2) "Agricultural business activity" means activities relating to
any stock, dairy, poultry, fruit, furbearing animal, or truck farm,
plantation, ranch, nursery, or range. "Agricultural business activity"
also includes activities relating to cultivating the soil or raising
or harvesting any agricultural or horticultural commodity,
including, but not limited to, the raising, shearing, feeding, caring
for, training, or management of animals on a farm as well as the
handling, drying, packing, grading, or storing on a farm any
agricultural or horticultural commodity in its unmanufactured state,
but only if the owner, tenant, or operator of the farm regularly
produces more than one-half of the commodity so treated. 

   (3) "Extractive business activity" means activities relating to
the production, refining, or processing of oil, natural gas, or
mineral ore.  
   (4) "Savings and loan activity" means any activities performed by
savings and loan associations or savings banks which have been
chartered by federal or state law. 
   (5) "Banking or financial business activity" means activities
attributable to dealings in money or moneyed capital in substantial
competition with the business of national banks.  
   (6) "Apportioning trade or business" means a distinct trade or
business whose business income is required to be apportioned under
Sections 25101 and 25120, limited, if applicable, by Section 25110,
using the same denominator for each of the applicable payroll,
property, and sales factors.  
   (7) Paragraph (4) 
    (d)     Subparagraph (D) of paragraph (6)
 of subdivision (c) shall apply only if the Franchise Tax Board
adopts the Proposed Multistate Tax Commission Formula for the Uniform
Apportionment of Net Income from Financial Institutions, or its
substantial equivalent, and shall become operative upon the same
operative date as the adopted formula. 
   (8) 
    (e)  In any case where the income and apportionment
factors of two or more savings associations or corporations are
required to be included in a combined report under Section 25101,
limited, if applicable, by Section 25110, both of the following shall
apply: 
   (A) 
    (1)  The application of the more than 50 percent test of
subdivision (b) shall be made with respect to the "gross business
receipts" of the entire apportioning trade or business of the group.

   (B) 
    (2)  The entire business income of the group shall be
apportioned in accordance with either subdivision (a) or (b), or
subdivision (b) of Section  25128.5   25128.7
 , as applicable.
  SEC. 3.  Section 25128.5 of the Revenue and Taxation Code is
repealed. 
   25128.5.  (a) Notwithstanding Section 38006, for taxable years
beginning on or after January 1, 2011, any apportioning trade or
business, other than an apportioning trade or business described in
subdivision (b) of Section 25128, may make an irrevocable annual
election on an original timely filed return, in the manner and form
prescribed by the Franchise Tax Board to apportion its income in
accordance with this section, and not in accordance with Section
25128.
   (b) Notwithstanding Section 38006, for taxable years beginning on
or after January 1, 2011, all business income of an apportioning
trade or business making an election described in subdivision (a)
shall be apportioned to this state by multiplying the business income
by the sales factor.
   (c) The Franchise Tax Board is authorized to issue regulations
necessary or appropriate regarding the making of an election under
this section, including regulations that are consistent with rules
prescribed for making an election under Section 25113. 
  SEC. 4.  Section 25128.7 is added to the Revenue and Taxation Code,
to read:
   25128.7.  (a) Notwithstanding Section 38006, for taxable years
beginning on or after January 1, 2011, any apportioning trade or
business, other than an apportioning trade or business described in
subdivision (b) of Section 25128, shall apportion its business income
in accordance with this section, and not in accordance with Section
25128.
   (b) Notwithstanding Section 38006, for taxable years beginning on
or after January 1, 2011, all business income of an apportioning
trade or business described in subdivision (a) shall be apportioned
to this state by multiplying the business income by the sales factor.

   (c) The Franchise Tax Board may issue regulations necessary or
appropriate regarding the administration of this section.
  SEC. 5.  Section 25136 of the Revenue and Taxation Code is amended
to read: 
   25136.  (a) For taxable years beginning before January 1, 2011,
and for taxable years beginning on or after January 1, 2011, for
which Section 25128.5 is operative and an election under subdivision
(a) of Section 25128.5 has not been made, sales, other than sales of
tangible personal property, are in this state if:
   (1) The income-producing activity is performed in this state; or
   (2) The income-producing activity is performed both in and outside
this state and a greater proportion of the income-producing activity
is performed in this state than in any other state, based on costs
of performance.
   (3) This subdivision shall apply, and subdivision (b) shall not
apply, for any taxable year beginning on or after January 1, 2011,
for which Section 25128.5 is not operative for any taxpayer subject
to the tax imposed under this part.
   (b) 
    25136.    (a)  For taxable years beginning on
or after January 1, 2011:
   (1) Sales from services are in this state to the extent the
purchaser of the service received the benefit of the service in this
state.
   (2) Sales from intangible property are in this state to the extent
the property is used in this state. In the case of marketable
securities, sales are in this state if the customer is in this state.

   (3) Sales from the sale, lease, rental, or licensing of real
property are in this state if the real property is located in this
state.
   (4) Sales from the rental, lease, or licensing of tangible
personal property are in this state if the property is located in
this state. 
   (5) (A) If Section 25128.5 is operative, then this subdivision
shall apply in lieu of subdivision (a) for any taxable year for which
an election has been made under subdivision (a) of Section 25128.5.
 
   (B) If Section 25128.5 is not operative, then this subdivision
shall not apply and subdivision (a) shall apply for any taxpayer
subject to the tax imposed under this part.  
   (C) Notwithstanding subparagraphs (A) or (B), this subdivision
shall apply for purposes of paragraph (2) of subdivision (b) of
Section 23101.  
   (c) 
    (b)  The Franchise Tax Board may prescribe those
regulations as necessary or appropriate to carry out the purposes of
subdivision  (b)   (a)  .
  SEC. 6.  This act provides for a tax levy within the meaning of
Article IV of the Constitution and shall go into immediate effect.