BILL ANALYSIS
AB 1935
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Date of Hearing: May 19, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1935 (De Leon) - As Introduced: February 17, 2010
Policy Committee: Revenue and
Taxation Vote: xx
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill requires most multi-state companies, beginning in
2011, to use the "single sales factor" method of apportioning
their combined income to California for purposes of California's
Corporation Tax Law. Under last year's budget agreement,
companies will be able to elect to use either the single sales
factor method or the existing three factor formula (using
property, payroll, and sales) for apportioning their combined
income to this state.
FISCAL EFFECT
The FTB staff estimates this bill will result in an annual GF
gain of $135 million in 2010-11, $450 million in 2011-12, $600
million in 2012-13, and $550 million in 2013-14 and beyond.
COMMENTS
1)Purpose . According to the author, the bill will strengthen
incentives for companies to invest in California, eliminate
benefits that companies will garner under existing law from
moving their operations out of state, and provide much-needed
revenues to the GF.
2)Background . A key issue relating to the corporation franchise
tax involves the determination of California income for
corporations doing business both inside and outside of the
state. Given the numerous challenges involved in separately
determining receipts and expenses of operations occurring in
the state, California (like virtually all other states levying
a corporation tax) uses the company's combined U.S. or
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worldwide income as a starting point and then allocates a
share of it to California based on an apportionment formula.
Prior to 1993, California used the standard three-factor
apportionment formula adopted by most states - the average of
the percentages of the company's combined property, payroll,
and sales that are attributable to operations in California.
Under this formula, a California based company with, for
example, 65% of its combined property and payroll and 20% of
its sales attributable to California would have the average of
these three percentages - in this case 50% -- of its combined
income apportioned to this state for taxation. Since 1993,
California has double-weighted the sales factor for businesses
in most industries. Oil and certain financial industries
continue to use the unweighted three-factor formula.
In recent years, a large number of states have moved from the
three-factor formula to a formula based, solely or primarily,
on just the percentage of sales. Proponents of the single
sales formula argue the three-factor formula creates a
disincentive for new investment in a state, because the new
investment will raise the percentages for the property and
payroll factors. In contrast, a formula based on just sales
will not raise taxes apportioned to the state when a company
builds a new facility or hires new workers.
A shift from the three factor formula to a single sales factor
results in a tax decrease for in-state companies (because
their large property and payroll factors no longer count), and
a partly offsetting tax increase for out-of-state companies
that sell into California markets, since they have small
percentages of property and payroll in this state but a
relatively larger percentage of sales.
As part of the 2009 budget agreement, California will,
beginning January 2011, change from a modified three-factor
formula to a single-sales method of apportionment. However,
unlike all other states except Missouri, California will allow
companies to choose each year the apportionment method
resulting in the lowest amount of income subject to California
taxation. The elective system not only rewards companies that
invest in California (by allowing them to use the single sales
factor and ignore the larger property and payroll factors),
but it also rewards companies making investments in other
states, by allowing them to benefit from the small property
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and payroll percentages under the three factor formula.
This bill makes the single sales formula mandatory for all
companies except for financial institutions and oil companies,
who, as under current law, will continue to use the three
factor formula. The change will raise income and taxes that
will be reported by predominately out-of-state companies that
sell into California markets.
3)Related legislation . This bill is similar to the provisions
affecting income apportionment in SB x6 18 (Steinberg),
introduced in the 6th Extraordinary Session and pending before
the Senate Revenue and Taxation Committee.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081