California voters approved Proposition 30, which increases sales and use tax rates and personal income tax rates for high-income earners, in the November 6, 2012 election. California voters also approved Proposition 39, which requires the use of single-factor (sales factor) apportionment for most businesses.
Sales tax rate increase: Effective from January 1, 2013, through December 31, 2016, the sales and use tax rate in California will increase by 0.25% from 7.25% to 7.50%.
Personal income tax rate increases: Proposition 30 also increases personal income tax rates for high-income earners by creating three new tax brackets. These brackets are effective for taxable years beginning on or after January 1, 2012, and before January 1, 2019.
Taxpayers, except heads of households and married filing jointly taxpayers, are subject to personal income tax at a rate of 10.3% for the portion of taxable income over $250,000, but not over $300,000; at a rate of 11.3% for the portion of taxable income over $300,000, but not over $500,000; and at a rate of 12.3% for the portion of taxable income over $500,000. The above thresholds for married filing jointly taxpayers are double those for single taxpayers.
Taxpayers who are heads of households are subject to personal income tax at a rate of 10.3% for the portion of taxable income that is over $340,000, but not over $408,000; at a rate of 11.3% for the portion of taxable income over $408,000, but not over $680,000; and at a rate of 12.3% for the portion of income over $680,000.
With the passage of Proposition 30 along with the existing Millionaire’s Tax imposed on taxable income in excess of $1 million the new California highest marginal rate becomes 13.3%.
Due to the retroactive nature of the rate changes the law waives the underpayment of estimated tax penalty that results from these changes.
The Franchise Tax Board will adjust the brackets for inflation for taxable years beginning on and after January 1, 2013.
Proposition 39 requires the use of single-factor apportionment for most businesses for taxable years beginning on or after January 1, 2013. This means that multistate businesses are no longer going to be allowed to choose the method for determining their state taxable income that is most advantageous for them. Instead, most multistate businesses must determine their California taxable income using the single sales factor method. Businesses that operate only in California are not affected by this change.
The sales sourcing rules for California require that, if the single sales factor method is used, sales of services be sourced to California to the extent that the purchaser received the benefit of the services in California, regardless of where the services were performed. This means that out-of state businesses with nexus in California might have significant portions of their income apportioned to California without even setting foot in the state.
Effective January 1, 2011 California adopted the economic presence standard for determining nexus, making it much easier for businesses to trigger California filing requirements. The new economic presence standard imposes nexus not only on businesses that meet specific numerical tests but also on businesses that meet the rather broad definition of “doing business” in the state. “Doing business” is defined as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit”
Businesses deriving more than 50% of their business receipts from one or more “qualified business activities” are still required to apportion their business income using the three-factor apportionment method (property, payroll, and sales factors). “Qualified business activity” is defined as agricultural, extractive, savings and loan, banking or financial.
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