BILL ANALYSIS
AB 2671
Page 1
Date of Hearing: April 12, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2671 (Cook) - As Introduced: February 19, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Corporation tax: minimum franchise tax: member of
the United States Armed Forces.
SUMMARY : Exempts from the annual minimum franchise tax any
corporation that is solely owned by a deployed member of the
United States (U.S.) Armed Force. Specifically, this bill :
1)Provides that a corporation solely owned by a deployed member
of the U.S. Armed Forces is not subject to the minimum
franchise tax for any taxable year in which the owner is
deployed, provided that the corporation operates at a loss or
ceases operation.
2)Defines "deployed" as being called to active duty or active
service during a period when a Presidential Executive order
specifies that the U.S. is engaged in combat or homeland
defense. The definition of "deployed" does not include a
temporary duty for the sole purpose of training or processing
or a permanent change of station.
3)Defines the phrase "operating at a loss" as negative net
income as defined in Revenue and Taxation Code (R&TC) Section
24341.
4)Corrects an erroneous cross-reference and deletes provisions
relating to financial asset securitization investment trusts.
5)Takes effect immediately as a tax levy and applies to taxable
year beginning on or after January 1, 2010.
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
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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:
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. 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) are subject
to and 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
required to pay the minimum franchise tax. RICs, REITs, and
REMICs, 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.
FISCAL EFFECT : The FTB staff estimates this bill will result in
a negligible revenue loss of less than $100,000 each fiscal year
(FY), beginning with FY 2010-11.
COMMENTS :
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1)The purpose of this bill . According to the author, this bill
is intended to provide tax relief to members of the U.S. Armed
Forces called to service to defend the nation.
2)The Minimum Tax in Other States . 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.
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.
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)FTB's Implementation Concerns . The FTB staff notes that,
under this bill, a member of the U.S. Armed Forces may be
deployed to a location where there is no combat during a
period when a Presidential Executive order specifies that the
U.S. is engaged in combat or homeland defense. If the
author's intent is to limit the tax relief only to a member of
the Armed Forces deployed to a combat zone, this bill needs to
be amended.
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4)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. 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.
c) While cognizant of the personal sacrifices made by
members of the military, the Committee staff would like to
highlight the fact that this bill would favor one group of
taxpayers over another and would create a precedent
for a special tax treatment for other residents of
California whose service the state wishes to recognize
(e.g., police, firemen, teachers) or those who need extra
financial support (e.g. disabled, elderly).
d) The provisions of this bill apply only to corporations
but most small businesses operate as "pass-through"
entities, and not as "C" corporations. Committee staff
recommends that this bill be amended to include LLCs,
partnerships, qualified Subchapter "S" corporations, and
other eligible "pass-through" business entities in order to
provide for a uniform treatment of all small businesses.
e) It is unclear what the phrase "ceases operation" means;
the lack of the definition may crease confusion and
potentially lead to litigation between the taxpayer and the
FTB. Committee staff suggests that the author amend this
bill to define that phrase.
5)Sunset Date . This bill lacks a sunset date to allow periodic
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legislative review of this tax expenditure. The Committee
staff recommends an amendment to add a sunset date.
6)Related legislation .
AB 2126 (Garrick), introduced in the 2009-10 Legislative
Session, 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. AB 2126 is set for a hearing
in this Committee on April 12, 2010.
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 this bill. 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
None on file
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098