BILL ANALYSIS                                                                                                                                                                                                    




            SENATE REVENUE & TAXATION COMMITTEE

            Senator Lois Wolk, Chair

                                                        AB 469 - Eng 

                                                 Amended: June 18, 2009

                                                                       

            Hearing: June 24, 2009                          Fiscal: Yes




            SUMMARY: Sales and Use taxes: qualified use tax payment

            

                 EXISTING LAW imposes a sales tax on retailers for the  
            privilege of selling tangible personal property without a  
            specific exemption.  The tax is based upon the gross  
            receipts from the sale of tangible personal property in  
            this state.  

                 A use tax is imposed on the storage, use, or other  
            consumption in this state of tangible personal property  
            purchased from any retailer for storage, use, or other  
            consumption in this state without a specific exemption.  

                 Existing law allows a person to make an irrevocable  
            choice to report qualified use tax on that person's income  
            tax return.  

                 The Franchise Tax Board (FTB) is required to include a  
            space on income tax returns to allow a person to report and  
            remit qualified use tax to the FTB.  Then, the FTB is  
            required to remit the collected qualified use tax to the  
            Board of Equalization.  

                 THIS BILL removes the option to report and pay  
            qualified use tax on an acceptable tax return and requires  
            any taxpayer to report and remit the qualified use tax on a  
            tax return if they have not reported to nor paid the  
            qualified use tax in accordance to the Sales and Use Tax  







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            Law. 

                 For "one or more single nonbusiness purchases of  
            individual items" of tangible personal property with a  
            sales price of less than $1000, the term "qualified use  
            tax" means either of the following: 

                  a.          the use tax is imposed under the Sales  
                        and Use Tax Law, the California Constitution,  
                        the Bradley-Burns Uniform Local Sales and Use  
                        Tax Law, or the Transactions and Use Tax 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  
                        instructions of the tax return.

                 This bill also stipulates that for one or more single  
            nonbusiness purchases of individual items of tangible  
            personal property with a sales price of $1,000 or more, or  
            any tangible personal property purchased for use in a trade  
            or business, qualified use tax means the amount of use tax  
            imposed under the Sales and Use Tax Law, the California  
            Constitution, the Bradley-Burns Uniform Local Sales and Use  
            Tax Law, or the Transactions and Use Tax Law, that has not  
            been paid to a retailer holding a seller's permit or  
            certificate of registration-use tax. 

                 A qualified use tax does not include taxes imposed on:  
            purchase of cigarettes, tobacco products, or cigarettes and  
            tobacco products for which the purchaser is registered with  
            the Board of Equalization as a cigarette consumer, a  
            tobacco products consumer, or a cigarette and tobacco  
            products consumer.  

                 A person who is required to report the qualified use  
            tax on an acceptable tax return shall report and remit the  
            qualified use tax by reporting the amount due based on all  
            taxable purchases of tangible personal property made during  
            the taxable year for which the return is required to be  
            filed.  







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                 A person who has made one or more single nonbusiness  
            purchase of individual items of tangible personal property,  
            each with a sales price of less than $1000, may satisfy  
            their tax liability for those purchases by using the use  
            tax tables in the instructions of the acceptable tax  
            return.  

                 With respect to the purchases single nonbusiness  
            purchases of individual items of tangible personal property  
            that are less than the sales price of $1,000, the Board of  
            Equalization shall be prevented from making any  
            understatement determination against any person that uses  
            the use tax table in accordance with the instructions of  
            the tax return.  

                 AB 469 applies to purchases of tangible personal  
            property make on or after January 1, 2010, in taxable years  
            beginning on or after January 1, 2010.  

                  




            FISCAL EFFECT: 

            According to the BOE:

            The Minnesota House of Representatives report indicates  
            that, on average, the average participation rate in states  
            that have look-up tables for estimating use tax liability  
            is 1.63 percent, and the average amount of use tax  
            collected from those who participate is $57.  (Currently,  
            the participation rate in California without a look up  
            table is 0.2%).  About 14.8 million individual income tax  
            returns are filed in California annually.  Assuming that  
            241,240 individual income tax returns (14.8 million x  
            1.63%) would include an average of $57 in use tax,  
            approximately $13.75 million in use tax revenues would be  
            collected as follows:









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                                   State General Fund (6%)              
                        $9,207,589
                                   State Fiscal Recovery Fund (1/4%)     
                          383,650
                                   Local Revenue Fund (1/2%)             
                                    767,299
                                   Local Public Safety Fund (1/2%)       
                          767,299
                                   Local and County (1%)                 
                        1,534,598
                                   Special districts (.71%)              
                         1,089,565

                                        Total                             
                                                                       
                         $13,750,000  

            


            COMMENTS:

            A.   Purpose of the Bill

            According to the author's office:

            The use tax was established in 1935 to protect California  
            retailers from out-of-state and mail-order vendors, who  
            generally are not registered with the Board and therefore  
            do not collect California sales tax.  

            Currently, if consumers fail to report their use tax  
            liability directly to the Board, they can "elect" to report  
            this liability on their income tax returns.  The term  
            "elect," however, is misleading and adds to the  
            misconception that reporting use tax liabilities on income  
            tax returns is optional.

            By clarifying that consumers are required to report use tax  
            liabilities on their income tax returns after failing to  
            pay the BOE directly, this measure will enable both tax  
            practitioners and consumers to have a better understanding  







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            of their obligation to properly report use tax liabilities.


            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.  Further, it would preserve vital  
            state programs without proposing new tax burdens on  
            business and working families.  

            B.   Technical Amendment

            The author will change the table income measurements from  
            taxable income to adjusted gross income.  The change is on  
            page 3, line 24 to change the word "taxable" to "adjusted  
            gross."

            C.   Extra Lines do not equal more money

            The BOE's costs associated with this measure would be  
            commensurate with the number of additional returns that  
            would be filed with FTB (currently the BOE incurs personnel  
            costs for collecting the unpaid use tax reported on the FTB  
            returns, refunding use tax reported in error, answering  
            questions from taxpayers about the use tax, and allocating  
            the local and district taxes included in the tax reported  
            on the FTB returns).  However, the BOE anticipates that the  
            additional revenue would substantially exceed the  
            additional costs.   

            Since the line was incorporated into the FTB returns, the  
            BOE has reimbursed FTB for associated costs, as shown  
            below.   

                         -------------------------- 
                        |2003-04    |    $1,007,316|
                        |           |              |
                        |-----------+--------------|
                        |2004-05    |       237,038|







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                        |           |              |
                        |-----------+--------------|
                        |2005-06    |       239,458|
                        |           |              |
                        |-----------+--------------|
                        |2006-07    |      198,649*|
                        |           |              |
                        |-----------+--------------|
                        |2007-08    |118,859*      |
                        |           |              |
                         -------------------------- 
            

            D.The optional use tax table would provide simplicity  

            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.  This  
            bill would provide that the use tax table is in the income  
            tax form; the table will be a suggestion for consumers in  
            the event they do not know exactly how much use tax is  
            owed.

            Of the 38 states that impose both an income tax and a use  
            tax on purchases of tangible personal property, 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 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.







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            The committee may wish to suggest to the BOE that consumers  
            must use either receipts from purchased items or the use  
            tax tables so that consumers do not think there is an  
            option of not reporting any use tax on the form.  If the  
            consumer has no use tax liability, he or she would be  
            required to report "0." 

            E.What would the use tax table look like?  

            The bill does not incorporate a specific use tax table that  
            taxpayers could use to determine their use tax liability if  
            they opted to do so.  The BOE would therefore determine the  
            applicable use tax amount that is commensurate with varying  
            levels of taxable income, and the table would likely be  
            similar to other states' tables.   To illustrate five other  
            states' tables, a taxpayer that has an annual adjusted  
            gross income (AGI) or taxable income (TI) of $50,000 with  
            no individual taxable purchases of $1,000 or more, the use  
            tax liability would be:

                State               Rate of Tax     Use Tax

              New York (AGI)        7% to 8.75%               $21

            North Carolina (TI)    6.75% to 7.25%33.75
            Oklahoma (AGI) 4.5% to 9% 28
            Massachusetts (AGI)     5%                    25
            Michigan (AGI)              6% 31


            F.   The Use Tax is Confusing? but does not have to be

            The Governor vetoed AB 969, a similar bill in 2008.  In his  
            veto message, the Governor cited the following:

               "Although increasing use tax reporting is desirable, I  
               have concerns that the effective date of January 1,  
               2008 is too soon for taxpayers to compile adequate  
               records of their purchases that are subject to the use  
               tax for calendar year 2007.  Further, I would like to  
               see a plan to better educate taxpayers on the use tax,  
               as I suspect that many taxpayers have little knowledge  







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               of the tax and may unknowingly fail to pay it."

            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).

            The BOE has agreed to update the instructions in the income  
            tax form that accompanies the line on the income tax return  
            to clarify the meaning of the use tax and the amount owed.   
            The operative date of this bill is prospective for January  
            1, 2010 to report use tax on April 15, 2011; therefore, the  
            consumers have entire year in advance to collect receipts  
            and remit the use tax.  The BOE and the FTB will provide  
            information on their websites and in the tax booklets  
            related to use tax.


            Support and Opposition

                 Support: 

                        Board of Equalization (Sponsor)

                        League of California Cities
                        California Association of School Business  
            Officials
                        California Professional Firefighters (CPF)
                        California Rural Legal Assistance Foundation
                        California School Employees Association (CSEA)
                        California State Association of Counties (CSAC)
                        California Public Interest Research Group  
            (CALPIRG)







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                        American Federation of State, County, and  
            Municipal Employees
                        Alhambra Fire Department
                        City of San Gabriel
                        Peace Officers Research Association of  
            California (PORAC)
                        The Advocacy Respect Commitment (Arc) of  
            California


                 Oppose:None Received

            ---------------------------------

            Consultant:  Gayle Miller & Gina Le