The California Taxpayers Association (CalTax) filed suit last month to challenge a retroactive tax increase, claiming it infringes on the rights of businesses operating in California.
The lawsuit, filed on August 15 in Fresno County Superior Court, targets Senate Bill 167 (Chapter 34, Statutes of 2024). The bill, which was opposed by the California Chamber of Commerce, retroactively changed the rules for apportioning global income to determine what portion is taxable in California.
This change, which was adopted in a state budget trailer bill to boost revenue, will lead to higher taxes for many businesses for periods that ended decades ago, according to CalTax.
“This legislation imposes a retroactive tax hike that would reach back several decades, allowing California’s tax collectors to go after companies that already paid every cent of the taxes owed under the laws that were in place at the time,” said CalTax President Robert Gutierrez. “This egregious violation of taxpayers’ rights cannot go unchallenged.”
Corporate Tax Increase on Foreign Dividends
Among other things, SB 167 requires companies to exclude foreign dividends from their sales factor when making a water’s-edge election. This was inaccurately described during legislative discussions as a “clarification of existing law,” when it actually overturns a law that has been in place since the 1960s, CalTax said.
The new law disregards the decisions of two independent panels from the Office of Tax Appeals (OTA), which had clearly ruled that the longstanding law permitted companies to include foreign dividends in their sales factor. Additionally, the Department of Finance revenue projections for SB 167 indicated it would immediately generate $1.3 billion, with an additional $200 million annually.
“This legislation shreds well-reasoned, unanimous decisions of California’s Office of Tax Appeals and serves as a not-so-hidden tax increase,” Gutierrez said. “This is a cash grab that undermines the tax system and threatens the integrity of the tax appeals process in California, and it must be stopped.”
Reasons for CalChamber Opposition
In addition to the tax increase outlined above, the CalChamber opposed SB 167 because its budget provisions suspended the net operating loss deduction, and limited the utilization of business tax incentives and credits, among several other changes that would harm the state’s business climate.
Credits limited by SB 167 include:
- research-and-development tax credit;
- incentives for hiring California workers;
- incentives for filming motion pictures and television productions in California; and
- elimination of bad debt deduction.
