BILL ANALYSIS SENATE REVENUE & TAXATION COMMITTEE Senator Lois Wolk, Chair SB 1028 - Correa As Introduced February 12, 2010 Hearing: April 14, 2010 Fiscal: Yes SUMMARY: Allows the Board of Equalization to impose interest on a daily basis on a late payment, or late prepayment, of a tax, fee or surcharge provided the late payment or prepayment is only one day late. EXISTING LAW imposes penalties and interest on persons who pay their tax and fee obligations after the due date. The penalty is 10 percent of the tax, plus monthly, simple interest on those unpaid taxes from the date the tax was due to the date it was paid. In the case of a late prepayment, the law imposes a 6 percent penalty. As of January 1, 2010, the interest rate for late payments is 7 percent. Interest accrues on any unpaid tax on a monthly basis regardless if the payment is late three days or 29 days. In other words, if a taxpayer is three days late on a tax payment interest accrues for the entire month, not for just the three days. EXISTING LAW authorizes the Board of Equalization (BOE) to relieve a late payment penalty when the Board finds that the taxpayer's failure to make a timely payment was due to reasonable cause and circumstances beyond the person's control. EXISTING LAW, generally, does not allow the BOE to relieve accrued interest on late payments. However, the SB 1028 - Correa Page 3 BOE may relieve interest in cases of a disaster or where the failure to pay the tax in a timely manner was due to an unreasonable error or delay by a BOE employee. Additionally, existing law authorizes the BOE to deem timely tax payments sent via the United States Postal Service or through a bona fide commercial delivery service if those payments are one day late, thereby relieving the taxpayer of the monthly interest. THIS BILL authorizes the BOE to modify, after meeting as a public body and taking into account all facts and circumstances, the method of computing interest on a late payment, or prepayment, of a tax, fee, or surcharge by accruing interest on a daily basis, instead of monthly, provided: 1. The payment or prepayment of the tax was made one, and only one, day after the date the tax or prepayment was due. 2. The person was granted relief from all penalties that applied to that payment of tax or prepayment. 3. The person files a request for an oral hearing before the BOE. THIS BILL disallows the modification of interest computation for any payment made pursuant to a deficiency determination, a determination where no return has been filed, or a jeopardy determination. Furthermore, the bill defines "modified adjusted daily rate" in accordance with the definition of "adjusted rate per annum" as defined by Revenue and Taxation Code divided by 365. FISCAL EFFECT: The BOE estimates that this bill results in a revenue loss of less than $ 10,000 annually. SB 1028 - Correa Page 3 COMMENTS: A. Purpose of the Bill According to the author's office, this bill gives the BOE authority to impose only one day's interest on a payment made only one day late, in special circumstances and on a case-by-case basis. This bill is intended to encourage timely payments of taxes, fees and surcharges while providing taxpayers with fairness and relief in specified circumstances. B. Background According to the BOE, for 47 years its administrative policy allowed a 1 day grace period in cases where a mailing of a payment was postmarked one day late. Upon learning they did not have the legal authority to provide this 1 day grace period, the BOE ended this practice. AB 1638 (Assembly Committee on Revenue and Taxation, 1999) authorized the BOE to continue their 47 year old policy. However, AB 1638 contained a caveat: the one day grace period applies only to payments made by mail or commercial delivery service. Accordingly, late electronic payments are not eligible for the one day grace period provided under current law. The BOE states that this bill targets those taxpayers that are required by law to remit their tax payments to the BOE electronically. This is because, unlike income tax return due dates, most of these taxpayers are required to make electronic payments each month to the BOE, and the due dates of these payments vary. For example, for sales tax payments, a payment is required every month, and for seven months of the year, the due date is the 24th of the month. For four of the months, the due date is the end of the month. And for the June payment, the due date is the 15th of the month. A payment of only 10 minutes late for these taxpayers automatically results in an entire month's interest charge - currently at a seven percent annual rate. SB 1028 - Correa Page 3 Moreover, BOE points out that for a late income tax payment, the Franchise Tax Board (FTB) computes interest on a daily, rather than a monthly basis. Therefore, allowing the BOE to compute interest on the liability for the one day the taxpayer was late (if the other criteria in the bill is met), would be consistent with the general interest provisions administered by the FTB for all late payments. C. Prompt Payment Incentive The BOE contends that taxpayers who are one day late, generally, do not make a conscious decision to be late and that late payments are usually a result of inadvertent errors or circumstances beyond the taxpayer's control. Furthermore, this bill provides an incentive for those taxpayers who happen to be a day late to remit their payment sooner rather than later as presently taxpayers are charged the same amount of interest regardless of being one day or 29 days late. Accordingly, this bill may not undermine the filing deadline but could encourage late taxpayers to pay promptly. D. Is the one-day standard equitable? This bill provides that if the BOE, after taking into account all facts and circumstances, finds "that it is inequitable" to compute interest at a monthly rate, it may compute interest on a daily basis provided the taxpayer is only one day late. The one day standard, however, is arbitrary. Why is computing interest on a daily basis "equitable" for a payment that is one day, and not two days, late, especially if being late was beyond a taxpayer's control? And why is a two-day late payment less deserving of the relief? To encourage the timely remittance of taxes, California imposes penalties and interest to late payments. The line of demarcation between timely and untimely is the due date. If SB 1028 is aimed at addressing an inequity that exists within the process, SB 1028 - Correa Page 3 consistency may require treating all taxpayers who pay late due to reasonable cause or circumstance beyond their control equally. Support and Opposition Support: Board of Equalization (Sponsor) Cal-Tax California Chamber of Commerce California Business Properties Association California Manufacturers and Technology Association Michelle Steel, Board Member, Third District, Board of Equalization Oppose: None registered. --------------------------------- Consultant: Meg Svoboda