BILL ANALYSIS Ó
AB 154
Page 1
ASSEMBLY THIRD READING
AB
154 (Ting)
As Amended May 28, 2015
2/3 vote. Urgency
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|Committee |Votes |Ayes |Noes |
| | | | |
| | | | |
|----------------+------+--------------------+----------------------|
|Revenue & |6-0 |Ting, Dababneh, | |
|Taxation | |Gipson, Roger | |
| | |Hernández, Mullin, | |
| | |Quirk | |
| | | | |
| | | | |
|----------------+------+--------------------+----------------------|
|Appropriations |15-0 |Gomez, Bigelow, | |
| | |Bonta, Calderon, | |
| | |Daly, Eggman, | |
| | |Eduardo Garcia, | |
| | |Gordon, Holden, | |
| | |Jones, Quirk, | |
| | |Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
| | | | |
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SUMMARY: Changes California's specified date of conformity to
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federal income tax law from January 1, 2009 to January 1, 2015
and, thereby, generally conforms to numerous changes made to
federal income tax law during that six-year period. Specifically,
this bill:
1)Conforms or partially conforms to the following federal
provisions relating to the:
a) Exclusion from gross income of qualified military base
realignment and closure fringe benefits. [Worker, Homeowner,
and Business Assistance Act of 2009 (Public Law (P.L.)
111-92).]
b) Denial of deductions for annual fee on branded
prescription pharmaceutical manufacturers and importers.
[Patient Protection and Affordable Care Act (P. L. 111-148).]
c) Disclosure of information with respect to foreign
financial assets. [Hiring Incentives to Restore Employment
(HIRE) Act (P.L. 111-147).]
d) Increase in additional tax on distributions from Archer
MSAs (Medical Savings Accounts) not used for qualified
medical expenses. [Patient Protection and Affordable Care
Act (P.L. 111-148).]
e) Certain swaps not treated as Section 1256 contracts.
[Dodd-Frank Wall Street Reform and Consumer Protection Act
(P.L. 111-203).]
f) Special rule with respect to certain redemptions by
foreign subsidiaries. [State Fiscal relief and Other
Provisions; Revenue Offsets (P.L.111-226).]
g) Limitation on penalty for failure to disclose reportable
transactions based on resulting tax benefits. [Small
Business Jobs Act of 2010 (P.L. 111-240).]
h) Removal of cellular telephones and similar
telecommunications equipment from listed property. [Small
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Business Jobs Act of 2010 (P.L. 111-240).]
i) Special rules for annuities received from only a portion
of a contract. [Small Business Jobs Act of 2010 (P.L.
111-240).]
j) Modification of the definition of "control" for purposes
of Internal Revenue Code (IRC) Section 249. [Federal
Aviation Administration Modernization and Reform Act of 2012
(P.L. 112-95, Title IX).]
aa) Transfers of excess pension assets. [Moving Ahead for
Progress in the 21st Century Act (MAP-21) (P.L. 112-141).]
bb) Modifications of provisions related to acquisitions,
disposition and aggregation of research credit expenditures.
[American Taxpayer Relief Act of 2012 (ATRA) (P.L. 112-240).]
cc) Indian general welfare benefits. [Tribal General Welfare
Act of 2014 (P.L. 113-168).]
dd) Investment direction rule for 529 plans. [The Achieving a
Better Life Experience Act of 2014 (P.L. 113-295).]
2)Provides that the state shall not conform to certain federal
provisions, including, among others:
a) Deferral and ratable inclusion of income arising from
business indebtedness discharged by the reacquisition of a
debt instrument. [American Recovery and Reinvestment Tax Act
of 2009 (P.L. 111-5).]
b) Exception from the limitations applicable to a "loss
corporation" that experiences an "ownership change" and the
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extent to which it may offset taxable income in any
post-change taxable year by pre-change net operating loss
(NOL), certain built-in losses, and deductions attributable
to the pre-change period. [American Recovery and Reinvestment
Act of 2009 (P.L. 111-5).]
c) Increase in penalty for failure to file a partnership or
"S" corporation return. [Worker, Homeowner, and Business
Assistance Act of 2009 (P.L. 111-92).]
d) Requirements for certain tax preparers to file tax returns
electronically. [Worker, Homeowner, and Business Assistance
Act of 2009 (P. L. 111-92).]
e) Modification of itemized deduction for medical expenses.
[Patient Protection and Affordable Care Act (P. L. 111-148).]
f) Qualified ABLE programs. [The Achieving a Better Life
Experience Act of 2014 (P.L. 113-295).]
g) Inflation adjustment for certain civil penalties. [The
Achieving a Better Life Experience Act of 2014 (P.L.
113-295).]
h) Extension of Work Opportunity credit. [Tax Increase
Prevention Act of 2014 (P.L. 113-295).]
3)Conforms to the federal NOL rules that allow corporations
expecting an NOL carryback to extend the time for payment of
taxes for the preceding taxable year.
4)Makes technical changes, corrects cross-references and deletes
unnecessary language that was used to conform to federal law
changes subsequent to January 1, 2009 and prior to January 1,
2015.
5)States legislative intent to confirm the validity and ongoing
effect of SB 401 (Wolk), Chapter 14, Statutes of 2010.
6)Provides that specified technical corrections to federal income
tax laws incorporated by this bill into the state law are
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declaratory of existing law and shall be applied in the same
manner and for the same periods as specified for federal
purposes, or if later, the specified date of incorporation.
7)Takes effect immediately as an urgency statute, but will be
operative for taxable years beginning on or after January 1,
2015, except as otherwise provided.
EXISTING LAW conforms the state's Revenue and Taxation Code, in
many instances, to provisions contained in the federal IRC.
California does not automatically conform to new federal
legislation. Rather, California may conform to specific
enactments at the federal level or may conform to the IRC as of a
specified date. The last IRC to which California conformed was
that in effect as of January 1, 2009.
FISCAL EFFECT: According to the Assembly Appropriations
Committee:
1)Potentially significant General Fund (GF) costs to Franchise Tax
Board (FTB) to administer the changes to forms, procedures, and
systems.
2)The two provisions in this bill have offsetting revenue impacts:
a) Estimated GF revenue increases of $15.2 million, $16.0
million, and $17.2 million in Fiscal Year (FY) 2015-16, FY
2016-17, and FY 2017-18, respectively, for the conforming
changes contained in provision 1) above; and
b) Estimated GF revenue decreases of $12.0 million, $8.0
million, and $3.0 million in FY 2015-16, FY 2016-17, and FY
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2017-18, respectively, for the conforming changes contained
in provision 2) above.
As a result, estimated net GF revenue impacts are increases of
$3.2 million, $8.0 million, and$14.2 million in FY 2015-16, FY
2016-17, and FY 2017-18, respectively.
COMMENTS:
1)Author's Statement. According to the author's office, "AB 154
is a vital measure conforming state tax law to federal tax,
easing tax preparation for taxpayers and tax preparers alike.
This measure is intended to narrow differences between state and
federal law and provide relief to members of the United States
Armed Forces, businesses, and individual taxpayers."
2)Arguments in Support. The proponents argue that this bill "is a
critical first step toward reinstating comprehensive conformity,
and is important for taxpayers and the state." They cite the
independent FTB Taxpayers' Right Advocate's 2014 report to the
Legislature stating that "non-conformity is a leading cause for
taxpayer error and non-compliance." The proponents assert that
conformity "would reduce the number of different adjustments and
methodologies required when filing a state return, reducing the
potential for errors and penalty and interest assessments." The
proponents note that, due to non-conformity with federal law,
the state must utilize more staff "to answer questions, conduct
separate audits, and initiate collections on errors." All in
all, conformity "would reduce the need for many of these
activities, saving the state and taxpayers time and money."
3)Arguments in Opposition: None submitted.
4)Conformity Decisions. Full descriptions of each of the
conformity items in this bill are included in the FTB's annual
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report to the Legislature, "Summary of Federal Income Tax
Changes," that are available on the FTB's Web site.
5)The Importance (and Conundrum) of Conformity. When changes are
made to the federal income tax law, California does not
automatically adopt such provisions. Instead, state legislation
is needed to conform to most of those changes. Conformity
legislation is introduced either as individual tax bills to
conform to specific federal changes or as one omnibus bill to
conform to the federal law as of a certain date with specified
exceptions, a so-called "conformity" bill.
6)In the 1980s through the early 1990s, the state enacted
conformity legislation almost every year. However, since the
mid-1990s, state conformity has taken place less frequently - in
1997, 1998, 2001, 2005, and 2010. In 2008, AB 1561 (Charles
Calderon) of the 2007-08 Regular Session, a conformity bill,
required a two-thirds vote of the membership in each house. AB
1561 did not advance from the Senate Floor because it failed to
secure 27 Senate votes. A year later, in 2009, the Legislature
approved AB 1580 (Charles Calderon), but the Governor vetoed it
because of a "single provision inserted at the last minute" that
he could not support. In 2010, the Legislature, in the Eighth
Extraordinary Session, passed SB 32 X8 (Wolk), which was similar
to AB 1580; the Governor also vetoed SB 32 X8 for the same
reason.
Finally, SB 401, the latest California-federal conformity bill,
was enacted in 2010 [SB 401 (Wolk), Chapter 14, Statutes of
2010]; and for the last five years, businesses, tax
practitioners and state tax agencies have been advocating for a
new bill to conform state tax laws to ever-changing federal tax
laws. Businesses generally prefer conformity to federal tax
laws because it reduces their state tax compliance costs. The
tax practitioners have argued that failure to conform to federal
law in some areas may lead to improper tax reporting to
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California and extra costs to the taxpayers. As an example, a
taxpayer may roll-over balances in an Archer MSA to a new Health
Savings Account without triggering liability at the federal
level, but will unknowingly face penalties for the transfer
since it constitutes a disqualified distribution for state
purposes. Finally, conformity legislation is also important to
state agencies. Conformity eases the burden, and reduces the
costs, of tax administration because the state may rely on
federal audits, federal case law, and regulations.
While state conformity to federal income tax provisions offers
certain advantages and reduces tax compliance costs, it can also
significantly impact state revenues. Thus, it would be
difficult to achieve complete conformity with federal income tax
rules. Often, the Legislature needs to increase tax rates to
fund a new or expand an existing credit or deduction allowed for
federal income tax purposes. Tax credits, deductions, and
exemptions are designed to provide incentives for taxpayers that
incur certain expenses or to influence behavior, including
business practices and decisions. Both the federal and state
governments often use tax policy to influence taxpayers'
behavior. However, federal tax incentives may not necessarily
produce the same effect on the taxpayer's behavior at the state
level if adopted by the state government as they do on the
federal level. Furthermore, unlike the Federal Government,
California cannot print money to subsidize its budget.
Therefore, the Legislature must be mindful of fiscal effects of
conforming to federal tax laws, even if those may not trigger
significant fiscal concerns in Congress.
The Legislature continues to struggle with tax conformity and
this bill represents the most recent attempt to ease the
hardship on taxpayers and tax practitioners by bringing the two
tax codes closer together.
7)Homeowner Assistance Program Payment for Employees and Members
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of the Armed Forces. Under federal law, the Secretary of
Defense is authorized to provide assistance or reimbursement for
losses in the sale of family dwellings by members of the Armed
Forces living on or near a military installation in situations
where there was a base closure or realignment and the property
was the owner's primary residence, among other requirements.
These amounts are excluded from gross income for federal income
tax purposes and are not considered wages for Federal Insurance
Contributions Act tax purposes. The excludable amount is
limited to the reduction in the fair market value of the
property. Under state law, however, these assistance payments
are subject to the state income tax. This bill would exclude
those amounts from the state income tax, in conformity with the
federal law.
8)Annual Fee on Branded Prescription: Manufacturers and
Importers. Under federal law effective starting in 2010,
certain entities engaged in the business of manufacturing or
importing branded prescription drugs for sale to any specified
government program or pursuant to coverage under any such
program are subject to an annual fee. The collected revenues
are credited to the Medicare Part B Trust fund. The fee amount
imposed on each individual entity fluctuates. The aggregate fee
amount is set by the federal government for each calendar year
and is apportioned among the covered entities based on the
entity's relative share of branded prescription drug sales taken
into account during the previous calendar year. The fees are
treated as excise taxes for purposes of the federal income tax
law and are considered a non-deductible tax as described in IRC
Section 275(a)(6). As discussed, California conforms to the IRC
as of the specified date - January 1, 2009. The federal
provision imposing the fee in question was enacted in 2010,
after the "specified date" of January 1, 2009. Therefore, the
fee is deductible under the Personal Income Tax Law. Because of
the interaction between the federal and state income tax laws
and the lack of conformity, the state is currently subsidizing
the fee imposed by the federal government by allowing a
deduction to the affected entities for purposes of calculating
their California income tax liability. This bill would
eliminate this subsidy and conform to the federal tax treatment
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of the fee as a nondeductible tax.
9)NOL Carryback Procedures. On September 30, 2008, the Governor
signed AB 1452 (Budget Committee), Chapter 763, Statutes of
2008, to implement provisions of the 2008-09 Budget agreement.
Among other things, AB 1452 suspended the NOL deduction for the
2008 and 2009 tax years (except for taxpayers with net business
income of less than $500,000), authorized NOL carrybacks for
losses incurred in 2011 or later tax years, and expanded the NOL
carryforward period from 10 years to 20 years for losses
incurred after January 1, 2008. AB 1452 authorized taxpayers to
use carrybacks to offset their income during the two prior tax
years. The carryback provisions were scheduled to phase in,
with 50% of any 2011 NOLs available for carryback, 75% of any
2012 NOLs, and full carryback for NOLs in subsequent years.
Two years later, when the Legislature was facing another
difficult budget, SB 858 (Budget and Fiscal Review Committee),
Chapter 721, Statutes of 2010, was enacted. SB 858 further
suspended the NOL deductions for the 2010 and 2011 taxable years
and delayed the implementation of the NOL carrybacks provisions,
among other changes. Specifically, SB 858 disallowed NOL
carrybacks for any NOLs attributable to taxable years beginning
before January 1, 2013. Consequently, under existing law, the
carryback provisions are scheduled to phase in with 50% of any
2013 NOLs available for carryback, 75% of any 2014 NOLs, and
full carryback for NOLs attributable to tax year 2015 and
thereafter.
Federal law allows a corporation anticipating a current-year NOL
to file Form 1138 to postpone the payment of all or some of its
income tax from the immediately preceding year. Generally, to
take advantage of NOLs, taxpayers have to first wait for the
conclusion of the tax year and then file an amended return or
ask for a refund. In this case, a corporation can file for a
postponement of payment of taxes from the preceding tax year in
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the current (unfinished) tax year. By allowing a corporation to
postpone part or all of the payments during the year, companies
can keep more cash on hand to pay debts or make payroll. This
bill would conform California law to the federal rules allowing
a corporation expecting an NOL carryback to extend the time for
payment of taxes for the immediately preceding taxable year.
1)SB 401 and Proposition 26 (2010). Proposition 26 was approved
by the voters on November 2, 2010. By amending California
Constitution Article XII A, Section 3, Proposition 26 expanded
the definition of a "tax" to include many state and local
government assessments classified as "fees" and provided that
any change in state statute that results in any taxpayer paying
a higher tax must be passed by a two-thirds vote of the
Legislature. Proposition 26 also included a provision stating
that any state law adopted between January 1, 2010 and November
2, 2010 that conflicts with Proposition 26 would be repealed one
year after the proposition's approval. This repeal would not
take place, however, if the Legislature passed the law again in
compliance with Proposition 26. There is significant ambiguity
regarding the scope and meaning of this provision. According to
the FTB legal staff, there is no basis to believe that SB 401 is
not a valid law, at least for the 12-month period following the
adoption of Proposition 26. Furthermore, California
Constitution Article III, Section 3.5 requires the FTB to
enforce SB 401 until an appellate court has made a determination
that some portion or all of SB 401 is "void" pursuant to
Proposition 26 and, therefore, unenforceable. [FTB publication,
Legal Division Guidance 2011-01-01 "Impact of Proposition 26 on
SB 401 (Wolk)".] Despite the FTB pronouncement, some taxpayers
are seeking reassurance that the last conformity bill stands on
firm legal ground, which this bill would provide. Specifically,
this bill includes a legislative intent provision confirming the
validity and ongoing effect of SB 401.
Analysis Prepared by:
Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN:
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