BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 110| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 110 Author: Assembly Budget Committee Amended: 3/14/11 in Senate Vote: 27 - Urgency PRIOR VOTES NOT RELEVANT SENATE BUDGET & FISCAL REVIEW COMMITTEE : 11-5, 3/16/11 AYES: Leno, Alquist, DeSaulnier, Evans, Liu, Lowenthal, Rubio, Simitian, Wright, Hancock, Wolk NOES: Huff, Emmerson, Fuller, Anderson, La Malfa SUBJECT : Budget Act of 2011: Tax Compliance and Programs SOURCE : Author DIGEST : This bill makes various program changes to state laws regarding tax compliance and tax programs in order to implement provisions of law to balance the 2011 Budget Act. Senate Floor Amendments of 3/14/11 delete the prior version of the bill expressing the intent of the Legislature to enact statutory changes relating to the 2011 Budget Act, and insert the current language relative to tax compliance and programs. ANALYSIS : CONTINUED AB 110 Page 2 This bill does the following: 1. Use Tax "Look-Up" Table . This bill provides that persons who are required to report and remit the Use Tax on the purchase of tangible personal property to use a "Look-Up" table, which provides an estimated amount due based on income level. Under existing law, Use Tax, the counterpart to the Sales Tax, is owed on purchases made out-of-state, or through means such as mail-order or internet, when the tax was not collected by a registered retailer. Individuals who owe the Use Tax may pay such tax directly to the Board of Equalization (BOE) or declare and pay the tax through the income tax return by using the Use Tax line provided on the return. This bill allows for single nonbusiness purchases of $1,000 or less to report on the Use Tax line on the income tax return either (i) the actual amount of Use Tax due or (ii) the amount shown on a Look-Up table prepared by BOE and included in the income tax return instructions. The BOE, which has authority over the collection of the Use Tax, would prepare the Look-Up table, which would indicate an estimate amount of Use Tax due based on the person's adjusted gross income. The BOE would then provide the Franchise Tax Board (FTB), which is responsible for administering income taxes, the necessary instructions and information to include the Look-Up table as part of income tax return information. This provision is estimated to result in additional revenues of $10 million in 2011-12 and annually thereafter, $6.5 million of which is General Fund. 2. Refundable Portion of the Child and Dependent Care Expense Tax Credit . This bill eliminates the refundable aspect of the Child and Dependent Care Expense Tax Credit available under the personal income tax. Under the program, taxpayers are granted a credit up to a maximum against taxes for expenses related to child and dependent care expenses. Qualified expenses are limited to $3,000 for one child and $6,000 for two or more, with AB 110 Page 3 the actual credit amount equal to a percentage of a parallel federal credit program. The amount of the credit declines as income increases and is not available to taxpayers with income in excess of $100,000. Under the current program, if the amount of the credit exceeds the tax liability, the credit is "refundable" and the excess is refunded to the taxpayer. This can result in a tax refund for taxpayers with little or no personal income tax liability. This bill eliminates the refundable part of the tax credit for tax years beginning January 1, 2011 and after, but retains the core elements of the tax credit program. This provision is estimated to result in additional revenues of $70 million in 2011-12 and annually thereafter. 3. Voluntary Compliance Initiative Two . This bill directs the FTB to establish a Voluntary Compliance Initiative (VCI) for those taxpayers that either utilized an abusive tax avoidance transaction or have unreported income from the use of an off-shore financial arrangement. This narrow amnesty program would provide for a 91 day amnesty period, running from August 1, 2011 through October 31, 2011 and would apply to taxpayers subject to the state's personal income tax laws and corporation tax laws. The initiative is designed to collect taxes previously unpaid but otherwise due to the state's General Fund and would result in both new and accelerated revenues. The State ran the first VCI program in 2004 and generated approximately $1.3 billion revenues from this effort. California and the federal government generally deny claimed tax benefits of an abusive tax avoidance transaction if the transaction that gives rise to such benefits lacks economic substance independent of income tax considerations. In other words, the transactions have no real value; rather they are only intended to avoid taxes. This initiative would provide a mechanism for qualifying individuals and businesses to remit back taxes with reduced penalties and avoid criminal prosecution. It applies to tax years beginning prior to AB 110 Page 4 January 1, 2011. The program would be available to personal income tax and corporation taxpayers who have: Abusive tax avoidance transactions currently under audit; Abusive tax avoidance transaction cases in protest; Unknown abusive tax avoidance transactions; or Unreported income from the use of an offshore financial arrangement. Under the VCI program, all penalties other than the Large Corporate Understatement Penalty and the Amnesty Penalty would be waived. In addition, there would be protection from any criminal action against any qualified VCI participant who is not the subject of an existing criminal complaint or investigation. VCI participants would be required to file amended returns and pay all unpaid tax and interest resulting from an abusive tax avoidance transaction. Furthermore, tax bills that are addressed in the VCI would be closed and would have no appeal rights. This bill also makes the following changes in law to further discourage the use of abusive tax avoidance transactions in the future: A. Increases from 8 to 12 years the statute of limitations for the FTB to issue a tax assessment for abusive tax avoidance transaction activity. B. Enacts a uniform definition of an abusive tax shelter to simplify administration and avoid confusion. C. Establishes a 50 percent penalty for the filing of an amended return after being contacted by the Franchise Tax Board but prior to the FTB issuing a deficiency notice. Under current law a taxpayer can avoid the penalty completely if they file an amended return after being contacted, but prior to the FTB issuing a deficiency notice. AB 110 Page 5 D. Amends the California non-economic substance transaction (NEST) penalty to include any transaction determined by the IRS to lack economic substance. 4. Financial Institutions Records Match System . This bill requires the FTB, in coordination with financial institutions in the state, to operate a Financial Institutions Records Match (FIRM) system, which would provide a means to match delinquent tax debtor records with customer records provided by financial institutions. The FIRM system would permit the FTB to identify previously unknown non-interest bearing deposit accounts held by delinquent income tax debtors and collect outstanding income tax debts. The FTB would use the match information to collect delinquent state income tax debts using existing authority and collection methods, including orders to withhold. This proposed data match is similar to one used by the existing Financial Institution Data Match program mandated by federal law for the collection of delinquent child support payments. The proposal would require financial institutions doing business in California to conduct records matches on delinquent taxpayers and would compensate such institutions for their costs of compliance with these requirements. This provision is estimated to generate additional revenues of $10 million in 2010-11 and $30 million in 2011-12. FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes Local: Yes The total combined fiscal impact of all the provisions in this bill results in additional General Fund revenues of $280 million in 2010-11 and $56.5 million in 2011-12. AB 110 Page 6 DLW:mw:kc 3/17/11 Senate Floor Analyses SUPPORT/OPPOSITION: NONE RECEIVED **** END ****