BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2201


                                                                    Page  1





          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:










                                                                    AB 2201


                                                                    Page  2





             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.








                                                                    AB 2201


                                                                    Page  3







          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.








                                                                    AB 2201


                                                                    Page  4







          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:








                                                                    AB 2201


                                                                    Page  5






               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  








                                                                    AB 2201


                                                                    Page  6





            "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  








                                                                    AB 2201


                                                                    Page  7





            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  








                                                                    AB 2201


                                                                    Page  8





            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.  









                                                                    AB 2201


                                                                    Page  9






          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


                                                                    Page  10









          Opposition


          None on file




          Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098