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/
          * 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