State Tax Notes correspondent Lenny Goldberg reports that a measure to place income from offshore tax havens in the water’s edge passed the Assembly on Thursday, January 28, by a margin of 42-28 (see Tax State Tax Notes Story that follows). The measure, which would raise $120 million, could be passed by majority instead of the 2/3 required for a tax increase because it contained an offsetting tax cut which would lower the sales tax on college textbooks sold in on-campus bookstores.
The bill would require that income attributable to tax havens, as defined by the GAO and subsequently by the U.S. Treasury, would count as domestic income and therefore be apportionable to California. Multi-national taxpayers can currently elect to apportion either worldwide or domestic income to California, but by making a “water’s-edge” election, only income covered by Subpart F, to which California conforms, is counted as part of domestic income. AB 1178 would redefine the water’s edge to include all income reported in tax havens. This income would be discoverable to the FTB by audit, if not it is not reported.
The bill would exempt legitimate activity in tax havens, based on economic presence and the presence of factors in those countries, and would allow corporations to appeal to the FTB with regard to the legitimacy of their economic presence. It is modeled after statutes currently in place in Montana, Alaska, and West Virginia. It is expected to raise approximately $120 million, and will sunset in 2015.
The offsetting revenue to make the bill revenue-neutral would provide a sales tax exemption for textbooks purchased in bookstores on campuses of the University of California, California State Universities, and community colleges. That will cost a roughly equal amount of revenue in the 4-year period, and the bill was sunsetted to make sure that the revenue projections are correct and the result will in fact be revenue neutral.
In floor debate, Democrats argued that this bill only affected the very small number of bad actors using tax havens, not the 99% of businesses paying their taxes and not using tax havens. They pointed to the recent election in Oregon, noting that voters want businesses to pay their fair share of taxes. They cited federal information that one building in the Cayman Islands included over 18,000 businesses registered there. Republicans called the bill anti-business, argued that this will drive business out of the state, and that it is a runaround of the 2/3 vote requirement for increasing taxes.
–Lenny Goldberg, State Tax Notes