BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 1028
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          Date of Hearing:  June 28, 2010

                              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  


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            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  


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          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  

          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  


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            paid only one day late and the late payment is due to  
            reasonable cause or circumstances beyond the taxpayer's  

           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  


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            only to electronic payments or prepayments of tax, fee, or  

           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  

           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  


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            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. 


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           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.  


          State Board of Equalization (sponsor)
          California Chamber of Commerce
          California Business Properties Association
          California Manufacturers and Technology Association
          California Taxpayers' Association
          None on file

           Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916)