BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 193|
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THIRD READING
Bill No: AB 193
Author: Assembly Budget Committee
Amended: 6/24/09 in Senate
Vote: 27 Urgency
PRIOR VOTES NOT RELEVANT
SUBJECT : Budget Act of 2009: Tax
Enforcement/Administration
SOURCE : Author
DIGEST : Senate Floor Amendments of 6/26/09 delete the
prior version of the bill expressing the intent of the
Legislature to enact statutory revisions relating to the
2009 Budget Act. This bill now provides the necessary
statutory changes in the area of tax enforcement and tax
administration in order to amend the 2009 Budget Act, as
specified below.
ANALYSIS : This bill makes various amendments related to
tax enforcement and tax administration:
1.Implements Governor's May Revise proposals which:
A. Increase tax withholding schedules by 10 percent.
Currently, many taxpayers owe tax in excess of that
withheld by their employer, and for these taxpayers,
the increase would result in withholding more closely
matching their final tax liabilities. The final tax
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owed by the taxpayer is unchanged, and, as under
existing law, taxpayers may modify their withholding
to reflect their individual circumstances if they
wish.
B. Require individual and corporate taxpayers to
accelerate estimated payments by remitting 30 percent
of their estimated annual income or corporate tax
liabilities in April, 40 percent in June (compared to
existing law requirements of 30 percent each in April
and June).
2.Imposes withholding on independent contractors beginning
January 1, 2010. Businesses and government entities
would be required to withhold three percent of payments
for goods or services to independent contractors that
currently require the filing of a federal 1099-MISC. The
amount withheld would be credited against the state
income tax liability of the contractor, as with wage
withholding.
3.Creates a financial institution record match system
(FIRM) similar to an existing program for child support
collections. Financial institutions would be required to
perform quarterly matches of their account records with a
file of delinquent taxpayers provided by the Franchise
Tax Board in order to identify assets that can be applied
to pay the delinquent tax debts. It also authorizes FTB
to institute civil proceedings to enforce specified
provisions of this measure.
4.Requires out-of-state sellers, such as Amazon, that pay
commissions to California firms or residents for sales
referrals (often through a website link) to collect use
tax on their sales to California residents. Existing law
requires Californians to self-report and pay the use tax
on these purchases, but compliance is low.
5.Generally conforms California to federal income tax
backup-withholding rules related to various non-wage
payments. Specifically, the measure requires a business
to withhold seven percent of reportable payment of
interest, dividends, compensation for services, and other
forms of income if the IRS determines a condition for
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withholding exists (such as significant underreporting of
non-wage payments by the recipient on tax returns).
6.Requires non-retailing businesses with receipts of more
than $100,000 to register with the Board of Equalization
and file annual use tax returns by April 15. The annual
use tax return and payment applies to purchases on which
sales tax was not collected (generally from out-of-state
sellers), excluding vehicles, vessels, and aircraft
(which are covered through separate registration
requirements).
7.Strengthens laws related to abusive tax shelters by: (a)
providing a single definition for such transactions for
purposes of the application of several statutes aimed at
and curtailing such activity and revising penalty
provisions; (b) adopting federal categories for
reportable "transactions of interest"; and (c) and
revising penalty provisions.
8.Permits the state to suspend state occupational and
professional licenses because of unpaid income tax
liabilities. Allows taxpayer to avoid suspension by
entering into an installment agreement with FTB.
Comments
1. Increased withholding . Existing law requires that
employers withhold a portion of employees' wages and
remit them to the Employment Development Department.
The amounts withheld are based on tables provided by
the Franchise Tax Board to EDD. By law, these tables
are designed so that withholding of wage payments
cover the taxpayer's full liability arising from the
wage payments. However, in many instances, taxpayers
with significant income from non-wage sources, or with
wage income from a spouse, owe significant taxes on
their final returns. This measure raises the required
amount of withholding by 10 percent, and makes
conforming changes for payments related to stock
options and bonuses. Taxpayers are permitted to modify
their withholding if they wish.
2. Accelerated estimated taxes . Individuals with
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non-wage income and corporations are required to remit
quarterly estimated tax payments toward their annual
liabilities. Through last year, the majority of
taxpayers, those using the regular installment method,
were required to remit four quarterly payments, each
worth 25 percent of their estimated full-year tax
liability. SBX1 28 (Senate Budget Committee), Chapter
1, First Extraordinary Session/2008, accelerated the
payment schedule beginning January 1, 2009, so that
the April and June payments are now equal to 30
percent of estimated liabilities, and September and
December are each equal to 20 percent of estimated
liabilities. This measure further accelerates the
schedules, requiring payments equal to 30 percent of
estimated liabilities in April, 40 percent in June,
zero in September, and 30 percent in December. It
also makes conforming changes for taxpayers using the
annualized income installment method and those making
payments beginning after the first quarter of the
year.
3. Withholding of Independent Contractors . Under
existing law, employers are required to withhold a
portion of wages paid to their employees and remit the
withheld amounts to EDD, which administers the
reporting, collection, and enforcement of specified
state taxes subject to withholding. This withholding
requirement does not apply to payments made to
independent contractors. However, businesses making
payments to a contractor in excess of $600 per year
are required to file Form 1099-MISC with the Internal
Revenue Service (IRS). This bill requires businesses
and governmental entities to withhold three percent of
payments they make to independent contractors
exceeding $600 each year. In this regard, the
withholding requirement would apply only to businesses
that are currently required to file a federal Form
1099-MISC, thus somewhat mitigating the administrative
burdens imposed on businesses by this measure.
In addition to providing a one-time increase in
revenues to help balance the budget in the fiscal year
(FY) 2009-10, mandatory withholding on independent
contractors helps address the "tax gap," the
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difference between taxes owed under the laws of the
state and the taxes actually collected. According to
FTB, the measure increases payments by about $300
million per year over time, due to increased
compliance.
4. Financial institution record match system . The FIRM
program require financial institutions to match a list
for delinquent tax debtors against its customer
records, and provide to FTB, on a quarterly basis, the
name, record address, social security number or
taxpayer identification number for each delinquent tax
debtor in its customer records. The measure requires
FTB to reimburse a financial institution for its
actual costs incurred to implement FIRM, up to $2,500
for startup costs and no more than $250 per calendar
quarter thereafter. The provisions in this measure
are similar to SB 402 (Wolk).
5. Expanded sales tax nexus . A contentious issue in
sales and use tax administration relates to the extent
to which a state may compel an out-of-state retailer
to collect use taxes from its in-state customers. The
issue is of considerable importance because, although
Californians are required to self-report out-of-state
purchases for use in this state, the compliance rate
is very low.
In general, an out-of-state retailer must have
sufficient business presence (also known as "nexus")
in order to be required to collect and remit the tax.
Under current law, a retailer is considered "engaged
in business in this state" and required to collect the
California use tax on sales made to California
consumers when it maintains storage or warehousing
facilities in the state or it has a representative or
independent contractor operating in this state for the
purpose of selling, delivering, installing,
assembling, or the taking of orders for the tangible
personal property.
Current Board of Equalization regulations specify that
the use of a computer server on the Internet to create
or maintain a web page or site by an out-of-state
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retailer is not considered a factor in determining
whether the retailer has a substantial nexus with
California. The regulations further state that an
Internet service provider or other Internet access
service provider, or World Wide Web hosting services
shall not be deemed the agent or representative of any
out-of-state retailer as a result of the service
provider maintaining or taking orders via a web page
or site on a computer server that is physically
located in this state.
This bill provides that the term "retailer engaged in
business in this state" includes any retailer that
enters into an agreement with a California business or
other entity under which the California entity, for a
commission or other consideration, directly or
indirectly refers potential customers of tangible
personal property. The referral can be by a link or
an Internet website, or some other means, provided
that the cumulative sales price from sales by the
retailer to customers in California who are referred
pursuant to these agreements exceeds $10,000 during
the preceding 12 months.
The measure does not apply to advertising on
television, radio, in print, on the Internet, or any
other medium, unless the payment for advertising
consists of a commission or other consideration that
is based on sales of tangible personal property.
Thus, banners and "click-throughs" on internet sites,
such as Google, which are based on models other than
sales commissions for referrals would not create nexus
with California.
The bill is based on legislation enacted in the state
of New York in 2008. That law has been challenged on
Constitutional grounds, but the challenges were
dismissed at the trial court level. The provisions of
this measure are similar to AB 178 (Skinner).
6. Abusive tax shelters . Current federal and state law
place reporting requirements and restrictions on
abusive tax shelter (ATS) and related transactions
designed to avoid taxes. The use of, and failure to
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report, such transactions is subject to assessment,
substantial penalties, and interest by the FTB up to
eight years after the tax return is filed by the
taxpayers.
According to the Franchise Tax Board, current law
suffers from inconsistencies in definitions among
various ATS provisions, hampering the enforcement of
these provisions. This bill eliminates these
inconsistencies by providing a single, consistent
definition for abusive tax shelters, which would be
referred to as "potentially abusive tax avoidance
transactions." It also adopts the federal reportable
transaction categories for "transactions of interest"
for California purposes, and it provides similar
authority to the FTB to determine transactions of
interest for California income or franchise tax
purposes (thereby enabling the state to seek
additional information related to such transactions).
Abusive tax shelter penalties can currently be avoided
if a taxpayer that has been contacted by the FTB about
such activities files an amended return prior to when
FTB issues a deficiency notice. The measure would
impose a reduced penalty, equal to 50 percent of the
full penalty, for taxpayers that file an amended
return in these circumstance. The reduced penalty is
aimed at encouraging taxpayers to file amended returns
and pay taxes owed, while at the same time maintaining
some penalty on taxpayers that had previously reduced
their tax by the use of abusive transactions. The
provisions in this measure are similar to SB 401
(Wolk).
7. Other provisions . The provision requiring backup
withholding is similar to the introduced version of AB
1848 (Ma) from the 2008 session. The provision
requiring non-retailers to register with the BOE is
similar to SB 711 (Calderon), and is aimed at raising
compliance for use tax payments on business purchases
of equipment from out-of-state sources. The business
license revocation provisions are similar to AB 484
(Eng).
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FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
As shown in the accompanying table, the tax compliance and
revenue acceleration measures would raise GF collections by
$4.4 billion in 2009-10 and $653 million in 2010-11.
Annual revenue gains would fall to the low hundreds of
millions in the subsequent two years (due to payment
accelerations from those years into 2009-10), and then rise
to about $1 billion annually in out-years, due to improved
tax compliance.
Revenue Impact of Compliance and Acceleration Provisions
(in millions)
-----------------------------------------------
| |2009-10 |2010-11|
| | | |
|------------------------------+--------+-------|
|Governor's proposal | $1,700 | $98 |
|withholding | | |
|------------------------------+--------+-------|
|Governor's proposal estimated | 610 | 95 |
|pmts. | | |
|------------------------------+--------+-------|
|Independent contractor | 1,965 | 130 |
|withholding | | |
|------------------------------+--------+-------|
|FIRM | 27 | 60 |
|------------------------------+--------+-------|
|Extended sales tax nexus | 48 | 102 |
|------------------------------+--------+-------|
|Backup withholding | 26 | 25 |
|------------------------------+--------+-------|
| Non-retailer registration w/ | 26 | 123 |
|BOE | | |
|------------------------------+--------+-------|
| Abusive tax shelters | 4 | 2 |
|------------------------------+--------+-------|
| Suspension of licenses for | 10 | 19 |
|delinquent taxpayers | | |
|------------------------------+--------+-------|
|Total: | $4,416 |$653 |
| | | |
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DLW:nl 6/23/09 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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