BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 1848|
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THIRD READING
Bill No: AB 1848
Author: Ma (D)
Amended: 5/23/08 in Assembly
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 5-1, 6/25/08
AYES: Oropeza, Alquist, Machado, Scott, Wiggins
NOES: Cogdill
NO VOTE RECORDED: McClintock, Runner
SENATE FLOOR : 16-20, 8/20/08 (FAIL)
AYES: Alquist, Corbett, Florez, Kehoe, Kuehl, Lowenthal,
Machado, Migden, Oropeza, Perata, Romero, Scott,
Simitian, Steinberg, Torlakson, Wiggins
NOES: Aanestad, Ackerman, Ashburn, Battin, Calderon,
Cedillo, Cogdill, Correa, Cox, Denham, Dutton, Harman,
Hollingsworth, Maldonado, Margett, McClintock, Negrete
McLeod, Runner, Wyland, Yee
NO VOTE RECORDED: Ducheny, Padilla, Ridley-Thomas, Vincent
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 41-33, 5/29/08 - See last page for vote
SUBJECT : Income tax: returns: withholding
SOURCE : Franchise Tax Board
DIGEST : This bill requires, in modified conformity with
the federal backup withholding rules, a collection of tax,
CONTINUED
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at a rate of seven percent, on specified reportable
payments made to California residents and nonresidents, on
or after January 1, 2009.
ANALYSIS : Existing law requires the withholding of
California income or franchise taxes, generally, at a rate
of seven percent, from specified payments made to
nonresidents, including corporations, limited liability
companies, and partnerships that do not have a permanent
place of business in this state. Thus, payments for
services performed by independent contractors, rents,
royalties, estate distributions, trust distributions, and
partnership distributions and allocations of income are
subject to withholding when the payments or distributions
made to a nonresident exceed $1,500 per calendar year. The
Franchise Tax Board (FTB) is also authorized to administer
withholding on sales of California real estate by residents
and nonresidents.
This bill:
1. Requires a payor, in modified conformity with the
federal backup withholding rules, to deduct and withhold
seven percent of a reportable payment if a condition for
withholding exists.
2. Defines the term "reportable payment," by reference to
Section 18662 of the Revenue and Taxation Code, to
include payments of rents, prizes and winnings,
premiums, annuities, emoluments, compensation for
services, including bonuses, partnership income or
gains, and other fixed or determinable annual or
periodical gains, profits, and income.
3. Excludes from the definition of "reportable payment"
payments of interest, dividends, and any release of loan
funds made by a financial institution in the normal
course of business.
4. Defines a "financial institution" as a depository
institution (i.e., any bank or savings association), an
institution-affiliated party (i.e., any director,
officer, employee, or controlling shareholder), or a
federal or state credit union.
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5. Defines "payor," by reference to the federal income tax
laws, as any person who is required to make a specified
information return with respect to any reportable
payment.
6. Specifies, by reference to Section 3406 of the Revenue
and Taxation Code, the conditions under which the backup
withholding is required. Generally, reportable payments
are subject to backup withholding when:
A. The payee does not give the payor his/her taxpayer
identification number (TIN) in the required manner.
B. The Internal Revenue Service (IRS) notifies the
payor that the TIN furnished by the payee is
incorrect.
C. In the case of a reportable interest or dividend
payment, a payee is required, but fails, to certify
that he/she is not subject to withholding.
D. The IRS notifies the payor of the payee's
underreporting of interest or dividends on his/her
federal income tax return.
7. Requires a payor to notify the payee of the withholding
of tax at a time and in a manner prescribed by the FTB.
8. Requires the recipient of income to furnish his/her
social security number or other TIN, in addition to
providing his/her name and address.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 7/7/08)
Franchise Tax Board (source)
California Federation of Teachers
California Nurses Association
California School Employees Association
California Tax Reform Association
Service Employees International Union Local 1000
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OPPOSITION : (Verified 7/7/08)
American Electronics Association
Association of California Insurance Companies
Association of California Life and Health Insurance
Companies
California Aerospace Technology Association
California Bankers Association
California Building Industry Association
California Business Properties Association
California Chamber of Commerce
California Financial Services Association
California Grocers Association
California League of Food Processors
California Manufacturers and Technology Association
California Restaurant Association
California Retailers Association
California Taxpayers Association
Council on State Taxation
Long Beach Area Chamber of Commerce
Personal Insurance Federation of California
Securities Industry and Financial Markets Association
ARGUMENTS IN SUPPORT : The author states that, "Bad or
missing taxpayer identification numbers compromise
Franchise Tax Board's enforcement efforts-including its
ability to pursue nonfilers-by preventing FTB from linking
reported income to the correct taxpayer. By conforming to
federal backup withholding requirements, California will be
able to address an element of the tax gap. Especially in
difficult budget times, it is imperative that California
collects on taxes that the state is owed in order to
provide essential services."
According to the bill's sponsor, the FTB, the purpose of
this bill is to address the problem of underreporting of
income or overreporting of deductions by taxpayers, to
ensure the effectiveness of information returns as a
compliance tool, and to close the tax gap of approximately
$6.5 billion per year.
ARGUMENTS IN OPPOSITION : The opponents believe that this
bill imposes an additional burden on California companies
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by requiring those companies to police the state tax
compliance of independent contractors, companies,
investors, and customers who are residents of California.
The opponents of this bill argue that extending backup
withholding requirements to payments made to vendors for
services performed in California, especially in the case of
vendors performing services in more than one state on the
same contract, requires payors to monitor vendors on behalf
of the state and shifts the enforcement and administrative
costs of compliance, generally borne by a tax agency, onto
the private sector, thus creating yet another disincentive
for businesses to operate in California.
ASSEMBLY FLOOR :
AYES: Arambula, Beall, Berg, Brownley, Carter, Coto,
Davis, De La Torre, De Leon, DeSaulnier, Dymally, Eng,
Evans, Feuer, Fuentes, Furutani, Hancock, Hayashi,
Hernandez, Huffman, Jones, Karnette, Krekorian, Laird,
Leno, Levine, Lieber, Lieu, Ma, Mendoza, Mullin, Nava,
Nunez, Price, Ruskin, Salas, Saldana, Solorio, Swanson,
Torrico, Bass
NOES: Adams, Aghazarian, Anderson, Benoit, Berryhill,
Blakeslee, Cook, DeVore, Duvall, Emmerson, Fuller,
Gaines, Galgiani, Garcia, Garrick, Horton, Huff,
Jeffries, Keene, La Malfa, Maze, Nakanishi, Niello,
Parra, Plescia, Sharon Runner, Silva, Smyth, Spitzer,
Strickland, Tran, Villines, Walters
NO VOTE RECORDED: Caballero, Charles Calderon, Houston,
Portantino, Soto, Wolk
DLW:mw 8/25/08 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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