BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1449 |Hearing |4/27/16 |
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|Author: |Nguyen |Tax Levy: |Yes |
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|Version: |4/18/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Personal income tax: credit for taxes paid
Requires multistate taxpayers when calculating the other state
tax credit to use the apportionment and allocation rules of the
state in which the taxpayer paid the tax.
Background
California taxes its residents on all income regardless of
source, including income from residents performing services
outside California. Part-year residents pay tax on all income
generated while they are a resident, again including from
sources outside the state. Nonresidents pay tax based on all
income from California sources. California applies various
sourcing rules to certain items of nonresident income for
retirees, nonresident salespeople's commissions, performances by
athletes and entertainers, professional services like attorneys
and physicians, officers of corporations, and operators of
trucks, trains, and ships.
California and many other states allow a nonrefundable credit
against the personal income tax for taxes paid to other states
to avoid double taxation, known as the "other state tax credit"
(OSTC). Even though it's a credit against the personal income
tax, taxpayers calculate California OSTC using laws,
regulations, and rules from its Corporation Tax, such as its
formula for apportioning corporate income by using only the
SB 1449 (Nguyen) 4/18/16 Page 2
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sales factor, and assigning the sales of intangibles to the
state where the property is used, and not the rules in place in
the other states where the taxpayer does business. Because
rules for assigning or apportioning income vary from state to
state, a taxpayer's OSTC in California can be less than the
actual tax paid; however, California does not allow an OSTC that
exceeds the actual amount of taxes paid to the other state.
One significant difference is the standards for sourcing sales
of intangible property, like sales of services of royalties from
licensing intellectual property. California mostly requires
taxpayers to include sales of intangibles in their California
sales factor to the state where the customer uses it
(market-based sourcing), but many other states allocate the same
sales from intangibles like services to the location of the
income producing activity (cost-of-performance sourcing). For
example, consider a California resident taxpayer who developed
an intangible service in "State B," and only sells here and in
State B, with total sales of $200,000 equally split between the
two states. This taxpayer:
Includes $200,000 in sales in her State B income under
costs of performance sourcing because the service was
developed there, and pays $20,000 in tax at State B's tax
rate of 10%, thereby generating an OSTC.
Calculates California tax based on that half of sales to
customers in California ($100,000) based on market based
sourcing, to be further reduced by her State B OSTC.
Recalculates and claims on the return only $10,000 of
OSTC ($100,000 times 10%), because California requires the
taxpayer to use California's rules for sourcing intangibles
As a result, more than 100% of the taxpayer's income is subject
to tax. Similar differences can occur because of other
apportionment and allocation provisions, such as income from
sales of interests in partnerships. However, a different fact
pattern could result in less than 100% of income subject to tax,
depending on the laws and rules in states outside California in
which the taxpayer does business. The author wants to modify
California's OSTC to prevent the possibility of double-taxation.
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Proposed Law
Senate Bill 1449 requires taxpayers when calculating their other
state tax credit to use the apportionment and allocation rules
of the other state, not California's, when doing so will either
maintain or increase the amount of credit a taxpayer is allowed.
The measure also makes legislative findings and declarations
supporting its purposes, including preventing residents from
being subject to tax on more than 100% of their income, and
precluding any risk from current law being an impermissible
burden on interstate commerce.
State Revenue Impact
FTB states that SB 1449's revenue impact is unknown due to a
lack of available data, but estimates that for every one percent
of taxpayers impacted, the measure would result in a revenue
loss of approximately $8.8 million.
Comments
1. Purpose of the bill . According to the author, "SB 1449 will
reform the current calculation of the Other State Tax Credit
(OSTC) to prevent Californians with income from other states
from being double taxed. This bill would change the current
calculation of the OSTC to simply allow credit for the income
taxes actually paid to another state, instead of requiring these
taxpayers to calculate the income that would have been paid in
the other state, if it was subject to California's apportionment
and allocation rules."
2. Rough justice . State corporation income taxes have always
been challenged by multi-state and multinational taxpayers,
resulting in a line of court cases, regulations, and statutes
where each state seeks to both levy a tax that reflects the
corporation's true demand for public services a state must
provide, and ensures fairness, especially compared to the
state's tax treatment of wholly in-state companies. Consistent
with federal requirements, each state sets its own apportionment
formulas, allocation rules, and other state tax credit
calculations, according to its own priorities and values.
Absent future federal preemption, each state's business tax
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regime will always differ to some degree, so the goal of taxing
100% of a multistate taxpayer's income, no more or no less, is
highly unlikely to happen anytime soon. SB 1449 results in a
tax reduction for many of these firms; however, the Legislature
enacted California's rules based on its values, and they
continue to be one of the nation's most effective to limit
corporations from shifting its tax base. The Committee may wish
to consider whether SB 1449 is consistent with California's
policies regarding corporate taxation.
3. Winning . SB 1449 requires taxpayers to make two OSTC
calculations: first, using California laws and rules, and
second, using those of the state where they paid the tax that
gave rise to the OSTC. The measure then requires the taxpayer
to use whichever calculation either maintains or increases the
OSTC amount, and therefore provides the greater taxpayer
benefit. However, having to complete both calculations means
the measure doesn't reduce the current administrative burden on
the taxpayer and FTB. The bill could instead require other
states laws and rules be applied when calculating the OSTC
regardless of whether it increased or maintained the amount of
credit. That way, there would be no need to calculate using
California's system, but doing so would likely increase a tax on
any taxpayer for purposes of Section Three of Article XIIIA of
the California Constitution, which requires a 2/3 vote of each
house of the Legislature.
4. Wynning . The United States Constitution, federal law
enacted by Congress pursuant to the Commerce Clause, and case
law, determine the limits on state taxing authority. While
these limits haven't changed significantly in recent years, the
United States Supreme Court decided Maryland Comptroller of the
Treasury v. Wynne in May, 2015, holding that Maryland's tax
scheme unconstitutional, using the internal consistency test,
which courts have used in several cases to determine whether a
state's tax system discriminates against interstate commerce.
That test requires the court to imagine a state of affairs where
every state in the Union adopted an identical tax scheme, and
determine whether the state imposes a higher tax burden on
commerce that crosses state lines than commerce that stays
entirely within one state. While the court's decision in Wynne
made clear that states must offer other state tax credits to the
extent they tax residents' out-of-state income, the decision was
specific only to Maryland, and said that states could comply in
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different ways. The decision does not appear to require
California to change its credit in any way, because internal
consistency is not violated if all states calculated their
credits using their own rules. However, a future court could
enhance the holding in Wynne to require a full offset of taxes
paid to other states whenever states choose to tax its
residents' out-of-state income.
Support and
Opposition (4/21/16)
Support : California Chamber of Commerce, California Taxpayers
Association, Taxation Section of the Business Law Section of the
State Bar of California.
Opposition : California Tax Reform Association.
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