BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2688
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          Date of Hearing:  April 9, 2012

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair
            AB 2688 (Committee on Revenue and Taxation) - As Introduced:  
                                   March 12, 2012

          Majority vote.  Fiscal committee.  
           
          SUBJECT  :  State Board of Equalization:  worthless accounts:  
          bullion and coins:  transactions and use taxes:  erroneous 
          charges

           SUMMARY  :  Enacts four technical and noncontroversial proposals 
          sponsored by the State Board of Equalization (BOE).  
          Specifically,  this bill  :  

          1)Provides that, for purposes of the Sales and Use Tax (SUT) 
            Law's "bad debt" deduction and refund provisions, a proper 
            election shall be established when the retailer that reported 
            the tax and the lender prepare and retain an election form, 
            signed by both parties, designating which party is entitled to 
            claim the deduction or refund.  

          2)Changes, from September 1 to October 1, the date by which the 
            BOE must annually adjust the monetary value threshold for 
            sales of monetized bullion, non-monetized gold or silver 
            bullion, and numismatic coins (collectively, Precious Metals) 
            to be considered "bulk" sales qualifying for a statutory SUT 
            exemption.

          3)Amends two sections of the Transactions and Use Tax (TUT) Law 
            as a housekeeping matter.  Specifically, amends Revenue and 
            Taxation Code (R&TC) Sections 7261 and 7262 to conform to 
            changes implemented by AB 686 (Huffman), Chapter 176, Statutes 
            of 2011, which decreased the rate at which a city or county 
            may levy, increase, or extend a TUT from 0.25% (or a multiple 
            thereof) to a rate of 0.125% (or a multiple thereof).  

          4)Grants the BOE discretion to extend the 90-day filing period 
            for claims seeking reimbursement of bank charges and 
            third-party check charge fees incurred by a taxpayer as the 
            direct result of an erroneous BOE action.  

          5)Adds erroneous processing and collection actions to the list 








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            of BOE actions giving rise to a claim for reimbursement of 
            bank charges and third-party check charge fees incurred by a 
            taxpayer.  

           EXISTING LAW  :

           1)Worthless accounts  :

             a)   Relieves retailers from SUT liability on transactions 
               that were reported on a retailer's SUT return, but which 
               were subsequently found to be worthless and written off for 
               income tax purposes.  If a retailer is not required to file 
               income tax returns, the law allows a bad debt deduction if 
               the amount is charged off in accordance with generally 
               accepted accounting principles.  

             b)   Provides that, in the case of accounts held by a lender, 
               a retailer or lender who makes a proper election, shall be 
               entitled to a deduction or refund of the SUT that the 
               retailer has previously reported and paid if the following 
               conditions are met:

               i)     No deduction was previously claimed or allowed on 
                 any portion of the accounts;

               ii)    The accounts have been found worthless and written 
                 off by the lender; 

               iii)   The contract between the retailer and the lender 
                 contains an irrevocable relinquishment of all rights to 
                 the account from the retailer to the lender; and,

               iv)    The party electing to claim the deduction or refund 
                 files a claim in a manner prescribed by the BOE.  

           2)Bullion and coins  :  Provides a SUT exemption for the sale or 
            purchase "in bulk" of Precious Metals, when substantially 
            equivalent to transactions in securities or commodities 
            through a national securities or commodities exchange.  
            Provides that a sale "in bulk" shall be deemed to have 
            occurred if the amount of Precious Metals sold in the 
            transaction totals $1,000 or more (or its present day 
            equivalent adjusted for inflation).  The BOE is required by 
            law to adjust the "bulk sale threshold" annually by September 
            1.








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           3)TUT  :  

             a)   Authorizes a county to impose a TUT for  general  purposes 
               at a rate of 0.125% (or a multiple thereof), if the 
               ordinance proposing the tax is approved by a two-thirds 
               vote of the board of supervisors and a majority vote of the 
               qualified voters of the county.

             b)   Authorizes a county to impose a TUT for  special  purposes 
               at a rate of 0.125% (or a multiple thereof), if the 
               ordinance proposing the tax is approved by a two-thirds 
               vote of the board of supervisors and a two-thirds vote of 
               the qualified voters of the county.

             c)   Authorizes a city to impose a TUT for  general  purposes 
               at a rate of 0.125% (or a multiple thereof), if the 
               ordinance proposing the tax is approved by a two-thirds 
               vote of all members of the governing body and a majority 
               vote of the qualified voters of the city.

             d)   Authorizes a city to impose a TUT for  special  purposes 
               at a rate of 0.125% (or a multiple thereof), if the 
               ordinance proposing the tax is approved by a two-thirds 
               vote of all members of the governing body and a two-thirds 
               vote of the qualified voters of the city.

             e)   Provides, per R&TC Section 7261, that the transactions 
               tax portion of any TUT ordinance adopted shall include a 
               provision imposing the tax for the privilege of selling 
               tangible personal property (TPP) upon every retailer in the 
               district at a rate of 0.25% (or a multiple thereof).  

             f)   Provides, per R&TC Section 7262, that the use tax 
               portion of any TUT ordinance adopted shall impose a 
               complementary tax upon the storage, use, or other 
               consumption in the district of TPP at the rate of 0.25% (or 
               a multiple thereof).   

           4)Erroneous charges  :  Provides that, under the SUT Law, a 
            taxpayer may file a claim with the BOE for the reimbursement 
            of bank charges and any other reasonable third-party check 
            charge fees incurred as a direct result of an erroneous levy 
            or notice to withhold, erroneous processing action, or 
            erroneous collection action by the BOE.  Such claims must be 








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            filed within 90 days from the date of the erroneous BOE 
            action.  

           FISCAL EFFECT  :  

           1)Worthless accounts  :  The BOE notes, "While enactment of this 
            proposed change in law would allow additional refunds or 
            deductions that are not currently allowable, it would not 
            result in a revenue loss per se.  These are amounts that would 
            otherwise be subject to refund or eligible for a deduction 
            that the claimant failed to obtain the election form claim."  

           2)All remaining provisions  :  Negligible revenue losses.  

           COMMENTS  :

           1)Worthless accounts  :  The BOE notes the following in its staff 
            analysis of this bill:
           
                The purpose of this revision is to address an unintended 
               consequence that has resulted in situations where the 
               lenders have failed to file properly completed election 
               forms when claiming the deduction or refund.  In such 
               cases, the claim for deduction or refund is not considered 
               valid.  Currently, staff allows the claimant to prepare and 
               file a proper election form after the claim for deduction 
               or refund is filed, but will not consider the claim valid 
               until such time as the election form is filed (see 
               Regulation 1642 (i)(5)(F), which interprets and explains 
               these provisions). Consequently, if an election form is not 
               filed by the lender within the general limitations period 
               for which a claim for refund or credit may be accepted as 
               timely under the law, the BOE is barred from accepting the 
               claim for deduction or refund for those periods that fall 
               outside the statute of limitations for filing refund claims 
               pursuant to Section 6902 (even if the claim itself was 
               filed within the limitations period).  Consequently, staff 
               has disallowed otherwise valid claims for deductions or 
               refunds by lenders for periods beyond the limitations 
               period.

               This bill would delete the requirement that the election 
               form be prepared and retained prior to claiming a deduction 
               or refund.  Therefore, the date of filing of a proper 
               election will have no affect on the date of filing of the 








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               claim for a deduction or refund.  Even where the lender 
               files a proper election form outside the limitations 
               period, the timeliness of the claim will still be 
               determined by the date of filing of the claim itself.  

          2)Bullion and coins  :  R&TC Section 6355 provides a SUT exemption 
            for the sale or purchase "in bulk" of Precious Metals.  R&TC 
            Section 6355 further provides that a sale "in bulk" shall be 
            deemed to have occurred if the amount sold in the transaction 
            totals $1,000 or more (or its present day equivalent adjusted 
            for inflation).  The BOE is required to adjust the $1,000 
            "bulk sale threshold" each year.  Specifically, on or before 
            September 1 of each year, the BOE must multiply the current 
            bulk sale threshold by the inflation factor adjustment 
            determined by the Franchise Tax Board pursuant to R&TC Section 
            17041(h).  When the result of this calculation is $500 greater 
            than the existing threshold, the threshold is adjusted and 
            rounded to the nearest $500 increment.  To explain this 
            adjustment system, BOE staff provide the following example:
           
                ÝI]f the bulk sale threshold amount is currently $1500, and 
               multiplying this amount by the inflation factor adjustment 
               results in a new threshold of $1700, the bulk sale 
               threshold does not become operative since it does not 
               exceed the $500 increment (it must equal or exceed $2,000 
               to become operative).  The next year, the $1,700 threshold 
               must be multiplied by the inflation factor adjustment to 
               determine the new threshold.  

            BOE reports that the inflation factor adjustment is based on a 
            comparison of the California Consumer Price Index (CCPI) 
            published by the Department of Industrial Relations for June 
            of each year.  Once the calculation is made by BOE staff, the 
            issue is placed on the BOE's consent agenda for the August BOE 
            meeting, so that the new threshold can be officially adopted.  
            The CCPI for June, however, is generally not available until 
            late August of each year.  Since items placed on the BOE 
            meeting agenda are subject to public notice, this calculation 
            must be done by staff by the end of July.  Since the CCPI is 
            generally not available, staff has been required to track down 
            "preliminary numbers" to perform its statutorily mandated 
            calculation.  The BOE reports that it is often difficult to 
            obtain the preliminary numbers in a timely manner to have this 
            item placed on the BOE's August agenda.  









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            BOE notes, "This proposal would change the date from September 
            1 to October 1 of each year by which the BOE must determine 
            the bulk sale threshold.  Changing the date from September 1 
            to October 1 will allow staff sufficient time to obtain the 
            June CCPI, prepare the necessary calculation, and place the 
            item on the BOE meeting agenda.  An October 1 date will still 
            provide for adequate lead time in amending Regulation 1599 and 
            notifying the public in the event the calculation results in a 
            new operative threshold."
             
          3)TUT  :  On August 4, 2011, Governor Brown approved AB 686 
            (Huffman).  AB 686 amended various sections of the R&TC to 
            decrease the rate at which a city or county may levy, 
            increase, or extend a TUT from 0.25% (or a multiple thereof) 
            to a rate of 0.125% (or a multiple thereof).  This 
            BOE-sponsored housekeeping proposal would change the rate in 
            R&TC Sections 7261 and 7262 from 0.25% to 0.125%, to conform 
            to the changes made by AB 686 (Huffman).  

           4)Erroneous charges  :  As noted above, this proposal grants the 
            BOE discretion to extend the 90-day filing period for claims 
            seeking reimbursement of bank charges and third-party check 
            charge fees incurred by a taxpayer as the direct result of an 
            erroneous BOE action.  This proposal also adds erroneous 
            processing and collection actions to the list of BOE actions 
            giving rise to a claim for reimbursement of bank charges and 
            third-party check charge fees incurred by a taxpayer.  

           5)Suggested technical amendments  :  Committee staff suggests the 
            following technical amendments to this bill:

             a)   On page 12, line 10, strike "for reimbursement" and 
               insert "or reimbursed";

             b)   On page 12, strike lines 15-17 and insert "(1) The 
               erroneous levy or notice to withhold, erroneous processing 
               action, or erroneous collection action was caused by board 
               error.";

             c)   On page 13, line 5, strike "for reimbursement" and 
               insert "or reimbursed";

             d)   On page 13, line 40, strike "for reimbursement" and 
               insert "or reimbursed";









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             e)   On page 14, line 35, strike "for reimbursement" and 
               insert "or reimbursed";

             f)   On page 15, line 31, strike "for reimbursement" and 
               insert "or reimbursed";

             g)   On page 16, line 26, strike "for reimbursement" and 
               insert "or reimbursed";

             h)   On page 17, line 22, strike "for reimbursement" and 
               insert "or reimbursed";

             i)   On page 18, lines 17-18, strike "for reimbursement" and 
               insert "or reimbursed";

             j)   On page 18, line 25, strike "resulted from" and insert 
               "was caused by";

             aa)  On page 18, line 30, strike "that was";

             bb)  On page 18, line 31, strike "The requirement of this 
               paragraph" and insert "This provision";

             cc)  On page 19, line 13, strike "to" and insert "by";

             dd)  On page 19, line 14, strike "for reimbursement" and 
               insert "or reimbursed"; and, 

             ee)  On page 20, line 9, strike "for reimbursement" and 
               insert "or reimbursed".

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          State Board of Equalization (sponsor) 

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916) 
          319-2098 










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