BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 469
                                                                  Page  1


          ASSEMBLY THIRD READING
          AB 469 (Eng)
          As Amended April 2, 2009
          Majority vote 

           REVENUE & TAXATION  6-2         APPROPRIATIONS      11-5        
           
           ----------------------------------------------------------------- 
          |Ayes:|Charles Calderon, Beall,  |Ayes:|De Leon, Ammiano, Charles |
          |     |Coto, Ma, Portantino,     |     |Calderon, Davis,          |
          |     |Fong                      |     |Krekorian, Hall, John A.  |
          |     |                          |     |Perez, Price, Skinner,    |
          |     |                          |     |Solorio, Torlakson        |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|DeVore, Nielsen           |Nays:|Nielsen, Duvall, Harkey,  |
          |     |                          |     |Miller, Audra Strickland  |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           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 return.


             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  







                                                                  AB 469
                                                                  Page  2


               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  
               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 return.  


             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,  
               2010.  


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



           EXISTING LAW  :  








                                                                  AB 469
                                                                  Page  3



             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.   



             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  :  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."

          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  







                                                                  AB 469
                                                                  Page  4


             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 [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.


          Committee Staff Comments:


             1)   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.

             2)   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. 


             3)   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.








                                                                  AB 469
                                                                  Page  5




          Prior legislation:


             1)   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.

             2)   AB 969 (Eng) of 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."  


             3)   AB 1957 (Eng) of  2008 would have also replaced the  
               election with a mandatory reporting requirement.  AB 1957  
               failed in the Senate Committee on Revenue and Taxation.  





           Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098 


                                                                 FN: 0000683