BILL ANALYSIS �
AB 2439
Page 1
Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2439 (Eng) - As Amended: April 16, 2012
Majority vote. Fiscal committee.
SUBJECT : Corporation tax: disclosure: publicly traded
corporations.
SUMMARY : Requires a publicly traded corporation to disclose
annually to the State Controller (SC) the amount of payments
made to the Franchise Tax Board (FTB), as provided, and
authorizes the publication of this information on the SC's
website, as specified. Specifically, this bill :
1)Contains legislative findings and declarations relating to the
following:
a) Disclosure of federal and state corporation taxes paid
by publicly traded corporations to the Securities and
Exchange Commission (SEC) on Form 10-K; and
b) Recent changes in the state's Corporation Tax (CT) Law
that provide for the elective use of the single-sales
factor (SSF) apportionment formula and their potential
impact on taxpayers and California.
2)States the legislative intent to supplement federal tax
reporting requirements for corporations filing a Form 10-K by
adding a single data point that is reported to the SC and is
made publicly available.
3)Requires each corporation that files an annual Form 10-K with
the SEC to disclose to the SC annually the payments made to
the FTB pursuant to Revenue &Taxation Code Part 11
(commencing with Section 23001) for the previous taxable year.
Provides that the disclosure must be made within three months
of the corporation's filing deadline.
4)Specifies that the payments made for the 2010 and 2011 taxable
years must be disclosed to the SC on or before April 1, 2013.
5)Requires the SC to publish the payment information on its
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Internet website and maintain a record, available to the
public, of that information.
6)Provides that, if the payment amount is contested by either
side or otherwise is under dispute, the SC shall include that
information on the website and in its records.
EXISTING STATE LAW:
1)Imposes the franchise tax, the corporate income tax, or the
bank tax on corporations, whichever is applicable (CT). The
regular CT rate is 8.84%, and the bank tax rate is 10.84%. In
addition, an "S" corporation, which is a "pass-through"
entity, is subject to a reduced rate of tax at 1.5%.
2)Imposes a franchise tax on all corporations doing business in
California equal to 8.84% of the taxable income attributable
to California, unless otherwise exempted. Generally, for
corporations operating both in and outside of the state,
income sourced to California is determined on a worldwide
basis applying the unitary method of taxation. The unitary
method combines the income of affiliated corporations that are
members of a unitary business and apportions the combined
income to California based upon the average of four factors
(the property factor, the payroll factor, and two sales
factors). Each of these factors is a fraction the numerator
of which is the value of the item in California and the
denominator of which is the value of the item elsewhere. This
four-factor formula identifies the relative levels of business
activity in the state and apportions the combined income to
California using the determined share of California business
activity.
3)Specifies that, for taxable years beginning on or after
January 1, 2011, certain corporate taxpayers may make an
annual election to apportion its income to California using a
SSF apportionment formula. The election must be made on a
timely filed original return in the manner and form prescribed
by the FTB. However, taxpayers that derive more than 50% of
gross business receipts from conducting a "qualified business
activity" are required to use a three-factor, single-weighted
sales apportionment formula. A "qualified business activity"
is defined as an agricultural, extractive, savings and loan,
and banking or financial business activity. Thus, those
taxpayers are prohibited from electing the SSF apportionment
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formula.
4)Requires tax agencies to keep taxpayer information
confidential. Consistent with federal law, it is a
misdemeanor for FTB to disclose or make known in any manner
information as to the amount of income or any other
particulars of taxpayer information, unless expressly
provided. Similarly, the State Board of Equalization (BOE) is
not allowed to divulge taxpayer information.
5)Requires FTB and BOE to make available as public record a list
of the 500 largest tax delinquencies in excess of $100,000 for
each calendar year. For these purposes, a tax delinquency is
defined as the total amount owed by a taxpayer to California
for which a Notice of State Tax Lien has been recorded in any
county recorder's office in the state.
EXISTING FEDERAL LAW requires all publicly held corporations to
file annual reports with the SEC, disclosing the amount of
corporate profits, amounts of federal and state taxes paid, and,
in some instances, information on specific tax expenditures
claimed by each corporation.
FISCAL EFFECT : The FTB staff estimates that this bill will
have no impact on the California income or franchise tax
revenues.
COMMENTS :
1)Author's Statement . The author states that, "AB 2439 helps
provide transparency and accountability in the corporation
tax. It asks for one simple data point which is very close to
data which is already publicly reported in the SEC 10-K, for
publicly-traded corporations. Reporting tax liability
consistent with federal reporting will greatly advance the
discussion of corporate tax reform and potential changes in
the law, as it has at the federal level. Combined with other
publicly-available data, this information will be very helpful
in analyzing the impact of recent major changes in the
corporation tax. In order to have an informed discussion of
on-going tax reform and to evaluate future proposed policies,
it is important to know who pays and who has benefitted from
the recent tax changes and what the impacts may be of changing
the system during this difficult budget climate."
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2)Arguments in Support . The proponents of this bill argue that
"it is imperative that state policymakers have the information
necessary to determine how the "elective sales factor
apportionment" impacts the state budget." They believe that
AB 2439 "creates an important opportunity to determine the
impacts of this policy."
3)Arguments in Opposition . The opponents of this bill state
that it is "important for legislators to have access to
information that will help them identify areas for reform."
However, they argue that the information "sought by AB 2439 is
potentially misleading ? raising concerns that it might be
misused by the public to harm individual California
employers." The opponents assert that attempting "to draw
conclusions about the effectiveness of the entire corporation
income tax code based on one number is a risky proposition
that is bound to lead to inaccurate conclusions." Finally,
they believe that AB 2439 "erodes important taxpayer
confidentiality without providing any significant data not
already available to legislators."
4)Public Disclosure of Corporate Tax Information. Disclosure of
corporate tax information has been debated for a long time.
The advocates of public disclosure have argued that making
corporate income tax returns public would shed light on the
effectiveness of tax policies designed to promote economic
development, would improve tax compliance, and would increase
political pressure for a more fair and efficient tax system.
While the federal lawmakers have access, albeit limited,
through the SEC filings, to some information on corporate
profits and the amount of federal corporate taxes paid, almost
no public information is available to state legislators in
evaluating the "state" of the state corporate income tax laws.
Thus, when a state enacts a corporate tax incentive for the
purpose of creating jobs or encouraging investment in the
state, unless the incentive itself is expressly contingent
upon a determinable number of jobs created, it is difficult,
if not impossible, to ascertain the effectiveness of such
policies without the information provided by company-specific
tax disclosure.
The opponents of corporate disclosure, generally, argue that
public disclosure is unconstitutional; it also violates
corporate privacy, jeopardizes corporate trade secrets and
encourages businesses to move to other states. In 1911, the
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U.S. Supreme Court dismissed the claim that the 1909 corporate
excise tax was unconstitutional and concluded that the
publicity of corporate tax returns violated neither the Fourth
nor the Fifth Amendment to the U.S. Constitution. Flint v.
Tracy Co. (1911) 220 U.S. 107, 174.
The opponents also believe that corporate tax disclosure would
violate corporate privacy and would reveal valuable
proprietary business information. As far as the privacy
rights are concerned, publicly traded corporations cede any
privacy rights to keep their affairs private when they issue
stock traded on public stock exchanges. These corporations
must file with the SEC detailed public disclosures of their
current finances and the aggregate amount of state corporate
income taxes, among other items of information. The right to
privacy argument is much more compelling in the case of a
privately held company than in the case of a publicly traded
corporation.
The loss of proprietary information was a primary objection in
the 1930s to the original mandated financial disclosures for
publicly traded companies and has been raised for every new
financial disclosure. (See, e.g., Disclosure of corporate tax
return information: accounting, economics, and legal
perspectives, p. 20). While full disclosure of corporate tax
returns, most likely, would result in a loss of some
proprietary business information, the extent to which
companies would be disadvantaged is uncertain. To reduce the
potential utility of tax-related information to out-of-state
competitors not subject to the disclosure requirement, it is
advisable to delay the disclosure of a corporation's tax
return information for a particular tax year for at least two
calendar years following the end of the tax year. (See, e.g.,
State Corporate Disclosure Report, Center for Budget and
Policy Priorities, p. 21). Finally, some business
representatives argue that corporate tax disclosure would
raise the cost of doing business and would create, or
exacerbate, an anti-business climate in the state adopting
this policy. It is possible, however, that some corporations
may welcome disclosure of tax information to "dispel the
negative image that corporations are somehow tax freeloaders."
(Richard D. Pomp, Corporate Tax Policy and the Right to Know,
p. 49). The publication of corporate tax information may also
reveal that some businesses pay more than their competitors
and are at an economic disadvantage.
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5)Corporate Tax Disclosure in Other States . Several states have
some sort of public disclosure of state income tax
information. The State of Wisconsin was the first to provide
for public disclosure of income tax returns in 1923,
authorizing a release of state income tax, franchise tax, or
gift tax information reported by an individual or corporation
if the person requesting information is a Wisconsin resident.
In the early 1990s, Massachusetts, West Virginia, and Arkansas
enacted public disclosure rules as well. The Massachusetts
law, which was enacted in 1993, is broad and requires a bank,
an insurance company, and a publicly traded company doing
business in Massachusetts to file annual reports stating its
name, address, the amount of state taxable income, total
excise tax due, gross receipts or sales, either gross profit
or credit carryovers to future years, income subject to
apportionment, and the amount of each credit taken against the
excise tax due. �Massachusetts General Law, Chapter 62C,
Section 83(n)]. These reports are available for public
inspection but only after the names and addresses on the
companies have been expunged. Twelve states mandate
disclosure of economic development tax incentives claimed by
companies (Company-Specific Subsidy Disclosure in the States,
www.goodjobsfirst.org ) and 31 states plus the District of
Columbia provide online disclosure of corporate tax break
recipients
( http://clawback.org/2012/03/14/subsidies-and-sunshine ).
6)Disclosure of Tax Information in California . The State of
California, as well as other states, readily publishes
information on unpaid taxes and delinquent taxpayers with
respect to property taxes. An unpaid property tax becomes a
lien against the real property and dissemination of
information on such liabilities is important for protecting
potential buyers, lenders, etc. In the area of income tax
liabilities, however, the state law generally prohibits
disclosure or inspection of any income tax return information,
except as specified in law. In fact, the FTB is required to
notify taxpayers if criminal charges have been filed for
willful unauthorized inspection or disclosure of their tax
data. However, FTB may release tax return information to
certain other agencies, including legislative committees, the
Attorney General, the California Parent Locator Service, the
Commissioner of the Internal Revenue Service, and others, for
certain statutorily enumerated purposes. The BOE is similarly
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restricted from divulging taxpayer information. Furthermore,
since 2007, both FTB and BOE are required to make as a matter
of public record a list of the largest 250 tax delinquencies
over $100,000. Starting in 2012, the number of tax
delinquencies required to be reported by those tax agencies
has increased to 500.
7)Corporate Tax Disclosure Proposed by This Bill. AB 2439
requires each publicly traded corporation, which files Form
10-K, to report annually to the SC the amount of corporate
taxes paid in California for the previous tax year. The
disclosure must be made within three months of the
corporation's filing deadline. The SC, in turn, will have to
publish this information on its website and make it available
as a matter of public record, beginning with the 2010 tax year
disclosure.
a) Who Is Subject to the Disclosure ? Publicly traded
companies filing Form 10-K with the SEC and paying
corporate tax to California would be subject to the
disclosure requirement proposed by AB 2439. Form 10-K is
an annual report that provides an overview of a public
company's business and a comprehensive summary of the
company's performance, including its financial condition.
A company's Form 10-K is public information and may be
found in the SEC's EDGAR database. According to the SEC's
website, Form 10-K generally must be filed with the SEC
within 90 days after the end of the company's fiscal year
(FY). However, in September 2002, the SEC changed this
deadline for "accelerated filers" -- certain companies that
have a public float of at least $75 million. In December
2005, the SEC voted to adopt amendments that create a new
category of "large accelerated filers" that includes
companies with a public float of $700 million or more.
Thus, currently, Form 10-K is due within 60, 75, or 90 days
after the end of the company's FY, depending on the
company's "public float."
The FTB currently receives over 700,000 corporate income tax
returns a year. According to www.smallcapreview.com ,
approximately 1,400 publicly traded companies are doing
business, or organized, in California. However, it is
unclear how many corporate taxpayers will be affected by
the disclosure requirements proposed by AB 2439.
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b) The Scope of the Disclosure . AB 2439 takes a cautious
approach. While it proposes a company-specific tax
disclosure, the scope of the proposed disclosure is
limited. It does not require a disclosure of the amount of
gross receipts, sales, gross profit, the amount of credit
carryovers, or income subject to apportionment. Further,
there is no requirement to describe the source of any
non-business income reported on the return and the state to
which the income was assigned for taxation; nor is there an
obligation to include the tax information related to the
corporation's affiliated companies or to disclose the
corporation's total employment in the state.
However, this bill does not appear to allow for public
release of a company's tax liability to occur with a time
lag. It does not specify the timeframe within which the SC
must publish the information on its website, but at the
same time it does not expressly authorize the SC to delay
the public release. Some corporations may argue that
public release of their state tax amounts may jeopardize
their economic interests because this information may turn
out to be valuable to their competitors. While it is
unlikely that the type of information required to be
revealed under this bill is strategically useful to
competitors, the author may wish to consider authorizing
the SC to delay the disclosure of a corporation's tax
information for a particular tax year for at least two
calendar years following the end of the tax year. The
delay would reduce the potential, or perceived, utility of
the information to out-of-state competitors not subject to
the disclosure requirement.
c) The Stated Benefits of the Proposed Disclosure . The
author states that the disclosure of corporate tax
payments, in conjunction with other publicly-available
data, will provide an accurate view of how the state
corporate tax burden is distributed under the current tax
system and will greatly advance the discussion of corporate
tax reform and potential changes in the law, as it has at
the federal level. In addition, the information sought by
this bill will be helpful in analyzing the impact of recent
major changes in the corporation tax, i.e. an adoption of
the elective SSF apportionment.
8)What Is the Elective SSF Apportionment Formula? Under
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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 are 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.
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. Double-weighting of the
sales factor does not apply to businesses that derive more
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.
Starting in 2011, multi-state businesses may choose to
apportion their business income to California using only their
percentage of sales in California (SSF), as an alternative to
using the double-weighted apportionment formula. The
Legislature included a provision that allows taxpayers to make
an annual election to choose between the SSF and a
double-weighted formula for the apportionment of their
business income to California. However, businesses that
derive more than 50% of their gross receipts from agriculture,
extractive business, savings and loans, or banks and financial
activities will continue to be limited to a single-weighted
sales factor and will be required to use the same three-factor
apportionment formula.
Under the elective system, businesses will naturally choose,
on an annual basis, whichever method reduces their tax
liability the most. An elective SSF formula is a tax
expenditure that contains no requirement to invest or to
create jobs in the state, no accountability measures, no paper
trail for the state to review, and no records about outcomes
at any specific company or industry. Furthermore, an elective
SSF regime provides a fertile soil for creative tax planning,
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especially in light of other recent legislation that allows
corporate taxpayers to carryforward California's net operating
loss (NOL) to 20 years with a phased in two-year carryback and
to share business tax credits with the members of a combined
reporting group. In other words, an elective SSF provides
multistate and multinational corporate taxpayers with an
opportunity, i.e. an "election," to choose how much tax they
like to pay to the state in a particular tax year. This
election is one of a kind. The only other election allowed to
corporate taxpayers is an election between two reporting
methods: worldwide combined reporting and a reporting on a
"water's-edge" basis. However, even the "water's-edge"
election is binding for a seven-year period. Consequently,
it is understandable that the author would like to create some
sort of a mechanism to evaluate the impact of the elective SSF
on taxpayers and the state.
9)Ascertaining the Impact of the Elective SSF Apportionment
Formula: How Will This Bill Help? AB 2439 sets out to
achieve a laudable goal of determining a distribution of the
California tax burden and the impact of the elective SSF on
California and taxpayers. However, information about an
amount of corporate tax paid to California by a publicly
traded corporation, without more, is of little value in
ascertaining the corporation's tax burden. Unless this
information is considered in the context of the company's
overall tax position, including its California apportionment
percentage, it will be difficult to evaluate if its tax burden
has decreased or increased in comparison to prior taxable
years or other corporations. Let's assume that, in 2011,
company A paid $10 in tax to California, whereas company B
paid $100. It does not necessarily follow that company B
shares a higher burden of California's corporate tax. It
might have paid more tax because it had more sales in
California than company A. It may be that company A had NOLs
or claimed certain tax credits in 2012. In addition, it is
possible that company B paid $100 under protest and intends to
challenge the FTB's assessment. In other words, the sheer
knowledge of the amount of corporate tax paid to California
would not be sufficient in ascertaining a distribution of the
California's tax burden among publicly traded corporations
under the new elective SSF regime. The author may wish to
consider requiring a publicly-traded corporation to report its
election of the apportionment formula for the taxable year, in
addition to disclosing the amount of tax paid.
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10)FTB's Implementation Concerns . The FTB staff identified the
following implementation concerns:
a) AB 2439 would require a disclosure of payments that are
contested or under dispute by the corporation or the FTB
and would authorize the SC to publish this otherwise
confidential information on the SC's website. If the
author intends to allow FTB to share this information with
the SC, this bill should be amended to provide FTB with the
specific disclosure authorization.
b) It is unclear whether the "payment amount" reported by
the corporation is intended to be net of any refunds issued
by the FTB and only relating to payments applied to the
previous taxable year, or the total payments made during
the previous taxable year, without regard to which taxable
year the payments are due.
11)Proposed Amendments . The FTB staff recommended the following
technical amendments:
Amendment 1
On page 2, beginning on line 24 and continuing to line 25,
strike out "pursuant to" and insert:
"with respect to the tax imposed by"
Amendment 2
On page 2, beginning on line 30 and continuing to line 31,
strike out "pursuant to" and insert:
"with respect to the tax imposed by"
12)Related Legislation.
AB 2666 (Skinner), introduced in the 2009-10 legislative
session, would have required the FTB to compile information on
tax expenditures claimed and reported by publicly traded
companies and requires the State Chief Information Officer to
publish this information on the Reporting Transparency in
Government Internet Web site. AB 2666 was vetoed by Governor
Schwarzenegger.
AB 2230 (Charles Calderon), introduced in 2009-10 legislative
session, would have required FTB to post on its website, by
March 31, 2011, and annually thereafter, a list of the 100
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largest publicly traded corporations disclosing certain
tax-related information reported by those corporations, as
specified. AB 2230 was placed on the Assembly inactive file.
SBx6 19 (Florez), introduced in the 2009-10 legislative
session, would have required corporate tax credits of $20,000
or more to be reported on the RTG Website. SBx6 19 failed
passage in the Senate Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation
Service Employees International Union (SEIU) California
Opposition
BIOCOM
California Chamber of Commerce
California Aerospace Technology Association
California Bankers Association
California Healthcare Institute
California Manufacturers and Technology Association
California Retailers Association
California Taxpayers Association
Council on State Taxation
TechAmerica
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098