BILL ANALYSIS
AB 2640
Page 1
Date of Hearing: May 3, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2640 (Arambula) - As Amended: April 8, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income tax: exclusion for subsidized parking: sales
and use tax exemption credit.
SUMMARY : Repeals the exclusion from gross income for free or
subsidized parking provided by employers to employees who
participate in a ridesharing arrangement. Allows an income tax
credit for the sales or use tax (SUT) paid by a qualified
taxpayer for qualified property, subject to an annual cutoff
date established by the Franchise Tax Board (FTB).
Specifically, this bill :
1)Repeals, for taxable years beginning on or after January 1,
2010, the exclusion from gross income for "free or subsidized
parking." "Free or subsidized parking" is defined as the
benefit received by a taxpayer from an employer for parking
while participating in a ridesharing arrangement within
California.
2)Allows, for taxable years beginning on or after January 1,
2010, a credit against either a "net tax," as defined under
the Personal Income Tax (PIT) Law, or the "tax," as defined
under the Corporation Tax (CT) Law, for the SUT paid by a
qualified taxpayer for qualified property placed in service
within California.
3)Provides that the amount of credit allowed is the percentage
of the total sales tax reimbursement or use tax paid on a
purchase or purchases of qualified property, the revenues of
which are deposited in the General Fund.
4)Defines "qualified property" as Internal Revenue Code (IRC)
Section 1245 property, as defined in IRC Section 1245(a)(3).
5)Defines "qualified taxpayer" as a purchaser engaged in any of
those lines of business described in Codes 311111 to 339999,
inclusive, of the North American Industrial Classification
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System (NAICS) Manual published by the United States Office of
Management and Budget, 2007 Edition.
6)Provides that, if the amount of credit exceeds the amount of
tax, the excess may be carried forward by the taxpayer until
the credit is exhausted.
7)Disallows the credit and the credit carryover in the year in
which the property is disposed of, or removed from this state,
if removed or disposed of within one year of the date of
purchase.
8)Limits the allowance of the credit by requiring FTB to grant
the credit on a first-come-first-served basis and to establish
a cutoff date for taxpayers to claim the credit.
9)Specifies that, for the 2010 tax year, the cutoff date is the
last day of the calendar quarter within which the FTB
estimates that the aggregate revenue increase generated from
the repeal of the subsidized parking exclusion has reached
$100 million (baseline amount). For each subsequent taxable
year, the cutoff date is the last day of the calendar quarter
within which the FTB estimates that the "baseline amount" has
been reached, as adjusted each calendar year to reflect the
rate of inflation or deflation, as measured by the Consumer
Price Index or other method of measuring the rate of inflation
or deflation, which the FTB determines is reliable and
generally accepted.
10)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW allows employees to exclude from gross
income the value of qualified transportation fringe benefits,
including employer-provided qualified parking. For the 2009
taxable year, the current maximum monthly amount value of
qualified parking that may be excluded from an employee's gross
income is set at $230.
EXISTING STATE LAW :
1)Conforms to federal law that allows an exclusion from gross
income for the value of qualified transportation fringe
benefits, including employer-provided qualified parking.
2)Excludes from "gross income" any compensation or the fair
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market value of any benefit, except salary or wages, that is
received by an employee from an employer for participation in
any ridesharing arrangement in California, including free or
subsidized parking. The phrase "free or subsidized parking"
means the benefit received from an employer for parking while
participating in a ridesharing arrangement within California.
Ridesharing arrangements include carpools, vanpools, and
buspools. There is no limitation on the amount of monthly
benefits received for participating in ridesharing
arrangements in California.
3)Allows a taxpayer to deduct ordinary and necessary business
expenses, which generally include providing fringe benefits,
such as parking subsidies and commuter benefits to the
taxpayer's employees.
4)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 retailer's gross receipts from TPP
sales in this state. Imposes a mirror use tax on the storage,
use, or other consumption of TPP purchased out of state and
brought into California. The use tax is imposed on the
purchaser, and unless the purchaser pays the use tax to an
out-of-state retailer registered to collect California's use
tax, the purchaser remains liable for the tax. The use tax is
set at the same rate as the state's sales tax and must be
remitted to the Board of Equalization.
5)Allows an income tax credit in an amount equal to the SUT paid
on the purchase of qualified machinery purchased for exclusive
use in an economic development area (except a Manufacturing
Enhancement Area). Limits the amount of this credit to the
amount of tax attributable to economic development area
income. The maximum value of property that may be eligible
for the SUT credit is $1 million for individuals and $20
million for corporations.
PRIOR STATE LAW : Prior to January 1, 2004, California law
contained various tax incentives [collectively referred to as
the Manufacturers' Investment Credit (MIC)] designed to
encourage investment in manufacturing equipment. Specifically,
prior state law:
1)Provided a partial SUT exemption for purchases of specified
manufacturing equipment, or an income tax credit equal to 6%
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of the amount paid or incurred for qualified property placed
in service in California. Specifically, the MIC:
a) Defined a "qualified person" as any taxpayer engaged in
the manufacturing activities described in specific Standard
Industrial Classification (SIC) Manual Codes.
b) Limited the availability of the SUT exemption to a
qualified person engaged in a new trade or business.
2)Defined qualified TPP as equipment used primarily for
manufacturing, processing, refining, fabricating, or
recycling; for research and development; for maintenance,
repair, measurement, or testing of qualified property; and for
pollution control meeting state standards. Special purpose
buildings were also included as qualified property.
3)Provided for the MIC's sunset on January 1, 2001, or on
January 1 of the earliest year thereafter, if the total
manufacturing employment in this state, as determined by the
Employment Development Department (EDD) on the preceding
January 1, did not exceed by 100,000 jobs the total
manufacturing employment in California on January 1, 1994.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual loss of $630 million in fiscal year (FY)
2010-11, $580 million in FY 2011-12, and $610 million in FY
2012-13.
COMMENTS :
1)The Author's Statement . The author states that, "California
provides billions of dollars in tax expenditures each year.
Once created, these expenditures are often never reviewed for
their effectiveness or compatibility with present day state
policy objectives.'
"AB 2460 eliminates a tax expenditure that is no longer
compliant with the State's broad policy goals, and redirects
the increased revenue for the purpose of providing a sales and
use tax exemption for the purchase of new manufacturing
equipment.
2)Exclusion for Transportation Related Benefits . Existing
federal and state laws allow an employee to exclude from
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income qualified transportation fringe benefits, including
transportation in a vanpool in connection with travel between
the employee's residence and place of employment. In
addition, employees may exclude from gross income the value of
a transit pass for use on a mass transit facility (rail, bus,
or ferry), and qualified parking at, or near, the employer's
business premises or location from which the employee commutes
to work by mass transit or hired commuter vehicle. The
exclusion is limited to the fair market value of the benefits
received but may not exceed a certain amount as prescribed by
federal law. For example, for the 2009 tax year, the maximum
exclusion amount allowed to an employee for qualified parking
provided by his/her employer is $230 per month. The exclusion
for ridesharing under California law is more generous than
under federal law: the ridesharing exclusion is limited to
$100 per month for federal tax purposes, whereas for
California income tax purposes, the exclusion is unlimited.
a) Qualified Parking. According to a 2002 report prepared
by the Legislative Analyst's Office (LAO), providing free
parking may encourage employees to drive to work alone to
work. The report cited a 1990 study that found a 41%
average reduction in solo driving when employees had to pay
to park. The LAO also noted a 2000 survey of Bay Area
commuters, which found that while 77% of commuters drive
alone to work when free parking is available, only 39% do
so when they have to pay to park.
b) Employer-Provided Ridesharing Program . The favorable
tax treatment for mass transit and ridesharing can be
justified on the grounds that encouraging alternative forms
of transportation may reduce congestion and air pollution.
This program allows taxpayers to "expense" (that is,
immediately deduct as a current business-related expense)
costs associated with providing ridesharing programs for
employees. The deduction covers a taxpayer's expenses to
provide for company commuter vans or bus service to
employees; subsidizing employee commuting expenses in
third-party vanpools, private commuter buses, or
subscription taxipools; free parking facilities for
carpools; and, certain other ridesharing programs. In
addition, taxpayers are allowed an accelerated (36-month)
depreciation deduction for costs of facility improvements
for employee ridesharing, bicycling, and walking programs.
Arguably, state tax incentives are needed to encourage
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employees and employers to use ridesharing programs to
alleviate traffic congestion, reduce air pollution, and
reduce gasoline consumption. By lowering the costs of
ride-sharing and other related policies, this program makes
alternative forms of transportation more attractive,
leading to an increase in participation.
c) What Kind of Parking Benefit Does This Bill Repeal ?
This bill repeals the subsidized parking provided to
employees participating in a ridesharing arrangement but
leaves intact the exclusion from gross income for
employer-subsidized parking for employees who commute to
work alone. As discussed, under existing federal and state
law, a taxpayer may exclude from gross income up to $230 in
monthly fees paid by his/her employer for the taxpayer's
qualified parking. It seems that the author's intent is to
eliminate this income exclusion for parking, i.e. a
qualified transportation fringe benefit, rather than an
employer-subsidized ridesharing program. As noted by the
FTB, unless this bill eliminates the exclusion from gross
income for transportation-related fringe benefits, the
repeal of the "free or subsidized parking" for ridesharing
arrangements would not result in any revenue gain. Thus,
the Committee staff recommends that this bill be amended to
repeal, as discussed, California's conformity to IRC
Section 132(f)(C).
3)Credit for the Amount of SUT Paid .
a) Background : Prior to January 1, 2004, California tax
law contained various tax incentives referred to as the MIC
to encourage investment in manufacturing equipment to be
used in California. The MIC expired on January 1, 2004
pursuant to a finding by EDD that total manufacturing jobs
on the preceding January 1 did not exceed the total
manufacturing jobs in California on January 1, 1994 by
100,000 jobs. According to:
i) EDD, from the time of implementation of the MIC in
1994 to January 1, 2002, the net increase in
manufacturing employment was 35,150.
ii) The LAO, most studies conducted on manufacturing
jobs created by tax incentives show revenue reductions
were greater than revenue increases.
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iii) The LAO, industry representatives noted that a SUT
exemption is preferable to an income tax credit, since it
would be less complicated to calculate, results in less
administrative work and auditing, and would not be
limited only to firms with taxable income. The LAO noted
that a partial exemption of the state SUT may even be
preferable in some respects to an income tax credit as
provided under the previous MIC.
b) Is the Proposed Credit for the SUT Paid by Businesses
Good Tax Policy ? Most economists who study government
finance and taxation agree that business inputs (e.g.,
machinery, research equipment, raw materials, etc.) should
be exempt from sales tax because, generally, business
outputs are already subject to sales tax, and taxing both
business inputs and business outputs results in double
taxation. While this bill does not provide for an outright
exemption from the SUT for purchases of manufacturing
equipment, it does take a step in the right direction by
allowing purchasers of that equipment to offset their
income tax liability with a credit measured by the amount
of SUT paid. However, it may not be useful to businesses
because of the $100 million limitation that the author
attempts to impose on the amount of credit for each taxable
year.
c) How is this bill different from the prior MIC law ? For
a 10-year period ending December 31, 2003, the law allowed
a SUT exemption for purchases of equipment and machinery by
new manufacturers, and an income tax credit for existing
manufacturers' investment in equipment. The amount of the
income tax credit was equal to 6% of the gross receipts or
sales price on purchases of TPP. In contrast to the prior
MIC which, generally, applied only to equipment used by
manufacturers engaged in activities described in specific
codes of the SIC manual, this bill applies to all TPP
subject to depreciation, including most equipment and
furnishings, used by all manufacturers. However, under
this bill buildings are excluded from the definition of
TPP.
Furthermore, the prior MIC allowed an outright SUT exemption,
although its availability was limited only to qualified
taxpayers engaged in a new trade or business, i.e. one that
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has been conducted by the taxpayer for not more than 36
months. The prior SUT exemption was intended to assist new
businesses that had no income tax liability. In contrast,
this bill does not allow an exemption for SUT paid and does
not differentiate between start ups and established
companies. It provides only an income tax credit, which is
measured by the amount of SUT paid. Finally, for each
taxable year, this bill attempts to cap the aggregate
amount of SUT credit available to taxpayers to $100
million, whereas prior MIC law did not impose any cap on
the credit amount.
d) Is the Amount of the Proposed SUT Income Tax Credit
Limited ? Similar to the existing SUT credit available in
economic development areas, this bill is intended to allow
a credit for the SUT paid (although only the state portion
of the SUT would qualify). As indicated in the FTB's
analysis of this bill, even though it appears to be the
author's intent to cap the amount of credit to $100 million
each year, this bill does not really limit this credit.
Instead, it attempts to establish a cutoff date in each
taxable year for the taxpayers to claim this credit by
reference to a baseline of $100 million, which is required
to be estimated by the FTB. In other words, the FTB must
determine, each calendar quarter of the taxable year,
whether the amount of revenue gain resulting from the
repeal of the "free or subsidized parking" provision has
reached $100 million. Arguably, if the baseline amount
does not reach $100 million in a particular tax year, the
SUT credit would be allowed with no limitation and could
add up to much more than $100 million. Therefore, the
author may wish to consider amending this bill to cap the
amount of the SUT credit, even though a capped credit, most
likely, will not be very effective since it will be claimed
only by a few taxpayers. In addition, the Committee staff
recommends that this bill be amended to clarify whether the
amount of SUT credit equals the full amount of the state
portion of the SUT paid or only to a percentage of that
amount. As currently written, this bill uses the word
"percentage" without stating the actual percentage number.
e) The Date of Purchase and Placement in Service .
Committee staff suggests that this bill be amended to
clarify that purchases made before the effective date of
this bill are not eligible for the SUT income tax credit
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and that qualified property must be placed in service in
the taxable year in which the credit is claimed. In
addition, if this bill is intended as an incentive for
taxpayers to invest in the state's manufacturing sector, it
is advisable to allow this incentive only for taxable years
beginning on or after January 1, 2011.
f) "Double Dip ." The proposed credit is provided for an
item that is already deductible as a business expense or is
depreciable. Thus, under this bill, a taxpayer may
depreciate the full cost of the qualified property,
including the SUT paid when the property is purchased, and
still be allowed the credit for the same SUT amount.
Committee staff recommends that this bill be amended to
eliminate this potential double benefit to the taxpayers.
g) Notification Requirement . This bill does not require
the manufacturer to notify FTB if property is removed from
California or converted from an exempt use within one year,
and there is currently no means, other than an audit,
through which FTB would learn of the new tax liability.
h) Definition of a Qualified Person : In defining a
"qualified person," Committee staff suggests amending this
bill to require that the qualifying entity be primarily
engaged in the activities specified in the referenced NAICS
codes. The failure to include such language in the MIC led
to many taxpayer disputes with FTB.
i) Sunset Date . Committee staff notes that, unlike the
previous MIC, this bill does not contain a sunset date.
Arguments in favor of not providing a sunset include the
promotion of certainty needed for long-term planning
purposes. Arguments in favor of a sunset include providing
the Legislature the ability to review the exemption's
effectiveness in the future. Committee staff suggests that
this bill be amended to include a sunset date.
j) Implementation concerns . The FTB staff identified
several implementation problems with this bill. One of the
main issues is the determination of a cutoff date for the
proposed tax credit, which cannot be implemented by FTB for
a number of reasons, as stated in the FTB's analysis of
this bill. The Committee staff understands that the author
is working with the FTB to resolve these issues.
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aa) Suggested Technical Amendments . FTB staff also suggests
the following technical amendments:
On page 3, line 4, strike out "purchaser" and insert
"taxpayer"
On page 3, line 14, strike out "of purchase" and insert "the
qualified property was placed in service in this state"
On page 7, line 23, strike out "purchaser" and insert
"taxpayer"
4)A Revenue-Neutral Bill: A New Approach ? This bill attempts a
delicate, and yet untested, balancing act by increasing taxes
due to the measure's disallowance of a currently allowed
qualified parking exclusion and decreasing taxes by granting a
new SUT credit. It authorizes a credit on a first-come,
first-served basis, establishes a cutoff date for taxpayers to
claim the credit, and requires FTB to estimate, each taxable
year, when the amount of revenue gain generated from the
repeal of the parking exclusion has reached $100 million.
Article XIIIA of the California Constitution requires that
measures that increase the net revenues derived from the
imposition of taxes be approved by 2/3 vote of each house of
the Legislature. While Legislators have offered several
majority vote bills in the past that contained both tax
reductions and tax increases, none of these bills have yet
been challenged, so no court has yet opined whether the tax
increase within bills with neutral or negative revenue effects
are lawfully enacted by majority vote. Many observers of
California tax law have long awaited a definitive view on the
question, and should AB 2640 be enacted, it may be the test
case that could offer policymakers a wider array of options to
reevaluate tax expenditure programs and further realign
incentives within California's tax system.
5)Related Bills in the Current Legislative Session :
AB 1719 (Harkey) creates a partial sales and use tax (SUT)
exemption for specified business equipment. AB 1719 is
scheduled to be heard in this Committee along with this
measure.
AB 1812 (Silva) creates a partial SUT exemption, operative
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January 1, 2011, for specified tangible personal property
(TPP). AB 1812 pending on this Committee's suspense, set to
be heard on May 10, 2010.
AB 2280 (Miller) would create a complete SUT exemption for
equipment a manufacturer purchases for use in its
manufacturing business in this state. AB 2280 is scheduled to
be heard in this Committee along with this measure.
AB 2525 (Blumenfield) would create a partial SUT exemption for
equipment used primarily in any stage of the manufacturing,
processing, refining, fabricating, or recycling of property in
clean energy technology. AB 2525 is pending in this
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916)
319-2098