BILL ANALYSIS Ó
AB 1199
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 1199
(Nazarian) - As Introduced February 27, 2015
2/3 vote. Tax levy. Fiscal committee
SUBJECT: Income taxes: credits: motion pictures.
SUMMARY: Modifies the existing California Motion Picture and
Television Production Credit (Motion Picture Tax Credit) program
by revising the 5% credit "uplift" eligibility requirements for
qualified expenditures relating to music scoring and music track
recording, as provided. Specifically, this bill:
1)Expands the scope of "qualified expenditures relating to music
scoring and music track recording," which are currently
eligible for an extra 5% credit "uplift," to also include
"qualified music preparation and music editing."
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2)Requires that at least 75%, or at a minimum $100,000, of the
total qualified expenditures for the music preparation, music
scoring, music track recording, and music editing attributable
to the production of a qualified motion picture in California
be paid or incurred in the state.
3)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Allows a qualified taxpayer, as defined, under both the
Personal Income Tax (PIT) and the Corporation Tax (CT) laws, a
Motion Picture Tax Credit equal to 20% or 25%, whichever is
applicable, of the qualified expenditures for the production
of a qualified motion picture in California. The credit is
allowed for taxable years beginning on or after January 1,
2016.
2)Prohibits a Motion Picture Tax Credit for any qualified
expenditures for the production of a motion picture in
California if a credit for those same expenditures has been
claimed under either Section 17053.85 or Section 23695 of the
Revenue and Taxation Code (R&TC) (the original "film tax
credit").
3)Authorizes the California Film Commission (CFC) to administer
the Motion Picture Tax Credit program and allocate the tax
credits, subject to a $230 million cap in the first year (FY)
2015-16 and $330 million in the FY 2016-17 and each FY
thereafter, through and including the FY 2019-20.
4)Defines a "qualified taxpayer" as a taxpayer who has paid or
incurred qualified expenditures and has been issued a credit
certificate by the CFC, as specified.
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5)Defines "qualified expenditures" as amounts paid or incurred
for tangible personal property (TPP) purchased or leased, and
used, within this state in the production of a qualified
motion picture and payments, including qualified wages, for
services performed within California in the production of a
qualified motion picture.
6)Requires a "qualified motion picture" to film at least 75% of
its principal photography days wholly in California or incur
at least 75% of the production budget expenses within the
state.
7)Specifies that the applicable credit percentage shall be as
follows:
a) 20% of the qualified expenditures attributable to the
production of a qualified motion picture in California,
including, but not limited to, a feature, up to one hundred
million dollars ($100,000,000) in qualified expenditures,
or a television series that relocated to California that is
in its second or subsequent years of receiving a tax credit
allocation, as provided.
b) 25% of the qualified expenditures attributable to the
production of a qualified motion picture in California
where the qualified motion picture is a television series
that relocated to California in its first year of receiving
a tax credit allocation pursuant to this section.
c) 25% of the qualified expenditures, up to ten million
dollars ($10,000,000), attributable to the production of a
qualified motion picture that is an independent film.
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8)Increases the applicable percentage of the credit allowable to
a qualified motion picture, not to exceed a maximum of 25%,
for qualified expenditures relating, among other things, to
music scoring and music track recording by musicians
attributable to the production of a qualified motion picture
in California.
9)Defines "production period" as the period beginning with
preproduction and ending upon completion of postproduction.
10)Defines "postproduction" to mean the final activities in a
qualified motion picture's production, including editing,
foley recording, automatic dialogue replacement, sound
editing, scoring, music track recording by musicians and music
editing, beginning and end credits, negative cutting, negative
processing and duplication, the addition of sound and visual
effects, sound mixing, film-to-tape transfers, encoding, and
color correction.
FISCAL EFFECT: The Franchise Tax Board (FTB) staff assumes that
the California Film Commission would fully allocate the Motion
Picture Tax Credit each fiscal year. Therefore, it is estimated
that this bill would not impact the General Fund revenues.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"It is crucial in today's economy that the state provides
comprehensive incentives for the music industry to thrive.
California's long and rich history of entertainment business,
creativity and music work, makes it imperative that our state
create competitive policies that offer meaningful financial
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incentives to retain and lure production, middle class jobs
and spending."
2)Arguments in Support . The proponents state that once the
"epicenter of the entertainment industry, California has seen
music scoring work plummet in the last 15 years in the face of
runaway production and post-production." The proponents
assert that while the Motion Picture Tax Credit program is a
"significant factor in bringing more jobs to the state,"
"continued improvements to the law are needed to ensure the
fair treatment of the professional musicians who rely on jobs
creating the soundtracks to motion pictures and TV shows as
their primary way to earn a living." They note that AB 1199
requires, for the first time, "a specified amount of the total
expenditures relating to music post-production to be done in
California for a production to qualify for an added rebate."
The proponents argue that, while the existing program requires
post-production work to be done in-state in order to qualify
for an added bonus, "it does not make doing this work in
California a requirement, and productions still receive
significant credits even if all post-production is done out of
state."
1)Arguments in Opposition . The opponents note that this bill
would authorize "additional 5% for qualified expenditures
relating to 'qualified music preparation, music scoring, music
track recording, and music editing,' but would limit the scope
of that term to the described activities for which a specified
amount of the total expenditures is paid or incurred in
California." The opponents oppose this bill "unless [the
bill] remains strictly revenue neutral." They believe that,
while the bill may change the program priorities, it "should
not increase the cost since it is a capped program."
2)California Film Tax Credit Programs: Background . In February
2009, the original
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California Film Tax Credit Program was enacted as a part of
an economic stimulus plan to
promote production spending, jobs, and tax revenues in
California. [SBX3 15 (Calderon),
Chapter 17, Statutes of 2009-10 Third Extraordinary Session,
and ABX3 15, (Krekorian),
Chapter 10, Statutes of 2009-10 Third Extraordinary Session.]
Originally, the program was
scheduled to sunset in 2013-14 FY, 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, it was further extended for two additional years (until
FY 2016-17). [AB 2026
(Fuentes) Chapter 841, Statutes of 2012.]
In 2014, a new Motion Picture Tax Credit Program was created
for taxable years beginning on or after January 1, 2016,
tripling the annual budget available for tax credit allocation
by the CFC, from $100 million to $330 million dollars. [AB
1839 (Gatto) Chapter 413, Statutes of 2014.] Specifically, AB
1839 authorized the CFC to administer the program and allocate
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the tax credits, subject to a $230 million cap in the FY
2015-16 and $330 million in FY 2016-17 and each FY thereafter,
through and including the FY 2019-20. While similar to the
original film tax credit program, the new law implemented a
number of programmatic changes, including a change of the
credit allocation from a once-a-year lottery to a competitive
system based upon a formula using the ratio of jobs projected
to be created and the amount of funding requested.
Unlike other proposals in the past, the existing tax credit
programs (both the original and the new one) are targeted,
capped and allocated. In many respects, they are similar to a
grant program. The credits are effective only for a limited
number of years and the CFC is required to allocate and
certify the credits. The credit is allowed to qualified
taxpayers to be used against the income and franchise taxes
under either the PIT or CT law. The credit is not refundable,
but the credit allocated to an "independent film" may be
transferred to an unrelated party. The program also allows a
qualified taxpayer to use the tax credit to offset qualified
sales and use taxes.
3)Additional 5% Credit Uplift . The new Motion Picture Tax
Credit program created an additional 5% credit or "uplift" for
certain qualified expenditures relating to: (a) original
photography occurred outside the Los Angeles zone, (b) visual
effects, or (c) music scoring and music track recording.<1>
In order to qualify for this additional bonus of 5% for
expenditures related to qualified visual effects, the taxpayer
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<1> This additional bonus is available only for qualified
expenditures attributable to a production of a qualified motion
picture in California. Indeed, a film may qualify for, and
receive, a 20% credit against expenses if 75% of the overall
expenditures of the film are incurred in California, or if 75%
of total shooting days occur in state.
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must incur at least 75%, or a minimum of $10 million of those
expenditures in California. No such requirement exists for
expenditures related to either original photography performed
outside of the Los Angeles zone or music scoring. Thus, once
a film has satisfied the applicable requirements, any
qualifying music costs (those incurred in California) will be
eligible for the 5% additional credit (over and above the 20%)
regardless of where the total music costs have been incurred.
In contrast, the expenditures associated with visual effects
must overcome one additional hurdle, namely the expenditures
must meet the minimum threshold of being paid or incurred in
California in order to qualify for the 5% uplift. The policy
rationale for this disparate tax treatment is unclear to
Committee staff.
4)Postproduction Costs . The qualified expenditures eligible for
the 20% credit percentage include post-production, which is
defined as the final activities in a qualified motion
picture's production, including editing, foley recording,
sound editing, scoring, music track recording by musicians and
music editing; the addition of sound and visual effects; and
sound mixing, among others (emphasis added). However,
similarly to the 5% uplift, there is no minimum threshold
requirement for the post-production activities to occur in
California. As an example, if 80% of the otherwise eligible
postproduction activities have occurred outside of California
and 20% have taken place in the state, the latter would still
qualify for the Motion Picture Tax Credit, assuming all other
applicable conditions have been met, even though more than
half of the work has been performed in other states or
countries.
5)The Proposed Solution . The author of this bill seeks to
create an additional requirement for a taxpayer to qualify for
the 5% credit uplift in the case of qualified expenditures
related to music services. Specifically, this bill would
require that at least 75%, or a minimum $100,000, of the total
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expenditures for the music preparation, music scoring, music
track recording, and music editing be paid or incurred in
California. Proponents of this bill argue that under current
law a qualified motion picture may be eligible for the basic
20% tax credit in California by reaching the 75% of qualifying
expenses through filming and other post-production activities
in California, yet score their film in New York and collect
that state's 35% tax credit for musical scoring. By
conditioning the eligibility for the 5% uplift on the
performance of at least 75% of music post-production
activities in California (or a minimum threshold of $100,000),
the author hopes to retain more post-production activities
related to music preparation, scoring, recording and editing
in California.
In its analysis, the Arts, Entertainment, Sports, Tourism, and
Internet Media Committee staff noted that this bill may
inadvertently prompt producers to move all music work out of
state because a film would still be able to qualify for the
20% tax credit in California, while taking their music scoring
and editing to another state that offers a better credit.
Admittedly, this bill does not contain any language
prohibiting film makers from receiving multiple state credits,
but neither does existing law. And, although a film may still
qualify for the 20% credit percentage, if this bill were to
become law the taxpayer would lose the benefit of the 5%
credit "uplift" if it does not meet the minimum threshold for
music-related work required to be performed in California.
The Committee may wish to consider whether additional
safeguards should be created to ensure the success of the
Motion Picture Tax Credit program.
6)Measuring Success . The new and expanded Motion Picture Tax
Credit program was recently implemented and its impact is yet
to be ascertained by the Legislature. The Legislative
Analyst's Office is required to issue a report, on or before
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July 1, 2019, evaluating the economic effects and
administration of the tax credit programs. The Committee may
wish to consider whether the proposed modification of the
Motion Picture Tax Credit program is warranted in the absence
of data necessary to evaluate the needs of the program or its
effectiveness.
7)Double Referral : This bill was referred to both this
Committee and the Assembly Committee on Arts, Entertainment,
Sports, Tourism, and Internet Media. AB 1199 passed out of
the Assembly Committee on Arts, Entertainment, Sports,
Tourism, and Internet Media on a 7-0 vote. For a more
detailed analysis of this bill, please refer to that
Committee's analysis.
8)Related Legislation : AB 688 (Gomez) extends the new Film Tax
Credit program for an additional year, to July 1, 2021, and
would specify the aggregate amount of credits that may be
allocated for FY 2020-21. AB 688 is currently pending hearing
in the Assembly Committee on Arts, Entertainment, Sports,
Tourism and Internet Media; AB 688 is a two-year bill.
9)Prior Legislation : AB 2700 (Nazarian), of the 2013-14
Legislative Session, would have allowed a credit under either
the PIT or CT law for the post-production expenditures of a
qualified motion picture, as provided. AB 2700 was held on
the Assembly Committee on Appropriations' Suspense File.
REGISTERED SUPPORT / OPPOSITION:
Support
American Federation of Musicians, Local 47
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Professional Musicians of California
The Recording Academy
United Food and Commercial Workers Union, Local 770
Opposition
California Tax Reform Association
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098