BILL ANALYSIS AB 969 Page 1 ASSEMBLY THIRD READING AB 969 (Eng) As Amended April 25, 2007 Majority vote RULES REVENUE & TAXATION 6-3 (vote not relevant) ----------------------------------------------------------------- | | |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 | | | | | | | | ----------------------------------------------------------------- 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); AB 969 Page 2 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 AB 969 Page 3 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 AB 969 Page 4 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 FN: 0000772