BILL ANALYSIS
AB 2126
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2126 (Garrick) - As Amended: April 5, 2010
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Minimum franchise tax: corporations: exemptions.
SUMMARY : Exempts a new corporation from the annual minimum
franchise tax and reduces the amount of that tax from $800 to
$100 for nine years thereafter. Specifically, this bill :
1)Exempts each corporation that first commences business
operations on or after January 1, 2011, from the minimum
franchise tax for the first taxable year.
2)Reduces the annual minimum franchise tax imposed on that
corporation from $800 to $100 for each of the nine taxable
years thereafter.
3)Does not apply to any corporation that began business
operations in this state in any other business form prior to
its incorporation, or any corporation that reorganizes solely
for the purpose of reducing its minimum franchise tax.
4)Applies to taxable years beginning on or after January 1,
2011.
5)Takes effect immediately as a tax levy.
EXISTING LAW imposes franchise tax on all corporations doing
business in California equal to 8.84% of the taxable income
attributable to California. A minimum franchise tax of $800 is
imposed on all corporations that are incorporated under
the laws of California, qualified to transact intrastate
business in California, or are doing business in California.
Taxpayers must pay the minimum franchise tax only if it is more
than their regular franchise tax liability. Specifically:
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1)Limited exceptions exist with respect to imposition of the
minimum franchise tax. For instance, credit unions and
nonprofit organizations are not subject to the minimum
franchise tax and a corporation is not subject to the minimum
franchise tax for its first taxable year, provided that it
incorporates or qualifies to do business in this state on or
after January 1, 2000. However, even though a corporation is
not subject to the minimum tax in its first taxable year, it
will be subject to franchise tax in its first taxable year
based on its taxable income.
2)According to the Franchise Tax Board (FTB), for taxable years
beginning on or after January 1, 1997, only taxpayers with net
income less than approximately $9,040 pay the minimum
franchise tax because the amount of measured tax owed would be
less than $800 ($9,039 x 8.84% = $799).
3)Limited partnerships (LPs), limited liability partnerships
(LLPs), and limited liability corporations (LLCs) that are
doing business in California, registered or qualified to do
business in California, or formed in this state are subject to
annual tax in an amount equal to the minimum franchise tax,
currently set at $800. These entities (known as 'pass-through
entities') are not subject to any tax based on taxable income.
Rather, the items of income, gain, loss, deduction and credit
are passed-through to the owners and reported on their
respective income or franchise tax returns.
4)Real estate mortgage investment conduits (REMICs) and
financial asset securitization investment trusts (FASITs) are
subject to and are required to pay the minimum franchise tax.
Regulated investment companies (RICs) and real estate
investment trusts (REITs) organized as corporations are also
subject to and are required to pay the minimum franchise tax.
RICs, REITs, REMICs, and FASITs are entities authorized by the
federal government for special tax treatment. California
conforms in large part to federal tax provisions but subjects
each entity to payment of the annual minimum tax.
5)LPs, LLCs not classified as corporations, LLPs, charitable
organizations, RICs, REITs, REMICs, and FASITs are not exempt
from the minimum franchise tax for the first taxable year of
existence.
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FISCAL EFFECT : The FTB staff estimate that this will reduce
General Fund revenues by $0 million in fiscal year (FY) 2010-11,
$38 million in FY 2011-12, and $60 million in FY 2012-13.
COMMENTS :
1)The author states that, "Under current law, a franchise tax of
8.84% of taxable income is charged to all businesses operating
in California. Unfortunately, California's franchise tax is a
minimum of $800 after the first year - even if a business is
operating in the red and struggling to keep its doors open.
With this tax, businesses are subjected to an excessive tax
that is not consistent with the tax of neighboring states."
"According to a study released in 2007, only 17 percent of
businesses are able to turn a profit after the second year of
operations. In other words, 83% of companies are either
unable to make a profit or went out of business. Although the
majority of new companies do not even have a net income,
California's harsh tax code still forces these companies to
pay an $800 tax.
"When deciding where to locate a business, entrepreneurs have to
look no further than Nevada, Oregon, Arizona or Utah, which
all charge $100 or less.
"AB 2126 will remove one of the several barriers to doing
business in California and begin to level the playing field
with other states by reducing the minimum franchise tax to
$100 for the first 10 years after a new business opens in the
state.
"If AB 2126 becomes law, California can once again begin to
attract employers to do business in this state. Ultimately,
it will assist with lowering the unemployment rate and putting
Californians back to work."
2)According to FTB, the following states currently impose a
minimum franchise tax:
a) Illinois has a minimum 1% tax based on "paid-in" capital
(calculated using the shares of stock issued by the
corporation as disclosed in the annual statement reported
to the Illinois Secretary of State). The tax ranges from a
minimum of $25 to a maximum of $1 million.
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b) Massachusetts imposes the greater of a corporate excise
tax of 9.5% based on taxable income or a minimum tax equal
to $456.
c) Beginning January 1, 2008, Michigan taxpayers are
subject to the Michigan Business Tax. The Michigan
Business Tax is composed of two taxes - a business income
tax of 4.9% on every taxpayer with business activity in the
state, and a modified gross receipts tax of 0.80% on every
taxpayer having nexus with Michigan. Michigan does not
have a minimum tax.
d) Minnesota imposes a franchise tax on a corporation's
taxable income at the rate of 9.8%. In addition, a minimum
franchise tax, ranging from $0 to $5,000, is imposed based
on the sum of the property determined by property, payroll,
and sales in the state.
e) New York imposes a franchise tax of 7.1% based on net
income plus a fixed dollar minimum tax based on gross
payroll. The fixed dollar minimum tax ranges from $100 to
$1,500.
3)Committee staff notes all of the following:
a) The minimum franchise tax was enacted to ensure that all
corporations pay at least a minimum amount of franchise tax
for the privilege of doing business in this state,
regardless of the corporation's income or loss. Thus, the
minimum franchise tax is not technically an "income tax",
but rather it is a tax on the right to exercise the powers
granted to a corporation doing business in California.
Even when a corporation earns no income, it still receives
the benefits of its corporate status, including the limited
liability protection under the laws of this state.
b) California's minimum tax was increased from $100 to $200
in 1972. It was increased to $300 in 1987, to $600 in
1989, and to $800 in 1990.
c) It has never been shown that the minimum franchise tax
discourages businesses, particularly, since small
businesses can always organize as sole proprietorships to
avoid paying the minimum franchise tax. Many large
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corporations hold a number of inactive subsidiaries on
which they readily pay the minimum franchise tax. Because
the franchise tax is the greater of the minimum franchise
tax or tax of 8.84% on the corporations' taxable income,
the actual beneficiaries of this bill are corporations that
report minimal taxable income and all pass-through
entities, regardless of the amount of income earned.
d) Under existing law, a corporation that incorporates or
qualifies to do business in this state on or after January
1, 2000, is already exempt from the minimum franchise tax
for its first taxable year. Nonetheless, this bill
includes a similar provision for a corporation that first
commences business operation on or after January 1, 2011.
It is unclear whether the existing tax relief would be
available to corporations that first incorporate between
the effective date of this bill and January 1, 2011.
Committee staff suggests that this bill be amended to
delete this provision in order to avoid any confusion and
also to ensure that the relief is still available before
January 1, 2011.
e) It appears that the provisions of this bill do not apply
to LPs, LLCs that are classified as partnerships, LLPs or
other "flow-through" entities. The Committee may wish to
consider amending this bill to create a uniform policy of
reducing costs for all small businesses.
f) This bill lacks a sunset date to allow periodic
legislative review of the proposed exemption. The Committee
staff recommends an amendment to add a sunset date.
4)Committee staff also suggests the following technical
amendment:
On page 5, strike out lines 11 and 12, and insert:
taxable years. This subdivision does not apply to any
corporation that began business operations as a sole
5)Related legislation.
AB 2671 (Cook), introduced in the 2009-10 Legislative Session,
exempts from the annual minimum franchise tax any corporation
that is solely owned by a deployed member of the U.S. Armed
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Forces, provided that the corporation operates at a loss or
ceases operation.
AB 2671 passed out of this Committee on April 12, 2010 and was
re-referred to the Assembly Appropriations Committee.
AB 327 (Garrick), introduced in the 2009-10 Legislative Session,
would have reduced the minimum franchise tax for corporation
as well as pass-through entities from $800 to $100. AB 327
was held under submission in this Committee.
AB 2178 (Garrick), introduced in the 2007-08 Legislative
Session, would have reduced the minimum franchise tax from
$800 to $200. AB 2178 was held under submission in this
Committee.
AB 1179 (Garrick), introduced in the 2007-08 Legislative
Session, is similar to AB 327. AB 1179 was held in this
committee.
AB 1419 (Campbell), introduced in the 1997-98 Legislative
Session, would have reduced the minimum franchise tax for a
qualified corporation from $800 to $100. AB 1419 failed
passage in the Senate Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
American Council of Engineering Companies of California
National Federation of Independent Business
Opposition
California Tax Reform Association
California Professional Firefighters
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098