BILL ANALYSIS Ó
SB 211
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Date of Hearing: August 12, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 211 (Price) - As Amended: May 8, 2013
Majority vote. Fiscal committee.
SENATE VOTE : 32-6
SUBJECT : Tax administration: disclosure of information:
Franchise Tax Board (FTB) and cities
SUMMARY : Extends the sunset on the state-local tax information
sharing program, codifies existing safeguard practices, and
allows agents of the city to participate in the tax information
sharing program. Specifically, this bill :
1)Extends the sunset date on the reciprocal sharing of tax
information between the FTB and a city's tax officials until
January 1, 2019.
2)Allows a city, participating in the tax information sharing
program, to provide tax information to third party agents.
3)Requires that tax information provided to a city shall be
utilized in a form and manner to safeguard the tax information
as required by the FTB, including, but not limited to:
a) The completion of a data exchange security questionnaire
provided by the FTB prior to approval of a data exchange by
the FTB;
b) The tax official or agent of the city shall allow the
FTB to conduct an onsite safeguard review;
c) The completion of disclosure training provided by the
FTB and a confidentiality statement signed by all employees
or agents with access to information provided by the FTB
confirming the requirement of data security with respect to
that information and acknowledging awareness of penalties
for unauthorized access or disclosure under Revenue and
Taxation Code (R&TC) Sections 19542 and 19552, and Penal
Code Section 502;
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d) The tax official or the agent of a city shall notify the
FTB within 24 hours upon discovery of any incident of
unauthorized or suspected unauthorized access or disclosure
of the tax information and provide a detailed report of the
incident and the parties involved; and,
e) All records received by the tax officials of a city or
its agents shall be destroyed in a manner to make them
unusable or unreadable so an individual record may no
longer be ascertained in a time frame specified by the FTB.
EXISTING LAW
1)Authorizes FTB to permit tax officials of a city to enter into
a reciprocal tax sharing information agreement with FTB, as
specified. The information that may be furnished to a city's
tax officials is subject to the following limitations:
a) The city is only authorized to receive information
related to taxpayers operating within the city and who
report income from a trade or business to the FTB;
b) The information is limited to a taxpayer's name,
address, social security or taxpayer identification number,
and business activity code;
c) Tax information provided to a city's taxing authority
may not be furnished to, or used by, any person other than
an employee of that taxing authority; and,
d) The information provided to a city's tax officials is
subject to Revenue and Taxation Code Section 19542, which
makes it a misdemeanor to disclose confidential tax
information. Specifically, the information may only be
used for the city's tax enforcement, or as otherwise
authorized by state or federal law.
2)Provides that any information, other than the limited type of
tax information specified above, may be requested by a city's
tax officials by affidavit.
3)Provides that the information available from cities to the FTB
is limited to the following:
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a) The name of business if it is a corporation,
partnership, or limited liability company, or the owner's
name if it is a sole proprietorship;
b) Business mailing address;
c) Federal employer identification number, if applicable,
or the business owner's social security number;
d) Standard Industry Classification Code or North American
Industry Classification System Code;
e) Business start date;
f) City number; and,
g) Ownership type.
4)Provides for the automatic repeal of the tax information
sharing program on January 1, 2014.
FISCAL EFFECT : The FTB estimates an annual revenue increase of
$1.5 million in fiscal year (FY) 2014-15, and $4.9 million in FY
2015-16.
COMMENTS :
1)The author states, "SB 211 would extend the sunset date
currently in statute until January 1, 2019 to ensure the
continuity of a proven cost effective tax data sharing program
and would preserve the revenue benefit to the state and
participating cities."
2)Proponents state that this bill "clarifies that cities may
contract with third party agents in pursuing such activities.
Passage of this measure will continue to allow disclosure of
limited confidential tax information for the specific purpose
of enhancing local and state tax enforcement activities. This
is an important tool that cities across California use for
business license discovery efforts to identify businesses that
are operating without a license."
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3)Opponents state, "despite safeguards, outsourcing tax
administration functions heightens the risk for security
breaches, resulting in dissemination of confidential
information for unauthorized use. This information can be
sold for profit, resulting in physical or financial risk to
taxpayers. Potential security breaches are exacerbated by
inappropriate incentives, usually on a contingency-fee basis,
to contractors."
4)Committee Staff Comments
a) Program Background : As noted in the FTB's staff analysis
of this bill, "FTB compiles information from many sources
including employers, financial institutions, and federal
and state entities for purposes of ensuring compliance with
the state's income tax laws. When the FTB receives
information indicating that a tax return should be filed
for a taxable year, but has no record of a return, the FTB
may contact the taxpayer to request that the taxpayer file
a return or explain why no return is required. When a
taxpayer is required to file a return, but fails to do so,
the FTB is authorized to assess tax based on reported and
estimated income from all available sources."
Additionally, "FTB uses data obtained from cities to ensure
compliance with state income tax requirements; cities use
data obtained from the FTB to ensure compliance with city
business tax requirements."
The program authorizes the FTB to enter into agreements
with cities to exchange tax data. These agreements can
either require the cities to reimburse the FTB's costs for
providing the data, or allow for a waiver of the FTB's
costs if the cities agree to provide their tax data at no
cost to FTB. Cities providing tax data to the FTB without
also receiving tax data from the FTB are required to be
reimbursed by the FTB at a maximum rate of $1 per usable
record. The FTB can only provide tax information that
contains an address within the city's jurisdiction. The
information is limited, unless agreed to otherwise, to the
taxpayer's name, taxpayer's address, taxpayer's social
security number or taxpayer identification number, and the
principal business activity.
This bill would extend the sunset date on the reciprocal
sharing of tax information between the FTB and a city's tax
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official until January 1, 2019.
b) Increased Security Risk : The FTB has maintained the
integrity of taxpayer information since the inception of
the tax information sharing program. However, providing
confidential taxpayer information to third party agents may
increase the likelihood of data breaches. In July, the
Office of the Attorney General released the first report
detailing 131 data breaches, which compromised the personal
information of 2.5 million Californians. Data Breach
Report 2012, Kamala D. Harris, Attorney General, California
Department of Justice, July 1, 2013. Out of the 131
breaches, government held responsibility for eight percent
of them. The California Department of Social Services lost
a computer storage device containing information on 845,000
parents, children, and caregivers. Information has also
been breached from third party agents contracting with
cities. According to the report, Pinkerton Government
Services and Advanced Data Processing, two companies that
contract with government entities, suffered at least three
data breaches in 2012, compromising the social security
numbers of potentially thousands of Californians<1>.
Even though certain penalties apply to local cities and
agents under current law, those penalties do little for
taxpayers who must spend time and money rectifying actual
and potential identity theft. A strong correlation exists
between data breaches and identity theft. According to the
report, individuals who received a data breach notification
had an identity theft incident rate of 22.5 percent, which
is four times higher than the average 5.3 percent rate for
adults. Because of this, the report recommended that
government agencies and companies offer mitigation products
like credit monitoring services or a security freeze when
such incidents occur.
c) Contingency Fee : According to the FTB, only 102 of the
478 incorporated cities in California currently participate
in the tax information sharing program. This, in part, is
due to a lack of funds by smaller cities. As such, this
bill hopes to increase participation by allowing smaller
cities to contract with third parties. Although not
--------------------------
<1> Data breaches are only required to be reported to the
Attorney General when the breach involves more than 500
Californians.
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specifically stated, it appears that such contracts will
exist on a contingency fee basis. Such contingency fee
agreements will likely increase revenue by ensuring
additional compliance with city business tax requirements.
However, contingency fees, when used for tax audits, may
also create an incentive to distort the tax system for
private gain.
In Sears, Roebuck and Co. v William J. Parsons, the Georgia
Supreme Court voided a contract between Chatham County
Board of Tax Assessors and Atlantic Resources because the
contract allowed for a 35 percent contingency fee on
additional revenue plus 100 percent of all first-year
penalties. 260 Ga. 824 (1991). The contract was voided on
public policy grounds. In deciding the case, the Supreme
Court noted that "[t]he people's entitlement to fair and
impartial tax assessments lies at the heart of our system,
and, indeed, was a basic principle upon which this country
was founded. Fairness and impartiality are threatened
where a private organization has a financial stake in the
amount of tax collected as a result of the assessment it
recommends." Ultimately, government's role in auditing
taxpayers is to ensure that the correct tax is paid and
collected, but a contingency fee encourages third parties
to extract the highest settlement amounts possible, and
jeopardizes the tax system in favor of the independent
agent. Specifically, contingency fee agreements make it
less likely that a taxpayer will be informed of audit
adjustments like tax credits and refund claims that could
lower tax payments. Incidentally, if a tax is later found
to have been assessed incorrectly, the city will remain
liable to the taxpayer for the full amount, but without any
direct method of obtaining a refund from the third party
agent.
The use of contingency fee arrangements appears to provide
a no-cost way of raising additional city revenue and to
increase participation rates by smaller cities, but this is
not the case. Cities choosing to enter into these
contingency fee agreements give up a large percentage of
the funds collected. For instance, if the City of Los
Angeles decides to contract with a third party under a
contingency fee model of 35 percent, it could potentially
pay out as much as $4.8 million of the $13.9 million
collected in FY 2011-12. Furthermore, it is unclear as to
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why the additional revenue, which could be in the hundreds
of thousands for smaller cities, is insufficient to offset
the hiring of new employees or redirecting existing
employees. The hiring of an additional employee to sift
through tax information may actually be less expensive than
what the city pays in contingency fees, yet no information
has been presented by the sponsors of the bill explaining
why cities are incapable of conducting the program in
house. Without such evidence, it seems imprudent for the
state to place sensitive financial information at greater
risk in exchange for additional revenue. As such, the
Committee may wish to consider amending the bill to remove
the third party agent provision.
d) Safeguard Standards : The codification of existing
safeguard practices will help ensure that tax information
data remains free of data breaches. However, because these
standards are already being utilized, codifying the
standards in law may not actually provide any additional
security.
e) Related Legislation :
SB 1036 (Cedillo), introduced in the 2009-10 legislative
session, would have allowed local cities to share taxpayer
information with third party agents. SB 1036 failed to
pass out of this Committee.
SB 1146 (Cedillo), Chapter 345, Statutes of 2008, extended
the authority of the FTB to disclose limited confidential
tax information to city tax officials, and allowed a city
that administers a business tax to provide specific data to
the FTB upon request and authorized cities to exchange data
with the FTB in lieu of obtaining mandated cost
reimbursement.
SB 1374 (Cedillo), Chapter 513, Statutes of 2006, extended
the FTB's authority to disclose limited confidential tax
information to city tax officials until 2011.
AB 63 (Cedillo), Chapter 915, Statutes of 2001, authorized
the FTB to disclose limited confidential tax information to
city tax officials in order to enhance the enforcement of
an existing city business tax law.
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REGISTERED SUPPORT / OPPOSITION :
Support
City of Los Angeles
City of Santa Monica
Opposition
CalTax
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098