BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
SB 209 (Lieu) - Income Taxes: Exclusions: Deferral: Qualified
Small Business Stock
Amended: April 3, 2013 Policy Vote: G&F 6-1
Urgency: No Mandate: No
Hearing Date: May 13, 2013 Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: SB 209 would reenact a recently struck-down income
exclusion for gains when selling qualified small business stock
(QSBS). Under the measure, (1) taxpayers who did not already
claim the QSBS exclusion between 2008 and 2012 could do so, (2)
the Franchise Tax Board (FTB) would not issue notices of
proposed assessments (NPAs, essentially tax bills) and seek
interest for taxable years 2008 through 2011, (3) the QSBS
exclusion would be suspended for taxable years 2013 through
2015, and (4) the QSBS exclusion (specifically the element not
struck down by the court) would resume beginning January 1,
2016.
Fiscal Impact:
The bill would require changes to existing tax forms and
instructions, as well as information systems, resulting in
an unknown increase (greater than $50,000 General Fund) to
the FTB's printing, processing and information technology
costs.
The calculation of revenue impact resulting from this measure
depends entirely on the baseline revenue scenario selected to
which this measure compares (see Staff Comments). From the
perspective that all QSBS exclusions and deferrals are currently
invalid dating back to 2008, this measure would result in annual
revenue losses in the range of roughly $30 million to $50
million.
Alternatively, using the methodology that QSBS exclusions and
deferrals associated with the portion of the statute not struck
down are valid, because it would suspend the QSPS exclusion for
the period 2013 to 2015, this measure's net revenue loss in the
aggregate (as currently drafted) would be greatly reduced,
SB 209 (Lieu)
Page 1
approaching revenue neutrality.
Background: As originally enacted, federal law allowed taxpayers
to defer the entire gain or exclude from income 50 percent of
the gain from the sale of QSBS in specified circumstances. In
1993, the State enacted a statute that was generally identical
to the federal version, with three exceptions:
A requirement that when the stock was issued, at least
80 percent of the corporation's payroll was in the State.
A requirement that, during substantially all of the
taxpayer's holding period of the subject stock, at least 80
percent (by value) of the corporation's assets was used in
the active conduct of one or more qualified trades or
businesses in the State.
A requirement that, during substantially all of the
taxpayer's holding period of the subject stock, at least 80
percent of the corporation's payroll expense was
attributable to employment in the State.
A California Court of Appeal, hearing the case of a taxpayer who
didn't meet one of these tests, ruled in August 2012 that two of
the incentive's three requirements discriminated against the
interstate commerce clause of the U.S. Constitution. In
response, FTB invalidated all QSBS deferrals and exclusions
taxpayers claimed in each taxable year within the statute of
limitations (2008). FTB directed affected taxpayers to file
amended returns without QSBS deferrals or exclusions back to
2008, and pay any resulting tax due, along with potential
interest.
Proposed Law: SB 209 would reenact California's QSBS deferral
and 50 percent exclusion statutes with the requirement that the
firm have 80 percent of its payroll in the state at issuance
(the one requirement not struck down by the Court of Appeal).
SB 209 reenactment applies to the 2008 through 2012 taxable
years, thereby absolving taxpayers who claimed the deferral or
exclusion and expect to soon receive NPAs from FTB. The measure
then enacts the QSBS deferral and exclusion again beginning in
the 2016 taxable year.
SB 209 (Lieu)
Page 2
Related Legislation: AB 901 (Wieckowski) would provide
retroactive tax relief for taxpayers who claimed QSBS
incentives.
Staff Comments: From the perspective that the entire QSBS
statute is invalid in the aftermath of the Court of Appeal
ruling, SB 209 would lead to a revenue loss for the period 2008
through 2012, and ongoing beginning in 2016 (because the
baseline under this scenario is that the QSBS exclusion is
completely "off the table"). Specifically, FTB estimates the
following General Fund revenue losses: $45 million in 2012-13,
$34 million in 2013-14, $9 million in 2014-15, $58 million in
2015-16, and roughly $45 million annually thereafter. The
revenue loss results from (1) allowing the QSBS exclusion to
taxpayers who have not already claimed it previously for the
period 2008 to 2012, and (2) not issuing NPAs (nor seeking
interest) for the period 2008 to 2011.
Alternatively, from the viewpoint that the portion of the QSBS
exclusion statute that was not struck down by the Court of
Appeal is current law, the bill's current calculated net revenue
loss would be considerably smaller. Revenue losses would still
result from (1) allowing taxpayers to claim the QSBS exclusion
from 2008 to 2012 who did not do so previously, and (2) a larger
number of taxpayers qualifying for the exclusion beginning in
2016. Both result from the bill only including the 80 percent
payroll requirement, whereas the previous statute had the other
two requirements that were struck down. However, these revenue
losses would be nearly offset because under the bill, the QSBS
exclusion "goes dark" from 2013 to 2015. Current calculations of
the net impact of these two effects results in a small revenue
loss. However, reducing the percentage of the exclusion, from 50
percent down closer to 38 percent, could result with the bill
having no aggregate net impact on General Fund revenues.