BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 116|
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THIRD READING
Bill No: SB 116
Author: De León (D)
Amended: 2/23/11
Vote: 27
SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 3/23/11
AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu
NOES: Huff, Fuller, La Malfa
SENATE APPROPRIATIONS COMMITTEE : 6-2, 5/2/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Runner
NO VOTE RECORDED: Emmerson
SUBJECT : Income taxes: single sales factor
SOURCE : Author
DIGEST : This bill makes the single sales apportionment
formula mandatory for specified taxpayers and requires that
all taxpayers use the
market rule to source intangibles.
ANALYSIS : The February 2009, state budget agreement
changed the formula that multistate firms use to determine
the share of its total income that is taxable in California
(AB 15 X3 ÝKrekorian], Chapter 10 and SB 15 X3 ÝCalderon],
Chapter 17, Statutes of 2009-10, Third Extraordinary
Session). Previously, firms used a weighted average of
their California sales, property, and payroll compared to
CONTINUED
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its totals. Starting in 2011, firms may choose to
apportion using the sales factor, with the intent to
encourage firms to locate payroll and property in
California.
This bill makes the single sales factor apportionment
formula mandatory for all taxpayers except those in a
qualified business activity (extractive, agricultural,
savings and loans, and banks and financial services) for
taxable years beginning on or after January 1, 2011.
This bill changes the way corporations assign sales of
intangible goods to the state by requiring that all
taxpayers, including those not in qualified business
activities, use the "market rule." Therefore, all
corporations will have to assign sales from services to
California to the extent the purchaser derives benefit of
the service in California or the property is used in
California. For example, if a movie is viewed in
California but originates in Delaware, that movie would be
sourced to California under the market rule. If a customer
of marketable securities is in California, that sale would
also be sourced to California under the market rule.
Consistent with existing law, real property, including
leases and rentals, would also all be assigned to
California.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Mandatory single-sales $1,300,000
$1,100,000 $1,100,000 General
factor apportionment
(revenue gains)
SUPPORT : (Verified 5/3/11)
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American Federation of State, County and Municipal
Employees
Apple Inc.
BayBio
BIOCOM
California Academy of Family Physicians
California Alliance for Retired Americans
California Healthcare Institute
California Labor Federation AFL-CIO
California-Nevada Conference of Operating Engineers
California Nurses Association
California Pan-Ethnic Health Network
California Partnership
California Professional Firefighters
California School Employees Association
California Teachers Association
Clergy and Laity United for Economic Justice-Los Angeles
Community Resources for Independent Living
Genentech
Greater Los Angeles African American Chamber of Commerce
Hunger Action Los Angeles
Independent Living Services of Northern California
Los Angeles County Young Democrats
Parent Voices
Peace Officers Research Association of California
Power PAC
Resources for Independent Living
St. Mary's Center
Service Employees International Union California State
Council
Services, Immigrant Rights & Education Network
State Building and Construction Trades Council
United Firefighters of Los Angeles City
Ronald O. Loveridge, Mayor, City of Riverside
OPPOSITION : (Verified 5/3/11)
California Cable and Telecommunications Association
California Chamber of Commerce
California Manufacturers and Technology
California Taxpayers Association
Time Warner Cable
ARGUMENTS IN SUPPORT : According to the author's office,
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SB 116 saves the state upwards of $1 Billion annually
through repeal of the tax break for corporations that move
jobs out of state and out-of-state companies that refuse to
invest in California or hire its residents. Instead of
out-sourcing jobs to other states, revise the tax code to
encourage corporations to
increase their investment in California through universal
application of the single sales factor in the calculation
of corporate taxes owed to the state.
Beginning on January 1, 2011, corporations will have the
option of using the "single sales factor" in calculating
taxes owed to the state. However, unlike the vast majority
of other states that utilize such a corporate tax
calculation, California failed to require all eligible
companies to use the "single sales factor" and instead made
its use elective, thereby continuing to reward companies
that move or base their operations out-of-state. In
addition to California, 26 states have implemented or are
in the process of phasing-in the single sales factor
apportionment method. Use of the single sales factor is
currently mandatory in 20 other states. Only one state
(Missouri) is like California's law, which allows
corporations to annually elect which formula
they prefer.
This bill requires every eligible company to utilize the
single sales factor so
corporations that move jobs out of state will not be
rewarded with a tax break and incentivize out-of-state
companies that have large sales in the state to move jobs
and investments to California. California currently uses
an apportionment formula that is based on three factors:
sales, payroll, and property located in the state. Most
types of businesses also apply a double weighted sales
factor. This system tends to penalize corporations that
maintain substantial payroll and operations in California
but primarily sell their products nationally or
internationally-this results in an incentive to expand
operations out-of-state in order to reduce the weight of
the payroll and property factors.
The single sales factor (in which sales is the sole
apportionment factor), reduces overall taxes for companies
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that have significant payroll and facilities in California,
but make most of their sales outside of the state.
Corporations that base the vast majority of their payroll
and operations outside of California but make substantial
sales here will ultimately pay more in state taxes under
this simplified formula. Starting in the 2011 tax year,
corporations doing business in California will be able to
decide whether to utilize the single sales factor or the
three-factor formula. Allowing this election unfairly
rewards corporations that invest the bulk of their payroll
and operations out-of-state.
According to a recent report by the Legislative Analyst's
Office (LAO), Reconsidering the Optional Single Sales
Factor (2010), implementation of a mandatory single sales
factor could produce an eventual net gain of about 40,000
jobs in California.
The LAO report also confirms that the elective single sales
factor provides greater benefits to out-of-state firms
compared to balanced multi-state and California-only
corporations, and that conformity with other large states
that now use the single sales factor would prevent
California businesses from being placed at a competitive
disadvantage.
This bill seeks to establish a consistent standard that
does not give unnecessary tax breaks for corporations
anchored outside of California, and equalizes the tax
assessment for all corporations doing business in this
state.
ARGUMENTS IN OPPOSITION : In an opposition letter, the
California Chamber of Commerce, the California
Manufacturers and Technology Association and CalTax state
that the elective single sales factor was a "remarkable,
although rare, bright spot in California's notoriously bad
business climate." The three groups state that the state
was correct in making the single sales factor elective in
2009 and that the attempt to make it mandatory negates the
importance of business contributions to the state's overall
economic health. Furthermore, the opposition states that
not all business models fit easily into a single sales
calculation, but these companies have significant
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investments of property and payroll in California. The
size of their sales in one of the largest markets in the
world renders those investments moot by comparison.
Finally, they state that this bill will "cut the heart out
of an already weakened California economy."
In its opposition letter, the California Cable and
Telecommunications Association (CCTA) cites the cost of
performance allocation methodology which was part of the
2010 budget deal as recognition of its significant
contributions to the state's economy through investment in
infrastructure, taxes paid and people hired. CCTA states
that the elimination of the cost of
performance methodology for the industry results in an
increased tax liability of $35 to $50 million, reducing its
ability to grow in this state.
AGB:kc 5/3/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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