From Hollywood to Napa Valley, California is a largely diverse state known for beautiful weather and bad traffic. It is one of the most popular places for visitors, on top of which there are over 38 million people living across 58 counties. In conjunction with the high population, California’s tax structure has become one of the most complex in America. Taxes appear at the state and local levels, and they finance most of California’s public services.

A few years ago, California’s successful economy was considered the 8th largest in the world. But now the state’s budget deficit is estimated to reach $53.7 billion in the year 2010, which has resulted in the rise of taxes and an unemployment rate of 12.2% (in August).

The following information explains the general aspects of California’s tax system, recent and notable changes in policies/legislation, and details about filing your own taxes.

TABLE OF CONTENTS

General Information About California Tax Laws

• • Personal Income Tax
• • Sales and Use Tax
• • Corporate Tax
• • Other Taxes

Notable Changes In Policy/Legislation

Information About Filing Your California Taxes

Tax Tips & Helpful Facts

GENERAL INFORMATION ABOUT CALIFORNIA TAX LAWS

There are three major taxes in California: the Personal Income Tax (PIT), the Sales and Use Tax (SUT), and the Corporation Tax (CT). These, plus some motor vehicle-related taxes, are the major sources of revenue for the state. Other local taxes are enforced by county.

Personal Income Tax (PIT)

Established in 1935, PIT contributes the most to California’s General Fund for state spending. It applies to all types of California source income (including wages, interest, dividends, business income, and capital gains) for both residents and nonresidents. It also applies to sole proprietorships, partnerships, estates, trusts, and subchapter S corporations.

California has 7 different brackets for Personal Income Tax rates:

• 1.25% on the first $7,168 of taxable income
• 2.25% on taxable income between $7,169 and $16,994
• 4.25% on taxable income between $16,995 and $26,821
• 6.25% on taxable income between $26,822 and $37,233
• 8.25% on taxable income between $37,234 and $47,055
• 9.55% on taxable income between $47,056 and $1,000,000
• 10.55% on taxable income $1,000,001 or more

Personal Income Tax rates were raised 0.25% in February 2009. These numbers reflect those changes, and apply to those who file as Single or Married/RDP Filing Jointly. For Head of Household and Married/RDP Filing Separately statuses, the rates are the same but the income brackets are doubled.

There are 5 filing statuses acknowledged by the state of California: Single, Married/RDP Filing Separately, Married/RDP Filing Jointly, Head of Household, and Qualifying Widow(er) With Dependent Child.

The California PIT is a progressive tax, which means that an individual’s tax rate rises with his or her income. Basically, the more you make, the more you pay.

California’s PIT rates are the highest in the country (followed by Rhode Island, Vermont, Iowa, New Jersey, and Oregon).

There are many issues surrounding California’s PIT structure. Some people are pushing for the simplification of the system, saying it has too many special provisions for groups/businesses. Others are worried that the state relies too heavily on PIT financing since it accounts for over half of the General Fund.

Sales and Use Tax (SUT)

California is one of forty-five states that have a SUT. It is the second largest source of revenue for the state’s General Fund, and it is evaluated at state and local levels. The SUT has two parts: the sales tax (established in 1933) and the use tax (established in 1935). The sales tax applies to registered retailers selling tangible goods. The use tax applies to consumers who purchase out-of-state goods and use them in California—the use tax is enforced when the sales tax is not. Most services are not directly levied, but they may be subject to other taxes or included on a final bill and taxed together with tangible goods.

California’s SUT rates vary by county/vicinity and range between 8.25% and 10.75%. For SUT rates listed by city and county, visit the following website:

• www.boe.ca.gov/cgi-bin/rates

With state and local taxes combined, California has the highest SUT rate in the country, but there are also numerous exclusions and exemptions. To see a list, visit the California State Board of Equalization:

• www.boe.ca.gov/pdf/pub61.pdf

Policy issues for California’s SUT have emerged with the movement towards non-tangible goods, untaxed services, and the Internet. The Internet allows businesses and vendors with no physical presence in California to conduct remote sales. This gives out-of-state sellers a price advantage and diverts revenue from California.

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