BILL ANALYSIS
AB 1087
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1087 (Ma)
As Amended September 2, 2009
Majority vote.
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|ASSEMBLY: |50-28|(June 3, 2009) |SENATE: |23-16|(September 4, 2009) |
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|COMMITTEE VOTE: |6-1 |(September 10, |RECOMMENDATION: |Concur |
| | |2009) | | |
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Original Committee Reference: REV. & TAX.
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).
The Senate amendments :
1)State 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.).
2)Amend the CTSP Act's definition of an "expatriate corporation."
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
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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, 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
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partnership); or,
b) 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) the
acquiring foreign entity is more than 50% owned by domestic
shareholders or partners.
AS PASSED BY THE ASSEMBLY , this bill provided 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.
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:
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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 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.
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
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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:
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
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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. 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) 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 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.
vi) 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
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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.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098
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