BILL ANALYSIS Ó
AB 1500
Page 1
Date of Hearing: May 25, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1500 (John A. Pérez) - As Amended: May 8, 2012
Policy Committee: Revenue and
Taxation Vote: 6-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill makes the single sales factor (SSF) apportionment
formula mandatory, revises the rules for assignment of sales,
and requires that revenue derived from those changes be
deposited in the newly established Middle Class Scholarship
Fund. Specifically, this bill:
1)Revises the provisions of the corporation tax law that
currently allow a corporation to make an annual election to
use either a SSF or a double-weighted sales factor formula in
apportioning its business income to California. Repeals the
annual election and mandates that, for taxable years beginning
on or after January 1, 2012, corporations use the SSF formula
in apportioning business income to California, and provides
for specified exceptions.
2)Requires all taxpayers, in assigning their sales of other than
tangible personal property to the sales factor, to use the
cost of performance rule for assigning sales for taxable years
beginning before January 1, 2011, as specified. Allows a
cable or network services company that is a qualified taxpayer
to assign only 50% of their sales to California compared to
what would otherwise be assigned under the market rule.
3)Requires the Franchise Tax Board (FTB) to report to the
Department of Finance, pursuant to a time schedule prescribed
by the Director of Finance, on the estimated revenues
resulting from enactment of this legislation.
4)Requires that the Director of Finance direct the State
Controller to deposit in the Fund the increased revenues
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resulting from this bill, as specified.
FISCAL EFFECT : The FTB staff estimates this bill will result in
an annual gain of $1.2 billion in fiscal year (FY) 2012-13, $950
million in FY 2013-14, and $950 million in FY 2014-15.
COMMENTS
1)Purpose. The author notes the dramatic increase in student
fees at the California State University (191 percent) and the
University of California (145 percent) since 2003-04.
The author states families who cannot pay for college
out-of-pocket, or who earn too much for financial aid grants
are forced to take on a significant financial burden, with
many students assuming a staggering level of debt. According
to the author, this bill helps address the problem by
establishing the Middle Class Scholarship Fund, which will
help any student in a CSU or UC whose family earns under
$150,000 and does not already have fees covered by financial
aid, and provide $150 million to increase affordability at
community colleges.
The author notes the Middle Class Scholarship is funded by
closing California's elective single sales factor loophole,
which allows out-of-state corporations to choose their own
formula for the taxes they owe in California. The author notes
closing the elective single sales factor loophole would put
California in line with the tax policies of a mix of 15 red
and blue states. Michigan, Texas, New Jersey, New York, South
Carolina, Georgia, Wisconsin, Indiana, Illinois, Iowa,
Nebraska, Colorado, Oregon, Minnesota, and Maine. Only three
other states allow out-of-state corporations to choose which
tax formula they prefer.
2)Arguments in Support . The proponents of this bill argue the
ability to elect each year how to apportion income to
California is the least justifiable loophole in the tax code
since the election allows corporations to allocate more income
to California when they take losses, and less income when they
make profits. Proponents assert the repeal of the elective
component of the SSF would remove the competitive advantage
that out-of-state corporations have over California employers,
and end the practice of rewarding companies with minimal job
presence in California from collecting a larger tax break.
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Finally, the proponents state that savings from closing this
tax break for out-of-state corporations will enable the state
to make higher education more affordable and accessible for
middle-class families.
3)Arguments in Opposition . Opponents of this bill, including
the Chamber of Commerce, California Taxpayers Association and
Howard Jarvis Taxpayers Association, state the bi-partisan
agreement in February 2009 allowed use of SSF to help
stimulate investment and hiring in the state for companies who
might otherwise invest elsewhere. They argue that repeal of
the elective single sales factor would punish taxpayers who
neither supported SSF, nor ever planned to use it, thus adding
new uncertainty and unpredictability to the tax climate in the
state. Opponents are concerned that in many situations, a
mandatory single sales factor approach does not accurately
estimate the level of business income to be apportioned to
California, and could lead to double taxation of business
income that is earned in other states.
According to opponents, the elective nature of a SSF formula,
on the other hand, ensures that different types of businesses
would be able to more accurately report their portion of
taxable income in California, rather than using a
one-size-fits-all approach. Proponents conclude that
requiring the new apportionment methodology to be mandatory is
nothing short of a massive tax increase on an existing group
of taxpayers already contributing to the California economy
through one of the highest corporate tax rates in the nation.
4)Background . Multistate or multinational businesses must
apportion their income among the jurisdictions in which they
do business. California may only tax a portion of the income
earned by businesses that operate in other states (or
nations), in addition to California. That amount is
determined by an apportionment formula. Prior to January 1,
1993, California used a three-factor formula that was based on
the proportion of a company's sales, payroll and property that
were located in California.
In 2009, a component of the 2009-10 budget package gave
multistate and multinational corporations an additional option
for apportioning their business income to California. The
legislation was ABX3 15 (Krekorian), Chapter 10, Statutes of
2009, and SBX3 15 (Calderon), Chapter 17, Statutes of 2009.
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The legislation authorized multi-state businesses to apportion
their business income to California using only their
percentage of sales in California, as an alternative to using
the traditional four-factor apportionment methodology.
This conversion to SSF came about because businesses with
substantial employment and facilities in California that
primarily sell their products nationally or internationally
argued that the three- or four-factor apportionment method
that was used previously penalized them for expanding in
California. They pointed out that any increase in their
payroll and/or property in California would result in an
increase of their tax liability in California under the three-
or four- factor apportionment formula. Conversely, any
decrease in their California property and/or payroll factors,
without any change to their sales factor, would result in a
reduction of their California tax liability. Many California
high-tech and biotech companies made the argument that the
three-factor formula rewarded businesses for expanding outside
the state.
When the elective SSF provision was enacted, its overall
impact was estimated to be a GF revenue loss, of about $700
million, eventually growing to $1.5 billion. Over time,
proponents argued, this loss will be offset by additional
revenue from employment and property due to improved business
retention, expansion and location in the state.
5)Legislative Analyst's Office (LAO) Recommendations . In its
publication, "Reconsidering the Elective Single Sales Factor"
published in May 2010, the LAO recommended the Legislature
require sales factor-only apportionment. The LAO stated that
optional formulas benefit firms without a clear rationale, and
allow taxpayers to switch formulas annually to either minimize
tax or generate significant NOLs to apply against future tax
liabilities. The LAO also noted that mandatory SSF raises
needed revenue, and puts California into conformity with other
large states that currently use mandatory single sales,
thereby preventing California firms from being put at a
disadvantage with out-of-state competitors.
6)Assignment of Sales of Intangibles and Services. When a
company, which is subject to tax in California, sells products
or services in several states, it must determine how much of
those sales should be assigned to California. There are two
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basic rules for assigning sales of intangibles and other
services: a so-called cost of performance (COP) rule and the
market rule.
Under the COP rule, sales receipts from intangibles and all
other services are assigned to California if the
income-producing activity that gave rise to the receipts is
performed wholly in California. If, however, the
income-producing activity is performed in several states, the
sales are assigned to the state in which the greatest portion
of costs of the income-producing activity are performed. As
an alternative to COP, under the market rule, a company would
assign its sales of intangibles and services to the state in
which the product or service is ultimately used.
7)Related legislation. This bill is a companion measure to AB
1501 (John A. Perez), pending in this committee, which would
establish the Middle Class Scholarship Program to provide
grants, as specified, for students at the University of
California and the California State University with family
incomes below $160,000.
8)Previous Legislation .
a) ABX1 40 (Fuentes and Fletcher), 2011, mandated the use
of the SSF formula for all companies except for certain
qualified business activities (extractive, agricultural,
banks and financials, and savings and loan) and allowed
qualified cable industry companies to assign 50% of their
mandatory sales to California. This bill was held in
Senate Rules Committee.
b) SB 116 (De León), 2011, mandated the use of the SSF
formula for all companies except for certain qualified
business activities (extractive, agricultural, banks and
financials, and savings and loan) and allowed qualified
cable industry companies to assign 50% of their mandatory
sales to California. This bill failed on the Senate floor.
c) AB 1935 (De León),2010, mandated the use of the SSF for
all companies except for financial institutions and oil
companies, which, as under current law, would continue to
use the three-factor formula. This bill was held on this
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committee's Suspense File.
d) SB 858 (Committee on Budget and Fiscal Review), Chapter
721, Statutes of 2010, among other things, reinstated the
cost of performance rules for assigning the sales of
intangibles and services for non-electors of the SSF
formula.
e) SBX3 15 (Calderon), Chapter 17, Statutes of 2009,
allowed specific entities to elect to utilize a sales-only
formula to apportion its income subject to franchise or
income tax and modified the rules for assigning certain
receipts for inclusion in the sales factor.
f) SBX6 18 (Steinberg), 2010, among other things, repealed
the elective nature of the SSF, requiring each apportioning
trade or business, except certain businesses, to apportion
business income by using the SSF formula. This bill was
held in Senate Revenue and Taxation Committee.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081