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