BILL ANALYSIS
AB 1178
Page 1
ASSEMBLY THIRD READING
AB 1178 (Block)
As Amended January 25, 2010
Majority vote. Tax levy
REVENUE & TAXATION 5-3 APPROPRIATIONS 12-5
-----------------------------------------------------------------
|Ayes:|Charles Calderon, Coto, |Ayes:|De Leon, Ammiano, |
| |Ma, Portantino, Fong | |Bradford, Charles |
| | | |Calderon, Coto, Davis, |
| | | |Fuentes, Hall, John A. |
| | | |Perez, Skinner, Solorio, |
| | | |Torlakson |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Beall, Harkey, Nestande |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, Strickland |
| | | | |
-----------------------------------------------------------------
SUMMARY : Requires multinational corporations that elect to file
tax returns based only on income earned inside the United States
(U.S.), known as the water's-edge method, to include, for tax
years beginning on or after July 1, 2011 and before July 1,
2014, the income of a related corporation located in a tax haven
country. Provides a partial exemption from the sales and use
taxes (SUT), on and after July 1, 2011, and before January 1,
2015, for the purchases of college textbooks and supplies by
college students, as defined. Specifically, this bill :
1)Requires a corporate taxpayer, for taxable years beginning on
and after July 1, 2011, and before July 1, 2015, to include in
the taxpayer's water's-edge return the entire income and
apportionment factors of any affiliated corporation that was
doing business in, or had income derived from or attributable
to, a tax haven.
2)Defines "doing business in" a tax haven as being engaged in
activity that is sufficient for a tax haven jurisdiction to
impose a tax under United States (U.S.) constitutional
standards.
3)Defines the term "tax haven" as any jurisdiction identified in
Table 1 of Appendix I to the December 2008 Report of the U.S.
AB 1178
Page 2
Government Accountability Office on International Taxation
(GAO-09-157) for which a United States District Court order
granted leave for the federal Internal Revenue Service to
serve a "John Doe" summons.
4)Provides that an additional jurisdiction shall be considered a
"tax haven" if the U.S. Secretary of the Treasury issues
notice after January 1, 2011, declaring that the jurisdiction
is recognizes as a tax haven by the U.S. A jurisdiction shall
not be considered a "tax haven" if the U.S. Secretary of the
Treasury issues notice declaring the jurisdiction is no longer
recognized as a tax haven by the U.S.
5)Allows a taxpayer to petition the Franchise Tax Board (FTB) to
exclude the income and apportionment factors of a tax haven
corporation from the water's-edge return if that corporation
is engaged in the active conduct of trade or business in a tax
haven, within the meaning of Internal Revenue Code (IRC)
Section 367(a)(3)(A) and the regulations thereunder.
6)Authorizes FTB, in accordance with Revenue and Taxation Code
(R&TC) Section 25137, to prescribe a form and manner in which
a taxpayer must file the petition.
7)Allows taxpayers to appeal the FTB's determination to the
State Board of Equalization (BOE) in the specified form and
manner.
8)Authorizes FTB to prescribe regulations necessary to carry out
the purposes of this bill.
9)Requires FTB to issue annually a notice identifying the
jurisdictions that are considered tax havens.
10)Provides a partial exemption from SUT, on and after July 1,
2011, and before January 1, 2015, for the sale of, and the
storage, use, or other consumption of, textbooks and supplies
purchased by a student enrolled in an institution of higher
education. Specifically, it provides that:
a) For purchases made between July 1, 2011, and before July
1, 2012, the state portion of SUT otherwise applicable to
those purchases is reduced to 2%;
AB 1178
Page 3
b) Purchases made on or after July 1, 2012, and before
January 1, 2015, are exempted from the state portion of
SUT;
c) The exemption does not apply to any of the following
taxes:
i) Tax imposed pursuant to R&TC Section 6051.2 and
Section 6201.2, dedicated to local governments to fund
health and welfare programs (Local Revenue Fund);
ii) Tax imposed pursuant to R&TC Section 6051.5 and
Section 6201.5, dedicated to the repayment of the
Economic Recovery Bonds (Fiscal Recovery Fund);
iii) Tax imposed pursuant to Section 35 of Article XIII
of the California Constitution, dedicated to local
government to fund public safety services (Local Public
Safety Fund); and,
iv) Any tax levied by a county, city, or district
pursuant to the Bradley-Burns Uniform Local SUT Law or
the Transactions and Use Tax Law.
11)Defines "institution of higher education" as the University
of California, the California State University, or a
California community college.
12)Defines "supplies" as pens, paper, blue books, notebooks, art
supplies, uniforms, safety equipment, tools, computer paper,
and flash drives necessary for the course of study in which a
student is enrolled at the institution of higher education.
The definition of "supplies" does not include computers,
printers, or related hardware and software.
13)Defines "textbooks" as any published material that is
principally designed for use by a student at an institution of
higher education as a source of instructional material and
includes any book or edition of a book that is directed or
recommended by an instructor at an institution of higher
education to a student to purchase for use as a basis for a
course of study in which that student is enrolled at that
institution.
AB 1178
Page 4
14)Takes effect immediately as a tax levy.
FISCAL EFFECT : The FTB staff estimates that the water's-edge
provisions of this bill will result in an annual gain of $70
million in the fiscal year (FY) 2011-12, $120 million in FY
2012-13, and $120 million in FY 2013-14, and $50 million in FY
2014-15. The State Board of Equalization (BOE) staff estimates
that SUT provisions of this bill will result in an annual loss
of $70 million in FY 2011-12, $122 million in FY 2012-13, $128
million in FY 2013-14, and $48 million in FY 2014-15.
COMMENTS :
1)The Author's Statement . The author states that, "AB 1178
would close a loophole currently used by corporations that set
up affiliates in listed tax haven countries to primarily park
their income to avoid paying their equitable share of
California taxes. These corporations' tax evasions through
this loophole result in fewer dollars for education, health,
and public safety programs on which Californians depend. The
Franchise Tax Board (FTB) estimates that closure of this
loophole would generate approximately $120 million per year in
additional revenue to help address the substantial increased
costs to students and families in obtaining a higher
education. The bill would simultaneously reduce the sales tax
burden imposed on textbooks and supplies purchased by students
at a UC, CSU, or California Community College store by a
partial exemption of the state sales tax. According to the
Board of Equalization, this would result in a reduction of
approximately $120 million per year in revenue. Therefore,
this bill would yield no net change in state revenue, while it
improves the affordability of materials required by students
to attend public higher education institutions. Local sales
tax revenues would not be affected."
2)Arguments in Support . The proponents of this bill argue that,
"as California prepares to make more devastating cuts to
social and human services programs in 2010, the necessity to
shut down abusive off-shoring practices that simply pad the
bottom lines of multibillion dollar corporations has never
been greater." Proponents believe that moneys derived from
closing corporate tax loopholes could be put to better use as
tax relief for already struggling college students in
California.
AB 1178
Page 5
3)Arguments in Opposition . The opponents believe that this bill
runs contrary to the intent of the water's-edge election,
could adversely impact foreign relations, and would penalize
California-based U.S. companies for doing business in certain
countries with which the U.S. has diplomatic ties. The
opponents argue that this bill violates the Foreign Commerce
Clause, provides for no process to appeal FTB's determination,
and contains unreliable revenue estimates. Finally, the
opponents state that this bill runs directly contrary to the
Treasury Department's position on listing "tax havens" by
referring to the GAO list of "tax haven" countries about which
the Deputy Assistant Secretary of the Treasury had substantial
foreign policy concerns.
4)What Exactly Does this Bill Propose to Do ? This bill does two
things: it partially exempts from SUT the purchases of
textbooks and supplies by college students and revises the
water's-edge provisions to include the income and
apportionment factors of affiliated companies that are doing
business in, or derive income from, a tax haven country.
5)The Partial SUT exemption . The proposed exemption would apply
only to textbooks and supplies purchased by students enrolled
in the University of California, the California State
University, or a California community college. Furthermore,
only textbooks required or recommended for a course at an
eligible institution would be exempted from SUT. The intent
of this bill is to make college textbooks and supplies more
affordable for college students. However, purchases by
students enrolled in a private university or college would not
be eligible for this exemption.
Under current law, the statewide base SUT rate is 8.25%, which
is comprised of 5% General Fund (GF) state rate, 1% GF state
rate (until July 1, 2011), 0.25% Fiscal Recovery Fund rate,
0.50% Local Revenue Fund rate, 0.50% Local Public Safety Fund
rate, 0.75% city and county operations rate and 0.25% county
transportation rate. In addition to the statewide base rate
of 8.25%, cities and counties are authorized to impose
additional voter-approved taxes.
This bill would reduce the state rate of 5% to 2% for purchases
of eligible textbooks and supplies between July 1, 2011 and
AB 1178
Page 6
June 30, 2012. On and after July 1, 2012 and until January 1,
2015, those purchases would be completely exempted from the
state portion of SUT. However, this partial exemption would
not apply to the Bradley-Burns local taxes, transactions and
use taxes, the 0.25% tax dedicated to the repayment of
Economic Recovery Bonds, the 0.50% dedicated to local
government for funding of local health and welfare programs or
the 0.50% tax dedicated to funding local public safety
services.
6)The Water's-Edge Provision . Under existing law, a corporate
taxpayer with worldwide business activities may elect to
report income to California on a "water's-edge" basis. A
water's-edge election, generally, allows the taxpayer to
exclude from its tax return the income and apportionment
factors of taxpayer's foreign affiliates. Currently, in order
to be included in the taxpayer's water's-edge return, a
foreign affiliated company must be a domestic international
sales corporation, a foreign sales corporation, an export
trade corporation, a CFC with Subpart F income, or must have
U.S.-source income or some U.S. presence (i.e. an average of
the property, payroll, and sales factors within the U.S. of
20% or more). This bill would expand the list of foreign
affiliated companies whose income and apportionment factors
must be included in the taxpayer's water's-edge tax return.
It would require any foreign affiliated company doing business
in, or deriving income attributable to, a tax haven country to
be on that list, which means that a foreign company that has
neither U.S.-source income nor U.S. presence (no payroll,
property or sales factor) would qualify for the inclusion.
Furthermore, all income and apportionment factors of a CFC
would be included in the taxpayer's return, instead of the
percentage based on the ratio of its Subpart F income to the
current year earnings and profits. It should be remembered,
however, that this proposal would apply only to the taxpayer's
affiliated foreign companies, i.e. companies that are members
of a commonly controlled group, that are unitary with the
taxpayer.
7)Similar Legislation: Water's-Edge Provisions .
AJR 12 (Block), introduced in the 2009 legislative session,
would request that the President and the U.S. Congress enact
legislation that closes the corporate federal tax loopholes
AB 1178
Page 7
relating to tax haven countries. AJR 12 is in the Senate
Revenue and Taxation Committee.
AB 34 (Ruskin), introduced in the 2005-06 legislative session,
was nearly identical to AB 1178 and would have required
taxpayers filing on a water's-edge basis to include the income
and apportionment factors of affiliated corporations doing
business in, or having income derived from or attributable to,
a tax haven. AB 34 failed to pass out of the Assembly.
AB 441 (Chu), introduced in the 2005-06 legislative session,
would have required a corporation that makes a water's-edge
election to include the income and apportionment factors of
certain foreign affiliates. AB 441 failed to pass out of the
Assembly.
SB 663 (Migden), Chapter 22, Statutes of 2006, clarified
specific provisions of the franchise tax law relating to
water's-edge taxpayer and reformed the water's-edge procedure
by replacing existing rules creating a contract between the
taxpayer and FTB with election procedures. SB 663 applies to
a taxpayer making a water's-edge election on or after January
1, 2006, and to those taxpayers that made a water's-edge
election before January 1, 2006, but not until the expiration
of the seven-year period during which a taxpayer is prohibited
from terminating that election without the consent of the FTB.
8)Similar Legislation: SUT Exemption for Purchases of Textbooks
and Supplies .
AB 2636 (Leonard), introduced in the 2001-02 legislative
session, would have provided a state SUT exemption for the
purchase of any instructional materials, as defined, by any
qualifying school entity, as defined. AB 2636 was held under
submission in this Committee.
AB 1077 (Mountjoy), introduced in the 2001-02 legislative
session, would have provided a state SUT exemption for the
purchase of any TPP by a K-12 public school or school district
for use by that school or district. AB 1077 was held under
submission in this Committee.
SB 546 (McClintock), introduced in the 2001-02 legislative
AB 1178
Page 8
session, would have provided a SUT exemption for the sale and
purchase of any textbook, as defined, purchased by a K-12
public school or school district, or an accredited private
school, or sold to a student of an accredited private school
or institution of higher education. SB 546 failed passage in
the Senate Revenue and Taxation Committee.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0003625