BILL ANALYSIS �
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THIRD READING
Bill No: AB 103
Author: Assembly Budget Committee
Amended: 3/14/11 in Senate
Vote: 27
PRIOR VOTES NOT RELEVANT
SUBJECT : Budget Act of 2011: Taxes/Revenues trailer
bill
SOURCE : Author
DIGEST : This bill (1) establishes a mandatory single
sales factor for apportionment of corporate income tax
across states and changes the manner in which the location
of sales of service and intangibles are assigned, and (2)
eliminates the enterprise zone tax credits.
Senate Floor Amendments of 3/14/11 delete the prior version
of the bill and insert the current language relative to
taxes and revenues.
ANALYSIS :
This bill:
1. Establishes a Mandatory Single Sales Factor and Market
Sourcing of Intangibles . This bill establishes a
mandatory single sales factor for apportionment of
corporate income tax across states and changes the
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manner in which the location of sales of services and
intangibles are assigned for purposes of the corporation
tax, as described below:
A. Corporations that have income attributable to
sources both inside and outside of California must
divide or apportion income to California and other
jurisdictions based on prescribed formulas. Starting
with the 2011 tax year, California has two methods of
apportioning income for corporation tax purposes:
(i) Single Sales Factor apportionment that 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) a "double-weighted" three factor formula that
requires a corporation to compute the proportion
California sales, property, and payroll are of total
sales, property, and payroll, respectively (with the
sales factor weighted twice).
Under current law, starting with the 2011 tax year,
corporations will be able to annually elect the
formula they want to use to apportion income to
California for tax purposes. This bill changes that
law to require that all corporations (except those
noted below) use the Single Sales Factor
apportionment system to apportion income to
California for tax purposes.
Under existing law, certain corporations that derive
50 percent or more of gross business receipts from
agriculture, extractive industries, savings and loan
activity, or banking and financial business activity
are required to use a three factor apportionment
formula (equal weight on sales, property, and
payroll). This bill will not make any changes to the
income apportionment rules for these industries.
B. Current law allows corporations that do not elect
or are not eligible to elect Single Sales Factor for
income apportionment to assign sales of services and
intangibles based on cost of performance. Cost of
performance allows corporations to apportion no
revenue from the sales of intangibles or services in
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California if a firm incurs a plurality of costs
associated with developing the intangibles or
services outside of California.
This bill removes the cost of performance criterion
for the assignment of sales. Instead, sales would be
assigned to California based on the following market
criteria: (i) sales of services would be assigned to
California if the benefits of the service were
received in the State; (ii) sales of intangible
property would be assigned to California if the
property were used in this state; (iii) sales of the
sale, lease, rental, or licensing of real property
would be assigned to California if the real property
were located in the State; and (iv) sales from the
rental, lease, or licensing of tangible personal
property would be assigned to California if the
property were located in this State.
According to the Franchise Tax Board (FTB), the
provisions to switch to a mandatory single sales factor
and market sourcing of intangibles is expected to
generate approximately $468 million in 2010-11 and $942
million in the budget year.
2. Eliminates State Tax Benefits in Enterprise Zones . This
bill repeals all tax credits and other tax incentives
available to individuals and corporations for certain
types of expenditures in designated areas through both
the personal income tax (PIT) and the corporation tax
(CT). This bill also eliminates credits that have been
earned in prior years, but not used.
California currently provides an array of tax incentives
to businesses and their employees located in four
state-defined geographically targeted economic
development areas. The four types of economic
development areas include Enterprise Zones, Local Agency
Military Base Recovery Areas (LAMBRAs), Manufacturing
Enhancement Areas (MEAs), and Targeted Tax Areas (TTAs).
The tax benefits for these economic development areas
are listed below:
A. For Enterprise Zones, available incentives include
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tax credits for sales and use tax paid on qualified
machinery and equipment; tax credits for wages paid
to qualified employees working in the zone; deduction
for net interest income on loans made to businesses
located in the zone; expensing of all or part of
qualified property; and 15-year 100 percent net
operating loss (NOL) carryover to offset zone income.
B. For LAMBRAs, available incentives include tax
credits for sales and use tax paid on qualified
machinery and equipment; tax credits for wages paid
to qualified employees working in the area; expensing
of all or part of qualified property; and 15-year 100
percent NOL carryover to offset area income.
C. For MEAs, the available incentives are tax credits
for wages paid to qualified employees working in the
area.
D. For TTAs, available incentives include tax credits
for sales and use tax paid on qualified machinery and
equipment; tax credits for wages paid to qualified
employees working in the area; expensing of all or
part of qualified property; and 15-year 100 percent
NOL carryover to offset area income.
This bill eliminates all of the tax benefits listed
above earned in 2011 and in future years and terminates
the entities' ability to carry forward credits that had
been earned in prior years. The Department of Finance
has estimated that these provisions to eliminate the
State tax benefits in enterprise zones would generate
approximately $343 million in 2010-11 and $581 million
in the budget year.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
The combined fiscal impact of all the provisions of this
bill is additional General Fund revenue of $811 million in
2010-11 and $1,523 million in 2011-12.
DLW:mw 3/15/11 Senate Floor Analyses
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SUPPORT/OPPOSITION: NONE RECEIVED
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