BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 495 (Stone) - Income taxes: withholding: real property
sales
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|Version: April 22, 2015 |Policy Vote: GOV. & F. 7 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 4, 2015 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 495 would end the withholding requirement on sales
of real estate by California residents and entities if the
taxpayer elects to pay the tax when filing a return.
Fiscal
Impact: The Franchise Tax Board (FTB) indicates that the bill
would result in a revenue loss of $490 million in 2015-16, $47
million in 2016-17, and $37 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 the subsequent
year's tax payments. FTB anticipates the bill would have a
negligible impact on its administration costs.
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Background: Current state law requires the buyer to withhold on transfers
of real estate, except in specified instances. 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 the withholding
amount). However, the withholding requirement was extended to
state residents beginning in 2001-02; the associated revenue
acceleration was used to address that fiscal year's budget
shortfall.
Withholding is due on the 20th day of the month following the
month escrow closes. Currently, buyers must withhold 3 1/3
percent 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.
Proposed Law:
This bill would provide that withholding is not required for
sales of property by California residents and entities beginning
in 2016, so long as the seller makes an election to pay any tax
due when filing their annual return.
Staff
Comments: 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. As noted above, 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 transaction has just occurred and cash is readily
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available.
FTB's revenue estimate assumes that roughly 20 percent of real
estate transactions are conducted by nonresidents. The large
first-year revenue impact reflects the timing change from taxes
being paid by residents via withholding to those monies being
remitted the subsequent April when final returns are due.
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