BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 364|
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VETO
Bill No: SB 364
Author: Yee (D)
Amended: 8/15/11
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
SENATE FLOOR : 22-17, 6/1/11
AYES: Alquist, Calderon, Corbett, De Le�n, DeSaulnier,
Evans, Hancock, Hernandez, Kehoe, Leno, Lieu, Liu,
Lowenthal, Negrete McLeod, Padilla, Pavley, Price,
Simitian, Steinberg, Vargas, Wolk, Yee
NOES: Anderson, Berryhill, Blakeslee, Cannella, Correa,
Dutton, Emmerson, Fuller, Gaines, Harman, Huff, La Malfa,
Runner, Strickland, Walters, Wright, Wyland
NO VOTE RECORDED: Rubio
ASSEMBLY FLOOR : 42-28, 9/1/11 - See last page for vote
SENATE FLOOR : 22-15, 9/2/11
AYES: Calderon, Corbett, De Le�n, DeSaulnier, Evans,
Hancock, Hernandez, Kehoe, Leno, Lieu, Liu, Lowenthal,
Negrete McLeod, Padilla, Pavley, Price, Rubio, Simitian,
Steinberg, Vargas, Wolk, Yee
NOES: Anderson, Berryhill, Cannella, Correa, Dutton,
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Emmerson, Fuller, Gaines, Harman, Huff, La Malfa, Runner,
Strickland, Wright, Wyland
NO VOTE RECORDED: Alquist, Blakeslee, Walters
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 imposes a penalty on a qualified
taxpayer that claims a business tax credit, enacted after
January 1, 2012, but fails to maintain the requisite number
of full-time equivalent employees in subsequent years, as
provided.
Assembly Amendments delete the provision relating to sales
and use tax provision in the Senate version and add
clarifying amendments to the income tax reporting
information and associated penalties.
ANALYSIS : Current law allows various tax credits
designed to provide incentives for taxpayers that incur
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.
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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 imposes a penalty on a qualified taxpayer that
claims a business tax credit, enacted after January 1,
2012, but fails to maintain the requisite number of
full-time equivalent (FTE) employees in subsequent years,
as provided.
This bill:
1. States the legislative findings and declarations
relating to California's economic climate and the need
to create qualified jobs in the state.
2. Requires a qualified taxpayer doing business in the
state that claims any business tax credit under either
the Personal Income Tax Law or the Corporation Tax Law
to include annually, on a timely filed original return
in the form and manner prescribed by the FTB, the number
of FTE employees, as defined, employed by the taxpayer
in the state for the current taxable year and the
preceding taxable year.
3. Imposes a penalty of $5,000 for each failure to provide
the required information, unless that failure is due to
reasonable cause and not due to willful neglect.
4. Imposes a penalty of $5,000 per annual FTE on a
qualified taxpayer that claims a business tax credit,
but subsequently experiences a net decrease in the
number of annual FTE employees in a taxable year that is
equal to or greater than 10 percent of the total annual
FTE employees in this state in the preceding taxable
year.
5. Specifies that, for purposes of calculating this
penalty, the employees of any trade or business acquired
by the qualified taxpayer during the current taxable
year shall be aggregated with the taxpayer's existing
employees. Provides that the employees of any trade or
business that is disposed of, or otherwise is no longer
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a related entity, during the current taxable year shall
be excluded from the qualified taxpayer's existing
employees.
6. Provides that the penalty amount may not exceed the
amount of business tax credits that reduced the
qualified taxpayer's tax liability, as reflected on the
qualified taxpayer's income or franchise tax returns for
the three preceding taxable year.
7. Defines "qualified taxpayer" as a person that is engaged
in or carrying on a trade, business, profession,
vocation, calling or commercial activity in this state,
and that pays qualified wages to more than 100 FTE
employees in this state.
8. Defines "business credit" as a credit that is:
A. Enacted after January 1, 2012.
B. Is based on either employee compensation,
including qualified wages, or the number of employees
employed.
C. May be claimed against the "net tax," as defined
in Revenue and Taxation Code (R&TC) Section 17039, or
against the "tax," as defined in R&TC Section 23036.
9. Defines "annual full-time equivalent" as either of the
following:
A. In the case of an employee paid hourly qualified
wages, it means the total number of hours worked for
the taxpayer by an employee (not to exceed 1,820
hours per employee) divided by 1,820.
B. In the case of a salaried employee, it means the
total number of weeks worked for the taxpayer by an
employee divided by 52.
10.Defines "qualified wages" as wages subject to
Unemployment Insurance Code Division 6 (commencing with
Section 13000).
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11.Specifies that, for purposes of determining whether a
person is a "qualified taxpayer," all employees of the
trades or businesses that are treated as related under
Internal Revenue Code Section 267, 318, or 707 shall be
treated as employed by a single taxpayer.
12.Provides that any business tax credit that is sold,
assigned, or otherwise transferred to another taxpayer
shall be treated as reducing the "net tax" or the "tax"
of the qualified taxpayer for the taxable year for which
the assignment, sale or transfer was made.
13.Provides that Government Code Chapter 3.5 (commencing
with Section 11340) of Part 1 of Division 3 of Title 2
does not apply to any standard, criterion, procedure,
determination, rule, notice, or guideline established or
issued by the FTB pursuant to the provisions of this
bill.
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.
Other states operate economic development programs by
application, and claw back incentives when companies leave
the state or decrease employment. Many firms must apply
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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 Assembly Appropriations Committee, the FTB
would incur initial costs of approximately $275,000 to
develop new reporting forms and procedures for collecting
and storing the data. Ongoing costs to input taxpayer
information on employment and administer the program would
be approximately $25,000 annually. This bill is estimated
to have no direct impact on state revenues because it
applies only prospectively. However, it could result in
unknown, but potentially significant increases in revenues
to the extent the clawback requirements are operative and
taxpayers are required to pay penalties for tax credits
they have taken.
SUPPORT : (Verified 9/1/11)
California Labor Federation (source)
State Building and Construction Trades Council of
California (co-source)
California Alliance for Retired Americans
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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!
International Longshore & Warehouse Union
Sierra Club California
Unite Here!
United Food & Commercial Workers Union, Western States
Council
OPPOSITION : (Verified 9/1/11)
BICOM
California Aerospace and Technology Association
California Chamber of Commerce
California Grocers Association
California Taxpayers Association
Council on State Taxation
San Gabriel Valley Legislative Coalition of Chambers
TechAmerica
ARGUMENTS IN SUPPORT : Proponents of this bill argue
that, while currently corporations receive an estimated
$14.5 billion in tax expenditures annually, including $9
billion in sales tax exemptions, it is nearly impossible to
track if those subsidies contribute to the creation of jobs
in California. The proponents also note that, as dollars
flow out to corporations without oversight, the state is
facing a jobs crisis and public services are being
devastated by budget cuts that touch every sector from
education to health care.
ARGUMENTS IN OPPOSITION : The opponents state that, while
they understand the desire to insure that new tax
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incentives are effective in achieving their stated goals,
the policy rationale of this bill is to penalize 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. Opponents
also assert the penalty is too high and could exceed the
actual tax benefits received by a taxpayer for any
incentive. Finally, opponents contend a company could be
penalized for temporary reduction of jobs due to outside
economic conditions.
GOVERNOR'S VETO MESSAGE:
"I am returning Senate Bill 364 without my signature.
This bill imposes penalties on businesses claiming
future-enacted hiring/employment credits should the
business's number of employees drop by more than 10%
during a year.
The tactic used in this bill can be effective for
assuring that businesses deliver promised employment to
the State in exchange for valuable credits.
Unfortunately, the bill's approach is too broad.
Penalties should be tailored to the unique provisions
of each tax credit given."
ASSEMBLY FLOOR : 42-28, 9/1/11
AYES: Allen, Ammiano, Atkins, Beall, Block, Blumenfield,
Bradford, Brownley, Butler, Charles Calderon, Carter,
Cedillo, Chesbro, Dickinson, Eng, Feuer, Fong, Fuentes,
Furutani, Gatto, Hall, Hayashi, Roger Hern�ndez, Hill,
Hueso, Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza,
Mitchell, Monning, Pan, Perea, Portantino, Skinner,
Solorio, Swanson, Torres, Williams, Yamada, John A. P�rez
NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly,
Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman,
Harkey, Huber, Jeffries, Jones, Knight, Logue, Mansoor,
Miller, Morrell, Nestande, Nielsen, Norby, Olsen, Silva,
Smyth, Valadao, Wagner
NO VOTE RECORDED: Alejo, Bonilla, Buchanan, Campos, Davis,
Galgiani, Gordon, Gorell, V. Manuel P�rez, Wieckowski
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AGB:do 1/4/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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