BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 364|
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THIRD READING
Bill No: SB 364
Author: Yee (D)
Amended: 5/31/11
Vote: 21
SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 4/27/11
AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu
NOES: Huff, Fuller, La Malfa
SENATE APPROPRIATIONS COMMITTEE : 6-2, 5/26/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Runner
NO VOTE RECORDED: Emmerson
SUBJECT : Sales and use taxes: income taxes: business
tax incentives:
reporting information and penalty
SOURCE : California Labor Federation
State Building and Construction Trades Council
of California
DIGEST : This bill provides for the imposition of
penalties on businesses with more than 100 employees that
claim a business tax incentive enacted on or after January
1, 2012, if the business experiences a 10 percent or more
reduction in full-time employees over the previous year.
ANALYSIS : Current law allows various tax credits
designed to provide incentives for taxpayers that incur
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certain expenses, such as child adoption, or to influence
behavior, including business practices and decisions, such
as research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
State law also requires the Franchise Tax Board (FTB) to
"recapture" or "claw back" tax credits from taxpayers under
specified circumstances to ensure that taxpayers do not
financially benefit when acting opposite to the intent of a
tax credit. Taxpayers who claim an enterprise zone hiring
credit then terminate an employee within 270 days must
repay the credit, and a low-income housing developer must
sacrifice tax credits if he or she raises rents at the
project to the extent that they're no longer affordable.
Additionally, tax law specifies penalties for understating
liability, failing to file returns, engaging in
transactions that lack economic substance, and engaging in
fraud, among others.
This bill enacts a penalty on a qualified taxpayer that
claims a business tax incentive enacted by the Legislature
on or after January 1, 2012, but subsequently has a net
decrease in employees of 10 percent or more over the
previous calendar year.
The bill defines a "qualified taxpayer" as a person that is
engaged in or carrying on a trade, business, profession,
vocation, calling, or commercial activity in the state and
the pays qualified wages to more than 100 annual full-time
equivalent employees. This bill uses Internal Revenue Code
definitions to treat firms owned by related parties as a
single firm.
This bill defines a "business tax incentive" as:
A sales and use tax exemption or exclusion based
on qualified wages or numbers of persons employed.
A personal income or corporation tax credit based
on qualified wages or the number of employees.
This bill uses a full-time equivalent measurement to
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determine whether the taxpayer decreased jobs in an amount
necessary to trigger the penalty, and to calculate the
amount of the penalty. A full-time equivalent is:
In the case of an employee paid qualified wages,
the number of hours worked for the qualified
taxpayer divided by 1,820.
In the case of a salaried employee, the number of
weeks worked divided by 52.
The Board of Equalization (BOE) shall assess the penalty
for firms that claim sales and use tax exclusions and
exemptions, and the FTB levies the penalty for taxpayers
claiming income and corporation tax credits. The BOE and
the FTB assess a penalty of $5,000 per employee decreased
over 10 percent from the previous year, capped by the
amount of income and corporation tax credits claimed, and
sales and use tax exemptions and exclusions obtained for
the last three years. The BOE and the FTB calculate the
penalty as follows, including any fractions:
Take 90 percent of the taxpayer's annual
full-time equivalents for the prior calendar year,
minus.
The annual full-time equivalents for the current
calendar year, multiplied by $5,000 per annual
full-time equivalent.
If the difference between the two is zero, the
FTB and the BOE do not assess the penalty.
The BOE and the FTB shall aggregate the employees of any
trade or business acquired by the qualified taxpayer during
the current calendar year with the taxpayer's existing
employees, and specifies rules in existing law to determine
whether the employees of the trade or business acquired
must be included in the taxpayer's calculation.
The bill also requires qualified taxpayers doing business
to include the number of full-time equivalents for the
current year and preceding year on a timely filed original
return in the form and manner prescribed by the FTB or BOE
to determine the penalty. Taxpayers failing to comply must
pay an additional penalty of $5,000 unless the failure is
due to reasonable cause and not willful neglect.
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This bill further requires that taxpayers selling,
assigning, or otherwise transferring tax credits to another
taxpayer must expressly agree to continue to report and
actually report the number of full-time equivalents or the
sale, assignment, or transfer is invalid. The buyer or
assignee must add the penalty to net income if meets the
conditions that trigger the penalty. The FTB has four
years to send the buyer or assignee a notice of proposed
assessment if the seller or assignor fails to satisfy the
reporting requirements.
The BOE and the FTB may issue rules, guidelines, or
procedures necessary to carry out the purposes of the bill,
and such rules, guidelines, and procedures are exempt from
the Administrative Procedures Act. This bill further
provides that it does not limit the audit authority of the
BOE or the FTB.
This bill also makes legislative findings and declarations
regarding unemployment rates, and job creation.
Comments
California's key business tax credits, the Research and
Development Tax Credit and the Geographically Targeted
Economic Development Area Hiring Credit and Sales and Use
Tax Credit, are neither capped to a specified amount of
foregone revenue nor specifically allocated by a state
agency. If firms legitimately satisfy the conditions
necessary to claim the credit, such as increasing research
and development year-over-year or hiring a qualified worker
(with proper documentation), the firm claims the credit on
its return, thereby reducing its tax in the current tax
year, or carrying the credit over to be used against tax
due in a future year. Once granted, the state cannot
cancel the credit and make the firm repay the amount, a
procedure known as a claw back, if the firm followed the
law. In that way, California's key business tax
expenditures function similarly to entitlement programs,
but unlike spending programs, cannot be limited or
eliminated without two-thirds vote required by Section 3 of
Article XIIA of the California Constitution.
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Other states operate economic development programs by
application, and claw back incentives when companies leave
the state or decrease employment. Many firms must apply
for tax incentives, which the state awards up to an amount
specified in each state's budget, or sign memorandums of
understanding with the state. Next, the state requires
reports from firms to ensure that it meets specified
employment totals, wage amounts, and investment thresholds.
If the firm does not meet the targets, it must pay back
the entire value of the tax credit in some cases, sometime
with a penalty. A chart from the organization "Good Jobs
First" details these provisions for 20 states.
This bill brings California part of the way there. First,
it requires all firms to include the number of its
full-time employees in California for the current and
preceding year. Secondly, if a firm claims a future tax
credit as a jobs incentive, and the firm cuts payroll by
more than 10 percent, the firm must pay a penalty of $5,000
for each employee after the first 10 percent. This bill
ensures that firms that avail themselves of tax credits
cannot enjoy the financial benefit of tax credits hen
subsequently sack the employees that qualified it for the
tax credit.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee analysis:
Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13
2013-14 Fund
Revenue clawback potential
future revenue gains to General
the extent that future tax incentives
are enacted and penalties would apply.
FTB administration $150-$300$24General
SUPPORT : (Verified 5/31/11)
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California Labor Federation (source)
State Building and Construction Trades Council of
California (co-source)
American Federation of State, County & Municipal Employees
California alliance for Retired Americans
California Conference Board of the Amalgamated Transit
Union
California Conference of Machinists California Nurses
Association
California Conference of the Amalgamated Transit Union
California Partnership (120 CBO's)
California Professional Firefighters
California Tax Reform Association
California Teamsters Public Affairs Council
CalPIRG
Communication Workers of American, AFL-CIO, District 9
Engineers and Scientists of California
Having our Say Coalition
International Longshore & Warehouse Union
National Nurses Organizing Committee
Service Employees International Union, Local 1000
Sierra Club California
Unite Here!
United Food & Commercial Workers Union, Western States
Council
OPPOSITION : (Verified 5/31/11)
BICOM
California Aerospace and Technology Association
California Chamber of Commerce
California Grocers Association
California Manufacturers & Technology Association
California Taxpayers Association
Council on State Taxation
TechAmerica
ARGUMENTS IN SUPPORT : According to the author's office,
this bill brings much needed accountability to corporate
tax expenditures. This bill will levy a penalty on
corporations that claim tax credits and then fail to meet
employment requirements. This bill requires corporations
that claim tax breaks with the goal of job creation to
annually submit to the FTB specified information relating
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to the number and type of employees for the current and
preceding taxable years. Specifically, if a company cuts
10 percent of their workforce in a year, then they are
subject to a penalty of $5,000 for each full-time job lost
beyond the 10 percent. The penalty will not exceed the
total amount of credit claimed by the taxpayer on the
previous year's return. Clawback provisions make tax
expenditures more effective, transparent, and accountable.
This bill will set clear expectations for corporations and
guarantee that the state's investment will yield measurable
results in the form of job retention and creation."
ARGUMENTS IN OPPOSITION : The opposition argue that while
they "understand the desire to insure that new tax
incentives are effective in achieving their stated goals,
the basic approach of SB 364 inappropriately penalizes
California employers for decreases in employment numbers
regardless of whether a tax incentive meets its stated
objectives. In addition, despite the recent amendments,
these penalties may still exceed the actual benefit the
employer receives from the tax incentives it claim?The
penalty itself is also somewhat arbitrary, as it penalizes
taxpayers whose overall employment is reduced
year-over-year without any necessary connection between the
failure of the business and the failure of the tax
incentive. In addition, SB 364 would impose a $5,000
penalty for each job lost beyond the 10 percent threshold,
regardless of the amount the employer benefit actually
claimed from the hiring of each individual employee."
AGB:do 5/24/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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