BILL ANALYSIS
AB 327
Page 1
Date of Hearing: May 18, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 327 (Garrick) - As Introduced: February 18, 2009
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Corporation tax: minimum franchise tax
SUMMARY : Reduces the amount of annual minimum franchise tax
from $800 to $100. Specifically, this bill :
1)Reduces the annual minimum franchise tax currently imposed on
every corporation incorporated, qualified to transact
business, or doing business in California from $800 to $100.
2)Reduces the annual tax for a limited partnership (LP), a
limited liability company (LLC) not classified as a
corporation, a limited liability partnership (LLP), and a
qualified Subchapter S subsidiary consistent with the
reduction in corporate minimum franchise tax.
3)Reduces the annual tax for regulated investment companies,
real estate investment trusts, real estate mortgage investment
conduits, and financial asset securitization investment trusts
consistent with the reduction in corporate franchise tax.
4)Applies to taxable years beginning on and after January 1,
2009.
5)Takes effect immediately as a tax levy.
EXISTING LAW imposes franchise tax on all corporations doing
business in California equal to 8.84% of the taxable income
attributable to California. A minimum franchise tax of $800 is
imposed on all corporations that are incorporated under
the laws of California, qualified to transact intrastate
business in California, or are doing business in California.
Taxpayers must pay the minimum franchise tax only if it is more
than their regular franchise tax liability. Specifically:
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1)Limited exceptions exist with respect to imposition of the
minimum franchise tax. For instance, credit unions and
nonprofit organizations are not subject to the minimum
franchise tax and a corporation is not subject to the minimum
franchise tax for its first taxable year. However, even
though a corporation is not subject to the minimum tax in its
first taxable year, it will be subject to franchise tax in its
first taxable year based on its taxable income.
2)According to the Franchise Tax Board (FTB), for taxable years
beginning on or after January 1, 1997, only taxpayers with net
income less than approximately $9,040 pay the minimum
franchise tax because the amount of measured tax owed would be
less than $800 ($9,039 x 8.84% = $799).
3)LPs, LLPs, and LLCs that are doing business in California,
registered or qualified to do business in California, or
formed in this state are subject to annual tax in an amount
equal to the minimum franchise tax, currently set at $800.
These entities (known as 'pass-through entities') are not
subject to any tax based on taxable income. Rather, the items
of income, gain, loss, deduction and credit are passed-through
to the owners and reported on their respective income or
franchise tax returns.
4)Real estate mortgage investment conduits (REMICs) and
financial asset securitization investment trusts (FASITs) are
subject to and required to pay the minimum franchise tax.
Regulated investment companies (RICs) and real estate
investment trusts (REITs) organized as corporations are also
subject to and required to pay the minimum franchise tax.
RICs, REITs, REMICs, and FASITs are entities authorized by the
federal government for special tax treatment. California
conforms in large part to federal tax provisions but subjects
each entity to payment of the annual minimum tax.
FISCAL EFFECT : FTB staff estimate that this will reduce General
Fund revenues by $800 million in fiscal year (FY) 2009-10, $550
million in FY 2010-11, and $550 million in FY 2011-12.
COMMENTS :
1)The author states that, "AB 327 would reduce the annual
minimum franchise tax on business in the state from $800 to
$100. Savings from this tax reduction could be reinvested
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back into the business, pay higher hourly wages or bonuses.
The amount may seem small but for many start-up or struggling
businesses the $700 savings can constitute a substantial
reinvestment. Employers, employees, vendors and customers
will benefit from this reinvestment.
"Reduction of this tax encourages small businesses, especially
struggling businesses operating from the home or garage, to
file the proper paperwork and comply with existing state laws
governing the workplace. In the long term, it is in the
state's best interest to reduce the number of businesses that
are operating in the underground economy."
2)The author provided the following information on minimum tax
assessed by neighboring states:
a) Arizona assesses a minimum tax of $50 on financial
institutions, corporations and LLCs that elect to be taxed
as corporations and imposes a business license fee of $15.
b) Oregon assesses a minimum excise tax of $10 on financial
institutions, corporations and LLCs that elect to be taxed
as corporations
c) Nevada does not assess tax on corporate income but
imposes a minimum fee of $100.
d) Utah imposes a minimum tax of $100 on "C" corporations.
3)According to FTB, the following states currently impose a
minimum franchise tax:
a) Illinois has a minimum 1% tax based on "paid-in" capital
(calculated using the shares of stock issued by the
corporation as disclosed in the annual statement reported
to the Illinois Secretary of State). The tax ranges from a
minimum of $25 to a maximum of $1 million.
b) Massachusetts imposes the greater of a corporate excise
tax of 9.5% based on taxable income or a minimum tax equal
to $456.
c) Beginning January 1, 2008, Michigan taxpayers are
subject to the Michigan Business Tax. The Michigan
Business Tax is composed of two taxes: A business income
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tax of 4.9% on every taxpayer with business activity in the
state and a modified gross receipts tax of 0.80% on every
taxpayer having nexus with Michigan.
d) Minnesota imposes a franchise tax on a corporation's
taxable income at the rate of 9.8%. In addition, a minimum
franchise tax, ranging from $0 to $5,000, is imposed based
on the sum of the property determined by property, payroll,
and sales in the state.
e) New York imposes a franchise tax of 7.1% based on net
income plus a fixed dollar minimum tax based on gross
payroll. The fixed dollar minimum tax ranges from $100 to
$1,500.
4)The proponents of this bill state that "providing small
businesses with additional incentives, such as the minimum
franchise tax reduction proposed by this bill, is one way to
help small businesses survive these tough economic times."
The proponents also assert that AB 327, by granting California
firms a modest annual savings, helps "to foster continued
economic growth and job creation."
5)The opponents of this bill argue that it will result in
massive revenue losses without providing any apparent benefit
to the state, and thus, "is just another version of corporate
welfare at the expense of our? public education system." The
opponents contend that the minimum franchise tax is a very
minor cost of doing business and that many large corporations
hold a number of inactive subsidiaries on which they readily
pay the minimum franchise tax. Furthermore, the minimum
franchise tax is currently waived for a "C" corporation during
the first two years of its existence, and there is no
rationale for waiving the tax beyond these two years.
Finally, the proponents assert that the "current $800 tax is a
nominal and fair amount for the privilege of conducting
business in the state" and "is warranted in exchange for
providing corporations with the legal and economic benefits of
becoming a limited partnership, limited liability partnership,
and limited liability company."
6)Committee staff notes all of the following:
a) The minimum franchise tax was enacted to ensure that all
corporations pay at least a minimum amount of franchise tax
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for the privilege of doing business in this state,
regardless of the corporation's income or loss. Thus, the
minimum franchise tax is not technically an "income tax",
but rather it is a tax on the right to exercise the powers
granted to a corporation doing business in California.
Even when a corporation earns no income, it still receives
the benefits of its corporate status, including the limited
liability protection under the laws of this state.
b) California's minimum tax was increased from $100 to $200
in 1972. It was increased to $300 in 1987, to $600 in
1989, and to $800 in 1990.
c) It has never been shown that the minimum franchise tax
discourages businesses, particularly, since small
businesses can always organize as sole proprietorships to
avoid paying the minimum franchise tax.
d) Because the franchise tax is the greater of the minimum
franchise tax or tax of 8.84% on the corporations' taxable
income, the actual beneficiaries of this bill are
corporations that report minimal taxable income and all
pass-through entities, regardless of the amount of income
earned. Consequently, profitable entities that are formed
as LLCs, LPs or LLPs will reap tax savings of $700 every
taxable year.
7)Related legislation.
AB 2178 (Garrick), introduced in the 2007-08 Legislative
Session, would have reduced the minimum franchise tax from
$800 to $200. AB 2178 was held under submission in this
Committee.
AB 1179 (Garrick), introduced in the 2007-08 Legislative
Session, is similar to AB 327. AB 1179 was held in this
committee.
AB 1419 (Campbell), introduced in the 1997-98 Legislative
Session, would have reduced the minimum franchise tax for a
qualified corporation from $800 to $100. AB 1419 failed
passage in the Senate Revenue and Taxation Committee.
8)FTB staff recommends one technical amendment to delete the
outdated language from the bill.
AB 327
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AMENDMENT 1
On page 3, strike out lines 8 through 40, and on page 4, strike
out lines 1 through 17.
REGISTERED SUPPORT / OPPOSITION :
Support
Associated Builders and Contractors of California
National Federation of Independent Business
Opposition
American Federation of State, County and Municipal Employees,
AFL-CIO
California Tax Reform Association
California School Employees Association, AFL-CIO
California Professional Firefighters
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098