BILL ANALYSIS
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THIRD READING
Bill No: AB 1618
Author: Assembly Budget Committee
Amended: 10/6/10 in Senate
Vote: 27 - Urgency
PRIOR VOTES NOT RELEVANT
SUBJECT : Revenues Budget Trailer Bill
SOURCE : Author
DIGEST : Senate Floor Amendments of 10/6/10 delete the
prior version of the bill which expressed the intent of the
Legislature to enact statutory changes relating to the
Budget Act of 2010.
This bill now suspends the ability of taxpayers under the
personal income tax and the corporation tax to use set
operating losses in the 2010 and 2011 taxable years and
extend carryforward periods to account for the suspension
period, exempts specified taxpayers from 2008 and 2009 net
operating loss suspension, modifies the large corporate
understatement penalty, allows taxpayers not electing
sales-factor only apportionment to source sales of
intangibles to states with highest cots of performance,
reauthorizes taxpayers to report use tax on California's
income tax form, reauthorizes taxpayers to report use tax
on California's income tax form, and authorizes the Board
of Equalization to assess a cost recovery fee on any person
that fails to pay accounts due and owing.
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ANALYSIS : This bill does the following:
1. Net Operating Loss (NOL) Suspension . This bill suspends
the ability of taxpayers under the personal income tax
and the corporation tax to use NOLs in the 2010 and 2011
taxable years, and extends carryforward periods to
account for the suspension period. The bill also delays
for two years the above listed NOL carrybacks. This
bill also makes technical and conforming changes.
This bill alters the exemption for the 2010 and 2011 NOL
suspensions to personal income taxpayers with less than
$300,000 in modified adjusted gross income or corporate
taxpayers with less than $300,000 in preapportioned
income (net business and nonbusiness income before
apportionment and allocation). This exemption will
exempt over 90 percent of corporations.
According to the Franchise Tax Board (FTB), this
provision is expected to generate approximately $1.2
billion in the budget year. This figure reflects the
net impact of the exemptions.
2. Exempts Specified Taxpayers from 2008 and 2009 NOL
Suspension . This bill provides that the suspension does
not apply to a taxpayer:
A. That ceased to do business and had a final taxable
year prior to August 28, 2008.
B. That sold or transferred substantially all of its
assets resulting in a gain on sale during a taxable
year ending prior to August 28, 2008.
C. The gain generated by the sale or transfer could
be offset with existing NOLs.
D. The sale or transfer occurred pursuant to a plan
of reorganization under Chapter 11 of Title 11 of the
United States Code.
This bill provides that an amended return claiming a net
operating loss allowed pursuant to this section shall be
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treated as a timely filed original return. The measure
also provides a public purpose statement asserting that
this provision provides necessary tax relief for a
taxpayer affected by its contents by ensuring that these
taxpayers are not permanently denied the NOL.
According to FTB, they were unable to estimate this
provision because doing so would violate FTB taxpayer
confidentiality laws. However, for every $100 million
in NOLS that the taxpayers would be able to use to
offset income, there would be a revenue loss of
approximately 8.8 million. Those interested in this
provision indicate there would be a $30 million loss.
3. Modifies Large Corporate Understatement Penalty .
Existing law penalizes taxpayers filing under the
corporate tax 20 percent of any understatement that
exceeds $1 million of the tax shown on an original
return (or amended return filed on or before the
extended due date of the original return) for taxable
years beginning on or after January 1, 2003 (SBx1 28,
Committee on Budget, 2008).
This bill modifies the penalty for taxable years
beginning on or after January 1, 2010, to apply only to
understatements that exceed the greater of:
A. $1 million, or
B. 20 percent of the tax shown on an original return
or shown on an amended return filed on or before the
original or extended due date of the return for the
taxable year.
According to FTB, this provision is expected to reduce
revenues by $45 million in the budget year and
approximately $100 million in 2011-12.
4. Allows Taxpayers not Electing Sales-Factor Only
Apportionment to Source Sales of Intangibles to States
with Highest Costs of Performance . This bill requires
taxpayers electing three-factor, double-weighted sales
formula to use the costs of performance method to source
sales. If the section of law allowing sales factor-only
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apportionment is repealed, all taxpayers must use the
cost of performance method to source sales. This bill
applies to the 2011 taxable year, and allows FTB to
issue regulations.
According to FTB, this provision is expected to reduce
revenues by $29 million in the budget year and
approximately $100 million in 2011-12.
5. Reauthorizes Taxpayers to Report Use Tax on California's
Income Tax Form . This bill allows taxpayers to make an
irrevocable election to report and remit use tax on an
acceptable tax return, defined as a personal income tax
or corporate tax return. Taxpayers cannot use the
income tax forms to report use tax due on mobile homes,
commercial coaches, vehicles, vessels, aircraft,
tangible personal property leases, and cigarettes and
tobacco products.
This bill clarifies that total sale prices of items
subject to the use tax reported by taxpayers on the
income tax form need not be reported on the taxpayer's
sales tax returns. This bill applies penalties and
interest provisions, mechanisms for claiming refunds and
credits, qualifications for timely filed returns,
determinations of understatements, and ordering rules
that apply to use tax returns filed directly with the
Board of Equalization (BOE) to use tax reported on
income tax forms.
This bill directs FTB to revise forms and instructions
to allow a person to report and pay use tax in a form
and manner approved by BOE starting with the 2010 tax
year. This bill provides specified procedures for BOE
to approve the changes to the form and instructions.
Tax payments must first be applied to the personal
income and corporation tax before the use tax. FTB must
transfer use tax payments and information to BOE within
60 days of processing the return.
According to the BOE, this provision is expected to
generate $9.2 million General Fund in the budget year.
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6. Authorizes BOE to Assess a Cost Recovery Fee . This
bill:
A. Authorizes the BOE to impose and collect a
collection cost recovery fee on any person that fails
to pay amounts due and owing.
B. Specifies that the collection fee shall be in an
amount equal to the BOE's costs for collections, as
reasonably determined by the BOE.
C. Specifies that the collection fee is operative
with a demand notice for payment which is mailed to
the taxpayer on or after January 1, 2011.
D. Specifies that the BOE may relieve the taxpayer of
the fee under specified conditions.
This bill amends Sections 6833 (Sales and Use Tax Law),
9035 (Use Fuel Tax Law), 11534 (Private Railroad Car
Tax), 30354.7 (Cigarette and Tobacco Products Tax Law),
32390 (Alcoholic Beverage Tax Law), 38577 (Timber Yield
Tax), 40168 (Energy Resources Surcharge Law), 41127.8
(Emergency Telephone Users Surcharge Law), 43449
(Hazardous Substances Tax Law), 45610 (Integrated Waste
Management Fee Law), 46466 (Oil Spill Response,
Prevention, and Administration Fees Law), 50138.8
(Underground Storage Tank Maintenance Fee Law), 55211
(Fee Collection Procedures Law), and 60495 (Diesel Fuel
Tax Law) of the Revenue and Taxation Code to provide for
the cost recovery fee for all of these programs.
According to the BOE, this bill generates approximately
$20 million ($13 million General Fund) in the budget
year.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
DLW:do 10/6/10 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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