None of the firms benefiting from a tax credit for equipment purchases paid state income taxes. Activists threaten lawsuit.

Los Angeles Times

SACRAMENTO — A powerful state tax board has awarded a group of companies that paid no corporate income taxes in recent years $80.6 million in refunds.

The board voted to give 18 companies, most of them technology firms, the refunds for manufacturing equipment they had purchased. A similar vote by the board last month for three companies that received about $5 million — against the advice of the board’s staff — triggered an angry reaction from consumer advocacy groups.

After Tuesday’s vote, the groups said they may try to force the companies to give the money back through a lawsuit.

The refunds from the State Board of Equalization amount to “an unwarranted gift of public funds, an unlawful act,” said Lenny Goldberg, chairman of the California Tax Reform Assn., one of the advocacy groups.

“This is a sinkhole,” said Senate Appropriations Committee Chairwoman Carole Migden (D-San Francisco), a former chairwoman of the State Board of Equalization. “The state is hemorrhaging real cash. These are refunds for taxes not even paid. It is scandalous.”

Attorneys at the board, which implements state tax policy, had long urged members not to grant the refunds. In a memo drafted for board members in the summer of 2003, the attorneys said the credit for manufacturing equipment was never intended for companies that had accumulated enough other tax credits to owe no income tax.

The attorneys reiterated that position before last month’s vote. But before Tuesday’s vote, the attorneys said that since the board had given the initial refunds, it should be consistent and approve the 18.

The board approved refunds for Hewlett-Packard, National Semiconductor, Sun Microsystems and Intel Communications, among other companies.

At issue is a decade-old tax break called the manufacturers investment credit, which reimburses manufacturing companies for purchases of new equipment. California enacted the 6% tax credit during the recession in the 1990s to help create manufacturing jobs.

Lawmakers allowed the credit to expire in 2003, after it failed to meet its promise of creating 100,000 manufacturing jobs over 10 years.

The refunds approved Tuesday are tied to equipment purchases the companies made when the tax break was in effect.

“The idea that these companies don’t pay anything… is a wrong assertion,” said board member Bill Leonard, a Republican from San Bernardino who pushed to create the credit as an Assembly member in the early 1990s. He said that although the companies paid no corporate income taxes in the years at issue, they did pay millions in sales tax on the equipment purchases.

Despite board attorneys’ finding to the contrary, Leonard said the tax credit was intended to be available for businesses to retroactively get refunds on such sales taxes. The companies argue the same.

The five-member board consists of three Democrats and two Republicans. The two Democrats who approved the refunds, John Chiang of Los Angeles and state Controller Steve Westly, said they were following the Legislature’s intent. Both board members had been forced to recuse themselves when the refunds first came before the board in 2003 — Westly because one of the companies had donated campaign money to him, and Chiang because he owned stock in one of the firms.

Democrats in the Legislature became alarmed after the board approved the 2003 refunds without Westly and Chiang on a 2-1 vote. Fearful that a precedent was set — and that the state could ultimately lose $600 million if the board continued to grant such refunds — former state Senate Leader John Burton tried to push through a bill to block further payments.

The version of the bill that ultimately passed the Legislature exempted the 21 companies that already had applied for refunds. Board of Equalization members argued that the bill guaranteed refunds to those 21 companies. Burton said the bill does not and the refunds should not be paid.

The California Tax Reform Assn. and the Foundation for Taxpayer and Consumer Rights sent board members a letter this week accusing them of “coddling California’s corporate welfare queens.”