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 AB 2758 Page 2 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 AB 2758 Page 3 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 AB 2758 Page 4 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 AB 2758 Page 5 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