Archive for the ‘California’ Category

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Amazon and California Legislators Strike a Deal

Thursday, September 8th, 2011

Yesterday, Amazon.com and key California legislative leaders of both parties struck a deal. Assuming this deal passes the state legislature and is signed by Governor Brown, Amazon.com will begin collecting sales tax in California on September 12, 2012. However, if Congress were to pass a national law dealing with Internet retailers, that law would supersede this legislation.

Amazon has been trying to get a referendum qualified on the California ballot. That measure would put the new “Amazon Tax” up to a vote of the people (probably on the March/June presidential primary); if the referendum were to pass, the Amazon Tax would be a thing of the past.

From Amazon’s view, this measure gives them a year to operate without any legal worries, and a year to lobby Congress to pass a national measure. (Given that next year is a presidential election year, I’m not hopeful of anything substantive passing Congress.) For key Democrats, this deal gives the likely certainty of future revenues versus the strong possibility of the Amazon Tax heading into history via a probable referendum.

That said, Governor Brown has not stated his position on the measure. Should he veto the measure, it’s likely the referendum would move forward.

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The Shipment of California Jobs to Texas — What can be Done?

Monday, August 29th, 2011

Back in April, Herman Bouma, an attorney with Buchanan Ingersoll & Rooney PC in Washington, DC, penned this prediction:

May 2, 2011. This just in: Concerned about the shipment of California jobs to Texas, the California State Legislature today passed legislation imposing current, worldwide income taxation on every corporate group headed by a California corporation, thus subjecting such a group to current taxation on its income earned worldwide, including in Texas. The Governor indicated he will sign the legislation, stating, “It is high time we repeal the tax breaks and loopholes for shipping California jobs to Texas.”

May 2, 2016. This just in: Recently released statistics indicate that the number of corporate groups headed by California corporations has dropped precipitously over the last five years. The statistics also indicate that those California-headed corporate groups still remaining are having a difficult time competing with other corporate groups. Members of the California State Legislature expressed surprise at the findings.

May 2, 2017. This just in: Dazed but undaunted, the California State Legislature today passed legislation imposing current, worldwide taxation on every corporation in the world and instructing the Governor to take over the world in order to ensure compliance. The Governor indicated he will sign the legislation and expressed every confidence in the ability of the California Highway Patrol to carry out its new mission.

This is, of course, false…except that as Phil Hodgen noted, its true about trusts.

Let’s say there exists a trust. The assets are outside of California. All of the beneficiaries live outside of California and have never traveled to California in their lives. The only connection with California is that the trustee is based here.

Result 1: California says the trust must pay California income tax on its income. (Consequently, the beneficiaries end up paying the California income tax even though they don’t live here). This is seen as completely logical in Sacramento–as immutable as the Law of Gravity.

Result 2: California banks and trust companies cannot compete for this business. Instead they open trust companies in Nevada and Delaware. (Consequently, banking and trust company jobs are created in Nevada and Delaware). This produces utter bewilderment in Sacramento.

It’s also true about business entities which are registered to do business in California, especially LLCs. Assume Acme LLC is a Delaware LLC; its managing member, Joe Smith, is a California resident but none of the business of the LLC is conducted in California. All of the business is conducted in Delaware (there are no California employees, offices, or any other ties that would give nexus to California). Tough; just having the managing member be a Californian is enough to give nexus to California for the LLC.

California also passed the “economic nexus” bill last year. Under this law, if 25% of an entity’s sales are to California, there is economic nexus to California and an entity is supposed to file a California tax return even if it has no employees, plant, or materials in California. (Good luck on enforcing this, or on the constitutionality of it, but the law is on the books.)

Mr. Bouma’s prediction was meant in jest about the way California has gone. The trouble is, some of his prediction is already true.

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Perhaps $1 Million a Rider

Monday, August 15th, 2011

How many individuals want to ride high-speed rail through California’s Central Valley? That’s not an academic question, as that will be the first leg of the line built by the California High-Speed Authority. The line will run from Shafter (population 17,000) to Madera (population 61,000): just north of Bakersfield to just south of Merced.

The first major city north of Bakersfield is Visalia, with a population just above 124,000. The line will then pass through Fresno (510,000) before reaching Madera. Just how many of those people need to get from one end of the Central Valley to the other?

Let’s be real: This is a colossal waste of money. And it’s now over budget by somewhere between $2.6 billion to $6.8 billion.

Yes, I realize the goal of the line is to connect the Bay Area with the Los Angeles Basin. While the news article I linked to notes a cost of $43 billion, the true cost will undoubtedly be higher. I’m guessing that the eventual cost per rider will be about $1 million. It currently costs around $100 each way to fly that route. Given where our government is today, wouldn’t a better use of the $43 billion (or $143 billion) be paying down all of our government’s debt and not building a white elephant?

I also realize that California voters approved this measure. This is one time the legislature should step up, and let the voters know that a mistake was made. Return the federal funds to Washington, and stop the project. White elephants like this is why the government is in the mess it’s in.

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California Revenues Below Expectations; State Likely Looking at a $5 Billion Deficit

Thursday, August 11th, 2011

I’m shocked, just shocked to find out that the Bronze Golden State is already falling behind on collections.

That was sarcasm, of course.

In June, California collections were $350 million below the budgeted amount. In July, they were $539 million less. That’s a total of $889 million in two months. If we extrapolate that out for an entire year, we get a $5.3 billion shortfall. Back when the budget passed I said,

And there’s a projected $4 billion increase in revenues…inserted because California had $1.2 billion in higher tax collections than projected in April. Finally, there’s the usual accounting gimmicks (moving certain payments to the following fiscal year) that will result in $1 billion of “savings”.

Surprise, surprise: $5 billion in shortfall with a budget containing $5 billion of imaginary revenue.

Unfortunately for Californians, there’s nothing to drive an increase in state revenues. As I wrote last month,

The problem for California is, there really is no driver for continued revenue growth. The new Amazon Tax will lead to less revenues in future months (it won’t be a huge loss, but it will be a loss) rather than the $200 Million increase that was written into the budget. Unemployment is increasing, and California businesses continue to face regulatory hell. I’m not seeing any improvement in the national economy.

California policymakers are hoping, of course, that I’m wrong. But for business to expand there must be reasons to do so. The administration in Washington is giving no one a reason to expand. Sacramento is following suit. Unless something drastic changes, California is looking at another year of malaise.

What the state legislature should do is obvious. Unfortunately, what they will do is also obvious: nothing.

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While I Was Out…

Wednesday, August 10th, 2011

…Nothing much happened, right? (I’m ignoring that AAA/AA+ thing, of course.)

The IRS announced that Form 8939 for estates for 2010 will be due on November 15th. However, the form has yet to be released.

Joe Kristan noted that the Wesley Snipes strategy didn’t work (again), this time in nearby Bakersfield. A Mark DeVries didn’t like the results of his audit, and among his other brilliant ideas he sued the IRS Revenue Officer and Revenue Agent handling the case…for $50 million (plus punitive damages). As Joe noted,

Suing your IRS agent for “libel, slander, nuisance, intentional and negligent infliction of emotional distress, trespass, conspiracy and imposition of a constructive trust” hasn’t worked yet. Perhaps a less confrontational approach to IRS exams would have been wise.

Peter Pappas noted that low taxes lead to economic growth. Well, I knew that but a lot of people in Washington don’t.

Phil Hodgen is running a series on PFIC’s. If you deal with them, it’s a must read.

The Franchise Tax Board has a new amnesty program (aka “Voluntary Compliance Initiative 2”). This program is for taxpayers who avoided California tax through either Offshore Financial Arrangements or Abusive Tax Avoidance Transactions. Filing period for this amnesty runs through the end of October. Taxpayers who sign up for this amnesty must file amended returns, sign a participation agreement, and pay all tax, penalties and interest by the end of October. Note that the Noneconomic Substance Transaction Understatement Penalty, the Accuracy Related Penalty, the Interest Based Penalty, and the Fraud Penalty are removed with this amnesty; however, the Large Corporate Understatement Penalty (if applicable) and the Amnesty Penalty cannot be waived.

Finally, I feel relaxed and ready for ten days of tax work to be squashed into the rest of the week. Yes, I enjoyed my vacation.

Posted in California, Estate Tax, International, IRS, Legislation, Tax Fraud | Comments Closed

Speaking of California’s Use Tax…

Thursday, July 28th, 2011

A couple posts ago, I reported on the Board of Equalization having a Use Tax Table available for next year’s filing season. An article in today’s Orange County Register reminded me how California regulations hurt small businesses and bring in far fewer revenues than projected.

Back in 2009, the legislature passed a law that said that any business that would otherwise not have to file sales tax returns that had $100,000 or more of gross receipts would have to file Use Tax returns. Once you register for the program, you must file returns until your business closes. The law was projected to bring in $81 million in its first year, eventually rising to $651 million.

So how much has the new law brought in? A total of $56 million for all three years…at a cost of $23 million.

For small businesses, the cost to comply with the regulation continues forever (or until your business stops or leaves California).

Welcome to the Bronze State….

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The FTB Would Like Some Help from California Tax Professionals

Thursday, July 28th, 2011

If you’re a tax professional in California, the Franchise Tax Board is asking for some help to improve their website.

We need tax professionals’ help to test webpages and online applications (such as MyFTB Account) and provide feedback to us. If you elect to help us, here’s what to expect:
• Testing generally takes 15 to 30 minutes.
• Sessions vary based on what we test.
• We contact you by email or phone and provide you information about the test.
• We plan to contact you only once or twice a year.
• We will not contact you during April or October.
If you would like to participate or have additional questions, respond to Donna Freeman with the following information at Donna [dot] Freeman [at] ftb.ca.gov:

Your name
Your email address
Your daytime phone
Your city

We appreciate your help!

It’s too every tax professional’s benefit to have the FTB website work well, so those of you who have a little extra time (and remember, the FTB will not contact you during April or October) should send Ms. Freeman an email.

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BOE Approves Use Tax Table for Indviduals

Thursday, July 28th, 2011

The Board of Equalization approved a tax table that individuals can use (if they wish) to report Use Tax for their 2011 tax returns (filed in 2012). Use Tax is owed by individuals and businesses when they buy products where sales tax is not charged but would be charged if they purchased it in a local store.

The table is only for non-business purchases of $1,000 or less; businesses cannot use the table and must report their actual expenses. The table is:

Adjusted Gross Income Use Tax
Less than $20,000 $7
$20,000 – $39,999 $21
$40,000 – $59,999 $35
$60,000 – $79,999 $49
$80,000 – $99,999 $63
$100,000 – $149,999 $88
$150,000 – $199,999 $123
More than $199,999 AGI times 0.07% (0.0007)

Again, businesses must use actual expenses to calculate Use Tax.

Most individuals ignore Use Tax so it’s likely having the table will increase compliance with the law.

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Class Action Approved for Los Angeles Phone Tax Lawsuit

Tuesday, July 26th, 2011

The City of Los Angeles’ telephone tax used to be based on the Federal telephone excise tax. The federal tax, collection of which began to fund the Spanish-American War (Remember the Maine?), ended when almost every circuit Court of Appeal ruled the tax unconstitutional.

So a gentleman named Estuardo Ardon sued the City of Los Angeles claiming that its phone tax was just as unconstitutional; he asked that it be made a class action suit. The city objected, claiming that each resident must sue separately per the California constitution. Today, the California Supreme Court ruled unanimously that the case can proceed as a class action.

The case now reverts back to the Superior Court, where presumably the amount of damages (that is, the amount that must be refunded to residents) must be calculated. Eventually, residents of Los Angeles will likely get some money back. This impacts other California cities, too, as several other cities have been sued for similar reasons in class actions.

Hat Tip: The Tax Foundation

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Only in California: $440.5 Million in Extra Revenue Is $350 Million Short

Wednesday, July 13th, 2011

Here in the Bronze Golden State, the state income numbers for June have just come in. Collections came in better than forecast by $440.5 Million. That seems good, but it’s not quite good enough to meet California’s budget. That budget projected that revenues would exceed the projection by $790.5 Million, so California’s golden revenues in June now look like pyrite.

The problem for California is, there really is no driver for continued revenue growth. The new Amazon Tax will lead to less revenues in future months (it won’t be a huge loss, but it will be a loss) rather than the $200 Million increase that was written into the budget. Unemployment is increasing, and California businesses continue to face regulatory hell. I’m not seeing any improvement in the national economy.

California policymakers are hoping, of course, that I’m wrong. But for business to expand there must be reasons to do so. The administration in Washington is giving no one a reason to expand. Sacramento is following suit. Unless something drastic changes, California is looking at another year of malaise.

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