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The Franchise Tax Board (FTB) administers an 8.84% tax (known as the Bank and Corporation Franchise Tax) on net corporate income.
California S Corporations are subject to a tax rate of 1.5% on net income.
California uses the unitary method to determine the portion of income reasonably attributable to this state and thus subject to the Bank and Corporation Franchise Tax. Corporations deriving income from sources both within and outside the state are required to report the income of all related business units in a combined report. The combined income derived from all business activity is apportioned to each state or nation using an apportionment formula.
The percentage of property, payroll, and sales attributed to California, versus worldwide operations, is calculated. They are then added together, with double weight given to sales, and divided by four.
This calculation determines the percentage of the unitary or combined income subject to California’s bank and corporation franchise tax.
Apportionment Formula = percentage of unitary income subject to California’s corporate tax:
|California Payroll (percent) +||California Property (percent) +||California Sales (percent) +||California Sales (percent)|
Multinational corporations may make a “Water’s Edge” election whereby they exclude most income derived from foreign operations from the combined report. Foreign business units or corporations that have an apportionment percentage in excess of 20% must be included in the combined report. The election lasts for seven years, but is continuously renewed unless a notice of non-renewal is filed by the business.
Effective January 1, 2011 California businesses will have the option to select a Single Sales Factor. This allows companies to choose to weigh only sales made in the state – not property or payroll – to determine corporate taxes owed.
Administered by the Board of Equalization, the State of California imposes a sales and use tax that is 7.25%. In addition local counties and cities can add a percentage to the State tax which is currently averaging 1.00%. The sales tax applies to the gross receipts of retailers from the sale of tangible personal property which is not specifically exempt. Specific exemptions include most food for home consumption and prescription medicine. Sales tax is imposed at the point of sale. It is the responsibility of the retailer, but paid by the purchaser.
Use tax is paid on items purchased for the intent of use in California. Intent of use is defined as used in California within 90 days of purchase. The tax is self-reported and paid at the rate applicable in the jurisdiction in which the item will be used less the tax paid in another state.
Note: Construction materials are not exempt from sales tax and construction labor is not taxed.
County government levies and administers property taxes. The State Board of Equalization performs an oversight role relative to county assessors’ activities. Property tax is levied on 100% of assessed valuation. The tax rate is 1% plus a component representing bonded indebtedness for the district in which the property is located on the lien date. The average property tax rate in California is 1.1%, but varies on a parcel basis.
Real property is appraised upon change of ownership or new construction, and then adjusted annually at the lower of 2% or the rate of inflation as measured by the Consumer Price Index. Assessed values on real property may be reduced if the value is higher than the current market value.
Business personal property, including machinery, equipment, and fixtures is taxed at the same rate as real property, but is not subject to any special assessments. Unlike real property, business personal property is reappraised annually. Business owners must file a property statement with the county assessor each year detailing market value.
Finished goods and raw materials are not subject to property tax. Only finished goods held for use are assessed.
All employers are required to pay into the Unemployment Insurance Fund, which is used to pay unemployment benefits. All new employers are required to pay a rate of 3.4% on the first $7,000 in wages for up to three years.
There is a maximum of $434 per employee, per year. (Calculated at the highest UI tax rate of 6.2% x $7,000)
The State Disability Insurance (SDI) withholding rate for 2012 is 1.0%. The taxable wage limit is $95,585 for each employee per calendar year. The maximum to withhold for each employee is $955.85.
Administered by the California Employment Development Department, this is an employee paid tax.
California's workers' compensation system is overseen by the Department of Industrial Relations and the Department of Insurance. Landmark reform legislation (SB 899, 2005) overhauled the workers' compensation system and required independent medical reviews, established employer-selected doctor networks and imposed uniform standards. As a result, insurance capital has flowed into the state and new insurers have entered the market.
According to the Department of Insurance, base rates have fallen over 35% since January 2004.
|Tax||Base or Measure||Rate||% Administering Agency|
|Corporation Income or Bank and Corporation Franchise Tax||Combined net income apportioned to California.||8.84%||Franchise Tax Board|
|Sales and Use Tax||Receipts from sales or lease of taxable items.||7.25-10.25%||Board of Equalization|
|Property Tax||100% of Assessed Valuation||Avg. 1.1%||Board of Equalization|
|Personal Income Tax||Taxable personal income.||1.25-10.55%||Franchise Tax Board|
|Unemployment Insurance Tax (aka Payroll Tax)||First $7,000 of wages per employee per year.||1.5 – 6.2%||Employment Development Department|
|Disability Insurance (employee paid)||Taxable wage limit for withholding of $95,585.||1.0%||Employment Development Department|
|Finished Goods, Raw Materials, and Inventory Tax||NONE||NONE||NONE|
|Workers’ Compensation Insurance||Per $100 of payroll.||Varies based on job classification, workplace safety record, and insurance carrier.||Department of Insurance, Department of Industrial Relations|