BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 1548                     HEARING:  4/25/12
          AUTHOR:  Wyland                       FISCAL:  Yes
          VERSION:  2/24/12                     TAX LEVY:  No
          CONSULTANT:  Grinnell                 

                              OFFERS IN COMPROMISE
          

          Removes the sunset on the BOE's authority to accept offers 
          in compromise from firms currently in operation


                           Background and Existing Law 

          An "offer in compromise" is a way to resolve a tax 
          delinquency in which there is no dispute about the amount 
          owed, but the taxpayer cannot pay the full amount.  
          Negotiating an offer in compromise may allow a tax agency 
          to collect the maximum amount feasible in a timely manner 
          without forcing a taxpayer into bankruptcy, which further 
          delays collection.   Generally, once the tax agency 
          determines that the liability is final, the taxpayer makes 
          an offer, which the agency then reviews to ensure that the 
          offer represents the maximum amount it can expect to 
          receive from the taxpayer in a reasonable period of time, 
          typically five to seven years.  

          The Legislature first allowed the Franchise Tax Board to 
          accept offers in compromise (SB 94, Romero, 1999), then 
          later authorized the Board of Equalization to do so for 
          final tax liabilities for owners of defunct businesses 
          under the Sales and Use Tax Law, the Use Fuel Tax Law, and 
          the Underground Storage Tank Maintenance Fee Law (AB 1458, 
          Kelley, 2002).   The Legislature then extended the 
          authority for the BOE to make offers in compromise for 
          final tax liabilities under the Cigarette and Tobacco 
          Products Law, Alcoholic Beverage Tax Law, Timber Yield Tax 
          Law, Energy Resources Surcharge Law, Emergency Telephone 
          Users Surcharge Law, Hazardous Substances Tax Law, 
          Integrated Waste Management Fee Law, Fee Collection 
          Procedures Law, Diesel Fuel Tax Law, and the Oil Spill 
          Response Prevention and Administration Fees law (AB 3076, 
          Committee on Revenue and Taxation, 2006).  





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          Under the BOE and FTB programs, the taxpayer must establish 
          that the amount offered in payment is the most that can be 
          expected to be paid or collected and they do not have 
          reasonable prospects of acquiring increased income or 
          assets that would enable them to satisfy a greater amount 
          of the tax liability than the amount offered. BOE and FTB 
          can reestablish the final tax liability should the taxpayer 
          have sufficient annual income during the succeeding 
          five-year period following the date of the compromise.  
          When BOE and FTB determine that a taxpayer concealed assets 
          or falsified, withheld, destroyed, or mutilated any book, 
          document, or record relating to their financial condition, 
          they may reestablish all compromised liabilities and the 
          taxpayer may be found guilty of a felony crime,  fined up 
          to $50,000, and imprisoned.

          In 2007, the Legislature expanded the program to allow BOE 
          to accept offers in compromise for businesses currently in 
          operation, as many taxpayers were surprised when BOE audits 
          uncovered transactions that the taxpayer didn't know were 
          taxable, so they never charged consumers the tax (AB 2047, 
          Horton, 2008).  Additionally, for many firms, paying the 
          entire liability would cause the business to close.  The 
          bill allowed BOE to accept offers from operating firms 
          when:
                 The final tax liability arises from transactions 
               for which the BOE finds no evidence that the taxpayer 
               collected sales tax reimbursement or use tax,
                 The person liable is the successor to the business, 
               or
                 A consumer has a use tax liability.

          When the Legislature expanded the program to include 
          businesses in operation, it applied a sunset for existing 
          businesses, but left the authority to compromise with 
          defunct ones intact.  BOE wants to remove the sunset.


                                   Proposed Law  

          Senate Bill 1548 removes the sunset on the BOE's authority 
          to accept offers in compromise from firms currently in 
          operation.  The measure applies to the Sales and Use Tax 
          Law, Cigarette and Tobacco Products Law, Use Fuel Tax Law, 
          Alcoholic Beverage Tax Law, Emergency Telephone Users 
          Surcharge Law, Fee Collection Procedures Law, Diesel Fuel 





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          Tax Law, and the Oil Spill Response Prevention and 
          Administration Fees law.


                               State Revenue Impact
           
          According to BOE, SB 1548 results in revenue increases of 
          $286,034 per year.  


                                     Comments  

          1.   Purpose of the bill  .  According to the Author, Offer in 
          Compromise programs are mechanisms that government agencies 
          use to help taxpayers settle outstanding tax liabilities 
          that they could not pay in full without having to declare 
          bankruptcy.  The goal of establishing an OIC program is to 
          incentivize taxpayers to negotiate with the government 
          agency to pay a reduced amount to settle their tax 
          liability.  This approach allows the taxpayer to keep their 
          business open, which creates further economic development.  
          At the same time, OIC programs increase the likelihood that 
          tax liabilities will be collected, even if for a reduced 
          amount.  Both the Internal Revenue Service (IRS) and the 
          California Franchise Tax Board (FTB) operate OIC programs 
          for both taxpayers and businesses.  In 2002, Assembly Bill 
          1458 (Kelley) was signed into law which allowed the BOE to 
          create an OIC program.  The program authorized by the 
          legislation only applied to discontinued or successor 
          businesses that inherited tax liabilities.  Only business 
          owners who had tax liabilities from uncollected taxes or 
          fees were allowed to participate in the OIC program.  
          Businesses that collected the fee or tax but never remitted 
          them to the BOE were ineligible from participating in the 
          OIC program.  In addition to having tax liabilities, the 
          business must show that if they were forced to pay the 
          liability in full it would cause the business to cease 
          operation and declare bankruptcy.  With this information on 
          hand, the BOE and the business work together to find an 
          appropriate amount that should be paid to release the 
          liability.  The program expanded in 2008 with the passage 
          of AB 2047 (Horton) to include active businesses.  When 
          passed in 2008 it was estimated that total revenue 
          collected by the BOE would increase by $2.5 million because 
          of these OIC programs, with $1.4 million going to the 
          general fund.  When enacted, AB 2047 contained a sunset 





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          date of January 1, 2013.  If the OIC program is not 
          extended it will sunset and cease to exist.  SB 1548 
          extends the operation of the Offer in Compromise (OIC) 
          program maintained by the California Board of Equalization 
          (BOE).  The Offer in Compromise program allows the BOE to 
          work with businesses to reduce certain tax liabilities that 
          would have forced the business to cease operation and 
          declare bankruptcy."

          2.   So, how did we do  ?  When the Committee on Revenue and 
          Taxation, the predecessor to this Committee, approved AB 
          2047 in 2008, it inserted a sunset to review the authority 
          granted by the bill to accept offers from firms still in 
          operation.  According to BOE, they have accepted a total of 
          eight offers from firms that were not defunct when they 
          made the offer, seven of which are still in operation.   
          The total amount collected was $532,668, and the BOE 
          forgave approximately $357,000 when accepting those offers. 
           The Committee may wish to consider whether the amounts 
          forgiven are sufficiently consistent with sound tax 
          collection practices to merit sunset removal, another five 
          year sunset extension, or terminating the authority.


                         Support and Opposition  (4/19/12)

           Support  :  State Board of Equalization (Sponsor), BOE Member 
          George Runner, Los Angeles Area Chamber of Commerce, Orange 
          Chamber of Commerce, Grass Valley/Nevada Chamber of 
          Commerce, Industry Manufacturing Council, California 
          Taxpayers' Association; California Chamber of Commerce. 

           Opposition  :  Unknown.