BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 1449 (Nguyen) - Personal income tax: credit for taxes paid ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 2, 2016 |Policy Vote: GOV. & F. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 9, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 1449 would require multistate taxpayers, when calculating the other state tax credit (OSTC), to use the apportionment and allocation rules of the other state in which the taxpayer paid the tax. Fiscal Impact: The Franchise Tax Board (FTB) estimates the revenue impact of this bill as follows: for every one percent of taxpayers impacted, there would be a revenue loss of roughly $8.8 million (General Fund). FTB's costs to implement the bill have yet to be determined. SB 1449 (Nguyen) Page 1 of ? Background: California taxes its residents on all income regardless of source, including income from residents performing services outside of the State. Part-year residents pay tax on all income generated while they are a resident, including from sources outside the State. Nonresidents pay tax based on all income from California sources. The State 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. In some instances, taxpayers are taxed by both California and another state on the same income. California and many other states allow a nonrefundable credit against the personal income tax for taxes paid to other states. The purpose of the credit, known as the OSTC, is to avoid double taxation. Even though it is 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 sales factor, and assigning the sales of intangibles to the State where the property is used. Thus, the California OSTC is not calculated using 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. In summary, for purposes of calculating the OSTC, California's sourcing principles apply even though the results may be contrary to the other states' principles. The following describes the sourcing principles of various types of income: Compensation for services rendered by employees or independent contractors has a source where the services are performed. Income from tangible personal property and real estate has a source where the property is located. Income from intangible personal property (such as SB 1449 (Nguyen) Page 2 of ? interest and dividends) generally has a source where the owner resides. Business income has a source where the business is conducted. Proposed Law: This bill would require California residents to apply the other state's sourcing rules, instead of California's sourcing rules, when calculating the OSTC. Staff Comments: FTB cites that a lack of available data precludes it from estimating the frequency and amount of credits that would be impacted by this bill. Instead, FTB estimates that for every one percent of taxpayers impacted, the measure would result in a revenue loss of approximately $8.8 million. -- END --