5. Treatment of State Taxes
The disputed state tax issue is the correct determination of the state tax deduction in the test year as a part of calculating the federal income tax allowance. As discussed below we determine that we should use the 2012 test year estimate of state taxes as the 2012 federal tax deduction because it is the most reasonable application of our current ratemaking practices and the most reasonable calculation.
5.1. Background
The California corporate tax is a deductible expense for federal income tax purposes. The ratemaking questions are the correct calculation and application of that calculation. For federal tax purposes in the current year a taxpayer files a return on the prior year's business results. (Thus, the federal tax return filed in 2012 addresses 2011 operations.) The state tax deduction allowance for 2012's return is the amount paid in 2011. For ratesetting purposes, we allow the utility to collect in current year rates the state and federal income taxes applicable to that current year.
5.2. Suburban's Position
Suburban reviews a lengthy history of the treatment for state taxes and argues its test year 2012 state tax deduction should be the actual state tax incurred in 2011. (Suburban (Sub.) Opening Brief at 2 - 3.) Suburban's request is for $1,001,108 for its 2012 state income tax deduction.
5.3. DRA's Position
DRA proposes to use the prior-year expense for the test year. (DRA Opening Brief at 5.) Further, DRA argues Suburban did not consistently follow the existing ratemaking practice and that it has filed other estimates in recent advice letters, which are inconsistent with its estimate in this proceeding. DRA notes that Suburban had positive state tax estimates/test year about subsequent escalation years and therefore proposes to use the amount adopted from Advice Letter 279-W.2
5.4. Discussion
The Commission, in D.89-11-058, required that for ratemaking purposes the prior year's state tax expense should be used as a deduction in the calculation of the test year's federal income tax. However Assembly Bill 1843, enacted in 2000, amended the California Revenue and Taxation Code to provide that corporations are no longer required to make estimated state tax payments one year in advance.3 Thus there is no need to follow D.89-11-058 because the timing difference of the current year's state tax payments as a deduction in the current year's federal income tax calculation is no longer an issue. Use of the current year's state taxes as a deduction in the current year's federal tax calculation is a better match of revenues and expenses for the same period. Because the tax calculations are based on test year expenses and revenues, it is logical to use the test year state tax estimate as the deduction for the test year's federal income taxes.
We therefore find that neither Suburban nor DRA are reflecting the current tax law and we will instead calculate the test year 2012 federal tax deduction using the estimated 2012 state tax expense as a deeduction.
2 This advice letter implemented the rate changes for 2010 as a part of the post-test year treatment authorized in Suburban's last general rate case.
3 See: http://www.leginfo.ca.gov/pub/99-00/bill/asm/ab_1801-1850/ab_1843_bill_20000929_chaptered.pdf at 14. "SEC. 4. Section 18415 of the Revenue and Taxation Code is amended to read: 18415. Unless otherwise specifically provided therein, the provisions of any act: ... (b) That change the provisions of Sections 19023 to 19027, inclusive, (relating to payment of estimated tax) or Section 19136 or Sections 19142 to 19151, inclusive, (relating to underpayment of estimated tax) shall be applied to taxable years beginning on or after January 1 of the year immediately after the year in which the act takes effect."
