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State & Local Tax Bulletin (January 2011)

Governor Brown's 2011-2012
California Budget Tax Proposals




By Michael J. Cataldo, a tax associate in the San Francisco office of Pillsbury Winthrop Shaw Pittman LLP.

If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our January 2011 State & Local Tax Bulletin (a 137K pdf file), containing a printed version of this article and also available via ftp at:

    ftp.pmstax.com/state/bull1101.pdf.

This bulletin concerning state and local tax matters is part of the Tax Page, a World Wide Web demonstration project, no portion of which is intended and cannot be construed as legal or tax advice. Comments are welcome on the design or content of this material.

Governor Jerry Brown has released tax proposals for the 2011-2012 California budget that include an extension of expiring temporary tax increases, elimination of the single-sales factor election and enterprise zones, and a tax amnesty program for certain tax shelters. Any tax increases proposed by the Governor may be subject to voter approval.

Extension of Temporary Tax Increases

The Governor's proposal calls for an extension of the temporary tax increases set to expire in 2011, enacted as part of a 2009-2010 budget trailer bill.[fn. 1] Under the proposal, the personal income tax surcharge of 0.25 percent would be extended through 2015, the 1 percent sales and use tax rate increase would be extended through July 1, 2016, and the increase of the vehicle license fee to 1.15 percent would continue through July 1, 2016.

Elimination of Single Sales Factor Election

The Governor proposes to eliminate the election to use a single-sales factor method of apportioning income for franchise tax purposes. All apportioning taxpayers other than agricultural, extractive and financial corporations would be required to use the single-sales factor method of apportionment and market-based sourcing rules for taxable years beginning on or after January 1, 2011.[fn. 2]

Elimination of Enterprise Zone Tax Benefits

For taxable years beginning on or after January 1, 2011, the Governor proposes to repeal all enterprise zone tax benefits, which include hiring credits, sales tax credits, and deductions for interest income derived from enterprise zones.

Tax Shelter Amnesty

For taxpayers who have engaged in abusive tax avoidance transactions and offshore financial arrangements, the Governor has proposed a tax amnesty program to be administered by the Franchise Tax Board.

Notes

  1. Assembly Bill X3 3, enacted February 20, 2009.[return to text]

  2. Senate Bill ("SB") 116, introduced on January 19, 2011, would implement the Governor's proposal to mandate use of the single-sales factor method of apportionment and market-based sourcing rules if approved by two-thirds of the members of each house of the Legislature. If passed, SB 116 would be effective for taxable years beginning on or after January 1, 2011.[return to text]


This material is not intended to constitute a complete analysis of all tax considerations. Internal Revenue Service regulations generally provide that, for the purpose of avoiding United States federal tax penalties, a taxpayer may rely only on formal written opinions meeting specific regulatory requirements. This material does not meet those requirements. Accordingly, this material was not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal or other tax penalties or of promoting, marketing or recommending to another party any tax-related matters.


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