October 2001

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Guest Commentary 

Chris Micheli is an attorney and registered lobbyist for the Sacramento governmental relations firm of Carpenter Snodgrass & Associates (916) 447-2251, where he specializes in tax legislative affairs.

The 2001 California Legislative session, which concluded in the early morning hours of September 15, produced nominal tax law changes of significance.  In addition, there was no federal conformity bill, for the third year in a row, and an end-of-session targeted tax incentives package did not succeed.

State Budget Accord

As part of its 2001-02 fiscal year budget, effective July 1, California adopted a modest tax relief package that primarily benefits the agricultural sector of the economy and seniors.  In addition, the quarter-cent sales tax issue, which was the primary stumbling block in adopting this year’s budget agreement, was modified.

This package of tax law changes amounts to just over $100 million annually in targeted tax incentives, including five new sales/use tax exemptions.  These provisions are contained in AB 426 (Cardoza), which was signed into law by Governor Davis on August 7, 2001 as Chapter 156.

The following is an overview of AB 426:

Sales/Use Tax Reduction Trigger

The Sales and Use Tax Law provides for the levy of a state sales and use tax at a basic rate of 6 percent upon the gross receipts from the sale in California of, or the storage, use, or other consumption in California of, tangible personal property.  That law imposes, as a component of that basic rate, a state sales and use tax rate of 0.25 percent, but suspends the imposition of that rate for any single calendar year for which the amount in the Special Fund for Economic Uncertainties exceeds a specified amount in both the prior and current fiscal years, as determined and certified by the Director of Finance.[1]

AB 426 revises this formula and suspends the 0.25 percent rate[2] in any calendar year beginning on or after January 1, 2002, if the Director of Finance determines on or before the preceding November 1 that (1) the General Fund reserve is 3 percent of revenues excluding the revenues derived from the 0.25 percent sales and use tax rate, and (2) actual General Fund revenues for the period May 1 through September 30 equal or exceed the May Revision forecast prior to the November 1 determination[3].

The 0.25 percent reduction will be operative for each calendar year commencing on the next January 1 after the determination is made.  The test will be based on a one-year, rather than a two-year, period of time.  The intent of these changes in the formula is to make the reduced rate easier to achieve.  To implement this provision, AB 426 added CRTC Sections 6051.45 and 6201.45.

LPG Exemption

The Sales and Use Tax Law provides various exemptions from that tax, including an exemption for gas, electricity, and water, including steam and geothermal steam, brines, and heat, when delivered to consumers.

AB 426 additionally exempts liquefied petroleum gas (LPG), delivered to a qualified residence[4] by the seller, that is sold for household use in the qualified residence, as well as LPG that is purchased for use by a qualified person[5] to be used in producing and harvesting agricultural products.  The LPG must be delivered into a tank with a storage capacity for LPG that is equal to or greater than 30 gallons.

These are full exemptions from the entire sales/use tax and include any tax levied by a city, county, or city and county.  The exemptions are effective starting September 1, 2001.  To implement this provision, AB 426 amended CRTC Section 6353.  This provision is projected to result in $11 million annually in savings to taxpayers.

Agriculture Equipment Partial Exemption

AB 426 exempts farm equipment and machinery[6], and the parts thereof, purchased for use by a qualified person[7] to be used primarily in producing and harvesting agricultural products.

This is a partial exemption only from the state’s share of the sales/use tax (which is 4.75 percent during calendar year 2001) and does not apply to any tax levied by a city, county, or city and county.  This partial exemption is effective starting September 1, 2001.  To implement this provision, AB 426 added CRTC Section 6356.5.  This provision is projected to result in $21 million annually in savings to taxpayers.

Timber Harvest Equipment Partial Exemption

AB 426 exempts equipment and machinery designed primarily for off-road use in commercial timber harvesting operations, and the parts thereof, that is purchased for use by a qualified person[8] to be used primarily in harvesting timber.

The State Board of Equalization (BOE) may adopt emergency regulations to specify equipment and machinery exempted by this section, and may revise those regulations from time to time.

This is a partial exemption only from the state’s share of the sales/use tax and is effective on September 1, 2001.  To implement this provision, AB 426 added CRTC Section 6356.6.  This provision is projected to result in $3 million annually in savings to taxpayers.

Diesel Fuel Partial Exemption[9]

AB 426 exempts diesel fuel used in farming activities[10] and food processing[11].  The intent is to provide the exemption for those using diesel fuel in the production, harvest and transportation and delivery of agricultural products to market.

This is a partial exemption only from the state’s share of the sales/use tax and is effective on September 1, 2001.  To implement this provision, AB 426 added CRTC Section 6357.1.  This provision is projected to result in $19 million annually in savings to taxpayers.

Racehorse Breeding Stock Partial Exemption[12]

AB 426 exempts any racehorse breeding stock[13].

This is a partial exemption only from the state’s share of the sales/use tax and is effective September 1, 2001.  To implement this provision, AB 426 added CRTC Section 6358.5.  This provision is projected to result in $1 million annually in savings to taxpayers.

Seniors’ Assistance Programs

The Gonsalves-Deukmejian-Petris Senior Citizens Property Tax Assistance Law provides for payment of assistance by the Franchise Tax Board (FTB) to claimants, whether those claimants own or rent their residences, in accordance with schedules that reduce the amount of assistance provided as the amount of a claimant's household income increases along a specified scale.

AB 426 increases by 45 percent the adjusted household income figures that are used to calculate these assistance payments for the 2001 calendar year and each calendar year thereafter.  As a result, there is a permanent increase in the level of benefits provided for low-income seniors and disabled individuals.

This increased funding is contained in AB 440[14] (Cardoza), which appropriates $75 million in addition to the amount appropriated in the Budget Act of 2001 for tax relief for senior citizens’ property tax assistance and senior citizen renters’ tax assistance.  To implement this provision, AB 426 amends CRTC Sections 20543 and 20544.  This provision is projected to result in $75 million annually in savings to taxpayers.

FTB Fees

The State Budget, contained in SB 739 (Peace) [Chapter 106], made the following changes to the FTB's filing enforcement and collection fees effective July 1, 2001:

• The bank and corporation filing enforcement fee decreased from $197 to $73;

• The bank and corporation collection fee remains at $150;

• The personal income tax filing enforcement fee increased from $69 to $109; and

• The personal income tax collection fee remains at $101.

Other Legislation of Interest

The following provides an overview of the major tax legislation considered during the 2001 California Legislative Session:

Assembly Bills

AB 2xx (Corbett) [Failed Passage] – would have enacted a sliding scale windfall profits tax on power sellers.

AB 86xx (Florez) [Chapter 8] – exempts until January 1, 2007 from the excise tax on diesel fuel the water portion of a mixed diesel and water fuel blend provided that the fuel meets Air Resources Board standards.

AB 10 (Corbett) [Chapter 4] – conforms to federal law concerning the treatment of real estate investment trusts (REITs).

AB 44 (Wiggins) [Chapter 618] – provides for disaster tax relief for losses resulting from the September 2000 Napa earthquake to carryforward 100 percent of any excess losses for up to five taxable years on their personal income tax.  If any excess loss remains after that period, then the taxpayer can carryforward 50 percent of the amount remaining for up to 10 additional years.

AB 46 (Washington) [Chapter 587] – increases the authorization of the Technology Trade & Commerce Agency to designate a maximum number of enterprise zones in California from 39 to 42.  Under current law, all 39 zones have been designated and are operational.

AB 63 (Cedillo) [Chapter 915] – allows the FTB to provide city officials with certain, limited tax information concerning businesses reporting income within the city’s boundaries.

AB 81 (Migden) [2-year bill] – would require state assessment (rather than local assessment) of power plants.

AB 110 (Zettel) [Chapter 410] – prohibits the Franchise Tax Board from imposing the accuracy-related penalty on taxpayers who incorrectly claimed the teacher retention credit for the 2000 tax year only.

AB 121 (Leslie) [Vetoed] – would have increased the income limit for the Senior Citizens and Disabled Property Tax Postponement Program from $24,000 to $39,000 in 2002.  It also would have required that this amount be indexed for inflation.

AB 136 (Corbett) [Chapter 161] -- increases the value of the personal property tax exemption for hand tools from $20,000 to $50,000 beginning on or after January 1, 2002.

AB 169 (Wiggins) [Chapter 381] – standardizes county auditor property tax allocation guidelines.  It also deems correct property tax revenue allocations that were subject to pre-qualifying audits, and limits the amount of property tax reallocations or adjustments imposed on counties.

AB 180 (Cedillo) [Chapter 383] – makes permanent the sales/use tax exemption, which was set to expire on January 1, 2000, for sales of used clothing, household items, or other retail items by non-profit thrift stores operated to raise funds to provide specialized services to AIDS patients.

AB 184 (Liu) [Chapter 330] – clarifies the definition of seismic improvements that would be exempt from reassessment under the current property tax.

AB 185 (Wright) [Chapter 412] – makes technical, nonsubstantive changes to the Local Area Military Base Recovery Act (LAMBRA) program.

AB 232 (Campbell) [Chapter 699] – increases the rate of compensation paid to a personal representative and his/her attorney for the first $200,000 of an estate, and adds the proration of estate taxes or generation-skipping taxes to the list of appealable orders.

AB 238 (Pacheco) [Chapter 623] – allows a 100 percent net operating loss carryforward for farm losses caused by Pierce’s Disease, which is a pest infestation that affects grape growers.  The carryforward period is limited to 10 years.

AB 249 (Matthews) [Vetoed] – would have created a sales/use tax exemption for certain items used in the treatment of diabetes.  Current law already exempts items such as insulin and syringes.  The bill would have codified an existing BOE regulation.

AB 309 (Longville) [Chapter 429] – requires the prepayment of the sales tax on motor vehicle fuel and jet fuel to be paid at the first point of distribution.  Current law requires the distributor to collect a prepayment of this tax from the person to whom the fuel is distributed.

AB 402 (Papan) [Chapter 455] – establishes the Lupus Foundation of America, California Chapter Fund, and allows taxpayers to designate their own funds on their personal income tax returns to that Fund.  The check-off would become operative following the removal of another voluntary contribution fund from the tax form.

AB 440 (Cardoza) [Chapter 197] – appropriates $75 million to provide additional tax assistance under the Senior Citizens Property Tax and Renters’ Assistance Programs.  The FTB estimates there will be 172,000 claimants under the Property Tax Assistance Program and 542,000 claimants under the Renters’ Assistance Program in 2001-02.

AB 589 (Wesson) [Chapter 521] – replaces the State-County Property Tax Administration Loan Program, which is due to sunset in fiscal year 2001-02, with the five-year State-County Property Tax Administration Grant Program starting in 2002-03 and running through 2006-07.

AB 594 (Harman) [Chapter 86] – provides a uniform effective date for receipt of electronic payments of property taxes.  CRTC Section 2512.

AB 645 (Horton) [Chapter 238] – extends the final date for property owners to appeal their property tax assessment from September 15 to November 30 in most counties and provides all taxpayers with identical assessment appeal rights after a property tax audit.  It also standardizes the appeal rights for taxpayers who are subjected to property tax audits, allowing taxpayers subject to “nonmandatory” audits “to appeal the value of all property at the location of the business when the audit discloses property subject to additional tax.”

AB 646 (Horton) [Chapter 706] – expands the sales/use tax exemption for medical supplies to surgical clinics and outpatient clinics by expanding the definition of the term “health facility.”  Non-24-hour facilities are not included in the current definition.  The bill clears up the definition to conform to existing practice because vendors typically assume that surgical and other outpatient clinics are in the tax-exempt category.

AB 694 (Corbett) [2-year bill] – would enact a targeted tax incentives package and conformity to federal tax laws enacted in 1998, 1999 and 2000.  In addition, it would enact the following tax law provisions that had been contained in other legislation:  Building Rehabilitation Credit – AB 166 (Cedillo); Agricultural Products Donation Credit – AB 727 (Correa); Loaned Teacher Credit – AB 902 (Alquist/Wyland); Mortgage Insurance Deduction – AB 273 (Nakano); Adoption Expenses Credit – AB 665 (Bates); Computer Equipment Partial Exemption – AB 593 (Diaz); FTB Penalties – AB 1320 (Rod Pacheco); and, Acupuncturists’ Partial Exemption – AB 208 (Frommer).

AB 816 (Thomson) [Chapter 164] -- modifies the filing requirement threshold to allow the exclusion of gain on the sale of a principal residence.

AB 863 (Thomson) [Chapter 263] – authorizes the city of West Sacramento to place before the local electorate a 0.25 percent to 0.5 percent sales tax measure dedicated to general government purposes.

AB 866 (Diaz) [Chapter 650] – extends the sunset date from January 1, 2002 to January 1, 2007 of the two tax credits for employers who provide childcare to their employees.  Both are 30 percent credits for either establishing a childcare program, constructing a facility, or making contributions directly to a qualified childcare plan used by employees.

AB 898 (Leach) [Chapter 391] – permanently sets the amount of Limited Liability Company (LLC) annual fee.  It also amends the definition of total income to remove income reported to California for purposes of the LLC annual fee by another LLC.

AB 934 (Hertzberg) [2-year bill] – would provide for trial de novo for locally assessed property tax disputes.

AB 952 (Kelley) [Chapter 212] – allows an income tax deduction equal to the value of rebates for water and energy efficient clothes washers and plumbing fixtures used to service recycled water used in toilet fixtures.

AB 984 (Papan) [Chapter 592] – provides a sales/use tax exemption for the sale and leaseback of public passenger transportation vehicles when sold or leased by a transit authority, special district or governmental entity.  It also contains a January 1, 2004 sunset date and requires a report back to the Legislature on the effects of the measure.

AB 1115 (Committee on Rev & Tax) [Chapter 920] – clarifies the methodology to be used by nonresidents and part-year residents when computing the amount of California tax owed.  It also removes a portion of California law believed to be unconstitutional by allowing nonresidents and part-year residents to claim alimony deductions in the same manner that residents do.

AB 1116 (Committee on Rev & Tax) [Chapter 191] -- allows the FTB to adjust income tax withholding rates in the first year following the enactment of a new law and establishes a process for taxpayers to appeal adjustments to tax credit carryover amounts made by the FTB.

AB 1123 (Committee on Rev & Tax) [Chapter 251] – makes several changes to correct and update the tax and fee laws administered by the BOE.  These changes include correcting prior drafting errors, removing confusing references, repealing obsolete code sections, and updating laws to reflect court rulings and constitutional amendments.

AB 1228 (Leslie) [Vetoed] – would have allowed railroads to report their property holdings by county, rather than by individual tax rate area, for purposes of property taxation.  It would have also required county auditors to make one-time adjustments to local jurisdictions’ tax bases to incorporate revenue from railroad unitary property.

AB 1370 (Wiggins) [Chapter 266] – requires the FTB to conduct a study of senior tax filing forms and changes the tables in statute for the senior citizens’ property tax relief to conform to the 45 percent increase in benefits that was provided in AB 426.

AB 1457 (Keeley) [Chapter 772] – requires county assessors to revalue certain resident-owned mobile home parks, and provides that no escape or supplemental assessments may be levied for a pro rata change in ownership of a resident-owned mobile home park, if the assessor failed to timely discover this change.

Senate Bills

SB 1xx (Soto) [2-year bill] – would create a 100 percent windfall profits tax on power generators.

SB 17xx (Brulte) [Chapter 12] – allows an income tax credit for the purchase of certain solar energy systems for tax years between 2001 and 2003.  It is equal to the lesser of 15 percent of the purchase cost or $4.50 per rated watt of a photovoltaic or wind-driven system with a generating capacity of not more than 200 kilowatts.  The credit is reduced to half that amount for tax years 2004-05, and would sunset on January 1, 2006.  Qualifying systems would need to be certified by the Energy Commission, installed with a five-year warranty, and be required to be in service in California for at least one year.

SB 75xx (Ortiz) [Chapter 5] – allows a tax deduction for interest paid on a loan that is financed through a public utility company to purchase energy-efficient equipment for use in California residences.

SB 73 (Dunn) [Chapter 668] – increases the aggregate annual low-income housing credit amount from $50 million to $70 million, starting in 2001, and then adjusts that amount annually for inflation based on the federal Consumer Price Index.  It also directs the California Tax Credit Allocation Committee to examine the geographic apportionment methodology of the credit program, considering equitable distribution of tax credits, and to report back to the Legislature by June 30, 2002.

SB 198 (Chesbro) [Chapter 533] – extends through the 2012 lien date the property tax welfare exemption for open-space land owned by nonprofit organizations, if the land is used exclusively for the preservation of nature or for recreation and open to the general public, subject to reasonable restrictions.

SB 263 (Johnson) [Chapter 425] – requires the Secretary of State to provide persons registering limited liability partnerships (LLPs) with important information regarding tax liability.

SB 312 (Alpert) [Chapter 426] – codifies the BOE’s existing practice for claiming a tax refund on returned saleable tobacco products.

SB 366 (Haynes) [Chapter 669] – adds to the Taxpayer’s Bill of Rights Act that would prevent the FTB from “making a levy on the principal residence of any innocent investor if the basis for the levy were the underpayment of tax attributable to an abusive tax shelter.”  It also requires the FTB to return any proceeds from the sale of a principal residence on the owner’s request and to substantiate the owner’s status as an innocent partner.  The new law is intended to protect the homes of innocent taxpayers where the legal violation was the result of another partner’s fraudulent scheme.

SB 394 (Sher) [Chapter 343] – extends the California Internet Tax Freedom Act so that it is effective for more than one year only if the state Commission on Tax Policy in the New Economy is functioning and issues a report on reforming tax policy in light of the Internet and other changes to the economy.

SB 409 (Vincent) [Chapter 535] – extends the expiration date from January 1, 2002 to January 1, 2007 of the existing credit for qualified investments made by a taxpayer to a community development financial institution.  Qualified investments are deposits or loans that do not earn interest, equity investments, or an equity-like instrument that conforms to federal law.  The aggregate amount of qualified investments that can be made in a calendar year is capped at $10 million.  The maximum credit allowed each year is 20 percent.

SB 445 (Burton) [Chapter 670] – expands the Taxpayers’ Bill of Rights and states that the purpose of a proceeding between a taxpayer and the FTB or BOE is the correct determination of tax liability.  It also provides that documents to be acted upon at a meeting of the BOE or FTB Boards be distributed to interested parties without delay.

SB 539 (Local Government Committee) [Chapter 636] – conforms the notification and approval requirements for levying new or increased benefit assessments to requirements of Proposition 218.

SB 685 (Costa) [Chapter 474] – allows the voters of Fresno County to decide whether or not to continue the 0.5 percent transactions and use tax and the Fresno County Transportation Authority for a period of up to 30 years, which would require a two-thirds majority vote of the local electorate.

SB 882 (O’Connell) [Chapter 609] – provides a property tax exemption for a public park that is leased to a non-profit organization.

SB 896 (Poochigian) [Chapter 638] – conforms the state Emergency Telephone Users Surcharge Law to the federal Mobile Telecommunications Sourcing Act with respect to the taxation of mobile telecommunications services.

SB 1122 (Poochigian) [Chapter 673] – requires owners of real property in any local assessment district to notify prospective purchasers of any continuing bond assessments upon the property.

SB 1181 (Committee on Rev & Tax) [Chapter 407] – makes numerous technical changes to the property tax laws in order to ease administration.  Among the changes are to simplify the appeals process for private railroad car taxpayers, allow parent-child transfers of manufactured homes to qualify for the exemption from reassessment, and require any assessor or auditor who obtains confidential information from the BOE to keep that information confidential.

SB 1182 (Committee on Rev & Tax) [Chapter 744] – enacts clean-up language to measures from 2000 that grant taxpayers, in counties that have no special ordinance, additional time to file an assessment appeal.

SB 1183 (Committee on Rev & Tax) [Chapter 121] – modifies assessment practices of local property tax rolls.

SB 1184 (Committee on Rev & Tax) [Chapter 613] – enacts a number of provisions proposed by the California Assessors Association concerning property tax administration.  For example, the bill extends the period of time in which to file a claim for reassessment after a disaster, and extends the number of years subject to escape assessment when a penalty for willful concealment of tangible personal property is applied.

SB 1185 (Committee on Rev & Tax) [Chapter 543] – makes numerous technical changes to the CRTC, including the renaming of the Bank and Corporation Tax Law to the “Corporation Tax Law.”

SB 1186 (Chesbro) [Chapter 292] – revises the vote requirements for the existing city of Sebastopol transactions and use tax and authorizes the city to impose a sales tax for general revenue purposes with a majority public vote, if the measure is pre-approved by a two-thirds majority vote of the city council.

SB 1187 (Costa) [Chapter 285] – authorizes the Fresno County Board of Supervisors to place before the local electorate a 0.1 percent transactions and use tax for zoological purposes, if the measure is pre-approved by a two-thirds majority vote of the board of supervisors.

Conclusion

This year was relatively modest for tax legislation in California.  Despite the fact that there have been several years of significant efforts that resulted in conformity to a large number of federal tax law provisions, this is the third year in a row that the omnibus conformity measure languished.  While there will be a renewed effort to enact a conformity bill when the California Legislature reconvenes on January 7, 2002, the lack of conformity is becoming more burdensome to taxpayers.

[1] See California Revenue & Taxation Code (CRTC) Sections 6051.4 and 6201.4.
[2] See CRTC Sections 6051.3 and 6201.3.
[3] This is an additional requirement that was not contained in the original formula.
[4] “Qualified residence” means a primary residence, not serviced by gas mains and pipes.
[5] “Qualified person” means any person engaged in a line of business described in Codes 0111 to 0291, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition, and any other person that assists that person in the lines of business described in this paragraph in producing and harvesting agricultural products.
[6] “Farm equipment and machinery” means implements of husbandry, as defined in [CRTC] Section 411.
[7] “Qualified person” means any person engaged in a line of business described in Codes 0111 to 0291, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition, and any other person that uses farm equipment and machinery to assist this person in the lines of business described in this paragraph in producing and harvesting agricultural products.
[8] “Qualified person” means any person engaged in commercial timber harvesting.
[9] When this provision passed the Assembly, it did not apply to food processing activities and it contained a one-year sunset clause.
[10] “Farming activities” has the same meaning as “farming business” as set forth in Section 263A of the Internal Revenue Code.  “Farming activities” also includes the transportation and delivery of farm products to the marketplace.
[11] The new statute does not define this term.
[12] When this provision passed the Assembly, it applied only to thoroughbred breeding stock.
[13] “Racehorse breeding stock” means a horse that is capable of reproduction and for which the purchaser states that it is the purchaser’s sole intent to use the horse for breeding purposes.
[14] This bill was signed into law on August 13, 2001 as Chapter 197.