Caltaxletter

David R. Doerr, principal contributor
Ronald W. Roach, editor



Vol. IX, No. 5
February 5, 1996

MAJOR TAX BILLS, INCLUDING UNITARY REFORM, CLEAR ASSEMBLY

Working under a constitutional deadline, the Assembly last week approved a number of significant tax reduction measures, including a unitary reform bill sponsored by Cal-Tax.

In general, Republicans argued that the bills will improve fairness in the tax code, improve California's business climate and create more jobs for the future. Many Democrats denounced the proposals as "giveaways" to business. They indicated their priority use of additional revenues is more government spending.

Before debate on almost all of the bills, Democratic Assemblyman Phil Isenberg offered the same amendment that would have made all tax cuts moot by saying 40 percent of the amount of the tax reduction should be spent on schools. His amendments would have also prohibited any company benefiting from the bills from reducing employment in California. The amendments were routinely tabled without debate.

Presenting the unitary reform bill (AB 916) Tuesday evening, Assemblyman Jim Cunneen said California should not be taxing income earned overseas. AB 916 establishes, for taxpayers filing a water's-edge election, a flat 75 percent foreign dividend exclusion, repeals the interest offset and excludes Subpart F income from the water's edge. Assemblyman Nao Takasugi, Revenue and Taxation Committee chair, also spoke in favor.

Other Assembly actions:

HIGH-TECH INDUSTRY ASKS BOE AND FTB TO RESCIND MTC NEXUS STANDARD

The high-tech industry has asked two California tax regulatory agencies to rescind approval of Multistate Tax Commission (MTC) guidelines for taxing mail-order computer sales (MTC Bulletin 95-1).

In a January 30 letter to the State Board of Equalization and Franchise Tax Board, Kaye Caldwell, policy project director of the Software Industry Coalition, states, "We believe not only that the legal analysis contained in the bulletin is significantly flawed but also that the process by which Bulletin 95-1 has now been adopted for enforcement by California is highly inappropriate and violates the Administrative Procedures Act."

The BOE on October 26 and the FTB on December 14 affirmed, without opportunity for public comment, a staff draft of MTC Nexus Program Bulletin 95-1, which calls for taxing out-of-state computer sales with a nexus to third-party warranty repairs.

Ms. Caldwell, also editor of CSIA Update, newsletter of the Computer Software Industry Association, reported in the January issue: "California Tax Boards Adopt Secret Underground Tax Regulation Affecting Mail-Order Computer Companies."

The MTC bulletin details warranty practices of computer mail-order companies and nexus consequences when the out-of-state manufacturer maintains control over the warranty process.

Ms. Caldwell complained of a lack of public hearings and opportunity to comment before the boards acted on the industry-specific MTC nexus standards.

David Levine, supervising staff counsel at the BOE, responded to Cal-Tax's request for comment on the CSIA article. He denied allegations of secrecy or improper actions.

He said the question on the board's public agenda was to affirm that the MTC bulletin "is a correct statement of the rules" in California and does not constitute approval of a regulation. He said it "passed constitutional muster" and was adopted through "normal procedures."

Nexus exists when, as the MTC guideline says, the purchaser must first contact the out-of-state manufacturer or seller to gain authority for local repairs, Mr. Levine said.

"We are in agreement with that (MTC guideline), (but) as far as how aggressive we will be, I do not know. We did not go out and start knocking on people's doors," Mr. Levine said.

At the FTB, spokeswoman Denise Quade said no public hearing was required because "Bulletin 95-1 is an educational, informational announcement. It was never intended to be a regulation or a rule. It is simply a statement of what the MTC and the states agree to be correct analysis and application of cases decided by the U.S. Supreme Court. The bulletin will stand or fall on the accuracy of the analysis contained in it, and it has no independent significance or weight."

Ms. Quade said no new enforcement program has resulted from the action that merely shapes "the kind of argument" that the FTB would make in defending against legal appeals.

Ms. Caldwell said the CSIA is concerned with both the content of the MTC bulletin and the way it is being implemented. She said it raises the question of "what industry is next? Will the MTC continue to implement controversial provisions of its draft nexus guidelines on an industry-by-industry basis with no public review? Those ... who have been participating in MTC meetings know their efforts to find a way to tax on-line transactions. Will this be how they accomplish it?"

Ms. Caldwell said the FTB and BOE, by approving the guidelines, were agreeing to their enforcement. In her January 30 letter, she said the MTC had used incorrect legal analysis to find nexus for sales and franchise income taxes.

"Both the BOE and the FTB have stated, erroneously, that California law is consistent with nexus as described in Bulletin 95-1 and that they will enforce these standards," Ms. Caldwell wrote. "... The MTC has, by erroneously characterizing its actions as consistent with current law, simply done an end run around the requirements for hearings and the necessity for the adoption of legislation or regulations by the states. This is highly inappropriate and of questionable legality ..."

Ms. Caldwell also noted that the two boards acted after Governor Pete Wilson last fall signed SB 718 (a bill sponsored by the BOE). The law requires congressional action -- which has not occurred -- before the state can instruct mail-order companies to collect sales taxes. Thus the boards "ignored the will of the California Legislature and the power delegated to Congress," she said.

She said the agreement to enforce the new nexus standard is equivalent to the adoption of regulations. "Not only is Bulletin 95-1 contrary to state law, but even if it was consistent with state law, it was not properly adopted," she added.

Ms. Caldwell said, "The MTC should not be making California law. They don't seem to be aware that they lost the Quill case (the 1992 U.S. Supreme Court decision restricting taxation of mail-order sales)." She said the MTC Bulletin 95-1 analysis "focuses rather heavily on the Due Process Clause ruling in the Quill case while conveniently ignoring the Commerce Clause ruling, a favorite MTC tactic.

She quoted Eric Miethke, a Sacramento tax attorney with the firm of Nielsen, Merksamer, Parrinello, Mueller and Naylor: "The MTC position that a third-party maintenance contractor creates nexus has never been upheld by a court. It was inappropriate for them to suggest that it is well-settled law. Certainly, if the MTC believes that an authorized repair facility creates nexus, they will next be alleging the presence of an authorized dealer also creates nexus."

While the MTC's compact with the states requires public hearings on uniform regulations, this nexus bulletin for specific industries "seems to have had no public hearing or review process at all," Ms. Caldwell wrote. "The states should reject these bulletins summarily and send them back to the MTC for the requisite public hearings."

She questioned why the MTC is "promulgating industry-specific nexus standards when their highly criticized "Guideline for Application of a Taxing State's Sales and Use Tax to a Remote Seller" has not been finalized. She also asked whether MTC's failure to gain approval for proposed amendments, which were subject to public hearings, motivated the MTC to create another way to achieve regulations without public input.

Ms. Caldwell said a state's agreement, in writing, to enforce the nexus standards described in the bulletins make them equivalent to state regulations that should undergo the same public hearing process both within the MTC and as required by each state.

"In the case of California, given that the nexus standards conflict with state appeals court decisions, legislation should be required prior to their adoption," she wrote.

Further, a major California-based computer manufacturer believes the FTB made a "costly mistake by agreeing to enforce the new nexus rules ... (as they) will result in California companies paying higher taxes in other states and lower taxes in California."

This is because most California firms "throw back" to California sales made into states where they have no property because they do not have nexus there. Thus the California company's sales apportionment factor -- and California taxes -- are increased.

"Under 95-1," the manufacturer notes, "California firms will not have 'throw-back' sales because they will have nexus in every state. This will raise the sales apportionment factor and income tax in other states and lower the income tax and apportionment factor in California."

An October 26, 1995 letter from FTB Executive Officer Gerald Goldberg to FTB members "did not mention the nexus rule actually impacts all California companies that provide repair services directly or through independent third parties; irrespective of how their sales transactions are consummated," the California computer manufacturer said. "Enforcement by the MTC of 95-1 will place a heavy burden on California-headquartered companies; whether they struggle to comply with other states' laws or fight this new legal interpretation."

SENATE APPROVES THIRD FTB BUILDING

Legislation authorizing a third Franchise Tax Board building to be located in the Butterfield Road area east of Sacramento (SB 565, Johnston) was approved by the Senate 22-7 last Wednesday.

State Controller Kathleen Connell, at an FTB meeting last year, raised a number of questions about the need for the new building. The board, by a 2-1 vote, agreed to support SB 565 (see Caltaxletter of November 13).

The measure contains a $218 million cap on revenue bonds that would be used to finance the project.

Other Senate actions last week to beat the midnight Wednesday deadline for Senate approval of Senate bills introduced in 1995:

SAN DIEGO AND MONTEREY SALES TAX RATE GOES UP APRIL 1

The .75 percent temporary sales tax rate reduction in San Diego and Monterey counties will expire April 1, according to the State Board of Equalization. The lower rates were in effect in each county as a way of refunding illegally collected sales tax. The new rate in San Diego County will be 7.75 percent. In Monterey County, the rate goes up to 7.25 percent.

YUBA COUNTY PROPOSES TAX ON MINERS

With the 49ers turning in their graves, Yuba County supervisors are proposing a tax on miners. If approved by a two-thirds vote on the March 26 ballot, the tax would be 8 cents per ton of material mined in Yuba County. The county estimates the tax would raise $160,000 a year, and is needed for repairing roads.

Opponents argue that the tax unfairly singles out one industry and will create a competitive advantage for mines outside the county. Andrew Coolidge, who is heading a Citizens for the Economic Survival of Yuba County, said mining boosts the county's economy.

YOSEMITE CONCESSIONAIRE BIG TAXPAYER IN MARIPOSA COUNTY

Difficulties in determining the possessory interest assessment for Yosemite National Park's primary concessionaire has consumed much of the Mariposa County assessor's time, detracting from time available for other work, according to a State Board of Equalization assessment practices survey. The Yosemite possessory interest assessment produces the county's largest tax bill.

The uncertainty of when the park will be open, due to federal budget disputes, could affect future possessory interest value.

In a sample of 66 newly constructed properties at the time of the board survey, the BOE said it found 32 undervalued because assessable new construction escaped assessment. As a result, the board is suggesting the county establish a pilot program of reviewing specific areas to find the new construction. The survey report notes that Nevada and Plumas counties have such programs and find them to be cost effective.

In a juxtaposition of historic proportions, Mariposa County (a Mother Lode County) has decided to go to Sacramento to find gold. The county has hired Wagerman Associates (at $22,500 per anum) to get additional state revenue. County Chief Administrator Michael Coffield states "Wagerman seeks a 20-to-1 return on the investment for the county. We would be satisfied with 2-to-1." In the 1840s and 1850s, people left Sacramento to go to the Mother Lode to seek their fortunes.

TAX REFORM CONFERENCE FOCUSES ON FLAT TAX

State Controller Kathleen Connell called for a "simplified and focused tax policy" as she drew a day-long conference on tax reform to a close last Wednesday. Some 150 persons attended the conference at UCLA.

"What we've done here today is take a very public and visible step in the ongoing conversation on tax reform in California," Dr. Connell said, pledging that her office will continue to sponsor forums for those committed to substantive tax reform.

"We need a simplified and focused tax policy, and I am encouraged by the level of participation and interest demonstrated at this conference.

"While I am not yet ready to endorse any new tax plan at this time, I strongly believe that a revision must occur," Dr. Connell said.

Cal-Tax President Larry McCarthy, participating on a panel discussing the impacts of federal and state flat tax proposals, urged caution so that California would avoid any more self-inflicted tax wounds.

He recommended that "policy makers at the state and federal levels, if compelled to establish a flat tax, do it as an option for taxpayers. Taxpayers should be allowed to choose to file under a new flat tax or under the current tax system."

One conclusion that could be drawn from the conference is that the impacts of a flat tax on taxpayers and government agencies must be more fully understood.

Speakers on flat tax proposals and impacts included Dan Bucks of the Multistate Tax Commission, Robert Hall of the Hoover Institution, and Arthur Laffer, economist who is pushing a consolidated flat tax initiative for the November ballot in California. Also, Jean Ross of the California Budget Project, Anthony Taddey of the Bank of America, Fred Main of the state Chamber of Commerce, and Leslie Appleton-Young of the California Association of Realtors.

NEW WINE IN OLD BOTTLES

Omnibus Tax Bill Gutted. SB 681 (formerly Alquist, now Hurtt) has been stripped of its tax relief provisions and now relates to local government assistance. The tax provisions in the bill were identical to the ones in AB 397 (Hannigan), (see Caltaxletter of September 18, 1995) except that SB 681 had no tax increase provisions. The bill passed the Assembly last week.

NEW LEGISLATION OF INTEREST

Local Sales and Use Tax. AB 2084 (Richter) allows counties to put in the county general fund a portion of the quarter-cent local sales and use tax now deposited in the local transportation fund.

Checkoff. AB 2092 (Mazzoni) establishes a new income tax checkoff for contributions to the Nicholas Green Organ Donation Awareness Fund.

Alternative Minimum Tax. AB 2094 (Cunneen) provides that the personal exemption may be applied to reduce tax below the alternative minimum tax.

Sales Tax: Fire District Exemption. AB 2100 (McPherson) exempts from sales tax a single order purchase of $25,000 or more by a qualified fire district.

Disaster Relief. AB 2103 (Mazzoni) extends the usual tax relief provisions for disasters (carryforward of losses, county reimbursement for lower property tax assessments) to the victims of the 1995 fires in Marin County.

Term Limits for Assessors. ACA 34 (Conroy) places term limits on assessors (and other local officials). Assessors would be limited to two four-year terms.

Property Tax Allocation. SB 1422 (Ayala) allocates additional property tax revenue to the City of Chino Hills.

Smog Impact Fee. SB 1436 (Kelley) exempts from the state's $300 smog impact fee

motor vehicles sold through a dealer's wholesale auction.

COMING UP

Feb. 8: SENATE SELECT COMMITTEE ON CALIFORNIA'S WINE INDUSTRY HEARING

Location: Room 3191, State Capitol, at 1:00 p.m.

Subject: Economic impact of the proposed alcoholic beverage tax initiative on California's wine industry.


© Copyright 1996, California Taxpayers' Association. All rights reserved.