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Change To Business Tax Calculation Approved

Multistate businesses will be required to calculate their California income tax liability based on the percentage of their sales in the state under a measure approved by voters.

Proposition 39 was being approved by a margin of 59.8 percent to 40.2 percent, with vote-by-mail ballots and 83 percent of the state's precincts partially or fully counted, according to figures released early today by the Secretary of State's Office.


The initiative's passage "will help everybody from small business owners and home-grown companies to schools and those who rely on state services," campaign co-chairman Tom Steyer said. "They've all taken hits throughout this recession and welcome this opportunity to grow our economy, reduce our budget deficit and invest in local jobs."

Under the law in effect before Proposition 39's passage, most multistate businesses were allowed to pick one of two methods to determine the amount of their income associated with California and taxable by the state.

The "three-factor method" uses the location of the company's sales, property and employees. The more sales, property or employees the business has in California, the more of the business' income is subject to state tax.

The "single sales factor" uses only the location of the sales.

Proposition 39 will generate $500 million in the 2012-2013 fiscal year and $1 billion in each fiscal year beginning in the 2013-2014 fiscal year, according to an estimate from the Legislative Analyst's Office and Director of Finance Ana J. Matosantos.


For the first five fiscal years Proposition 39 is in effect, half the revenues it raises, up to a maximum of $550 million, will be transferred annually to the Clean Energy Job Creation Fund created by the measure. The fund will support projects intended to improve energy efficiency and expand the use of alternative energy.

Proposition 39 will also create a nine-member oversight board to annually review and evaluate spending from the fund.

The additional tax revenues generated by Proposition 39 will result in an increase to the minimum guarantee for public schools and community colleges under terms of Proposition 98, approved by voters in 1988.

The California Manufacturers and Technology Association, which opposed Proposition 39, said calling the 2009 change to the formula to determine the amount of taxes multistate businesses pay a loophole was "false and misleading."

The association also claimed that Proposition 39 would not spur economic development and job growth. It said giving another $500 million annually to programs related to energy efficiency and creating a new board to review the spending "when public safety, schools and low-income programs are competing for budget resources does not make any sense."