BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 469 (Eng) Hearing Date: 08/17/2009 Amended: 08/17/2009 Consultant: Mark McKenzie Policy Vote: Rev&Tax 5-2 _________________________________________________________________ ____ BILL SUMMARY: AB 469 would require, rather than authorize, taxpayers to report and pay use tax obligations on income tax returns if they failed to report and remit use tax obligations directly to the Board of Equalization (BOE). The bill would also eliminate the sunset on provisions that require the Franchise Tax Board (FTB) to include a line on income tax forms for use tax reporting. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2009-10 2010-11 2011-12 Fund BOE reimbursements $118 $118 General to FTB FTB tax booklet updatesminor and absorbable costs General Use tax revenue gains ($9,208) ($9,208) General ($384) ($384) Special* ($4,159) ($4,159) Local/ ____________ District * Fiscal Recovery Fund _________________________________________________________________ ____ STAFF COMMENTS: Existing law imposes a use tax at the same rate as the sales tax on the in-state storage, use, or other consumption of tangible personal property purchased from any retailer. Generally, a use tax liability occurs when a California consumer or business purchases items from an out-of-state retailer that is not registered with BOE to collect the California use tax. Compliance for payment of use tax is relatively low because internet sellers are not required to collect and remit sales and use taxes when taking orders from California residents, and enforcement is prohibitively complex and burdensome. In response to compliance problems, the Legislature enacted SB 1009 (Alpert), Chapter 718 of 2003, which required FTB to revise income tax forms to allow taxpayers to report and pay use taxes for purchases made from January 1, 2003 through December 31, 2009 as an alternative to reporting directly to BOE. The penalty for failure to pay use taxes is 10 percent of the amount owed, plus interest. AB 469 would eliminate the sunset on the requirement that FTB include a line on income tax forms for reporting use tax, and would require, rather than authorize, taxpayers to report and pay use tax obligations on income tax returns for the taxable year in which the liability for payment was incurred, beginning with the 2010 tax year, if the use taxes have not been paid directly to BOE. Taxpayers with one or more single nonbusiness purchase of under $1,000 could either report actual amounts that have not been paid to a retailer or use an estimated amount based upon the adjusted gross income. FTB would update tax return instructions to include estimated use tax tables. Page 2 AB 469 (Eng) By changing statutory language for the reporting of use tax obligations on income tax forms from permissive to mandatory, this bill is intended to clarify the obligations of both tax practitioners and consumers with respect to the payment of use taxes. The amount of use tax reported on income tax returns has increased every year since the passage of SB 1009: $2.8 million in 2004, $4.6 million in 2005, $5.5 million in 2006 and 2007, and $9 million in 2009. BOE estimates, however, that the total amount of unreported use taxes is over $1.1 billion annually. By eliminating the sunset date on the requirement that FTB include the line for use tax reporting on income tax returns, AB 469 would ensure the continued remittance of use taxes to the state and local governments that may have otherwise gone unreported. Staff notes that while the inclusion of a line on income tax returns for taxpayers to report unpaid use taxes has resulted in significant net gains to the state and local governments, it is difficult to estimate the magnitude of increased compliance as a result of requiring, rather than authorizing, the reporting of use tax on income tax returns. BOE estimates increased compliance, based upon the average participation rates of other states that have look-up tables for estimating use tax liability. Using the current average statewide sales and use tax rate of 8.96%, BOE estimates this bill would result in increased use tax collections of approximately $13.75 million annually, beginning in 2010-11, including $9.21 million General Fund. FTB's costs associated with administering the use taxes reported on income tax forms are reimbursed by BOE. These costs are proportional to the number of additional returns that would be filed with FTB and have decreased substantially in recent years as more taxpayers file electronically and FTB's printing costs have decreased. FTB was reimbursed $118,859 by BOE for administrative costs incurred in the 2007-08 fiscal year. Staff notes that ongoing costs are likely to be similar in future years, but additional use tax revenues collected would substantially exceed any additional costs. AB 469 would also require FTB to update instruction booklets to reflect the mandatory rather than permissive requirements to report use tax obligations on income tax returns and to include optional use tax tables for taxpayers to estimate use tax obligations. These costs would be minor and absorbable since the requirements could be accomplished during normal annual revisions to income tax instructions. Staff notes that this bill is substantially similar to AB 969 (Eng), which was vetoed by the Governor in 2007. The veto message stated 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 of the tax and may unknowingly fail to pay it. AB 469 specifies that it would apply to tax years beginning after January 1, 2010, providing consumers with time to retain receipts prior to reporting use tax in 2011. In addition BOE and FTB will provide information on websites and in tax publications.