The acting governor of the US state of California, Eleni Kounalakis, signed Senate Bill 167 into law on June 27, 2024, introducing several tax amendments aimed at addressing the USD 27.6 billion shortfall in the 2024-25 budget and the projected USD 28.4 billion deficit for the 2025-26 fiscal year.
The key changes of the bill include:
The sales and use tax law (SUT)
The Sales and Use Tax Law (SUT) imposes taxes on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state, measured by sales price.
The SUT relieves a retailer of liability for sales and use tax insofar as the measure of the tax is represented by accounts that have been found to be worthless and charged off, either for income tax purposes or based on generally accepted accounting principles, as specified, and defines “retailer” for that purpose to include certain entities affiliated with the retailer, as specified.
The SUT also, if an account is held by a lender, entitles a retailer or lender that makes a proper election, as specified, to a deduction or refund of the tax that the retailer has previously reported and paid if certain conditions are met, including that the account has been found worthless and written off by the lender pursuant to the provision described above.
This bill will sunset the definition of “retailer” described above on 1 January, 2025, and require an account to have been found worthless and written off by the lender before 1 January, 2025, in order for the lender to be entitled to the deduction or refund described above.
The bill will, on 1 January, 2028, repeal the provision described above regarding accounts held by a lender.
The personal income tax law and the corporation tax law
The Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal income tax laws, allow various deductions in computing the income that is subject to the taxes imposed by those laws, including a deduction for a net operating loss, as specified. Existing law disallows the net operating loss deduction, as specified, for taxable years beginning on or after 1 January, 2020, and before 1 January, 2022.
This bill will disallow the net operating loss deduction for taxable years beginning on or after 1 January, 2024, and before 1 January, 2027.
Business credit limit and related carryover provisionsÂ
The Personal Income Tax Law and the Corporation Tax Law authorise various credits against the taxes imposed by those laws. Existing law, for taxable years beginning on or after 1 January, 2020, and before 1 January, 2022, limits the total tax reduction by all business credits, as defined, to USD 5 million per taxable year and allows the amounts disallowed by that limit to be carried over, as specified.
This bill will similarly apply a USD 5 million business credit limit and related carryover provisions to taxable years beginning on or after 1 January, 2024, and before 1 January, 2027, as provided, unless a specified exception applies.
The bill will also state the legislature’s intent to enact legislation allowing taxpayers to utilise their credits after the limitation period ends by electing to receive a refund of those tax credits, as specified.
Oil and gas provisions
The Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal income tax laws, allow a deduction for intangible drilling and development costs in the case of oil and gas wells and geothermal wells and a deduction for depletion of natural resource deposits.
That law calculates the deduction for depletion of natural resource deposits as a percentage of gross income from the property in the case of specified natural resources, including oil, gas, and shale.
This bill will disallow the deduction for intangible drilling and development costs in the case of oil and gas wells paid or incurred on or after 1 January, 2024. It will also disallow, for taxable years beginning on or after 1 January, 2024, the calculation of depletion as a percentage of gross income from the property for specified natural resources, including coal, oil, oil shale, and gas.
Section 263(c) of the Internal Revenue Code, relating to intangible drilling and development costs in the case of oil and gas wells and geothermal wells, shall not apply to intangible drilling and development costs, in the case of oil and gas wells, paid or incurred on or after 1 January, 2024.
For taxable years beginning on or after 1 January, 2024, Section 613A of the Internal Revenue Code, relating to limitations on percentage depletion in the case of oil and gas wells, shall not apply.
