BILL ANALYSIS AB 8 X8 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 8 X8 (Budget Committee) As Amended February 17, 2010 Majority vote ----------------------------------------------------------------- |ASSEMBLY: | |(February 4, |SENATE: |30-8 |(February 18, | | | |2010) | | |2010) | ----------------------------------------------------------------- (vote not relevant) Original Committee Reference: RLS. SUMMARY: Contains several provisions aimed at improving tax compliance. The Senate amendments delete the Assembly version of this bill, and instead: 1)Create a financial institution record match system (FIRM) similar to an existing program for child support collections. Financial institutions would 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 delinquent tax debts. It also authorizes FTB to institute civil proceedings to enforce specified provisions of this measure. 2)Require out-of-state sellers, such as Amazon, that pay commissions to California firms or residents for sales referrals (often through a Web site 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)Strengthen laws related to abusive tax shelters by: a) providing a uniform definition for the application of several statutes aimed at curtailing such activity; b) adopting federal categories for reportable "transactions of interest;" and; c) revising penalty provisions. 4)Permit the state to suspend state occupational and professional licenses because of unpaid income tax liabilities. AB 8 X8 Page 2 Suspension could not occur until at least 60 days after all due process provisions in current law have been exhausted. Allow taxpayer to avoid suspension by entering into an installment agreement with FTB. FISCAL EFFECT : As shown in the accompanying table, the tax compliance measures would raise GF collections by $15 million in 2009-10, $160 million in 2010-11, and $162 million in 2011-12. These fiscal effects assume that this bill is enacted by June 1, 2010. AB 8 X8 Page 3 Revenue Impact of Compliance and Acceleration Provisions (General Fund Revenue Impacts, In millions) ---------------------------------------------------- | |2009-1|2010-1|2011-12 | | |0 |1 | | |---------------------------+------+------+----------| |FIRM\a | | 32| 32| |---------------------------+------+------+----------| |Extended sales tax nexus\b | | 107| 107| |---------------------------+------+------+----------| |Strengthened definition of | 1| 2| 4| |abusive tax shelters | | | | |---------------------------+------+------+----------| |Occupational license | 14| 19| 19| |suspension for delinquent | | | | |taxpayers\c | | | | |---------------------------+------+------+----------| |Total: | $15| $160|$162 | | | | | | ---------------------------------------------------- a\ Does not include administrative costs and reimbursement costs for the program, which FTB estimates would be $1.4 million in 2010-11, $5.1 million in 2011-12, and $3.6 million in 2012-13. b\ Would also increase special and local sales and use tax revenue by about $43 million per year. c\ Does not include administrative costs for the program, which FTB estimates would be $2.5 million in 2010-11 and $1.4 million annually thereafter. AS PASSED BY THE ASSEMBLY ; this bill was a vehicle for 2009 Budget legislation. COMMENTS : 1)Financial institution record match system . 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. The measure requires FTB to reimburse a financial institution for its actual costs incurred to implement FIRM, up to $2,500 for AB 8 X8 Page 4 startup costs and no more than $250 per calendar quarter thereafter. 2)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. In general, an out-of-state retailer must have sufficient business presence in the State (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 that depends on actual sales, directly or indirectly refers potential customers of tangible personal property to the retailer. The referral can be by a link or an AB 8 X8 Page 5 Internet Web site, 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 measure 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 create nexus with California. However, the bill could apply to out-of-state sellers using California-based marketplace sites, such as e-Bay. 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. Currently, three states (New York, North Carolina, and Rhode Island) have enacted laws requiring remote sellers using on-line affiliates to collect use taxes, and lawmakers in several other states have introduced similar legislation. 3)Abusive tax shelters . Current federal and state laws place reporting requirements and restrictions on abusive tax shelter (ATS) 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 the FTB, current law suffers from inconsistencies in definitions among various ATS provisions, hampering the enforcement of these provisions. This bill would eliminate 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 AB 8 X8 Page 6 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 measure would impose a reduced penalty, equal to 50% 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. 4)Suspension of occupational licenses . Taxpayers facing collections for unpaid taxes are afforded a variety of due process protections. Under this process, the FTB must attempt to notify taxpayers multiple times, provide ample time periods for taxpayer response, and give taxpayers opportunities to dispute or appeal the amounts. Once this process has run its course and tax assessments remain unpaid, FTB can take several actions to enforce collections. These include the issuance of orders to withhold taxes, placement of filing liens against an individual's property, and the seizure of property. While these enforcement actions are effective in cases where taxpayers receive paychecks from employers, and/or have financial accounts and other property that can be located, they can be ineffective in cases where taxpayers are self employed, and operate on a cash basis. The FTB states that there are approximately 25,000 delinquent taxpayers with a state-issued occupational or professional license; this figure excludes taxpayers that have filed for bankruptcy or those who agreed to a payment installation plan and are working to pay off their tax liability. This bill provides an additional enforcement tool by allowing the state to suspend occupational licenses once all due process provisions have been completed and the FTB has issued a tax lien. Prior to suspension, the taxpayer would be provided with additional notice and given 60 days to satisfy his or her obligation or enter into an installment agreement. The measure also provides that a licensee's suspension be canceled upon compliance with tax obligations. 5)Previous legislation . All of these provisions were contained AB 8 X8 Page 7 in SBX3 17 (Ducheny), which was vetoed by the Governor in 2009. The FIRM provisions were also contained in SB 401 (Wolk), the expanded sales tax nexus provisions were also in AB 178 (Skinner), the abusive tax shelter provisions were also in versions of SB 402 (Wolk), and the occupational license provisions were also in AB 484 (Eng), all of the 2009 session. Analysis Prepared by : Brad Williams / APPROPS. / (916) 319-2081 FN: 0003688