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
          
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          |Version: May 2, 2016            |Policy Vote: GOV. & F. 7 - 0    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: May 9, 2016       |Consultant: Robert Ingenito     |
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          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.










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          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  







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               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.


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