BILL ANALYSIS
AB 711
Page 1
ASSEMBLY THIRD READING
AB 711 (Charles Calderon)
As Amended June 1, 2009
Majority vote
REVENUE & TAXATION 6-2 APPROPRIATIONS 12-5
------------------------------------------------------------------
|Ayes:|Charles Calderon, Beall, |Ayes:|De Leon, Ammiano, Charles |
| |Coto, Ma, Portantino, | |Calderon, Davis, Fuentes, |
| |Fong | |Hall, John A. Perez, |
| | | |Price, Skinner, Solorio, |
| | | |Torlakson, Krekorian |
| | | | |
|-----+--------------------------+-----+---------------------------|
|Nays:|DeVore, Nielsen |Nays:|Nielsen, Duvall, Harkey, |
| | | |Miller, |
| | | |Audra Strickland |
| | | | |
------------------------------------------------------------------
SUMMARY : Requires a qualified purchaser, as defined, to
register with the Board of Equalization (BOE) and report and
pay, by April 15, the use tax owed for the previous calendar
year. Specifically, this bill :
1)Requires a qualified purchaser to register with BOE for
purposes of facilitating the collection of use tax.
2)Specifies that, to register, the qualified purchaser must file
a form prescribed by BOE and provide all of the following
information:
a) The name under which the purchaser transacts or intends
to transact business;
b) The location of the purchaser's place or places of
business; and,
c) Other information as BOE may require.
3)Defines a "qualified purchaser" as a person that meets all of
the following conditions:
a) Is required to hold a business license as required by
AB 711
Page 2
the local ordinance of the city, county, or city and county
in which the person conducts business;
b) Is not required to hold a seller's permit pursuant to
Revenue and Taxation Code (R&TC) Part 1 (commencing with
Section 6001) of Division 2;
c) Is not required to be registered pursuant to R&TC
Section 6226; and,
d) Is not a holder of a use tax direct payment permit as
described in R&TC Section 7051.3.
4)Requires a qualified purchaser to file a return with, and
remit the amount of the use tax due to, BOE by April 15.
5)Does not apply to the purchase of a vehicle, vessel, or
aircraft as defined in R&TC Article 1 (commencing with Section
6271) of Chapter 3.5 of Part 1 of Division 2.
6)Becomes operative on July 1, 2010.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the gross receipts from the sale of TPP
in this state. [R&TC Chapter 2 (commencing with Section 6051)
of Part 1 of Division 2].
2)Imposes a use tax on the storage, use, or other consumption in
California of TPP purchased from any retailer, absent a
specific exemption. [R&TC Chapter 3 (commencing with Section
6201) of Part 1 of Division 2].
3)Provides that the use tax is imposed on the purchaser, and
unless that purchaser pays the use tax to a retailer
registered with BOE to collect the California use tax, the
purchaser is liable for the tax, absent a specific exemption.
4)Sets the same rate for the use tax as it does for the sales
tax.
5)Specifies that a purchaser must remit the use tax to BOE on or
AB 711
Page 3
before the last day of the month following the quarterly
period in which the purchase was made, or on the purchaser's
state income tax return filed with the Franchise Tax Board
(FTB).
FISCAL EFFECT : BOE staff estimates that this bill would result
in the collection of approximately $620 million in state and
local use tax revenues annually. BOE staff also indicates that
it would incur costs of tens of millions of dollars to notify
and register all affected businesses.
COMMENTS : The author states that, "The most costly area of tax
noncompliance, according to the State Board of Equalization
(BOE), is a collection of use tax due on purchases of goods from
out-of-state vendors. Both individuals and businesses
underreport and underpay the use tax. It is estimated that,
just in 2007, businesses underreported and failed to pay
approximately $775 million in use taxes. AB 711 would
facilitate the collection of use tax from businesses by
requiring all business license holders in California, and not
just retailers, to register with the BOE. It is estimated that
the measure will bring in $620 million."
California enacted its first retail sales tax in 1933. In 1935,
California adopted a use tax to alleviate the competitive
disadvantage experienced by in-state retailers. The intent
behind the enactment of the use tax was to offset the incentive
to purchase from retailers in other states with low sales tax
rates or no sales tax. The use tax is virtually identical to
the sales tax, except it is imposed on the storage, use or
consumption of the goods. It is imposed on the purchases at the
same rate as the sales tax, including any applicable local sales
taxes. Generally, an individual or company is obliged to pay
the use tax when they purchase TPP from an out-of-state retailer
that is not registered with BOE.
Even though the use tax has been in effect since the 1930s, it
is relatively unknown to California consumers and BOE has not
been very successful in collecting the use tax. Apparently,
many consumers that use mail-order or the internet to purchase
TPP are unaware of their responsibility to report and remit use
tax. Unreported use tax is the largest area of noncompliance -
an estimated annual $1.2 billion is attributable to unreported
California use tax by both businesses and individual consumers.
AB 711
Page 4
Another reason for the use tax remittance noncompliance is the
growing number of out-of-state internet and mail-order vendors
who are not required to collect use tax for the State of
California. In-state retailers, however, must collect and remit
sales tax to BOE. States have been unable to impose a similar
compliance and collection requirement on out-of-state retailers,
largely, because of the "physical presence" requirement.
Consequently, California must rely on purchasers of TPP to
report their use tax obligations on their out-of-state
purchasers, such as those made over the Internet or through mail
order. The fact that out-of-state retailers can provide almost
an instant 10% discount by virtue of not collecting the use tax,
coupled with the misconception that reporting use tax is
optional for the purchaser, gives out-of-state vendors a
competitive advantage. A consumer, who believes that a use tax
is voluntary, as opposed to a mandatory sales tax, will most
likely make a purchase with a vendor who does not have the
mandatory sales tax.
The purchaser is required to remit the use tax on or before the
last day of the month following the quarterly period in which
the purchase was made. Failure to pay the tax results in a 10%
penalty plus interest. Alternatively, taxpayers may elect to
report their use tax on their personal income or corporate tax
returns. Should a purchaser opt for this alternative, the use
tax is considered timely reported and remitted. For the 2008
taxable year, FTB processed over 18.5 million returns. FTB tax
forms have comprehensive instructions with respect to computing
and reporting the use tax liability on income tax returns.
However, only a little over 44,000 state income tax returns had
use tax reported, yielding only $9 million in state and local
tax revenues.
BOE staff estimates that, in 2007, an estimated $775 million of
uncollected use tax was attributable to businesses. AB 711
would require every California business, regardless of the size,
to register with BOE, unless it is a retailer, holder of a use
tax direct payment permit, or is already required to register
with BOE. BOE estimates that approximately two million
businesses would be affected by this bill. Despite its broad
application, AB 711 does not appear to impose an excessive
burden on businesses. A California Seller's Permit Application
AB 711
Page 5
(BOE-400-SRA) is a 2-page document, so is the California
Certificate of Registration - Use Tax Application (BOE-400-CSC).
Those forms are, currently, used to register retailers that
sell or lease TPP in California.
Similar legislation. AB 469 (Eng), introduced in the 2009-10
Legislative Session, would require taxpayers, who have failed to
report and pay the use tax to BOE, to report and pay qualified
use tax on an income tax return for the taxable year in which
the liability for the use tax was incurred, as specified. AB
469 passed out of the Assembly on a vote of 49-30.
AB 969 (Eng), introduced in the 2007-08 Legislative Session,
would have required, rather than authorized, taxpayers to report
and pay use tax obligations on income tax returns if they failed
to report and remit use tax obligations directly to BOE. AB 969
was vetoed by the Governor.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001168