BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
AB 154 (Ting) - Taxation: federal conformity.
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|Version: June 30, 2015 |Policy Vote: GOV. & F. 6 - 0 |
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|Urgency: Yes |Mandate: No |
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|Hearing Date: August 17, 2015 |Consultant: Robert Ingenito |
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This bill does not meet the criteria for referral to the
Suspense File.
Bill
Summary: AB 154 would (1) conform state tax law to federal tax
law as of January 1, 2015, and (2) modify the large corporate
understatement penalty, as specified.
Fiscal
Impact: The Franchise Tax Board (FTB) estimates that the bill's
cumulative revenue impact from all its provision would be
General Fund increases of $3 million in 2015-16, $7.8 million in
2016-17, and $14 million in 2017-18. The bill would not impact
FTB's administration costs.
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Background: 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.
SB 401, the latest California-federal conformity bill, was
enacted in 2010, and businesses, tax practitioners and state tax
agencies have since 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 California and extra costs
to the taxpayers. 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.
Corporation taxpayers are subject to a penalty equal to 20
percent of any understatement that exceeds $1 million of the tax
shown on an original return (or amended return filed on or
before the extended due date of the original return) for taxable
years beginning on or after January 1, 2003 (SBx1 28, Committee
on Budget, 2008). The measure also applies to understatements
on amended returns filed on or before May 31, 2009 for taxable
years beginning before January 1, 2008. The penalty applies to
the total amount of the understatement for an entire combined
report, and excludes any understatement attributable to a change
in law under specified circumstances or when the taxpayer relied
on written advice from FTB. The penalty applies in addition to
any other penalty, and is strict liability, meaning that the
taxpayer has no appeal rights. In 2010, the Legislature
modified the penalty for taxable years for the 2011 taxable year
and thereafter to apply only to understatements that exceed the
greater of $1 million, or 20 percent.
Proposed Law:
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This bill would conform relevant sections of the Revenue and
Taxation Code to the Internal Revenue Code as of January 1,
2015, with specified modifications. Additionally, it would make
the following changes to the Large Corporate Understatement
Penalty (LCUP):
Provide that any amount of tax reflecting a proper 338
election doesn't count towards the understatement amount
for purposes of the penalty, which can generally be made up
to one year after an acquisition, are treated as shown on
an original return.
State that no penalty shall apply when FTB imposes an
alternative apportionment formula under Revenue and
Taxation Code §25137, or as a result of a change in the
taxpayer's federal accounting method where the due date of
the return is before the Secretary of the Treasury's
determination to change the accounting method.
Staff
Comments: FTB's aggregate revenue estimate described above can
be distilled into the following three components:
General Conformity. FTB estimates a revenue gain of
$15.2 million in 2015-16, $16 million in 2016-17, and $17.2
million in 2017-18.
Modified Net Operating Loss Conformity. FTB estimates a
revenue loss of $12 million in 2015-16, $8 million in
2016-17, and $3 million in 2017-18.
LCUP. FTB estimates a revenue loss of $200,000 across
all three fiscal years.
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