State Legislative - Week of May 28, 2010

 

Budget Update:

 

Senate Budget Hearing on Corporate Taxes: COP and DBS Tax.  This week, the Senate Budget Subcommittee dealing with tax issues discussed recent tax policy changes, including Net Operating Losses (NOLs), the Elective Single Sales Factor (SSF), and Unitary Group Credit Sharing tax credits.  Given the state’s fiscal condition and projected multi-year deficit, the Senate budget committee staff recommended that the budget subcommittee delay the implementation of these tax changes for two years.  In addition, budget staff recommended that the committee make the elective SSF policy mandatory for all businesses.

 

Senator Alex Padilla (D-Pacoima) stated that the 2009 legislation (SBx3 15) that authorized the elective SSF included other tax policy changes that negatively impacted other industries, including specifically the cable industry.  In response to the Senator’s statement, CCTA provided testimony and explained that 2009 legislation authorizing the elective SSF also eliminates, as of January 1, 2011, a statute that defines how income is apportioned for companies that do business in multiple states.  California, like many states, has historically sourced sales of intangible products and services based on the taxpayer’s “costs-of-performance.”  The testimony included a request that if the committee decides to delay the implementation of the SSF for two years, that they also  delay the elimination of the “cost of performance” methodology for apportioning intangibles for multistate businesses

 

Senator Padilla also commented that the cable industry is also at a competitive disadvantage with the direct broadcast satellite (DBS) industry because the DBS industry did not pay the same taxes and fees that are paid by cable.  He added that this inequity resulted in a significant loss of resources to local government.  The subcommittee chair, Senator Denise Ducheny (D-San Diego), asked the Legislative Analyst’s Office (LAO) to prepare a paper for the sub-committee on both the COP and the DBS tax.   Senator Ducheny plans on discussing these two items during upcoming budget conference committee negotiations with the Assembly.

 

In addition to delaying implementation of corporate tax credits, the Senate budget subcommittee also extended the temporary 0.25 percent personal income tax increase that was adopted for 2009; reduced the dependent care credit from $309 to $99; increased the alcohol excise tax by the rate of inflation since 1991, and extended last year’s temporary vehicle license fee (car tax) for another two years.  The budget committee also adopted several changes at the State Board of Equalization and the Franchise Tax Board to make them more aggressive in collecting taxes.

 

Legislative Analyst Recommends Mandatory Single Sales Factor.  On May 26th, the Office of the Legislative Analyst released a report, "Reconsidering the Optional Single Sales Factor," that recommends the state replace the elective single sales factor with a mandatory single sales factor for apportionment of corporate taxes.

 

As noted above, the February 2009 state budget agreement authorizes multistate businesses, starting in 2011, to apportion their income taxes only on their California sales (SSF) which is intended to encourage firms to produce in California.  In contrast, the current formula for calculating business income tax considers the location of firms' sales, property and payroll.

 

The Legislative Analyst's report includes three findings:

 

• A formula with a higher weight on sales and lower weights on property and payroll promotes job growth to some extent.
• With most states' formulas now based only on sales, the old formula that used property and payroll could put some California producers at a competitive disadvantage.
• Allowing firms to choose their formula every year arbitrarily favors some firms over others.
The report recommends that “the state require all firms to use the single sales factor, which would help the state's competitiveness while limiting the impact on the budget."

 

Assembly Release Budget Plan.  Speaker John Perez (D-Los Angeles) and Assembly Budget Committee Chair Bob Blumenfield (D-Van Nuys) held a press conference to release (in concept) their Assembly Democratic budget proposal.  Speaker Perez stated that this budget will protect and create 465,000 private sector jobs while protecting funding for schools, public safety, and a basic safety net.  This budget rejects the Governor’s $3 billion cut in education, and maintains the state’s welfare program.

 

Like the Senate budget subcommittee, this budget would also delay the implementations of the 2009 changes in corporate tax policy (SSF, NOLs, Unitary Group Credit Sharing).  The Assembly Democratic budget includes a 10 percent oil severance tax that would generate approximately $900 million annually.  The plan also includes significant borrowing: $8.7 billion.

 

Budget negotiations between the Senate and Assembly will begin soon.

Legislative Update

 

Mandatory Single Sales Factor (SSF) Apportionment.  Assembly Bill 1935 (De Leon) would require all businesses in California, beginning in 2011, to apportion their income pursuant to a single sales factor methodology.  On Thursday, May 28th, the measure was held (killed) in the Assembly Appropriations Committee.

Net Operating Losses.  Assembly Bill 1936 (De Leon) would repeal provisions passed in the 2008-09 budget that allow net operating losses (NOLs) incurred by businesses beginning in 2011 to be carried back to offset income during the two prior years under the personal income tax and corporate tax.  On Thursday, May 28th, the measure was held (killed) in the Assembly Appropriations Committee.

 

Cable Television Industry Procurement Practices.  Assembly Bill 2758 (Bradford) would require any cable television corporation with annual revenues exceeding $25 million to comply with rules developed by the California Public Utilities Commission (CPUC) to procure or contract for 15 - 20 percent of products and services with women, minority and disable veterans businesses and to submit an annual report  to the CPUC.  The CPUC currently imposes the same requirement on electrical, gas, water, and telephone corporations.  This bill would also expand the utility purchasing requirement to include renewable energy, wireless communications, broadband, smart grid, and rail projects.  AB 2758 was amended to remove the cable industry from the bill.  With that amendment, the measure was approved by the Assembly Appropriations Committee and now moves to the Assembly Floor for a vote next week.

 

Property Spilt Roll Tax.  Assembly Bill 2492 would require a “change-of-ownership” reassessment of property taxes when a hundred percent of the ownership interest in a corporation, limited liability company, partnership, or other legal entity holding the property is sold or transferred in a single transaction or in multiple transactions occurring over a period of up to three years.  On Thursday, May 28th, the measure was held (killed) in the Assembly Appropriations Committee.

 

Sex offenders: registration of Internet Accounts and Identifiers.  Assembly Bill 1850 (Galgiani) would expand sex offender registration and reporting requirement to include Internet accounts and identifiers within the list of information that a sex offender must disclose when registering.  In addition, this bill would require as a condition of probation or parole that a sex offender be prohibited from using the internet to access pornographic material, to access a social networking Internet web site, or to communicate with other individuals or groups for the purpose of promoting sexual relations with minors.  AB 1850 was held (killed) in the Assembly Appropriations Committee.

 

Social Networking Prohibition for Registered Sex Offenders.  Similar to AB 1850, Assembly Bill 2208 (Torres) would add e-mail addresses and Internet identifiers to the list of information that must be disclosed to law enforcement agencies by persons required to register as a sex offender.  AB 2208 would also prohibit specified registered sex offenders on probation or parole from using any Internet social networking Web site, unless authorized by the probation or parole supervisors.  The bill would authorize the Department of Justice to release the e-mail address to an Internet social networking Web sites to conduct searches and to purge the e-mail address of the sex offender from their Web site.  AB 2208 was held (killed) in the Assembly Appropriations Committee.