BILL ANALYSIS                                                                                                                                                                                                    



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          ASSEMBLY THIRD READING
          AB 969 (Eng)
          As Amended April 25, 2007
          Majority vote 

           RULES                           REVENUE & TAXATION       6-3    
                     (vote not relevant)
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          |     |                          |Ayes:|Charles Calderon,         |
          |     |                          |     |Arambula, Eng, Feuer,     |
          |     |                          |     |Hayashi, Ma               |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |Nays:|DeVore, Plescia, Spitzer  |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           APPROPRIATIONS      12-5                                        
           
           ----------------------------------------------------------------- 
          |Ayes:|Leno, Caballero, Davis,   |     |                          |
          |     |DeSaulnier, Huffman,      |     |                          |
          |     |Karnette, Krekorian,      |     |                          |
          |     |Lieu, Ma, Nava, Solorio,  |     |                          |
          |     |Evans                     |     |                          |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Walters, Emmerson, La     |     |                          |
          |     |Malfa, Nakanishi, Sharon  |     |                          |
          |     |Runner                    |     |                          |
          |     |                          |     |                          |
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           SUMMARY  :  Replaces permissive provisions with respect to  
          reporting use tax liability on an acceptable tax return with  
          mandatory provisions.  Specifically,  this bill  :  

          1)Requires every person that has an obligation to report and  
            remit use tax to the Board of Equalization (BOE), but fails to  
            do so, to report and remit qualified use tax on an acceptable  
            tax return for all purchases made on or after January 1, 2007.  
             Specifically:

             a)   Defines "acceptable tax return" as an original income  
               tax return timely filed with the Franchise Tax Board (FTB);









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             b)   Defines "qualified use tax" as the use tax due under the  
               sales and use tax laws (SUT) other than use tax imposed on:  
                i)  a vehicle, vessel, or aircraft; ii)  a lessee of  
               tangible personal property; and, iii)  purchasers of  
               cigarettes or tobacco products for which the purchaser is  
               registered with BOE as a cigarette or tobacco products  
               consumer;

             c)   Permits an individual using the "married, filing  
               separately" filing status with FTB to elect to report  
               either one-half of the qualified use tax or the entire  
               qualified use tax on his/her separate California personal  
               income tax return.  If an individual elects to report  
               one-half of the qualified use tax, the election is not  
               binding with respect to the other half of the qualified use  
               tax due;

             d)   Provides that all penalties and interest imposed under  
               the SUT, and rules with respect to claims for refunds or  
               credits apply to the qualified use tax reported on an  
               acceptable tax return.  Considers all qualified use tax as  
               timely reported and remitted for purposes of the SUT if it  
               is reported and remitted on a timely filed acceptable tax  
               return;

             e)   Allows BOE to make determinations for understatements of  
               qualified use tax reported on an acceptable tax return  
               within a three-year period; 

             f)   Establishes the order for application of payments  
               received on an acceptable tax return as amounts due under  
               the personal income or corporation tax laws, then qualified  
               use tax; and,

             g)   Prevents a person otherwise required to hold a seller's  
               permit or to register with BOE from using the procedures  
               set out in this bill.

          2)Eliminates the January 1, 2009, sunset requiring FTB to  
            provide a line for payment of use tax on the tax return forms  
            it administers and amends various provisions of existing law  
            to conform to these changes.

           FISCAL EFFECT  :  BOE estimates the total dollar amount of unpaid  








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          use tax by consumers is over $400 million but the expected  
          revenue increase from this bill is $6 million per fiscal year.

           COMMENTS  :  The author states that AB 969 will raise public  
          awareness of the California use tax and increase compliance  
          among the growing number of California consumers that use  
          electronic commerce.  The author attributes the minimal use of  
          the existing FTB forms to misleading language:  Use of the term  
          "elect" adds to the misconception that reporting use tax  
          liabilities is optional.  The author states, "By clarifying that  
          consumers are required to report and pay use tax liabilities on  
          their income tax returns after failing to pay BOE directly, this  
          measure will enable both tax practitioners and consumers to have  
          a better understanding of their obligation to properly report  
          use tax liabilities."

          FTB analyzed data on use tax payments reported on income tax  
          returns for the three tax filing periods.  The total amount of  
          use tax reported was:  $2.8 million in 2004 (for tax year 2003);  
          $4.6 million in 2005 (for tax years 2004); and $5.5 million in  
          2006 (for tax year 2005).  Other facts gleaned from FTB's  
          receipt of use tax payments in 2004 include:  taxpayers  
          preparing their own tax returns were eight times more likely to  
          report use tax owed than taxpayers filing tax returns prepared  
          by tax professionals; tax returns prepared by tax professionals  
          represented 63% of all returns received by FTB but prepared only  
          16.6% of the returns with use tax declarations.  Reporting use  
          tax on an income tax return protects the taxpayer from late  
          payment penalties, but some tax professionals advise their  
          clients reporting use tax due is voluntary.  Additional problems  
          arise if tax software companies do not allow the election in  
          their tax programs.

          BOE believes requiring consumers, who fail to report use tax to  
          BOE, to report and remit the use tax on their income tax returns  
          will cause both consumers and tax practitioners, including tax  
          return preparers, to be more aware of current law about unpaid  
          use tax.    

          Many consumers that use mail-order or the internet to purchase  
          tangible personal property are unaware of their responsibility  
          to pay use tax.  FTB tax forms have comprehensive instructions  
          with respect to paying use tax on income tax returns.  However,  
          if these mail-order or Internet purchasers are among the 63% of  








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          taxpayers whose returns are prepared by tax professionals, they  
          may not see the actual tax forms or instructions.  They rely on  
          their tax professionals for information with respect to the use  
          tax reporting obligation.  Also, the competitive disadvantage of  
          in-state retailers when compared to out-of-state retailers will  
          lessen as purchasers pay the use tax due.

          Committee staff note that use tax is due four times every year  
          and is based upon taxable purchases made during the preceding  
          calendar quarter.  Therefore, the very latest date that a use  
          tax obligation may be timely paid (thereby avoiding penalties  
          and interest) for any purchase during a calendar year is January  
          31 of the following calendar year.  Therefore, if a taxpayer has  
          not paid the use tax by the time that income tax return is  
          prepared (the filing period generally commencing in early  
          February), the use tax due will always be untimely.  Revenue and  
          Taxation Committee staff question the conduct of tax  
          professionals that fail to inform clients of the opportunity to  
          report and pay use tax obligations which are technically late in  
          a manner that will prevent imposition of penalties and interest.


           Analysis Prepared by  :  Kimberly Bott / REV. & TAX. / (916)  
          319-2098 


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