BILL ANALYSIS                                                                                                                                                                                                    

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          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  

           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  


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            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,  


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          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  


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            startup costs and no more than $250 per calendar quarter  

           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  

            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  


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            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  

            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  


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            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  


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            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)