California Budget Includes Major Revenue Raisers and Other State Tax Law Changes

As part of the 2020-21 California State budget, where the state’s fiscal year begins July 1, the Legislature passed and Governor Newsom is expected to sign AB 85 (Committee on Budget), which makes numerous tax law changes, including suspension of the net operating loss deduction and a $5 million cap on the use of business tax credits for three years.

The following is a review of the provisions of AB 85, based upon the just over two dozen sections of the bill:

Section 1 – CRTC Section 6295 is added

This bill, when a vehicle required to be registered under the Vehicle Code is sold at retail on and after January 1, 2021, by any dealer holding a license issued pursuant to the Vehicle Code, except a new motor vehicle dealer, requires the dealer to pay the applicable sales tax to the Department of Motor Vehicles acting for and on behalf of the California Department of Tax and Fee Administration within 30 days from the date of the sale.

The bill imposes specified penalties if the dealer makes an application to the Department of Motor Vehicles that is not timely and imposes penalties and interest if the dealer fails to make an application to the Department of Motor Vehicles, fails to pay the sales tax, or fails to timely file the return required by the Sales and Use Tax Law with the California Department of Tax and Fee Administration.

Section 2 – CRTC Section 6363.9 is amended

This bill extends the sales and use tax exemptions for the sale of, or the storage, use, or other consumption of, diapers for infants, toddlers, and children until July 1, 2023.

Section 3 – CRTC Section 6363.10 is amended

This bill extends the sales and use tax exemptions for the sale of, or the storage, use, or other consumption of, menstrual hygiene products until July 1, 2023.

Section 4 – CRTC Section 6902.5 is amended

For those amounts for which an irrevocable election is made by taxpayers in lieu of claiming tax credits, beginning on or after January 1, 2020, and before January 1, 2023, there applies to those in-lieu credit amounts that do not exceed five million dollars ($5,000,000) for that taxable year.

Section 5 – CRTC Section 12209 is added

This bill provides that for each taxable year beginning on or before January 1, 2020, and before January 1, 2023, the total credits otherwise allowable, except as specified, for the taxable year may not reduce the taxes imposed by those laws by more than $5,000,000. The bill provides that the amount of any credit otherwise allowable that is not allowed due to the application of this bill will remain a credit carryover amount. The bill also provides that the carryover period for any credit that is not allowed due to the application of this bill will be increased by the number of taxable years the credit or any portion thereof was not allowed.

Section 6 – CRTC Section 17039.3 is amended

For taxpayers required or not required to be included in a combined report, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, for the taxable year shall not reduce the “net tax,” as defined in Section 17039, by more than five million dollars ($5,000,000).

For purposes of this section, “business credit” means a credit allowable under any provision of Chapter 2 (commencing with Section 17041) other than the following credits:

(1) The credit allowed by Section 17052 (relating to credit for earned income).

(2) The credit allowed by Section 17052.1 (relating to credit for young child).

(3) The credit allowed by Section 17052.6 (relating to credit for household and dependent care).

(4) The credit allowed by Section 17052.25 (relating to credit for adoption costs).

(5) The credit allowed by Section 17053.5 (relating to renter’s tax credit).

(6) The credit allowed by Section 17054 (relating to credit for personal exemption).

(7) The credit allowed by Section 17054.5 (relating to credit for qualified joint custody head of household and a qualified taxpayer with a dependent parent).

(8) The credit allowed by Section 17054.7 (relating to credit for qualified senior head of household).

(9) The credit allowed by Section 17058 (relating to credit for low-income housing).

(10) The credit allowed by Section 17061 (relating to refunds pursuant to the Unemployment Insurance Code).

Section 7 – CRTC Section 17053.95 is amended

This bill extends the carryover period from 6 taxable years to 9 taxable years for the motion picture tax credit.

Section 8 – CRTC Section 17276.23 is added

This bill, subject to certain exceptions related to a taxpayer’s income, disallows a net operating loss deduction for any taxable year beginning on or after January 1, 2020, and before January 1, 2023, and extends the carryover period for a net operating loss deduction disallowed by that provision.

Section 9 – CRTC Section 17935 is amended

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2024, in which a specified appropriation is made in any budget measure, exempts a limited partnership that files, registers, or organizes to do business in this state from the payment of the minimum franchise tax in its first taxable year.

Section 10 – CRTC Section 17941 is amended

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2024, in which a specified appropriation is made in any budget measure, exempts a limited liability company that files, registers, or organizes to do business in this state from the payment of the minimum franchise tax in its first taxable year.

Section 11 – CRTC Section 17948 is amended

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2024, in which a specified appropriation is made in any budget measure, exempts a limited liability partnership that files, registers, or organizes to do business in this state from the payment of the minimum franchise tax in its first taxable year.

Section 12 – CRTC Section 19533 is amended

The bill requires the Franchise Tax Board to apply funds collected from a debtor toward payment of the Individual Shared Responsibility Penalty and overpaid advanced premium subsidies as a first priority.

Section 13 – CRTC Section 23036 is amended

This bill adds to the ordering of business tax credit usage for taxable years beginning on or after January 1, 2020, and before January 1, 2026, the credit allowed by Section 23636 (relating to the new advanced strategic aircraft credit).

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2026, allows the above-described strategic aircraft credit to reduce the regular tax below the tentative minimum tax.

Section 14 – CRTC Section 23036.3 is amended

For taxpayers required or not required to be included a combined report, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, for the taxable year shall not reduce the “net tax,” as defined in Section 17039, by more than five million dollars ($5,000,000).

Section 15 – CRTC Section 23695 is amended

This bill extends the carryover period from 6 taxable years to 9 taxable years for the motion picture tax credit.

Section 16 – CRTC Section 24416.23 is amended

This bill, subject to certain exceptions related to a taxpayer’s income, disallows a net operating loss deduction for any taxable year beginning on or after January 1, 2020, and before January 1, 2023, and extends the carryover period for a net operating loss deduction disallowed by that provision.

Section 17 – CRTC Section 61015 is amended

This bill limits the maximum monthly penalty for a responsible individual with an applicable household size of 5 or more individuals to the maximum monthly penalty for a responsible individual with an applicable household size of 5 individuals.

Section 18 – CRTC Section 61020 is amended

This bill makes technical changes to the Individual Shared Responsibility Penalty.

Section 19 – CRTC Section 61030 is amended

This bill makes a clarifying amendment to the Franchise Tax Board rulemaking authority under ISRP.

Section 20 – Vehicle Code Section 426 is amended

This bill makes additional cross references to definition of “New motor vehicle dealer”.

Section 21 – Vehicle Code Section 4456 is amended

This bill requires, for retail sales of vehicles occurring on and after January 1, 2021, a dealer, other than a new motor vehicle dealer, to also submit with the application payment of the applicable sales tax to the Department of Motor Vehicles.

Section 22 – Vehicle Code Section 4750.6 is amended

The bill requires the Department of Motor Vehicles to transmit to the California Department of Tax and Fee Administration all collections of sales tax and penalty within 30 days. The bill requires the Department of Motor Vehicles to withhold the registration or the transfer of registration of any vehicle sold at retail on and after January 1, 2021, to any applicant by any dealer holding a license issued pursuant to the Vehicle Code, other than a new motor vehicle dealer until the dealer pays to the Department of Motor Vehicles the sales tax and any penalties. The bill requires the California Department of Tax and Fee Administration to reimburse the Department of Motor Vehicles for its costs incurred.

Section 23 – Statutes of 2019, Chapter 34, Section 12 is amended

This bill extends the due date of specific Legislative Analyst Office reports to July 1, 2022.

Section 24 – Intent

This bill states it is the intent of the Legislature to apply CRTC Section 41 to specified provisions of this bill.

Section 25 – Section 2230 Waiver

This bill provides that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill as required by that section.

Section 26 – Budget trailer bill

This bill declares that it is to take effect immediately as a bill providing for appropriations related to the Budget Bill.

As a result of the enactment of AB 85, it is estimated that over $4.4 billion in new revenue will be generated in the upcoming fiscal year. Note that the provisions of this bill are retroactive to tax years beginning on or after January 1, 2020 and so taxpayers will need to make adjustments for the loss of the NOL deduction and the limitation on their tax credit usage.