When the bloody battle over the state budget was over, businesses walked away with wounds of higher fees and tax rates but also with a valuable prize.

That prize is a change to state taxation that will allow some companies to lower their tax bills by as much as several million dollars a year. If companies are considering moving operations out of state for tax advantages, the change could convince them to stay put.

It’s one of a handful of economic stimulus measures in the budget package inserted at the insistence of Republican lawmakers and Gov. Arnold Schwarzenegger, and it will affect the way income taxes on companies are calculated. The impact will be felt by some of the L.A. area’s largest employers, such as Northrop Grumman Corp., Walt Disney Co. and Amgen Inc.

“It’s no secret that we’ve lost a lot of corporate headquarters,” said Gary Toebben, chief executive of the Los Angeles Area Chamber of Commerce. “That’s in large part because this state, unlike 22 others, treats corporate headquarters and jobs and property as a tax liability. This now levels the playing field and should help keep these headquarters here.”

Currently, California taxes companies based on a complex calculation of sales, payroll and property. After the change takes effect in 2011, companies can limit their tax liability to in-state sales.

“Right now, the state tax code acts to discourage companies from placing people here and buying more property here, which has encouraged them to expand elsewhere,” said Jon Ross, a Sacramento lobbyist representing many of the state’s largest corporations on taxation issues. “This is a good first step in reversing that.”

The goal of this move to what’s called a “single-sales” system of calculating corporate income taxes is to make it easier for major corporate headquarters and manufacturing companies to remain in the state or site additional operations here.

Twenty-two other states are already doing this, including neighboring Oregon and Arizona, so the move by state legislators here was to send a signal that at least in this instance, California was trying to remain competitive.

Headquarters helped

Overall, it is estimated that the legislation will save the state’s corporate taxpayers about $700 million in 2011, gradually increasing to about $1.5 billion a year.

The biggest beneficiaries will be major corporations that have significant operations in the state such as headquarters or manufacturing facilities but only a fraction of their global sales taking place within California.

Locally, this could include companies such as Amgen in Thousand Oaks, Disney in Burbank, Mattel Inc. in El Segundo and NBC Universal and Northrop, both headquartered in Los Angeles.

NBC Universal, which is owned by General Electric Corp. and Vivendi Universal Entertainment, stands to reap one of the largest gains, as it is in the midst of a $3 billion project to expand its campus in Universal City.

Midsize manufacturers that sell mostly nationwide or even to a global market could also see savings, though on a more modest scale. Oil and mineral extraction companies, such as Occidental Petroleum Corp., along with financial institutions and agricultural businesses, are excluded from the relief.

Critics of the legislation derided it as a giveaway to multibillion-dollar corporations, one that the state can ill afford as it grapples with a deficit that could climb as high as $15 billion for the coming fiscal year.

But supporters said the move will pay dividends in the long run, pointing to Massachusetts, which enacted its single-sales formula in 1995. A 2003 study by the Associated Industries of Massachusetts found the sales-only apportionment formula is an efficient tax incentive.

“Massachusetts gains over $7 of additional net personal income for each dollar of reduced state corporate excise tax revenues,” the study stated. “This is a significant long-run return in terms of new jobs and higher incomes as a result of the state’s investment.”

Supporters also point to decisions by California companies to site manufacturing operations in other states with a single-sales tax formula. South San Francisco biotech company Genentech Inc. specifically cited the tax issue in its 2006 decision to build a plant outside Portland, Ore., rather than in California.

Although the benefit is clear, the change is not high on the radar screens of most companies in the state, especially as the severe recession has focused the attention of businesses on short-term cost-savings.

Most companies contacted for this story declined to comment on the impact this legislation might have on their bottom lines. Some were wary of publicly speculating how much they would benefit, especially given rapidly changing economic conditions; others, like Mattel, didn’t know.

“It is unclear at this time what the benefit would be,” said Mattel spokeswoman Lisa Marie Bongiovanni.

Complex formula

Figuring out the specific tax savings is no easy task. The current formula used to determine a company’s income tax liability can yield results that vary widely from business to business.

The formula multiplies the percentage of a company’s global gross receipts that are generated in California by a factor of two, then adds in the percentage of payroll attributed to California employees, and finally adds in the percentage of the total dollar value of the company’s property holdings or leases that are in the state. All of these percentages are then averaged out. The average is multiplied by taxable income to determine tax due.

The legislation enacted in February allows companies to drop the payroll and property components and just use the percentage of sales times two.

While actual tax savings from the change won’t become reality for another three years, some larger benefits to the state’s economy could turn up much sooner as companies look at this and decide it’s enough to keep their operations and jobs within the state.

“We have clients that are constantly looking at the cost-benefit analysis of whether to keep their plants here or move them to a lower-cost state,” said Andy Gold, partner in charge of the multistate tax services group at Deloitte Tax LLP, a division of the Deloitte Touche Tohmatsu accounting firm. “This is an important part of the analysis and is favorable for staying in California.”

Eventually, Gold said, as companies look to expand operations, this provision will make it more likely that their new plants will be built in California.

The change is optional. Businesses with small payrolls, modest property values or more than half of their sales in the state might be better off sticking with the current formula, so they’d be allowed to do so.

“This is extremely important, because whichever method you use, there are winners and losers,” said Greg Hines, lobbyist with the California Manufacturers and Technology Association, which supported the legislation.

Hines said the legislation might help some manufacturers, but these savings won’t offset the existing sales tax on the purchase of manufacturing equipment. The trade group has been lobbying for the removal of that sales tax for nearly a decade, saying it discourages investment in new plant equipment.

“If that sales tax were removed, then the combination of these two moves would be a formidable one-two punch announcing that California is competitive again on the manufacturing front,” Hines said.

The issue:


California has adopted a so-called single- sales system of figuring corporate income taxes.

The benefit:


Companies will not be penalized for having employees and owning property in the state. That should help businesses expand.

The problem:


The new system doesn’t go into effect for two years. And in this recession, most businesses aren’t thinking of expanding.