Keeping Up with California’s Tax Changes

Proposition 30 prospectively increases the state sales tax rate from 7.25% to 7.5% beginning January 1, 2013 and retroactively increases income tax rates on California taxpayers with incomes exceeding certain threshold limits.

From 2012 through 2018 the marginal tax rates will be increased as follows:

Single Filer Taxable Income	Joint Filer Taxable Income	Head of Household Taxable Income	Prior Marginal Tax Rate	New Marginal Tax Rate
$250,001 – $300,000	$500,001 – $600,000	$340,001 - $408,000	9.3%	10.3%
$300,001 – $500,000	$600,001 – $1,000,000	$408,001 – $680,000	9.3%	11.3%
$500,001 – $1,000,000		$680,001 – $1,000,000	9.3%	12.3%
$1,000,000+	$1,000,000+	$1,000,000+	10.3%	13.3%

 

Taxpayers who have already made their 2012 quarterly estimated tax payments based on the prior marginal tax rates will not be subject to underpayment penalties related to the tax rate increase to the extent any underpayment is attributable to the newly increased rates. Taxpayers making quarterly payments have until April 15, 2013 to pay any additional tax liability resulting from Proposition 30’s rate increase.

For more information, see Proposition 30 – What It Means for California Taxpayers.

Proposition 39 (California)

Proposition 39 requires most multistate businesses to use a mandatory single-sales factor apportionment formula for tax years beginning on or after January 1, 2013, and to use a market-based approach for sourcing sales other than sales of tangible personal property. Apportioning taxpayers have previously had three options available with respect to apportioning income: a statutorily prescribed three-factor formula with a double-weighted sales factor, an elective single-sales factor formula, and possibly an elective three-factor, evenly-weighted formula under the Multistate Tax Compact. With the exception of the elective single-sales factor formula, sales other than sales of tangible personal property were sourced to California under a greater cost of performance approach. Proposition 39 removes the option to use a three-factor, double-weighted sales formula and requires apportioning taxpayers to source sales other than sales of personal property to California under market sourcing rules. Proposition 39 may also be affected by the final outcome of Gillette v. Franchise Tax Board.[1]

For more information, see Californians Vote to Require a Market-Based Single-Sales Factor.

Proposition E (City of San Francisco)

Voters in San Francisco approved Proposition E, phasing out San Francisco’s current payroll expense tax over a period of five years and phasing in a gross receipts tax. Proposition E is effective January 1, 2014. The current payroll expense tax applies to businesses with more than $250,000 in payroll expenses attributable to San Francisco and is imposed at a rate of 1.5% on the business’ total payroll expense in San Francisco. This payroll expense threshold subjects approximately 10% of businesses operating in San Francisco to the payroll expense tax, whereas the gross receipts tax will apply to the apportioned San Francisco gross receipts of all businesses conducting business activities in San Francisco at rates varying by industry and contingent upon the actual revenue collected during the payroll expense tax phase out process. San Francisco plans to accelerate or slow down the phase out of the payroll expense tax depending on the revenue collected under the gross receipts tax. The final phase in/phase out rates are to be effective by 2019.

 

[1] The Gillette Company, et al. v. Franchise Tax Board, No. A 130803 (Cal. Ct. App. Oct 2, 2012) [The Franchise Tax Board plans to appeal the Court of Appeal’s decision in Gillette to the California Supreme Court]