BILL ANALYSIS Ó AB 242 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 242 (Revenue and Taxation Committee) As Amended August 31, 2011 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |76-0 |(June 2, 2011) |SENATE: |34-0 |(September 7, | | | | | | |2011) | ----------------------------------------------------------------- Original Committee Reference: REV. & TAX. SUMMARY : Conforms the Personal Income Tax (PIT) Law to specified provisions of the federal Patient Protection and Affordable Care Act (PPACA) and contains other provisions sponsored by the State Board of Equalization (BOE). The Senate amendments : 1)Specify that the BOE must reimburse the manufacturer of a new motor vehicle for any use tax the manufacturer pays to or for a buyer or lessee when providing a replacement vehicle or making restitution under California's "Lemon Law." 2)Eliminate the requirement for retailers and lenders to file an election with the BOE designating which party is entitled to claim a "bad debt" deduction or refund. 3)Make a technical clarification to the "repair, retrofit, or modification" exception to the 12-month rebuttable presumption for vessels purchased outside of California. 4)Delete superfluous language in the Sales and Use Tax (SUT) Law as a matter of code maintenance. 5)Allow a taxpayer to file a claim for reimbursement of bank charges and third-party check charge fees incurred as the direct result of an erroneous processing action or erroneous collection action by the BOE. 6)Amend the SUT Law to provide that restitution orders that are due and payable to the BOE may be collected by the BOE in any manner provided by law for the collection of a delinquent SUT liability. AB 242 Page 2 7)Amend the Cigarette and Tobacco Products Tax Law and the Diesel Fuel Tax Law to provide the BOE with similar collection authority. 8)Amend the Motor Vehicle Fuel Tax Law to provide that restitution orders that are due to the State of California and payable to the State Controller may be collected by the Controller in any manner provided by law for the collection of a delinquent motor vehicle fuel tax liability. 9)Delete the provisions of this bill that had: a) Increased the amount of qualified adoption expenses excludable from an employee's gross income; and, b) Provided an income exclusion for federal grants for qualifying therapeutic discovery projects; and, 10)Make technical and conforming changes to the code. AS PASSED BY THE ASSEMBLY , this bill: 1)Provided that, for taxable years beginning on or after January 1, 2013, a simple cafeteria plan created by a certain small employer for its employees would be treated as having satisfied the nondiscrimination rules of a classic cafeteria plan. 2)Allowed small employers to offer exchange-participating health plans through cafeteria plans effective in 2014. 3)Increased, for taxable years beginning on or after January 1, 2010, the amount of qualified adoption expenses excludable from an employee's gross income by $1,000. 4)Excluded from income certain qualified health care benefits provided after March 30, 2010, to a member of an Indian tribe, the member's spouse, or the member's dependents. 5)Excluded from gross income and the alternative minimum taxable income, for taxable years beginning on or after January 1, 2009, a federal grant for a qualifying therapeutic discovery project undertaken by the taxpayer in a tax year beginning in 2009 or 2010. AB 242 Page 3 6)Excluded from income, for taxable years beginning on or after January 1, 2010, certain payments received by an individual taxpayer under the National Health Service Corps loan repayment or forgiveness programs. FISCAL EFFECT : According to Senate Appropriations Committee staff, the following represents the General Fund impact of this bill's main provisions: 2010-11 2011-12 2012-13 Healthcare Conformity Student loan exclusions-$400,000 -$500,000 -$350,000 Tribal benefits exclusion -$50,000 -$150,000 -$80,000 Small employer plans negligible revenue loss BOE Provisions Technical provisions negligible revenue loss BOE admin: restitution -$106,000 Back restitution collections $865,000* $865,000* Ongoing restitution collections $568,000* $1,136,000* *(revenue gains) COMMENTS : Assembly Revenue and Taxation Committee staff notes all of the following: 1)Establishment of simple cafeteria plans for small businesses . Under existing law, an employer may establish a "cafeteria plan" - a separate written plan under which all participants are employees and are permitted to choose among at least one taxable benefit (e.g., current cash compensation) and at least one "qualified benefit." "Qualified benefits" are employer-provided benefits that are not taxable, such as, for example, group term life insurance coverage not in excess of $50,000 and benefits under a dependent care assistance program. Cafeteria plans and certain qualified benefits are subject to non-discrimination requirements. The basic purpose of those requirements is to prevent the provision of disproportionate benefits to highly-compensated employees. A failure to satisfy the nondiscrimination rules, generally, results in a loss of the tax exclusion by the highly-compensated individuals. For taxable years beginning on or after January 1, 2013, the PPACA (Public Law 111-148) AB 242 Page 4 allows certain small employers to provide a simple cafeteria plan for their employees, under which the nondiscrimination rules of a classic cafeteria plan would be treated as satisfied. A small business is an employer that, during either of the two preceding years, employed an average of 100 or fewer employees on business days. This bill would conform California's income tax law to the federal change under the PPACA to provide small employers a safe harbor from the nondiscrimination requirements of a cafeteria plan. The safe harbor would apply to taxable years beginning on or after January 1, 2011. 2)Offering of exchange-participating qualified health plans through cafeteria plans . For taxable years beginning after December 31, 2013, reimbursement or direct payments for the premiums for coverage under any qualified health plan offered through an exchange is a qualified benefit under a cafeteria plan if the employer is a qualified employer (PPACA Section 1515). A qualified employer, generally, is a small employer that elects to make all its full-time employees eligible for one or more qualified plans offered in the small group market through an Exchange. This bill would conform California's tax laws to the federal definition of "qualified benefits" to include reimbursement and direct payments for the premiums for qualified health plans offered through an Exchange under a qualified employer's cafeteria plan. 3)Health care benefits of Indian tribe members . Under the PPACA, qualified health care benefits provided to a member of an Indian tribe, the member's spouse, or the member's dependents are excludable from the member's gross income, for benefits and coverage provided after March 30, 2010. The exclusion applies to the value of: a) health services or benefits provided or purchased by the Indian Health Service (HIS) through a grant to or a contract or compact with an Indian tribe or tribal organization, or through programs of third parties funded by the HIS; b) medical care provided by an Indian tribe or tribal organization to a member of an Indian tribe, including the member's spouse or dependents; c) accident or health plan coverage provided by an Indian tribe or tribal organization for medical care to a member of an Indian tribe, including the member's spouse or dependents; and, d) any other medical care provided by an Indian tribe or tribal organization that supplements, replaces, or substitutes AB 242 Page 5 for the programs and services provided by the federal government to Indian tribes or Indians. This bill would allow the same tax treatment for those benefits under the PIT Law. 4)Student loan repayment program . Gross income generally includes the discharge of indebtedness of the taxpayer. Under an exception to this general rule, gross income does not include any amount from the forgiveness of certain student loans, provided that the forgiveness is contingent on the student's working for a certain period of time in certain professions for any of a broad class of employers. The new federal law (Internal Revenue Code Section 108) modifies the gross income exclusion for amounts received under the National Health Service Corps loan repayment program and certain state loan repayment programs to include any amount received by an individual under any state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas (as determined by the state). Thus, under the PPACA, for taxable years beginning on or after January 1, 2010, individuals are allowed to exclude from income certain payments received under the National Health Service Corps loan repayment or forgiveness programs. This bill would also exclude from gross income those types of payments for purposes of the PIT Law. 5)This bill's BOE-sponsored provisions : In addition to the provisions governing the collection of restitution awards, this bill contains several BOE-sponsored provisions that were previously included in the May 4th version of AB 1424 (Revenue and Taxation Committee), which passed the Assembly Floor on a vote of 75-0 on May 26, 2011. Those provisions were later amended out of AB 1424 in the Senate. Analysis Prepared by : Oksana Jaffe and M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0002385 AB 242 Page 6