BILL ANALYSIS
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THIRD READING
Bill No: SB 28X
Author: Senate Budget and Fiscal Review Committee
Amended: As introduced
Vote: 27
WITHOUT REFERENCE TO COMMITTEE OR FILE
SUBJECT : Budget Trailer Bill: State Revenue and Tax
Administration
SOURCE : Author
DIGEST : This bill makes changes to AB 88 (Assembly
Budget Committee), AB 1452 (Assembly Budget Committee) and
AB 36XXX (Laird), all related to revenue and tax
administration.
ANALYSIS : This bill enacts new penalties on corporate
taxpayers, enacts provisions accelerating estimated
quarterly payments for corporate and personal income
taxpayers and repeal of safe harbor exemption for taxpayers
earning more than $1 million (provisions from AB 36XXX
(Laird), and implements changes to both AB 88 and AB 1452
(Assembly Budget Committee).
1. Accelerate Estimated Quarterly Payments . Currently,
corporate taxpayers with an estimated quarterly tax
payment in excess of $20,000 or annual tax liability
exceeding $80,000 must remit its tax payment
electronically in four quarterly payments of 25 percent
CONTINUED
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of estimated liability. California law generally
conforms to federal law by requiring personal income
taxpayers to make quarterly payments when the tax is
expected to exceed $200 after subtracting withholding and
credits, and when withholding and credits are expected to
be less than the smaller of 90 percent of the current
year's tax, or 100 percent (110 percent for higher income
taxpayers) of last year's tax. Taxpayers who fail to
remit payments electronically are subject to a penalty of
10 percent of the amount paid. This bill increases
estimated payments due for corporate and personal income
taxpayers required to make such payments in April and
June to 30 percent of liability, and reduces estimated
payments due in September and December to 20 percent of
liability, resulting in an increase in General Fund
revenues of $1.3 billion in 2008-09 and $240 million in
2009-10 while not increasing tax liability.
2. Eliminate "Safe Harbor" for Taxpayers with Taxable Income
over $1 million . Currently, taxpayers make estimated
payments or withhold up to 110 percent of prior year tax
liability. If the tax liability exceeds 110 percent of
the prior year liability, the taxpayer can pay the
difference by April 15 of the following tax year without
penalty. However, taxpayers who make more than $1
million in the current taxable year only have to make
estimated payments or withhold based on the prior year
liability. This bill eliminates the "safe harbor" for
taxpayers with incomes over $1 million, such that they
will have to make quarterly payments according to their
current taxable income. This will be a permanent change
and will increase General Fund revenues by $900 million
in 2008-09 and $110 million in 2009-10. The interaction
of this bill with the acceleration of estimated quarterly
payments will result in an additional revenue gain of
$135 million in 2008-09 and $25 million in 2009-10. The
final tax owed by the taxpayer is unchanged by this bill.
3. New Penalty for Understatement of Corporate Tax ,
Currently, the Franchise Tax Boar (FTB) assesses a
penalty of five percent of the unpaid tax, plus 0.5
percent of the unpaid tax each month for unpaid
corporation tax liability, known as the "late payment"
penalty. FTB may also apply an interest penalty for
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failing to pay or underpaying an estimated payment of
corporate tax. Additionally, California conforms to a
federal accuracy-related penalty equal to 20 percent of a
"substantial understatements of tax," as well as
additional penalties that apply to cases of negligence,
fraud, and reportable transactions. The accuracy-related
penalty applies to corporations other than S-Corporations
for understatements of 10 percent of the tax required to
be shown on the return for the taxable year, or $5
million, whichever is less; however, the understatement
amount is reduced by any portion where the taxpayer
relied on substantial authority, which is defined in
federal regulations. Additionally, FTB cannot impose a
penalty when it is shown that there was reasonable cause
for the portion of the understatement and the taxpayer
acted in good faith, or if the transaction was adequately
disclosed on the original return. This bill enacts a
penalty of 20 percent of the understated tax if the
understated tax is more than $1 million, regardless of
whether the understatement is for a single taxpayer or
for all entities within a combined report. The penalty
applies to understatements made on original filed returns
or amended returns filed on or before the original or
extended due date of the return for the taxable year.
The penalty does not apply to amended returns filed and
paid on or before May 31, 2009. FTB may apply the
penalty in addition to all other applicable penalties
under existing law for returns beginning in the 2003 tax
year. The bill provides that the existing deficiency
assessment process does not apply; and limits refund or
credits of the penalty only when FTB makes a
computational error. The penalty does not apply when a
change in law causes the understatement, or when the
taxpayer has reasonably relied on written advice of the
FTB in the form of a legal ruling from the chief counsel.
The bill enacts a strict liability penalty, where no
reasonable cause exception exists, and contains no
allowance for a taxpayer relying on substantial
authority. This provision results in revenue increases
of $1.4 billion in 2007-08, $75 million in 2008-09, and
$45 million in 2009-10.
4. Eliminate Tax Amnesty Penalty and Program from AB 1452 .
AB 1452, approved by the Senate and the Assembly on
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Monday, September 15, required FTB to operate a tax
amnesty program and authorized a penalty for taxpayers
not participating in the program. The program was
expected to result in a net revenue gain of $360 million
General Fund over 2007-08 and 2008-09. This bill repeals
the tax amnesty program and the amnesty penalty.
5. Accrual Changes . AB 88 (Assembly Budget Committee)
accrued all of the $1.8 billion change of the treatment
of corporation and franchise tax payments and all of the
change of personal income tax payments to the 2007-08
fiscal year. This bill provides that 60 percent of the
balance of the changes of corporation income and
franchise tax payments are accrued to the 2007-08 fiscal
year ($416 million), and the balance of corporation and
franchise tax payments and all changes in personal income
tax payments are accrued to the 2008-09 fiscal year ($1.4
billion).
6. Corrections and Clarifications . This bill makes the
following changes and clarifications to recently approved
budget measures:
A. First, AB 1452 requires Limited Liability Company
(LLC) fee taxpayers to estimate and pay LLC fees by
June 15 of the current tax year. This bill provides
that the fee payment requirement starts on June 15,
2009.
B. Second, AB 1452 additionally allowed taxpayers to
assign tax credits to an affiliated corporation
within the commonly controlled group. The bill
provided that the affiliated corporation receiving
the credit shall be treated as if it originally
earned the credit, and existing law requires that the
value of enterprise zone hiring credits cannot exceed
the amount of a taxpayer's business income
apportioned to the enterprise zone. This bill
provides that for purposes of the enterprise zone
hiring credit, any limitations on the assigning party
also apply to the affiliated corporation receiving
the credit.
C. Lastly, this bill declares that the above changes
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make clarifying changes for the purposes of proper
implementation of the LLC fee acceleration and credit
assignment provisions of AB 1452.
D. These changes have no revenue effect.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
DLW:cm 9/19/08 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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