BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1424 HEARING: 7/6/11
AUTHOR: Perea FISCAL: Yes
VERSION: 6/7/11 TAX LEVY: No
CONSULTANT: Miller
TAX ADMINISTRATION
Changes administrative and enforcement functions at the
Franchise Tax Board (FTB).
Background and Existing Law
Under both federal and state income tax laws, in general,
if a taxpayer owes a delinquent tax amount, a tax lien
automatically arises by operation of law for that amount,
and is known as a statutory tax lien. A statutory tax lien
is a claim upon real and personal property for the
satisfaction of a tax debt. For federal purposes, the
statutory tax lien exists as long as the delinquency exists
or until automatically released ten years after a tax is
assessed.
For state purposes, a statutory tax lien arises
automatically when the debt becomes final and exists for
ten years, unless the liability becomes satisfied or, if
the debt remains unpaid, a Notice of State Tax lien is
recorded. The recording of the notice provides notice to
the world of the debt against all real and personal
property belonging to the taxpayer and located in the
California county where recorded.
Current state law authorizes FTB to use a variety of
collection tools to collect delinquent tax liabilities:
An Order to Withhold (OTW) can be issued to any
third-person in possession of funds or properties
belonging to the debtor, such as vacation trust funds,
interest, financial assets, and miscellaneous payors.
Upon receipt of an OTW, the entity notified is
required to submit to the department all cash or cash
equivalents due the debtor that will satisfy the
amount of the OTW.
AB 1424 -- 6/7/11 -- Page 2
An Earnings Withholding Order for Taxes (EWOT) is
used to collect delinquent tax liabilities for which a
tax lien is in effect. An EWOT is a continuing wage
garnishment based on a percentage of a debtor's
earnings, not to exceed 25 percent of disposable
income.
A warrant can be issued to seize property and
convert it to cash to satisfy a debt. Warrants are
enforced by county sheriffs or the California Highway
Patrol. The most common use of the warrant is to
seize and sell vehicles.
Current state law specifies that the Contractors State
License Board (CSLB) may refuse to issue, reinstate,
reactivate, suspend, or renew a contractor's license for
the failure of a licensee to pay state taxes and any fees
that may be assessed by the CSLB, the Department of
Industrial Relations, the Employment Development
Department, or the FTB.
Current state law also authorizes occupational,
professional, and driver's license denial and suspension
for failure to pay court-ordered child support debts. The
local child support agencies compile a list for the
Department of Child Support Services (DCSS) of obligors who
are more than 30 calendar days in arrears in making their
child support payments. DCSS reviews the list to verify
the information is accurate and then sends the list of
obligors to the various licensing boards/agencies. Once
the list is received, those boards/agencies immediately
send a 150-day compliance letter to the obligor. If the
obligor fails to comply within the 150-day timeframe and
the licensing board/agency fails to receive a release
letter from the local child support agency, the
occupational, professional, or driver's license is
suspended by the licensing board/agency.
Current state law provides that the California Supreme
Court may suspend or disbar an attorney from practice for
an act of professional misconduct or convicted of serious
crimes.
Current state law requires the FTB to compile and make
publicly available an annual list that identifies the Top
250 tax delinquencies that exceed $100,000, selected from
both the Personal Income Tax and Corporation Tax records as
AB 1424 -- 6/7/11 -- Page 3
of December 31st of the previous year. For purposes of the
Top 250 list, a tax delinquency is defined as the total
amount owed by a taxpayer to the State of California for
which a Notice of State Tax Lien has been recorded in any
county recorder's office in the state.
Under current state law, the California State Controller is
authorized to offset money due an individual or entity from
a state agency as payment for debts due California state
agencies, cities, counties, and colleges, as well as the
IRS. Income tax refunds are available for offset only after
all existing income tax debts have been satisfied.
If there is more than one offset request, the priority is as
follows:
1. Delinquent child or family support cases enforced
by a district attorney.
2. Delinquent child or family support cases enforced
by someone other than a district attorney.
3. Delinquent spousal support cases enforced by a
district attorney.
4. Delinquent spousal support cases enforced by
someone other than a district attorney.
5. The nonpayment of penalties to the crime victims'
Restitution Fund.
6. Unemployment benefits overpayment cases.
7. All other California state agencies.
8. California Cities and counties.
9. California Colleges.
10. IRS.
Current state law does not provide authority for California
income tax refunds to be offset for debts owed to other
states.
Current state law allows the FTB to contract with private
AB 1424 -- 6/7/11 -- Page 4
collection companies to collect delinquent tax debts owed
by California residents or those residing outside
California. However, current state law lacks express
authority for the FTB to contract with other states or the
IRS for such services. In addition, current state law does
not provide authority for the FTB to collect debts owed to
other states and the only tool available to collect debts
owed to the IRS is the above discussed tax refund offset
tool.
Proposed Law
Assembly Bill 1424 contains five provisions all of which
either increase the reporting requirements of taxpayers and
enforcement tools of the FTB.
Top 250 Tax Debtor List
Requires the FTB to update the Top 250 tax debtor list at
least twice each year and:
Include on the list the type and status of any
occupational or professional license held by a debtor
on the list and the names and titles of the principal
officers of limited liability companies and
corporations appearing on the list.
Require a taxpayer's proposed resolution of a tax
delinquency to be "accepted" by the FTB rather than
"not rejected" to avoid appearing on the list.
Allow the FTB to return a tax debtor's name to the
list if he or she fails to comply with the terms of
the resolution that resulted in the removal of his or
her name from the list.
License Suspension for Delinquent Taxpayers Appearing on
the Top 250 Tax Debtor List
Provides discretionary authority to a state governmental
licensing entity to withhold issuance or renewal of the
license of an applicant or to suspend the license of a
licensee whose name appears on a certified list provided by
AB 1424 -- 6/7/11 -- Page 5
the FTB which indicates the licensee or applicant appears a
Top 250 tax debtor list. The FTB would be required to
provide a release form to the state governmental licensing
entity for any applicant or licensee that complies with his
or her delinquent tax obligation by either payment in full
or entry into an installment payment arrangement. The
state governmental licensing entity would have five
business days to process the release.
This provision requires the FTB to do the following:
Submit a certified list of tax debtors appearing on
a Top 250 tax debtor list to a state governmental
licensing entity.
Create release forms to remove the licensee's name
from the certified list.
Provide a release to a state governmental licensing
entity and licensee as specified.
Notify the state governmental licensing entity when
the licensee fails to comply with an installment
payment arrangement.
This provision authorizes the FTB to notify a licensee of
suspension for unpaid tax debts if the state governmental
licensing entity fails to take action within 90 days of a
preliminary notice issued by the state governmental
licensing entity. Additionally, a state governmental
licensing entity is required to notify the FTB if no action
is taken and the reason why.
If a state governmental licensing entity does not suspend
or withhold issuance of the license of an applicant for
appearing on the Top 250 tax debtor list, the license would
be suspended by operation of law. The suspension would
occur only after the FTB provides the debtor a 60-day
preliminary suspension notice.
This provision requires the FTB to disclose to the
licensing boards the reason for the suspension-the licensee
appearing on the Top 250 tax debtor list.
State Agency Contracts for Goods and Services
AB 1424 -- 6/7/11 -- Page 6
AB 1424 prohibits any state agency from entering into a
contract for goods and services with a tax debtor on the
Top 250 tax debtor list. Any contract entered into in
violation of this provision would be void and
unenforceable.
Tax Refund Offsets
This bill allows the FTB to offset tax refunds for
delinquent tax debts owed to other states, but only upon a
reciprocal agreement in which the other state's tax refunds
are offset for delinquent tax debts owed to the FTB.
Offsets for delinquent income tax debts owed to other
states would only occur after all other offset requests
from California state agencies, cities, counties, and
colleges, as well as the federal government, have been
satisfied.
Collection Agreements with the IRS and Other States
This bill:
Provides authority for the FTB to contract with the
IRS or any state imposing an income tax or tax
measured by income to collect tax debts owed to the
FTB.
Provides authority for the FTB to collect tax debts
due the IRS or any state imposing an income tax or tax
measured by income, but only if the IRS or other state
agrees to collect tax debts owed to the FTB.
State Revenue Impact
AB 1424 -- 6/7/11 -- Page 7
The FTB estimates about $750,000 in start-up administrative
costs and $600,000 in ongoing administrative costs.
In addition, FTB estimates the following revenue increase:
--------------------------------------------------
| Estimated Revenue Impact of AB1424 |
| For Taxable Years Beginning On Or After January |
| 1, 2012 |
| Enactment Assumed After June 30, 2011 |
|--------------------------------------------------|
| (In Millions) |
--------------------------------------------------
--------------------------------------------------
| 2011-12 | 2012-13 | 2013-14 | 2014-15 | 2015-16 |
|---------+---------+----------+---------+---------|
| $19 | $24 | $25 | $28 |$30 |
--------------------------------------------------
Comments
1. Purpose of the bill . According to the author: Each
year $6.5 billion of taxes owed to California go unpaid. As
of May 2011 the top 250 delinquent taxpayers owe more than
$180 million dollars in delinquent personal income and
business taxes, with individual debts ranging from $300,000
to over $14 million dollars. The current budget problems
have forced difficult cuts on education, public safety,
health and human services and many other programs that hurt
some of the most vulnerable Californians. Since 2007, the
Top 250 list has enabled the state to collect $81 million
in owed taxes. AB 1424 would give the FTB additional
authority to collect the full amount owed by the most
delinquent taxpayers. Nearly 90 percent of Californians
pay their taxes, however, to allow individuals to avoid
paying their fair share, places an undue burden on those
who do. This bill takes the necessary steps to hold the Top
250 debtors accountable and recover the substantial amount
of money owed to California.
2. It takes two . The opposition to this measure strongly
opposes the sections related to license suspension citing
the Business and Professions Code section 7141.5. Under
that provision, the Contractors' License Board already has
the ability to suspend any license if the licensee fails to
resolve income or sales and use tax obligations. These
AB 1424 -- 6/7/11 -- Page 8
provisions are not limited to the top 250 delinquent tax
debtors as the provisions of AB 1424 require. By expanding
license revocation to the FTB, taxpayers and business
owners may not even know that their license were suspended
and could create serious confusion and consequences as it
relates to the existing law. For example, if the FTB
revoked a license, and the business owner was not
appropriately notified or didn't know, he or she would not
be allowed to keep any payment for work performed under the
Business and Professions requirements.
3. What's good for the goose ? This bill's provisions
apply only the FTB for purposes of expanding the authority
at that tax agency. If the Committee agrees that the
provisions make sense, it may wish to consider expanding
the bill's provisions to the BOE as well.
4. More is better . AB 1424 applies to the top 250 debtors
in the state. At its June 24th meeting, the BOE voted to
suggest to the Legislature that it expand the debtor list
to 500 for the BOE only. The Committee may wish to
consider making this change or wait and see how effective
the top 250 debtor listing is before expanding it further.
The Committee may also wish to consider the wisdom of only
applying these provisions only to the top 250 debtors
versus all other delinquent taxpayers.
5. Nathaniel Hawthorne Lives . Using shame to enforce
social behavior is nothing new in the world of public
policy. In Nathaniel Hawthorne's classic novel, The
Scarlet Letter , Hester Prynne is publicly shamed for
committing adultery by being forced to wear the letter 'A'
on her gown at all times. While AB 1424 is less forceful,
the concept is the same: first publicly branding someone as
a violator of social mores and public laws, in this case
paying your taxes, provides a powerful incentive to play by
the rules and then using additional enforcement actions on
only these taxpayers. Could first embarrassing or angering
taxpayers and then punishing only those taxpayers undermine
the current practice of self-disclosure and assessment of a
taxpayer's liability, and lead taxpayers to behave in
unintended ways? The Committee may also wish to consider
the wisdom of only applying these provisions only to the
top 250 debtors versus all other delinquent taxpayers.
AB 1424 -- 6/7/11 -- Page 9
Assembly Actions
Not relevant to the June 7, 2011 version of the bill.
AB 1424 -- 6/7/11 -- Page 10
Support and Opposition (6/30/11)
Support : California Tax Reform Association; Western Center
on Law and Poverty.
Opposition : California Association of Realtors;
California Chapter of the American Fence Association;
California Fence Contractors Association; Engineering
Contractors Association; California Landscape Contractors
Association; Marin Builders Association; Flasher Barricade
Association.