BILL ANALYSIS Ó
AB 1500
Page 1
ASSEMBLY THIRD READING
AB 1500 (John A. Pérez)
As Amended May 25, 2012
2/3 vote. Urgency
REVENUE & TAXATION 6-2 APPROPRIATIONS 12-5
-----------------------------------------------------------------
|Ayes:|Lara, Beall, Charles |Ayes:|Fuentes, Blumenfield, |
| |Calderon, Cedillo, | |Bradford, Charles |
| |Fuentes, Gordon | |Calderon, Campos, Davis, |
| | | |Gatto, Ammiano, Hill, |
| | | |Lara, Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Nestande |Nays:|Harkey, Donnelly, |
| | | |Nielsen, Norby, Wagner |
| | | | |
-----------------------------------------------------------------
SUMMARY : 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
(Fund). Specifically, this bill :
1)Revises the provisions of the Corporation Tax (CT) 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. Specifically:
a) 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, except those that:
i) Derive more than 50% of their gross receipts from
conducting an agricultural, extractive, savings and loan,
or banking or financial business activity (a 'qualified
activity').
ii) Make an election to use the four-factor formula,
which is available only if it would result in a greater
amount of tax, before credits, than would the SSF
AB 1500
Page 2
formula.
b) Requires all taxpayers, in assigning their sales of
other than tangible personal property
(i.e., services and intangible property) to the sales
factor, to use the following rules:
i) The "cost of performance" rule for assigning sales
for taxable years beginning before January 1, 2011.
ii) The "market rule" for assigning sales for taxable
years beginning on or after January 1, 2011, and before
January 1, 2012, but only for those taxpayers that
elected the SSF apportionment formula. Taxpayers that
did not elect to use the SSF must use the "cost of
performance" (COP) rule.
iii) The "market rule" for assigning sales for all
taxpayers, including those businesses that are engaged in
a qualified activity, for taxable years beginning on or
after January 1, 2012.
c) Allows a cable or network services company that is a
"qualified taxpayer" to assign only 50% of their sales to
California of what would otherwise be assigned under the
"market rule."
d) Defines "qualified taxpayer" as a member of a combined
reporting group that is also a qualified group, which
satisfies both of the following conditions:
i) Has a minimum investment of $250 million in
California for the taxable year.
ii) For the taxable year beginning in calendar year
2006, derived more than 50% of its United States (U.S.)
network gross business receipts from operations of one or
more cable systems.
e) Defines "minimum investment" as qualified expenditures
of not less than $250 million, i.e., expenditures for
tangible property, payroll, services, franchise fees, or
any intangible property distribution or other rights, by a
combined reporting group during the calendar year that
AB 1500
Page 3
includes the beginning of the taxable year.
f) Defines the terms "qualified group," "cable system,"
"network," "gross business receipts," "qualified
partnership," and "qualified sales".
2)Requires the Franchise Tax Board (FTB) to report to the
Department of Finance (DOF), pursuant to a time schedule
prescribed by the Director of Finance, the following
information:
a) The preliminary estimated increase in revenues for the
2012-13, 2013-14, 2014-15, and 2015-16 fiscal years (FYs),
as the result of changes in the SSF apportionment and
assignment of sales rules made by this bill (preliminary
estimated increase).
b) On and after January 1, 2016, the final estimated
increase in revenues for the FY 2012-13 and each of the
three subsequent FYs, as the result of changes to the SSF
apportionment and assignment of sales rules made by this
bill (final estimated increase). The final estimated
increase, other than the one for the 2012-13 FY, shall be
computed by multiplying the final estimated increase for
the 2012-13 FY by a specified ratio.
c) The estimated increase in revenues for the FY 2016-17
and each FY thereafter, as the result of changes in the SSF
apportionment and assignment of sales rules made by this
bill (estimated increase). The estimated increase for each
FY shall be computed by multiplying the final estimated
increase in revenues for the FY 2012-13 by a specified
ratio.
3)Establishes the Fund and requires the money in the Fund to be
allocated, upon appropriation by the Legislature, for the
purpose of increasing the affordability of higher education.
4)Requires that the Director of Finance direct the State
Controller to deposit in the Fund the following amounts:
a) On or before September 1 of each FY, beginning with the
2012-13 FY and until FY 2016-17, an amount equal to the
preliminary estimated increase in revenues for that FY, as
AB 1500
Page 4
reported by the FTB.
b) On or before September 1, 2016, and each September 1
thereafter of each FY until FY 2020-21, an amount equal to
the estimated increase in revenues for that FY, plus an
additional amount, as specified. The "additional amount"
is the difference between the preliminary estimated
increase and the final estimated increase in revenues for
the FY ending four years before.
c) On or before September 1, 2020, and each September 1
thereafter, an amount equal to the estimated increase in
revenues for the FY in which each September 1 occurs.
5)Specifies that this bill will become operative only if AB 1501
(John A. Pérez)
of the 2011-12 Regular Session, which establishes a
middle-class scholarship program, is chaptered.
6)Takes effect immediately as an urgency statute.
7)States that the urgency is necessary to provide needed
financial aid to California public postsecondary students in
time for the beginning of the 2012-13 academic year.
FISCAL EFFECT : The FTB staff estimates that 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 :
Author's Statement . The author states that, " Since the
2003-2004 school year, student fees at the California State
University have increased by 191, from $2,046 to $5,970, and
fees at the University of California have increased by 145
percent since 2003-04, from $4,984 to $12,192. Fees at our
community colleges have also increased substantially. Financial
aid programs have expanded to mitigate the impacts of fee
increases for lower-income families, but families who can't 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.
AB 1500
Page 5
"The Middle Class Scholarship will apply to any student in a CSU
or UC whose family earns under $150,000 and does not already
have fees covered by financial aid. A typical UC student, or
their parents, will save approximately $8,200 per year, and a
typical CSU student or their parents will save approximately
$4,000 per year. The Middle Class Scholarship Act also provides
$150 million for Community Colleges to increase affordability
there. Community college students planning to transfer to UC or
CSU will of course also benefit from the reduced fees at those
institutions.
"The Middle Class Scholarship is funded by closing California's
"elective" single sales factor loophole. Right now out-of-state
corporations get to choose their own formula for the taxes they
owe in California. And the fewer jobs they have in California,
the bigger their tax break.
"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, including Michigan, Texas, New Jersey, New York,
South Carolina, Georgia, Wisconsin, Indiana, Illinois, Iowa,
Nebraska, Colorado, Oregon, Minnesota, and Maine. In fact, only
three other states allow out-of-state corporations to choose
which tax formula they prefer.
"In 2009, changes to corporate tax law were made that, beginning
in 2011, shifted from the "three factor formula" (which
considers location of sales, property, and payroll) to the
"single sales factor" (which considers only location of sales).
Governor Schwarzenegger used budget negotiations to insist that
the change be optional, so that out-of-state corporations with
little California property and small California payrolls but
high sales could take advantage of this "elective" loophole and
use the three factor formula and avoid California taxes.
"In 2010, the non-partisan Legislative Analyst's Office (LAO)
recommended closing the "elective" single sales factor loophole
stating it would generate revenue from out-of-state corporations
while allowing California-based firms to continue their reduced
their tax bills. The report recommended that "the state require
all firms to use the single sales factor, which would help the
state's competitiveness while limiting the cost to the budget.
"The LAO report went on to state that "California has been
AB 1500
Page 6
criticized at times for having high costs of doing business.
The single sales factor would reduce those costs for mobile
firms who sell into national or world markets and are more of a
flight risk than firms who sell only into the California market.
"On a bipartisan two-thirds basis, the California State Assembly
voted in 2011 to close the single sales factor loophole. Given
the targeted nature of Middle Class Scholarship Act and the
substantial benefit it provides to California families, it
should also garner support as the appropriate use of the $1
billion in revenue generated from closing the "elective" single
sales factor loophole.
"In 2011, Governor Brown stated that closing the "elective"
single sales loophole is "a critical step in making sure the
state does everything it can to support local job creation."
Writing in the Los Angeles Times, veteran columnist George
Skelton stated, "here's a no-brainer opportunity to encourage
job-creation and collect a pile of money" and noted closing the
"elective" single sales factor loophole would remove a
disincentive for business expansion in California."
Arguments in Support . The proponents of this bill argue that
"the ability to elect each year how to apportion income to
California is the weakest and least justifiable loophole in the
tax code" since the election "allows corporations to allocate
more income to California when they takes losses and less income
when they make profits." The proponents assert that the repeal
of the "elective" component of the SSF "would remove the
competitive advantage that out-of-state corporations have over
California employers," would "end the practice of rewarding
companies that have minimal jobs in California from collecting a
larger tax break," and would be "a significant improvement in
the tax system." Finally, the proponents state that savings
from "closing this tax break for out-of-state corporations will
fund the Middle Class Scholarship Fund to make higher education
affordable and accessible for middle-class families in
California," will "assure that financial challenges do not
prevent qualified students from attending universities, and will
reverse the devastating impact of a decade of fee increases."
Arguments in Opposition . The opponents of this bill state that
"Ýt]he bi-partisan agreement in February 2009 allowed use of SSF
to help stimulate investment and hiring in the state for
AB 1500
Page 7
companies who might otherwise invest elsewhere." They argue that
the 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." The 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." 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." The 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 and are struggling to maintain operations in
the state."
Background: Apportionment Formulas . Under California's CT Law,
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. For example, if one-third of a company's sales,
one-third of its payroll, and one-third of its property are
located in California, then one-third of its total earnings are
subject to California tax under CT Law.
1)Double-Weighted Sales Factor . After January 1, 1993,
California adopted a formula in which the sales factor is
double-weighted - given twice the importance of the other two
factors. For example, if a company has 75% of its property
and of its payroll in California, but only 10% of its sales in
this state, then 53.3% of its income would be subject to
California tax under equal weighting of the three factors.
The double-weighted sales factor would reduce the
apportionment percentage to 42.5%. Double-weighting of the
sales factor does not apply to businesses that derive more
AB 1500
Page 8
than 50% of their gross receipts from agricultural, extractive
(e.g., oil and gas producers), or banking or other financial
activities. Those companies must still use the equally
weighted three-factor formula to apportion their worldwide
income.
2)SSF . 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 (AB 15 X3
(Krekorian), Chapter 10, Statutes of 2009-10 Third
Extraordinary Session, and SB 15 X3 (Calderon), Chapter 17,
Statutes of 2009-10 Third Extraordinary Session). 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.
Starting with the 2011 taxable year, corporations are allowed
to make an annual election to choose between the SSF and a
four-factor formula. Businesses that derive more than 50% of
their gross receipts from agriculture, extractive business,
savings and loans, or banks and financial activities are still
limited to a single-weighted sales factor and are required to
use the same three-factor apportionment formula.
Legislative Analyst's Office (LAO) Recommendations . In its
publication, "Reconsidering the Elective Single Sales Factor"
published in May 2010, the LAO recommends that the Legislature
require sales factor-only apportionment. The LAO states that
optional formulas benefit firms without a clear rationale, and
allow taxpayers to switch formulas annually to either minimize
tax or generate significant Net Operating Losses (NOLs) to apply
against future tax liabilities. The LAO states that mandatory
SSF raises needed revenue, puts California into conformity with
other large states that currently use mandatory single sales,
thereby preventing California firms from being put at a
disadvantage to its out-of-state competitors.
This bill is a companion measure to AB 1501 (John A. Perez),
pending on the Assembly Floor, 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.
AB 1500
Page 9
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0003818