BILL ANALYSIS
AB 1087
Page 1
Date of Hearing: September 10, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1087 (Ma) - As Amended: September 2, 2009
Majority vote. Fiscal committee.
SUBJECT : State Board of Equalization: sales and use taxes:
administration: transportation charges: public contracts with
expatriate corporations: tax treaty
SUMMARY : Modifies the current sales and use tax (SUT) exclusion
for separately stated transportation charges and modifies the
definition of an "expatriate corporation" for purposes of the
California Taxpayer and Shareholder Protection Act of 2003 (CTSP
Act). Specifically, this bill:
1)Provides that charges for transportation are separately stated
for purposes of the exclusion if the charges are stated as a
single amount and are not included within a single amount that
combines transportation charges with other charges.
2)States that it is the Legislature's intent in enacting this
bill to clarify that a state agency shall not enter into any
contract with an expatriate corporation located in a foreign
jurisdiction that does not have an income tax treaty with the
United States (U.S.).
3)Amends the CTSP Act's definition of an "expatriate
corporation." Specifically provides that, to be deemed an
"expatriate corporation," the foreign incorporated entity must
be domiciled in a jurisdiction that does not have an income
tax treaty with the U.S.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the gross receipts from sales of TPP in
this state.
2)Imposes a use tax on the storage, use, or other consumption in
this state of TPP purchased from any retailer for storage,
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use, or other consumption in this state, absent a specific
exemption.
3)Provides, under the SUT Law, that the terms "gross receipts"
and "sales price" do not include separately stated charges for
transportation from the retailer's place of business or other
point from which shipment is made directly to the purchaser.
However, the exclusion may not exceed a reasonable charge for
transportation "by facilities of the retailer or the cost to
the retailer of transportation by other than facilities of the
retailer." In other words, in cases where the retailer uses a
common carrier, the exclusion is limited to the retailer's
cost for the transportation.
4)Prohibits, except as otherwise provided, a "state agency" from
entering into any contract with an "expatriate corporation" or
its subsidiaries.
5)Provides that the term "state agency" means every state
office, department, division, bureau, board, commission, and
the California State University, but does not include the
University of California, the Legislature, the courts, or any
agency in the judicial branch of government.
6)Defines an "expatriate corporation" as a foreign incorporated
entity that is publicly traded in the U.S., and that meets
other specific requirements. First, the U.S. must be the
principal market for the public trading of the entity.
Second, the entity must have no substantial business
activities in the place of incorporation. Finally, either of
the following requirements must be met:
a) The foreign entity was established through a transaction
whereby (1) the foreign entity acquired substantially all
of the properties held by a domestic corporation (or all of
the properties constituting a trade or business of a
domestic partnership or related foreign partnership), and
(2) immediately after the acquisition, more than 50% of the
foreign entity's publicly traded stock is held by former
shareholders of the domestic corporation (or by former
partners of the domestic partnership or related foreign
partnership); or,
b) The foreign entity was established through a transaction
whereby (1) the foreign entity acquired substantially all
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of the properties held by a domestic corporation (or all of
the properties constituting a trade or business of a
domestic partnership or related foreign partnership), and
(2) the acquiring foreign entity is more than 50% owned by
domestic shareholders or partners.
FISCAL EFFECT :
1)Transportation charges : The Board of Equalization (BOE)
estimates that this bill's SUT provisions would increase
General Fund revenues by $2.5 million annually.
2)Expatriate corporations : The fiscal effect of the provisions
relating to expatriate corporations is unknown.
COMMENTS :
1)Transportation Charges:
a) The author states, "AB 1087 will provide much needed
simplicity and clarity for retailers in California and the
Board of Equalization in determining the extent to which
delivery charges are subject to sales tax. With the
changes proposed in this bill, the applicable sales tax can
be collected from the ultimate consumers at the time of the
transaction just as other sales taxes are paid. These
changes will streamline the accounting process for small
businesses and other retailers that offer delivery services
to their customers. They will also greatly ease
administrative and audit burdens for retailers and the
Board of Equalization."
b) This bill's SUT provisions are sponsored by the
California Retailers Association, which states:
Most retailers charge their customers a flat fee
for delivery of merchandise. (The amount of the
fee may be based on the total purchase price for
the merchandise.) In many instances, the amount
the delivery company charges the retailer exceeds
what the retailer charged its customer, resulting
in no tax being due. However, to the extent the
delivery company charges the retailer less than
the amount the retailer charged the customer for
the delivery, this difference is not excluded
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from the definition of 'sales price' or 'gross
receipts' and is thus subject to sales tax. At
the time the customer is completing the
transaction, the retailer typically has no way of
knowing the exact amount that the delivery
company will charge for the delivery, thus the
retailer cannot effectively collect the proper
amount of sales tax from the customer. This puts
retailers in the untenable position of being
forced to pay sales tax out of their pockets that
should be paid by the ultimate consumers.
c) Committee Staff Notes:
i) Revenue and Taxation Code (R&TC) Section 6011
and 6012 impose SUT on all charges related to the
retail sale of TPP, except those charges
specifically excluded. For example, current law
excludes from the definition of "sales price" and
"gross receipts" (i.e., the tax measure) certain
separately stated transportation charges. [R&TC
Sections 6011(c)(7) and 6012(c)(7)]. This
exclusion, however, may not exceed "a reasonable
charge for transportation by facilities of the
retailer or the cost to the retailer of
transportation by other than facilities of the
retailer."
ii) Existing law also provides that the terms
"sales price" and "gross receipts" include the cost
of services that are part of the sale of TPP. In
other words, related handling charges are currently
taxable whether separately stated or not. Moreover,
under existing law, a charge for "shipping and
handling" does not constitute a separate statement
of shipping charges, and, if there is no further
itemization, the entire charge would be included in
the computation of tax.
iii) To further complicate matters, BOE notes,
"Although a designation such as, 'shipping and
handling' or 'postage and handling' is not regarded
as a separate statement of transportation charges,
under the Board's Regulation 1628, Transportation
Charges, the designation 'postage and handling,'
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'shipping and handling,' or similar designation,
coupled with a statement of the actual amount of
postage placed on the package mailed to a customer,
constitutes a separate statement of transportation
charges and those transportation charges are
excludable from the measure of tax."
2)Expatriate Corporations
a) The author provides the following statement in
support of this bill's expatriate corporation
provisions:
Recently a number of multi-national companies
that were located in "tax haven" countries have
moved their corporate headquarters to other
foreign jurisdictions where they have an active
business presence and where the foreign
jurisdiction has a tax treaty with the United
States. One such company is the parent of ADT
(fire safety and alarm company), Tyco
International, which has moved its corporate
headquarters from Bermuda to Switzerland. This
move out of a tax haven country is not recognized
currently under [the] statute making ADT still
subject to the provisions of [the CTSP Act], even
though the multi-national has moved to a country
with a long trading history and treaty history
with the United States.
In Switzerland ADT maintains a large and growing
business presence. For ADT, and its corporate
parent, more than 50% of their employees and
business activity are outside of the United
States making them a clear multi-national
company.
In these tough economic times the State of
California is missing out on the high quality,
competitively bid services that an ADT can
provide and ADT is missing out on the opportunity
to secure work for its more than 1,500 employees
in California.
b) Committee Staff Notes:
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i) The CTSP Act : In 2003, the Legislature passed
SB 640 (Burton), which established the CTSP Act. As
noted above, the CTSP Act generally prohibits state
agencies from contracting with expatriate
corporations, as defined. SB 640 (Burton) was
designed to prohibit U.S. companies that
reincorporate offshore for tax reasons from
contracting with the state. SB 640 (Burton) was
sponsored by the State Treasurer, who estimated that
the practice of "expatriation" would cost the state
roughly $180 million in foregone tax revenues over a
ten-year period, while jeopardizing the rights of
corporate shareholders.
ii) Expatriation : Expatriation or "corporate
inversion" occurs when a U.S. company creates a new
parent corporation based in a "tax haven" country
like Bermuda, the Bahamas, or the Cayman Islands.
Ownership of the U.S. company is transferred over as
a subsidiary of the new parent corporation. This
permits the corporation to enjoy lower tax rates and
fewer regulations because of its new nationality,
while control of the company remains virtually
unchanged. In addition, many argue that the
practice of expatriation acts to constrain the legal
rights of shareholders.
iii) What is an expatriate corporation? : Under the
CTSP Act, an "expatriate corporation" is currently
defined as a foreign incorporated entity that is
publicly traded in the U.S. and that meets other
specified requirements. Specifically, to be deemed
an expatriate corporation, the U.S. must be the
principal market for the foreign entity's public
trading. In addition, the foreign entity must have
no substantial business activities in the place of
incorporation.
iv) How would this bill modify the existing
definition of an expatriate corporation? : This bill
would add an additional requirement that must be met
for a foreign incorporated entity to be deemed an
expatriate corporation, and thereby precluded from
most public contracting with the State.
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Specifically, under this bill, a foreign entity
would have to be domiciled in a jurisdiction without
an income tax treaty with the U.S. to be deemed an
expatriate corporation. In other words, a foreign
entity could meet all of the other statutory
requirements for classification as an expatriate
corporation, but if domiciled in a jurisdiction with
a tax treaty with the U.S., it would fall outside
the CTSP Act's prohibitions and would be eligible to
contract with state agencies.
v) What is an income tax treaty? : The U.S. has
tax treaties with a number of foreign countries.
Under these treaties, residents (not necessarily
citizens) of foreign countries are taxed at a
reduced rate, or are exempt from U.S. taxes on
certain items of income they receive from sources
within the U.S. These reduced rates and exemptions
vary among countries and specific items of income.
Under these same treaties, residents or citizens of
the U.S. are taxed at a reduced rate, or are exempt
from foreign taxes, on certain items of income they
receive from sources within foreign countries. Most
income tax treaties contain what is known as a
"saving clause", which prevents a citizen or
resident of the U.S. from using the provisions of a
tax treaty to avoid taxation of U.S. source income.
vi) Who does this bill help? : Based on the
author's statement, it would appear that this
definitional modification is primarily designed to
assist ADT Security Services (ADT), which is a
division of Tyco International (Tyco) - a
diversified company that provides products and
services in more than 60 counties around the world.
(According to its website, Tyco is a leading
provider of electronic security and fire protection
services, valves and controls, and other industrial
products.) For its part, ADT notes:
[W]e are seeking a slight revision to the
state's contract ban law to allow our company,
ADT to resume selling products and services to
the state now that our parent company Tyco
International has moved to Switzerland from
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Bermuda. Switzerland is not a tax haven
country; therefore we respectfully submit that
California's "expatriate" law should no longer
apply to Tyco and ADT.
vii) Is Tyco currently an expatriate corporation? :
While Tyco believes this legislation is needed to
enable it to bid on state contracts, it is not clear
whether Tyco even meets the current definition of an
expatriate corporation. To be deemed an expatriate
corporation under current law, a corporation must
have "no substantial business activities in the
place of incorporation." Tyco, in turn, is
currently incorporated in Switzerland and it is
committee staff's understanding that Tyco employs
roughly 1,000 individuals in that county.
Nevertheless, Tyco representatives state that it is
currently unclear whether their business activities
in Switzerland would be considered "substantial" by
a reviewing entity. Thus, Tyco is effectively
seeking a safe harbor, under which it (and its
subsidiaries) would be excluded from the statutory
definition of an expatriate corporation because Tyco
is incorporated in a country with a tax treaty with
the U.S. Tyco representatives also argue that
creating a clear safe harbor would ease
administration of the state's contracting law.
viii) Does this bill preserve the original intent of
SB 640 (Burton)? : As noted above, SB 640 (Burton)
was designed to prohibit U.S. companies that
reincorporate offshore for tax reasons from
contracting with the state. If this bill is passed,
companies that expatriate to tax haven counties
without a U.S. tax treaty will still generally be
barred from contracting with the state. However,
companies that expatriate to a country with a U.S.
tax treaty would fall under the bill's safe harbor,
even if the move was entirely driven by tax
considerations. In this manner, it is conceivable
that this bill could even encourage companies to
expatriate to such countries.
REGISTERED SUPPORT / OPPOSITION :
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Support
California Retailers Association (sponsor of SUT provisions)
Opposition
None on file
Analysis Prepared by : M. David Ruff and Oksana Jaffe / REV. &
TAX. / (916) 319-2098