BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 154| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 154 Author: Ting (D) Amended: 6/30/15 in Senate Vote: 27 - Urgency SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/8/15 AYES: Hertzberg, Beall, Hernandez, Lara, Moorlach, Pavley NO VOTE RECORDED: Nguyen SENATE APPROPRIATIONS COMMITTEE: 5-0, 8/17/15 AYES: Lara, Beall, Hill, Leyva, Mendoza NO VOTE RECORDED: Bates, Nielsen ASSEMBLY FLOOR: 75-0, 6/3/15 - See last page for vote SUBJECT: Taxation: federal conformity SOURCE: Author DIGEST: This bill conforms state tax law to relevant sections of the Internal Revenue Code as of January 1, 2015, and makes changes to the large corporate understatement penalty. ANALYSIS: Existing law: 1)Does not automatically conform to changes made by Congress to the Internal Revenue Code except for changes to pension and retirement programs; instead, the Legislature must affirmatively conform state law to federal to ensure consistent treatment for the same items. AB 154 Page 2 2)Conforms to the Internal Revenue Code as of January 1, 2009. 3)Applies the Large Corporate Understatement Penalty (LCUP) on corporation taxpayers of 20% of any understatement on an original return that exceeds $1 million. 4)Provides that LCUP applies to the total amount of the understatement for an entire combined report of corporations, and excludes any understatement attributable to a change in law under specified circumstances or when the taxpayer relied on written advice from the Franchise Tax Board (FTB). This bill: 1)Conforms appropriate sections of state law to the Internal Revenue Code as of January 1, 2015, which includes, among others: a) Federal net operating loss (NOL) rules that allow corporations expecting an NOL carryback to extend the time for payment of taxes for the preceding taxable year, b) The exclusion from gross income for the qualified military base realignment and closure fringe benefit enacted by the Worker, Homeowner, and Business Assistance Act of 2009, c) The disclosure of information with respect to foreign financial assets in the Hiring Incentives to Restore Employment Act, d) Not treating certain swaps as Section 1256 contracts under the Dodd-Frank Wall Street Reform and Consumer Protection Act, e) The special rule with respect to certain redemptions by foreign subsidiaries in the State Fiscal Relief and Other Provisions Revenue Offsets, f) The modification of the definition of "control" for purposes of Section 249 in the FAA Modernization and Reform Act of 2012, AB 154 Page 3 g) Treatment for transfers of excess pension assets in the Moving Ahead for Progress in the 21st Century Act, h) Modifications to acquisitions, dispositions, and aggregation of expenditures in the research and development credit in the American Taxpayer Relief Act of 2012, i) Treatment of Indian general welfare benefits in the Tribal General Welfare Act of 2014, j) Various technical changes in the Tax Technical Corrections Act of 2014, aa) The Investment Direction Rule for 529 Education Savings accounts in the Achieving a Better Life Experience Act,and bb) In the Small Business Jobs Act of 2010, the limitation on penalty for failure to disclose reportable transactions based on resulting tax benefits, removal of cell phones and similar technology from listed property, increase in information return penalties, and special rules for annuities received from only a portion of a contract. 2)Enacts modified conformity for other state tax law, including: a) A lower state excise tax of 12.5% on nonqualified Archer Medical Savings Account distribution, instead of 20% at federal, and b) Disconnection of inflation adjustments to penalty amounts. 3)Repeals sections added by AB 36 (Perea, Chapter 17, Statutes of 2010), AB 242 (Committee on Revenue and Taxation, Chapter 727, Statutes of 2011), and AB 1423 (Perea, Chapter 490, Statutes of 2011), as the January 1, 2015 general conformity date incorporates changes made by Congress made subsequent to the enactment of those bills. 4)Makes legislative findings and declarations stating that that SB 401 (Wolk, Chapter 14, Statutes of 2010) is valid. 5)Changes the LCUP to: AB 154 Page 4 a) Provide that any amount of tax reflecting a proper election under Internal Revenue Code §338 doesn't count towards the understatement amount for purposes of LCUP. b) States that LCUP doesn't 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. Comments AB 154 is the state's first omnibus tax conformity measure in five years, and would move ahead the state's conformity date by six years, picking up changes that will more closely align state and federal personal income and corporation tax statutes, easing compliance headaches for taxpayers as well as administrative difficulties for FTB. However, the measure also contains changes to the state's Large Corporate Understatement Penalty, which only applies to large corporate taxpayers that significantly understate tax on their original returns, and doesn't have a federal counterpart. While the measure's changes to the penalty simply account for changes where federal law affords taxpayers time to choose between two transaction structures, or have their tax due changed by decisions made by either IRS or FTB, putting the two together is an odd match. SB 401 was the last tax conformity bill the Legislature enacted by majority vote, because Proposition 26 (2010) changed the standard in the California Constitution that Legislative Counsel uses to determine whether a legislative bill is a tax increase, and therefore must be approved by 2/3 vote of each house of the Legislature. Instead of "changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in the method of computation," Proposition 26 amended Section 3 of Article XIIIA of the California Constitution to provide that the 2/3 vote applied to any "change in state statute that leads any taxpayer to pay a higher tax." As such, measures like SB 401 that contained some provisions that increased taxes, and others that decreased them, but resulted in a net revenue loss, were majority vote bills before Proposition 26, but 2/3 vote bills today. Additionally, the initiative provided that the AB 154 Page 5 Legislature must reenact any bill that was enacted one year before its enactment by majority vote or else such measure would be "void," which captured two such bills, the gas tax swap (ABx8 6, Assembly Committee on Budget, 2010) and SB 401. While the Legislature subsequently reauthorized the gas tax swap by 2/3 vote, it did not do the same for SB 401. While no one has yet challenged the bill in court, should the measure be invalidated, an adverse decision could theoretically change the calculation of tax for every tax return filed in the state for the last five years. AB 154 restates SB 401's validity in the hopes of eliminating any uncertainty regarding the legality of its provisions. Additionally, the measure doesn't conform to some changes in federal tax law, including: 1)The higher threshold of 10% of adjusted gross income to claim unreimbursed medical expense deductions, maintaining California current 7.5% threshold. 2)Deferral and ratable inclusion of income arising from business indebtedness discharged by reacquisition of debt. 3)Requirement for certain tax preparers to file returns electronically. 4)Increase in penalty for failing to file partnership or S-Corporation returns 5)Exempting limitation on net unrealized built-in losses resulting from bank reorganizations. 6)Expansion of work opportunity tax credit, which would have reduced the value of enterprise zone and other geographically targeted economic development area credits. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No According to Senate Appropriations Committee, 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. AB 154 Page 6 SUPPORT: (Verified8/18/15) California Asian Chamber of Commerce California Bankers Association California Chamber of Commerce California Manufacturers and Technology Association California Society of Enrolled Agents California Taxpayers Association Computing Technology Industry Association Hewlett Packard Company National Federation of Independent Business Spidell Publishing, Inc. OPPOSITION: (Verified8/18/15) None received According to the author, "AB 154 is a vital measure conforming state tax law to federal tax, easing tax preparation for taxpayers and tax preparers alike. This measure is intended to narrow differences between state and federal law and provide relief to members of the United States Armed Forces, businesses, and individual taxpayers." ASSEMBLY FLOOR: 75-0, 6/3/15 AYES: Achadjian, Alejo, Baker, Bigelow, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins NO VOTE RECORDED: Travis Allen, Brough, Chang, Dahle, Harper AB 154 Page 7 Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119 8/19/15 20:50:27 **** END ****