BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 495 |Hearing |4/15/15 |
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|Author: |Stone |Tax Levy: |No |
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|Version: |2/26/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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INCOME TAXES: WITHHOLDING: REAL PROPERTY SALES
Ends withholding requirement on sales of real estate if the
taxpayer elects to pay the tax when filing a return.
Background and Existing Law
State law requires employers who pay employees
California-sourced income to withhold expected taxes. State law
also requires withholding for other items of income, like gifts,
prizes, dividends, interest, and capital gains, among others.
Withholding agents deposit funds with the Employment Development
Department for wage and salary amounts withheld from employees,
or the Franchise Tax Board (FTB) for other items of income.
Taxpayers reconcile withheld amounts with the actual amount of
tax due each year when filing a return. The general penalty for
failing to withhold is the greater of $500, or 10% of the amount
withheld, but may be abated upon showing reasonable cause.
California requires the buyer to withhold on transfers of real
estate except when the real estate was the seller's principal
place of residence, part of a like-kind exchange, or an
involuntary conversion because these transactions generally
don't result in taxable income, in addition to other exemptions
listed below. In the past, state law only required nonresident
taxpayers who sold California real estate to withhold, unless an
exemption applied, or FTB authorized a waiver or reduction in
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the withholding amount. However, the Legislature applied this
requirement to residents during the 2001-02 Budget Crisis (AB
2065, Oropeza, 2002). Unlike most other items, federal law does
not require withholding on real estate sales for federal tax
purposes. Withholding is due on the 20th day of the month
following the month escrow closes.
Additional exemptions include, among others:
Sales of properties with prices under $100,000,
Sales in which the real estate escrow person doesn't
provide written notification of the withholding
requirement,
Sales pursuant to a mortgage deed of trust foreclosure,
deed in-lieu of foreclosure, or a trustee sale need not
comply with the requirement,
Sales by corporations, or entities like partnerships
electing to be considered corporations for tax purposes,
that are taxable in California, or
Sales that result in a loss or no taxable gain for
California purposes.
Currently, buyers must withhold 3 1/3% of the total sales price;
however, if the seller makes an election, the buyer instead
withholds an amount certified under penalty that is not less
than the expected gain required under the appropriate rate
imposed by California's Personal Income Tax or Corporation Tax
(AB 2962, Benoit, 2006). FTB must provide electronic means to
help the seller calculate this amount.
Because of the burden placed on sellers of real estate, who do
not currently have the option to pay any applicable tax when
filing their return, the author wants to repeal the withholding
requirement commencing with the 2016 taxable year.
Proposed Law
Senate Bill 495 provides that withholding is not required for
sales of property in taxable years, beginning in the 2016
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taxable year, so long as the seller makes an election to pay any
tax due when filing their annual return. FTB must prescribe a
written form for the election, and adopt any requirements
necessary to efficiently administer the bill.
State Revenue Impact
According to FTB, SB 495 results in revenue losses of $500
million in 2015-16, $50 million in 2016-17, and $39 million in
2017-18; however, this revenue effect is mostly shifting the
timing of payments, as withholdings not made in one year will
show up in tax payments the next. FTB identified a small,
unspecified adjustment due to taxpayer compliance and subsequent
collections actions.
Comments
1. Purpose of the bill . According to the author, "SB 495, which
would allow a property seller the option to pay the Capital
Gains Tax on the sale of the property to the FTB once escrow
closes or when that person files their State Income Taxes. This
bill does not eliminate or change the tax in any way. The bill
only gives the seller another option to pay the amount owed.
The seller would have to file a form with the FTB electing to
pay the tax with the filing of their State Income Taxes."
2. Burdens . The real estate withholding requirement originally
applied solely to individuals and corporations without any other
presence in California to improve compliance, as these entities
often failed to ultimately pay the tax due after the sale.
Additionally, collecting outstanding taxes from out-of-state
entities is more difficult and costly for tax enforcement
agencies. When the Legislature extended the withholding
requirement to California residents, it did so for both
compliance reasons and to accelerate cash flow due to a budget
crisis. While the real estate withholding requirement is
burdensome, some sellers of real estate end up not having the
funds to pay the tax a year following the sale. The withholding
requirement ensures that the tax is paid by compelling payment
when the cash is on the barrel. The Committee may wish to
consider whether alleviating the burden is worth the potential
loss of compliance.
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3. Here and there . The Legislature extended the real estate
withholding requirement to California residents in 2002, but it
applied to nonresidents and corporations without other
California presence that sold real estate long before that.
Despite the distinction, SB 495 eliminates the requirement for
both sets of real estate sellers, which would create a
significant precedent because nonresidents are almost always
required to withhhold. The Committee could instead amend SB 495
to eliminate the requirement on the California residents and
entities, but continue to apply it to nonresidents.
4. Even Flow . The real estate withholding requirements were
one of many cash flow acceleration measures the Legislature
enacted in the last decade amid State Budget crises, often
creating new burdens or compliance problems for taxpayers. To
the extent that the state's fiscal condition has improved
sufficiently to eliminate the real estate withholding
requirement, the Legislature could review other measures enacted
during that time, such as accelerated estimated tax payments,
and the Large Corporate Understatement Penalty, among others.
Support and
Opposition (4/9/15)
Support : California Association of Realtors.
Opposition : Unknown.
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