LEGISLATIVE CHANGE NOTICE 97-12

Assembly Bill 1217 (Bustamante), as enacted on October 3, 1997, made the following changes to California law:

SUBJECT: Economic Development Areas/Trade and Commerce to Designate Targeted Tax Area

Chapter 12.93 (commencing with Section 7097) is added to the Government Code.

This act authorizes a new type of economic deve"t area called &quot"ted Tax Area" (TTA). This act requires the Trade and Commerce Agency (TCA) to designate one targeted tax area in addition to the 39 enterprise zones. This act specifies that TCA may designate only cities that meet certain additional criteria regarding unemployment, income levels, poverty levels, and percentages of people receiving Aid to Families with Dependent Children. The TTA designation is binding for 15 years, beginning January 1, 1998.

This act also requires TCA to develop, in consultation with the department and other agencies, a framework for evaluating the effectiveness of the targeted tax area program.

Sections 17039 and 23036 of the Revenue and Taxation Code are amended.

This act specifies that the credits allowed under the act may reduce regular tax below tentative minimum tax.

Sections 17053.33 and 23633 are added to the Revenue and Taxation Code.

Sales or use tax credit: This act allows taxpayers that, as specified by Standard Industrial Classification (SIC) codes, are engaged in manufacturing (except tobacco), warehousing, certain transportation, and wholesale trade to be eligible to receive a credit for an amount equal to the sales or use taxes paid on the purchase of qualified machinery purchased for exclusive use in a TTA. The amount of the credit is limited to the tax attributable to TTA income. Qualified machinery is defined as machinery and machinery parts used to (1) manufacture, process, combine, or otherwise fabricate a product; (2) produce renewable energy resources; (3) control air or water pollution; (4) data processing and communications equipment; or (5) motion picture manufacturing equipment. In addition, qualified machinery must be purchased and placed in service before the TTA designation expires. The maximum value of property that may be eligible for the TTA sales or use tax credit is $1 million for individuals and $20 million for corporations. This act provides that the amount of tax or income attributable to the TTA for purposes of determining the allowable amount of sales or use tax credit is determined using a two-factor apportionment formula, consisting of property and payroll.

Sections 17053.34 and 23634 are added to the Revenue and Taxation Code.

Hiring credit: This act allows the same taxpayers as noted above to be eligible to receive a credit in an amount equal to a percentage of wages paid to qualified employees. A qualified employee must be hired after the area is designated as a TTA and meet certain other criteria. At least 90% of the qualified employee’s work must be directly related to a trade or business located in the TTA and at least 50% must be performed inside the TTA. The business may claim up to 50% of the wages paid to a qualified employee as a credit against tax imposed on TTA income. The credit is based on the lesser of the actual hourly wage paid or 150% of the current minimum hourly wage. The amount of the credit must be reduced by any other federal or state jobs tax credits and the taxpayer’s deduction for ordinary and necessary trade or business expenses must be reduced by the amount of the hiring credit. This act provides that the amount of tax or income attributable to the TTA for purposes of determining the allowable amount of hiring credit is determined using a two-factor apportionment formula, consisting of property and payroll.

Sections 17267.6 and 24356.6 are added to the Revenue and Taxation Code.

Business expense deduction: This act allows the same taxpayers as noted above to elect to deduct as a business expense a specified amount of the cost of qualified property purchased for exclusive use in the TTA. The deduction is allowed in the taxable year in which the taxpayer places the qualified property in service. The election must be made on the original return. The basis of the property must be reduced by the amount of the deduction. The maximum deduction for all qualified property is the lesser of 40% of the cost or the following:

If the property was placed in service:

Sections 17276.2 and 24416.2 the Revenue and Taxation Code are amended.

NOL: This act allows the same taxpayers as noted above to elect to carry over 100% of the TTA net operating losses (NOLs) to deduct from TTA income of future years. The TTA NOL is determined by computing the business loss then applying a percentage (apportioning) to calculate the TTA portion of the loss. This act provides that the amount of tax or income attributable to the TTA for purposes of determining the allowable amount of NOL is determined using a two-factor apportionment formula, consisting of property and payroll.

The changes made to the Revenue and Taxation Code by this act apply to taxable or income years beginning on or after January 1, 1998. The TTA designation is binding for a period of 15 years beginning January 1, 1998.

This act does not require any reports by the department to the Legislature.