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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