BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2758
                                                                  Page  1

          Date of Hearing:  April 28, 2014

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Raul Bocanegra, Chair

              AB 2758 (Committee on Revenue and Taxation) - As Amended:   
                                   April 10, 2014

          Majority vote.  Fiscal committee.  
           
          SUBJECT  :  Sales and use taxes:  administration:  qualified use  
          tax:  acceptable tax return 

           SUMMARY  :  Provides that an amount equal to the qualified use tax  
          a taxpayer reports on an acceptable tax return filed with the  
          Franchise Tax Board (FTB) shall be applied to that taxpayer's  
          use tax liability.  Specifically,  this bill  :  

          1)Deletes the current statutory provisions requiring payments  
            and credits shown on the return of a taxpayer electing to  
            report qualified use tax to be first applied to liabilities  
            arising under the Personal Income Tax (PIT) Law and the  
            Corporation Tax (CT) Law.

          2)Applies to purchases of tangible personal property (TPP) made  
            on or after January 1, 2014, in taxable years beginning on or  
            after January 1, 2014.  

           EXISTING LAW  :

          1)Imposes a sales tax on retailers for the privilege of selling  
            TPP, absent a specific exemption.  The tax is based upon the  
            retailer's gross receipts from TPP sales in this state.  

          2)Imposes, on transactions not subject to sales tax, 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  
            California's 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 State Board of Equalization (BOE).

          3)Authorizes a person to make an irrevocable election to report  








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            qualified use tax, as defined, on that person's income tax  
            return. 

          4)Provides that any payments and credits shown on the return of  
            a person reporting qualified use tax shall be applied in the  
            following order:

             a)   Taxes imposed under the PIT Law or the CT Law, including  
               penalties and interest, if any; and, 

             b)   Qualified use tax reported.  

           FISCAL EFFECT  :   The BOE's revenue estimate for this bill is  
          pending.  The FTB, in turn, estimates revenue losses of $60,000  
          in fiscal year (FY) 2014-15, $40,000 in FY 2015-16, and $30,000  
          in FY 2016-17.  



           COMMENTS :

          1)The BOE notes the following in its staff analysis of this  
            bill:

                Bill would reduce taxpayer confusion and create  
               efficiencies  :  "The provision that specifies that use tax  
               payments included with the FTB returns shall be applied  
               first to FTB taxes, interest, and [penalties] was included  
               in the original legislation that allowed for reporting of  
               use tax on the FTB returns.  However, this payment order  
               has resulted in considerable confusion in situations where  
               a taxpayer fails to remit the proper amount when filing his  
               or her return with the FTB.  

               "On occasion, taxpayers make underreporting errors while  
               preparing their income tax returns, or they file late and  
               incur penalty and interest charges.  This results in an  
               FTB-related return payment shortage.  When a shortage  
               occurs, the law requires FTB to apply the amount paid with  
               the return (even the amount the taxpayer designated as use  
               tax) first to amounts owed to the FTB.  When this occurs,  
               the FTB notifies the BOE so that the BOE can send a tax  
               shortage notice to the taxpayer, explain the issue, and  
               request payment of the use tax and penalty.  In these  
               situations, the taxpayer usually also receives a billing  








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               from FTB, as generally, there is further outstanding  
               liability due the FTB arising from the return filed.  As a  
               result, the taxpayer often ends up with two shortage  
               notices - on from each tax agency.  Taxpayers are  
               frequently frustrated as to why they receive a BOE tax  
               shortage notice for the use tax, with an added penalty for  
               late payment, when they believed the use tax was already  
               timely paid to the FTB. 

               "Since the use tax liability is generally much lower than  
               the income tax liability, requiring the payment allocation  
               to the use tax liability first makes more sense.  It  
               minimizes the BOE's workload associated with the necessary  
               additional correspondence and billing for the use tax and  
               penalty, and also eliminates the confusion this law  
               generates for taxpayers."   

          2)Committee Staff Comments:

              a)   California's use tax  :  Since 1933, the state has imposed  
               a sales tax on California retailers for the privilege of  
               selling TPP, absent a specific exemption.  The tax is based  
               upon the retailer's gross receipts from TPP sales in this  
               state.  In 1935, California adopted a complementary "use  
               tax" on the storage, use, or other consumption of TPP  
               purchased out-of-state and brought into California.  The  
               use tax was designed to protect California merchants who  
               would otherwise be at a competitive disadvantage when  
               out-of-state retailers sell to California customers without  
               charging tax.

               Unlike the sales tax, the use tax is imposed on the  
               purchaser and not the retailer.  Unless the purchaser pays  
               the use tax to an out-of-state retailer registered to  
               collect California's use tax, the purchaser remains liable  
               for the tax.  The use tax is set at the same rate as the  
               state's sales tax and must generally be remitted to the  
               BOE.

              b)   Impediments to collection  :  The most practical way for a  
               state to enforce its use tax is to have retailers collect  
               the tax at the time of sale.  However, there is  
               considerable ambiguity surrounding the circumstances under  
               which a state may legally compel an out-of-state retailer  
               to collect use tax on its behalf.  This ambiguity has its  








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               origins in the commerce clause of the U.S. Constitution,  
               which charges Congress with regulating commerce among the  
               several states.  The U.S. Supreme Court has held that, by  
               implication, the commerce clause also prohibits states from  
               enacting laws that unduly burden interstate commerce.    

               In Quill Corp. v. North Dakota (1992), 504 U.S. 298, the  
               U.S. Supreme Court was asked to decide the  
               constitutionality of a North Dakota law that imposed a use  
               tax collection obligation on out-of-state retailers that  
               advertised in the state three or more times in a single  
               year.  The Court invalidated the law, holding that, under  
               the negative commerce clause, a retailer must have a  
               "physical presence" in a state before that state can  
               require the retailer to collect its use tax.  

               The "physical presence" test affirmed in Quill has  
               complicated California's efforts to collect its use tax.   
               For example, when a California consumer purchases a coat  
               from an out-of-state retailer through its catalog or online  
               store, the consumer's use of the coat in California  
               triggers a use tax liability.  If the out-of-state retailer  
               lacks a "physical presence" in California, however,  
               California is constitutionally prohibited from requiring  
               the retailer to collect the tax.  If the consumer fails to  
               remit the tax, the purchase completely escapes taxation.  

             c)   Recent legislative efforts focused on increasing use tax  
               collections  :  In recent years, California has taken several  
               steps to increase use tax compliance.  Chief among these  
               efforts was the inclusion of a use tax line on the state's  
               income tax returns.  In 2010, Governor Schwarzenegger  
               signed SB 858 (Committee on Budget and Fiscal Review),  
               Chapter 721, into law as part of the FY 2010-11 Budget  
               Agreement.  Among other things, SB 858 provided for the  
               permanent inclusion of a use tax line on the state's income  
               tax returns, thereby allowing income tax filers to fill-in  
               the amount of use tax due on their returns. 

              d)   "Me first"  :  When a taxpayer reports qualified use tax  
               on an income tax return, existing law requires the FTB to  
               apply payments and credits shown on the return in a certain  
               order.  Specifically, payments and credits are first used  
               to satisfy any liabilities arising under the PIT Law or CT  
               Law, as applicable, and only then are applied to the  








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               taxpayer's use tax liability.  The Committee has introduced  
               this bill to ensure that highly conscientious taxpayers who  
               self-report a use tax liability on their income tax return  
               are not faced with a late payment penalty because their use  
               tax payments were applied to other tax liabilities.    
               

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          None on file

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098