A California “Fix” Back to ‘66

by Tom Yamachika, President, Tax Foundation Hawaii

“Lucky you live Hawaii,” the saying goes.  Sometimes we take it for granted; sometimes we consider it hype; but sometimes we really do have it better than some of our neighbors.

This week, we focus on a development in our neighboring state of California that was brought to our attention by our counterpart organization there, the California Taxpayers Association or CalTax.

It turns out that there is a formula that exists in the laws of Hawaii, California, and several other states that looks at certain statistics of a multistate taxpayer’s income to sort out which states get to tax how much of that income.  That formula, part of the Uniform Division of Income for Tax Purposes Act or UDITPA, was enacted in California in 1966.  The law was also enacted in several other states at about the same time, including in Hawaii in 1967.

Part of the formula is called the “Sales Factor.”  It compares how much gross income a taxpayer has brought in from the taxing state with the gross income the taxpayer has received everywhere.  If the Sales Factor is higher, the taxing state imposes more tax.  If it’s lower, the taxing state imposes less tax.  This calculation is important especially for large companies that do business in several states or countries.

The issue that came up in California is whether there are kinds of income that “do not count” in the Sales Factor.  If there is income that does not count, then getting that kind of income from outside the taxing state does not dilute the Sales Factor, meaning that the taxing state is taking a larger bite.

California has a history of court decisions and administrative decisions stating that, for purposes of the Sales Factor, everything counts.  But there are some people who want California to have more tax, so they are pushing for interpretations of the law saying that there are classes of income that don’t count.

When California was considering its budget act this year, its legislature shoved in a last-minute amendment adding statutory language to the Sales Factor formula.  The amendment says it’s a “clarification” of the law, and it says that certain kinds of out-of-state income don’t count.  The California Legislature passed the budget bill with the amendment in it just three days later, and the entire budget was signed into law a mere two weeks after that.  The amendment says that the “clarification” is both prospective and retroactive without limit.  It also gives the California taxing authorities the ability to write rules and regulations and adopt them without public hearing or input.

The California revenue estimators scored the amendment as wiping out a potential revenue loss of $1.3 billion for past years and $200 million a year for future years.  Which means that the law is intended to go back to 1966, namely 57 years, so tax authorities could potentially rake taxpayers over the coals again for tax years that they already paid.

This kind of legislation, as you might expect, has all kinds of constitutional problems, such as the violation of taxpayers’ due process rights.  CalTax recently marched into Fresno County Superior Court with the backing of a high-powered, multinational law firm with offices in London and Washington, DC as well as in California.  We are confident that justice will be done.

And, in the meantime, be lucky you live Hawaii.