California Legislature—2013–14 Regular Session

Assembly Bill No. 2700

Introduced by Assembly Member Nazarian

February 21, 2014

An act to amend Section 17053.85 of the Revenue and Taxation Code, relating to taxation.

LEGISLATIVE COUNSEL’S DIGEST

AB 2700, as introduced, Nazarian. Personal income taxes: credits: film.

The Personal Income Tax Law allows various credits against the taxes imposed by that law, including a credit against those taxes for taxable years beginning on or after January 1, 2011, in an amount equal to a specified percentage of the qualified expenditures, as defined, attributable to the production of a qualified motion picture in California, or, where the qualified motion picture has relocated to California or is an independent film, as provided.

This bill would make a technical, nonsubstantive change to that provision.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 17053.85 of the Revenue and Taxation
Code is amended to read:

17053.85.  

(a) (1) For taxable years beginning on or after
January 1, 2011, there shall be allowed to a qualified taxpayer a
credit against the “net tax,” as defined in Section 17039, in an
amount equal to the applicable percentage, as specified in
paragraph (4), of the qualified expenditures for the production of
a qualified motion picture in California.

(2) The credit shall be allowed for the taxable year in which the
California Film Commission issues the credit certificate pursuant
to subdivision (g) for the qualified motion picture, and shall be for
the applicable percentage of all qualified expenditures paid or
incurred by the qualified taxpayer in all taxable years for that
qualified motion picture.

(3) The amount of the credit allowed to a qualified taxpayer
shall be limited to the amount specified in the credit certificate
issued to the qualified taxpayer by the California Film Commission
pursuant to subdivision (g).

(4) For purposes of paragraphs (1) and (2), the applicable
percentage shall be:

(A) Twenty percent of the qualified expenditures attributable
to the production of a qualified motion picture in California.

(B) Twenty-five percent of the qualified expenditures
attributable to the production of a qualified motion picture in
California where the qualified motion picture is a television series
that relocated to California or an independent film.

(b) For purposes of this section:

(1) “Ancillary product” means any article for sale to the public
that contains a portion of, or any element of, the qualified motion
picture.

(2) “Budget” means an estimate of all expenses paid or incurred
during the production period of a qualified motion picture. It shall
be the same budget used by the qualified taxpayer and production
company for all qualified motion picture purposes.

(3) “Clip use” means a use of any portion of a motion picture,
other than the qualified motion picture, used in the qualified motion
picture.

(4) “Credit certificate” means the certificate issued by the
California Film Commission pursuant to subparagraph (C) of
paragraph (2) of subdivision (g).

(5) (A) “Employee fringe benefits” means the amount allowable
as a deduction under this part to the qualified taxpayer involved
in the production of the qualified motion picture, exclusive of any
amounts contributed by employees, for any year during the
production period with respect to any of the following:

(i) Employer contributions under any pension, profit-sharing,
annuity, or similar plan.

(ii) Employer-provided coverage under any accident or health
plan for employees.

(iii) The employer’s cost of life or disability insurance provided
to employees.

(B) Any amount treated as wages under clause (i) of
subparagraph (A) of paragraph (18) shall not be taken into account
under this paragraph.

(6) “Independent film” means a motion picture with a minimum
budget of one million dollars ($1,000,000) and a maximum budget
of ten million dollars ($10,000,000) that is produced by a company
that is not publicly traded and publicly traded companies do not
own, directly or indirectly, more than 25 percent of the producing
company.

(7) “Licensing” means any grant of rights to distribute the
qualified motion picture, in whole or in part.

(8) “New use” means any use of a motion picture in a medium
other than the medium for which it was initially created.

(9) (A) “Postproduction” means the final activities in a qualified
motion picture’s production, including editing, foley recording,
automatic dialogue replacement, sound editing, scoring and music
editing, beginning and end credits, negative cutting, negative
processing and duplication, the addition of sound and visual effects,
soundmixing, film-to-tape transfers, encoding, and color correction.

(B) “Postproduction” does not include the manufacture or
shipping of release prints.

(10) “Preproduction” means the process of preparation for actual
physical production which begins after a qualified motion picture
has received a firm agreement of financial commitment, or is
greenlit, with, for example, the establishment of a dedicated
production office, the hiring of key crew members, and includes,
but is not limited to, activities that include location scouting and
execution of contracts with vendors of equipment and stage space.

(11) “Principal photography” means the phase of production
during which the motion picture is actually shot, as distinguished
from preproduction and postproduction.

(12) “Production period” means the period beginning with
preproduction and ending upon completion of postproduction.

(13) “Qualified entity” means a personal service corporation as
defined in Section 269A(b)(1) of the Internal Revenue Code, a
payroll services corporation, or any entity receiving qualified wages
with respect to services performed by a qualified individual.

(14) (A) “Qualified individual” means any individual who
performs services during the production period in an activity related
to the production of a qualified motion picture.

(B) “Qualified individual” shall not include either of the
following:

(i) Any individual related to the qualified taxpayer as described
in subparagraph (A), (B), or (C) of Section 51(i)(1) of the Internal
Revenue Code.

(ii) Any 5-percent owner, as defined in Section 416(i)(1)(B) of
the Internal Revenue Code, of the qualified taxpayer.

(15) (A) “Qualified motion picture” means a motion picture
that is produced for distribution to the general public, regardless
of medium, that is one of the following:

(i) A feature with a minimum production budget of one million
dollars ($1,000,000) and a maximum production budget of
seventy-five million dollars ($75,000,000).

(ii) A movie of the week or miniseries with a minimum
production budget of five hundred thousand dollars ($500,000).

(iii) A new television series produced in California with a
minimum production budget of one million dollars ($1,000,000)
licensed for original distribution on basic cable.

(iv) An independent film.

(v) A television series that relocated to California.

(B) To qualify as a “qualified motion picture,” all of the
following conditions shall be satisfied:

(i) At least 75 percent of the production days occur wholly in
California or 75 percent of the production budget is incurred for
payment for services performed within the state and the purchase
or rental of property used within the state.

(ii) Production of the qualified motion picture is completed
within 30 months from the date on which the qualified taxpayer’s
application is approved by the California Film Commission. For
purposes of this section, a qualified motion picture is “completed”
when the process of postproduction has been finished.

(iii) The copyright for the motion picture is registered with the
United States Copyright Office pursuant to Title 17 of the United
States Code.

(iv) Principal photography of the qualified motion picture
commences after the date on which the application is approved by
the California Film Commission, but no later than 180 days after
the date of that approval.

(C) For the purposes of subparagraph (A), in computing the
total wages paid or incurred for the production of a qualified
motion picture, all amounts paid or incurred by all persons or
entities that share in the costs of the qualified motion picture shall
be aggregated.

(D) “Qualified motion picture” shall not include commercial
advertising, music videos, a motion picture produced for private
noncommercial use, such as weddings, graduations, or as part of
an educational course and made by students, a news program,
current events or public events program, talk show, game show,
sporting event or activity, awards show, telethon or other
production that solicits funds, reality television program, clip-based
programming if more than 50 percent of the content is comprised
of licensed footage, documentaries, variety programs, daytime
dramas, strip shows, one-half hour (air time) episodic television
shows, or any production that falls within the recordkeeping
requirements of Section 2257 of Title 18 of the United States Code.

(16) “Qualified expenditures” means amounts paid or incurred
to purchase or lease tangible personal property used within this
state in the production of a qualified motion picture and payments,
including qualified wages, for services performed within this state
in the production of a qualified motion picture.

(17) (A) “Qualified taxpayer” means a taxpayer who has paid
or incurred qualified expenditures and has been issued a credit
certificate by the California Film Commission pursuant to
subdivision (g).

(B) In the case of any pass-thru entity, the determination of
whether a taxpayer is a qualified taxpayer under this section shall
be made at the entity level and any credit under this section is not
allowed to the pass-thru entity, but shall be passed through to the
partners or shareholders in accordance with applicable provisions
of Part 10 (commencing with Section 17001) or Part 11
(commencing with Section 23001). For purposes of this paragraph,
“pass-thru entity” means any entity taxed as a partnership or “S”
corporation.

(18) (A) “Qualified wages” means all of the following:

(i) Any wages subject to withholding under Division 6
(commencing with Section 13000) of the Unemployment Insurance
Code that were paid or incurred by any taxpayer involved in the
production of a qualified motion picture with respect to a qualified
individual for services performed on the qualified motion picture
production within this state.

(ii) The portion of any employee fringe benefits paid or incurred
by any taxpayer involved in the production of the qualified motion
picture that are properly allocable to qualified wage amounts
described in clause (i).

(iii) Any payments made to a qualified entity for services
performed in this state by qualified individuals within the meaning
of paragraph (14).

(iv) Remuneration paid to an independent contractor who is a
qualified individual for services performed within this state by that
qualified individual.

(B) “Qualified wages” shall not include any of the following:

(i) Expenses, including wages, related to new use, reuse, clip
use, licensing, secondary markets, or residual compensation, or
the creation of any ancillary product, including, but not limited to,
a soundtrack album, toy, game, trailer, or teaser.

(ii) Expenses, including wages, paid or incurred with respect to
acquisition, development, turnaround, or any rights thereto.

(iii) Expenses, including wages, related to financing, overhead,
marketing, promotion, or distribution of a qualified motion picture.

(iv) Expenses, including wages, paid per person per qualified
motion picture for writers, directors, music directors, music
composers, music supervisors, producers, and performers, other
than background actors with no scripted lines.

(19) “Residual compensation” means supplemental
compensation paid at the time that a motion picture is exhibited
through new use, reuse, clip use, or in secondary markets, as
distinguished from payments made during production.

(20) “Reuse” means any use of a qualified motion picture in the
same medium for which it was created, following the initial use
in that medium.

(21) “Secondary markets” means media in which a qualified
motion picture is exhibited following the initial media in which it
is exhibited.

(22) “Television series that relocated to California” means a
television series, without regard to episode length or initial media
exhibition, that filmed all of its prior season or seasons outside of
California and for which the taxpayer certifies that the credit
provided pursuant to this section is the primary reason for
relocating to California.

(c) (1) Notwithstanding any other law, a qualified taxpayer
may sell any credit allowed under this section that is attributable
to an independent film, as defined in paragraph (6) of subdivision
(b), to an unrelated party.

(2) The qualified taxpayer shall report to the Franchise Tax
Board prior to the sale of the credit, in the form and manner
specified by the Franchise Tax Board, all required information
regarding the purchase and sale of the credit, including the social
security or other taxpayer identification number of the unrelated
party to whom the credit has been sold, the face amount of the
credit sold, and the amount of consideration received by the
qualified taxpayer for the sale of the credit.

(3) In the case where the credit allowed under this section
exceeds the “net tax,” the excess credit may be carried over to
reduce the “net tax” in the following taxable year, and succeeding
five taxable years, if necessary, until the credit has been exhausted.

(4) A credit shall not be sold pursuant to this subdivision to
more than one taxpayer, nor may the credit be resold by the
unrelated party to another taxpayer or other party.

(5) A party that has acquired tax credits under this section shall
be subject to the requirements of this section.

(6) In no event may a qualified taxpayer assign or sell any tax
credit to the extent the tax credit allowed by this section is claimed
on any tax return of the qualified taxpayer.

(7) In the event that both the taxpayer originally allocated a
credit under this section by the California Film Commission and
a taxpayer to whom the credit has been sold both claim the same
amount of credit on their tax returns, the Franchise Tax Board may
disallow the credit of either taxpayer, so long as the statute of
limitations upon assessment remains open.

(8) Chapter 3.5 (commencing with Section 11340) of Part 1 of
Division 3 of Title 2 of the Government Code does not apply to
any standard, criterion, procedure, determination, rule, notice, or
guideline established or issued by the Franchise Tax Board
pursuant to this subdivision.

(9) Subdivision (g) of Section 17039 shall not apply to any
credit sold pursuant to this subdivision.

(10) For purposes of this subdivision, the unrelated party or
parties that purchase a credit pursuant to this subdivision shall be
treated as a qualified taxpayer pursuant to paragraph (1) of
subdivision (a).

(d) No credit shall be allowed pursuant to this section unless
the qualified taxpayer provides the following to the California
Film Commission:

(1) Identification of each qualified individual.

(2) The specific start and end dates of production.

(3) The total wages paid.

(4) The amount of qualified wages paid to each qualified
individual.

(5) The copyright registration number, as reflected on the
certificate of registration issued under the authority of Section 410
of Title 17 of the United States Code, relating to registration of
claim and issuance of certificate. The registration number shall be
provided on the return claiming the credit.

(6) The total amounts paid or incurred to purchase or lease
tangible personal property used in the production of a qualified
motion picture.

(7) Information to substantiate its qualified expenditures.

(8) Information required by the California Film Commission
under regulations promulgated pursuant to subdivision (g)
necessary to verify the amount of credit claimed.

(e) The California Film Commission may prescribe rules and
regulations to carry out the purposes of this section including any
rules and regulations necessary to establish procedures, processes,
requirements, and rules identified in or required to implement this
section. The regulations shall include provisions to set aside a
percentage of annual credit allocations for independent films.

(f) If the qualified taxpayer fails to provide the copyright
registration number as required in paragraph (5) of subdivision
(d), the credit shall be disallowed and assessed and collected under
Section 19051 until the procedures are satisfied.

(g) For purposes of this section, the California Film Commission
shall do the following:

(1) On or after July 1, 2009, and before July 1, 2017, allocate
tax credits to applicants.

(A) Establish a procedure for applicants to file with the
California Film Commission a written application, on a form jointly
prescribed by the California Film Commission and the Franchise
Tax Board for the allocation of the tax credit. The application shall
include, but not be limited to, the following information:

(i) The budget for the motion picture production.

(ii) The number of production days.

(iii) A financing plan for the production.

(iv) The diversity of the workforce employed by the applicant,
including, but not limited to, the ethnic and racial makeup of the
individuals employed by the applicant during the production of
the qualified motion picture, to the extent possible.

(v) All members of a combined reporting group, if known at
the time of the application.

(vi) Financial information, if available, including, but not limited
to, the most recently produced balance sheets, annual statements
of profits and losses, audited or unaudited financial statements,
summary budget projections or results, or the functional equivalent
of these documents of a partnership or owner of a single member
limited liability company that is disregarded pursuant to Section
23038. The information provided pursuant to this clause shall be
confidential and shall not be subject to public disclosure.

(vii) The names of all partners in a partnership not publicly
traded or the names of all members of a limited liability company
classified as a partnership not publicly traded for California income
tax purposes that have a financial interest in the applicant’s
qualified motion picture. The information provided pursuant to
this clause shall be confidential and shall not be subject to public
disclosure.

(viii) Detailed narratives, for use only by the Legislative
Analyst’s Office in conducting a study of the effectiveness of this
credit, that describe the extent to which the credit is expected to
influence or affect filming and other business location decisions,
hiring decisions, salary decisions, and any other financial matters
of the applicant.

(ix) Any other information deemed relevant by the California
Film Commission or the Franchise Tax Board.

(B) Establish criteria, consistent with the requirements of this
section, for allocating tax credits.

(C) Determine and designate applicants who meet the
requirements of this section.

(D) Process and approve, or reject, all applications on a
first-come-first-served basis.

(E) Subject to the annual cap established as provided in
subdivision (i), allocate an aggregate amount of credits under this
section and Section 23685, and allocate any carryover of
unallocated credits from prior years.

(2) Certify tax credits allocated to qualified taxpayers.

(A) Establish a verification procedure for the amount of qualified
expenditures paid or incurred by the applicant, including, but not
limited to, updates to the information in subparagraph (A) of
paragraph (1) of subdivision (g).

(B) Establish audit requirements that must be satisfied before
a credit certificate may be issued by the California Film
Commission.

(C) (i) Establish a procedure for a qualified taxpayer to report
to the California Film Commission, prior to the issuance of a credit
certificate, the following information:

(I) If readily available, a list of the states, provinces, or other
jurisdictions in which any member of the applicant’s combined
reporting group in the same business unit as the qualified taxpayer
that, in the preceding calendar year, has produced a qualified
motion picture intended for release in the United States market.
For purposes of this clause, “qualified motion picture” shall not
include any episodes of a television series that were complete or
in production prior to July 1, 2009.

(II) Whether a qualified motion picture described in subclause
(I) was awarded any financial incentive by the state, province, or
other jurisdiction that was predicated on the performance of
primary principal photography or postproduction in that location.

(ii) The California Film Commission may provide that the report
required by this subparagraph be filed in a single report provided
on a calendar year basis for those qualified taxpayers that receive
multiple credit certificates in a calendar year.

(D) Issue a credit certificate to a qualified taxpayer upon
completion of the qualified motion picture reflecting the credit
amount allocated after qualified expenditures have been verified
under this section. The amount of credit shown in the credit
certificate shall not exceed the amount of credit allocated to that
qualified taxpayer pursuant to this section.

(3) Obtain, when possible, the following information from
applicants that do not receive an allocation of credit:

(A) Whether the qualified motion picture that was the subject
of the application was completed.

(B) If completed, in which state or foreign jurisdiction was the
primary principal photography completed.

(C) Whether the applicant received any financial incentives
from the state or foreign jurisdiction to make the qualified motion
picture in that location.

(4) Provide the Legislative Analyst’s Office, upon request, any
or all application materials or any other materials received from,
or submitted by, the applicants, in electronic format when available,
including, but not limited to, information provided pursuant to
clauses (i) to (ix), inclusive, of subparagraph (A) of paragraph (1).

(5) The information provided to the California Film Commission
pursuant to this section shall constitute confidential tax information
for purposes of Article 2 (commencing with Section 19542) of
Chapter 7 of Part 10.2.

(h) (1) The California Film Commission shall annually provide
the begin delete Legislative Analyst’s Office, the Franchise Tax Board, end delete
begin insert Franchise Tax Board, the Legislative Analyst’s Office, end insert and the
board with a list of qualified taxpayers and the tax credit amounts
allocated to each qualified taxpayer by the California Film
Commission. The list shall include the names and taxpayer
identification numbers, including taxpayer identification numbers
of each partner or shareholder, as applicable, of the qualified
taxpayer.

(2) (A) Notwithstanding paragraph (5) of subdivision (g), the
California Film Commission shall annually post on its Internet
Web site and make available for public release the following:

(i) A table which includes all of the following information: a
list of qualified taxpayers and the tax credit amounts allocated to
each qualified taxpayer by the California Film Commission, the
number of production days in California the qualified taxpayer
represented in its application would occur, the number of California
jobs that the qualified taxpayer represented in its application would
be directly created by the production, and the total amount of
qualified expenditures expected to be spent by the production.

(ii) A narrative staff summary describing the production of the
qualified taxpayer as well as background information regarding
the qualified taxpayer contained in the qualified taxpayer’s
application for the credit.

(B) Nothing in this subdivision shall be construed to make the
information submitted by an applicant for a tax credit under this
section a public record.

(i) (1) The aggregate amount of credits that may be allocated
in any fiscal year pursuant to this section and Section 23685 shall
be an amount equal to the sum of all of the following:

(A) One hundred million dollars ($100,000,000) in credits for
the 2009-10 fiscal year and each fiscal year thereafter, through
and including the 2016-17 fiscal year.

(B) The unused allocation credit amount, if any, for the
preceding fiscal year.

(C) The amount of previously allocated credits not certified.

(2) If the amount of credits applied for in any particular fiscal
year exceeds the aggregate amount of tax credits authorized to be
allocated under this section, such excess shall be treated as having
been applied for on the first day of the subsequent fiscal year.
However, credits may not be allocated from a fiscal year other
than the fiscal year in which the credit was originally applied for
or the immediately succeeding fiscal year.

(3) Notwithstanding the foregoing, the California Film
Commission shall set aside up to ten million dollars ($10,000,000)
of tax credits each fiscal year for independent films allocated in
accordance with rules and regulations developed pursuant to
subdivision (e).

(4) Any act that reduces the amount that may be allocated
pursuant to paragraph (1) constitutes a change in state taxes for
the purpose of increasing revenues within the meaning of Section
3 of Article XIII A of the California Constitution and may be passed
by not less than two-thirds of all Members elected to each of the
two houses of the Legislature.

(j) The California Film Commission shall have the authority to
allocate tax credits in accordance with this section and in
accordance with any regulations prescribed pursuant to subdivision
(e) upon adoption.