BILL NUMBER: SB 116 AMENDED
BILL TEXT
AMENDED IN SENATE FEBRUARY 23, 2011
INTRODUCED BY Senator De León
(Coauthors: Senators DeSaulnier, Hancock, Hernandez, Leno,
Lowenthal, Price, Steinberg, and Wolk)
( Coauthors: Assembly Members
Blumenfield and Hueso )
JANUARY 19, 2011
An act to amend Sections 23101, 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 amended, 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 23101 of the Revenue
and Taxation Code is amended to read:
23101. (a) "Doing business" means actively engaging in any
transaction for the purpose of financial or pecuniary gain or profit.
(b) For taxable years beginning on or after January 1, 2011, a
taxpayer is doing business in this state for a taxable year if any of
the following conditions has been satisfied:
(1) The taxpayer is organized or commercially domiciled in this
state.
(2) Sales, as defined in subdivision (e) or (f)
of Section 25120 as applicable for the taxable year
, of the taxpayer in this state exceed the lesser of five
hundred thousand dollars ($500,000) or 25 percent of the taxpayer's
total sales. For purposes of this paragraph, sales of the taxpayer
include sales by an agent or independent contractor of the taxpayer.
For purposes of this paragraph, sales in this state shall be
determined using the rules for assigning sales under Section 25135
and subdivision (b) of Section 25136 and the
regulations thereunder, as modified by regulations under Section
25137.
(3) The real property and tangible personal property of the
taxpayer in this state exceed the lesser of fifty thousand dollars
($50,000) or 25 percent of the taxpayer's total real property and
tangible personal property. The value of real and tangible personal
property and the determination of whether property is in this state
shall be determined using the rules contained in Sections 25129 to
25131, inclusive, and the regulations thereunder, as modified by
regulation under Section 25137.
(4) The amount paid in this state by the taxpayer for
compensation, as defined in subdivision (c) of Section 25120, exceeds
the lesser of fifty thousand dollars ($50,000) or 25 percent of the
total compensation paid by the taxpayer. Compensation in this state
shall be determined using the rules for assigning payroll contained
in Section 25133 and the regulations thereunder, as modified by
regulations under Section 25137.
(c) (1) The Franchise Tax Board shall annually revise the amounts
in paragraphs (2), (3), and (4) of subdivision (b) in accordance with
subdivision (h) of Section 17041.
(2) For purposes of the adjustment required by paragraph (1),
subdivision (h) of Section 17041 shall be applied by substituting
"2012" in lieu of "1988."
(d) The sales, property, and payroll of the taxpayer include the
taxpayer's pro rata or distributive share of pass-through entities.
For purposes of this subdivision, "pass-through entities" means a
partnership or an "S" corporation.
SECTION 1. SEC. 2. 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 (2) of subdivision
(c) (b) 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. SEC. 3. 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).
(b)
25128. (a) If an apportioning
trade or business derives more than 50 percent of its "gross business
receipts" from conducting one or more qualified business activities,
as defined in subdivision (b), 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)
(b) For purposes of this section:
(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:
(A) An agricultural business activity.
(B) An extractive business activity.
(C) A savings and loan activity.
(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) 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.
(e)
(c) 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:
(1) The application of the more than 50 percent test of
subdivision (b) (a) shall be made with
respect to the "gross business receipts" of the entire apportioning
trade or business of the group.
(2) The entire business income of the group shall be apportioned
in accordance with either subdivision (a) or (b), or
subdivision (b) of this section or Section
25128.7, as applicable.
(d) The amendments made to this section by the act adding this
subdivision, shall apply to taxable years beginning on or after
January 1, 2011.
SEC. 3. SEC. 4. Section 25128.5 of
the Revenue and Taxation Code is repealed.
SEC. 4. SEC. 5. 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. SEC. 6. Section 25136 of the
Revenue and Taxation Code is amended to read:
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.
(b) The Franchise Tax Board may prescribe those regulations as
necessary or appropriate to carry out the purposes of subdivision
(a).
SEC. 6. SEC. 7. This act
provides for a tax levy within the meaning of Article IV of the
Constitution and shall go into immediate effect.