BILL ANALYSIS Ó
SB 86
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SENATE THIRD READING
SB 86 (Budget and Fiscal Review Committee)
As Amended March 14, 2011
2/3 vote. Urgency
SENATE VOTE :Vote not relevant
SUMMARY : Makes various changes to state laws regarding tax
compliance and tax programs in order to implement provisions of
the 2011-12 Budget agreement. Specifically, this bill :
1)Provides that persons who are required to report and remit the
use tax on the purchase of tangible personal property may use
a 'Look-Up' table, which provides an estimated amount due
based on income level. Under existing law, use tax is owed on
purchases made out-of-state, or through means such as
mail-order or internet, when the tax is not collected by a
retailer. Currently, individuals who owe the use tax may pay
such tax directly to the Board of Equalization (BOE) or
declare and pay the tax through the income tax return by using
the use tax line included on the return. For single
nonbusiness purchases of $1,000 or less, this bill would allow
the person to report on the use tax line on the income tax
return by either i) the actual amount of use tax due, or ii)
the amount shown on Look-Up table prepared by the BOE and
included in the income tax return instructions. The BOE,
which has authority over the collection of the use tax, would
prepare the Look-Up table, which would indicate an estimate of
the amount of use tax due based on the person's adjusted gross
income. The BOE would then provide the Franchise Tax Board
(FTB), which is responsible for administering income taxes,
the necessary instructions and information to include in the
Look-Up table as part of the income tax return information.
This provision is estimated to result in additional revenues
of $10 million annually, $6.5 million of which is General Fund
(GF).
2)Eliminates the refundable component of the Child and Dependent
Care Expense Tax Credit available under the personal income
tax. Under the program, taxpayers are granted a credit
against taxes up to a maximum amount for expenses related to
child and dependent care expenses. Qualified expenses are
limited to $3,000 for one child and $6,000 for two or more,
with the actual credit amount equal to a percentage of a
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parallel federal credit program. The amount of the credit
declines as income increases and is not available to taxpayers
with incomes in excess of $100,000. Under the current
program, if the amount of the credit exceeds the tax
liability, the credit is "refundable" and the excess is
refunded to the taxpayer. This refundable provision can
result in a tax refund for taxpayers with little or no
personal income tax liability. This bill would eliminate the
refundable part of the tax credit for tax years beginning
January 1, 2011, and after, while retaining the core elements
of the program. This provision is estimated to result in
additional revenues of $70 million in 2011-12 and similar
amounts annually thereafter.
3)Directs the FTB to establish a Voluntary Compliance Initiative
(VCI) for those taxpayers that either utilized an abusive tax
avoidance transaction (ATAT) or have unreported income from
the use of an off-shore financial arrangement. This
narrowly-constructed amnesty program would extend for a 91-day
period, beginning August 1, 2011, through October 31, 2011,
and would apply to taxpayers subject to the state's personal
income tax laws and corporation tax laws. The VCI is designed
to collect taxes previously unpaid but otherwise due to the
state's GF and would result in both new and accelerated
revenues. California and the federal government generally
deny claimed tax benefits of an ATAT if the transaction that
gives rise to such benefits lacks economic substance
independent of income tax considerations. The VCI would
provide a mechanism for qualifying individuals and businesses
to remit back taxes with reduced penalties and avoid criminal
prosecution. It would apply to tax years beginning prior to
January 1, 2011. The program would be available to personal
income tax and corporation taxpayers who have the following:
a) ATATs currently under audit;
b) ATAT cases in protest;
c) Unknown ATATs; and,
d) Unreported income from the use of an offshore financial
arrangement.
Under the VCI bill, all penalties other than the Large
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Corporate Understatement Penalty (LCUP) and the Amnesty
Penalty would be waived. In addition, there would be
protection from any criminal action against any qualified VCI
participant who is not the subject of an existing criminal
complaint or investigation.
VCI participants would be required to file amended returns and
pay all unpaid tax and interest resulting from an ATAT.
Furthermore, tax bills that are addressed in the VCI would be
closed and would have no appeal rights. The bill would make
the following changes in law to further discourage the use of
ATATs in the future:
a) Increases from eight to 12 years the statute of
limitations for the FTB to issue a tax assessment for ATAT
activity;
b) Enacts a uniform definition of an ATAT to
simplify administration and avoid confusion;
c) Establishes a 50% penalty for the filing of an amended
return after being contacted by the FTB but prior to the
FTB issuing a deficiency notice. Under current law a
taxpayer can avoid the penalty completely if they file an
amended return after being contacted, but prior to the FTB
issuing a deficiency notice; and,
d) Amends the California non-economic substance transaction
(NEST) penalty to include any transaction determined by the
IRS to lack economic substance.
This proposal is expected to generate additional revenues of
$270 million in 2010-11 and a revenue reduction of $50 million
in 2011-12 due to acceleration.
4)Requires the FTB, in coordination with financial institutions
in the state, to operate a Financial Institutions Records
Match (FIRM), which would provide a means to match delinquent
tax debtor records with customer records provided by financial
institutions. FIRM would permit the FTB to identify previously
unknown non-interest bearing deposit accounts held by
delinquent income tax debtors and collect outstanding income
tax debts. The FTB would use the match information to collect
delinquent state income tax debts using existing authority and
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collection methods, including orders to withhold. The
proposed data match is similar to one used by the existing
Financial Institution Data Match program mandated by federal
law for the collection of delinquent child support payments.
The proposal would require financial institutions doing
business in California to conduct record matches on delinquent
taxpayers and would compensate such institutions for their
costs of compliance with these requirements. This provision
is estimated to generate additional revenues of $10 million in
2010-11 and $30 million in 2011-12.
5)Adds an urgency clause allowing this bill to take effect
immediately upon enactment.
FISCAL EFFECT : The total combined fiscal impact of all the
provisions noted above would result in additional revenues of
$290 million in 2010-11 and $60 million in 2011-12.
Analysis Prepared by : Mark Ibele / BUDGET / (916) 319-2099
FN: 0000070