California's tax rules will be brought into conformity with the new federal centralized partnership audit regime under a bill signed into law by Gov. Jerry Brown (D).
The new federal audit regime focuses on partnerships, rather than their various partners. S.B. 274, signed into law on September 24, would modify California’s rules to also allow the state to handle taxpayer reporting triggered by federal audits at the partnership level. The bill requires a partnership to report to the California Franchise Tax Board changes or corrections made to a federal partnership return. The reporting must be done within six months of each final federal determination.
The bill also allows partnerships to either pay any additional taxes due because of the federal adjustments or shift the obligation to their members. If a partnership decides to have its partners pay additional state taxes, all tiered partners have 90 days from the final federal due date to pay what they owe or pass the payment obligation down to their own partners. If a partnership chooses to pay additional state taxes at the partnership level, its unitary partners, if there are any, must nonetheless pay their portion of the partnership’s adjustment to the state themselves.
Under the legislation, partnerships may use a different partnership representative at the state level than at the federal level. S.B. 274 also includes a provision requiring the FTB to study whether the state should implement a de minimis rule for reporting federal changes, which would absolve partnerships of the obligation to report very small changes.
The bill, which was approved in the state Assembly unanimously on August 27 and in the Senate 39 to 0 on August 31, was backed by the Council On State Taxation and included elements of a model statute for states to use to conform to the new federal audit regime being developed by COST and other stakeholders working with the Multistate Tax Commission. Nikki Dobay, a senior tax counsel for COST who worked on S.B. 274 with the California Taxpayers Association and the FTB, told Tax Notes that although the legislation differed from the model statute in several ways, COST is supportive of the overall changes made by S.B. 274.
“We’re happy that [Brown] signed the bill,” Dobay said. “Although it’s not the model, it incorporates many of those concepts, and we think is a step forward for uniformity.”