BILL ANALYSIS Ó AB 1559 Page 1 Date of Hearing: April 4, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 1559 (Dodd) - As Introduced January 4, 2016 2/3 vote. Urgency. Fiscal committee. SUBJECT: State Board of Equalization: returns and payment: extension: disaster SUMMARY: Authorizes the State Board of Equalization (BOE), in the case of a disaster, to extend the time for making any report or return or paying any tax for a period of up to three months. Specifically, this bill: 1)Provides that the extension may be granted at any time provided a request therefor is filed with the BOE within or before the period for which the extension may be granted. 2)Requires any person granted a disaster extension to pay, in addition to the tax or fee amount, interest at the modified adjusted rate per month, or fraction thereof, from the date on which the payment would have been due without the extension to the date of actual payment. AB 1559 Page 2 3)Takes immediate effect as an urgency measure. EXISTING LAW: 1)Authorizes the BOE for good cause to extend the time, not to exceed one month, for a taxpayer to submit any return or pay any amount required to be paid, as specified. The extension may be granted at any time provided a request therefor is filed with the BOE within or prior to the period for which the extension may be granted. 2)Requires any person granted extension relief to pay, in addition to the underlying tax or fee amount, interest at the modified adjusted rate per month, or fraction thereof, from the date on which the payment would have been due without the extension until the date of actual payment. 3)Provides similar authority under the following BOE-administered laws: a) The Sales and Use Tax (SUT) Law; b) The Motor Vehicle Fuel Tax Law; c) The Use Fuel Tax Law; d) The Cigarette and Tobacco Products Tax Law; AB 1559 Page 3 e) The Alcoholic Beverage Tax Law; f) The Timber Yield Tax Law; g) The Energy Resources Surcharge Law; h) The Emergency Telephone Users Surcharge Act; i) The Hazardous Substances Tax Law; j) The Integrated Waste Management Fee Law; aa) The Oil Spill Response, Prevention, and Administration Fees Law; bb) The Underground Storage Tank Maintenance Fee Law; cc) The Fee Collection Procedures Law; and, dd) The Diesel Fuel Tax Law. 4)Authorizes, in the case of a disaster, specified interest relief for late payments and returns under the SUT Law. Specifically, if the BOE finds that a person's failure to make a timely return or payment was due to a disaster, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person may be relieved of interest. Any person seeking such relief must file with the BOE a statement under penalty of perjury setting forth the facts AB 1559 Page 4 upon which the claim for relief is based. (Revenue and Taxation Code (R&TC) Section 6593.) 5)Authorizes specified penalty relief for late payments and returns under the SUT Law. Specifically, if the BOE finds that a person's failure to make a timely return or payment is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of penalties. Any person seeking such relief must file with the BOE a statement under penalty of perjury setting forth the facts upon which the claim for relief is based. (R&TC Section 6592.) 6)Authorizes the Governor to proclaim a state of emergency under specified circumstances. (Government Code Section 8625). Specifically, the Governor is empowered to proclaim a state of emergency upon the existence of conditions of disaster or of extreme peril to the safety of persons and property within the state, as specified. (Government Code Section 8558(b).) FISCAL EFFECT: Unknown. According to the BOE's staff analysis, this bill could result in "a minor revenue loss" related to foregone penalties for late returns and payments beyond the existing one-month extension period. COMMENTS: 1)The author has provided the following statement in support of this bill: Under limited circumstances, individuals and businesses are permitted to defer state and local taxes and fees to assist AB 1559 Page 5 them in recovering from a disaster such as a wildfire. Temporary relief from paying taxes and fees helps those individuals and businesses focus their limited resources where they are needed most - to restore their livelihood. However, the one month deferral allowed under current law is not much more than tinkering on the impacted taxpayer's financial margins[.] AB 1559 is an urgency bill, which revises current law by changing the one month deferral for paying of specified fees and taxes per filing period, to three months per filing period in the case of a declared disaster. This would grant disaster impacted taxpayers a more significant and meaningful amount of time to restore their business activities and get back on their feet. 2)This bill is sponsored by the BOE, which notes the following: The members of the BOE recognize the difficulties faced by victims of disasters and the need for additional time to handle their tax obligations. Allowing the BOE to extend the time for making any return or paying BOE-administered taxes and fees for up to 90 days provides meaningful tax relief to those taxpayers who have less presence of mind, resources, and necessary documentation under the circumstances. 3)This bill is supported by the Lake County Board of Supervisors, which notes the following: [T]he Valley Fire affected approximately 60 businesses in the Cobb Mountain, Middletown and Hidden Valley Lake communities. Harbin Hot Springs, the County's 10th largest employer was destroyed; Calpine, lost five of its 14 power AB 1559 Page 6 plants at the Geysers; and three fourths of the County's ranchers had range land and outbuildings destroyed by the fire. As you know Lake County has not recovered from the "Great Recession" and will now be faced with recovering from the wildfires of 2015 as well. Providing the temporary relief from paying taxes and fees will help the affected individuals and businesses focus their limited resources where they are needed most - to restore their livelihood. 4)The BOE notes the following in its staff analysis of this bill: a) Peace of mind : "Currently, a sales and use taxpayer affected by a disaster has two avenues to seek [to] avoid penalty: one-month extension (RTC Section 6459) and excusable delay relief (RTC Section 6592). This bill revises the one-month extension to three months in the case of a disaster thereby providing disaster-affected taxpayers an additional two months to file their return and pay the tax. "Although a taxpayer currently may request penalty relief for periods exceeding one month, they must file their return and pay the tax due. If a taxpayer does not file their return or pay the tax by the due date (varies by tax program), the BOE may commence delinquency-related action. This may include sending late notices, beginning collection action, or revoking permits during that period, adding more stress to an already stressful situation. This bill provides a disaster-affected taxpayer peace of mind from any BOE delinquency-related action by allowing the taxpayer to file the extension within or prior to the period for which the extension may be granted. AB 1559 Page 7 "This bill also benefits the BOE administratively by avoiding a potentially lengthy staff review to verify 'reasonable cause' and the penalty of perjury verification." b) Disaster victims generally require more time : "This bill grants additional time to those who have less presence of mind, resources, and necessary documentation under the circumstances to timely file their return and pay the tax." c) Tax and interest still due : "This bill does not automatically relieve a taxpayer of accrued interest, only a potential 10% late filing penalty. However, existing law already provides a taxpayer relief of interest if the BOE finds that a person's failure to make a timely return or payment was due to a disaster, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect. A person seeking interest relief must file a claim with the BOE." 5)Committee Staff Comments a) A general overview of current law : Under the SUT Law, taxpayers must file a SUT return on or before the last day of the month following the end of the reporting period. Businesses that are late in paying their tax obligations must pay a 10% penalty, plus interest on the unpaid tax from the tax due date to the date of payment. One-month's interest is due for each month or fraction of a month that payment is late. Similar statutory regimes govern the other BOE-administered tax and fee programs (i.e, the Motor Vehicle Fuel Tax Law, the Use Fuel Tax Law, the Cigarette AB 1559 Page 8 and Tobacco Products Tax Law, the Alcoholic Beverage Tax Law, the Timber Yield Tax Law, the Energy Resources Surcharge Law, the Emergency Telephone Users Surcharge Act, the Hazardous Substances Tax Law, the Integrated Waste Management Fee Law, the Oil Spill Response, Prevention, and Administration Fees Law, the Underground Storage Tank Maintenance Fee Law, the Fee Collection Procedures Law, and the Diesel Fuel Tax Law). b) The BOE's existing one-month extension authority : Existing law allows the BOE for good cause to extend for up to one month the time for making any return or paying the tax due. Such an extension may be granted at any time provided the request is filed with the BOE within or prior to the period for which the extension may be granted. An extension provides the taxpayer additional time to file a return and pay the tax, and relieves the person of any late payment penalty. The law, however, continues to impose interest from the due date until the payment date, except in the case of a disaster. c) The BOE's existing authority to grant interest and penalty relief in specified circumstances : Existing law authorizes, in the case of a disaster, interest relief for late payments. Specifically, if the BOE finds that a person's failure to make a timely return or payment was due to a disaster, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, a taxpayer may be relieved of interest. Taxpayers seeking interest relief, however, must file a statement with the BOE under penalty of perjury setting forth the facts upon which the request is based. Likewise, existing law authorizes taxpayers (including those impacted by a disaster) to seek penalty relief. Again, if the BOE finds that a person's failure to make a AB 1559 Page 9 timely return or payment is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of penalties. Taxpayers seeking penalty relief must also file a statement with the BOE under penalty of perjury setting forth the facts upon which the request is based. d) What would this bill do ? This bill would authorize the BOE, in the case of a disaster, to extend the time for making any report or return or paying any tax for a period of up to three months. This bill was introduced in the wake of the Butte and Valley Fires, which devastated portions of northern California in September 2015. e) The Butte and Valley Fires : On September 9, 2015, the Butte Fire started in Amador County and spread into Calaveras County, burning thousands of acres and destroying multiple structures. As a result, Governor Brown proclaimed a state of emergency on September 11, 2015 for both Amador and Calaveras Counties. The following day, on September 12, 2015, the Valley Fire began in Lake County and spread into Napa County. The fire burned thousands of acres of land, destroyed multiple structures, including homes, and necessitated the evacuation of residents. The fire also damaged critical infrastructure, and forced the closure of major highways and local roads. Thus, on September 13, 2015, Governor Brown proclaimed a state of emergency in both Lake and Napa Counties. On September 21, 2015, Governor Brown sent letters to President Obama requesting Presidential major disaster AB 1559 Page 10 declarations for the state following the Butte Fire and Valley Fire. The Governor noted that the fires had scorched more than 145,000 acres, taken lives, and destroyed thousands of homes and structures. Specifically, the Governor noted that the Butte Fire had burned over 70,760 acres, and destroyed at least 475 homes and 343 nonresidential properties. The Governor also noted that the Butte fire had, as of that date, taken two lives. The Valley Fire, in turn, had burned over 75,111 acres, destroyed 1,238 homes, and taken three lives. f) Looking forward : The author notes that this bill is part of a broader effort to support Lake County and the victims of the Valley Fire. It should be noted however that, given its prospective application, this bill is likely to afford relief to victims of future disasters in the state. Specifically, the Valley Fire occurred in September 2015, or the third quarter of 2015 for SUT purposes. Thus, SUT returns for that period were due on October 31, 2015 (or November 30, 2015, assuming a one-month extension was sought). Applying this bill's proposed three-month extension to victims of the Valley Fire would only bring the filing and payment deadline to January 31, 2016. Thus, while this bill is unlikely to provide relief to victims of the Valley and Butte Fires, it may provide meaningful relief to victims of future disasters. g) What is a disaster ? In its current form, this bill does not define the term "disaster". The BOE notes in its staff analysis that it considers a disaster to include a fire, flood, storm, tidal wave, earthquake or similar public calamity, whether or not resulting from natural causes. Thus, the BOE notes that a disaster includes, but does not require, a Governor declared state of emergency. Most disaster relief provisions, however, including those found in the tax code, are tied to gubernatorially declared AB 1559 Page 11 disasters. In this manner, there is clarity surrounding when such relief is made available and relief is reserved for truly catastrophic regional occurrences. Thus, the author may wish to consider amending this bill to clarify that the term "disaster" refers to a gubernatorially declared state of emergency issued pursuant to Government Code Section 8625. h) Open questions : Even if this bill is limited to gubernatorially declared states of emergency, there could be a degree of confusion surrounding its potential application. For example, would relief be limited to individuals and businesses located in a county declared to be in a state of emergency? Moreover, would a taxpayer have to be "directly" impacted by the disaster to receive relief? Obviously, there are both direct and indirect impacts following a disaster. Direct impacts may include property damage, equipment and inventory loss, and staff evacuations and displacement. As the author's office notes, "[i]ndirect business impacts typically result from limited access to a business due to road closures, utility outages, limited transportation of goods necessary for the businesses to continue functioning, and reduced distribution chains." Moreover, more general market impacts may result from a loss of customers both during and following a disaster. In its letter of support, the Middletown Area Merchants Association notes that all of its members are realizing economic business losses "as a result of the changed demographics" of the community. Would such indirect impacts of a disaster qualify for relief under this bill's provisions? The Committee may wish to consider amendments providing a greater degree of specificity concerning the circumstances in which relief may be grated. i) Suggested technical amendments : Committee staff recommends adoption of the following technical amendments: AB 1559 Page 12 i) On page 5, in line 1, insert "the" before "board"; ii) On page 6, in line 5, strike "tax" and insert "surcharge"; iii) On page 7, in line 20, strike "tax" and insert "fee"; iv) On page 8, in line 1, strike "tax" and insert "fee"; v) On page 8, in line 22, strike "tax" and insert "fee"; vi) On page 9, in line 3, strike "tax" and insert "fee"; and, vii) On page 9, in line 8, insert "person" after "any". REGISTERED SUPPORT / OPPOSITION: Support State Board of Equalization (Sponsor) AB 1559 Page 13 California Asian Pacific Chamber of Commerce California Society of Enrolled Agents Castro Valley / Eden Area Chamber of Commerce City of Lakeport Lake County Board of Supervisors Middletown Area Merchants Association State Board of Equalization Member Fiona Ma Yolo County Opposition None on file Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098 AB 1559 Page 14