BILL ANALYSIS Ó
AB 2201
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Date of Hearing: April 11, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2201
(Brough) - As Introduced February 18, 2016
Majority vote. Fiscal committee.
SUBJECT: State Board of Equalization: administration:
interest
SUMMARY: Reinstates provisions of law that expired on January
1, 2016, allowing the Board of Equalization (BOE) to impose
one-day's (rather than one-month's) interest on a late
electronic payment or prepayment where the BOE members, meeting
as a public body, find that it would be inequitable to impose
interest for the entire month given that the payment or
prepayment is only one day late. Specifically, this bill:
1)Allows the BOE to compute interest on a late payment, or
prepayment, of a specified tax, fee, or surcharge at the
modified adjusted daily rate, instead of the modified adjusted
rate per month or fraction thereof, if the BOE finds that it
is inequitable, and the following occur:
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a) The payment or prepayment of tax, fee, or surcharge was
made one business day after its due date;
b) The person was granted relief from all penalties that
applied to that payment or prepayment of tax, fee, or
surcharge; and,
c) The person files a request for an oral hearing before
the board.
2)Defines the terms "modified adjusted daily rate" and "modified
adjusted rate per month" by reference to the Revenue and
Taxation Code (R&TC) Section 6591.5.
3)Disallows the modification of interest computation for any
payment made pursuant to a deficiency determination, a
determination where no return has been filed, or a jeopardy
determination issued by the BOE.
4)Specifies that the modification of interest computation shall
only apply to the electronic payment or prepayment of tax,
fee, or surcharge.
5)Applies to payment or prepayment of tax, fee, or surcharge
imposed pursuant to the Sales and Use Tax (SUT) Law, Motor
Vehicle Fuel Tax Law, Use Fuel Tax Law, Cigarette and Tobacco
Products Tax Law, Alcoholic Beverage Tax Law, Energy Resources
Surcharge Law, Emergency Telephone Users Surcharge Act,
Hazardous Substances Tax Law, Integrated Waste Management Fee
Law, Oil Spill Response, Prevention, and Administration Fees
Law, Underground Storage Tank Maintenance Fee Law, Fee
Collection Procedures Law, Diesel Fuel Tax Law, and the law
governing the taxation of insurance companies.
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EXISTING LAW:
1)Requires a person who pays a tax, fee, or surcharge liability
after the statutory due date to pay a 10% penalty on the late
payment, plus six percent interest annually (one-half percent
monthly). Simple interest accrues on any late payment, from
the tax due date to the last day of the month in which payment
is made.
2)Authorizes the BOE to relieve a person of penalties if it
finds that the person's failure to make a timely payment is
due to reasonable cause and circumstances, and in the absence
of willful neglect.
3)Provides limited authority for the BOE to relive a person of
interest if it finds that the person's failure to make a
timely payment is due to a disaster, an unreasonable error or
delay by an employee of the BOE acting in his or her official
capacity, or the person's reasonable reliance on written
advice from the BOE.
4)Authorizes the BOE, whenever deemed necessary to ensure
voluntary compliance with due dates prescribed by law, to
establish a uniform policy for the acceptance of a remittance,
claim for credit or refund, or other document in cases where
the cancellation mark on the envelope shows a date after the
date specified by law.
5)Provides that this BOE policy shall not be construed as an
extension of the prescribed time limits for remitting
payments, filing claims for refund or credit, submitting
documents, returns, or other information.
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6)Requires specified taxpayers to remit amounts due via
electronic funds transfer (EFT). For these taxpayers, the law
requires that their EFT payments "settle into" the state's
account on the next banking day following the tax due date.
The law imposes a late payment penalty and interest, as
described above, when a taxpayer fails to initiate an EFT
payment in sufficient time so that the funds settle in the
state's account in accordance with the law.
7)Prescribes the following three methods for taxpayers to make
an EFT payment:
a) An automated clearinghouse (ACH) debit;
b) An ACH credit; or,
c) A Federal Reserve Wire Transfer (i.e., Fedwire).
8)Allowed the BOE, until January 1, 2016, under certain
circumstances, to impose a single day's interest (rather than
a month's) on a late electronic payment or prepayment.
FISCAL EFFECT: The BOE estimates annual state and local revenue
loss of $78,000.
COMMENTS:
1)Author's Statement : The author provided the following
statement in support of this bill:
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AB 2201 reinstates expired provisions to allow Members of
the State Board of Equalization to have flexibility to
address the inequity of applying an entire month's interest
(0.5%) to an electronic tax payment that is paid one day
late, due to reasonable circumstances. It is unfair to
charge a month's worth of interest on tax liabilities that
are just one day late often because they posted after the
financial system stops processing them on the due date.
This bill allows the BOE to continue a practice that
provides reasonable relief for taxpayers.
2)Arguments in Support : The sponsor of this bill, the BOE,
states: "AB 2201 could encourage taxpayers paying late to pay
more promptly. This will encourage those otherwise
law-abiding taxpayers who inadvertently missed the payment
deadline to pay the tax the next day to avoid the interest
charge for the entire month."
3)History of Late Payments : During a 47-year period ending in
1997, the BOE's administrative policy allowed a one-day grace
period when a taxpayer mailed a return or payment in an
envelope postmarked one day after the due date. According to
the BOE, this policy recognized the "potential complications
inherent in the U.S. Postal Service" and gave the taxpayer the
benefit of the doubt that the item in question was timely
mailed. Upon further review, however, the BOE's legal staff
determined that there was no legal basis for providing this
one-day grace period and eliminated the policy. According to
the BOE, the elimination of its one-day grace period caused
late billings to increase dramatically, and led to hundreds of
declarations requesting penalty and interest relief. As a
result, the BOE sponsored successful legislation in 1999
authorizing the BOE to establish a uniform policy for the
acceptance of a payment, claim for credit or refund, or other
document delivered to the BOE via the U.S. Postal Service or a
bona fide commercial delivery service where the envelope
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"shows a date after the date specified in law." Pursuant to
this statutory authority, the BOE adopted a regulatory policy
allowing it to accept payments or documents mailed or
delivered in an envelope postmarked one day after the due date
as timely.
Since this policy only applied to payments or documents that
are mailed or physically delivered to the BOE, any payments or
documents electronically submitted to the BOE one day after
the due date continued to be deemed late. In effect, penalty
and interest were not imposed on payments postmarked one day
late, but they were imposed on payments electronically
submitted to the BOE one day late. In order to address this
perceived inequity, the BOE sponsored successful legislation
in 2010 that allowed the BOE, in instances of an electronic
payment made one day late, to impose one-day's interest
instead of one-month's interest otherwise due if the person
has already been granted relief from relevant penalties and
the BOE finds in a public meeting that it would be inequitable
to impose the full interest. The provisions of this
legislation expired on January 1, 2016; as a result,
one-month's interest is once again imposed on any late
electronic payment even if only one day late.
4)Encouraging More Prompt Payments : Since this bill maintains
current penalty levels on late payments - the most severe
delinquency charge - this bill is unlikely to encourage
taxpayers to delay the remittance of timely payments.
However, a taxpayer who inadvertently missed the payment
deadline and will otherwise be charged a full month's interest
may have an incentive to quickly remit the payment the next
day rather than waiting until later in the month, if interest
will be prorated.
5)Navigating Electronic Transmission Deadlines : Existing law
requires a taxpayer who has an average monthly SUT liability
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of at least $10,000 and special taxes accounts that have
average monthly tax payments of at least $20,000 to remit
amounts due electronically via EFT. According to the BOE, the
standards for making a timely payment differ depending on the
EFT method used. For example, ACH debit payments (the most
commonly used EFT payment method in which the state, through
its designated depository bank, originates a transaction
debiting the taxpayer's bank account and crediting the state's
bank account for the amount of tax) made later than 3:00 p.m.
Pacific Standard Time, or that have the next banking day as
the debit date, are considered late and delinquency charges
apply. Moreover, each financial institution handles ACH
payments differently. Thus, to be timely and avoid penalties
and interest, taxpayers must initiate payment in accordance
with a financial institution's processes to ensure that the
deposit into the state's account occurs on the next banking
day following the due date.
Other than EFT payments, most electronically transmitted
payments that taxpayers initiate by midnight on the tax due
date are regarded as timely even though the funds may be
deposited into the state's account more than one day after the
due date. The payment initiation date determines the
payment's timeliness, just as the postmark date determines a
mailed payment's timeliness. Rather than maintaining a
separate policy for timeliness of EFT payments dependent on
when the money is deposited into the state's bank account, the
Committee may wish to consider whether the payment initiation
date should be a sufficient time marker across all payment
methods.
6)Who Benefits ? Unlike the BOE's one-day grace period for
postmarked payments that applies uniformly to all taxpayers,
the interest relief proposed by this bill is not available to
a person unless, in addition to all other requirements, the
BOE has already relieved the person from all penalties that
applied to the payment of tax, fee or surcharge. Under
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current law, the BOE may only relieve a person from penalties
if it finds that the person's failure to make a payment in a
timely manner was due to reasonable cause and circumstances
beyond the person's control, and occurred notwithstanding
ordinary care and the absence of willful neglect. It is
appropriate to have a more stringent late policy for
electronic payments than mailed payments because the taxpayer
has greater control over the electronic payment submission
process than one reliant on the U.S. Postal Service or other
delivery service - the taxpayer cannot blame a third party for
the delay.
According to the BOE, there were 122 successful interest
relief claims filed over the past three years. These claims,
filed pursuant to the process this bill would reinstate,
resulted in interest relief ranging from $14.59 to $17,620.85.
7)Compounded Interest : Unlike the BOE, both the Franchise Tax
Board (FTB) and Employment Development Department (EDD) charge
interest on a daily basis for late tax payments, compounded
daily, meaning that interest will accrue more quickly the
longer a tax remains unpaid and will cease to be imposed once
the tax is paid. If the tax payment is one day late, it will
be charged interest for one day; if the tax payment is two
days late, it will be charged interest for two days. Under
this bill, however, any payment to the BOE that is two days
late will be charged the full month's interest, rather than a
daily proration of that amount. If this bill is aimed at
addressing an inequity regarding how interest is imposed,
consistency may require treating all taxpayers who pay late
due to reasonable cause or circumstance beyond their control
equally. The Committee may wish to consider whether requiring
the BOE to calculate interest on a daily, instead of monthly,
basis until the payment is received would be a more equitable
practice.
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8)Sunset Date : When the Legislature first authorized the BOE to
impose one-day's interest on a late electronic payment or
prepayment if it deemed imposing one-month's interest to be
inequitable, the statute contained a five-year sunset date to
provide the Legislature with an opportunity to reevaluate the
program. The BOE believes the program was effective and is
sponsoring this bill to permanently reinstate the expired
provisions of law.
9)Related Legislation : AB 358 (Grove) would have expanded the
BOE's authority to establish a uniform policy for the
acceptance of specified remittances and documents after the
due date to include delivery through electronic transmission.
AB 358 was held by this Committee.
10)Prior Legislation : SB 1028 (Correa), Chapter 316, Statutes
of 2010, allowed the BOE, until January 1, 2016, under certain
circumstances, to impose one-day's (rather than one-month's)
interest on a late electronic payment or prepayment.
REGISTERED SUPPORT / OPPOSITION:
Support
Board of Equalization (Sponsor)
California Taxpayers Association
Fiona Ma, Chair, Board of Equalization
AB 2201
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Opposition
None on file
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098