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The Honorable Arnold Schwarzenegger Governor, State of California State Capitol Sacramento, CA 95814 Dear Governor Schwarzenegger: I am pleased to request your SIGNATURE of SB 788 (Cogdill) which would permit the Franchise Tax Board (FTB) to conduct audits of taxpayers with water’s-edge elections on a discretionary rather than mandatory basis. The “water’s-edge” election is an election by taxpayers with worldwide income to be taxed, with specific exceptions, only upon income from affiliates within the water’s edge of the United States. The water’s-edge election was established in by the state in 1986 in response to intense international pressure to alleviate the burden on foreign corporations doing business in California and averted potential trade retaliation by our foreign partners. Under current law, the FTB is required to conduct detailed examinations of water’s-edge returns whenever an initial examination reveals a potential non-compliance issue. FTB is not permitted to bypass this examination in cases where the noncompliance is not significant enough to yield a net revenue increase to the state following an audit. Thus, FTB must expend staff time and resources on audits that may produce little or no additional revenue benefit to the state. SB 788 will help reduce unnecessary expenditures of resources and time on the part of both the FTB and taxpayers. For these and other reasons, I respectfully request your SIGNATURE of SB 788.