State Senate OKs Tax Break for Some Foreign Companies

The state Senate reversed itself Tuesday and approved a tax break for certain foreign corporations.

The 26-8 vote sent the bill to the Assembly. Backers hope to move it through the lower house before lawmakers adjourn for the year at the end of next week. The bill, by Sen. Alfred Alquist (D-San Jose), was defeated Thursday on a 19-17 vote.

But Alquist amended the measure Monday to ease provisions that would reduce tax deductions for business-related meals and entertainment. Current law limits the deduction to 80% of the cost of meals and entertainment related to a business activity. Originally, Alquist’s bill would have reduced that deduction to 50% of the expenses.

On Monday, the Senate approved amendments offered by Alquist to reduce the deduction to 62% for corporate filers. Alquist also dropped language that would have eliminated tax deductions for business-related club dues.

The bill is the latest twist in a long-running fight over the way the state taxes corporations that also do business outside California.

Until a few years ago, those corporations’ state taxes were based on the percentage of their payroll, property and sales in California. But a change that took effect in 1988 allows corporations to exclude their foreign holdings from tax computations.

However, corporations choosing that “water’s edge” approach are required to pay a fee and provide state tax collectors with a spreadsheet on their income and tax liability reported to each state.

The law also gives the state Franchise Tax Board the power to revoke the water’s edge selection if a corporation refuses to file required information or if the board decides that it cannot prevent tax evasion with the information it has.