BILL ANALYSIS
AB 347
Page 1
Date of Hearing: April 27, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 347 (Block) - As Amended: April 21, 2009
Majority vote. Fiscal committee.
SUBJECT : Sales and use taxes: failure to furnish information:
penalty
SUMMARY : Authorizes the Board of Equalization (BOE), under
limited circumstances, to impose a specified penalty for a
person's failure or refusal to provide relevant and reasonable
information requested during an examination or audit.
Specifically, this bill :
1)Provides that if, during an examination or audit, a person
fails or refuses to furnish any relevant and reasonable
information requested by "the conclusion of the information
request period", then BOE may add a penalty of 25% of the
amount of any deficiency of tax determined by BOE concerning
that portion of the determination for which the information
was required.
2)Provides that "the conclusion of the information request
period" occurs after BOE or any authorized person has done all
of the following:
a) Made a verbal request for relevant and reasonable
information from the person related to the area or areas
under an examination or audit including alternative sources
of information to substantiate the facts and circumstances
of the area under examination or audit;
b) Following a person's failure or refusal to furnish the
information requested verbally, but no earlier than 30 days
from the date of that verbal request, made an "initial
written request" for the information specifying a date, at
least 30 days in the future, on which the information must
be provided;
c) Following a person's failure or refusal to respond to
the verbal request and the "initial written request", made
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a "follow-up written request" for the information
specifying a date for production at least 15 days in the
future;
d) Following a person's failure or refusal to respond to
the verbal request, the "initial written request", and the
"follow-up written request", issued a "formal notice and
demand" to furnish the information specifying a date for
production at least 15 days in the future; and,
e) Following a person's failure or refusal to respond to
the "formal notice and demand", issued a subpoena under
Government Code Section 15613 for the information.
3)Provides that BOE has fulfilled the requirements of making a
valid verbal request when it has made a good faith effort to
contact the person to obtain the information, whether by
telephone or otherwise, using the last known contact
information of that person contained in BOE's records.
4)Provides an exception to the penalty in cases where the
failure to furnish information is due to reasonable cause and
not willful neglect.
5)Adds electronic data to the list of records BOE is authorized
to examine.
EXISTING LAW :
1)Permits BOE, or any person it authorizes in writing, to
examine the books, papers, records, and equipment of any
person selling tangible personal property or any person liable
for the use tax. In addition, BOE, or any person it
authorizes in writing, may investigate the character of a
business to verify the accuracy of any return or to determine
tax amounts owed.
2)Provides that if any taxpayer fails or refuses to furnish any
information requested in writing by the Franchise Tax Board
(FTB) then, unless the failure is due to reasonable cause and
not willful neglect, the FTB may add a penalty of 25% of the
amount of tax determined.
FISCAL EFFECT : Unknown.
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COMMENTS :
1)The author states, "This bill is intended to assist in
accelerating the sales and use tax revenue stream generated
through the Board of Equalization's audit program by
encouraging taxpayers to provide their information, documents,
and books and records in a timely manner. According to the
Board, the trend or practice of not providing books and
records is prevalent statewide. Some Board audits have been
unresolved for up to seven years; some with hundreds of
unnecessary audit hours spent in attempting to secure the
requested books and records." The author goes on to state,
"The 25% penalty is intended to combat this ongoing problem by
creating a financial disincentive for taxpayers who
intentionally withhold books and records in the course of an
audit. The Board anticipates that the threat of the penalty
will encourage taxpayers to comply with the Board's request
for information and expedite the audit process." Finally, the
author notes, "By reducing the audit time spent on any given
audit, the Board will be better able to complete its audits,
allocate its audit resources to generate additional revenue,
and reduce expenses."
2)BOE, which is sponsoring this bill, notes:
a) "Under existing law, Revenue and Taxation Code Section
7054 authorizes the Board to examine the books, papers,
records, and equipment of any person selling tangible
personal property and any person liable for the use tax.
However, existing law does not provide for a penalty or
other monetary disincentive that would apply to taxpayers
who fail or refuse to provide the books and records
necessary to conduct an examination or an audit engagement
(the Government Code authorizes the Board to issue
subpoenas to obtain records, however, enforcement of the
subpoena can be a lengthy process and requires the
involvement of the Attorney General's office and the
Superior Court to compel compliance)."
b) "This bill is sponsored by the Board in order to assist
in accelerating the sales and use tax revenue stream
generated through the Board's audit program by encouraging
taxpayers to provide their information, documents, and
books and records in a timely manner. In recent years, the
Board has noticed a definite trend by taxpayers and/or
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their representatives to resort to delaying tactics and
other strategies in providing requested information,
documentation and books and records requested for an
examination or audit engagement. This strategy not only
delays the entire audit process, it also impacts the
Board's audit program and reduces revenue in any given year
to the State's General Fund."
c) "The trend or practice of not providing books and
records is prevalent statewide. The books and records
requested by the Board for an examination or audit
engagement are not outside of the norm, but are the normal
books of account maintained by an established business
entity's normal day-to-day operations and are generally
necessary to prepare their financial statements, as well as
file their various income and business tax returns."
d) "The Board's Sales and Use Tax Department tracks audit
assignments on a quarterly basis and has numerous examples
each quarter of taxpayers who during an audit engagement
have continually refused to provide or failed to provide
the required books and records necessary to conduct an
examination or audit engagement in a timely manner. Some
of these audits have been known to go unresolved for up to
seven years; some with hundreds of unnecessary audit hours
spent in attempting to secure the requested books and
records. By reducing the audit time spent on any given
audit, the Board will be better able to allocate its audit
resources to generate additional revenue and reduce
expenses."
3)Opponents state, "Although a 25 percent penalty is available
to income tax auditors, it is inappropriate in the sales and
use tax context without significant modification. The key
difference between the [FTB] and [BOE] with respect to audits
is the [BOE's] use of electronic records and computer audit
specialists. [FTB] has only one computer audit specialist for
the agency. [BOE] staff is proposing to add 17 new computer
audit specialists. Many disputes have arisen as to which
level of data dumping and access to taxpayers' electronic
records is reasonable. Some computer audit specialists have
requested unfettered access to taxpayer records, even when the
taxpayer's own tax department has restricted access based on
security protocol. Similar disputes are not present at the
[FTB], as it does not use electronic records in its income tax
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audits to the same extent as [BOE] uses them in sales tax
audits."
4)Committee Staff Notes:
a) FTB already has the authority to add a penalty . As
noted above, current law provides that if any taxpayer
fails or refuses to provide any information that FTB
requests in writing then, unless the failure is due to
reasonable cause and not willful neglect, FTB may add a
penalty of 25%.
b) How many warnings are needed ? This bill would provide
BOE with the authority to add a 25% penalty, but only after
making a verbal request for information, followed by an
"initial written request", a "follow-up written request", a
"formal notice and demand", and the issuance of a
Government Code subpoena. Committee staff understands that
BOE is requesting a tool to deal with taxpayers who
unnecessarily prolong audits by refusing to provide
relevant and requested information. At the same time, it
is unclear to Committee staff why this bill would require
BOE to request information on four separate occasions, and
then issue a Government Code subpoena, before it could
impose a penalty. Does BOE currently take these steps
during an audit? Would the codification of these
requirements encourage some taxpayers to "game" the system?
Does it make sense to codify these requirements for BOE,
but not for FTB? Would it not make sense to provide both
the FTB and BOE with parallel authority?
c) Technical amendments : Committee staff recommend the
following technical amendments:
i) On page 2, line 19, delete the second "the"; and,
ii) On page 3, line 25, insert "a" before "good".
REGISTERED SUPPORT / OPPOSITION :
Support
Board of Equalization (sponsor)
Opposition
AB 347
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California Bankers Association
California Chamber of Commerce
California Manufacturers & Technology Association
California Taxpayers' Association
TechAmerica
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098