BILL ANALYSIS SB 1028 Page 1 Date of Hearing: June 28, 2010 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Anthony Portantino, Chair SB 1028 (Correa) - As Introduced: February 12, 2010 Majority vote. Fiscal committee. SENATE VOTE : 30-0 SUBJECT : Administration of interest: late payments, or prepayments, of taxes, fees, and surcharges. SUMMARY : Authorizes the members of the State Board of Equalization (BOE) to impose interest on a daily basis in the case of a late payment, or prepayment, of a tax, fee, or surcharge, provided that the payment or prepayment is only one day late. Specifically , this bill: 1)Authorizes the members of BOE, after meeting as a public body and taking into account all facts and circumstances, to determine whether it is equitable to compute interest on a late payment, or prepayment, of a specified tax, fee, or surcharge at a modified adjusted rate per month or a modified adjusted daily rate. 2)Specifies the following additional conditions that must be satisfied before interest imposed on a late payment or prepayment may be computed at the modified adjusted daily rate, instead of the modified adjusted rate per month: a) The payment of tax, fee, or surcharge or the prepayment of tax was made by a person one business day after the date the tax, fee, or surcharge, or prepayment was due; b) The person was granted relief from all penalties that applied to that payment of tax, fee, or surcharge, or prepayment; and, c) The person has filed a request for an oral hearing before BOE. 3)Defines the terms "modified adjusted daily rate" and "modified adjusted rate per month" by reference to the Revenue and SB 1028 Page 2 Taxation Code (R&TC) Section 6591.5. 4)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 issued by BOE. 5)Applies to payments or prepayments of tax, and payments of the fees and surcharges imposed, respectively, pursuant to the Sales and Use Tax (SUT) Law, Motor Vehicle Fuel Tax Law, Diesel Fuel Tax Law, Use Fuel Tax Law, Cigarette and Tobacco Products Tax Law, Alcoholic Beverage Tax Law, Hazardous Substances Tax Law, Integrated Waste Management Fee Law, Oil Spill Response, Prevention, and Administrative Fees Law, Underground Storage Tank Maintenance Fee Law, Fee Collection Procedures Law, Energy Resources Surcharge Law, Emergency Telephone Users Surcharge Act, and the law governing the taxation of specified insurance companies. 6)Declares the legislative intent that BOE exercise its authority to change the method of computing interest only in special circumstances and on a case-by-case basis. EXISTING LAW imposes a penalty for a late payment or late prepayment of tax, fee or surcharge administered by BOE. The penalty for a late payment is 10% of the amount of tax, fee, or surcharge due, plus monthly, simple interest on the unpaid tax, fee or surcharge obligation. In the case of a late prepayment, existing law imposes a 6% penalty. Currently, the rate of interest for late payments is set at 7%, where the interest accrues on any unpaid tax liability on a monthly basis. Therefore, regardless of whether a taxpayer makes a payment two days after the due date of a return, or at the end of the month following the due date, the taxpayer is charged interest for the entire month. In the case of payments remitted electronically, i.e. electronic funds transfers, a payment made on the due date, but after 3 p.m., is also subject to an entire month's interest charge. Interest on tax deficiency is not a "penalty" but is simply compensation for a taxpayer's use of money after the due date of the tax. (In re Vignola, Bkrtcy. N. D. Cal.2007, 377 B. R. 271). While BOE has authority to relieve a person from a late payment penalty when BOE finds that the person's failure to make a timely payment was due to reasonable cause and circumstances, it SB 1028 Page 3 generally does not have the same authority to relieve the person of the interest on that late payment, except in very limited circumstances. Specifically: 1)BOE may relieve interest only in cases where a person's failure to make a timely return or payment is due to a disaster, defined as circumstances beyond the person's control. 2)The SUT Law allows BOE to relieve interest imposed in cases where the failure to file or pay fees is due, in whole or in part, to an unreasonable error or delay by an employee of BOE acting in his/her official capacity. 3)Government Code Section 15620.5, which was added by AB 1638 (Committee on Revenue and Taxation), Chapter 929, Statutes of 1999, authorizes BOE to establish a uniform policy for the acceptance of payments or prepayments that are delivered to BOE via the United States (U.S.) mail or a bona fide commercial delivery service . In accordance with this section, BOE has implemented a policy allowing taxpayers a uniform one-day grace period in cases where a mailing of a return or payment was postmarked one day after the due date. Prior to 1997, a similar administrative policy was in place for 47 years but that policy was initially eliminated after BOE's legal staff had reviewed the policy and found no legal basis for such policy. FISCAL EFFECT : Insignificant. BOE estimates that the limited interest relief provided by this measure will result in an annual revenue loss of less than $10,000. COMMENTS : 1)According to the author's office, this bill is intended to give 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. SB 1029 encourages timely payments of taxes, fees and surcharges, while providing taxpayers with fairness and relief in specified circumstances. 2)This bill is sponsored by BOE. According to the sponsor, the purpose of this bill is "to provide some limited flexibility for the members of BOE to address the inequity of applying an entire month's interest to a liability when the liability is SB 1028 Page 4 paid only one day late and the late payment is due to reasonable cause or circumstances beyond the taxpayer's control." 3)Should electronic payments of tax be treated differently than payments made by mail? If a taxpayer decides to pay his/her tax electronically and inadvertently misses the 3 p.m. deadline applicable to electronic payments, even by 10 minutes, he/she will automatically be penalized with an entire month's interest charge, currently set at a 7% annual rate. However, if the same taxpayer chooses the U.S. Postal Service or a bona fide commercial delivery service and mails the payment on the day after the due date, he/she will not be subject to the 7% interest charge. In fact, that taxpayer does not even have to ask BOE for the relief - it is automatic. In 2000, BOE reinstated its prior practice of allowing taxpayers a uniform one-day grace for remittances, claims for credit or refund, documents, or returns that are delivered to BOE by U.S. mail or commercial delivery service, provided that the envelope containing the payment is postmarked one day after the due date for the payment. This policy, however, does not apply to electronic payments of tax, even though some taxpayers are required to remit their payments to BOE electronically. For example, any taxpayer whose average monthly tax payments are $17,000 or more is required to pay the sales and use tax electronically. Those taxpayers do not have a choice but to remit tax payments electronically. BOE has recognized that electronic payments of tax should not be treated differently from tax payments mailed via U.S. Postal Service or commercial delivery service and sponsored this bill to provide relief, primarily, to those taxpayers that are required file their taxes electronically. 4)Does this bill apply only to electronic payments? It is unclear. The plain language of this bill does not limit its application only to electronic remittances of tax, fee, or surcharge. Thus, arguably, if this bill were to become law, a taxpayer who has mailed a payment or prepayment of tax postmarked one day after the due date for the payment would be subject to all of the applicable requirements to be eligible for the interest relief. However, under BOE's internal policy, the taxpayer's payment, most likely, would be accepted as timely. To eliminate the ambiguity, Committee staff suggests that this bill be amended to limit its application SB 1028 Page 5 only to electronic payments or prepayments of tax, fee, or surcharges. 5)Is it too easy to qualify for the relief provided by this bill? No. Unlike BOE's uniform grace day policy for mailed-in payments, the interest relief proposed by this bill is not available to a person unless, in addition to all other requirements, BOE relieves the person from all penalties that applied to the payment of tax, fee or surcharge. Generally, in order to relieve a taxpayer from the penalties, BOE must find that the person's failure to make a payment in a timely manner was due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect. In addition to being relieved from all penalties, the person must request an oral hearing before BOE. If BOE, taking into account all facts and circumstances, determines that it is inequitable to compute interest on a monthly basis, interest will be computed on a daily basis. A "facts and circumstances" test is routinely used by BOE in other cases to provide relief to taxpayers. For example, BOE is authorized, using the same "facts and circumstances" test, to relieve from tax liability or penalty an innocent spouse. (R&TC Section 6456). 6)Why are the requirements for tax relief in the case of electronic payments more stringent? Under BOE's internal schedule, a payment that is postmarked one day after the due date will be accepted as timely. Taxpayers are not required to request an oral hearing before BOE nor do they need to be relieved of all the penalties that otherwise may be applicable to the payment. The practice of automatically allowing a taxpayer a grace day for his/her filing was originally adopted by BOE because it recognized that the taxpayer has no control over the delivery process once the payment is entrusted to the U.S. Postal Service or any other delivery service. In the case of an electronic payment, no such problem exists - the taxpayer is in control of the process until the payment is submitted to BOE. Arguably, the more stringent requirements of the proposed uniform grace day policy for electronic payments are justified because taxpayers cannot blame a third party for the delay. However, would not those requirements discourage people from remitting tax payments electronically? It seems that taxpayers will choose to mail their tax, fee or surcharge payments, unless they are required by law to submit SB 1028 Page 6 those payments to BOE electronically. 7)Does this bill create a financial incentive for a taxpayer to pay late? It is unlikely that this bill would encourage taxpayers to delay the remittance of payments because the delinquent taxpayer will not be relieved by this bill of the most severe delinquency charges, i.e. a 10% penalty for late payments and a 6% penalty for late prepayments, unless the taxpayer's failure to make a timely payment is due to reasonable cause and circumstances beyond the person's control. A conscious decision by a person to be late on the payment or prepayment of tax, fee, or surcharge does not qualify as a reasonable cause or circumstance beyond the person's control. Therefore, this bill is not likely to encourage late payments or late prepayments, and, in fact, does provide an incentive for taxpayers and fee payers to make payments and prepayments as soon as possible. 8)Franchise Tax Board (FTB) Practice. If a taxpayer does not pay the amount of tax reported on his/her income tax return by the original due date, or if FTB assesses additional tax that becomes due and payable, FTB will charge interest on the balance due, compounded daily. The interest is calculated at the adjusted annual rate established under R&TC Section 19521 for the period from the due date until the date paid. (R&TC Section 19101). The interest may be abated under specified circumstances including, among others, extreme financial hardship, erroneous refund, or reliance on formally requested written advice. 9)What is so magical about one day as opposed to two days? The relief afforded to a taxpayer by this bill is based on the assumption that the taxpayer's payment was only one day late. Why is computing interest on a daily basis "equitable" for a payment that is one day, and not two days, late? And why is a two-day late payment less deserving of the relief? As noted in the analysis of this bill by the Senate Committee on Revenue and Taxation, if SB 1028 is aimed at addressing an inequity that exists within the process, consistency may require treating all taxpayers who pay late due to reasonable cause or circumstance beyond their control equally. Thus, as an alternative to our suggestion in comment 4, the Committee may wish to consider amending this bill to follow FTB's current practice of calculating interest on a daily, instead of monthly, basis until the payment is received. SB 1028 Page 7 10)Legislative History. Similar bills were sponsored by BOE for the last two years: AB 693 (Silva) and AB 1901 (Silva). AB 693, which was introduced in the 2009-10 legislative session, died in this Committee, and AB 1901, which was introduced in the 2007-08 Legislative Session, passed out of the Assembly but failed passage in the Senate Revenue and Taxation Committee. REGISTERED SUPPORT / OPPOSITION : Support State Board of Equalization (sponsor) California Chamber of Commerce California Business Properties Association California Manufacturers and Technology Association California Taxpayers' Association Opposition None on file Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098