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  




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          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.






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          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.   






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