BILL ANALYSIS Ó
AB 2758
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CONCURRENCE IN SENATE AMENDMENTS
AB 2758 (Revenue and Taxation Committee)
As Amended August 22, 2014
Majority vote
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|ASSEMBLY: |73-0 |(May 23, 2014) |SENATE: |34-0 |(August 26, |
| | | | | |2014) |
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Original Committee Reference: REV. & TAX.
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.
The Senate amendments specify that the provisions of this bill
apply to purchases of tangible personal property (TPP) made on
or after January 1, 2015, in taxable years beginning on or after
January 1, 2015.
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
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:
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a) Taxes imposed under the Personal Income Tax Law or the
Corporate Tax 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) 2015-16 and $50,000 in FY 2016-17.
COMMENTS : 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 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 -
one 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.
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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.
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.
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 origins in the commerce clause
of the United States (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,
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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.
Recent legislative efforts focused on increasing use tax
collection. 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.
"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 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.
Analysis Prepared by : M. David Ruff/ REV. & TAX. / (916)
319-2098
FN: 0005512
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