BILL ANALYSIS                                                                                                                                                                                                    


            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  


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            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,  

                    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  

                    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. 


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                 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.  


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                 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,  


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            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)

                        California Chamber of Commerce
                        California Business Properties Association
                        California Manufacturers and Technology  
                        Michelle Steel, Board Member, Third District,  
            Board of Equalization

                 Oppose: None registered.


            Consultant: Meg Svoboda