BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 2201 |Hearing |6/8/16 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Brough |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |2/18/16 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- State Board of Equalization: administration: interest Reenacts the Board of Equalization's authority to calculate interest on a daily, not monthly, basis for tax and fee payments made one business day late under specified circumstances. Background The California Constitution of 1879 created the five-member Board of Equalization (BOE), composed of four members elected by district and the State Controller, to equalize rates and assessment practices among counties. In addition to its property tax duties, BOE also administers the Sales and Use Tax, locally-imposed transactions and use taxes, several excise taxes, and more than 30 other fee programs. When individuals who must pay taxes or fees to BOE do so after the date they are due, state law imposes penalties, generally 10 percent of the tax, and plus monthly, simple interest from the date the tax was due to the date it was paid. BOE determines the interest rate on underpayments by adding three percent to the rate charged by the Internal Revenue Service, which it reevaluates every January and July the rates are evaluated, currently six percent, or one-half of one percent monthly. Any interest rate change takes effect six months later and remains in effect for at least six months. AB 2201 (Brough) 2/18/16 Page 2 of ? Historically, BOE generally calculates interest on a per-month basis, so one month's interest is charged for each month or fraction of a month that a payment is late. For example, if a payment is three days late, a full month's interest is due, or two month's interest is due for a payment one month and three days late. Interest accumulates from the day after the date on which the amount of tax first became due in most cases. While BOE can grant penalty relief when they find 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, they can only waive interest due to an error or unreasonable delay caused by one of its employees. In 2010, the Legislature allowed BOE to instead charge interest at the modified adjusted daily rate when (SB 1028, Correa): BOE, meeting as a public body, taking into account all facts and circumstances, determines that it is inequitable to compute interest on a monthly basis, The payment or prepayment was one business day late, BOE granted relief from all penalties that applied to that payment, and The person files a request for an oral hearing before BOE. SB 1028 applied to the Sales and Use Tax, Motor Vehicle Fuel Tax, Use Fuel Tax, the Gross Premiums Tax, Cigarette and Tobacco Products Tax, Alcoholic Beverages Tax, Energy Resources Surcharge, Emergency Telephone Users Surcharge, Hazardous Substances Tax, Prepaid Mobile Telephony Services Surcharge, Integrated Waste Management Fee, Oil Spill Fee, Underground Storage Tank Fee, Diesel Fuel Tax, as well as the statute used to collect many other fees, the Fee Procedures Collections Law. However, SB 1028 sunset on January 1, 2016, so today, BOE must charge a full month's interest for payments and prepayments made one day after the due date. BOE wants to reenact this authority. Proposed Law AB 2201 (Brough) 2/18/16 Page 3 of ? Assembly Bill 2201 reenacts the BOE's authority to compute interest at the modified adjusted daily rate for payments made one day after the due date under the Sales and Use Tax, Motor Vehicle Fuel Tax, Use Fuel Tax, the Gross Premiums Tax, Cigarette Tax, Alcoholic Beverages Tax, Energy Resources Surcharge, Emergency Telephone Users Surcharge, Prepaid Mobile Telephony Services Surcharge, Integrated Waste Management Fee, Underground Storage Tank Fee, Fee Procedures Collections Law, and Diesel Fuel Tax. To do so, BOE must meet as a public body, and taking into account all facts and circumstances, determine that it is inequitable to compute interest on a monthly basis. Additionally, BOE must have granted relief from all penalties that applied to that payment, and the person must have filed a request for an oral hearing before BOE for the measure's provisions to apply. The bill does not apply to payments made pursuant to deficiency determinations, determination where no return is filed, or a jeopardy determination. AB 2201 also defines several terms, and sets forth a method to calculate daily interest. State Revenue Impact BOE estimates state and local revenue losses of $78,000 annually. Comments 1. Purpose of the bill . According to the author, "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 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. Grace and forgiveness . For many years, BOE administrative policy allowed a one-day grace period when a payment was postmarked one day late. However, during a policy review, BOE AB 2201 (Brough) 2/18/16 Page 4 of ? counsel opined that no legal authority supported the grace period, so BOE ended it, until the Legislature enacted AB 1638 (Assembly Committee on Revenue and Taxation, 1999). That bill allows BOE to establish a uniform policy to accept payments as timely when the payment or document's envelope or delivery document's stamped cancellation mark shows a date after the statutory due date, which uniform BOE policy implements to allow acceptance of payments postmarked one day after the due date. However, because this authority applied only to payments made by mail or commercial delivery service, late electronic payments are not eligible for the one day grace period, which can create hardships due to mandatory electronic payment requirements imposed by state law on taxpayers with average monthly sale and use tax liability of $10,000 or more (or special tax liability of $20,000 or more). AB 2201 would reenact SB 1028's extension of the grace period to electronic payments made to BOE, similar to practices used by the Franchise Tax Board and Employment Development Department. 3. No sunset . While SB 1028 contained a five-year sunset, AB 2201 does not contain one. BOE states that it granted 122 interest relief claims in the past three years, ranging from $14.59 to $17,620.85. The Committee may wish to consider whether AB 2201 should contain a similar sunset, or whether this authority is sufficiently successful to merit its exclusion. Assembly Actions Assembly Revenue and Taxation 9-0 Assembly Appropriations 16-0 Assembly Floor 76-0 Support and Opposition (6/2/16) Support : BOE Member Fiona Ma, State Board of Equalization, California Chamber of Commerce, California Taxpayers Association. Opposition : None received. AB 2201 (Brough) 2/18/16 Page 5 of ? -- END --