BILL ANALYSIS �
AB 1203
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Date of Hearing: April 29, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1203 (Gorell) - As Introduced: February 22, 2013
Majority vote. Fiscal committee.
SUBJECT : Taxation: interest: penalties
SUMMARY : Prohibits the assessment of interest and penalties for
failure to pay certain taxes, if the tax must be collected due
to a court holding that a statute is unconstitutional.
Specifically, this bill :
1)Amends the Sales and Use Tax Law to provide that, on or after
January 1, 2014, interest and penalties shall not be assessed
against any person for failure to pay any taxes imposed if all
the following conditions are met:
a) The tax is required to be collected from the taxpayer
due to a court holding that a statute is unconstitutional;
b) The taxpayer relied on that statute when calculating the
amount of tax due; and,
c) The taxpayer pays the tax within 60 days of the State
Board of Equalization (BOE) sending a notice of
determination relating to the tax that must be collected.
2)Enacts similar provisions for purposes of the Personal Income
Tax (PIT) Law and the Corporation Tax (CT) Law. Provides
that, on or after January 1, 2014, interest and penalties
shall not be assessed against any taxpayer with respect to the
additional tax of that taxpayer for periods prior to the date
the taxpayer is notified of the additional tax due for the
taxable year, if all of the following apply:
a) The additional tax is an increase in tax for a taxable
year beginning on or after January 1, 2014, to the extent
the increase is attributable to a court holding that a
statute is unconstitutional, and the additional tax is
required to be collected due to that holding, as announced
by the Franchise Tax Board (FTB);
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b) The taxpayer relied on that statute when calculating the
amount of tax due; and,
c) The taxpayer pays the additional tax within 60 days of
receiving a notice of proposed assessment (NPA) or within
the time allowed by an installment payment agreement
entered into pursuant to existing law.
EXISTING FEDERAL LAW : Authorizes Congress, under the commerce
clause of the United States (U.S.) Constitution, to regulate
commerce with foreign nations, and among the several states.
The U.S. Supreme Court has held that the "negative" or "dormant"
commerce clause also prohibits states from enacting laws that
unduly burden or discriminate against interstate commerce.
EXISTING STATE LAW :
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's gross receipts from TPP
sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must generally be
remitted to the BOE.
3)Requires those who are late in paying their BOE-administered
taxes to pay a penalty equal to 10% of the tax, plus interest
on the unpaid tax, from the date the tax became due.
4)Provides various credits, deductions, exclusions, and
exemptions for particular taxpayer groups under both the PIT
Law and the CT Law. These tax expenditures are generally
designed to encourage socially beneficial behavior or to
provide relief to taxpayers who incur specified expenses.
5)Prohibits an administrative agency from declaring a statute
invalid or unenforceable in the absence of an appellate court
determination to that effect.
AB 1203
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FISCAL EFFECT : Unknown
COMMENTS :
1)The author has provided the following statement in support of
this bill:
AB 1203 is a companion measure with SB 209, both jointly
authored with Senator Ted Lieu and co-sponsored by Board of
Equalization Chairman Jerome Horton, [and] is a legislative
fix to the problem created by the recent California Court
of Appeal decision in Frank Cutler v. Franchise Tax Board.
The actions taken by the Franchise Tax Board, based on the
court decision, essentially changed the rules that
taxpayers relied on when they planned and made investment
decisions. The retroactive taxes that were applied on
taxpayers who claimed California's Qualified Small Business
Stock tax benefits undermine the assumptions and
foundations of the rule of law. The additional layering of
interest and penalties on retroactive taxes for those small
businesses that complied with the law is simply unfair and
builds upon the perception that the state is hostile to
business. AB 1203 and SB 209 [unwind] this faulty decision
and [bring] relief to small business owners across the
state while also setting prohibitions against this kind of
surprise tax increase again for the future.
2)Proponents of this bill note the following:
The recent unilateral decision by Franchise Tax Board
("FTB") staff to cancel California's Qualified Small
Business Stock ("QSBS") Tax Incentives, in itself, is a
step in the wrong direction for attracting new
entrepreneurs and investors. However, along with
cancelling the program, the decision of the FTB staff to
retroactively tax more than 2,500 entrepreneurs and
investors could be detrimental to our competitiveness, job
growth and the state's overall economy. This decision
essentially tells taxpayers that they can't even depend on
the rules in place because they are subject to change
without notice and the state can penalize you even though
you followed the rules.
3)Committee Staff Comments:
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a) A bit of context : The author has introduced this bill
in response to the Court of Appeal's recent decision in
Cutler v. Franchise Tax Board (2012) 208 Cal.App.4th 1247.
In this case, the court struck down a California statute
that allowed taxpayers a deferral for income received from
the sale of stock in corporations maintaining assets and
payroll in California, while providing no such deferral for
income from the sale of stock in corporations maintaining
assets and payroll elsewhere. Id. at 1250. Specifically,
the court held that "the deferral provision discriminates
on its face on the basis of an interstate element in
violation of the commerce clause."<1> Id.
The FTB was left in the unenviable position of implementing
this court decision. On December 21, 2012, the FTB began
this process by issuing Notice 2012-03. Specifically, the
FTB announced that, because the court had held California's
qualified small business stock (QSBS) provisions
unconstitutional, these provisions were "now invalid and
unenforceable." After an exhaustive review of its
administrative options, the FTB determined that its only
lawful option under existing case law was to deny the
benefits of the QSBS provisions to all taxpayers in all
"open" tax years. Specifically, the FTB announced that it
would be assessing and collecting additional tax for tax
years within the statute of limitations (i.e., taxable
years beginning on or after January 1, 2008).
b) The resulting firestorm : The FTB's Notice 2012-03
unleashed a firestorm of complaints and controversy.
Taxpayers who had relied in good faith on the QSBS
provisions were now facing increased tax liabilities due to
the retroactive disallowance of the provisions' deferral or
exclusion benefits.
c) What does this bill do? : This bill would prohibit the
--------------------------
<1> While the commerce clause is phrased as a positive grant of
regulatory power, it "has long been seen as a limitation on
state regulatory powers, as well as an affirmative grant of
congressional authority." Fulton Corp. v. Faulkner (1996) 516
U.S. 325, 330. This negative aspect, commonly referred to as
the dormant commerce clause, prohibits economic protectionism in
the form of state regulation that benefits "instate economic
interests by burdening out-of-state competitors." Id.
AB 1203
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assessment of interest and penalties for failure to pay
certain taxes, if the tax must be collected due to a court
holding that a statute is unconstitutional. This bill is
intended to prevent undue hardship to taxpayers who would
otherwise be subject to interest and penalties as a result
of unforeseen judicial action. The author's office has
indicated, however, that the intent is to provide
prospective relief to taxpayers in the event of future
court decisions holding a particular statute
unconstitutional. Thus, while this bill was introduced in
response to the recent Cutler decision, it would have no
effect on individuals receiving NPAs as a result of that
decision.
d) Implementation concerns and suggested amendments :
Committee staff has identified numerous technical and
administrative concerns with this bill's current language.
Committee staff will work with the author's office to
address these and any other issues that may be identified.
To that end, the author may wish to consider the following
amendments to this bill:
i) As currently drafted, this bill would relieve a
taxpayer of penalties and interest assessed on additional
tax (i.e., the difference between tax as recomputed and
the amount of tax originally computed) resulting from a
statute being held unconstitutional. However, the
application of a court decision may result in a taxpayer
being subject to the "underpayment estimated tax penalty"
in the year of the final court decision, where the
taxpayer made estimated tax payments relying on the
unconstitutional statute, but later correctly filed an
original return without computing tax under the
unconstitutional provision. If the author intends to
include relief from the underpayment of estimated tax
penalty, the author should amend this bill.
ii) To be eligible for relief under the FTB-administered
provisions of this bill, a taxpayer would have to pay the
additional tax owed within 60 days of receiving a NPA "by
the board." Because it would be difficult to determine
when precisely a taxpayer received an NPA, the author may
wish to provide that the tax must be paid within 60 days
of the NPA being mailed. In addition, the author may
wish to replace the reference to "board" with "Franchise
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Tax Board" to avoid unnecessary confusion.
iii) If the author intends to extend the penalty and
interest relief to taxpayers who receive correspondence
from the FTB other than a NPA, or who proactively file an
amended return as a result of a court holding,
appropriate amendments should be taken.
iv) This bill currently refers to "a court holding"
without providing any definition for the term. To
provide a degree of definitional clarity, and to further
clarify the author's intent to address only the issue of
future court decisions, the author may wish to amend this
bill. Specifically, the bill could be amended to refer
to final decisions of an appellate court rendered on or
after January 1, 2014.
REGISTERED SUPPORT / OPPOSITION :
Support
Brea Chamber of Commerce
Southwest California Legislative Council
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098