BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 8X8|
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THIRD READING
Bill No: AB 8X8
Author: Assembly Budget Committee
Amended: 2/17/10 in Senate
Vote: 21
ASSEMBLY FLOOR : Not relevant
SUBJECT : 2009-10 Budget Trailer Bill: tax enforcement
and
administration
SOURCE : Author
DIGEST : Senate Floor Amendments of 2/17/10 delete the
prior version of the bill which expressed the intent of the
Legislature to enact statutory changes relating to the
Budget Act of 2009.
This bill now provides the necessary statutory changes in
the area of tax enforcement and tax administration in order
to address the fiscal emergency declared by Governor
Schwarzenegger pursuant to the California Constitution.
Specifically, this bill: (1) Creates a financial
institution record match system (FIRM) similar to an
existing program for child support collections. Financial
institutions will be required to perform quarterly matches
of their account records with a file of delinquent
taxpayers provided by the Franchise Tax Board (FTB) in
order to identify assets that can be applied to pay the
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delinquent tax debts. It also authorizes FTB to institute
civil proceedings to enforce specified provisions of this
bill. (2) Requires out-of-state sellers, such as Amazon,
that pay commissions to California firms or residents for
sales referrals (often through a website link) to collect
use tax on their sales to California residents. Existing
law requires Californians to self-report and pay the use
tax on these purchases, but compliance is low. (3)
Strengthens laws related to abusive tax shelters by (a)
providing a single definition for such transactions for
purposes of the application of several statutes aimed at
and curtailing such activity and revising penalty
provisions; (b) adopting federal categories for reportable
"transactions of interest"; and (c) and revising penalty
provisions. (4) Permits the state to suspend state
occupational and professional licenses because of unpaid
income tax liabilities. Allows taxpayer to avoid
suspension by entering into an installment agreement with
FTB.
ANALYSIS :
Comments
Financial Institution Record Match System (FIRM) . The FIRM
program requires financial institutions to match a list for
delinquent tax debtors against its customer records, and
provide to FTB, on a quarterly basis, the name, record
address, social security number or taxpayer identification
number for each delinquent tax debtor in its customer
records. This bill requires FTB to reimburse a financial
institution for its actual costs incurred to implement
FIRM, up to $2,500 for startup costs and no more than $250
per calendar quarter thereafter. The provisions in this
bill are similar to SB 402 (Wolk).
Expanded Sales Tax Nexus . A contentious issue in sales and
use tax administration relates to the extent to which a
state may compel an out-of-state retailer to collect use
taxes from its in-state customers. The issue is of
considerable importance because, although Californians are
required to self-report out-of-state purchases for use in
this state, the compliance rate is very low.
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In general, an out-of-state retailer must have sufficient
business presence (also known as "nexus") in order to be
required to collect and remit the tax. Under current law,
a retailer is considered "engaged in business in this
state" and required to collect the California use tax on
sales made to California consumers when it maintains
storage or warehousing facilities in the state or it has a
representative or independent contractor operating in this
state for the purpose of selling, delivering, installing,
assembling, or the taking of orders for the tangible
personal property.
Current Board of Equalization regulations specify that the
use of a computer server on the Internet to create or
maintain a web page or site by an out-of-state retailer is
not considered a factor in determining whether the retailer
has a substantial nexus with California. The regulations
further state that an Internet service provider or other
Internet access service provider, or World Wide Web hosting
services shall not be deemed the agent or representative of
any out-of-state retailer as a result of the service
provider maintaining or taking orders via a web page or
site on a computer server that is physically located in
this state.
This bill provides that the term "retailer engaged in
business in this state" includes any retailer that enters
into an agreement with a California business or other
entity under which the California entity, for a commission
or other consideration, directly or indirectly refers
potential customers of tangible personal property. The
referral can be by a link or an Internet website, or some
other means, provided that the cumulative sales price from
sales by the retailer to customers in California who are
referred pursuant to these agreements exceeds $10,000
during the preceding 12 months.
The bill does not apply to advertising on television,
radio, in print, on the Internet, or any other medium,
unless the payment for advertising consists of a commission
or other consideration that is based on sales of tangible
personal property. Thus, banners and "click-throughs" on
internet sites, such as Google, which are based on models
other than sales commissions for referrals, would not
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create nexus with California.
The bill is based on legislation enacted in the state of
New York in 2008. That law has been challenged on
Constitutional grounds, but the challenges were dismissed
at the trial court level. The provisions of this measure
are similar to AB 178 (Skinner).
Abusive Tax Shelters . Current federal and state law place
reporting requirements and restrictions on abusive tax
shelters and related transactions designed to avoid taxes.
The use of, and failure to report, such transactions is
subject to assessment, substantial penalties, and interest
by the FTB up to eight years after the tax return is filed
by the taxpayers.
According to FTB, current law suffers from inconsistencies
in definitions among various abusive tax shelter
provisions, hampering the enforcement of these provisions.
This bill eliminates these inconsistencies by providing a
single, consistent definition for abusive tax shelters,
which would be referred to as "potentially abusive tax
avoidance transactions." It also adopts the federal
reportable transaction categories for "transactions of
interest" for California purposes, and it provides similar
authority to the FTB to determine transactions of interest
for California income or franchise tax purposes (thereby
enabling the state to seek additional information related
to such transactions).
Abusive tax shelter penalties can currently be avoided if a
taxpayer that has been contacted by the FTB about such
activities files an amended return prior to when FTB issues
a deficiency notice. The bill imposes a reduced penalty,
equal to 50 percent of the full penalty, for taxpayers that
file an amended return in these circumstances. The reduced
penalty is aimed at encouraging taxpayers to file amended
returns and pay taxes owed, while at the same time
maintaining some penalty on taxpayers that had previously
reduced their tax by the use of abusive transactions. The
provisions in this bill are similar to SB 401 (Wolk).
The business license revocation provisions are similar to
AB 484 (Eng), which failed passage in the Assembly Business
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and Professions Committee.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
As shown in the following table, the tax compliance and
revenue acceleration measures would raise GF collections by
about $174 million in 2009-10 and 2010-11 combined, and by
about $162 million in 2011-12.
Revenue Impact of Compliance and Acceleration
Provisions
(In millions)
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| | 2009-10 | 2010-11 | 2011-12 |
| | | | |
|------------------------------+---------+---------+----------|
|FIRM | 0| 32| 32|
| | | | |
|------------------------------+---------+---------+----------|
|Extended sales tax nexus | 0| 107| 107|
| | | | |
|------------------------------+---------+---------+----------|
|Abusive tax shelters | 0.5| 1.8| 3.8|
| | | | |
|------------------------------+---------+---------+----------|
|Suspension of licenses for | 14| 19| 19|
|delinquent taxpayers | | | |
| | | | |
|------------------------------+---------+---------+----------|
|Total: | $14.5| $159.8|$161.8 |
| | | | |
| | | | |
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DLW:cm 2/17/10 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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