BILL ANALYSIS �
AB 40 X1
Page 1
( Without Reference to File )
ASSEMBLY THIRD READING
AB 40 X1 (Fuentes)
As Amended September 8, 2011
2/3 vote. Tax levy
BUDGET
(Not applicable)
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SUMMARY : Makes various changes regarding the apportionment of
income, assignment of sales, and the minimum franchise tax under
the corporation tax; institutes specified reductions in the tax
rate applied to certain income for purposes of the corporation
tax and the personal income tax; establishes a tax exemption for
certain purchases under the sales and use tax; and, sets up a
process to adjust the sales and use tax exemption amount under
certain conditions. Specifically, this bill :
1)Establishes mandatory Single Sales Factor income apportionment
for purposes of California's corporation tax. Corporations
that have income attributable to sources both inside and
outside of California are required to divide or apportion this
income to California and other jurisdictions based on
prescribed formulas.
a) California has two principal methods of apportioning
income for corporation tax purposes:
i) Single Sales Factor apportionment requires a
corporation to compute its California income by
multiplying its total income everywhere by the proportion
California sales are of total sales; and,
ii) Four Factor apportionment requires a corporation to
compute the proportion California sales, property and
payroll are of total sales, property and payroll,
respectively. The arithmetic average of the factors
(with the sales factor weighted twice) is then multiplied
by the corporation's total income to arrive at California
income. Certain corporations with most of their business
receipts from agricultural, extractive, savings and loan,
AB 40 X1
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banking and financial activities must use a Three Factor
formula based on sales (weighted once), property and
payroll.
b) Under current law, for tax years beginning January 1,
2011, apportioning corporations (except the specific
industries noted above) are allowed to annually elect
Single Sales Factor apportionment or, alternatively, remain
on the Four Factor apportionment formula; and,
c) The statutory change in this bill would eliminate the
option of remaining on the Four Factor formula and require
all corporations (except for the specific industries noted
above and those electing to use the Four Factor formula, as
set forth below), to use Single Sales Factor apportionment
for tax years beginning on and after January 1, 2012. An
election to use the Four Factor formula would only be
available if it would result in a greater amount of
before-credit tax than would the Single Sales Factor
method. This provision would result in revenue gains of
$460 million in 2011-12, $926 million in 2012-13 and $1.0
billion in 2013-14.
1)Changes the manner in which sales are assigned for purposes of
the corporation tax. Apportioning corporations are required to
assign sales to California and to other jurisdictions based on
specified criteria.
a) Under current law, corporations that use Single Sales
Factor apportionment must assign sales of services and
intangibles to California based on where the benefits of
the service were received or the property was used or
accepted (market rule). Corporations which do not elect or
are not eligible to elect Single Sales Factor under the
corporation tax for purposes of income apportionment, must
assign sales of services and intangibles based on "cost of
performance." In other words, corporations that remain on
the Three Factor formula or Four Factor formula would
assign sales of services and intangibles to California if
the income-producing activity is performed in this state
or, in cases where the income-producing activity occurs
both in and outside of California, if a greater proportion
of the income producing activity is produced in California
than in any other state, based on cost of performance; and,
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b) This bill would establish that all taxpayers use the
market rule for the assignment of sales of services and
intangibles for tax years beginning on or after January 1,
2012. This bill allows cable or network services companies
under the Single Sales Factor, and with minimum qualified
expenditures for the taxable year of at least $250 million
(such as tangible property or payroll services), to assign
only 50% of their sales to California of what would
otherwise be assigned under the market rule. This
provision would result in revenue reductions of $15 million
in 2011-12, $32 million in 2012-13, and $36 million in
2013-14.
2)Reduces the corporation tax rate by percent for the first
$50,000 in income for tax years on and after January 1, 2012,
for most corporations. A rate of 8.34%would apply to the first
$50,000 and the current rate of 8.84% would apply to income
above this threshold. The reduction would not apply to
corporations whose income and apportionment factor data are
required to be included in a combine report, such as large
multistate and multinational corporations. (Combined
reporting is required of multistate companies and groups of
affiliated corporation that operate as one integrated
business, and results in treating the operation as a single
taxpayer.) This provision is estimated to result in revenue
losses of $9 million in 2011-12, $18 million in 2012-13, and
$20 million in 2013-14.
3)Reduces the minimum franchise tax under the corporation tax
from the current level of $800 to $750 annually for tax years
beginning on or after January 1, 2012. The minimum franchise
tax is paid by all corporations with an otherwise computed
corporation tax liability of less than this amount. This
provision is estimated to result in revenue losses of $28
million in 2011-12, $59 million in 2012-13, and $67 million in
2013-14.
4)Excludes from personal income for tax purposes an amount equal
to 10% of up to $50,000 of the business income of a taxpayer
for tax years beginning on or after January 1, 2012. Thus,
the maximum amount that could be excluded under this provision
is $5,000. Business income is income of a taxpayer from a
trade or business whether conducted by the taxpayer or by a
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passthrough identity in which the taxpayer is a shareholder.
This provision is estimated to result in revenue losses of
$149 million in 2011-12, $255 million in 2012-13, and $269
million in 2013-14.
5)Increases the standard deduction for taxpayers who do not
itemize deductions under the personal income tax. The bill
would increase the standard deduction by $1,000 for single
filers and $2,000 for joint filers for tax years beginning on
and after January 1, 2012. Thus, the amount of the standard
deduction would rise to approximately $4,780 for single filers
and $8,540 for joint filers. (The standard deduction is
annually computed based on changes in the cost of living and
2012 levels have not yet been established.) This provision is
estimated to result in revenue losses of $180 million in
2011-12, $306 million in 2012-13, and $317 million in 2013-14.
6)Establishes a partial exemption from the sales and use tax for
purchases of manufacturing equipment beginning March 1, 2012.
Current law levies a sales and use tax on tangible personal
property purchased or used in the state, unless the property
is specifically exempted. Tangible personal property subject
to taxation includes items of capital equipment used in the
manufacturing process. The sales and use tax is composed of
rates that generate revenues for the state General Fund and
realignment, various special funds, and local government.
Currently, the rates are: state 5%; special funds 1%; local
government 1%; fiscal recovery bonds 0.25%. In addition to
this composite statewide rate of 7.25%, local governments may
have various add-on rates.
a) Under the proposal, the purchase of manufacturing
equipment would be exempted from a portion of the
application of the state sales tax. In general,
manufacturing firms would be eligible for a 1%exemption
from state sales and use tax on equipment purchases.
Start-up firms would be eligible for a 3.94% exemption from
the state portion of the sales and use tax. Start-up firms
are defined as firms conducting activities in the state for
three or fewer years, after accounting for acquisitions and
changes in business structure;
b) The exemption would be available to manufacturing firms
and software publishers. Qualified businesses are those in
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manufacturing industries such as food and beverage;
textiles and apparel; wood and paper products; chemicals,
plastics and rubber; metal fabrication and machinery;
transportation and related, and computer, electronics and
software. The exemption is available only to corporations
that which are allowed to elect single sales factor for
purposes of income apportionment; and,
c) Equipment that would qualify for the exemption includes
equipment when used primarily (50% or more):
i) In any stage of manufacturing, processing, refining,
fabricating, or recycling of any tangible personal
property;
ii) For research and development;
iii) To maintain, repair, measure or test tangible
personal property; and,
iv) In the performance of construction conducted in
connection with manufacturing or research and
development.
d) The tax exemption would result in revenue reductions of
$91 million in 2011-12, $299 million in 2012-13, and $323
million in 2013-14.
7)Directs the Franchise Tax Board and the Board of Equalization
to report to the Department of Finance whether the bill
resulted in a revenue change during the 2012-13 fiscal year
relative to the amount of revenue that would have been raised
absent the enactment of the bill. The Director of Finance
would adjust the general sales and use tax exemption in a
manner that would result in no gain or loss in state tax
revenue in 2015-16 due to this act.
8)Specifies that the bill will take effect immediately upon
enactment.
FISCAL EFFECT : The net impact of the all the provisions of the
bill would be a reduction in revenues in each of the next three
years of $12 million in 2011-12, $44 million in 2012-13, and $31
million in 2013-14. Total revenue loses over the three-year
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period are estimated to be $87 million.
COMMENTS : Generally speaking, tax policy and economic theory
would indicate that the elimination of elective apportionment
formulas and reduced taxation of business capital purchases
represent salutary changes in the state tax system. The
elimination of optional Single Sales Factor would reduce
opportunities for manipulation by multistate companies and treat
them equivalently to in-state businesses. Reduced sales taxes
on the purchase of capital equipment would increase economic
efficiencies and decrease the amount of tax pyramiding that
occurs. The impact of reduced rates for the corporation tax and
the personal income tax would benefit businesses, regardless of
size, except for large companies filing combined reports. These
reductions would benefit the financial performance, but the
impact on business expansion or hiring is unknown.
Analysis Prepared by : Mark Ibele / BUDGET / (916) 319-2099
FN: 0002846