California eyes launch income regulation, not a new tax

by

SAN FRANCISCO — California is expected to approve a regulation, supported by SpaceX, that spells out how the state will determine the amount of income tax launch companies will be required to pay.

It’s not a new tax. Since Californians passed Proposition 13 in 1978, the state legislature cannot impose new taxes or increase tax rates without at least a two-thirds majority in both the California State Senate and State Assembly.

The new regulation, which was drafted after California’s Franchise Tax Board (FTB) held hearings in 2015 and 2016 and heard testimony from SpaceX and United Launch Alliance, spells out how companies will calculate their corporate income taxes once they begin to profit from launching rockets in the Golden State.

Without the new rules, launch companies did not know how California would calculate their tax burden because California does not simply direct companies that provide services to turn over a specific percentage of their income. Instead, the state asks companies to determine the location of the customer who benefits from their services and calculate taxes based on the customer’s location.

Space launch creates a new wrinkle because the customer who benefits may be in orbit, rather than in California, another state or foreign country. Launch companies petitioned the state for clear rules to help them anticipate future tax burdens, one element firms use to calculate overall costs and set launch prices.

Under the proposed regulation, companies based in California that launch rockets outside the state would not pay California income tax on profits derived from the contract. For launches inside California, companies will pay the state 6.2 percent of a contract’s value.

“The proposed regulation provides certainty for us, as well as other taxpayers in the industry, for our California franchise tax filings going forward,” Bret Johnsen, SpaceX chief financial officer, said in an April 19 letter to California’s Office of Administrative Law, which reviews proposed regulations. “The clarity provided by the regulation alleviates the need for taxpayers to seek guidance on a case-by-case basis from the FTB or request relief from the standard apportionment rules in individual petitions.”

California’s FTB plans to hold a June 16 hearing on the regulation, which pertains to any company that obtains at least 50 percent of its gross receipts from space transportation services.

Comments: [email protected]