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
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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.
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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/
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District
* Fiscal Recovery Fund
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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.