BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 507 HEARING: 4/27/11 AUTHOR: DeSaulnier FISCAL: Yes VERSION: 3/29/11 TAX LEVY: No CONSULTANT: Grinnell PROPERTY TAXATION: CHANGE IN OWNERSHIP STATEMENT Increases Penalties for Failing to File, and Extends Deadlines for New Owners to Submit Change in Ownership Statements Background and Existing Law Assessors revalue property at current, full market value for property tax purposes whenever it changes ownership or is newly constructed. Whenever ownership changes, the new owner must file a Change in Ownership Statement. However, there is no penalty for failure to file the statement unless the Assessor makes a written request for the statement and the owner subsequently fails to file the statement within 45 days. Additionally, persons who acquire control or ownership of legal entities that own property must file a change in ownership statement with the State Board of Equalization (BOE), but again, no penalty applies for failing to file the statement with BOE. BOE then makes a written request to the person for the statement, and assessors may then apply the penalty if the person does not respond to the BOE written request. The penalty for failing to file a Change in Ownership Statement after receiving a request from the Assessor is 10% of the tax, up to a maximum of $2,500, if the violation was not willful. The County Board of Supervisors may abate the penalty due to reasonable cause, provided the taxpayer filed an application for abatement within 60 days after the Assessor's notification of the penalty. Alternatively, the new owner may file a Preliminary Change in Ownership Report (PCOR), which is nearly identical to the Change in Ownership Statement, at the time the deed for change in ownership is recorded, thereby generally satisfying the requirement for filing the Change in SB 507 -- 03/29/11 -- Page 2 Ownership Statement. The statute prescribes the details of the report, but leaves to the BOE the task of determining the exact form for Change in Ownership Statements. SB 507 -- 03/29/11 -- Page 3 Proposed Law SB 507 increases the penalty for new owners failing to file a Change in Ownership Statement upon request from the assessor or the State Board of Equalization (BOE): From $2,500 to $5,000 for property eligible for the homeowners' exemption, and From $5,000 to $20,000 for property not eligible for the homeowners' exemption. The measure extends the deadline from 45 days to 90 days for new owners to file a change of ownership statement with either the assessor or BOE, and to comply with the request without penalty. SB 507 applies to statements law requires new owners file with assessors for locally-assessed property, or with BOE, which collects the statement when a legal entity changes ownership or control. SB 507 provides that the penalty shall be abated if the new owner notifies the BOE and the Assessor within 60 days of notice of the penalty that the request was based on erroneous information. The bill provides that the penalty also applies if the new owner submits an incomplete form and does not supply missing information upon a second request. The measure requires the assessor to mail the request for the statement to the new owner at the address specified on the instrument that records the property ownership change, the document evidencing the transfer of interest, or on the PCOR. The assessor must send notice of the penalty to the address on the PCOR, unless the new owner notifies the assessor of a change in address, in which case the assessor shall mail the notice of any penalty to that address. If none of these documents show an address, the assessor may use any address he or she reasonably knows for the new owner to send the request or the notice of the penalty. SB 507 deems that a change of ownership statement is filed on the date of the postmark affixed by the United States Postal Service or the date certified by a bona fide private courier statement. The bill changes the contents of the notice to taxpayers on the statement to reflect the higher penalty amounts, longer deadline, and revised dating procedures in each section spelling out the contents of the form (R&T §480, §480.1, and §480.2.) The measure also states that because this part of Property Tax Law refers SB 507 -- 03/29/11 -- Page 4 only to County Boards of Supervisors but many counties have assessment appeals boards, then references to Boards of Supervisors also refer to assessment appeals boards. State Revenue Impact No Estimate. SB 507 -- 03/29/11 -- Page 5 Comments 1. Purpose of the bill . According to the Author, "A property owner's failure to report changes in ownership, willful or not, has greatly reduced the ability of county assessors and the BOE to efficiently process these changes. It is time to increase the penalty for non-compliance so as to encourage timely response to requests for information, should a preliminary change in ownership be incomplete or should a county assessor or the BOE require additional information for processing. The purpose of this legislation is not to generate revenue for assessors' offices; rather the penalty increase is an attempt to encourage timely filing of the Change of Ownership Statement (COS). Taxpayers often view the low penalty as an opportunity to postpone timely filing of the COS to delay paying appropriate property taxes. The increase in the penalty is an attempt to eliminate the financial advantage of late filing and to facilitate timely payment of property taxes." 2. Uncomfortable questions . Taxpayers generally want to do the right thing. Most do not intentionally flaunt the law, and comply with relevant reporting requirements. Increasing penalties for failing to report property transfers assumes widespread malfeasance which may or may not exist. Additionally, assessors may be levying penalties on notices which never reach the new owners of the property, who would have complied had they been made aware of the requirement. 3. On the nature of penalties . Tax enforcement depends on effective penalties to maintain taxpayer compliance, thereby promoting equity among taxpayers and preventing shifting the costs of public services from tax scofflaws to law-abiding citizens. Taxpayers cannot be expected to follow the law unless the penalty amounts exceed the benefit of not following the law. Consider a taxpayer who purchased an office complex for $5 million with a current assessed valuation of $1 million. The taxpayer would pay $40,000 more in property taxes per year if reported and reassessed (at the 1% rate), but only be subject to a maximum penalty of $2,500 under current law for failing to file the statement. A sensible person would not report the information. SB 507 changes this cost-benefit calculation to improve compliance with existing law amongst owners of high-value ($2.5 million or more), non-homeowners' exempt SB 507 -- 03/29/11 -- Page 6 properties with a strong incentive not to report given the cap on penalties in existing law. 4. Look before you LEOP . Often times, assessors are unaware when ownership changes in a legal entity which can trigger reassessment of properties owned by that legal entity, often times relying only on changes in title information supplied by the County Recorder. To help track potential reassessments, BOE created the Legal Entity Ownership Program (LEOP) in 1982 to help find and detect changes in control and ownership of corporations, partnerships, and other legal entities, which have no recorded deed or notice of a transfer of an ownership interest in a legal entity. Under LEOP, the Franchise Tax Board sends to the BOE a list of legal entities that have reported a change in control or change in ownership on income tax returns, analyzes completed statements to determine changes in control or ownership, and notifies county assessors of changes in control and ownership. To assist these efforts, the Legislature established a penalty for legal entities failing to self-report a change in ownership and control to BOE (SB 816, Ducheny, 2009). 5. Have we met before ? SB 507 is very similar to AB 843 (Eng, 2007) and AB 926 (Chu, 2006), measures approved by the former Committee on Revenue and Taxation, but vetoed by Governor Arnold Schwarzenegger. Governor Schwarzenegger stated in vetoing AB 926 that while a reasonable argument existed for raising the penalty cap, he was concerned that taxpayers did not actually receive requests and penalty notices from Assessors in a timely manner. AB 843 responded to the veto message and crafted provisions in this bill that extend the time period from 45 days to 60 days before the Assessor levies penalties for failing to respond to a request and clarify taxpayer delivery protocols. However, Governor Schwarzenegger was not convinced by the changes, stating his reservation "that the notification procedures in this measure do not adequately ensure that property owners actually receive requests from county assessors in a timely manner." SB 507 allows new owners 90 days to respond to the request of the assessor and BOE, double the time in existing law, and 30 days longer than AB 943 offered. 6. Suggested amendments . The Committee should amend SB 507 to delete the specific requirements on the assessor SB 507 -- 03/29/11 -- Page 7 from the form to prevent it from becoming too long and cumbersome for taxpayers (Page 4, lines 37 through 40, Page 5, lines 1 through 3 and 4 up to "assessor.") The Committee should also amend the measure to clarify that the assessor determines whether the penalty was based on erroneous information, abates the penalty, and notifies the new owner of the abatement. Support and Opposition (04/21/11) Support : California Assessors' Association; California State Association of Counties, California Tax Reform Association. Opposition : Unknown.