BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 154 (Ting) - Taxation: federal conformity.
          
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          |Version: June 30, 2015          |Policy Vote: GOV. & F. 6 - 0    |
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          |Urgency: Yes                    |Mandate: No                     |
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          |Hearing Date: August 17, 2015   |Consultant: Robert Ingenito     |
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          This bill does not meet the criteria for referral to the  
          Suspense File.







          Bill  
          Summary: AB 154 would (1) conform state tax law to federal tax  
          law as of January 1, 2015, and (2) modify the large corporate  
          understatement penalty, as specified.


          Fiscal  
          Impact: The Franchise Tax Board (FTB) estimates that the bill's  
          cumulative revenue impact from all its provision would be  
          General Fund increases of $3 million in 2015-16, $7.8 million in  
          2016-17, and $14 million in 2017-18. The bill would not impact  
          FTB's administration costs.









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          Background:  When changes are made to the federal income tax law,  
          California does not automatically adopt such provisions.   
          Instead, state legislation is needed to conform to most of those  
          changes.  Conformity legislation is introduced either as  
          individual tax bills to conform to specific federal changes or  
          as one omnibus bill to conform to the federal law as of a  
          certain date with specified exceptions, a so-called "conformity"  
          bill.  
          SB 401, the latest California-federal conformity bill, was  
          enacted in 2010, and businesses, tax practitioners and state tax  
          agencies have since been advocating for a new bill to conform  
          state tax laws to ever-changing federal tax laws.  Businesses  
          generally prefer conformity to federal tax laws because it  
          reduces their state tax compliance costs.  The tax practitioners  
          have argued that failure to conform to federal law in some areas  
          may lead to improper tax reporting to California and extra costs  
          to the taxpayers. Finally, conformity legislation is also  
          important to state agencies.  Conformity eases the burden, and  
          reduces the costs, of tax administration because the state may  
          rely on federal audits, federal case law, and regulations.   


          Corporation taxpayers are subject to a penalty equal to 20  
          percent of any understatement that exceeds $1 million of the tax  
          shown on an original return (or amended return filed on or  
          before the extended due date of the original return) for taxable  
          years beginning on or after January 1, 2003 (SBx1 28, Committee  
          on Budget, 2008).  The measure also applies to understatements  
          on amended returns filed on or before May 31, 2009 for taxable  
          years beginning before January 1, 2008.  The penalty applies to  
          the total amount of the understatement for an entire combined  
          report, and excludes any understatement attributable to a change  
          in law under specified circumstances or when the taxpayer relied  
          on written advice from FTB.  The penalty applies in addition to  
          any other penalty, and is strict liability, meaning that the  
          taxpayer has no appeal rights.  In 2010, the Legislature  
          modified the penalty for taxable years for the 2011 taxable year  
          and thereafter to apply only to understatements that exceed the  
          greater of $1 million, or 20 percent.




          Proposed Law:  








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           This bill would conform relevant sections of the Revenue and  
          Taxation Code to the Internal Revenue Code as of January 1,  
          2015, with specified modifications. Additionally, it would make  
          the following changes to the Large Corporate Understatement  
          Penalty (LCUP):
                 Provide that any amount of tax reflecting a proper 338  
               election doesn't count towards the understatement amount  
               for purposes of the penalty, which can generally be made up  
               to one year after an acquisition, are treated as shown on  
               an original return.


                 State that no penalty shall apply when FTB imposes an  
               alternative apportionment formula under Revenue and  
               Taxation Code 25137, or as a result of a change in the  
               taxpayer's federal accounting method where the due date of  
               the return is before the Secretary of the Treasury's  
               determination to change the accounting method.




          Staff  
          Comments:  FTB's aggregate revenue estimate described above can  
          be distilled into the following three components:
                 General Conformity. FTB estimates a revenue gain of  
               $15.2 million in 2015-16, $16 million in 2016-17, and $17.2  
               million in 2017-18.


                 Modified Net Operating Loss Conformity. FTB estimates a  
               revenue loss of $12 million in 2015-16, $8 million in  
               2016-17, and $3 million in 2017-18.


                 LCUP. FTB estimates a revenue loss of $200,000 across  
               all three fiscal years. 




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