BILL ANALYSIS
AB 693
Page 1
Date of Hearing: April 13, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 693 (Silva) - As Introduced: February 26, 2009
Majority vote. Fiscal committee.
SUBJECT : Administration of interest: late payments, or
prepayments, of taxes, fees, and surcharges.
SUMMARY : Authorizes the members of the State Board of
Equalization (BOE) to impose interest on a daily basis in the
case of a late payment, or prepayment, of a tax, fee, or
surcharge, provided that the payment or prepayment is only one
day late. Specifically , this bill:
1)Authorizes the members of BOE, after meeting as a public body
and taking into account all facts and circumstances, to
determine whether it is equitable to compute interest on a
late payment, or prepayment, of a specified tax, fee, or
surcharge at a modified adjusted rate per month or a modified
adjusted daily rate.
2)Specifies the following additional conditions that must be
satisfied before interest imposed on a late payment or
prepayment may be computed at the modified adjusted daily
rate, instead of the modified adjusted rate per month:
a) The payment of tax, fee, or surcharge or the prepayment
of tax was made by a person one day after the date the tax,
fee, or surcharge, or prepayment was due;
b) The person was granted relief from all penalties that
applied to that payment of tax, fee, or surcharge, or
prepayment; and,
c) The person has filed a request for an oral hearing
before BOE.
3)Defines the terms "modified adjusted daily rate" and "modified
adjusted rate per month" by reference to the Revenue and
Taxation Code (R&TC) Section 6591.5.
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4)Disallows the modification of interest computation for any
payment made pursuant to a deficiency determination, a
determination where no return has been filed, or a jeopardy
determination issued by BOE.
5)Applies to payments or prepayments of tax, and payments of the
fees and surcharges imposed, respectively, pursuant to the
Sales and Use Tax Law, Motor Vehicle Fuel Tax Law, Diesel Fuel
Tax Law, Use Fuel Tax Law, Cigarette and Tobacco Products Tax
Law, Alcoholic Beverage Tax Law, Hazardous Substances Tax Law,
Integrated Waste Management Fee Law, Oil Spill Response,
Prevention, and Administrative Fees Law, Underground Storage
Tank Maintenance Fee Law, Fee Collection Procedures Law,
Energy Resources Surcharge Law, Emergency Telephone Users
Surcharge Act, and the law governing the taxation of specified
insurance companies.
6)Declares the legislative intent that BOE exercise its
authority to change the method of computing interest only in
special circumstances and on a case-by-case basis.
EXISTING LAW imposes a penalty for a late payment or late
prepayment of tax, fee or surcharge administered by BOE. The
penalty for a late payment is 10% of the amount of tax, fee, or
surcharge due, plus monthly, simple interest on the unpaid tax,
fee or surcharge obligation. In the case of a late prepayment,
existing law imposes a 6% penalty. Currently, the rate of
interest for late payments is set at 8%, where the interest
accrues on any unpaid tax liability on a monthly basis.
Therefore, regardless of whether a taxpayer makes a payment two
days after the due date of a return, or at the end of the month
following the due date, the taxpayer is charged interest for the
entire month. In the case of payments remitted electronically,
i.e. electronic funds transfers, a payment made on the due date,
but after 3 p.m., is subject to an entire month's interest
charge. Interest on tax deficiency is not a "penalty" but is
simply compensation for a taxpayer's use of money after the due
date of the tax. (In re Vignola, Bkrtcy. N. D. Cal.2007, 377 B.
R. 271).
While BOE has authority to relieve a person from a late payment
penalty when BOE finds that the person's failure to make a
timely payment was due to reasonable cause and circumstances, it
generally does not have the same authority to relieve the person
of the interest on that late payment, except in very limited
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circumstances. Specifically:
1)BOE may relieve interest only in cases where a person's
failure to make a timely return or payment is due to a
disaster, defined as circumstances beyond the person's
control.
2)The Sales and Use Tax Law allows BOE to relieve interest
imposed in cases where the failure to file or pay fees is due,
in whole or in part, to an unreasonable error or delay by an
employee of BOE acting in his/her official capacity.
3)Government Code (G.C.) Section 15620.5, which was added by AB
1638 (Committee on Revenue and Taxation, Chapter 929, Statutes
of 1999, authorizes BOE to establish a uniform policy for the
acceptance of payments or prepayments that are delivered to
BOE via the United States (U.S.) mail or a bona fide
commercial delivery service . In accordance with this section,
BOE has implemented a policy allowing taxpayers a uniform
one-day grace period in cases where a mailing of a return or
payment was postmarked one day after the due date. Prior to
1997, a similar administrative policy was in place for 47
years but that policy was initially eliminated after BOE's
legal staff had reviewed the policy and found no legal basis
for such policy.
FISCAL EFFECT : Insignificant. BOE estimates that the limited
interest relief provided by this measure will result in an
annual revenue loss of less than $10,000.
Proposition 98 Fiscal Effect : No effect.
COMMENTS :
1)The author states that "AB 693 will encourage timely payments
of taxes, fees and surcharges and will provide taxpayers with
fairness and relief in specified circumstances."
2)This bill is sponsored by BOE. According to the sponsor, the
purpose of this bill is "to provide some limited flexibility
for the members of BOE to address the inequity of applying an
entire month's interest to a liability when the liability is
paid only one day late and the late payment is due to
reasonable cause or circumstances beyond the taxpayer's
control."
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3)Committee staff notes all of the following:
a) Should electronic payments of tax be treated differently
than payments made by mail?
If a taxpayer decides to pay his/her tax electronically and
inadvertently misses the 3 p.m. deadline applicable to
electronic payments, even by 10 minutes, he/she will
automatically be penalized with an entire month's interest
charge, currently set at an 8% annual rate. However, if the
same taxpayer chooses the U.S. Postal Service or a bona
fide commercial delivery service and mails the payment on
the day after the due date, he/she will not be subject to
the 8% interest charge. In fact, that taxpayer does not
even have to ask BOE for the relief - it is automatic. In
2000, BOE reinstated its prior practice of allowing
taxpayers a uniform one-day grace for remittances, claims
for credit or refund, documents, or returns that are
delivered to BOE by U.S. mail or commercial delivery
service, provided that the envelope containing the payment
is postmarked after the due date for the payment. This
policy, however, does not apply to electronic payments of
tax, even though some taxpayers are required to remit their
payments to BOE electronically. For example, any taxpayer
whose average monthly tax payments are $17,000 or more is
required to pay the sales and use tax electronically.
Those taxpayers do not have a choice but to remit tax
payments electronically. BOE has recognized that
electronic payments of tax should not be treated
differently from tax payments mailed via U.S. Postal
Service or commercial delivery service and sponsored this
bill to provide relief, primarily, to those taxpayers that
are required file their taxes electronically.
b) Does this bill apply only to electronic payments? It is
unclear. The plain language of the bill does not limit its
application only to electronic remittances of tax, fee, or
surcharge. Thus, arguably, if this bill were to become
law, a taxpayer who has mailed a payment or prepayment of
tax postmarked one day after the due date for the payment
would be subject to all of the applicable requirements to
be eligible for the interest relief. However, under BOE's
internal policy, the taxpayer's payment, most likely, would
be accepted as timely. To eliminate the ambiguity,
Committee staff suggests that this bill be amended to limit
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its application only to electronic payments or prepayments
of tax, fee, or surcharges.
c) Is it too easy to qualify for the relief provided by
this bill? No. Unlike BOE's uniform grace day policy for
mailed-in payments, the interest relief proposed by this
bill is not available to a person unless, in addition to
all other requirements, BOE relieves the person from all
penalties that applied to the payment of tax. Generally,
in order to relieve a taxpayer from the penalties, BOE must
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
the exercise of ordinary care and the absence of willful
neglect. In addition to being relieved from all penalties,
the person must request an oral hearing before BOE. If
BOE, taking into account all facts and circumstances,
determines that it is inequitable to compute interest on a
monthly basis, interest will be computed on a daily basis.
A "facts and circumstances" test is routinely used by BOE
in other cases to provide relief to taxpayers. For
example, BOE is authorized, using the same "facts and
circumstances" test, to relieve from tax liability or
penalty an innocent spouse. (R&TC Section 6456).
d) Why are the requirements for tax relief in the case of
electronic payments more stringent? Under BOE's internal
schedule, a payment that is postmarked one day after the
due date will be accepted as timely. Taxpayers are not
required to request an oral hearing before BOE nor do they
need to be relieved of all the penalties that otherwise may
be applicable to the payment. The practice of
automatically allowing a taxpayer a grace day for his/her
filing was originally adopted by BOE because it recognized
that the taxpayer has no control over the delivery process
once the payment is entrusted to the U.S. Postal Service or
any other delivery service. In the case of an electronic
payment, no such problem exists - the taxpayer is in
control of the process until the payment is submitted to
BOE. Arguably, the more stringent requirements of the
proposed uniform grace day policy for electronic payments
are justified because taxpayers cannot blame a third party
for the delay. However, would not those requirements
discourage people from remitting tax payments
electronically? It seems that taxpayers will choose to
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mail their tax payments, unless they are required by law to
submit those payments to BOE electronically.
e) Does this bill create a financial incentive for a
taxpayer to pay late? It is unlikely that this bill would
encourage taxpayers to delay the remittance of tax payments
because the delinquent taxpayer will not be relieved by
this bill of the most severe delinquency charges, i.e. a
10% penalty for late payments and a 6% penalty for late
prepayments, unless the taxpayer's failure to make a timely
payment was due to reasonable cause and circumstances
beyond the person's control. A conscious decision by a
person to be late on the payment or prepayment of tax, fee,
or surcharge does not qualify as a reasonable cause or
circumstance beyond the person's control. Therefore, this
bill is not likely to encourage late payments or late
prepayments, and, in fact, does provide an incentive for
taxpayers and fee payers to make payments and prepayments
as soon as possible.
f) Franchise Tax Board (FTB) Practice. If a taxpayer does
not pay the amount of tax reported on his/her income tax
return by the original due date, or if FTB assesses
additional tax that becomes due and payable, FTB will
charge interest on the balance due, compounded daily. The
interest is calculated at the adjusted annual rate
established under R&TC Section 19521 for the period from
the due date until the date paid. (R&TC Section 19101).
The interest may be abated under specified circumstances
including, among others, extreme financial hardship,
erroneous refund, or reliance on formally requested written
advice.
g) What is so magical about one day as opposed to two days?
The relief afforded to a taxpayer by this bill is based on
the assumption that the taxpayer's payment was only one day
late. Why is computing interest on a daily basis
"equitable" for a payment that is one day, and not two
days, late? And why is a two-day late payment less
deserving of the relief? The Committee may wish to
consider amending this bill to follow FTB's current
practice of calculating interest on a daily basis until the
payment is received.
h) Legislative History. A similar bill, AB 1901 (Silva),
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was introduced in the 2007-08 Legislative Session. AB 1901
passed out of the Assembly but failed passage in the Senate
Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Taxpayers' Association
State Board of Equalization (sponsor)
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098