BILL ANALYSIS Ó
SB 640
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Date of Hearing: July 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
SB
640 (Beall) - As Amended June 2, 2015
Majority vote. Fiscal committee.
SENATE VOTE: 40-0
SUBJECT: Sales and use taxes: claim for refund: customer
refunds.
SUMMARY: Authorizes a person (i.e., retailer) to make an
irrevocable election to assign the right to file a claim for
refund of excess tax reimbursement in the amount of $1,000 or
greater to a single customer so that the Board of Equalization
(BOE) may make a direct refund to the customer. Specifically,
this bill:
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1)Allows a retailer that paid the tax to make an irrevocable
election to assign to the customer the right to file a claim
for refund and receive the amount refunded if all of the
following conditions are met:
a) The entire amount represents excess tax reimbursement
that is required to be paid by the retailer to a single
customer;
b) The amount to be refunded is $1,000 or more;
c) The irrevocable election to assign to the customer the
right to file a claim for refund and receive the amount
refunded is evidenced by a statement, signed by the
retailer and the customer that authorizes that customer to
file a claim for refund, and receive the amount refunded;
and,
d) The signed statement is submitted to the BOE in
conjunction with the claim for refund.
2)Requires the retailer that paid the tax and collected the
excess tax reimbursement to make the records available for
inspection by the BOE to verify the refund, and no refund
shall be payable until the BOE verifies by audit or other
means that the amounts are properly due for refund.
3)Provides that the excess amount collected or paid shall be
credited on amounts due and payable from the retailer that
paid the tax or for amounts for which a notice of
determination has been issued to the retailer that paid the
tax, and amounts due and payable from the customer from which
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the excess tax reimbursement was collected. The balance shall
be refunded to the customer that paid the excess tax
reimbursement.
4)Requires that the amount subject to refunded that is credited
to the retailer that paid the tax and not refunded to the
customer that paid the excess tax reimbursement be paid by the
retailer directly to the customer. If the retailer does not
make that payment, the credit that was on the amount due from
the retailer shall be reversed.
5)Defines a "person that paid the tax" as a single "person" as
defined under Revenue and Taxation Code (R&TC) Section 6005.
6)Defines a "customer" as a single "person" as defined by R&TC
Section 6005.
EXISTING LAW:
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (TPP), absent a specific exemption.
The tax is based upon the retailer's gross receipts from TPP
sales in California.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must generally be
remitted to the BOE.
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3)Provides that any amount collected or paid in excess of what
is due under the Sales and Use Tax (SUT) Law must be credited
by the BOE against any other amounts due from the person from
whom the excess amount was collected or by whom it was paid,
and the balance refunded, as specified.
4)Provides that, when an amount represented to a customer as SUT
reimbursement is computed upon an amount that is not taxable
or is in excess of the taxable amount and is actually paid by
the customer, the amount paid must be returned to the customer
upon notification by the BOE or by the customer that this
excess has been ascertained.
5)Provides that if the BOE determines that the retailer has paid
any amount of sales tax more than once or has erroneously or
illegally collected or computed the sales tax, the BOE must
note the amount in its records, credit the amount to the
retailer's other BOE liabilities, and refund the balance to
the retailer, or to the retailer's successor, administrator,
or executor. To obtain a sales tax refund, the retailer must
submit a claim for refund to the BOE. The BOE is required to
refund any overpayment of use tax directly to the purchaser,
even though the retailer collected and remitted the tax. In
sum, while the statute allows the BOE to refund excess use tax
directly to the purchaser, the BOE may issue a refund for
excess sales tax reimbursement only to the retailer.
6)Provides that the BOE may refund to the retailer excess sales
tax reimbursement upon submission of sufficient evidence that
the excess tax reimbursement has been or will be returned to
the customer. If a retailer has not refunded excess tax
reimbursement to the customer, but would rather do so than
incur an obligation to the state, the retailer must: (a)
inform the customer in writing that excess tax reimbursement
was collected and that the excess amount will be refunded or
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credited to the customer; and (b) obtain and retain for
verification by the BOE an acknowledgement from the customer
that the customer has received notice of the amount of
indebtedness of the retailer to the customer
FISCAL EFFECT: According to the BOE, "[a]ctual revenue impact
is indeterminable. However, to the extent that additional claims
involving excess sales tax reimbursement would be filed, this
could result in a significant state and local revenue loss."
COMMENTS:
1)Author's Statement : The author has provided the following
statement:
SB 640 would streamline the process by which a customer
files for and receives a refund of excess sales tax from
the [BOE]. Currently, the [R&TC] requires the BOE to
refund any overpayment of use tax directly to the
purchaser, even though the retailer collected and remitted
the tax. This process is different for excess sales tax
reimbursement. Current statute requires the BOE to refund
excess sales tax only to the retailer that collected and
reported the tax. This creates a situation where the
retailer serves as the middleman between customers and the
BOE. Unfortunately, customers who are rightfully owed a
sales tax refund are not able to access it if the retailer
is not willing or able to file a claim for the refund on
their behalf. Additionally, there have been instances
where customers were not given the refunds once the
retailer received them from the BOE. SB 640 would allow,
under limited circumstances, a retailer to assign to a
customer the right to access their sales tax refund
directly from the BOE. This would shorten the refund
process by approximately two to three months and eliminate
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processing by the retailer as the middleman. This bill
will enable customers to receive refunds in a more
expeditious fashion and ease the workload of certain
retailers who will no longer be required to issue refund
checks themselves, nor file a claim for refund on the
customer's behalf. SB 640 is a common sense measure that
increases government efficiency and gets California
business the money they are owed in a timely manner
2)Arguments in Support : According to the California Taxpayer's
Association, "[u]nder existing law, the [BOE] may only issue
refunds to the retailer, and the retailer is then required to
return the excess tax reimbursement to the customer
separately. Allowing a direct refund to the customer would
reduce the time period for processing and refunding payment by
two to three months because the retailer would not have to do
additional processing of the refund claims." Additionally,
the California Taxpayer's Association states that "[b]ecause
retailers will not have to issue refund checks, answer
customer calls and e-mails, or maintain as many records of
their transactions, they will be able to spend more time
focusing on more important aspects of running their business
efficiently and effectively."
3)Third Time a Charm :
a) AB 1412 (Assembly Committee on Revenue and Taxation),
Chapter 546, Statutes of 2013, authorizes a retailer to
make an irrevocable election to assign the right to receive
a refund payment of excess tax reimbursement in the amount
of $50,000 or more to a single customer. AB 1412 was
amended to prohibit contingency fees that are charged or
paid in connection with the election, assignment, or claim
for refund relating to an irrevocable election to assign
the right to receive a specified refund.
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b) AB 43 (Bocanegra), of the 2013-14 Legislative Session,
which was almost identical to AB 1412, permitted a retailer
to assign the right to file a claim for excess tax
reimbursement in the amount of $50,000 or more to the
customer, and not simply the right to receive refund
payment. These amendments increased BOE's administrative
costs considerably and AB 43 was held in the Senate
Appropriations Committee.
4)Purpose of the Bill : According to the author, "[v]endor
assignment would shorten the refund process by approximately
two to three months and eliminate processing by the retailer
as the middleman. This bill will enable customers to receive
refunds in a more expeditious fashion and ease the workload of
certain retailers who will no longer be required to issue
refund checks themselves, nor file a claim for refund on the
customer's behalf." Additionally, allowing retailers to
assign the right to file a claim for refund to the customer
addresses instances where a customer was not given a refund
from the retailer even after the retailer received the refund
from the BOE.
5)Who are We Helping ? The author's office has provided a total
of one example where the provisions of this bill would aid a
customer in obtaining a refund. In their example, The Gap,
Inc., a clothing store, was seeking a refund of taxes paid
from a photographer. The photographer filed a claim for
refund from the BOE but instead of forwarding the refund to
the Gap, the photographer kept the amount, which was more than
$700,000. Although it is unclear as to why the photographer
failed to refund the sales tax to the Gap, fraud or a dispute
between the two parties is believed to have played a role.
Unfortunately, this bill would have done little to aid the Gap
in retrieving its refund because the right to file a claim
must first be given by the photographer. Assuming fraud or a
dispute existed between the existed between the two parties,
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it is unlikely that such an assignment would have occurred.
6)Retailer Participation : The author states that the bill would
expedite the refund process by eliminating the middleman
(i.e., retailer). It appears, however, that access to the
retailer's records is required to verify payment. According
to the BOE's analysis of this bill, before providing a refund,
the BOE would have to first request documents from the
customer to determine that the sales tax reimbursement was
paid and then verify that the tax was paid to the BOE. In
order to satisfy the second requirement, BOE staff would still
need to contact the retailer to obtain the necessary
documentation, and would need to review of the retailers
records to ensure that the credit for the excess tax
reimbursement was not provided by the retailer to the customer
on a subsequent transaction. In some cases, this could
involve setting up appointments to visit the retailer's place
of business.
7)Expedited Process : In addition to removing the retailer from
the refund process, the author's office states that this bill
would shorten the time of the refund by two to three months.
Again, the BOE's analysis presents a number of issues that may
substantially lengthen the time needed to issue a refund. As
explained above, BOE staff is still required to obtain records
from the retailer, which may include large volumes of records.
The examination of large volumes of records would likely have
to take place at the retailer's place of business, which could
further delay the refund process. Additionally, not all
customers hold a permit with the BOE and, thus, may not have
the required documentation to verify a refund. Finally, under
existing law, a retailer may claim a refund for excess taxes
that relate to multiple customers. In these situations, BOE
staff conducts a single audit of the retailer's records and
refunds a single amount for refunds claims relating to every
customer. This bill may result in BOE staff conducting
separate examinations of the retailer's records for each
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individual customer, barring the BOE from addressing several
issues at one time.
8)Taxability of Coffee : In a 4-3 decision, the California
Supreme Court held that the reach of state consumer protection
laws does not extend to sales tax disputes. Specifically, the
Court found that customers have no recourse to challenge a
retailer's sales tax determination because only the retailer,
who is the taxpayer, can seek an official determination of
whether sales tax is actually owed. In Loeffler v. Target,
Target had charged its customers sales tax reimbursement on
all sales of coffee even though, arguably, not all sales were
subject to tax. (58 Cal. 4th 1081 (2014).) Specifically,
Target did not seek a determination from the BOE on whether
"to go" coffee was subject to sales tax. Instead, Target paid
the BOE the sales tax on all hot coffee sold in its stores,
and then charged all of its customers a sales tax
reimbursement. The Court stated that California's tax laws
provide for exclusive remedy to address tax disputes.
Specifically, once a retailer, who is considered the taxpayer
because the sales tax is imposed on the retailer and not the
purchaser, has remitted a customer's sales tax reimbursement
to the BOE, the retailer is the only individual that can claim
a refund. Existing law does not allow a customer the right to
dispute the application of sales tax.
At first glance, it appears that this bill might provide some
recourse to customers who have unknowingly been charged excess
sales tax reimbursement. However, two things specifically bar
most customers, and those in the Target case, from seeking
relief: a) excess sales tax must exceed $1,000, and b) the
entire claim amount must represent excess sales tax
reimbursement that must be paid by the retailer to a single
customer. These limitations appear to specifically exclude
everyday customers.
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The author's office states that the limitations are set in
place to reduce administrative costs. Unfortunately, the
requirement that the excess tax reimbursement be paid by the
retailer to a single customer may have the opposite effect.
Existing law allows a retailer to claim a refund for excess
taxes that relate to multiple customers, which allows BOE
staff to conduct a single examination of records instead of
conducting separate examinations for each individual claim.
This specifically prevents the BOE from resolving issues like
those found in Loeffler v. Target where the same legal issues
applied to thousands of customers.
9)Vendor Assignment : The stated benefits of this bill hinge on
a retailer's willingness to assign the right to a refund to a
customer. However, a retailer may refuse to assign the right
to a customer for a number of reasons. The retailer may be in
contractual disputes with the customer, the retailer may be
worried that an examination may interrupt business operations,
and the retailer may not want to be found liable for
inadvertently miscalculating a sales tax. Additionally, this
bill provides no remedy to a customer that is unable obtain an
assignment other that what existing law already provides. As
such, the Committee may wish to allow a customer to move
forward with the claim for refund if the retailer has refused
to assign the right to the customer.
10)The BOE has outlined the following issues in their analysis:
a) Statute of Limitations : First, the customer may not
realize that a purchase transaction is outside the statute
of limitations for issuing a refund (generally three years
from the due date of the return for which the overpayment
was made). In the case where a customer has been assigned
the right to claim a refund of $1,000 or more from more
than one vendor, the auditor would issue a separate audit
report or field investigation report for each retailer.
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Separate reporting is necessary because BOE must amend each
retailer's return or returns.
b) Appeals Rights : When a retailer assigns its right to
file a claim for refund to its customer, the customer will
have appeal rights. The customer must file a separate
appeal for each vendor/retailer from which it receives an
assignment. Under current law, if the BOE denies a
retailer's claim for refund (which can include multiple
customers), the retailer files one appeal encompassing the
multiple transactions.
c) Timeliness : BOE audit staff anticipates issues related
to the calculation of the $1,000 threshold. For example, if
a large farmer makes five purchases of farm equipment
paying $200 in tax on each purchase over a two-year period,
and one purchase is outside the statute of limitations,
then the farmer will not meet the $1,000 threshold.
d) Record Keeping and Access : Some customers may not hold a
permit with the BOE. If the customer does not have the
documentation for BOE to validate and approve a refund, the
BOE must inspect the retailer's records. Thus, the
retailer still must make all the necessary records
available for audit as needed, as these records will not be
in the customer's possession. This could result in
significant delays to schedule the audit or investigation.
(National retailers often are audited by many different
states. Scheduling audit appointments may take months to
coordinate with other audit requests of that retailer.)
e) Workload Increase . If a customer receives an assignment
from multiple vendors and makes refund claims for each,
further complications may occur. The process could
dramatically increase BOE audit staff workload. Under
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current law, if a single retailer is entitled to a refund
relating to multiple customers who paid $1,000 or more in
tax reimbursement, an auditor conducts a single examination
of the retailer's records, and then makes one payment to
the retailer. Under this bill, staff would conduct a
separate examination of each customer, as well as an
examination of the single retailer's records.
f) Duplication . A retailer assigning its right to file a
claim for refund to the customer creates the possibility of
duplicate tax refunds. A database to track refunds would
be required.
REGISTERED SUPPORT / OPPOSITION:
Support
Ryan (Sponsor)
California Chamber of Commerce
California Manufacturers & Technology Association
California Retailers Association
California Taxpayers Association
TechAmerica
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Opposition
None on File
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098