BILL ANALYSIS
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UNFINISHED BUSINESS
Bill No: SB 17XXX
Author: Ducheny (D)
Amended: 6/28/09
Vote: 21
PRIOR SENATE VOTE NOT RELEVANT
ASSEMBLY FLOOR : 42-31, 6/28/09 - See last page for vote
SUBJECT : Budget Act of 2009: Tax Enforcement
Administration
Trailer Bill
SOURCE : Author
DIGEST : As it left the Senate, this bill expressed the
intent of the Legislature to enact necessary statutory
changes relating to the Budget Act of 2009.
Assembly Amendments deleted the prior version of the bill
expressing the intent of the legislature to make statutory
changes relating to the Budget Act of 2009. This bill now
provides the necessary statutory changes in the area of tax
enforcement and tax administration in order to amend the
2009 Budget Act.
ANALYSIS : This bill makes various amendments related to
tax enforcement and tax administration:
1. Implements Governor's May Revise proposals which:
CONTINUED
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A. Increase tax withholding schedules by 10 percent.
Currently, many taxpayers owe tax in excess of that
withheld by their employer, and for these taxpayers,
the increase would result in withholding more closely
matching their final tax liabilities. The final tax
owed by the taxpayer is unchanged, and, as under
existing law, taxpayers may modify their withholding
to reflect their individual circumstances if they
wish.
B. Require individual and corporate taxpayers to
accelerate estimated payments by remitting 30 percent
of their estimated annual income or corporate tax
liabilities in April, 40 percent in June (compared to
existing law requirements of 30 percent each in April
and June).
2. Imposes withholding on independent contractors beginning
January 1, 2010. Businesses and government entities
would be required to withhold three percent of payments
for goods or services to independent contractors that
currently require the filing of a federal 1099-MISC.
The amount withheld would be credited against the state
income tax liability of the contractor, as with wage
withholding.
3. Creates a financial institution record match system
(FIRM) similar to an existing program for child support
collections. Financial institutions would be required
to perform quarterly matches of their account records
with a file of delinquent taxpayers provided by the
Franchise Tax Board (FTB) in order to identify assets
that can be applied to pay the delinquent tax debts. It
also authorizes FTB to institute civil proceedings to
enforce specified provisions of this measure.
4. Requires out-of-state sellers, such as Amazon, that pay
commissions to California firms or residents for sales
referrals (often through a website link) to collect use
tax on their sales to California residents. Existing
law requires Californians to self-report and pay the use
tax on these purchases, but compliance is low.
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5. Generally conforms California to federal income tax
backup-withholding rules related to various non-wage
payments. Specifically, the measure requires a business
to withhold seven percent of reportable payment of
interest, dividends, compensation for services, and
other forms of income if the IRS determines a condition
for withholding exists (such as significant
underreporting of non-wage payments by the recipient on
tax returns).
6. Requires non-retailing businesses with receipts of more
than $100,000 to register with the Board of Equalization
(BOE) and file annual use tax returns by April 15. The
annual use tax return and payment applies to purchases
on which sales tax was not collected (generally from
out-of-state sellers), excluding vehicles, vessels, and
aircraft (which are covered through separate
registration requirements).
7. Strengthens laws related to abusive tax shelters by (a)
providing a single definition for such transactions for
purposes of the application of several statutes aimed at
and curtailing such activity and revising penalty
provisions, (b) adopting federal categories for
reportable "transactions of interest", and (c) revising
penalty provisions.
8. Permits the state to suspend state occupational and
professional licenses because of unpaid income tax
liabilities. Allows taxpayer to avoid suspension by
entering into an installment agreement with FTB.
Comments
Increased withholding . Existing law requires that
employers withhold a portion of employees' wages and remit
them to the Employment Development Department (EDD). The
amounts withheld are based on tables provided by the FTB to
EDD. By law, these tables are designed so that withholding
of wage payments cover the taxpayer's full liability
arising from the wage payments. However, in many
instances, taxpayers with significant income from non-wage
sources, or with wage income from a spouse, owe significant
taxes on their final returns. This measure raises the
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required amount of withholding by 10 percent, and makes
conforming changes for payments related to stock options
and bonuses. Taxpayers are permitted to modify their
withholding if they wish.
Accelerated estimated taxes . Individuals with non-wage
income and corporations are required to remit quarterly
estimated tax payments toward their annual liabilities.
Through last year, the majority of taxpayers - those using
the regular installment method - were required to remit
four quarterly payments, each worth 25 percent of their
estimated full-year tax liability. SB 28X (Senate Budget
and Fiscal Review Committee), Chapter 1, Statutes of
2007-08, First Extraordinary Session, accelerated the
payment schedule beginning January 1, 2009, so that the
April and June payments are now equal to 30 percent of
estimated liabilities, and September and December are each
equal to 20 percent of estimated liabilities. This measure
further accelerates the schedules - requiring payments
equal to 30 percent of estimated liabilities in April, 40
percent in June, zero in September, and 30 percent in
December. It also makes conforming changes for taxpayers
using the annualized income installment method and those
making payments beginning after the first quarter of the
year.
Withholding of Independent Contractors . Under existing
law, employers are required to withhold a portion of wages
paid to their employees and remit the withheld amounts to
EDD, which administers the reporting, collection, and
enforcement of specified state taxes subject to
withholding. This withholding requirement does not apply
to payments made to independent contractors. However,
businesses making payments to a contractor in excess of
$600 per year are required to file Form 1099-MISC with the
Internal Revenue Service. This bill requires businesses
and governmental entities to withhold three percent of
payments they make to independent contractors exceeding
$600 each year. In this regard, the withholding
requirement would apply only to businesses that are
currently required to file a federal Form 1099-MISC, thus
somewhat mitigating the administrative burdens imposed on
businesses by this measure.
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In addition to providing a one-time increase in revenues to
help balance the budget in the fiscal year (FY) 2009-10,
mandatory withholding on independent contractors helps
address the "tax gap" - the difference between taxes owed
under the laws of the state and the taxes actually
collected. According to FTB, the measure would increase
payments by about $300 million per year over time, due to
increased compliance.
Financial institution record match system . The FIRM
program requires financial institutions to match a list for
delinquent tax debtors against its customer records, and
provide to FTB, on a quarterly basis, the name, record
address, social security number or taxpayer identification
number for each delinquent tax debtor in its customer
records. The measure requires FTB to reimburse a financial
institution for its actual costs incurred to implement
FIRM, up to $2,500 for startup costs and no more than $250
per calendar quarter thereafter. The provisions in this
measure are similar to SB 402 (Wolk).
Expanded sales tax nexus . A contentious issue in sales and
use tax administration relates to the extent to which a
state may compel an out-of-state retailer to collect use
taxes from its in-state customers. The issue is of
considerable importance because, although Californians are
required to self-report out-of-state purchases for use in
this state, the compliance rate is very low.
In general, an out-of-state retailer must have sufficient
business presence (also known as "nexus") in order to be
required to collect and remit the tax. Under current law,
a retailer is considered "engaged in business in this
state" and required to collect the California use tax on
sales made to California consumers when it maintains
storage or warehousing facilities in the state or it has a
representative or independent contractor operating in this
state for the purpose of selling, delivering, installing,
assembling, or the taking of orders for the tangible
personal property.
Current BOE regulations specify that the use of a computer
server on the Internet to create or maintain a web page or
site by an out-of-state retailer is not considered a factor
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in determining whether the retailer has a substantial nexus
with California. The regulations further state that an
Internet service provider or other Internet access service
provider, or World Wide Web hosting services shall not be
deemed the agent or representative of any out-of-state
retailer as a result of the service provider maintaining or
taking orders via a web page or site on a computer server
that is physically located in this state.
This bill provides that the term "retailer engaged in
business in this state" includes any retailer that enters
into an agreement with a California business or other
entity under which the California entity, for a commission
or other consideration, directly or indirectly refers
potential customers of tangible personal property. The
referral can be by a link or an Internet website, or some
other means, provided that the cumulative sales price from
sales by the retailer to customers in California who are
referred pursuant to these agreements exceeds $10,000
during the preceding 12 months.
The measure does not apply to advertising on television,
radio, in print, on the Internet, or any other medium,
unless the payment for advertising consists of a commission
or other consideration that is based on sales of tangible
personal property. Thus, banners and "click-throughs" on
internet sites, such as Google, which are based on models
other than sales commissions for referrals would not create
nexus with California.
The bill is based on legislation enacted in the state of
New York in 2008. That law has been challenged on
Constitutional grounds, but the challenges were dismissed
at the trial court level. The provisions of this measure
are similar to AB 178 (Skinner).
Abusive tax shelters (ATS) . Current federal and state law
place reporting requirements and restrictions on ATS and
related transactions designed to avoid taxes. The use of,
and failure to report, such transactions is subject to
assessment, substantial penalties, and interest by FTB up
to eight years after the tax return is filed by the
taxpayers.
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According to FTB, current law suffers from inconsistencies
in definitions among various ATS provisions, hampering the
enforcement of these provisions. This bill eliminates
these inconsistencies by providing a single, consistent
definition for abusive tax shelters, which would be
referred to as "potentially abusive tax avoidance
transactions." It also adopts the federal reportable
transaction categories for "transactions of interest" for
California purposes, and it provides similar authority to
the FTB to determine transactions of interest for
California income or franchise tax purposes (thereby
enabling the state to seek additional information related
to such transactions).
ATS penalties can currently be avoided if a taxpayer that
has been contacted by FTB about such activities files an
amended return prior to when FTB issues a deficiency
notice. The measure imposes a reduced penalty, equal to 50
percent of the full penalty, for taxpayers that file an
amended return in these circumstances. The reduced penalty
is aimed at encouraging taxpayers to file amended returns
and pay taxes owed, while at the same time maintaining some
penalty on taxpayers that had previously reduced their tax
by the use of abusive transactions. The provisions in this
measure are similar to SB 401 (Wolk).
Other provisions . The provision requiring backup
withholding is similar to the introduced version of AB 1848
(Ma), 2007-08 Session. The provision requiring
non-retailers to register with BOE is similar to SB 711
(Calderon), and is aimed at raising compliance for use tax
payments on business purchases of equipment from
out-of-state sources. The business license revocation
provisions are similar to AB 484 (Eng).
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
As shown in the accompanying table, the tax compliance and
revenue acceleration measures would raise General Fund
collections by $4.4 billion in 2009-10, and $670 million in
2010-11. Annual revenue gains would fall to the low
hundreds of millions in the subsequent two years (due to
payment accelerations from those years into 2009-10), and
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then rise to about $1 billion annually in out-years, due to
improved tax compliance.
Revenue Impact of Compliance and Acceleration Provisions
(In millions)
2009-10 2010-11
Governor's proposal - withholding $1,700 $98
Governor's proposal - estimated payments 61095
Independent contractor withholding 1,965130
FIRM 22 60
Extended sales tax nexus 48 102
Backup withholding 26 25
Non-retailer registration w/BOE 26 123
Abusive tax shelters 1.5 10.6
Suspension of licenses for delinquent taxpayers32.526.4
Total: $4,431 $670
ASSEMBLY FLOOR :
AYES: Ammiano, Arambula, Beall, Blumenfield, Brownley,
Buchanan, Charles Calderon, Chesbro, Coto, Davis, De La
Torre, De Leon, Eng, Evans, Feuer, Fong, Fuentes,
Furutani, Galgiani, Hayashi, Hernandez, Hill, Huffman,
Jones, Krekorian, Lieu, Bonnie Lowenthal, Ma, Mendoza,
Monning, Nava, John A. Perez, Portantino, Ruskin,
Saldana, Skinner, Solorio, Swanson, Torlakson, Torrico,
Yamada, Bass
NOES: Adams, Anderson, Bill Berryhill, Tom Berryhill,
Blakeslee, Caballero, Conway, Cook, DeVore, Duvall,
Emmerson, Fletcher, Fuller, Gaines, Garrick, Gilmore,
Hagman, Harkey, Huber, Jeffries, Knight, Logue, Miller,
Nestande, Niello, Nielsen, V. Manuel Perez, Silva, Smyth,
Audra Strickland, Tran
NO VOTE RECORDED: Block, Carter, Hall, Salas, Torres,
Villines, Vacancy
DLW:mw 6/29/09 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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