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Saturday, January 28, 2006

Muntean on California's Tax Nonconforming Tax Conformity Legislation

Muntean_2 Tax_analysts_231Mark A. Muntean (Robert W. Wood, P.C., San Francisco) has published California's Nonconforming Conformity Legislation, 39 State Tax Notes 259 (Jan. 23, 2006), also available on the Tax Analysts web site as  Doc 2005-25936, 2006 STT 14-11.   Here is the opening:

Some people would argue that nonconformity has always been a way of life in California..... So it is no surprise that, like most things in California, tax conformity is more about nonconformity than it is about conforming to the federal tax code. Unfortunately for tax advisers, that results in a bit of a mixed bag.

Many states like California adopt the Internal Revenue Code as the basis for their state income tax law. Recently, California updated its tax conformity, conforming to the IRC as of January 1, 2005. The irony of the California tax "conformity" legislation is that it includes nearly 50 pages of nonconforming provisions in the form of exceptions to the IRC. By not conforming to the federal tax reduction provisions, and by simultaneously adopting revenue-raising provisions, California tax conformity frequently results in a state tax increase for many taxpayers.

Businesses generally prefer conformity because it has the potential of reducing their state tax compliance costs. Another odd aspect of California tax conformity is the effective date of the law change. Tax statute effective dates can be confusing, and they're obviously critical if it's your ox that is being gored. In California, effective dates often bear no relationship to federal effective dates, in a typical Golden State bait-and-switch.

The California conformity legislation, AB 115, ... was signed into law on October 7, 2005. However, California conforms to the IRC as enacted on January 1, 2005. Since January 1, 2005, two major federal tax bills have been passed by Congress: the Energy Tax Incentives Act of 2005 (the Energy Act) and the Highway Reauthorization and Excise Tax Simplification Act of 2005 (Transportation Act), yet California apparently decided not to conform to that legislation. Go figure.

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