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Tax

Wealth Tax Debate Intensifies

The debate over California’s proposed wealth tax intensified, with the UC Berkeley-POLITICO poll showing early support for the tax. Key commentaries on the issue include:

• “Why California’s plan to tax billionaires is misguided,” Financial Times, March 8, 2026.

• Jared Walczak, “Would California’s Wealth Tax Be Temporary?,” Tax Foundation, March 19, 2026.

• Niko Gallogly, “California’s Billionaire Tax Battle,” New York Times, March 14, 2026.

• Harold Meyerson, Google Man Peddles Snake Oil, The American Prospect, March 10, 2026.

• Aaron With, “Why unions love the ‘Billionaire Tax’,” The Hill, March 12, 2026.

• Dan Walters, “Billionaires bolt from blue states amid tax fears, mirroring rebellion in ‘Atlas Shrugged’ novel,” Cal Matters, March 17, 2026.

• Shawn Regan, “California’s Billionaire Tax Proposal Is Already Doing Damage,” City Journal, March 24, 2026.

San Diego Puts Empty Home Tax on Ballot

The San Diego City Council agreed to place an empty home tax measure on the June ballot. The measure would impose a tax on thousands of homes that are vacant for at least six months of the year. The measure is intended to discourage owners from leaving homes vacant.

Labor Unions Look to Increases Taxes on California Corporations

Major labor unions launched a campaign called UnRig California, which aims to increase taxes on large corporations. The coalition supports a permanent wealth tax and various corporate tax proposals. This includes AB 1790, which would terminate California’s water’s-edge election for taxable years beginning on or after January 1, 2028.

Trade

California Attorney General Rob Bonta and Governor Gavin Newsom announced that the state filed a motion to block implementation of President Trump’s latest efforts to impose tariffs on U.S. imports.

Energy and Climate

CARB Approves Regulations Implementing California’s Emissions Reporting Laws

The California Air Resources Board (CARB) voted on February 26, 2026 to approve regulations implementing California’s landmark corporate climate disclosure laws, establishing compliance timelines and administrative rules for companies subject to the requirements. The regulations confirm that companies must submit their first emissions disclosures by August 10, 2026. Read more at the California Energy Journal.

Companies doing business in California should now be actively building emissions inventories, internal controls, and third-party assurance processes. The compliance timeline is short relative to the scope of required data collection.

California, Washington, Quebec Publish Draft Agreement on Carbon Markets

California and Washington state released a draft agreement outlining how their carbon emissions trading programs could be linked. This step would expand the existing California–Québec cap-and-trade market and potentially create a larger West Coast carbon market. Read more at the California Energy Journal.

Trump Administration Sues California over Electric Vehicle Mandate

The Trump administration is suing the California Air Resources Board (CARB) to block enforcement of the state’s vehicle emissions rules. The U.S. Department of Justice (DOJ) argues that the state’s fleetwide CO2 emissions regulation and zero-emission vehicle (ZEV) sales mandate conflict with federal law governing fuel economy standards. Read more at the California Energy Journal.

Sable Offshore Restarts Pipeline Upon Trump Administration Order

The Trump administration directed Sable Offshore Corp. on March 13, 2026 to restart the oil pipeline system serving the Santa Ynez Unit offshore oil field, citing national security concerns and the need to strengthen domestic energy supply on the West Coast. Read more at the California Energy Journal.

In response, California launched a legal effort to stop Sable Offshore Corp.’s restart of the Las Flores Pipeline System serving the offshore Santa Ynez Unit. Read more at the California Energy Journal.

Artificial Intelligence (AI) Regulation

Governor Gavin Newsom signed Executive Order N-5-26, directing state agencies to develop a plan for new state contracting processes and best practices for artificial intelligence (AI). The practices include vetting companies based in part on how they attest and explain their policies and safeguards to protect the public from exploitation or distribution of illegal content; models that display bias or lack technology to prevent such bias; and violations of civil rights and free speech.

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Tax

State corporate income tax bill targets water’s-edge election starting in 2028

AB 1790, introduced on February 10, 2026, would terminate California’s water’s-edge election for taxable years beginning on or after January 1, 2028, shifting affected taxpayers toward mandatory worldwide combined reporting (unless another exception applies). For multinationals with California filing groups built around water’s-edge planning, this is a material model change (effective-tax-rate, provision, and cash-tax forecasting). Even if the bill does not advance quickly, it is an early signal for 2026 legislative risk that can affect transaction diligence and long-range tax planning.

Republicans expressed their opposition to the bill. “One problem is if that bill passes, we will be the only state in the union that gets rid of that Waters Edge feature,” Sen. Roger Niello, R-Fair Oaks, said. “This isn’t exactly a way to try to overcome our business-unfriendly environment. I think it would be very unwise.”

Los Angeles County sales tax headed to June ballot

Los Angeles County officials advanced a temporary half-cent general sales tax for the June 2026 ballot, with public estimates of roughly $1 billion per year in revenue to support health care services. One supervisor publicly opposed the measure on the grounds that local taxpayers should not backfill for federal funding reductions. If approved, the measure would add another layer to California’s already complex local rate environment and could affect point-of-sale systems, invoicing, and tax engines. Companies with significant taxable sales into Los Angeles County should flag potential rate changes and downstream pricing/contracting impacts (especially for long-term procurement where “tax change” clauses matter).

Ballot proposal to exempt seniors from property taxes approved for signature gathering

A ballot initiative on whether to exempt homeowners age 60 and older from paying property taxes on their primary residences is cleared to gather signatures in support.

Wealth tax debate continues

California Democrats are split over the Billionaire Tax Act, which would assess a 5% tax on the net worth of billionaires to fund health care programs.

Commentary and analysis

• Jared Walczak, “California can learn from European countries that tried wealth taxes,” CalMatters, February 19, 2026.

• Maureen Kennedy, “Relocation threats shouldn’t stop California from taxing billionaires,” The Hill, February 26, 2026.

• Eliyahu Kamisher, “Even States With No Income Tax Are Flirting With Taxing the Rich,” Bloomberg, February 27, 2026.

• Paris Barraza, “What is the California Billionaire Tax Act? Is it actually happening?,” USA TODAY, February 20, 2026

• Steve Forbes, “California’s Proposed Wealth Tax Is A Result Of The Dollar’s Devaluation,” Forbes, February 11, 2026.

California Congressman Kevin Kiley introduced the Keep Jobs in California Act of 2026 , which would prohibit any state from imposing a retroactive tax on the assets of individuals who no longer reside in the state.

Consumer Privacy

California announces largest CCPA settlement to date

On February 11, Attorney General Rob Bonta announced a $2.75 million settlement with Disney tied to alleged failures to properly honor consumer opt-out signals across devices/services, positioning it as a major enforcement marker for cross-platform privacy controls.

Antitrust

California adopts state-level premerger notification law, effective in 2027

Governor Newsom signed SB 25, the California Uniform Antitrust Pre-Merger Notification Act, requiring certain parties that make federal HSR filings to submit a copy of their filing materials to the California Attorney General starting January 1, 2027.

California to review Paramount-Warner merger

State Attorney General Rob Bonta said California is already investigating the Paramount Skydance merger with Warner Bros. “As the epicenter of the entertainment industry, California has a special interest in protecting competition,” Bonta said in a social media post.

Budget and Fiscal Issues

Commentary and analysis

• Dan Walters, “Here’s how Newsom’s spending binge outstripped revenues, creating California’s chronic deficit,” CalMatters, February 13, 2026.

Energy and Climate

New Bills Target a Range of Energy Issues, with a Focus on Affordability

Legislators introduced an array of new legislation in the 2026 legislative session. With the February 20 deadline for new bills, several policy themes begin to emerge with several areas continuing from the 2025 session. Read more at the California Energy Journal.

Bill Would Expand CARB Authority over Indirect Emissions Sources

California Assemblymember Robert Garcia introduced legislation to expand the state’s authority to regulate greenhouse gas (GHG) emissions. AB 1777 would empower the California Air Resources Board (CARB) to adopt regulations targeting emissions linked to “indirect sources,” which are facilities and land uses that attract significant mobile emissions but have historically fallen outside direct regulatory control by state authorities. Read more at the California Energy Journal.

Bill to Hold Oil Companies Liable for Climate Disasters Reintroduced

Senator Scott Wiener reintroduced legislation to authorize civil lawsuits against oil companies and other “responsible parties” for damages from climate change. SB 982, introduced on February 5, 2026, would authorize the state attorney general to bring a civil action against a responsible party for “climate-attributable damage.” SB 982 is a revised successor to SB 222, which was introduced in 2025. Read more at the California Energy Journal.

CARB adopts initial climate disclosure regulations

CARB approved a climate transparency regulation package tied to SB 253 and SB 261 at its February 26, 2026 board meeting, including a fee structure and setting August 10, 2026 as the first-year SB 253 reporting deadline (with initial-year reporting limited to Scope 1 and Scope 2, per CARB’s announcement).

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Revenue and Budget

AI-Driven Capital Gains Help Narrow Budget Deficit

Governor Gavin Newsom’s recently released 2026–27 state budget projects a modest deficit (approximately $2.9 billion) and includes revenue adjustments based on updated economic forecasts. Stronger-than-expected personal income tax receipts tied to tech and AI-related market gains helped narrow the deficit. At the same time, the Legislative Analyst’s Office and other observers have warned that the state’s revenue picture remains sensitive to equity-market swings, with downside scenarios far larger than the administration’s baseline. Pressure on core programs — especially health and human services — will frame discussions over revenue policy and structural reforms.

Tax Litigation

Florida’s Supreme Court Challenge to California’s Corporate Apportionment Receives Business Support

Taxpayer and business groups have filed briefs urging the Supreme Court to hear Florida’s case challenging a California tax apportionment regulation. Florida argues that the rules can result in unconstitutional extraterritorial taxation and discrimination against out-of-state activity.

Energy and Climate

CARB Proposes Amendments to California’s Cap-and-Trade Rules

The California Air Resources Board (CARB) issued a set of proposed regulatory amendments to the rules governing California’s greenhouse gas trading program, now referred to as Cap-and-Invest. The proposal is designed to realign the program with California’s long-term climate objectives, including the statutory goal of achieving economy-wide carbon neutrality by 2045. Read more at the California Energy Journal.

Trump Administration Sues to Overturn California Oil Setback, Citing Federal Preemption

The Trump administration is suing California to pause and overturn the state’s 2022 oil drilling setback law, known as SB 1137. The administration is arguing that the Mineral Leasing Act and the Federal Land and Policy Management Act preempts the law. The administration notes that the law would “knock out about one-third of all federally authorized oil and gas leases in California.” The lawsuit asks the court to declare SB 1137 unconstitutional and seeks an injunction against its enforcement. Read more at the California Energy Journal.

Antitrust and competition

CLRC Recommends Changes to California Antitrust Law

The California Law Revision Commission (CLRC) recommended creating new prohibitions against single-firm conduct in California’s antitrust law. The recommendations would change how the state approaches predatory pricing issues and “net effects” balancing.

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Tax

California Office of Tax Appeals Rejects Interest Relief Claim

In a December opinion, the Office of Tax Appeals denied a request to refund more than $440,000 in interest. The tribunal held that interest continues accruing on an outstanding deficiency even when the state holds excess funds from overpayments applied to other tax years. The ruling underscores the tribunal’s narrow reading of interest-relief authority and highlights the financial exposure associated with unresolved assessments. (see Bloomberg Tax.)

California Court of Appeal Upholds Los Angeles Transfer Tax

An appellate panel upheld Los Angeles’ voter-approved transfer tax on high-value real estate transactions, rejecting procedural challenges to the initiative. The decision cements the durability of the local revenue measure and reinforces judicial deference to properly enacted ballot initiatives.

California Department of Tax and Fee Administration Clarifies Sales and Use Tax Appeals

The California Department of Tax and Fee Administration (CDTFA) issued detailed procedural guidance outlining the full sequence for disputing sales and use tax and special tax determinations. The publication addresses petitions for redetermination, appeals conferences, refund claims, settlement proposals, and escalation to the Office of Tax Appeals. The guidance emphasizes strict filing deadlines and documentation requirements. For taxpayers, the update reinforces that procedural compliance—timing, substantiation, and format—can be dispositive in audit disputes. (see Bloomberg Tax.)

Budgetary and Fiscal Issues

California State Auditor Report Intensifies Scrutiny

A California State Auditor report identified tens of billions of dollars in misused or insufficiently tracked public funds across multiple programs. While the report does not directly impose new compliance mandates, it is likely to influence legislative oversight, reporting standards, and audit practices—particularly for businesses receiving state funds or contracting with public agencies.

Employment and Workforce Regulation

2026 Employment Laws Take Effect

A series of new California employment statutes and regulatory adjustments take effect on January 1, 2026, expanding employer obligations in wage standards, employee notices, employment agreements, and workforce-reduction procedures. Read more.

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The measures stem from legislation enacted during the 2025 legislative session as well as previously adopted statutes with inflation-indexed thresholds and delayed implementation timelines. For employers, the cumulative effect increases compliance requirements across payroll administration, workforce documentation, and litigation risk management. Key laws that take effect in 2026 include:

Minimum wage increase

California’s statewide minimum wage increased to $16.90 per hour beginning January 1 under the state’s automatic inflation-adjustment framework. The increase applies to employers of all sizes and raises the minimum salary threshold for most exempt employees to $70,304 annually, reflecting the requirement that exempt salaries equal at least twice the minimum wage for full-time work.

Workplace Rights Notice Requirement

New employee notice obligations took effect under SB 294 (California Workplace Know Your Rights Act), which requires employers to provide workers with a stand-alone annual notice summarizing workplace rights.

The notice must explain protections related to workers’ compensation coverage, immigration-related workplace protections, the right to organize and participate in union activity, and constitutional rights during interactions with law enforcement in the workplace.

Restrictions on “Stay-or-Pay” Agreements

AB 692 (California stay‑or‑pay employment contract restrictions) restricts the use of employment agreements that require workers to repay training costs, hiring bonuses, or other expenses if they leave a job before a specified period.

The law generally prohibits such “stay-or-pay” provisions except in limited circumstances involving bona fide educational programs or training primarily benefiting the employee.

Collective Bargaining Framework for Rideshare Drivers

Under AB 1340 (transportation network company driver collective bargaining framework), certain rideshare drivers working for transportation network companies may organize and engage in collective bargaining under a state-established process. The statute creates procedures for representation and negotiations between driver organizations and platform companies.

Expanded Training Recordkeeping

SB 513 (workplace training documentation requirements) requires employers to retain detailed documentation for workplace training programs.

Employers must maintain records identifying the training provider, dates and duration of instruction, and participating employees for programs required under state law or company policy.

Expanded Layoff Notice Requirements

Changes to California’s Worker Adjustment and Retraining Notification (WARN) framework took effect under SB 617 (California WARN notice information expansion), which requires employers issuing layoff notices to include additional information about workforce assistance programs.

The notices must reference coordination with local workforce development boards and provide information on public benefits such as CalFresh that may be available to affected workers.

Compliance Implications

Taken together, the 2026 employment law changes continue California’s expansion of workplace regulation across wage policy, labor rights, employment contracts, and workforce-reduction procedures.

For employers operating in the state, the new requirements will require updates to employee notices, employment agreements, training documentation systems, and layoff-notification practices as companies adapt to the evolving regulatory framework governing California workplaces.

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Tax Litigation

Local Tax Measures Under Judicial Scrutiny

In Sacramento, a superior court blocked the City of Long Beach from accelerating a voter-approved sales tax increase, finding that adjusting the implementation timeline would disregard the express terms of the ballot measure. The ruling reinforces that local tax measures must adhere strictly to voter-approved language and timelines, underscoring judicial willingness to enforce procedural limits on municipal revenue actions.

Water District Fees Struck Down as Unconstitutional Taxes

The California Court of Appeal upheld a lower court’s finding that groundwater replenishment charges imposed by the Coachella Valley Water District were unconstitutional because they bore no reasonable relationship to benefits received. The decision ordered refunds totaling more than $13 million and emphasized that agencies must justify differential charges across geographic areas when they resemble taxes.

For businesses subject to utility, water, or special assessments, the decision highlights judicial scrutiny over fee structures that may mask tax-like effects without clear benefit allocations.

Regulatory and Compliance

Appeals Court Halts California Climate Risk Law

A federal appeals court granted an injunction against one of California’s climate reporting laws. The Chamber of Commerce and other business groups have challenged the laws on First Amendment grounds and have sought to block implementation of the laws while their lawsuit proceeds. (see California Energy Journal.)

Business Groups Petition U.S. Supreme Court to Pause California Climate Law

The U.S. Chamber of Commerce and other industry groups filed an emergency appeal on November 15, 2025, requesting the U.S. Supreme Court to put California’s climate reporting laws on hold while legal challenges continue, the AP reported. The laws take effect January 1, 2026. (see California Energy Journal.)

Revenue and Tax Policy

Budget Pressures Persist

Recent reporting underscored that although state revenues have increased—partly due to gains in capital and technology sectors—the uptick is insufficient to close California’s structural budget gap. Continued volatility in income and sales tax collections suggests policymakers may revisit revenue measures, tax incentives, and enforcement priorities in the 2026 legislative cycle. (see Dan Walters, “California sees revenue uptick, but not enough to erase its chronic budget deficit, CalMatters, November 19, 2025; Emily Hamann, “AI boom leads to windfall tax revenues – but no tech job growth for California,” State Affairs, November 26, 2025).

Property Tax

Renewed attention surfaced around proposals to revisit California’s treatment of inherited property under Proposition 19. There is a third campaign to repeal the inheritance portion of the proposition that raised property taxes. This is the third repeal campaign, with the first two in 2022 and 2024. “Fix Prop 19 to Save Our Children’s Future” must still receive enough signatures to make the November 2026 ballot.

Climate and Energy

Appeals Court Halts California Climate Risk Law

A federal appeals court granted an injunction against one of California’s climate reporting laws. The Chamber of Commerce and other business groups have challenged the laws on First Amendment grounds and have sought to block implementation of the laws while their lawsuit proceeds. Read more at the California Energy Journal.

Interior Offshore Oil Drilling Plan Includes Six Potential California Lease Areas

The Department of the Interior released a draft proposal to lease approximately 1.27 billion acres in the Outer Continental Shelf (OCS), including in six areas off the coast of California. The draft proposal, released on November 20, 2025, follows reports on a leaked draft of the plan earlier this month. Read more at the California Energy Journal.

Business Groups Petition U.S. Supreme Court to Pause California Climate Law

The U.S. Chamber of Commerce and other industry groups filed an emergency appeal on November 15, 2025, requesting the U.S. Supreme Court to put California’s climate reporting laws on hold while legal challenges continue. The laws take effect January 1, 2026. Read more at the California Energy Journal.

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Tax Legislation

California Updates Federal Tax Conformity

California enacted one of its most consequential tax changes in a decade by updating its Internal Revenue Code conformity date from January 1, 2015, to January 1, 2025, through enactment of SB 711. This change aligns California with a wide range of federal provisions enacted over the past 10 years, while preserving California-specific deviations. Notably, the state does not conform to changes enacted under the mid-2025 “One Big, Beautiful Bill Act,” underscoring California’s selective approach to federal alignment. Read more.

Tax Litigation

Florida Seeks Supreme Court Review of California Tax System

Florida Attorney General James Uthmeier has petitioned the U.S. Supreme Court to hear a challenge alleging that California’s tax system unconstitutionally penalizes multistate corporations, particularly those that relocate or expand operations across state lines.

The complaint argues that California’s apportionment and sourcing framework discriminates against interstate commerce by effectively increasing tax burdens on companies with multi-state footprints. While the legal merits remain uncertain—and Supreme Court review is discretionary—the filing highlights growing interstate friction over aggressive state tax regimes. The case could reopen dormant Commerce Clause questions around state income taxation,

Clean Energy and Advanced Manufacturing Incentives

Clean Energy Credit Payments Excluded from Income

California enacted SB 302 to ensure clean energy developers can fully benefit from federal refundable and transferable tax credits. The law excludes from California taxable income:

• Direct pay refunds received under IRC section 6417

• Payments received for transferred credits under IRC section 6418

The exclusion applies to tax years beginning on or after January 1, 2026, and before January 1, 2031, providing planning certainty for renewable energy and infrastructure developers.

Expanded Sales Tax Exclusions for Energy and Manufacturing

California extended its sales and use tax exclusion for qualifying renewable energy and advanced manufacturing equipment through January 1, 2028. SB 86 also expands eligibility to include nuclear fusion generation facilities.

Large employers seeking the exclusion must certify compliance with specified labor standards beginning in 2026, reinforcing the state’s linkage between tax incentives and workforce policy.

Property Tax

Solar Property Tax Exclusion Clarified

SB 710 revised California’s active solar energy system property tax exclusion by removing the prior fixed sunset date. Systems qualifying before January 1, 2027, retain the exclusion indefinitely unless ownership changes.

Related legislation provides property owners with a three-year window to file claims retroactively, reducing forfeiture risk due to administrative delay.

Property Tax Relief Following California Fires

California enacted a package of bills extending deadlines and preserving property tax benefits for owners affected by recent wildfires, particularly in Los Angeles County.

Key provisions include:

• Extended timeframes to transfer base-year property values to replacement homes

• Expanded deadlines for intergenerational transfer claims

• Additional assessor discretion for disaster-related reassessments

These measures provide flexibility for rebuilding and succession planning while preserving Proposition 13 protections.

Wealth Tax

Wealth Tax Proposals Resurface

October also saw renewed attention to proposed ballot initiatives targeting ultra-high-net-worth individuals through a one-time “billionaire tax.” While not yet enacted, the proposals signal continued pressure to use targeted wealth taxes to address fiscal and housing challenges. Businesses and executives should expect renewed debate heading into the 2026 election cycle.

Climate and Energy

Newsom Signs Bill to Allow Sale of E15 Gasoline

Governor Newsom signed AB 30, which allows E15 fuel, an additional blend of gasoline, to be sold in California while the California Air Resources Board (CARB) studies its impact on clean air requirements. E15 is widely accepted as a way to reduce gasoline prices without adding environmental harm. Read more at California Energy Journal.

California Sets Standards for EV Charger Reliability

The California Energy Commission (CEC) voted unanimously to require publicly funded fast chargers for electric vehicles (EV) to be functional 97% of the time. This applies to chargers built in 2024 or later. Read more at California Energy Journal.

ExxonMobil Challenges California Climate Reporting Laws on Speech Grounds

ExxonMobil is challenging California’s greenhouse gas (GHG) emissions reporting laws as a violation of the company’s right to free speech. The company is asking the court to block implementation of SB 253 and SB 261, scheduled to take effect in 2026. Exxon filed the lawsuit in the U.S. District Court for the Eastern District of California on October 24, 2025. Read more at California Energy Journal.

Trump to Open California Coast to Offshore Oil Drilling

The Trump administration plans to open large areas of the east and west coasts and Alaska to offshore oil drilling. The new areas in federal waters are part of the administration’s proposed five-year offshore oil drilling program and would include areas previously withdrawn for environmental protection. The plan would open lease sales in federal waters off Alaska in 2026, the coasts of southern and central California in 2027, and along the Atlantic Coast in 2028. Read more at California Energy Journal.

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This change aligns California with a wide range of federal provisions enacted over the past 10 years, while preserving California-specific deviations. Notably, the state does not conform to changes enacted under the mid-2025 “One Big, Beautiful Bill Act,” underscoring California’s selective approach to federal alignment.

Key Areas of Conformity and Non-Conformity

Depreciation and Expensing

California continues to diverge from federal depreciation rules. Bonus depreciation under IRC section 168(k) remains disallowed, and the state retains its own Section 179 expensing limits—$25,000 with a $200,000 phase-out threshold—far below federal levels.

Net Operating Losses

While California generally conforms to federal NOL rules, significant limitations remain. The state continues to suspend NOL deductions for taxpayers with taxable income of $1 million or more for tax years 2024 through 2026, reducing the value of loss carryforwards for larger businesses.

Interest Deductibility and CAMT

California does not conform to the federal Section 163(j) interest limitation, allowing full interest expense deductions at the state level. The state also does not adopt the federal corporate alternative minimum tax enacted under the Inflation Reduction Act, shielding large corporations from a parallel state-level minimum tax based on book income.

Pass-Through Owners

The state continues to disallow the federal Section 199A qualified business income deduction, resulting in higher California taxable income for pass-through owners despite federal relief.

Research Credit Changes

Elimination of Alternative Incremental Research Credit

Effective January 1, 2025, California repealed its alternative incremental research credit through SB 711. Taxpayers claiming research incentives must now elect either the regular incremental credit or the alternative simplified credit, using state-specific elections and forms. The change simplifies the credit structure but requires action by taxpayers that previously relied on the repealed method, particularly those with California-centric R&D operations.

Filing Changes

Mandatory Electronic Filing Expanded

Following IRC conformity, California now requires electronic filing for a broader set of business taxpayers, including:

• Corporations filing at least 10 returns of any type annually

• Partnerships filing at least 10 returns or with more than 100 partners

• Tax-exempt organizations with unrelated business income

The shift reflects the state’s push toward centralized compliance and audit efficiency.

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Tax Policy and Administration

Extension of the Elective Pass-Through Entity Tax

As part of California’s 2025 budget package, Governor Gavin Newsom signed SB 132, extending the state’s elective pass-through entity (PTE) tax for five additional years. The regime, originally scheduled to sunset after the 2025 tax year, will now apply to taxable years ending before January 1, 2031.

The extension allows partnerships and S corporations to continue paying entity-level tax and claiming a corresponding owner-level credit, preserving a state-level workaround to the federal SALT deduction cap. SB 132 also modifies the prepayment mechanics. While the June 15 payment date remains relevant, entities that miss the deadline may still make the election, subject to a credit reduction equal to 12.5% of the unpaid or underpaid amount. Fiscal-year filers receive limited transitional relief.

For pass-through businesses, the extension provides planning certainty through the end of the decade, but increases the importance of payment timing and cash-flow management.

Financial Institutions Required to Use Single-Sales-Factor Apportionment

SB 132 also eliminates a long-standing apportionment option for banks and financial institutions. Beginning with taxable years starting on or after January 1, 2025, businesses deriving more than 50% of gross receipts from banking or financial activities may no longer use an equally weighted three-factor formula.

Instead, these taxpayers must apportion income using a single-sales-factor methodology, aligning them with most other California taxpayers. For institutions with significant California customer activity but limited in-state payroll or property, the change may materially increase California tax exposure.

Franchise Tax Board Rulings and New Reporting Requirements

In July, the Franchise Tax Board (FTB) issued Legal Ruling 2025-1 addressing the treatment of Deferred Intercompany Stock Accounts (DISA) in certain nonrecognition transactions. The ruling clarifies how basis adjustments apply in multistate corporate structures, adding complexity for groups engaging in internal reorganizations.

Separately, the FTB introduced new disclosure requirements aimed at evaluating the effectiveness of specific tax expenditures. Taxpayers claiming certain deductions, credits, or exclusions on 2024 returns may be required to file new informational forms documenting usage and outcomes. These reporting changes reflect increased legislative scrutiny of tax incentives and may raise audit or compliance risks.

Revised Market-Based Sourcing Rules for Intangibles

The California Franchise Tax Board finalized amendments to its market-based sourcing regulations governing receipts from intangible property, with the updated rules taking effect for taxable years beginning on or after January 1, 2026.

The revisions place greater emphasis on identifying where the customer receives the benefit of an intangible, rather than relying on legal domicile or contract terms. While described as clarifications, the changes may shift income into California for businesses deriving revenue from licensing, digital services, or technology-enabled offerings.

Multistate taxpayers with significant intangible revenue should reassess sourcing methodologies and documentation well before the 2026 filing season.

Property Tax and Disaster-Related Relief

Hotel Valuation and Enterprise Intangibles

In a significant property tax decision, the California Supreme Court ruled that county assessors may include both transient occupancy tax receipts and certain upfront payments when valuing hotels under the income-capitalization method.

The Court concluded that Los Angeles’s transient occupancy tax and a substantial “key money” payment constituted income from the use of the real property itself. However, the Court also held that enterprise-level intangibles—such as brand goodwill, food-and-beverage operations, and an assembled workforce—must be identified and excluded from assessed value.

The decision reinforces the importance of separating real property income from operating business value in hotel assessments statewide.

Expanded Income Tax Exclusion for Wildfire Settlements

SB 159, enacted in September, broadened and clarified California’s exclusion from gross income for qualified wildfire settlement payments. The exclusion applies retroactively to tax years beginning on or after January 1, 2021, and extends through January 1, 2030.

Recent amendments refine eligibility definitions to reduce uncertainty around which payments qualify, including amounts tied to property damage, relocation costs, and other wildfire-related losses. Businesses and individuals affected by California wildfires should review settlement agreements and prior filings to assess refund or amendment opportunities.

Permanent Extension of Non-Resident Alien Filing Provisions

Separate legislation permanently extends administrative provisions affecting non-resident aliens with California-source income. Eligible taxpayers may continue to elect inclusion in group non-resident returns instead of filing individually, and estimated tax payment requirements have been eliminated for those making the election. The changes simplify compliance for employers and international assignees alike.

Federal Trade Signals Affecting California Industries

Former President Donald Trump renewed threats in late September to impose a 100% tariff on films produced outside the United States, arguing that foreign incentives have displaced domestic production, particularly in California.

The announcement lacked detail, and no executive order or regulatory guidance has been issued. While speculative, the proposal bears watching for studios, distributors, and investors with cross-border production or financing arrangements.

Employment and Workforce Policy

As the 2025 legislative session closed, dozens of workplace-focused bills awaited gubernatorial action ahead of the October signing deadline. Many measures would expand employee protections, increase employer reporting obligations, or enhance enforcement authority.

Separately, several employment laws enacted earlier in the year will take effect in 2026, covering wage and hour standards, paid leave mandates, and personnel record requirements. Collectively, these changes continue California’s trajectory toward broader employee protections and higher compliance costs.

Local Authority, Small Business, and Innovation

Small Business Procurement and Licensing

Legislative activity during the summer months highlighted proposals to expand small business participation in public contracting. SB 781, though not enacted, would have authorized local Small Business Utilization Programs with participation targets and reporting requirements, signaling ongoing interest in procurement reform.

Other measures addressing licensing, cannabis regulation, lodging taxes, and local revenue authority advanced through committee, underscoring continued legislative focus on small business regulation.

Artificial Intelligence Transparency Requirements

In September, California enacted SB 53, establishing one of the nation’s first transparency regimes for advanced artificial intelligence systems. The law applies to companies meeting defined revenue and model-complexity thresholds and requires public disclosures of risk assessments, safety practices, and significant incidents.

The statute also includes whistleblower protections and reporting obligations, positioning California as an early mover in AI governance and adding compliance considerations for large technology developers.

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California established the California Motion Picture and Television Tax Credit Program 4.0 in 2023. AB 1138 expands the program to cover live action and animated series with episodes averaging 20 minutes or more, animated films, and large-scale competition shows.

It also increases the credit amount allowed for a qualified motion picture to 35% of qualified expenditures for productions filmed in greater Los Angeles and 40% of qualified expenditures for productions filmed outside of greater Los Angeles.

The tax credit was originally for up to 20% or 25% of qualified expenses for live-action films and scripted television shows.

In May, Newsom discussed working with President Trump to create a $7.5 billion federal film and television tax incentive. “We’d like to see [Trump] match the ambition that we’re advancing here today in California with the ambition to keep filmmaking all across the United States, here in the United States,” Newsom said. “I am hopeful that we, in the hands of partnership, continue to work with the administration.”

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The U.S. District Court Judge ruled on June 2, 2025 that the state did not have jurisdiction to sue Trump in the Northern District of California. The U.S. Department of Justice had argued that the case belonged in the Court of International Trade in New York.

Attorney General Rob Bonta filed the lawsuit April 16, 2025, arguing that Trump’s tariffs announced April 2, 2025 are not authorized under the International Economic Emergency Powers Act (IEEPA).

The ruling is not related to the tariff challenges before the Court of International Trade and the U.S. District Court for the District of Columbia.

Bonta appealed the decision to the Ninth Circuit Court of Appeals.

In the first action, Attorney General Rob Bonta requested a preliminary injunction in the case challenging Trump’s authority to impose tariffs. Bonta filed the lawsuit April 16, 2025, arguing that Trump’s tariffs announced April 2, 2025 are not authorized under the International Economic Emergency Powers Act (IEEPA).

“President Trump has overstepped his authority, and now families, businesses, and our ports are literally paying the price,” Governor Gavin Newsom said in a statement. “As the largest economy in the nation, California has the most to lose from President Trump’s weak and reckless policies.”

Bonta stated that “Trump’s chaotic tariff war is threatening to skyrocket the cost of living for families, lower wages, slash jobs, and throw business owners and innovators into a spiral of uncertainty.”

Bonta also filed an amicus brief in the Court of International Trade in Oregon v. Trump, a case challenging Trump’s authority to impose “emergency” tariffs. In that case, 12 U.S. states, including California, argue that Congress did not grant the president the authority to impose the tariffs and that Trump’s trade edicts reflect a “national trade policy that now hinges on the president’s whims rather than the sound exercise of his lawful authority.”

California's gross domestic product (GDP) was $4.1 trillion in 2024, trailing only the United States as a whole at $29.18 trillion, China at $18.74 trillion, and Germany at $4.65 trillion. Japan’s GDP was $4.02 trillion. Among U.S. states, Texas’s GDP was $2.709 trillion and New York’s GDP was $2.297 trillion for 2024.

California’s economy also grew at a 6% in 2024, a higher rate than the world’s three largest economies. The U.S. economy grew 5.3%, China grew 2.6%, and Germany grew 2.9%.

“California isn’t just keeping pace with the world—we’re setting the pace. Our economy is thriving because we invest in people, prioritize sustainability, and believe in the power of innovation,” Governor Gavin Newsom said in a statement. “And, while we celebrate this success, we recognize that our progress is threatened by the reckless tariff policies of the current federal administration. California’s economy powers the nation, and it must be protected.”

Newsom and Attorney General Rob Bonta recently filed a lawsuit arguing that Trump’s tariffs are not authorized under the International Economic Emergency Powers Act (IEEPA). The lawsuit specially cited Trump’s 10% minimum tariffs on most countries, 145% tariffs on imports from China, and 25% tariffs on imports from Canada and Mexico. The lawsuit states that California is directly harmed by the tariffs. “No state is poised to lose more than the state of California,” Newsom said.

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The IEEPA grants the president broad authority to regulate certain financial transactions to deal with an “unusual and extraordinary threat with respect to which a national emergency has been declared…” Presidents have typically invoked the authority to place financial sanctions on countries, companies, and individuals. Previous presidents have not used the IEEPA to implement tariffs on imports.

“President Trump’s new tariff regime has already had devastating impacts on the economy, creating chaos in the stock and bond markets, wiping out hundreds of billions of dollars in market capitalization in hours, chilling investment in the face of such consequential presidential action with no notice or process, and threatening to push the country into recession,” according to the complaint.

The lawsuit states that California is directly harmed by the tariffs. “No state is poised to lose more than the state of California,” Newsom said. “So that’s our state of mind, and that’s why we’re asserting ourselves on behalf of 40 million Americans. And I imagine if you caucus those 40 million Americans, you’d find few... that are celebrating this uncertainty, that are celebrating the largest tax increase in modern U.S. history, in essence a sales tax.” Newsom noted the impact that tariffs would have on the technology and agriculture industries.

Newsom said the potential impact that the tariffs could have on California’s economy have forced him to cut the state’s baseline spending in the May budget. In January, Newsom proposed a $228.9 billion general fund budget, a cut of about $3 billion from the current year. The uncertainty from the tariffs and downgrading of California’s economy have forced Newsom to cut spending by more than the proposed $3 billion. Newsom has already asked California’s international trade partners to exclude products made in the state from tariffs imposed in retaliation to the Trump administration’s tariffs.

The U.S. Department of Justice asked that the lawsuit be moved from a California federal court to the U.S. Court of International Trade in New York, the Sacramento Bee reported. The Department of Justice argued that the case should be moved to the trade court because it has exclusive jurisdiction over tariffs and that the court is already overseeing other challenges to the tariffs. They also argued that the court should consolidate the cases.

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“Donald Trump’s tariffs do not represent all Americans,” Newsom said in a video. “We value international trade. We value our manufacturing base — the largest manufacturing economy in the United States of America. We look forward to continuing to strengthen those ties, strengthen those bonds,” he said. “California is a stable trading partner.”

Newsom emphasized the importance of international trade to California’s economy. “California leads the nation as the #1 state for agriculture and manufacturing — and it’s our workers, families, and farmers who stand to lose the most from this Trump tax hike and trade war,” Newsom said in a statement. “To our international partners: As the fifth largest economy in the world, the Golden State will remain a steady, reliable partner for generations to come, no matter the turbulence coming out of Washington. California is not Washington, D.C.”

Newsom directed his administration to “identify collaborative opportunities with trading partners that protect California’s economic interests — workers, manufacturers, and businesses — and the broader supply chains linked to the state’s economy.” This includes opportunities to support job creation and innovation in trade-reliant industries, promote economic stability, and “safeguard access” to critical supplies.

Newsom did not temper his message after Trump paused the tariffs on April 9, 2025. “Trump caved. He will change his mind again,” he posted on X. “To our international partners: California is a stable, reliable partner. We want your business.”

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Targeting Climate Change Policies

“Many States have enacted, or are in the process of enacting, burdensome and ideologically motivated “climate change” or energy policies that threaten American energy dominance and our economic and national security,” Trump said in the order.

The order directly attacked California’s cap-and-trade system by stating that it “punishes carbon use by adopting impossible caps on the amount of carbon businesses may use, all but forcing businesses to pay large sums to ‘trade’ carbon credits to meet California’s radical requirements.”

Trump also cited state delays in reviewing permit applications to produce energy as well as states that have sued energy companies “for supposed ‘climate change’ harm under nuisance or other tort regimes that could result in crippling damages.”

The order stated that these state laws and policies “weaken our national security and devastate Americans by driving up energy costs for families coast-to-coast” and “undermine Federalism by projecting the regulatory preferences of a few States into all States.” Additionally, the order states that these state laws and policies “try to dictate interstate and international disputes over air, water, and natural resources; unduly discriminate against out-of-State businesses; contravene the equality of States; and retroactively impose arbitrary and excessive fines without legitimate justification.”

“These State laws and policies are fundamentally irreconcilable with my Administration’s objective to unleash American energy,” Trump stated. “They should not stand.”

Stopping Enforcement

The order directed Attorney General Pam Bondi to identify and stop enforcement of state or local laws and policies burdening domestic energy production that “are or may be unconstitutional, preempted by Federal law, or otherwise unenforceable.” In this process, the attorney general is required to “prioritize the identification of any such State laws purporting to address ‘climate change’ or involving ‘environmental, social, and governance’ initiatives, ‘environmental justice,’ carbon or ‘greenhouse gas’ emissions, and funds to collect carbon penalties or carbon taxes.” It also requires the attorney general to submit a report on these actions within 60 days.

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California imposes a corporate tax on net income of 8.84% for most businesses or 10.84% for financial institutions. SB 573 would revise that rate and tax publicly held corporations from 7% to 13% (9% to 15% for financial institutions) based on CEO-to-median-employee compensation ratio.

The applicable tax rate would increase by 50% if a company’s workforce in the United States decreases by more than 10% against an increase in contracted and foreign full-time employees. This could raise corporate taxes to as high as 19.5% for some corporations (22.5% for financial institutions). The new rates would begin for tax years beginning on and after January 1, 2026.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIII A of the California Constitution. This would require the approval of 2/3 of the membership of each house of the legislature for passage.

Tax Rate and Compensation Ratio

The proposed tax rates on net income are as follows:

• 7% for compensation ratio is more than zero to 25

• 7.5% for compensation ratio of more than 25 to 50

• 8% for compensation ratio of more than 50 to 100

• 9% for compensation ratio of more than 100 to 150

• 9.5% for compensation ratio of more than 150 to 200

• 10% for compensation ratio of more than 200 to 250

• 11% for compensation ratio of more than 250 to 300

• 12% for compensation ratio of more than 300 to 400

• 13% for compensation ratio of more than 400.

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A coalition of business groups filed a lawsuit challenging SB 253 and SB 261, two new California laws that require companies to report greenhouse gas emissions (GHG) and climate risks. The lawsuit contended that the laws violate the First Amendment by compelling speech on a “politically controversial” topic and that the Clean Air Act preempts California’s “de facto regulations of greenhouse-gas emissions nationwide.”

The judge in the Central District of California granted the state’s motion in dismissing claims that the Clean Air Act preempts the two laws and that the laws burden interstate commerce. The remaining claim is that the laws compel speech about climate change in violation of the First Amendment.

The ruling noted that the California Air Resources Board (CARB) must develop regulations to implement SB 253 and require businesses with more than $1 billion in annual revenue to report their greenhouse gas emissions. The regulations were originally due on January 1, 2025 and have been delayed until July. The judge wrote that it is “not clear to the Court that any possible regulations CARB issues would impermissibly burden interstate commerce or violate the Supremacy Clause.”

For SB 261, the judge ruled that the Chamber of Commerce failed to make a claim that it violates the Constitution. The judge ruled that the law does not force actual reductions of greenhouse gas emissions but seeks to shame companies to pressure them to reduce emissions. The judge ruled that the plaintiffs failed “to cite any relevant authority to support the proposition that a disclosure regime intended to regulate emissions through third-party actions is a de facto regulatory scheme subject to preemption.”

Key Changes

SB 219 delays until July 1, 2025 the requirement that the California Air Resources Board adopt regulations on emissions reporting. The law also makes three other key changes:

• It requires that forthcoming CARB regulations will determine when Scope 3 reporting would begin, rather than no later than 180 days after its scope 1 emissions and scope 2 emissions are reported.

• It allows a parent company to consolidate the reports rather each subsidiary. Lastly, the bill also removes the requirement that the annual fee be paid upon filing the disclosure.

• It also authorizes, rather than requires, the state board to contract with an emissions reporting organization to develop a reporting program to receive and make certain required disclosures publicly available.

The reporting deadlines remain unchanged. Companies must still report Scope 1 and 2 emissions in 2026 and Scope 3 emissions in 2027.

Opposition to Delay

The laws were the first in the nation to require reporting on GHG emissions and climate risks. California lawmakers and climate advocates opposed Newsom’s delay proposal, first presented in a budget trailer bill in July.

Newsom previously supported delaying implementation of the law. In a signing statement for SB 261, Newsom stated that the “implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure.”

Newsom expressed concern “about the overall financial impact of this bill on businesses” and asked CARB to “closely monitor the cost impacts as it implements this new bill and to make recommendations to streamline the program.”

Lawsuit

Implementation of the laws still faces legal challenges. Earlier in the year, a coalition of business groups filed a lawsuit challenging the two laws as violating the First Amendment by compelling speech on a “politically controversial” topic and that the Clean Air Act preempts California’s “de facto regulations of greenhouse-gas emissions nationwide.”

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SB 253, known as the Climate Corporate Data Accountability Act, requires companies with revenues of more than $1 billion to report their greenhouse gas (GHG) emissions related to both operations and their supply chain. SB 261 requires companies with annual revenue of more than $500 million and that do business in California to disclose publicly their climate-related financial risks and how they will address them.

The laws were the first in the nation to require reporting on GHG emissions and climate risks. A coalition of business groups filed a lawsuit challenging the laws.(see Business Groups Challenge California Climate Reporting Law on Constitutional Grounds.)

Newsom previously supported delaying implementation of the law. In a signing statement for SB 261, Newsom stated that the “implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure.”

Newsom expressed concern “about the overall financial impact of this bill on businesses” and asked CARB to “closely monitor the cost impacts as it implements this new bill and to make recommendations to streamline the program.”