I attended Monday’s JEDE hearing only to hear more of the same arguments from the AB1139 opposition.  The primary opposition was once again from Labor and once again they just curtly referred to a scattering of old reports claiming that the EZ program doesn’t work.  On the contrary, the audience was filled with people from the private and public sectors beaming about the benefits of the EZ.  Several highlights were Lydia Moreno’s testimony about the effectiveness of the program and the companies who decided to stay in California because of the program.  Individual company representatives waited in line to tell their story and urge continued support and expansion of the EZ program.

Professor Samuel Bornstein, from Kean University School of Business, offered a keen remodel of the net interest deduction that he claimed could save the mortgage meltdown and cause the capital markets to function again.  The proposal was to allow lenders to claim the net interest deduction for residential loans made to small business owners who pulled money from their equity and invested it into their business.  Professor Bornstein cited statistics that many small business owners mortgaged their homes with toxic loans to fund their businesses.  Giving the lender a tax break will allow the lenders to renegotiate with the borrowers for lower monthly payments or lower principal to allow them to stay in business and keep their homes.  Several business owners testified that they could not have made it through the tough economic times without the Enterprise Zone program.

A revised 1139 should be ready by December and then open for discussion or vote in the JEDE committee by January 5, 2010.  Stay tuned.

A coalition of more than 40 business and employer groups led by the California Chamber of Commerce is continuing to raise questions and concerns about the new “business net receipts tax” being considered by a special state tax commission.

The CalChamber and coalition called on the commission to take time to undertake a thorough analysis of how the new tax will affect jobs and the economy, even after a tax rate is unveiled, before the commission votes on whether to adopt the proposal.

“We expect that the commission will provide an estimated business net receipts tax rate before its final hearing, but we are a short time away from what may be the decision day, and still do not have it,” said CalChamber President and CEO Allan Zaremberg.

“In order for commissioners to understand the impact of this tax on companies and industries, businesses must have the time to calculate how this tax will affect their often-complicated operations.”

The proposed business net receipts tax is designed to be a type of value-added tax in which companies are taxed on total receipts minus all purchases from other firms. The intent behind this new tax is to reduce revenue volatility by basing it on total receipts, rather than profits. The tax also would bring a large category of services businesses into the tax base.

More Specifics Needed
The CalChamber-led coalition presented its latest comments in a letter responding to Gerald Parsky, chairman of the Commission on the 21st Century Economy. At a commission workshop last week, Parsky invited the CalChamber and coalition to follow up testimony with their remaining ongoing issues with the business net receipts tax proposal.

The commission has scheduled a meeting on September 10 in Los Angeles to discuss its tax recommendations.

When creating the commission last fall, Governor Arnold Schwarzenegger asked the group to examine the state’s tax structure with a goal of stabilizing state revenues and reducing volatility, as well as promoting California’s economic prosperity and competitiveness.

In July, the Governor extended to September 20 the deadline for the commission to present its findings and said he will call a special session of the Legislature afterwards to consider the commission’s recommendations.

The coalition said it is requesting a detailed written proposal—including the tax rate and a full analysis of the policy, operational and transitional implications—so that California businesses and economic experts have the opportunity to respond to the commission regarding the proposal and analysis.

“As we emphasized during our workshop testimony, we believe it is crucial for the commission to take sufficient time to analyze” the proposed business net receipts tax, “rather than be driven by any arbitrary deadline, so that any vote of the commission . . . is an informed vote,” the coalition stated in its letter.

A thorough analysis and response by sectors affected also must be available for legislative review because the commission intends for its recommendation ultimately to be presented to the Legislature for consideration, the coalition said.

Key Issues
The coalition letter outlines transitional and operational questions that were not addressed in a “Preliminary Overview” released by the commission on August 21 or the commission’s August 26 and August 28 workshops on the proposed business net receipts tax:

How did the commission arrive at the proposed tax rate? Will the commission model the rate over the past several economic cycles (about 10 years) to determine the ability of the business net receipts tax to generate revenue and stem volatility? What is the risk that revenues will substantially deviate from the commission’s projected estimates?
Which came first, the rate or the base? In other words, was the rate developed as a result of the commission’s judgment as to what best comprises the base of a business net receipts tax as a matter of tax policy, or did the commission determine the most appropriate rate for the economy, and engineer the base to accomplish that rate?

The coalition expressed appreciation for the commission’s strong statements clarifying that only the Legislature, and not an administrative body, would have the authority to set and change the business net receipts tax rate, but noted that the coalition cannot provide a complete analysis of this proposal, nor can an individual company understand it, without knowing the rate and the base to which it applies.

What are the proposed deductions that will be available under the business net receipts tax? More details are needed, the coalition said.

For example, according to the “Preliminary Overview,” employers would not be able to deduct from revenues the cost of employees, an expense that is allowed under the current corporate income tax system. At the workshop, however, the commission indicated there was a possibility of a partial deduction for employee costs.

What about tax fairness? Although the commission’s intent is to develop a less volatile tax system, it should also give due consideration to tax fairness. California’s current tax system is based either on profits, such as the personal and corporate income taxes, or is passed through as a tax on consumption, like the sales tax. The business net receipts tax is imposed upon companies even when they are in a loss position, and it cannot be passed on as a transactions tax.

The coalition noted that it is not aware of any substantial discussion of why the business net receipts tax is a preferable tax policy to the current taxes that are based on profits or consumption. It pointed out that the only other major tax similar to this proposal is the property tax, the subject of the Proposition 13 tax revolt 30 years ago when it became unaffordable for major parts of California society.

Taxpayers and policymakers deserve more discussion and analysis on this issue, the coalition said.

Which economic sectors will be winners and which losers under a business net receipts tax? Adoption of this recommendation must await analysis of its impact on specific economic sectors, the coalition said.  For example, businesses with low profit margins and high employee expenses presumably would be especially hard-hit, as would companies in a loss position.

In addition, based on the limited information so far available, it appears the business net receipts tax may shift more of the tax burden onto small businesses, since many pay under the personal income tax system, and would not benefit from elimination of the corporate income tax.

What impact will the proposal have on California jobs and the economy? Adoption of the recommendation must also await analysis of this impact, the coalition stated. If the business net receipts tax amounts to a tax on employees (because it appears employers will not be able to deduct the cost of employees as they do now), will it motivate companies to outsource jobs to other states and nations? Will it further constrain California’s ability to compete for future investments if business loses important incentives such as the research and development or enterprise zone credits? What will become of California’s ability to compete with other states and countries if the cost of exported California goods becomes substantially higher than goods offered by other states and countries? Additionally, will the cost of doing business increase for Californians, due to higher prices for advertising and other business purchases?

Staff Contact: Kyla Christoffersen

The BOE is sending letters to businesses with at least $100,000 in business gross receipts who are not already registered with BOE and do not hold a seller’s permit. This means all businesses, regardless of business type (including tax practices), must register.

The letters state that the BOE has identified these businesses as qualified purchasers subject to a use tax return filing requirement (even if no use tax is due). Businesses that receive the letter must complete the contact info and mail it to the BOE. The BOE will then register the business and send them an account number and log-in information so that they can e-file their returns. The 2009 returns are due April 15, 2010. Taxpayers who did not report use tax for 2007 and 2008 must file returns to report and pay that tax. We believe this is the first step in an audit process that will continue indefinitely.

Spidell is working on a worksheet for clients to track use tax liabilities and a checklist for practitioners to easily get needed information. We will have the practice aids prepared and available at Spidell’s Fall Tax Update Seminar. Register now at a location convenient to you. You may want to attend in November or December to prepare for the onslaught of requests from your clients.

The 6th annual Oxnard Economic Outlook event speakers are predicting a slow road to recovery for the region. “Clearly we’re at the bottom,” said Chris Thornberg, of Beacon Economics, who made the presentation as part of UC Santa Barbara’s Economic Forecast Project which did the research for the economic outlook.

Thornberg has a moderate view of the economic recovery, he believes the worst is over, however he also is estimating a considerably long rebound for businesses. During his speech, he did reveal that the city of Oxnard has fared better than many other California cities.

Scott Hadly, from the Ventura County Star, reported, “The data he used, from 2008, showed that employment fell by just .03 percent in the city while countywide employment dropped by 2 percent. More recent numbers, however, show that while the nation as a whole is seeing unemployment rates of 9.8 percent as of September, California’s rate was 12.2 percent. Ventura County’s unemployment rate was 11.2 percent. Oxnard’s rate was 15.1 percent in August.”

The city of Santa Clarita has recently completed a long-term comparitive study regarding whether it is more beneficial for surrounding communities to annex into Santa Clarita or to found their own cities. The report completed in time to educate voters prior to the November 3rd election, which will guide the future planning of the region. Below are some of the report details:

Taxes:

Burr estimates that residents in the studied areas would save money on taxes if they annexed into the City. This is based on information that indicates solid waste charges are an average of $43 more expensive per home in the County versus the City. Additionally, LA County levies a utility tax of approximately $151 per home. The City does not impose such a tax.

However, several additional City taxes will bite into that savings. These include a stormwater fee, increased streetlight assessments and a $26 per-year open space fee. Overall, Burr predicts that the average homeowner would save about $93 per year.

The study forecasts a better picture for businesses. If annexation occurs, the Burr report anticipates several tax decreases. The County’s 4.5 percent utility tax is not mirrored by the City, and hotel taxes are only 10 percent in Santa Clarita, compared to 12 percent in unincorporated areas. Furthermore the City’s designation as a State Enterprise Zone could offer greater tax incentives for businesses if annexation takes place.

Developers currently pay much higher fees for parkland development in the City than in the County, and therefore that industry would be impacted to a greater extent if annexation were approved.

Governance:

Currently, Stevenson Ranch, West Ranch, Castaic and Tesoro are governed by Los Angeles County officials, who meet in downtown Los Angeles. At the top of this structure are five La County Supervisors, elected by district. In our local district, Michael Antonovich is the elected Supervisor. Although voters in the studied unincorporated areas do get to vote for their supervisor, they make up only two percent of the constituency for the District 5 seat.

If annexed into the city of Santa Clarita, residents would be governed by five City Council members elected at large. All Council members would be local residents.

Public Services:

Overall, the Burr study found that residents would receive a greater level of service if they were to approve annexation into the City. While Los Angeles County contracts with the LA County Sheriff’s Department for public safety in the unincorporated areas, the City does so on a larger level. This, the study assumes, would provide additional law enforcement services such as COBRA (a gang detail unit), the Business Alliance program, and Community Interaction Team. Additionally, unincorporated areas currently rely on the California Highway Patrol for traffic enforcement. The Study anticipates that by annexing the areas would then benefit from Sheriff’s traffic enforcement and investigation on City streets. Note: these benefits could also be attained if the areas formed their own City, provided that the chosen leaders contracted for said services.

Both the County and City have varying attributes when it comes to Code enforcement. While both respond to emergency code violations in the same time frame, the City was found to respond faster on non-emergency calls. However, the County operates regular code sweeps whereas the City only responds to complaints. The Study did note that the City operates a neighborhood makeover program which reaches out to violating neighborhoods.

Park space was found to be comparable in the studied unincorporated areas.

From the City side:

From a governmental standpoint, the Burr report predicts that the annexation would be a positive move for the City of Santa Clarita. While the City would have to pay some form of mitigating fees to the County for at least 7 years, local economic recovery and growth is expected to make the entire City function at a sustainable rate.

Voters in the unincorporated areas will chose from the following options in the November 3 election, selecting their preference for the future: incorporate a brand new city, stay exactly the same, or annex into the City of Santa Clarita. The vote is only meant to gauge what the residents prefer. The results will guide future actions towards the most popular option.

Of course these estimations can vary widely, depending on a host of circumstances. For example, the November 3rd vote might reflect interest in annexation from only a portion of the studied areas. If that is the case, each area’s fiscal benefits and detracting factors could force different results. Furthermore, if a majority of the studied areas do support annexation proceedings, and the City moves forward, the Local Agency Formation Commission (which has the ultimate approval over annexations provided less than 15% of registered voters in the affected areas don’t formally oppose) could alter the annexation area and/or County mitigation payments.

Both of the conducted studies represent the political infancy of this issue, and the resident vote will be the next major milestone.

The next community meeting to discuss these will be Thursday September 24, from 6:30 – 8:00 p.m. at Castaic Middle School located at 28900 Hillcrest Parkway in Castaic.

Bayer, which we have recently covered, has been an integral component of the job market for the West Berkley region, and thanks to the Enterprise Zone program, the company has announced they have chosen to stay in the area.

“The enterprise really strengthened our proposal to stay,” said Sreejit Mohan, director of public policy and communication for Bayer.

It’s estimated that Bayer will save approximately $6 million dollars in tax spending. The company will also qualify to receive $36,000 for every worker they hire who meets several qualifications, specifically:

• Native Americans
• Veterans
• Low income individuals

This is another example of the Enterprise Zone program at work, helping to stabilize local economies and increasing job opportunities.

Despite previous reports, it appears that several cities pursuing Enterprise Zone designations in California may still be in the running. Specifically the cities of Needles and Anaheim are looking to combine their efforts to gain the tax advantages offered by the program.

The Needles Daily Star reported that According to Sue Godnick, executive director of the Needles Chamber, Anaheim has invited the city to join a group effort proposing state legislation that will allow those cities not ranking high enough this year, plus an additional zone for an auto plant in Fremont, to be granted one-time enterprise zone statuses. The initiative is to be titled “100,000 New Jobs for Californians (11 New Enterprise Zones).”

Needles specifically is in need of the EZ program status due to its close proximity to Arizona, which has historically been more friendly to businesses. Without some sort of exemption, it will continue to be difficult to attract local companies to settle in the region.

California’s Franchise Tax Board has begun sending out letters to businesses who have been delinquent in filing. The FTB performs an initial state assessment to get a general sense of what businesses have yet to file, which is how they’ve created the list of companies to contact.

In 2008, this action brought in an additional $31 million in previously unpaid taxes. The letter has been sent out to over 35,000 businesses around the state requesting payment or the reason they have not filed.

This action is meant to lower the difference between the amount of taxes paid compared to what is fully owed. It is estimated that each year, California has a tax gap of $6.5 billion.

Cal-Tax has been asked to participate as amicus before the California Supreme Court in support of respondent Dicon Fiberoptics, Inc. on the merits of Dicon Fiberoptics, Inc. v. Franchise Tax Board. In that case the lower court sustained the FTB’s demurrer in a tax refund lawsuit arising out of a claim for enterprise zone hiring credits. The FTB claimed that because the taxpayer could not produce underlying documentation in support of its vouchers entitling it to hiring credits, the taxpayer could not state a cause of action.

Dicon Fiberoptics appealed to the Second District, claiming that the FTB did not have the right to audit the voucher once issued. The court held that FTB was entitled to audit the voucher, but that the voucher was prima facie evidence that an employee is a qualified worker for the purpose of the hiring credit and the voucher shifts the burden to the FTB to prove that the worker is not qualified. The California Supreme Court has granted review.

This is an important case because the only other case on the issue is Appeal of Deluxe Corporation, a BOE decision that held the FTB has the authority to audit vouchers, and statutes granting FTB authority to examine and audit tax returns bear no exception for decisions by other governmental bodies, such as zone coordinators that issue vouchers. It is important that a Supreme Court decision on this issue be favorable to taxpayers and that it decline to rule that FTB has unlimited authority to require voucher documentation from the taxpayer.