BILL ANALYSIS �
AB 2045
Page 1
Date of Hearing: May 16, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 2045 (Perea) - As Amended: May 2, 2012
Policy Committee: Revenue and
Taxation Vote: 8-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill creates a program to allow certain emerging technology
and biotechnology companies to transfer their net operating
losses (NOLs) to specified other companies in exchange for
private financial assistance. Specifically, this bill:
1)Authorizes the California State Treasurer, in cooperation with
the Franchise Tax Board (FTB), to establish a corporation
business tax benefit certificate transfer program to allow a
qualified California company, specifically new or expanding
emerging technology and biotechnology companies meeting the
bill's criteria, to transfer their unused NOLs to other
taxpayers that are subject to California's corporation tax.
2)Requires the recipient taxpayer provide private financial
assistance to the qualified company equal at least 80% of the
amount of the surrendered NOLs.
3)Limits the total amount of transferable NOLs in any given
fiscal year to $60 million.
4)Provides that an otherwise qualified company is not eligible
to surrender its NOLs if the company has positive net
operating income in any of the two previous full years of
ongoing operations.
5)Requires the Treasurer, in consultation with the FTB, to
establish rules for the recapture of all, or a portion, of the
amount of a tax certificate if the company that surrendered
the NOLs fails to use the private financial assistance, as
required, or fails to maintain a headquarters or a base of
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operation in California during the five years following
receipt of the assistance.
6)Directs the Treasurer, in cooperation with the FTB, to review
and approve applications of corporate taxpayers to acquire
surrendered NOLs from companies in exchange for financial
assistance.
FISCAL EFFECT
The FTB estimates the following revenue losses:
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------------------------------------------------
|For Taxable Years Beginning on or after January |
| 1, 2013 |
| ($ millions) |
|------------------------------------------------|
| |
------------------------------------------------
------------------------------------------------
|2012-1|2013-1|2014-1|2015-1|2016-1|2017-1|2018-1|
| 3 | 4 | 5 | 6 | 7 | 8 | 9 |
|------+------+------+------+------+------+------|
|-$0.02|-$0.06|-$0.04|-$0.02|-$2.40|-$5.00|-$5.40|
| | | | | | | |
------------------------------------------------
Administrative costs for the Treasurer's office of approximately
$500,000 annually to develop and implement the program. FTB
will incur cost minor and absorbable costs.
COMMENTS
1)Author's Statement . The author states that AB 2045 would make
it clear that California understands the importance of
supporting its local technology and biotechnology companies.
The author notes these industries are significant for economic
development in California because they create and maintain
high wage, high quality jobs. According to the author the
cost of available funding for early stage companies can be
very high and although the net operating losses may be used to
offset taxes once the company becomes profitable, some of
these companies are not be able to reach profitability without
additional sources of capital. The author argues additional
funding is potentially critical to their survival because it
would allow them to turn their tax losses and credits into
cash to buy equipment or facilities, or for other
expenditures.
2)Arguments in Support . BIOCOM, a trade association for the
life sciences industry, argues NOLs are one the most valuable
tools the State of California has to remain competitive with
other states in the life science industry and that this bill
will allow small companies to realize a monetization of those
unused credits. They note early stage companies face the
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challenge of a long (often 10-12 years) period of development
before approval and in the current economic climate have even
fewer options "to access the tremendous capital needed to take
a candidate from discovery to approval." The proponents
believe that AB 2045 may give many of these young companies a
lifeline while they work to advance their candidates through
the very difficult period of early stage development.
3)NOLs: Background . Generally speaking, an NOL is the excess
of business deductions over gross income, or negative taxable
income, in a particular tax year. A taxpayer can use an NOL
to obtain a refund for taxes paid in the past and/or to reduce
future tax obligations. The process of using an NOL to refund
previously paid taxes is known as an NOL carryback, whereas
the process of using an NOL to reduce future taxes is known as
a carry forward. State and federal law provides for carry
back of NOLs in specified manner and fashion and the laws are
not completely in conformance.
Allowing losses to be carried forward and back flows
recognizes businesses may not make profits in an individual
year but over the length of a business cycle. A suitably long
period for NOL deductions helps to smooth out income and taxes
paid over a business cycle, allowing a business to make
efficient decisions regarding financing and investment.
Neither federal nor state law allows taxpayers to sell NOLs
and severely restricts the taxpayers' ability to transfer
NOLs.
4)Technology Business Tax Certificate Transfer Program: The New
Jersey Experience . In 1995, New Jersey (NJ) created a program
- the NJ Technology Business tax Certificate Transfer Program
- authorizing new and emerging technology and biotechnology
companies in NJ to transfer their unused research and
development (R&D) tax credits, as well as unused NOLs, to
other unaffiliated corporations doing business in the state.
The NJ Program is similar to one that would be created by AB
2045, although the California program would not allow a sale
of R&D tax credits.
In 2010, the NJ Institute of Technology conducted an evaluation
of the NJ Program and found that the primary goal of the
program - creation of high wage and high quality jobs in NJ in
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a cost-effective manner - was achieved but only for
biotechnology companies. The study also states that the cost
of the tax transfers is less than the benefit of the NJ income
tax revenues generated by the beneficiary companies.
5)Related Legislation .
AB 1147 (Mullin) of 2007 allowed certain corporations to sell
their unused NOLs. AB 1147 was held under submission in the
Assembly Revenue and Taxation Committee.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081