BILL ANALYSIS
AB 711
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Date of Hearing: April 27, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 711 (Charles Calderon) - As Amended: April 14, 2009
Majority vote. Fiscal committee.
SUBJECT : Administration and collection of use tax.
SUMMARY : Requires a qualified purchaser, as defined, to
register with the Board of Equalization (BOE) and report and
pay, by April 15, the use tax owed for the previous calendar
year. Specifically, this bill :
1)Requires a qualified purchaser to register with BOE for
purposes of facilitating the collection of use tax.
2)Specifies that, to register, the qualified purchaser must file
a form prescribed by BOE and provide all of the following
information:
a) The name under which the purchaser transacts or intends
to transact business;
b) The location of the purchaser's place or places of
business; and,
c) Other information as BOE may require.
3)Defines a "qualified purchaser" as a person that meets all of
the following conditions:
a) Is required to hold a business license as required by
the local ordinance of the city, county, or city and county
in which the person conducts business;
b) Is not required to hold a seller's permit pursuant to
Revenue and Taxation Code (R&TC) Part 1 (commencing with
Section 6001) of Division 2;
c) Is not required to be registered pursuant to R&TC
Section 6226; and,
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d) Is not a holder of a use tax direct payment permit as
described in R&TC Section 7051.3.
4)Requires a qualified purchaser to file a return with, and
remit the amount of the use tax due to, BOE by April 15.
5)Does not apply to the purchase of a vehicle, vessel, or
aircraft as defined in R&TC Article 1 (commencing with Section
6271) of Chapter 3.5 of Part 1 of Division 2.
6)States the intent of the Legislature to appropriate annually
the revenues deposited into the General Fund to the
Intellectual Property Piracy Prevention and Prosecution Fund.
7)Becomes operative only if AB 819 (Charles Calderon),
introduced in the 2009-10 Legislative Session, is also
enacted.
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 gross receipts from the sale of TPP
in this state. [R&TC Chapter 2 (commencing with Section 6051)
of Part 1 of Division 2].
2)Imposes a use tax on the storage, use, or other consumption in
California of TPP purchased from any retailer, absent a
specific exemption. [R&TC Chapter 3 (commencing with Section
6201) of Part 1 of Division 2].
3)Provides that the use tax is imposed on the purchaser, and
unless that purchaser pays the use tax to a retailer
registered with BOE to collect the California use tax, the
purchaser is liable for the tax, absent a specific exemption.
4)Sets the same rate for the use tax as it does for the sales
tax.
5)Specifies that a purchaser must remit the use tax to BOE on or
before the last day of the month following the quarterly
period in which the purchase was made, or on the purchaser's
state income tax return filed with the Franchise Tax Board
(FTB).
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FISCAL EFFECT : BOE staff estimates that this bill would result
in the collection of approximately $620 million in state and
local use tax revenues annually.
COMMENTS :
1)The author states that, "The most costly area of tax
noncompliance, according to the State Board of Equalization
(BOE), is a collection of use tax due on purchases of goods
from out-of-state vendors. Both individuals and businesses
underreport and underpay the use tax. It is estimated that,
just in 2007, businesses underreported and failed to pay
approximately $775 million in use taxes. AB 711 would
facilitate the collection of use tax from businesses by
requiring all business license holders in California, and not
just retailers, to register with the BOE. It is estimated
that the measure will bring in $620 million, with at least $50
million of it to be used for the investigation and prosecution
of intellectual piracy crimes (crimes that cost the state
hundreds of millions of dollars a year in lost business and
tax revenue) as laid out in its companion measure, AB 819."
2)Background . California enacted its first retail sales tax in
1933. In 1935, California adopted a use tax to alleviate the
competitive disadvantage experienced by in-state retailers.
The intent behind the enactment of the use tax was to offset
the incentive to purchase from retailers in other states with
low sales tax rates or no sales tax. The use tax is virtually
identical to the sales tax, except it is imposed on the
storage, use or consumption of the goods. It is imposed on
the purchases at the same rate as the sales tax, including any
applicable local sales taxes. Generally, an individual or
company is obliged to pay the use tax when they purchase TPP
from an out-of-state retailer that is not registered with BOE.
3)Low Collection Rate . Even though the use tax has been in
effect since the 1930s, it is relatively unknown to California
consumers and BOE has not been very successful in collecting
the use tax. Apparently, many consumers that use mail-order
or the internet to purchase TPP are unaware of their
responsibility to report and remit use tax. Unreported use
tax is the largest area of noncompliance - an estimated annual
$1.2 billion is attributable to unreported California use tax
by both businesses and individual consumers.
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4)Competitive Advantage for Out-of-state Retailers . Another
reason for the use tax remittance noncompliance is the growing
number of out-of-state internet and mail-order vendors who are
not required to collect use tax for the State of California.
In-state retailers, however, must collect and remit sales tax
to BOE. States have been unable to impose a similar
compliance and collection requirement on out-of-state
retailers, largely, because of the "physical presence"
requirement. Consequently, California must rely on purchasers
of TPP to report their use tax obligations on their
out-of-state purchasers, such as those made over the Internet
or through mail order. The fact that out-of-state retailers
can provide almost an instant 10% discount by virtue of not
collecting the use tax, coupled with the misconception that
reporting use tax is optional for the purchaser, gives
out-of-state vendors a competitive advantage. A consumer who
believes that a use tax is voluntary, as opposed to a
mandatory sales tax, will most likely make a purchase with a
vendor who does not have the mandatory sales tax.
5)Payment of Use Tax . The purchaser is required to remit the
use tax on or before the last day of the month following the
quarterly period in which the purchase was made. Failure to
pay the tax results in a 10% penalty plus interest.
Alternatively, taxpayers may elect to report their use tax on
their personal income or corporate tax returns. Should a
purchaser opt for this alternative, the use tax is considered
timely reported and remitted. For the 2008 taxable year, FTB
processed over 18.5 million returns. FTB tax forms have
comprehensive instructions with respect to computing and
reporting the use tax liability on income tax returns.
However, only a little over 44,000 state income tax returns
had use tax reported, yielding only $9 million in state and
local tax revenues.
6)Is the registration process too cumbersome for businesses ?
BOE staff estimates that, in 2007, an estimated $775 million
of uncollected use tax was attributable to businesses. AB 711
would require every California business, regardless of the
size, to register with BOE, unless it is a retailer, holder of
a use tax direct payment permit, or is already required to
register with BOE. BOE estimates that approximately two
million businesses would be affected by this bill. Despite
its broad application, AB 711 does not appear to impose an
excessive burden on businesses. A California Seller's Permit
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Application (BOE-400-SRA) is a 2-page document, so is the
California Certificate of Registration - Use Tax Application
(BOE-400-CSC). Those forms are, currently, used to register
retailers that sell or lease TPP in California.
7)Delayed operative date . BOE staff suggests that this bill be
amended to include a delayed operative date, preferably July
1, 2010, in order for BOE to have sufficient time to properly
register two million businesses and train the additional staff
required to implement and administer this bill.
8) Use of funds . The intent of the author is to use some of the
revenues derived from the enhanced collection of the use tax
to provide additional funding for local law enforcement and
district attorneys to combat intellectual piracy crimes. AB
711 creates a mechanism to fund the Intellectual Property
Piracy Prevention and Prosecution Program that would be
established by AB 819. This bill will become operative only
if AB 819 becomes law.
9)Similar Legislation .
AB 469 (Eng), introduced in the 2009-10 Legislative Session,
would require taxpayers, who have failed to report and pay the
use tax to BOE, to report and pay qualified use tax on an
income tax return for the taxable year in which the liability
for the use tax was incurred, as specified. AB 469 is set to
be heard in this Committee on April 27, 2009.
AB 969 (Eng), introduced in the 2007-08 Legislative Session,
would have required, rather than authorized, taxpayers to
report and pay use tax obligations on income tax returns if
they failed to report and remit use tax obligations directly
to BOE. AB 969 was vetoed by the Governor. As stated in the
veto message:
"I am returning Assembly Bill 969 without my signature.
"Although increasing use tax reporting is desirable, I have
concerns
that the effective date of January 1, 2008 is too soon for
taxpayers
to compile adequate records of their purchases that are subject
to
the use tax for calendar year 2007. Further, I would like to
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see a
plan to better educate taxpayers on the use tax, as I suspect
that
many taxpayers have little knowledge of the tax and may
unknowingly
fail to pay it."
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098