The following discussion describes the outcome of Tuesday’s election concerning certain state and local tax proposals affecting taxpayers and multistate businesses.
California Proposition 39
For corporate taxpayers, California Proposition 39 was a significant tax-related ballot initiative that was passed by the voters, thereby making the single-sales factor apportionment mandatory for certain California taxpayers.
Under the new law, taxpayers affected by the provision must apportion their income to California using a single-sales factor apportionment formula for tax years beginning on or after January 1, 2013.
The mandatory “single sales factor” does not apply to taxpayers engaged in “qualified business activities”—which means that the taxpayer derives more than 50% of its gross receipts from agriculture, extractive, savings and loans, or banks and financial activities.
A unitary group that includes a corporation engaged in one or more “qualified business activities” must use single-sales factor apportionment if the overall unitary group does not derive more than 50% of its gross business receipts from qualified business activities (agricultural, extractive, banking and certain other financial activities).
Proposition 39 also mandates that, for general corporations, sales (other than sales of tangible personal property) will be attributed to California under the statutory market-based sourcing rules that currently apply to taxpayers electing single-sales factor apportionment. There is an exception to the mandatory single sales factor rule for certain combined groups deriving more than 50% of their U.S. gross business receipts from operating cable systems.
California Proposition 30
This initiative, also approved by the voters, increases California’s current highest marginal income tax rate of 9.3% effective for the 2012 tax year.
The increased rates remain effective until December 31, 2019.
- Individual filers with taxable income over $250,000, but not over $300,000 will pay tax at a rate of 10.3% on the excess over $250,000.
- Taxpayers with taxable income over $300,000, but not over $500,000 will pay tax at a rate of 11.3% on the excess over $300,000.
- For the portion of taxable income that exceeds $500,000, the tax rate is 12.3%.
The taxable income amounts are doubled for married taxpayers filing jointly.
Because the rate increase is retroactive to tax years beginning on or after January 1, 2012, taxpayers will need to take the change into account for purposes of making 2012 estimated payments. There is statutory protection for estimated tax penalties when the underpayment results from a retroactive tax increase. In the past, taxpayers had to take special filing steps to avoid the penalty. However, for purposes of this law change, the Franchise Tax Board (FTB) has programmed its system to compute estimated tax underpayments as if the rate had not changed. The FTB is cautioning, however, that certain penalties may automatically be triggered and that these are abatable with further explanations.
Effects on withholding
The increase in California’s highest marginal individual income tax rate from 9.3% to 12.3% also affects entities that are required to withhold tax with respect to individual owners of passthrough entities or individual sellers of real estate located in California.
In sum, for any provision of California’s tax law that references the maximum rate applicable to individuals, this rate will now be 12.3%.
Proposition 30 also increases California’s state sales and use tax rate by ¼% (0.25%) effective from January 1, 2013, through December 31, 2016.
If Proposition 30 had not passed, an estimated $6.0 billion of spending cuts, primarily related to education, would have been triggered.
California Proposition 38
This measure, which failed, would have raised taxes on individuals at all income levels.
Oklahoma State Question 766
This measure, approved by voters, exempts all intangible personal property from state property taxes.
The impetus for this measure was a 2009 Oklahoma Supreme Court decision holding that certain types of intangible property owned by centrally assessed businesses could be subject to property taxes. There was some fear that, based on this decision, county assessors would begin taxing intangible property owned by homeowners and small businesses. So that this would not happen, Oklahoma lawmakers adopted a moratorium on franchise taxes and imposed a new gross receipts tax—the Business Activity Tax (BAT)—in lieu of an ad valorem tax on intangible personal property.
Under the original BAT code (which was to have expired entirely for tax years beginning on or after December 31, 2012), the BAT imposed on gross receipts never became effective, and taxpayers remitted tax based on former franchise tax liability, plus $25.
In May 2012, Oklahoma Senate Bill 1436 was enacted, and extended the payment of BAT based on franchise tax through the 2013 tax year and provided that the net revenues component of the BAT would be effective beginning in 2014. Also, the provision stating that the BAT Code was to have expired for tax years after December 31, 2012, was amended to make the expiration dependent on Oklahoma voters approving Question 766. Now that voters have approved Question 766, the BAT will sunset after 2012, absent any further legislative action.
Sales and use tax increases
- Arizona Proposition 204: This proposition, which failed to pass, would have made permanent the 1.0% sales and use tax increase that is scheduled to sunset May 31, 2013.
- Arkansas Issue One: This measure, approved by voters, temporarily increases the Arkansas sales and use tax rate from 6.0% to 6.5% to fund transportation projects, effective July 1, 2013.
- South Dakota Initiated Measure 15: This measure, which failed to pass, would have increased the state’s general 4.0% sales and use tax rate to 5.0%, effective January 1, 2013. The funds were to be split evenly between funding for K-12 education and Medicaid.
- Michigan Proposition 12-5: Voters rejected this proposal, which would have required a two-thirds majority vote of the State House and the State Senate to impose new or additional taxes, expand the tax base, or increase tax rates.
- Washington Initiative Measure 1185: Voters reaffirmed this measure requiring that tax increases receive two-thirds legislative approval and that fee increases receive a simple majority vote. Voters had approved the statutory two-thirds requirement on multiple occasions, but it had been suspended by the legislature.
Local tax reform
- San Francisco Proposition E: San Francisco voters approved a measure that phases out the current payroll expense tax and phases in a gross receipts tax beginning January 1, 2014. The phase-out of the payroll tax and the phase-in of the gross receipts tax is expected to occur over multiple years, depending on actual revenue performance over that period, with the full phase-in/phase-out effective by 2019. The measure also makes significant changes to the annual business registration fee structure and, according to published estimates, is expected to generate an additional $28.5 million in revenue annually for the City of San Francisco.
For more information, contact a tax professional with KPMG’s State and Local Tax practice: