BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 2758 HEARING: 6/25/14 AUTHOR: Revenue and Taxation FISCAL: Yes VERSION: 4/10/14 TAX LEVY: No CONSULTANT: Bouaziz SALES AND USE TAXES: QUALIFIED USE TAX: ACCEPTABLE TAX RETURN Applies the amount of payments or credits first to the use tax liability reported on the tax return. Background and Existing Law State law imposes a sales tax on retailers for the privilege of selling tangible personal property (TTP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state. State law 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). State law authorizes a person to make an irrevocable election to report qualified use tax, as defined, on that person's income tax return and provides that any payments and credits shown on the return of a person reporting qualified use tax shall be applied in the following order: Taxes imposed under the Personal Income Tax (PIT) Law or the Corporation Tax (CT) Law, including penalties and interest, if any; and, Qualified use tax reported. A taxpayer reports use tax to FTB, and FTB generally remits AB 2758 -- 04/10/14 -- Page 2 the use tax to BOE. Under the current system, payments and credits are applied first to taxes owed, so if taxes exceed payments and credits, the taxpayer is still liable for the qualified use tax reported. By the time the BOE receives the use tax amount due and notifies the taxpayer, the taxpayer has incurred late penalties and fees for not paying the self-reported use tax owed. Changing the order that payments and credits are applied would eliminate this problem. Proposed Law Assembly Bill 2758 would first apply the amount of payments or credits available on the tax return to the use tax liability reported on the tax return, and then to outstanding taxes, penalties, or interest. AB 2758 would become effective January 1, 2015, and apply to taxable years beginning on or after January 1, 2014. State Revenue Impact The BOE's revenue estimate for this bill is pending. The Franchise Tax Board (FTB) 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. Purpose of the bill . 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. AB 2758 changes the payment order, which will minimize 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. AB 2758 -- 04/10/14 -- Page 3 2. 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. 2. Recent legislative efforts . 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. Assembly Actions Assembly Revenue & Taxation 9-0 Assembly Appropriations 17-0 Assembly Floor 73-0 Support and Opposition (06/19/14) Support : None received. Opposition : None received. AB 2758 -- 04/10/14 -- Page 4