BILL ANALYSIS Ó
AB 1424
Page 1
Date of Hearing: September 8, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1424 (Perea) - As Amended: September 2, 2011
Majority vote. Fiscal committee.
SUBJECT : Delinquent tax debtors lists: suspension of licenses.
SUMMARY Requires a state governmental licensing entity (SGLE)
to suspend a state occupational, professional, or driver's
license of a tax debtor whose name appears on either the
Franchise Tax Board (FTB) or the State Board of Equalization
(BOE) list of the largest tax delinquencies on or after July 1,
2012, as specified. Specifically, this bill :
1)Increases the BOE and FTB public lists of the top 250 tax
delinquencies, in excess of $100,000, to 500 tax
delinquencies, also in excess of $100,000, and require FTB to
update its list at least twice in each calendar year.
2)Requires FTB to include additional information on its list of
the top 500 tax delinquencies, with respect to each
delinquency, including the type, status, and license number of
any professional or occupational license held by each person
liable for payment of the tax and the names and titles of the
principal officers of a limited liability company or
corporation liable for payment of the tax.
3)Authorizes a SGLE, as defined, other than the Department of
Motor Vehicles (DMV), the State Bar of California, and the
Alcoholic Beverage Control (ABC) Board, to suspend or refuse
to issue or renew a license to the licensee whose name is
included on either the FTB or BOE list of the 500 largest tax
delinquencies. Require a SGLE to collect the social security
number or federal taxpayer identification number of each
applicant for the purpose of matching those applicants to the
names on the lists of the 500 largest tax delinquencies.
4)Authorizes the State Bar of California and the ABC Board to
suspend or to refuse to issue, reactivate, reinstate, or renew
a license of a licensee whose name appears on either the FTB
AB 1424
Page 2
or BOE list of the top 500 tax delinquencies.
5)Requires the DMV to suspend a license if a licensee's name is
included on either the FTB or BOE list of the top 500 tax
delinquencies.
6)Authorizes the BOE and FTB to disclose to SGLEs the names,
social security numbers or taxpayer identification numbers,
and the last known address of the persons identified on the
lists of the top 500 tax delinquencies.
7)Prescribes notice requirements, timeframes for compliance, and
a process for challenging the submission of a name on the FTB
and BOE lists.
8)Requires BOE and FTB to create release forms that provide for
the removal of a person from the top 500 tax delinquency lists
upon payment of unpaid taxes or entry into an installment
agreement, or in cases of financial hardship.
9)Prohibits any state agency from entering into a contract for
goods and services with a tax debtor on the 500 largest
delinquencies lists ("certified lists"), provided that the
contract is executed on or after July 1, 2012.
10)Allows the FTB and BOE to contract with the Internal Revenue
Service (IRS) or other states to collect delinquent tax debts
owed to the FTB or BOE. Authorizes the FTB and BOE to offset
tax refunds for delinquent tax debts owed to the IRS or other
states, but only upon a reciprocal agreement in which the IRS
or other state's tax refunds are offset for delinquent tax
debts owed to California.
EXISTING LAW:
1)Requires the BOE and FTB, respectively, to compile and make
available as public record a list that identifies the top 250
tax delinquencies in excess of $100,000. Prior to disclosing
a tax delinquency to the public, requires FTB and BOE to
provide a preliminary written notice by certified mail, return
receipt requested, to the person or persons liable for the
tax. Specifies that the tax debt must have been recorded as a
notice of state tax lien in any county recorder's office in
California and that a delinquency that is being litigated or
in bankruptcy may not be made public. Furthermore, a tax
AB 1424
Page 3
delinquency may not be made public if the taxpayer is
complying with an installment payment agreement.
2)Provides that, if a taxpayer has delinquent tax amounts, a tax
lien automatically arises by operation of law for that amount,
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. A statutory tax lien arises automatically when
the debt becomes final and exists for 10 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.
3)Authorizes FTB to use several collection tools to collect
delinquent tax liabilities, including an Order to Withhold
that is issued to third parties in possession of funds or
properties of the debtor, a warrant to seize property, which
is enforced by a marshal and an Earnings Withholding Order for
Taxes, which is continuing wage garnishment.
4)Authorizes the registrar of the Contractor's State License
Board (CSLB) to suspend an existing license or to refuse the
issuance, reinstatement, reactivation, or renewal of a
contractor's license if a licensee fails to resolve all
outstanding final liabilities, including taxes and fees
assessed by the CSLB, FTB, the Department of Industrial
Relations, or the Employment Development Department, and
permits the disclosure of certain information from the
licensing agency to FTB.
5)Authorizes professional license denial and suspension for
failure to pay court-ordered child support debts.
6)Authorizes the ABC Control and the DMV, respectively, to
suspend a taxpayer's alcoholic beverage license or to cancel a
dealer or lessor-retail license under certain specified
circumstances for non-payment of BOE-related taxes.
7)Permits the disclosure of certain information on all licensees
from a SGLE to FTB.
8)Authorizes many SGLEs to impose fees on their licensees to
cover administrative costs.
AB 1424
Page 4
9)Prohibits state departments and agencies from contracting with
a vendor, contractor, or their affiliates that does not
possess a seller's permit or a certificate of registration for
use tax.
10)Exempts a state department or state agency from this
prohibition if the department or agency makes a written
finding that the contract is necessary to meet a compelling
state interest, as specified.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual gain of $19 million in the 2011-12 fiscal
year (FY), $24 million in FY 2012-13, $26 million in FY 2013-14,
$29 million in FY 2014-15, and $31 million in FY 2015-16. The
BOE staff estimates that this bill will generate an additional
$1.1 million in annual state and local sales and use tax (SUT)
collection, of which $528,000 will be attributable to the
General Fund.
The FTB estimates about $750,000 in start-up administrative
costs and $600,000 in ongoing administrative costs. The BOE
estimates about $75,000 in start-up administrative costs and
$125,000 in ongoing costs. The DMV approximates $400,000 in
start-up administrative costs, about $98,000 in FY 2012-13, and
$91,000 in ongoing costs.
COMMENTS :
1)Author's Statement . The author states that, "Each year $6.5
billion of taxes owed to California go unpaid, of which
approximately $1.4 billion is a result of uncollected tax
liabilities of taxpayers with professional or occupational
licensees.
"Every year, the state Franchise Tax Board and the State Board
of Equalization compile and publish lists of the Top 250
taxpayers whose delinquent income tax liability exceeds
$100,000. As of September 6, 2011, 250 delinquent taxpayers
on the FTB list owed more than $156 million to the state, with
income tax debts ranging from $306,000 to over $14 million
dollars. And, as of August 31, 2011, the 250 delinquent
taxpayers on the BOE list owed collectively more than $409
million to the State, with sales tax debts ranging from
$600,000 to over $18 million dollars.
AB 1424
Page 5
"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. AB 1424 would give the state tax agencies the
proper tools to go after these debtors in order to collect
their long overdue debts. Nearly 90 percent of Californians
pay their taxes. Allowing certain 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 tax debtors
accountable and recover the substantial amount of money owed
to California."
2)Arguments in Support . The proponents of this bill state that
AB 1424 would strengthen tax collection processes. In recent
years, California has been forced to make difficult cuts and
even eliminate crucial programs in education, health services
and public safety. The proponents of this bill argue that to
allow "California's wealthiest individuals to neglect paying
their taxes is an affront to all taxpayers." They believe
that the current law "provides the California government with
very limited authority to make these delinquent taxpayers pay
their fair share."
3)Arguments in Opposition . The opponents of this bill state
that they appreciate the intent of this bill to create more
effective means of collecting taxes. However, they argue that
this bill "will not significantly impact the largest debtors
since they have the means to transfer business licenses to
other parties." Professional and occupational licenses
provide taxpayers with the income necessary to pay their tax
debts. Suspending the taxpayers' ability to earn a living to
force payment of tax delinquencies is counterintuitive. The
opponents are concerned that "this bill could have a
detrimental effect on those working taxpayers who need their
professional, occupational and driver's licenses to earn
income necessary to resolve their tax debts." Thus, the
opponents believe that, "this measure could have the
unintended consequence of making tax compliance more
difficult."
4)What Does This Bill Do ? First of all, AB 1424 expands the BOE
and FTB public lists from 250 tax delinquencies, in excess of
$100,000, to top 500 tax delinquencies, also in excess of
$100,000. Secondly, this bill requires state licensing
AB 1424
Page 6
entities to suspend state occupational, professional, or
driver's license of a tax debtor whose name appears on either
the FTB or BOE list of the largest tax delinquencies on or
after July 1, 2012. However, instead of requiring, this bill
simply authorizes the State Bar of California and the ABC
Board to suspend licenses or refuse to issue or renew a
license. Further, it prohibits any state agency from entering
into a contract for goods or services with a tax debtor whose
name is included on either the FTB or BOE certified list. Any
contract entered into in violation of this provision would be
void and unenforceable. Finally, AB 1424 expands the FTB's
and BOE's authority to enter into reciprocal contracts with
the IRS and other states to collect tax debts owed to the
state.
5)Background: the FTB and BOE Top 250 Tax Debtor Lists .
States, including California, readily publish information on
unpaid taxes with respect to property taxes. An unpaid
property tax becomes a lien against the real property and the
disclosure of information on such liabilities is important to
protect potential buyers, lenders, and third parties.
However, in the area of income and sales and use tax (SUT)
liabilities, the state tax agencies are required to keep
taxpayer information confidential, subject to certain
enumerated exceptions. Those exceptions include a publication
by the FTB and BOE lists of the top 250 tax delinquencies, in
excess of $100,000.
The first time the State of California allowed a limited public
disclosure of certain taxpayers' sales and use liabilities was
in 2000, when the Legislature directed the BOE to publicize a
quarterly list of the taxpayers with the 12 largest SUT
delinquencies over $1 million, from January 1, 2000 through
December 31, 2004. ƯAB790 (Honda), Chapter 443, Statutes of
1999]. The list was restricted to delinquencies that were
already public information because they had been the subject
of a property lien placed by BOE. The law was sponsored by
the BOE and was largely patterned after a similar program in
the State of Connecticut. The Connecticut Department of
Revenue Services had posted the top 100 delinquent taxpayers
on its Internet site beginning in 1997 and had found that its
practice of posting a list of delinquent taxpayers reduced the
number of taxpayers with delinquencies by approximately
one-third. At the time AB 790 was enacted, those 12 taxpayers
on the list owed BOE over $52 million. As of January 9, 2006,
AB 1424
Page 7
the BOE, according to its staff, collected only from one
account on the list of tax delinquencies and the collection of
that account, totaling $4.7 million, was not attributable to
the publishing of the delinquency list on the BOE's Web site.
The BOE staff noted, at that time, that the law was so
limiting that it did not create an avenue to reduce the past
due delinquencies significantly.
Subsequently, in 2006, the Legislature enacted AB 1418
(Horton), Chapter 716, Statutes of 2006. Thus, under AB 1418,
which is existing law, BOE is required to make as a matter of
public record a list of the largest 250, instead of 12, tax
delinquencies over $100,000. A "tax delinquency" is defined
as an amount owed to BOE that was based on a final
determination made under the SUT law or was a jeopardy
determination that was due and payable, was recorded as a
notice of state tax lien in any county recorder's office, was
self-assessed by the taxpayer, and was at least 90 days
delinquent. Existing law, however, provides an exemption for
tax delinquencies that are in litigation or delinquencies with
a pending request for redetermination. The exemption also
applies to tax debtors who entered into a payment arrangement
with the BOE or filed for bankruptcy.
AB 1418 also required FTB to mirror BOE's efforts and publish
a list of the largest 250 tax delinquencies over $100,000 as
of December 31 of the previous year for which a tax lien has
been recorded in any county recorder's office in the state,
except if the tax debtor and FTB have agreed to an
arrangement, the debtor has filed for bankruptcy, or persons
liable for the tax have contacted FTB and their resolution was
not rejected by the FTB.
Both the FTB and BOE must list the delinquent taxpayer's name,
last known address, the amount of delinquency as shown on the
state tax lien including any penalties, and the type of tax
that is delinquent. The FTB is also required to include on
that list the earliest date that the FTB filed a
notice of state tax lien. Both state tax agencies must
provide notice using
certified mail, return receipt requested, to the taxpayer
prior to making the delinquency a public record.
6)Expanding the Top 250 Tax Delinquencies List to Include 500
Tax Debtors . Public humiliation has long been used to
AB 1424
Page 8
influence social behavior and enforce societal rules and laws.
In 2006, when AB 1418 was enacted, the FTB estimated an
annual revenue gain of $1.5 million attributable to its Top
250 delinquent tax debtors list. Instead, the FTB's Top 250
list has enabled the state to collect, since 2007, $81 million
in owed taxes. Currently, the lowest amount of income tax
owed by a debtor on the FTB list is $306,000. The FTB staff
estimates that the expansion of the list to the top 500 tax
delinquencies, as well as the provision allowing for the
suspension of professional, business and driver's licenses,
will allow the FTB to collect over $120 million in additional
revenues over the next five FYs.
The BOE list, updated quarterly, currently includes debtors
with over $400 million in tax liabilities. In 2006, the BOE
anticipated increased annual tax revenue collections of $12
million due to the publication of large tax delinquencies.
According to the BOE, since the inception of this program, 37
qualifying taxpayers whose account balances with BOE represent
a total of $39.8 million in SUT liabilities have come forward
to take care of their debts. Of the $39.8 million in
liabilities, $5.2 million has been collected to date. The
debts have been taken care of in the following ways: 26
through installment payment agreements and 11 by making
payment in full. The BOE staff estimates that, by increasing
the BOE list to the top 500 delinquencies, an additional $105
million in SUT liabilities would be added to the list, thereby
increasing the potential for more taxpayers to come forward
and resolve their outstanding tax liabilities. The BOE staff
estimates that this bill will result in an annual gain of
approximately $1.1 million.
Unlike income taxes, the sale tax is regarded as a "trust tax"
because the retailers are designated by statute to collect the
sales tax from their customers and to hold and remit the money
to the state. These retailers hold the funds in trust for the
state, and thus, can be held personally liable when the funds
are not remitted. When these individuals fail to perform
their role as trustees, the public, as well as other honest
retailers, should be made aware. The Members of the BOE
recognize that if these 500 taxpayers continue ignoring their
tax debts, the public should have a right to know who the
debtors are.
7)The Power to Suspend One's License . AB 1424 expands the power
AB 1424
Page 9
of the state agencies to suspend professional, occupational,
and driver's licenses of delinquent taxpayers, enhancing the
State's tax enforcement powers. Currently, only the
appropriate regulatory boards and commissions may take
disciplinary actions against those licensees. However, the
idea of suspending one's license for failure to satisfy some
sort of a financial obligation is not new. In some cases,
based on a referral from local child support agencies, boards
and commissions may suspend or decide to deny renewal of
licenses for individuals who fail to pay child support.
Further, the Contractor's State License Board may refuse to
issue, reinstate, reactivate, or renew or suspend a
contractor's license for the failure of a licensee to resolve
any outstanding final liabilities, including taxes, penalties,
interest, and any fees assessed by the BOE Board, the FTB, the
Employment Development Department, or the Department of
Industrial Relations.
According to the BOE staff, there are two instances in which a
tax debtor's license is suspended for unpaid taxes
administered by the BOE: an alcoholic beverage license and a
DMV dealer license. A taxpayer's alcoholic beverage license
is automatically suspended if the taxpayer is at least three
months delinquent in the payment of sales or use or alcoholic
beverage taxes or penalties. The suspension remains in effect
until those liabilities are paid. The DMV is permitted to
cancel a dealer or lessor-retail license automatically when
the BOE has revoked or suspended the licensee's seller's
permit.
The power to suspend licenses would certainly enhance tax
compliance and reduce the "tax gap." However, the suspension
of licenses would also create a precedent for extending FTB's
and BOE's tax enforcement powers beyond frozen bank accounts
and garnished wages to the privilege of holding an
occupational, professional, or driver's license. By limiting
its application only to the top 1000 tax debtors, AB 1424
carefully balances the state's needs to collect taxes owed
with the taxpayers' needs to earn living in order to pay off
those tax debts.
8)Tax Refund Offsets . AB 1424 allows the FTB and BOE 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
AB 1424
Page 10
FTB or BOE. 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.
9)Collection Agreements with the IRS and Other States. In
addition, AB 1424 provides authority for the FTB and BOE to
contract with the IRS or any state imposing an income tax or
tax measured by income, or a SUT, or similar tax, to collect
tax debts owed to the FTB or BOE. Provides authority for
these tax agencies to collect tax debts due the IRS or any
state imposing an income tax, or tax measured by income, or a
SUT, or similar tax, but only if the IRS or other state agrees
to collect tax debts owed to the FTB or BOE.
10)Related Legislation .
ABX8 8 (Budget Committee), introduced in the 2010 legislative
session, would have permitted the state to suspend state
occupational and professional licenses due to unpaid income
tax liabilities. This bill was held in the Assembly Rules
Committee.
SBX8 8 (Budget and Fiscal Review), also introduced in the 2010
legislative session, would have permitted the state to suspend
state occupational and professional licenses due to unpaid
income tax liabilities. This bill was held on the Assembly
Floor.
ABX3 19 (Evans), introduced in the 2009 legislative session,
would have permitted the state to suspend state occupational
and professional licenses because of unpaid income tax
liabilities, and allow taxpayers to avoid suspension by
entering into an installment agreement with FTB. This bill
was held under submission in the Assembly Rules Committee.
SBX3 17 (Ducheny), introduced in the 2009 legislative session,
would have allowed the state to suspend state occupational and
professional licenses because of unpaid income tax
liabilities, and allow taxpayers to avoid suspension by
entering into an installment agreement with FTB. This bill
was vetoed by the Governor.
AB 484 (Eng), introduced in the 2009 legislative session, would
AB 1424
Page 11
have permitted FTB to suspend state occupational and
professional licenses because of unpaid tax liabilities. This
bill was held under submission in the Assembly Business and
Professions Committee.
AB 1925 (Eng), introduced in the 2008 legislative session, would
have allowed FTB to suspend state occupational and
professional licenses because of unpaid tax liabilities. This
bill was held under submission in the Senate Revenue and
Taxation Committee.
AB 2038 (Eng), introduced in the 2010 legislative session, is
almost identical to AB 1925. This bill was held under
submission in the Assembly Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Tax Reform Association
SEIU
Opposition
CalCPA
CalTax (oppose unless amended)
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098