BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 560 HEARING: 1/8/14
AUTHOR: Anderson FISCAL: Yes
VERSION: 1/6/14 TAX LEVY: Yes
CONSULTANT: Grinnell
DISASTER RELIEF
Enacts exemptions and exclusions for firms that currently
lack taxable nexus in California, but gain it when
providing disaster relief in the state.
Background and Existing Law
The United States Constitution grants the power to Congress
to "regulate Commerce with foreign nations, and among the
several states, and with the Indian Tribes;" a provision
widely known as the Commerce Clause (Article I, Section 8).
The United States Supreme Court established a doctrine,
known as the "dormant" or "negative" Commerce Clause, which
bars states from regulating or taxing interstate commerce.
States generally determine their own standards for taxing
a multistate or multinational corporation's activity
consistent with this doctrine.
One important standard for states to determine whether and
when a state can assert that a multistate or multinational
taxpayer has taxable nexus in a state, thereby compelling
the taxpayer to file returns and pay taxes due based on his
or her economic activity in that state. Generally, states
apply different standards to determine whether a taxpayer
has nexus for sales and use tax than for income tax. A
firm can have income tax nexus in a state, but not sales
tax nexus in that same state because of these varying
standards.
I. Income Taxes. In California, taxpayers have income tax
nexus if they are "doing business in the state," which
means that the taxpayer actively engaged in any transaction
for the purpose of financial or pecuniary gain or profit in
California, or is organizationally or commercially housed
in the state. In 2009, the Legislature added specific
measurements on top of this standard (ABx3 15
SB 560 - 1/6/13 -- Page 2
(Kerkorian)/SBx3 15 (Calderon), 2009). Currently, a
taxpayer has taxable nexus in the state if he or she has
amounts of any of the following that exceed either $509,500
(an amount set at $500,000 in 2009 and since indexed for
inflation), or 25% of his or her total in any taxable year:
Sales in the state,
Value of personal property in the state,
Compensation payments made in the state.
When a taxpayer has nexus, he or she must comply with the
state's tax law, including filing returns in a timely
fashion, even if he or she derived no income from the
state.
II. Sales and Use Taxes. California law imposes the Sales
and Use tax, currently 7.5%, plus any locally adopted sales
taxes (up to 2%), on the gross receipts when transferring
tangible personal property in this state. Many items are
fully exempted from the sales and use tax in this state
(prescription drugs, food, poultry litter) but only a
handful are partially exempted from the sales tax at the
rate of 5.5%; specifically: farm equipment and machinery;
diesel fuel used for farming and food processing;
teleproduction and postproduction equipment; timber
harvesting equipment and machinery; and racehorse breeding
stock.
III. Disasters. Natural disasters such as flood, fire,
drought, and hurricanes sever power and telecommunication
lines, destroy cell towers, and damage water and sewer
pipelines. State and local agencies may contract with
firms to help restore damaged infrastructure. However,
firms that previously did not have a taxable nexus in a
state will likely gain it if they deploy personnel and
purchase items for use in disaster relief. In response,
the National Conference of State Legislatures designed a
model statute to exclude the income gained by individuals
and businesses that currently lack nexus, but gain it when
they come into a state to help with a disaster. The author
wants to enact that model stature in California.
Proposed Law
Senate Bill 560 enacts exclusions against the income tax,
and exemptions from the sales and use tax for purchasing
SB 560 - 1/6/13 -- Page 3
property, for taxpayers that currently do not have nexus in
California who perform disaster-related work in the state,
as defined. The disaster must be a state of emergency
declared by the Governor or the President. Exclusions and
exemptions apply only during the disaster period, which
must begin within ten days of the Governor or President's
proclamation , and lasts up to 60 days after the Governor
or President declares the disaster terminated.
Additionally, the exclusion and exemption apply only when a
state or local agency, or a registered business, requests
the taxpayer to perform the work.
The income tax exclusion applies to taxable years beginning
on or after January 1, 2015. The exclusion applies to
limited partnerships (LPs), limited liability partnerships
(LLPs), limited liability companies (LLCs), and
corporations.
The sales and use tax exemption applies to purchases made
on or after January 1, 2015, and to any property used to
repairing, installing, building, or rendering services that
relate to infrastructure damaged, impaired, or destroyed by
the disaster. The taxpayer will be exempt from both state
and local shares of the sales and use tax. Additionally,
the taxpayer must furnish the retailer with an exemption
certificate, and the property must be used primarily, or
more than 50%, in disaster or emergency related work, for
the exemption to apply. The measure also makes legislative
findings and declarations supporting its purpose.
State Revenue Impact
According to the Franchise Tax Board (FTB), SB 560's
revenue losses depend on the number, type, and magnitude of
declared state disasters or emergencies, but estimate that
for every $100 million in payments made to taxpayers
affected by the bill, the bill results in a state revenue
loss of $1.2 million.
The Board of Equalization estimates annual revenue losses
resulting from SB 560 of between $968,500 and $4.5 million,
because of the unknown number, type, and magnitude of
future disasters.
Both estimates were based on the 4/1/13 version of the
SB 560 - 1/6/13 -- Page 4
measure; however, 1/6/14 amendments are unlikely to change
the above estimates significantly.
Comments
1. Purpose of the bill . According to the author, "The
most important thing in a disaster is the response to the
human needs. Senate Bill 560 will ensure that taxes don't
take precedence over the lives of its citizens. Whether
its wildfire, earthquake, or another declared emergency, we
can make sure restoration and repair of damage to lives and
property is encouraged, not penalized. This bill is a way
to incentivize doing good in our communities and easing the
burdens on those who in the darkest times are easing ours."
2. Trade-offs . For firms called in to provide disaster
relief that currently don't have taxable nexus in
California, complying with the state's tax laws can be a
significant burden. Locating forms, calculating tax, and
filing returns can be time-consuming. Paying preparers or
purchasing tax software can be costly. However, millions
of California taxpayers effectively comply with the state's
tax laws each day, so why should the Legislature exclude
income for out-of-state firms that's included for its
California counterparts? In reducing a compliance burden,
the measure could be granting a competitive advantage to
out-of-state firms. Additionally, the measure will result
in revenue losses to the state, as firms that would have
had to pay tax will not under the bill, that will have to
be replaced by reducing public services or increasing other
taxes. As such, the Committee may wish to consider whether
the foregone revenue resulting from SB 560's helpful change
is worth the tradeoff of cuts in spending or taxes on other
activities that it necessitates.
3. Evidence ? SB 560 presumes that complying with the
state's tax laws is a significant enough burden to deter
service providers from entering California to help during a
disaster. However, what evidence indicates that this
burden reduces disaster response readiness by limiting the
number of firms willing to respond? Exempting and
excluding one set of taxpayers from tax should be based on
experience and evidence. The Committee may wish to
consider whether sufficient cause exists to necessitate SB
560.
SB 560 - 1/6/13 -- Page 5
4. Do's and don'ts . SB 560 takes on a difficult, thorny
corner of tax law when excluding income and exempting
purchases from tax when a firm enters a state to provide
disaster relief services. As such, the measure focuses on
excluding the tax on a firm entering the state because of
the disaster. However, SB 560 leaves unchanged three other
effects of tax law that could also apply to the firm and
its employees during the same disaster, such as:
1. The taxpayer's obligation to file returns in
California. SB 560 exempts income, but doesn't amend
nexus requirements.
2. Any employee of a firm affected by SB 560 would
have to file a return in California, and include any
California-source income, to the extent that he or she
earned income in California during the disaster.
3. Any owner of an LLC, LLP, or LP could not exclude
the income from his or her return, as the measure
doesn't explicitly exclude his or her income which is
subject to tax as owner of the pass-through. Instead,
the bill wipes out the income for these entities,
which generally aren't subject to tax.
5. Waiting for superman . The solution contemplated in SB
560 has also drawn the attention of Congress, as firms that
operate across state lines seek clarity and relief from tax
compliance. Congress is currently considering the Mobile
Workforce State Income Tax Simplification Act of 2013,
which prohibits the wages or other remuneration earned by
an employee who performs employment duties in more than one
state from being subject to income tax in any state other
than the state of the employee's residence, and the state
within which the employee is present and performing
employment duties for more than 30 days during the calendar
year. The Act also exempts employers from withholding of
tax and information reporting requirements for employees
not subject to income tax.
6. Suggested amendments : The Committee may wish to
consider the following technical amendments.
The disaster period currently ends 60 days after
the date when the Governor, Legislature (by joint
resolution), or the President declares the end of the
disaster. However, the Governor and the Legislature
don't proclaim ends of disasters, so the measure's tax
exemption and exclusion could last indefinitely. The
SB 560 - 1/6/13 -- Page 6
measure should be amended to provide a 60 day period,
and allow the Governor or his or her designee to
designate a shorter or longer period based on the
amount and kind of disaster relief work caused by that
specific disaster.
Substitute "qualified person" with "qualified
taxpayer" to more properly reflect terminology used in
the Personal Income and Corporation Tax Laws.
Delete references that make the measure's exclusion
and exemption contingent "upon request registered
business." First, verifying such requests would be
difficult and costly, and likely subject to dispute.
Second, California businesses don't "register," they
incorporate with the Secretary of State or are
taxpayers as defined by the Personal Income and
Corporation Tax Laws.
Support and Opposition (1/6/15)
Support : Brian Dempsey, Fire Chief, Seaside, CA, Frank
Parra, Director of Emergency Services, National City Fire
Department, Big Bear Valley Community Response Team, Julian
Cuyamaca Resource Center, Kern River Valley Community
Response Team,
Opposition : Unknown.