Round-Up: Quotes, PCAOB under fire, more private equity, and NOCLAR
There is more but this will have to do for now. Word for today: Impunity
This is a round-up of recent news and my commentary on it. I am out west in California at Stanford today, co-teaching the Mattel case with Prof . Maureen McNichols to its Directors Consortium for the second year, and then headed to Berkeley where I'll teach the Mattel case to Prof Tanya Paul's MAcc students.
It's audit's hottest case, since as Stefon of SNL says, "This case has everything!"
A California tax mystery
On October 2 Levi Sumagaysay wrote for CalMatters about a mystery windfall for California Revenue. I am quoted and so is former Mattel Tax Director Brett Whitaker.
A mystery surge in California tax revenue points to tech companies like Nvidia. Here’s why
by Levi Sumagaysay October 2, 2024
An especially big surge came in July, and state officials and accounting experts think the extra receipts came from a small number of companies — most likely one or more Silicon Valley tech firms, with artificial intelligence chipmaker Nvidia a leading candidate...
But the July influx in corporate tax payments was likely related to changes in state tax rules adopted in June, according to state and accounting experts who spoke with CalMatters. The tax changes, intended to help close the deficit, include a suspension of a deduction businesses can claim to offset profit, called the net operating loss deduction, as well as a $5 million limit on how much businesses can claim for research and development and other tax credits...
If Nvidia was largely responsible for the July tax windfall, due to an estimated tax payment, the company likely expects a lot of taxable income this year, said Francine McKenna, an independent financial journalist who writes the Dig newsletter and has taught financial accounting at the University of Pennsylvania’s Wharton business school. McKenna said if that’s the case, and because there’s a limit on how much the company can claim in terms of other tax credits, Nvidia will likely make another sizable estimated tax payment in the third quarter.
“I’d expect payments from other companies as well, potentially,” said Brett Whitaker, a former tax executive at Ernst & Young, Nike and Mattel who now teaches corporate tax accounting at Indiana University. “They depend on these credits often to avoid paying tax, so suspending them could drive tax for many.”
Whitaker said most companies try to take advantage of R&D tax credits: “Big Four (accounting) firms have entire teams dedicated solely to this effort.” But he added that the credits are especially commonly used by tech companies and others whose businesses rely on innovation.
But what about other big companies? Could any of the other big California companies have contributed?
Levi writes:
A CalMatters examination of Silicon Valley’s biggest tech companies’ financial filings with the federal Securities and Exchange Commission suggests that some of them may also be affected by the tax changes. That means the companies could make estimated tax payments that could be similar in size to the ones the state received in July.
Apple, Google parent Alphabet and Facebook parent Meta are among the companies whose financial filings show they have past losses, which they could normally deduct, and/or unused research and development tax credits in the state.
What about Tesla? Well, Tesla's recent move from California to Texas complicates things. I spoke to Brett and he said that moving to Texas "will definitely change things but CA is a single sales factor state on WW income". What that means is if Tesla is still selling a lot of cars in California their base has not shifted. But if recent reports of significant sales drop in California are true, maybe their apportionment will change.
"It's unquestionable that this cloud of behavior has affected the brand," Mario Natarelli, managing partner at branding agency MBLM told Automotive News. "Tesla was the EV leader, the most innovative, represented by a visionary… Now people are selling their Teslas, ashamed to even drive them because of the association with him.”
Either way, state income tax is deductible for federal taxes... Anyway taxes are hard!
Levi's follow-up story does touch on Tesla, its continued presence in CA and tax apportionment. So check it out!