David R. Doerr, principal contributor
Ronald W. Roach, editor
After adding a tax rate increase to the measure, the Senate Revenue and Taxation Committee last Wednesday unanimously approved SB 5 (Lockyer) that would conform California tax law to recent federal changes affecting Subchapter S corporations.
Responding to an estimate by the Franchise Tax Board that Subchapter S conformity would reduce revenue by $18 million in 1997-98, the committee amended the bill to increase the special corporate Subchapter S tax rate from 1.5 percent to 1.6 percent for 1997. Using a variable rate formula to keep the bill revenue neutral, according to committee staff, the rate would be 1.65 percent for 1998; 1.7 percent for 1999, and 1.6 percent for 2000 and thereafter.
Senate President Pro Tem Bill Lockyer said he supports a revenue-neutral bill but will also be looking at other possibilities to bring the bill into balance. Senator Quentin Kopp noted the governor had included $5 million in the budget for a Subchapter S conformity bill.
The business community was looking for a fast track for the bill because corporations wishing to avail themselves of the advantages of new federal law will disqualify themselves from California Sub S status under current law. However, based on comments made at the hearing, the bill may get bogged down with other conformity items and perhaps with budget negotiations. Mr. Lockyer said, "It's early in the process. This is the opening of the conformity bill discussion. I don't know when it will end up."
Tim Hayes, representing Deloitte and Touche, spoke in favor of the bill and suggested minor amendments to correct some problems. Fred Main, representing the California Chamber of Commerce, expressed support for conformity but suggested other revenue-neutral components be added instead of a tax-rate increase.
Steve Baker, representing the California Society of Enrolled Agents, and Gina Rodriquez, representing Spidell Publishing, also spoke in support. Ms. Rodriquez said a poll of tax professionals indicated that this is the number one conformity issue.
Lenny Goldberg, representing the California Tax Reform Association, denounced the bill. He said he did not relish opposing Senator Lockyer's bill as the first major legislation to be heard this year, but argued that too much of the benefits go to a few large Subchapter S corporations.
In other action, the committee approved SB 78 (Thompson), extending the income tax checkoff for contributing to the Rare and Endangered Species Fund through 2001. The committee added amendments requiring all checkoffs to generate at least $250,000 to remain on the tax form.
A revised fixture regulation, generally classifying automatic teller machines (ATM) as personal property, was approved 4-1 by the State Board of Equalization last Tuesday.
Property Tax Rule 122.5 was amended to state: "An ATM is personal property and shall be classified as such if it can be removed or relocated for use at another location without material damage to the ATM or the realty with which it is being used."
The rule also provides that an ATM installed in a structure primarily built for the ATM (such as a kiosk) is a fixture.
A fixture is assessed as real property. Financial institutions pay a higher franchise tax (called the bank tax) to the state in lieu of paying property tax on personal property.
Yolo County Assessor Alan Flory, representing the County Assessors Association, spoke in opposition. He said an ATM is more of a fixture than personal property and gave examples of various types of fixtures. He argued that the ATM in Raley's Supermarket in Woodland is a fixture.
William Leonard of the Los Angeles County Assessor's Office, also speaking in opposition, argued that ATMs were permanently affixed to realty and are fixtures. He said the rule would result in a $1.8 million revenue loss to the county.
James Clark, speaking for the banking industry, said the rule correctly treats ATMs similar to computers. He cited the 1989 Crocker case for support of the position. In that case, the state Supreme Court ruled computers were not fixtures, saying modern data processing equipment would not be considered a permanent part of a building. The decision set a test of intent of how property is expected to be used as a way of determining proper classification (see Caltaxletter of December 18, 1989).
David McElroy of Bank of America testified that the bank relocates 200 machines a year, that the ATMs are not bolted to the floor and can be installed in a very short period of time.
Voting for the rule change were Chair Ernie Dronenburg, Member Dean Andal, Rex Halverson (representing Controller Kathleen Connell), and Acting Member John Chiang. Member Johan Klehs voted no.
In other BOE developments:
This is an upward change from the past two years where the CCPI grew less than 2 percent a year.
Staff presented a draft proposal excluding the three items. Senate Revenue and Taxation Committee Consultant Anne Maitland agreed with staff and said the proposed wording of the new statute was made more restrictive by amendments.
Witnesses from the business and agricultural community, including veterinarians, said that vitamins, growth hormones and insecticides improve animal health and are property included pursuant to the language in the bill.
They also pointed out that (1) definition of drugs and medicines used by the California Department of Food and Agriculture included vitamins and growth hormones, and (2) BOE Annotation 110.0650 states that certain products are exempt when incorporated into animal life feed, and the exemption applies "regardless of whether the substance is used to promote growth or to prevent disease."
The committee decided to:
BOE Member Dean Andal unsuccessfully argued that the board should hear all requests for reimbursement. He was supported by BOE Acting Member John Chiang who said we was willing to try the procedure in a "pilot program" basis.
Staff and other board members argued that unlimited hearings would lead to a flood of appeals and be costly to administer. Mr. Andal questioned a staff paper which he said was predicated on the assumption that 100 percent of prevailing taxpayers would ask for reimbursement. He said this was "way out of the ball park" and noted that in 65 percent of FTB cases, and 28 percent of business tax cases, taxpayers are not even represented by counsel.
Mr. Dronenburg, architect of the Taxpayers' Bill of Rights, said the program is intended to ensure taxpayers are treated fairly when they have additional costs due to unreasonable staff action.
It was pointed out that under the state's Bagley-Keene Open Meeting Act, a taxpayer could present comments to the board on the issue of whether the request for a reimbursement hearing should be granted at the time the board decides whether to grant the hearing.
Speaking for Pacific Telesis, Jim Barnes said deregulation as a result of the federal Telecommunications Act of 1996 adds to risk and needs to be reflected in the capitalization rate. He urged a company-specific capitalization rate, rather than an average of a number of other local telephone company capitalization rates.
Mr. Andal asked staff to explain why a company-specific capitalization rate cannot be used and why U.S. West was left out of the companies used to provide the average rate.
Reacting to a balky City Council and the potential loss of thousands of jobs, Mayor Richard Riordan wants an immediate $15 million tax cut for five health-care organizations to convince them to stay in Los Angeles.
A heavy business tax burden in Los Angeles is making the health maintenance organizations (HMOs) potential easy pickings for other cities that want these five companies' 6,500 jobs and millions of dollars in tax payments, according to published reports.
The council on January 29 delayed action, deciding to study the plan proposed by Councilwoman Laura Chick. Four of the five HMOs are in Ms. Chick's west San Fernando Valley District. She said Warner Center, where they are located, "could become a ghost town."
Ms. Chick said the HMOs are unfairly taxed and have threatened to move to cities with lower taxes. Los Angeles bases the business tax on gross receipts, collecting $6 for every $1,000 in taxable gross receipts. They say it us unfair to tax HMOs on fees they simply pass on from members to doctors and other medical providers; that they should be taxed only on the basis of administrative fees.
The disagreement has caused the HMOs to withhold $37.8 million in business taxes from 1994 and 1995. An additional $19 million has not been collected for 1996.
Initially, Mayor Riordan went along with the council majority's decision to wait a few weeks pending release of a preliminary study comparing business taxes in Los Angeles with those of other cities. However, on January 30, the mayor called for immediate action on behalf of the HMOs. They are CareAmerica, Health Net, Maxicare, Prudential and WellPoint. Together, the five HMOs account for 6.9 percent of the $275 million in annual business taxes collected by the city.
If the city waits, according to Deputy Mayor Gary Mendoza, there is the risk of losing major employers. Five other cities are known to be pursuing the HMOs, trying to lure them with lower taxes and lease rates. These are Burbank, El Segundo, Glendale, Calabasas and Vernon. Mr. Mendoza said the mayor based his decision on 10 months of study. "You don't need to look at their books," he said. "You just need to look at the tax structure of competing jurisdictions."
Councilwoman Rita Walters criticized the proposal: "... we want to keep every business in the city, but we can't let them beat us up and say, 'We are going to leave and take our marbles with us.'"
Officials of the HMOs, meanwhile, said they have scouted other cities. Patrick Garner, senior vice president for WellPoint Health Systems, was quoted in The Los Angeles Times as saying that unless the council acts to change the tax formula, "we will move." He added that WellPoint pays twice as much in business taxes as it does for rent.
When taxpayers exchanged small business stock eligible for a preference tax exemption on sale for stock that did not qualify, the exemption was lost, according to a decision of the First District Court of Appeal (Gerald F. Muething et al v. Franchise Tax Board).
At issue is the case of the scope of former exemption of gains in the sale of small business stock from California's former preference tax.
Taxpayers acquired stock in a small electronics firm (Paratronics) in 1997 that qualified for the exemption. In 1991, Nicolet Instrument Corporation acquired Paratronics, and taxpayers received Nicolet stock in exchange for their Paratronics stock. Although Nicolet stock was not eligible for the exemption, taxpayers argued that the Nicolet stock carried forward the "small business" characteristics of the Paratronics stock. The statute provides that the exemption is based on the characteristics at the time of acquisition. The trial court agreed with taxpayers, stating the merger of the two resulted in the continuing existence with a change of name, and the merger was a substitution for shares previously acquired that were eligible.
The appellate court said, "The plain language of the statutes indicates the sale of Nicolet stock -- which was admittedly not a small business -- was not exempt from the preference tax... The merger resulted in a fundamental change in the character of the stock the taxpayers held."
Long-awaited Assembly committee assignments were released on January 31 by new Assembly Speaker Cruz Bustamante, including an 11-member Revenue and Taxation Committee that has seven Democrats and four Republicans.
Democrats outnumber Republicans 43-37 in the 80-member house, retaking majority-party status in 1996 elections. As was previously announced, the new Revenue and Taxation Committee chair is Louis Caldera of Los Angeles. Other Democrat members are Elaine Alquist of Santa Clara, Dion Aroner of Oakland, Wally Knox of Los Angeles, Kevin Shelley of San Francisco, Michael Machado of Linden and Lou Papan of Millbrae. Republicans are Vice Chair Nao Takasugi of Oxnard (last year's chair), Howard Kaloogian of Carlsbad, Gary Miller of Diamond Bar and Charles Poochigian of Fresno.
Only three members of the panel are holdovers: Mr. Caldera, Mr. Takasugi and Mr. Kaloogian.
Three of the Democrats are in their first terms -- Ms. Alquist (wife of former state Senator Alfred E. Alquist), Mr. Aroner and Mr. Shelley. No stranger to the Capitol is Mr. Papan, who was powerful Rules Committee chair in the 1980s. He left the Assembly to mount an unsuccessful campaign for the Board of Equalization in 1990. The ex-FBI agent was elected to the Assembly last November.
Geographically, five of the 11 members have districts south of the Tehachapis, where most Californians reside. (See the January 27 Caltaxletter for the makeup of the Senate Revenue and Taxation Committee -- five Democrats, three Republicans and one independent, with five of the nine hailing from Northern California.)
Last session, there were nine members (six Republicans and three Democrats) on the Assembly Rev&Tax Committee.
Noting that the Budget Committee has 17 Democrats and 10 Republicans, compared to 13 Republicans and 8 Democrats last year, a spokesman for Assembly Minority Leader Curt Pringle said the partisan stacking of committees by Mr. Bustamante defied talk of bipartisan cooperation.
Mr. Bustamante said Republicans "should be pretty satisfied. Unlike last year, every committee has a vice chair that's a Republican and every vice chair has a budget."
Assembly Rev&Tax will continue to meet on Mondays at 1:30 p.m. in Room 126 of the Capitol. The committee office has been moved from its long-time second-floor suite to Room 6017 in the Capitol.
Assemblyman Tom Woods, a Shasta Republican, says the Legislature could consider a temporary sales tax increase to help 48 counties that have been declared in states of emergency from January's storms.
Governor Pete Wilson's resources secretary, Doug Wheeler, says such a tax, similar to that imposed after the 1989 Loma Prieta earthquake, might be appropriate. Further, he says the state should create a revolving disaster relief fund. This would allow agencies to provide disaster relief much sooner. Mr. Woods and Mr. Wheeler commented last Monday at a meeting in Yuba City called by the governor's Flood Emergency Action Team.
Yuba County Supervisor Brent Hastey appealed for a plan to direct all levels of government to respond more efficiently. Flood waters from the Feather River inundated 450 homes in Arboga, a town in his district. Three persons were killed.
Name the quotemeister: "Taxpayers in the state of California have been gouged by an over-regulated, barnacle-encrusted, taxpayer-dollar-guzzling bureaucracy."
(1) Pete Wilson. (2) Ronald Reagan. (3) Tom McClintock. (4) Howard Jarvis. (5) Hiram Johnson. (6) Lenny Goldberg. See answer below.
There's a new caucus in town. In the Assembly, former Contra Costa County Supervisor Tom Torlakson and former Hayward Mayor Mike Sweeney, both Democrats, are co-chairs of the newly formed Local Government Caucus. They note that 39 of the Assembly's 80 members have local government experience and 37 of them attended caucus meetings in January. They had what they called an "investigational meeting." This involved briefings on local government finance issues. In a November 21 caucus recruiting letter to members, Mr. Torlakson wrote: "Such a working group would be a positive signal to many local officials who have been alienated and frustrated with the state's actions over the past four to five years." Of the 39, there are 15 Republicans, including caucus Co-Vice Chairs Steve Kuykendall, former Rancho Palos Verdes mayor, and Roy Ashburn, former Kern County supervisor.
Georgia-Pacific's Tim Treichelt has been appointed to serve on the Timber Tax Advisory Committee of the State Board of Equalization. Mr. Treichelt, regional manager of government affairs for the company's Pacific Southwest region, will present the concerns of large timber owners to the committee. His January 10 appointment was announced by BOE Executive Director E.L Sorensen Jr. The committee, charged with determining the valuation, grading and taxation of timberland, has one BOE representative, one representative of the Board of Forestry, five county assessors and two members who represent small-scale and large-scale timber owners.
Former state Senator Dan Boatwright, who was "termed out" in 1996, has been appointed by the Senate Rules Committee to a $75,000-a-year post on the California Medical Assistance Commission. Mr. Boatwright, a Concord Democrat, was one of few legislators to have chaired both the Senate and Assembly policy committees on revenue and taxation.
The BOE's Chicago-area office has moved from 150 North Wacker Drive to 120 North La Salle Street, Suite 1600. The phone number is (312) 201-5300.
The Fourth District office of Acting BOE Member John Chiang has been moved to 15350 Sherman Way in Van Nuys. (Mr. Chiang has succeeded Brad Sherman on the board after Mr. Sherman's election to Congress last November. He will serve the last two years of the term unless replaced by a nominee of the governor who is supported by the Legislature.)
Fallout from voter approval of Proposition 218, the Right to Vote on Taxes initiative, continues to dominate the circuit of public finance-related symposia. A conference on Public Capital Finance is scheduled February 19 in Sacramento by the California Debt and Investment Advisory Commission, University Extension at UC-Davis and the UCLA Extension Public Policy Program. Sponsors say, "By popular demand," this section is called "Implementing Proposition 218: mapping and navigating the changing landscape of local government finance." The conference, which is $155 to attend, will be repeated February 27 in Cerritos. For information, call (800) 752-0881.
Proposition 218 is covered in the inaugural issue of Cal-Tax Digest, a monthly journal of analysis and comment on state and local government tax and spending issues. The February issue features a history of local government taxing authority -- "the roots of Proposition 218" -- by David R. Doerr, and a report on intent by Jonathan Coupal of the sponsoring Howard Jarvis Taxpayers Association.
Answer to Quotemeister Quiz: Mr. McClintock. He was re-elected to the state Assembly last November after leaving the Legislature and running unsuccessfully for statewide office. As outspoken as ever, he issued the rather colorful statement to drum up interest in his AB 19 -- The Bureaucracy Realignment and Closure Act of 1997. He said that state spending per capita, in 1995 inflation-adjusted dollars, increased from $1,070 in fiscal 1965-66 to $1,775 in 1995. Thus, he said his bill would create an independent commission to examine state bureaucracies and determine which ones should be closed or downsized.
Horse Racing Taxes. AB 172 (Wright) reduces the state license fee on horse race wagers in 1997 by 1 percent.
Donation of Agricultural Products. AB 196 (Thompson) establishes a tax credit for the donation of agricultural products at 20 percent of the inventory cost of the product.
Subchapter S Corps. AB 203 (Takasugi) conforms to federal law changes allowing Subchapter S corporations to have up to 75 shareholders.
Judicial Review. SB 209 (Kopp) revises judicial review provisions relating to government agency actions, including tax agencies.
Feb. 11: FRANCHISE TAX BOARD MEETING
Location: Room 121, 450 N Street, Sacramento, at 10:00 a.m.
Subjects: (1) Staff legislative proposals and positions on bills; (2) Presentation on pending
or proposed regulations; (3) MTC Alternative Dispute Resolution program, and (4)
Executive officer and board member time.
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