A mysterious increase in tax revenue in California points to tech companies like Nvidia. Here's why

If Nvidia is largely responsible for July's tax hit based on an estimated tax payment, the company is likely expecting 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 Wharton University of Pennsylvania Business School. McKenna said if that is the case, and since there is a limit to how much the company can claim in other tax credits, Nvidia will likely make another significant estimated tax payment in the third quarter.

An Nvidia spokesman declined to comment. Neither would a spokesman for Gov. Gavin Newsom.

“I may also expect payments from other companies,” said Brett Whitaker, a former tax executive at Ernst & Young, Nike and Mattel who now teaches corporate tax accounting at Indiana University. “They often rely on these loans to avoid paying taxes, so their suspension could result in higher taxes for many.”

Whitaker said most companies try to use tax credits for research and development: “The big four (business) firms have entire teams dedicated solely to this task.” But he added that the credits are particularly common among technology companies and used by others whose companies rely on innovation.

It's difficult to say exactly when these other estimated tax payments will arrive and how much they will be, said HD Palmer, a Treasury spokesman.

Estimated tax payments are due in April, June, September and January, but these payments are not always made on time and therefore can be received at any time, according to the Franchise Tax Board.

A CalMatters investigation of Silicon Valley's largest tech companies' financial filings with the Federal Securities and Exchange Commission suggests some of them may also be affected by the tax changes. That means companies could make estimated tax payments that could be similar to what the state received in July.

Apple, Google parent Alphabet and Facebook parent Meta are among the companies whose financial filings show they have a history of losses they could normally deduct and/or have unused federal research and development tax credits.

As of December 31 last year, Alphabet had legacy losses of $18.6 billion in California. The tech giant also had $6.3 billion in research and development credits. At the same time, Meta had a history of $2.78 billion in federal losses, as well as $4.08 billion in unspecified state tax credits from prior periods. And as of September 30, 2023, Apple had $3 billion in research and development credits. All of these companies are highly profitable, and any deductions and credits they would have expected to claim are now either on hold or limited.

According to analysis of the budget proposal that included the tax changes, California's deduction suspension and tax credit limits could reduce state revenue by $5.95 billion this fiscal year, $5.5 billion the following fiscal year and $3.4 billion the year after that Increase US dollars.

The tax changes divided state lawmakers largely along party lines when the governor proposed them in his budget earlier this year. Democrats called the changes necessary, while Republicans denounced them as a burden on companies.

Democratic Sen. Scott Wiener of San Francisco, a supporter of the changes, said in an emailed statement to CalMatters: “It's important not to read too much into any single month's sales numbers, but we believe this year “We have made difficult decisions.” will strengthen the state’s financial health going forward while protecting our core programs and benefiting the overall economy.”

Sen. Roger Niello, a Republican from Roseville, an opponent of the changes and a former accountant, told CalMatters he had asked his finance staff and the Legislative Analyst's Office about the higher-than-expected corporate tax payments in July. “It's fair to assume that these are tax changes, but they really don't know,” he said. “It appears to be large deposits from a few companies.”

Niello said the state denied the deduction for operating losses in nearly half of the years between 2008 and 2027, citing a finding by the Legislative Analyst's Office in a May report. The deductions are intended to help roughly offset taxes for companies with similar overall profits over several years.

The suspension of this deduction “appears to be a government measure to account for lost revenue,” Niello said. “That’s something companies can’t rely on right now.”

In addition to the tax changes, California tech companies have navigated various legislative battles and new regulations this year. The biggest dispute was over a bill that would force them to test powerful artificial intelligence models for their potential to enable cyberattacks, the development of weapons of mass destruction and other threats to infrastructure. Several major tech companies opposed the law, saying it would stifle innovation, while prominent whistleblowers said it would help curb the reckless pursuit of tech profits. Wiener's measure was approved by the Legislature, only to be rejected by Gov. Gavin Newsom last weekend. The governor also signed bills that would protect voters from deepfakes and allow doxxing victims to sue their attackers in civil court.