BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 469
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          Date of Hearing:  April 27, 2009

                             Charles M. Calderon, Chair

                      AB 469 (Eng) - As Amended:  April 2, 2009

          Majority vote.  Fiscal committee.

           SUBJECT  :  Sales and use taxes:  qualified use tax payment

           SUMMARY  :  Eliminates the election to report and pay qualified  
          use tax (QUT) on an acceptable tax return (Return), and instead,  
          requires any taxpayer who fails to report and pay QUT pursuant  
          to the Sales and Use Tax (SUT) Law to report and remit the QUT  
          on a Return.  Specifically,  this bill  :  

          1)Provides that, for "one or more single nonbusiness purchases  
            of individual items" of tangible personal property (TPP) with  
            a sales price of less than $1,000, the term QUT means either  
            of the following:

             a)   The use tax imposed under the SUT Law, the California  
               Constitution, the Bradley-Burns Uniform Local SUT Law, or  
               the Transactions and Use Tax (TUT) Law, that has not been  
               paid to a retailer holding a seller's permit or certificate  
               of registration-use tax; or,

             b)   The estimated amount of use tax due based on the  
               person's California taxable income as reflected in the use  
               tax table shown in the accompanying instructions of the  

             1)   Specifies that, for one or more single nonbusiness  
               purchases of individual items of TPP with a sales price of  
               $1,000 or more, or for any TPP purchased for use in a trade  
               or business, QUT means the amount of use tax imposed under  
               the SUT Law, the California Constitution, the Bradley-Burns  
               Uniform Local SUT Law, or the TUT Law, that has not been  
               paid to a retailer holding a seller's permit or certificate  
               of registration-use tax.  

             2)   Specifies that QUT does not include use tax imposed on a  


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               purchase of cigarettes, tobacco products, or cigarettes and  
               tobacco products for which the purchaser is registered with  
               the Board of Equalization (BOE) as a cigarette consumer, a  
               tobacco products consumer, or a cigarette and tobacco  
               products consumer.  

             3)   Provides that a person required to report QUT on a  
               Return shall report and remit the QUT by reporting the  
               amount due based on all taxable purchases of TPP made  
               during the taxable year for which the Return is required to  
               be filed.  Provides that a person that has made one or more  
               single nonbusiness purchases of individual items of TPP  
               each with a sales price of less than $1,000 may satisfy  
               his/her tax liability for those purchases by using the use  
               tax table shown in the accompanying instructions of the  

             4)   Specifies that, with respect to one or more single  
               nonbusiness purchases of individual items of TPP with a  
               sales price of less than $1,000, BOE shall be precluded  
               from making any understatement determination against any  
               person that uses the use tax table in accordance with the  
               accompanying instructions.  

             5)   Applies to purchases of TPP made on or after January 1,  
               2010, in taxable years beginning on or after January 1,  

             6)   Makes other conforming changes to the Revenue and  
               Taxation Code.  

           EXISTING LAW  :  

             1)   Imposes a sales tax on retailers for the privilege of  
               selling TPP, absent a specific exemption.  The tax is based  
               upon the gross receipts from the sale of TPP in this state.  


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             2)   Imposes a use tax on the storage, use, or other  
               consumption in this state of TPP purchased from any  
               retailer for storage, use, or other consumption in this  
               state, absent a specific exemption.

             3)   Authorizes a person to make an irrevocable election to  
               report QUT on that person's income tax return.

             4)   Requires the Franchise Tax Board (FTB) to include space  
               on income tax returns to allow a person to report and remit  
               QUT to the FTB.  The FTB, in turn, is required to remit the  
               QUT collected to BOE. 

           FISCAL EFFECT  :  BOE estimates that this bill would result in the  
          collection of approximately $13.75 million in use tax revenues.   
          FTB, in turn, notes that this bill would not impact state income  
          tax revenues.

           COMMENTS  :

             1)   The author states, "According to the BOE, California  
               loses over $1 Billion every year as a result of unreported  
               use tax from the purchase of electronic and mail-order  
               goods.  By increasing compliance and capturing a portion of  
               that unreported tax revenue, we could help prevent the  
               unnecessary elimination or reduction of core state  
               services, such as education, public transportation, and  
               assistance for the blind, disabled and elderly."

             2)   BOE, which is sponsoring this bill, states:

               While the use tax law was enacted in 1935, the most costly  
               area of tax noncompliance consists of purchases made from  
               out-of-state vendors without payment of use tax - [BOE] has  
               estimated that California is losing over one billion  
               dollars annually attributable to these purchases.  Closing  
               this tax gap is a priority of [BOE's], and we believe this  
               measure brings us one step closer by strengthening the laws  
               applicable to the reporting of use tax.  Instead of having  
               an option to either report to [BOE] or to [FTB], as the law  
               currently provides, this measure would require consumers  
               (including businesses that aren't already registered with  


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               [BOE]) to report their use tax obligations on their [FTB]  
               income tax return, if they failed to report the tax to  
               [BOE] during the preceding year.  With these changes, we  
               hope that we can achieve a greater level of compliance from  
               taxpayers, as well as enhanced cooperation from tax  
               practitioners, by making it perfectly clear that the use  
               tax is required to be paid on untaxed purchases made from  
               out-of-state retailers.

             3)   BOE also notes:

             a)   "In an effort to increase the public's awareness of the  
               use tax and to encourage voluntary compliance in reporting  
               the use tax, legislation enacted in 2003 (SB 1009, Ch.  
               718), required the FTB to revise the personal income tax  
               and corporations tax returns to add a separate line for use  
               tax reporting.  While the use tax law was enacted in 1935,  
               this was the first time a line to report use tax appeared  
               on the state's income tax returns.  This legislation  
               allowed consumers to elect to report use tax on their  
               income tax returns for purchases made on or after January  
               1, 2003, and through December 31, 2009, as an alternative  
               to reporting the tax to the [BOE] (certain consumers and  
               retailers already registered with the [BOE], however, may  
               not use this alternative)."

             b)   "In an FTB analysis of individual returns from tax year  
               2008, FTB found that taxpayers who self-prepared their  
               returns were three times more likely to declare use tax  
               than those who used a tax practitioner.  Nearly 64 percent  
               of all individual returns FTB received were  
               practitioner-prepared. Yet only 23 percent of all use tax  
               declarations were made on practitioner-prepared returns.   
               While the dollar amount of use tax reported on the FTB  
               returns is increasing (in 2004, use tax of $2.8 million was  
               reported, in 2005, $4.6 million, in 2006 and 2007, $5.5  
               million each year was reported, and in 2008, $9 million was  
               reported), voluntary compliance is still very low.  [BOE]  
               has estimated that the total annual dollar amount of  
               unreported use tax is over $1.1 billion (unreported use tax  
               by consumers is estimated to be over $400 million, and for  
               businesses not registered with [BOE], over $600 million)."   


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             c)   "One of the reasons that practitioner-prepared returns  
               do not reflect use tax is that some tax practitioners  
               believe that they can disregard their ethical obligation to  
               inquire about a client's use tax obligation when preparing  
               a client's income tax returns, since the income tax return  
               form and instructions simply provide for an election to  
               report the tax.  This bill is seeking to dispel this  
               misconception by eliminating the election to report on the  
               FTB return.  Instead, the bill would specify that the tax  
               is required to be reported on that return if the purchaser  
               failed to already report the tax to [BOE]."

             d)   "It is anticipated that these proposed changes would  
               enable tax practitioners, consumers, and business entities  
               not registered with the [BOE] to have a better  
               understanding of their obligation to properly report use  
               tax liabilities.  In return, the competitive disadvantage  
               in-state retailers have compared to out-of-state retailers  
               that are not required to collect the California use tax may  
               be improved."

             e)   "A use tax table would make compliance with reporting  
               use tax more convenient for taxpayers who know they have  
               made untaxed purchases but have not kept receipts from  
               those purchases. For individual purchases of less than  
               $1,000, the table would reflect the amount of use tax due  
               based on the person's California taxable income as shown in  
               the instructions in the state income tax booklet.  For  
               individual purchases of $1,000 or more, taxpayers would be  
               required to report the actual amount of use tax due."

             f)   "Of the 38 states that impose both an income tax and a  
               use tax on purchases of [TPP], 21 states provide for  
               individuals to report their use tax obligations on their  
               income tax return.  Nine of those states incorporate a use  
               tax table, and according to a November 2007 report prepared  
               by the Research Department of the Minnesota House of  
               Representatives, Use Tax Collection on Income Tax Returns  
               in Other States, many of those states that allow purchasers  
               to report their use tax obligations using the tables have  


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               higher participation rates.  Although those states collect  
               less use tax per return than do states without lookup  
               tables, the greater participation rate in those states  
               overwhelms the effect of lower average use tax reporting  
               per return."

             4)   Proponents state, "This legislation is of growing  
               importance in an economy where purchases increasingly occur  
               on the Internet - where sales taxes are not collected, but  
               use taxes, of the same amount, are owed by the purchaser.   
               Improved collection of these revenues is important for  
               funding vital state and local programs." 

             5)   FTB notes that, "Under this bill, administrative  
               functions regarding the use tax would remain divided  
               between FTB and BOE.  FTB would process and collect use tax  
               reported on the Personal Income Tax return, while BOE would  
               retain responsibilities for auditing, collecting, and  
               processing claims for refund of the use tax."  

             6)   Committee Staff Comments

              a)   A timely measure  :  With the increased SUT rate that  
               became effective on April 1 of this year, there are  
               concerns that some consumers may seek to avoid their SUT  
               obligations by purchasing TPP from out-of-state retailers  
               that are not required to collect California's use tax -  
               further increasing the already substantial tax gap.   
               Moreover, many consumers simply believe, incorrectly, that  
               SUT does not apply to any purchase made over the Internet.   
               This bill would make it clear, to consumers and tax  
               practitioners alike, that paying use tax is not elective.

              b)   What would the use tax table look like?  :  This bill does  
               not incorporate a specific use tax table for taxpayers to  
               use in determining their use tax liability.  BOE has stated  
               that it would determine the applicable use tax amount that  
               is commensurate with varying levels of taxable income, and  
               that the table would likely be similar to those used by  
               other states. 


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              c)   Greater compliance at the expense of accuracy  :  Under  
               this measure, as long as a person's use tax liability arose  
               from single non-business purchases of individual items of  
               TPP sold for less than $1,000, the individual could satisfy  
               his/her use tax liability using the contemplated table.   
               They could apparently do so without regard to the number of  
               such individual purchases, as the liability would be based  
               on their taxable income.

              a)   Prior legislative efforts  :

               i)     SB 1009 (Alpert), Chapter 718, Statutes of 2003,  
                 added the election for taxpayers to report and pay use  
                 tax on their state income tax returns.

               ii)    AB 969 (Eng), introduced in the 2007 legislative  
                 session, would have replaced the current option for a  
                 taxpayer to report use tax on the state income tax return  
                 with a requirement to report use tax.  AB 969 was vetoed  
                 by the Governor, who noted his concern that the bill's  
                 effective date was too soon for taxpayers to compile  
                 adequate records of purchases subject to use tax.  He  
                 also stated, "I would like to see a plan to better  
                 educate taxpayers on the use tax, as I suspect that many  
                 taxpayers have little knowledge of the tax and may  
                 unknowingly fail to pay it."  

               iii)   AB 1957 (Eng), introduced in the 2008 legislative  
                 session, would have also replaced the election with a  
                 mandatory reporting requirement.  AB 1957 failed in the  
                 Senate Committee on Revenue and Taxation.  


          Board of Equalization (sponsor)
          California Professional Firefighters
          California School Employees Association, AFL-CIO


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          California State Association of Counties
          League of California Cities

          None on file
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)