BILL ANALYSIS Ó
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UNFINISHED BUSINESS
Bill No: SB 86
Author: Senate Budget and Fiscal Review Committee
Amended: 3/17/11
Vote: 21
PRIOR SENATE VOTES NOT RELEVANT
ASSEMBLY FLOOR : 52-25, 3/17/11 - See last page for vote
SUBJECT : Budget Act of 2011: Tax Compliance and
Programs
SOURCE : Author
DIGEST : This bill makes various program changes to state
laws regarding tax compliance and tax programs in order to
implement provisions of law to balance the 2011 Budget Act.
Assembly Amendments delete the prior version of the bill
expressing the intent of the Legislature to enact statutory
changes relating to the 2011 Budget Act, and insert the
current language relative to tax compliance and programs.
ANALYSIS :
This bill does the following:
1. Use Tax "Look-Up" Table . This bill provides that
persons who are required to report and remit the Use Tax
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on the purchase of tangible personal property to use a
"Look-Up" table, which provides an estimated amount due
based on income level.
Under existing law, Use Tax, the counterpart to the
Sales Tax, is owed on purchases made out-of-state, or
through means such as mail-order or Internet, when the
tax was not collected by a registered retailer.
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 provided on the return.
This bill allows for single nonbusiness purchases of
$1,000 or less to report on the Use Tax line on the
income tax return either (i) the actual amount of Use
Tax due or (ii) the amount shown on a Look-Up table
prepared by 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 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 the Look-Up table as part of income tax return
information.
This provision is estimated to result in additional
revenues of $10 million in 2011-12 and annually
thereafter, $6.5 million of which is General Fund.
2. Refundable Portion of the Child and Dependent Care
Expense Tax Credit . This bill eliminates the refundable
aspect of the Child and Dependent Care Expense Tax
Credit available under the personal income tax. Under
the program, taxpayers are granted a credit up to a
maximum against taxes 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
parallel federal credit program. The amount of the
credit declines as income increases and is not available
to taxpayers with income in excess of $100,000.
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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 can
result in a tax refund for taxpayers with little or no
personal income tax liability. This bill eliminates the
refundable part of the tax credit for tax years
beginning January 1, 2011 and after, but retains the
core elements of the tax credit program.
This provision is estimated to result in additional
revenues of $70 million in 2011-12 and annually
thereafter.
3. Voluntary Compliance Initiative Two . This bill directs
the FTB to establish a Voluntary Compliance Initiative
(VCI) for those taxpayers that either utilized an
abusive tax avoidance transaction or have unreported
income from the use of an off-shore financial
arrangement. This narrow amnesty program would provide
for a 91 day amnesty period, running from 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 initiative is designed to
collect taxes previously unpaid but otherwise due to the
state's General Fund and would result in both new and
accelerated revenues. The State ran the first VCI
program in 2004 and generated approximately $1.3 billion
revenues from this effort.
California and the federal government generally deny
claimed tax benefits of an abusive tax avoidance
transaction if the transaction that gives rise to such
benefits lacks economic substance independent of income
tax considerations. In other words, the transactions
have no real value; rather they are only intended to
avoid taxes. This initiative would provide a mechanism
for qualifying individuals and businesses to remit back
taxes with reduced penalties and avoid criminal
prosecution. It applies to tax years beginning prior to
January 1, 2011. The program would be available to
personal income tax and corporation taxpayers who have:
Abusive tax avoidance transactions currently
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under audit;
Abusive tax avoidance transaction cases in
protest;
Unknown abusive tax avoidance transactions; or
Unreported income from the use of an offshore
financial arrangement.
Under the VCI program, all penalties other than the
Large Corporate Understatement Penalty 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 abusive tax avoidance transaction. Furthermore,
tax bills that are addressed in the VCI would be closed
and would have no appeal rights.
This bill also makes the following changes in law to
further discourage the use of abusive tax avoidance
transactions in the future:
A. Increases from 8 to 12 years the statute of
limitations for the FTB to issue a tax assessment for
abusive tax avoidance transaction activity.
B. Enacts a uniform definition of an abusive tax
shelter to simplify administration and avoid
confusion.
C. Establishes a 50 percent penalty for the filing of
an amended return after being contacted by the
Franchise Tax Board 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.
D. Amends the California non-economic substance
transaction (NEST) penalty to include any transaction
determined by the IRS to lack economic substance.
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4. Financial Institutions Records Match System . This bill
requires the FTB, in coordination with financial
institutions in the state, to operate a Financial
Institutions Records Match (FIRM) system, which would
provide a means to match delinquent tax debtor records
with customer records provided by financial
institutions.
The FIRM system 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 collection methods,
including orders to withhold.
This 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 records 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.
FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: Yes
The total combined fiscal impact of all the provisions in
this bill results in additional General Fund revenues of
$280 million in 2010-11 and $56.5 million in 2011-12.
ASSEMBLY FLOOR :
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Buchanan,
Butler, Charles Calderon, Campos, Carter, Cedillo,
Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Fuentes,
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Furutani, Galgiani, Gatto, Gordon, Hall, Hayashi, Roger
Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie
Lowenthal, Ma, Mendoza, Mitchell, Monning, Pan, Perea, V.
Manuel Pérez, Portantino, Skinner, Solorio, Swanson,
Torres, Wieckowski, Williams, Yamada, John A. Pérez
NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly,
Fletcher, Garrick, Grove, Hagman, Halderman, Harkey,
Jeffries, Jones, Knight, Logue, Mansoor, Miller, Morrell,
Nestande, Nielsen, Olsen, Silva, Smyth, Valadao, Wagner
NO VOTE RECORDED: Gorell, Norby, Vacancy
DLW:mw 3/21/11 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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