BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 116|
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THIRD READING
Bill No: SB 116
Author: De León (D)
Amended: 7/7/11
Vote: 27 - Urgency
SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 7/13/11
AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu
NOES: Huff, Fuller, La Malfa
SENATE APPROPRIATIONS COMMITTEE : 6-2, 8/15/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Emmerson
NO VOTE RECORDED: Runner
SUBJECT : Income taxes exemption: single sales factor:
sales and use taxes: manufacturing
SOURCE : Author
DIGEST : This bill makes changes to apportionment
formulas used to determine California taxable income for
specified multistate corporations, change the rules for
assigning intangibles and services for cable companies,
expand eligibility for the 2009 jobs tax credit, enact a
new education tax credit, and create a new sales and use
tax exclusion for manufacturing equipment.
Senate Floor Amendments of 7/7/11 (1) allows, instead of
mandating, an election of single factor or three factor
only when the tax is greater under the three factor
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formula; (2) expands the 2009 jobs credit; (3) adds a
manufacturing equipment sales and use tax exemption; (4)
creates a new education credit; and (5) changes the cost of
performance/market rule for cable companies.
ANALYSIS : Existing Law:
Apportionment Formula . A multistate firm generates profits
based on its operations in many states and has a right
under the United States Constitution to divide income
between these states for tax purposes, a process known as
"apportionment," to ensure that no state taxes more than
its fair share of that firm's income. The 1957 Uniform
Division of Income for Tax Purposes Act (UDITPA) created
the three-factor apportionment framework to capture the
factors of production; specifically, property to represent
capital, payroll to represent labor, and sales to represent
market presence.
In 1966, California adopted UDITPA where each of the three
factors had an equal weight of one-third. In 1993,
California adopted a "double-weighted" formula, reducing
the formula's weights on both property and payroll from
33.3 percent to 25 percent, but increasing the weight on
sales from 33.3 percent to 50 percent, thereby reducing
that share of a the firm's income apportioned to states
where it employs relatively more people and produces more
goods in the state compared to its sales. Under the
change, a firm with all or most of its production and
payroll in California, but a smaller share of its sales,
benefits from the change, whereas a firm that either
employs few or no people or owns little to no property
here, but sells into California, pays more tax. Many other
states also changed the apportionment weights in the 1980s
and 1990s to induce firms to maintain or relocate
facilities and employees in the state.
Starting in 2011, California's apportionment formula allows
multi-state firms to annually choose either the above
apportionment formula or to use only its sales, commonly
known as the "single sales factor."
Each of the factors in the apportionment formula is a
fraction: the numerator is the value of the item in
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California and the denominator is the value of the item
everywhere. The property factor generally includes all
tangible property owned or rented during the taxable year.
The payroll factor includes all forms of compensation paid
to employees. The sales factor includes all gross receipts
from the sale of tangible and intangible property.
Since 1993, the apportionment formula for most taxpayers
has been a three-factor formula consisting of payroll,
property and double weighted sales as illustrated below.
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| Average |+ | Average | + ( | |) = | California |
|Californi| |Californi| 2x |Californi| |Apportionmen|
| a | | a | | a Sales | | t Formula |
|Property | | Payroll | | | | |
|---------+--+---------+------+---------+----+------------|
| Average | | Average | | Total | | |
| Total | | Total | | Sales | | |
|Property | | Payroll | | | | |
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The only exceptions to this rule are four industries:
agriculture, extraction, including oil, savings and loan
and financial services. These four industries must use the
three factor formula without the double weighted sales
factor.
Beginning in 2011, as illustrated below, a qualified
business may elect to use a single sales factor based on
100 percent sales, instead of the three factor formula
described above. The industries listed above still do not
qualify for the single sales factor.
--------------------------------------
| California | = | California |
| Sales | | Apportionment |
| | | Formula |
|--------------+---+-------------------|
| Total | | |
| Sales | | |
--------------------------------------
Intangible Sourcing . As part of the budget agreement of
2010 (SB 858, ÝSenate Budget and Fiscal Review Committee],
Chapter 721, Statutes of 2010), taxpayers electing the
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three-factor, double-weighted sales formula must use the
cost of performance method to source sales of intangible
items starting with the 2011 taxable year; taxpayers
electing sales factor-only apportionment of income must
source the sales of intangibles to California using the
market rule. Intangibles are everything that isn't
"stuff", and include all services, such as online
stockbrokers and telecommunications, and licenses to
operate software programs, among others.
Sales of Intangibles - "Costs of Performance." A company
includes no revenue from its sales of intangibles to
California in the sales factor if the firm incurs a
plurality of the costs associated with developing these
products or services in another state; if the plurality
occurs in California, then the company includes all of its
sales in its California sales factor. For example, a
company that produces streaming video may spend $500,000 in
California and $520,000 in Oregon when developing the
service. The firm does not include any sales of its sales
of streaming video in this state in its California sales
factor, because it incurred most of its costs of
performance outside the state. Had the firm incurred most
of its costs of performance in California, the taxpayer
must include all of its sales of the video service in its
California sales factor.
Sales of Intangibles - "The Market Rule." Under the
competitively-neutral market rule, all firms source these
sales based on the state in which the product or service is
ultimately used, so all firms report sales based on how
much they sell in the state, instead of where they invested
when developing the intangible item or service. Each
license for an operating system used on a California
personal computer would be included in the software firm's
California sales factor. In the example above, the firm
would include its sales of the video service to customers
in this state in its California sales factor.
The following chart summarizes California's history of both
apportionment and intangibles.
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| |1966 - |1993-2010 |2011 |
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| |1992 | | |
|--------------+----------+----------+---------------------|
|Apportionment |3-factor |3-factor |Elective (3-factor |
| |formula |formula |formula with double |
| | |(double-we|weighted sales or |
| | |ighted |single sales factor) |
| | |sales | |
| | |factor) | |
|--------------+----------+----------+---------------------|
|Intangibles |Costs of |Costs of |Cost of performance |
| |performanc|performanc|if elect 3-factor; |
| |e |e |formula; market rule |
| | | |if single sales |
| | | |factor elected |
| | | | |
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Jobs Tax Credit . Current state law, SB 15X3 (Calderon),
Chapter 17, Statutes of 2009, allows a credit for taxable
years beginning on or after January 1, 2009, for a
qualified employer in the amount of $3,000 for each
qualified full-time employee hired in the taxable year,
determined on an annual full-time equivalent basis. The
calculation of annual full-time would be the total number
of hours worked for the taxpayer by the employee (not to
exceed 2,000 hours per employee) divided by 2,000. This
credit is allocated by the Franchise Tax Board (FTB) and
has a cap of $400 million for all taxable years. The
credit remains in effect until December 1 of the calendar
year after the year in which the cumulative credit limit
has been reached and is repealed after that date. Any
credits not used in the taxable year may be carried forward
up to eight taxable years.
A qualified employer is a taxpayer employing 20 or less
employees.
In addition, both the Personal Income Tax Law and
Corporation Tax Law provisions regarding this credit
contain certain anti-abuse rules. These rules were
designed to prevent an existing business from being treated
as first commencing business in the state when the business
simply changed structure, i.e. changed from a sole
proprietor to an S-corporation.
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Sales and Use Tax . Existing law provides no special tax
treatment to entities engaged in manufacturing or software
production for purchases of equipment and other supplies.
Business entities engaged in manufacturing, research and
development, and software producing activities that make
purchases of equipment and supplies for use in the conduct
of their manufacturing and related activities are required
to pay sales and use tax on their purchases to the same
extent as any other person either engaged in business in
California.
The state sales and use tax rate is 8.25 percent as
detailed below. Cities and Counties may increase the sales
and use tax rate up to 2 percent for either specific or
general purposes with a vote of the people.
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|4.75% |State |Goes to State's General Fund |
| | |(Total General Fund is 6%) |
|---------+----------+--------------------------------------|
|0.25% |State |Goes to State's General Fund |
| | |(Total General Fund is 6%) |
|---------+----------+--------------------------------------|
|0.25% |State |Goes Towards State's Fiscal Recovery |
| | |Fund, to pay off Economic Recovery |
| | |Bonds (2004) |
|---------+----------+--------------------------------------|
|0.50% |State |Goes to Local Public Safety Fund to |
| | |support local criminal justice |
| | |activities (1993) |
|---------+----------+--------------------------------------|
|0.50% |State |Goes to Local Revenue Fund to support |
| | |local health and social services |
| | |programs (1991 Realignment) |
|---------+----------+--------------------------------------|
|1.00% |Local |0.25% Goes to county transportation |
| | |funds |
| | |0.75% Goes to city and county |
| | |operations |
|---------+----------+--------------------------------------|
|Total: | | |
|---------+----------+--------------------------------------|
|7.25% |State/Loca|Total Statewide Base Tax Rate |
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| |l | |
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For a ten-year period ending December 31, 2003, California
law provided a partial (General Fund only) sales and use
tax exemption for purchases of equipment and machinery by
new manufacturers, and income and corporation tax credits
for existing manufacturers' investments (MIC) in equipment
(SB 671 ÝAlquist], Chapter 881, Statutes of 1993). The
bill provided an exemption to the state tax portion for
sales and purchases of qualifying property, and the income
tax credit was equal to six percent of the amount paid for
qualified property placed in service in California.
Qualified property was depreciable equipment used primarily
for manufacturing, refining, processing, fabricating or
recycling; for research and development; for maintenance,
repair, measurement or testing of qualified property; and
for pollution control meeting state or federal standards.
The MIC had a conditional sunset date which required that
the provisions sunset in any year following a year when
manufacturing employment (as determined by the Employment
Development Department) did not manufacturing employment by
more than 100,000. On January 1, 2003, manufacturing
employment, less aerospace, did not exceed the 1994
employment number by more than 100,000 (it was less than
the 1994 number by over 10,000), and therefore the MIC and
partial sales tax exemption sunset at the end of 2003.
This bill:
Apportionment Formula . This bill amends the apportionment
formula in two ways:
1. Single Sales Factor: This bill makes the single sales
factor apportionment formula mandatory for all taxpayers
except those in a qualified business activity
(extractive, agricultural, savings and loans, and banks
and financial services) for taxable years beginning on
or after January 1, 2011.
2. Elective Single Sales Factor and 50 percent assignment
of intangibles to this state. As introduced, this bill
required all taxpayers to use the mandatory single sales
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factor. As amended, this bill allows taxpayers to
choose the 3-factor formula only when it results in a
greater amount of tax owed.
Intangible Sourcing . 50/50 market costs of performance.
SB 858 (Senate Budget Committee), Chapter 721, Statutes of
2010, requires that companies that elect single sales
factor choose the "market" rule and source all intangible
property to this state and taxpayers that elect to pay
taxes under the 3-factor formula source intangible property
to where the goods originate. This bill as amended, allows
cable companies to choose either that have a "minimum
investment" in this state of $250 million or more, to
assign 50 percent of their intangible property to "this
state" under the market rule and 50 percent shall "not be
assigned to this state."
Jobs Tax Credit . This bill expands the eligibility for
the jobs credit to employers with 50 or fewer employees,
and also increases the amount of the credit from $3,000 to
$4,000 for each new hire.
Manufacturing Equipment Sales Tax Exemption . Current law
provides that all tangible personal property in this state
is subject to the sales and use tax.
This bill creates a new manufacturing sales and use tax
exemption. This bill provides that starting in 2012-13,
companies would be given a one percent exemption from the
General Fund Sales and Use Tax (SUT) for equipment, and
start-up companies would be eligible for a five percent
exemption.
K-12 Education Investment and Higher Education Investment
Tax Credit Programs . Existing law provides for a deduction
against net tax for any charitable contribution. The law
also provides for various credits with the intent of
changing behavior or encouraging investment.
This bill creates a new credit against net tax. This bill
sets up a special fund within the general fund to which
taxpayers may contribute. This bill provides a 75 percent
credit for contributions to the special fund. This credit
may not be combined with any other deduction or charitable
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contribution.
State Revenue Impact
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|Estimated Revenue Impact of SB 116 as Amended on 7/7/2011 |
|For Tax Years Beginning On Or After January 1, 2011 |
|Enactment Assumed After June 30, 2011 |
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|---------+------------+-------------+-------------+-------------|
| |2011-12 |2012-13 |2013-14 |2014-15 |
|---------+------------+-------------+-------------+-------------|
|Job Tax |-45,000,000 |22,000,000 |45,000,000 |55,000,000 |
|Credit | | | | |
|---------+------------+-------------+-------------+-------------|
|Education|-420,000,000|-900,000,000 |-950,000,000 |-950,000,000 |
| credit | | | | |
|---------+------------+-------------+-------------+-------------|
|Mandatory|1,300,000,00|$1,100,000,00|$1,100,000,00|$1,000,000,00|
| SSF |0 |0 |0 |0 |
|---------+------------+-------------+-------------+-------------|
|Special |-38,000,000 |-38,000,000 |-37,000,000 |-39,000,000 |
|sales | | | | |
|rule-cabl| | | | |
|e corps | | | | |
|---------+------------+-------------+-------------+-------------|
|Sales |-261,000,000|-275,000,000 |-291,000,000 |-301,000,000 |
|and Use | | | | |
|Tax | | | | |
|---------+------------+-------------+-------------+-------------|
|Net |536,000,000 |-91,000,000 |-133,000,000 |-235,000,000 |
|Fiscal | | | | |
|Impact | | | | |
----------------------------------------------------------------
Comments
Purpose of this bill . This bill seeks to stop rewarding
companies that move jobs out of state, incentivize job
creation here at home, and save California taxpayers over
$1 Billion annually through the implementation of a
mandatory single sales factor in the calculation of
corporate taxes owed to the state. The trend around the
country is states moving towards the "single sales factor"
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method for the calculation of taxes. However, in
California's adoption of this method in 2009, instead of
adopting a mandatory single sales factor like the vast
majority of other states-including Texas, New York,
Michigan, Illinois, Oregon, Washington, and just last
April, New Jersey-our tax law has an annual elective single
sales factor. Allowing corporations to choose the
three-factor, double weighted formula, which lowers their
tax liability the smaller their California presence,
unfairly benefits companies that move jobs or base the bulk
of their operations out-of-state-at the expense of $1
Billion/year to California's taxpayers. In order to
eliminate this competitive disadvantage and level the
playing field for California-based companies, we need to
make the single sales factor mandatory. This bill is about
putting California first-we should be encouraging job
creation and greater investment here in our home state,
instead of rewarding out-of-state corporations and
California companies that move jobs out of state.
According to the recent Legislative Analyst's Office
report, Reconsidering the Optional Single Sales Factor
(2010), adoption of a mandatory single sales factor would
result in a net gain of tens of thousands of jobs in
California. Other components of this bill also seek to
facilitate job creation and assist in California's economic
recovery by expanding eligibility for the existing Jobs
Credit, and providing a sales tax exemption on the purchase
of manufacturing equipment. In addition, two new tax
credit programs-the K-12 Education Investment Tax Credit
and the Higher Education Investment Tax Credit-would
provide taxpayers with access to $1 Billion in tax credits,
and direct funds generated towards our under-funded public
education systems. State budget solutions over the last
several fiscal years have included deep cuts and payment
deferrals to K-12 Education and the University of
California, California State University, and California
Community College systems. These tax credit programs will
help in the repayment of money owed to schools under
Proposition 98, and help rebuild the state's investment in
education.
FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: No
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According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Mandatory single-sales ($1,300,000)
($1,100,000) ($1,100,000) General
factor (revenue gains)
Cable corps, special rules $38,000
$38,000$38,000 General
Jobs Tax Credit changes $45,000
($22,000)($45,000) General
New Education Tax Credit $420,000 $900,000
$950,000 General
Manufacturing SUT $207,400 $218,800 General
exemption
__________________________________________________________
_
Net Tax Revenue Impact: ($797,000)
$23,400$61,800 General
FTB administration over $125 over
$250 over $250 General
BOE administration $657 $558
$516General
Education donations ($1,000,000)
($1,000,000) ($1,000,000) Special*
____________
* K-12 Investment Tax Credit Program Special Fund and the
Higher Education Investment Tax Credit Program Special
Fund
SUPPORT : (Verified 8/16/11)
Apple Inc.
BayBio
BIOCOM
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California Healthcare Institute
Community College League of California
Community Partnership
Genentech
Hunger Action Los Angeles
Mayor Antonio Villaraigosa, City of Los Angeles
Mayor Ronald O. Loveridge, City of Riverside
QUALCOMM
St. Mary's Center
OPPOSITION : (Verified 8/16/11)
California Chamber of Commerce
California Manufacturers and Technology
California Taxpayers Association
ARGUMENTS IN OPPOSITION : In an opposition letter, the
California Chamber of Commerce, the California
Manufacturers and Technology Association and California
Taxpayers Association state that the elective single sales
factor was a "remarkable, although rare, bright spot in
California's notoriously bad business climate." The three
groups state that the state was correct in making the
single sales factor elective in 2009 and that the attempt
to make it mandatory negates the importance of business
contributions to the state's overall economic health.
Furthermore, the opposition states that not all business
models fit easily into a single sales calculation, but
these companies have significant investments of property
and payroll in California. The size of their sales in one
of the largest markets in the world renders those
investments moot by comparison. Finally, they state that
this bill will "cut the heart out of an already weakened
California economy."
AGB:kc 8/17/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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