BILL ANALYSIS Ó AB 2688 Page 1 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 AB 2688 Page 2 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. AB 2688 Page 3 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 AB 2688 Page 4 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 AB 2688 Page 5 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. AB 2688 Page 6 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"; AB 2688 Page 7 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 AB 2688 Page 8