BILL ANALYSIS �
AB 1413
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Date of Hearing: April 29, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1413 (Committee on Revenue and Taxation) - As Introduced:
March 19, 2013
Majority vote. Fiscal committee.
SUBJECT : Tentative minimum tax: credits: exempt
organizations.
SUMMARY : Clarifies the scope of the California Motion Picture
Tax Credit (film tax credit) utilization and simplifies the
process by which certain nonprofit organizations may obtain
tax-exempt status in California. Specifically, this bill :
1)Provides that the film tax credit may be used to reduce a
qualified corporate taxpayer's "regular" income tax beyond the
tentative minimum tax (TMT) for taxable years beginning on or
after January 1, 2011.
2)Permits organizations formed under Internal Revenue Code (IRC)
Section 501(c)(4), (5), (6), or (7) that are tax-exempt for
federal tax purposes to be treated as tax-exempt organizations
for California tax purposes, without approval by the Franchise
Tax Board (FTB). Specifically:
a) Provides that an organization organized and operated for
nonprofit purposes shall be exempt under the Corporation
Tax (CT) Law upon submission to the FTB a copy of the
determination letter or ruling issued by the Internal
Revenue Service (IRS) approving the organization's
tax-exempt status under IRC Section 501(c)(4), (5), (6), or
(7).
b) Requires the organization to notify the FTB of a
revocation or suspension of tax-exempt status for federal
income tax purposes, and upon receipt thereof, the FTB
shall rescind the organization of tax-exempt status for
state tax purposes.
c) States that the California approval of tax-exempt status
based upon notification of federal approval does not
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prevent the FTB from revoking the exemption of an
organization that is not operated in accordance with
California or federal laws.
d) Provides that an organization formed as a California
corporation or is qualified to do business in this state
will not qualify as tax exempt for state tax purposes if it
is listed by the Secretary of State (SOS) or FTB as
"suspended" or "forfeited" and will not receive an
acknowledgment letter from the FTB until it reinstates its
status with the SOS and FTB as an "active" corporation.
e) Specifies that, if the FTB revokes or suspends
tax-exempt status of an organization, the exemption may be
reinstated only upon compliance with state tax laws,
regardless of whether the organization provides a
determination letter from the IRS.
3)Authorizes the FTB to prescribe rules and regulations to
implement this bill.
4)Declares that the retroactive application of amendments made
to the provisions relating to the film tax credit serves a
public purpose for specified reasons and does not constitute a
gift of public funds within the meaning of Section 6 of
Article XVI of the California Constitution.
EXISTING FEDERAL LAW:
1)Exempts organizations from tax in specified circumstances and
under specified provisions of the IRC. The most common
category of tax-exempt organizations are known as 501(c)(3)
organizations, being identified by reference to the IRC
section under which they are exempt. These include religious,
charitable, scientific, testing for public safety, literary,
or educational purposes, or to promote sports activities,
prevent cruelty to children or animals, etc.
2)Provides that civic leagues, social welfare organizations and
local associations of employees are exempt from tax under IRC
Section 501(c)(4). Social welfare organizations generally
fall into one of the following categories: (a) organizations
that may perform some type of public or community benefit but
whose principal feature is lack of private benefit or profit;
(b) organizations that would qualify for exemption under IRC
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Section 501(c)(3) but for a defect in their organizing
documents; and (c) nonprofit organizations that traditionally
have been labeled as social welfare organizations.
3)Allows labor, agricultural and horticultural organizations to
obtain tax-exempt status under IRC Section 501(c)(5), provided
they do not have earnings that inure to the benefit of any
member, as specified.
4)Authorizes trade associations, chambers of commerce, real
estate boards, boards of trade, and professional football
leagues that meet the requirements of IRC Section 501(c)(6) to
obtain tax-exempt statutes from federal income tax as business
leagues.
5)Exempts from federal income tax those social and recreational
clubs that satisfy the requirements of IRC Section 501(c)(7).
6)Provides that, even though requirements for tax-exempt status
are set forth in statute, tax-exempt status is not granted
automatically. Most organizations must apply with the IRS and
provide information as required by statute.
EXISTING STATE LAW :
1)Allows a qualified taxpayer, for taxable years beginning on or
after January 1, 2011, a film tax credit, under either the
Personal Income Tax Law (PIT) or CT Law. Requires the
California Film Commission (CFC) to allocate $100 million of
credit authorizations each year during the period 2009-10
through 2016-17 FYs on a first-come, first-served basis.
2)Prohibits taxpayers from using tax credits allowed under the
Personal Income Tax (PIT) law or Corporation Tax (CT) law to
reduce the taxpayers' regular tax below the TMT, unless
expressly provided otherwise.
3)Does not expressly allow a qualified taxpayer to use the film
tax credit to reduce its regular tax liability below the TMT.
4)Conforms to provisions of the IRC on the taxability of exempt
organizations and conforms by reference to federal law with
respect to terms and concepts. However, California maintains
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separate determinations of exempt status for nonprofit
organizations. As required under existing law, an
organization seeking to obtain tax exempt status for
California purposes must submit a completed exemption
application, a filing fee of $25, and various documents
including formation documents for the organization and a
balance sheet.
5)Provides that a federally tax-exempt 501(c)(3) organization
may establish California tax-exempt status by submitting a
copy of the IRS tax-exempt notice to FTB and receiving a
letter from the FTB verifying the organization's exemption
from state tax.
6)States that an LLC's or corporation's powers, rights, and
privileges may be suspended (domestic) or forfeited (foreign)
for failure to file a return or nonpayment of amounts due.
FISCAL EFFECT : The FTB staff estimates that the provision
simplifying the process by which certain nonprofit organizations
may obtain tax-exempt status in California would result in an
annual General Fund (GF) revenue loss of $9,000 in fiscal year
(FY) 2014-15, $20,000 in FY 2015-16, $20,000 in FY 2015-16, and
$20,000 in every FY thereafter. The FTB staff also estimates
that the provision of this bill clarifying the scope of the film
tax credit utilization would result in an annual GF revenue loss
of $9.3 million in FY 2012-13, $800,000 in FY 2013-14, $1.3
million in FY 2014-15, and $600,000 in FY 2016-17, and would
result in a GF revenue gain of $10,000 in FY 2015-16.
COMMENTS :
1)The Purpose of this Bill . AB 1413 is set to accomplish two
goals: To clarify that a taxpayer may use the film tax credit
to reduce its regular tax beyond the TMT, and to simplify the
process for applying for California tax-exempt status.
2)Arguments in Support . The proponents of this bill state that
AB 1413 "corrects an oversight in the original legislation"
and fulfills the original purpose of the film tax credit
program, "which is to permit production companies to maximize
the utility of the credit." They assert that allowing the
credit "to be used by film production companies to reduce
their tax liability below the otherwise applicable minimum tax
"is a common treatment for similar tax programs." Finally,
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the proponents argue that "AB 1413 will protect jobs in
California's signature industry - the film industry."
3)Non-profit Organizations: A Simplified Process for Applying
for Tax-Exempt Status in California. Currently, obtaining
tax-exempt status under California tax law is a separate
process from obtaining a federal exemption. If a California
charitable nonprofit received federal tax-exempt 501(c)(4),
(5), (6), or (7) status from the IRS, it must separately apply
for a state tax exemption. Specifically, the organization
will have to complete and submit to the FTB an exemption
application form (Form 3500), pay a filing fee of $25, and
receive a letter issued by the FTB indicating that the
organization is exempt from tax. The exemption application
must include the Articles of Incorporation, By-Laws of the
organization, and financial statements showing assets,
liabilities, receipts, and disbursements. To be exempt from
tax, the organization must be organized and operated for one
or more exempt purposes listed in the CT Law. The exempt
purposes for state tax purposes are the same as those listed
in the IRC.
In 2008, Revenue and Taxation Code (R&TC) Section 23701(d) was
amended to allow a nonprofit organization that has received a
determination letter from the IRS stating that it qualifies as
a charitable organization under IRC Section 501(c)(3) to
submit the letter to the FTB in lieu of submitting Form 3500
for a tax exemption under California law [AB 897 (Houston),
Chapter 238, Statues of 2007]. The change in law greatly
improved and simplified the application process for non-profit
organizations and benefitted both tax practitioners and the
FTB.
AB 1413 would extend the benefits of this simplified process
to organizations formed under IRC Section 501(c)(4), (5), (6),
and (7), by similarly allowing those organizations to submit a
determination letter from the IRS to the FTB in lieu of filing
Form 3500. It would still hold those organizations
accountable but remove the unnecessary duplicative paperwork.
Furthermore, AB 1413 would preserve FTB's ability to revoke an
organization's tax-exempt status and would retain all other
registration and reporting requirements with the California
SOS and the Attorney General. Finally, this bill would
prohibit organizations formed as a California corporation or
qualified to do business in the state from obtaining
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tax-exempt status using the simplified exemption process if
the organization's status is either "suspended" or "forfeited"
with the FTB or SOS. The organization may become eligible for
the simplified process once it is listed as "active" with both
the FTB and SOS. This provision is necessary to encourage a
suspended or forfeited corporation to satisfy its tax return
and tax payment obligations in the state.
While this bill will be operative for requests for California
tax-exempt status filed on or after January 1, 2014, it
specifies that the effective date of an organization's
tax-exempt status for state tax purposes will be no later than
the effective date of that organization's tax-exempt status
for federal tax purposes. The FTB proposes a technical
amendment to replace the phrase "no later than" with "no
earlier than" for purposes of specifying the effective date of
the state exemption.
4)The Exclusion from TMT: The Film Tax Credit . In February
2009, the film tax credit was enacted as a part of an economic
stimulus plan to promote production spending, jobs, and tax
revenues in California. Originally, the program was scheduled
to sunset in fiscal year (FY) 2013-14, but was extended by the
Legislature in 2011 for one additional year - until FY
2014-15. [AB 1069 (Fuentes) Chapter 731, Statutes of 2011].
In 2012, the operation of the film tax credit was extended for
two additional years, thereby authorizing the allocation of an
additional $100 million annually in tax credits to qualified
productions from July 1, 2015, until July 1, 2017. [AB 2026
(Fuentes) Chapter 841].
The enabling legislation, however, did not expressly add the
film tax credit to the list of tax credits that may be used to
reduce a corporate taxpayer's "regular tax" beyond the
"tentative minimum tax" or TMT. This language is routinely
included in over 97% of the tax credits claimed by California
corporations. As such, the film tax credit may be used to
reduce regular tax liability but only to the TMT level, which
prevents full monetization of the credit as envisioned by the
authors of the original legislation that enacted the film tax
credit program. In many cases, the credit is limited to about
25% of the amount awarded. Because the use of the film tax
credit is similarly limited in future years, even "carried
over" credits may not be fully utilized.
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"Tentative minimum tax" or TMT is determined by computing the
"alternative minimum taxable income" (i.e., income computed by
adding back to regular taxable income certain tax preference
items and by making certain adjustments to taxable income),
subtracting from it the $40,000 "exemption amount" and
multiplying the remaining amount by a flat rate of 6.65%.
Generally, the TMT is compared to regular tax before credits,
and the amount by which TMT exceeds regular tax before credits
is the Alternative Minimum Tax (AMT). The AMT can affect tax
liability in either or both of two ways: An AMT liability may
be assessed in excess of the taxpayer's regular tax liability
and the AMT calculation may reduce the amount of tax credits
that a taxpayer is allowed, thus effectively increasing
regular tax.
While, as a general rule, tax credits may not be used to reduce
the regular tax below the TMT, R&TC Section 23036 provides an
exception for certain types of credits. It lists 17 former
and present tax credits that may be used to reduce regular tax
beyond TMT. Some of these credits include the research and
development credit, the enterprise zone sales tax credit, the
enterprise zone hiring credit, and the former manufacturing
investment credit. The film tax credit, however, was
inadvertently omitted from that list. The proposed technical
fix is needed to allow taxpayers to utilize the film tax
credit in full, as intended by the Legislature, including the
credit allocations awarded in prior years. This proposal,
however, would only apply to corporations and not to taxpayers
subject to the PIT Law.
5)Double-referral . This bill was referred to this Committee and
the Committee on Arts, Entertainment, Sports, Tourism, and
Internet Media. AB 1413 passed out of the Committee on Arts,
Entertainment, Sports, Tourism, and Internet Media on Consent
with a 9-0 vote.
REGISTERED SUPPORT / OPPOSITION :
Support
California Teamsters Public Affairs Council
Directors Guild of America
International Alliance of Theatrical Stage Employees
International Brotherhood of Teamsters, Local 399
Laborers' International Union of North America, Local 724
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Professional Musicians Local 47
Recording Musicians Association
SAG-AFTRA
Opposition
None of file
Analysis Prepared by : Oksana Jaffe/ REV. & TAX. / (916)
319-2098