The California Franchise Tax Board, which administers California's individual income tax and corporate franchise tax, has announced it will conform to the federal extension of time to May 15, 2023 for making payments and filing income tax returns that are due during the period January 8 to May 14, 2023.
California NOL suspension and $800 business tax waiver for new businesses
The California legislature has passed budget legislation, AB 85, and sent it to Governor Newsom, who is expected to approve it.
Notably, there were no provisions conforming California tax law to the CARES Act relief measures adopted by the federal government earlier this year.
Net operating loss deductions won’t be allowed on California income (including corporate franchise) tax returns for 2020-2022 tax years for businesses with business income, or modified adjusted gross income of $1 million or more. The term for which net operating losses that could have been deducted in those years is extended by one year for losses incurred in taxable years years beginning on or after January 1, 2021 and before January 1, 2022, by two years for losses incurred in taxable years beginning on or after January 1, 2020 and before January 1, 2021, and by three years for losses incurred in taxable years beginning before January 1, 2020.
The $800 “privilege tax” for corporations, limited partnerships and limited liability companies “doing business” in California is waived for new companies organized (registered with the California Secretary of State) on or after January 1, 20121 and before January 1, 2024.
Business credits will be limited to $5 million for the 2020 – 2022 tax years. The carryover period for the credits is extended to compensate for the years the limitation applies.
The exemption for sales tax for baby diapers and for menstrual hygiene products, which was scheduled to expire on January 1, 2022 is extended to June 30, 2023.
New sales tax collection and reporting rules will apply for auto dealers, other than new car dealers, effective January 1, 2021. The details are beyond the scope of this summary. See your tax advisor for details.
The maximum monthly penalty for not having mandated health insurance for a responsible person with an applicable household size of five or more individuals is capped at the penalty for five individuals.
California sales tax relief for small businesses
Thanks to the Supreme Court’s Wayfair decision, retailers that sell tangible personal property to customers located in states where they don’t have a physical presence may be required to collect sales and use tax. For example, a company located in Nevada that sells furniture to a California customer may be required to collect California sales and use tax and report the sale and pay the tax to California.
The same concept can require a retailer located in one sales tax district, say Santa Clara County, that sells property to a customer located in another district, say Los Angeles County, to collect and remit the sales and use tax to the district where the customer is a resident (in this example, Los Angeles County.) (This requirement has long applied to sales of motor vehicles.)
Initially, California’s Department of Tax and Fee Administration (CDTFA) issued rules imposing this collection requirement when a taxpayer had in either the preceding or current calendar year either (1) sales into the state or district exceeding $100,000 or (2) 200 or more separate transactions.
The new requirements were proposed to be effective on April 1, 2019.
Smaller retailers complained that the requirements were too burdensome — especially because they might have 200 separate transactions with a small dollar amount.
On April 25, 2019, Governor Newsom approved Assembly Bill No. 147, which provides relief to smaller retailers.
The new threshold for the requirement to collect California state and district sales and use taxes is more than $500,000 of sales of tangible personal property to customers located in California. (Sales of motor vehicles are still subject to the use tax reporting requirement, regardless of the amount.)
The second threshold of 200 or more separate transactions has been repealed and is disregarded.
The new $500,000 of sales threshold is retroactively effective on April 1, 2019.
A change in the new law this isn’t favorable to small businesses doing business in California is that district sales and use taxes for all districts must be collected and reported when a business reaches the $500,000 threshold for all of California. Under the previous guidelines, reporting and collection was only required when the $100,000 or 200 transactions threshold was reached for the district. To help get the rates that apply, the CDTFA has on online lookup tool, Find a Sales and Use Tax Rate by Address. Here is a link to the tool. https://gis.cdtfa.ca.gov/public/maps/taxrates/ (Spidell’s California Taxletter, May, 2019, p. 3, California adopts $500,000 economic nexus threshold for use taxes.)
Retailers with a physical presence in California are still required to report and collect California sales and use tax and local district sales and use tax. They only need to be concerned about the $500,000 threshold as it relates to sales to customers located in another district.
The new law also includes a new requirement that requires “marketplace facilitators” that sell goods for other companies on their web sites, like Amazon and EBay, to treat those sales as made by the marketplace facilitator. The marketplace facilitator will report the sales and collect and remit the sales and use taxes when it exceeds the $500,000 of sales threshold for the State of California and the various districts.
If the marketplace facilitator reports the sale and collects and remits the sales and use tax, the retailer isn’t required to do so.
The marketplace facilitator rules won’t be effective until October 1, 2019.
Some retailers might have to report sales made through a marketplace facilitator from April 1 through September 30, 2019 and their reporting burden may be shifted to marketplace facilitators thereafter.
There may be audit issues with the new marketplace facilitator reporting requirement, because the sales reported on the sales tax report won’t agree to the books and records of the retailer and the marketplace facilitator.
Despite the complexity of the new reporting requirements, many smaller retailers will find a lot to be thankful for in this relief legislation.