BILL ANALYSIS
AB 2038
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2038 (Eng) - As Amended: April 13, 2010
REVISED
Majority vote. Fiscal committee.
SUBJECT : Administration of taxes: Franchise Tax Board:
suspension of business and professional licenses.
SUMMARY : Permits a state governmental licensing entity (SGLE)
and the Franchise Tax Board (FTB) to suspend state occupational
and professional licenses due to unpaid tax liabilities.
Specifically, the tax-related provisions of this bill :
1)Authorizes a SGLE, until January 1, 2016, to deny, revoke, or
suspend a license to a licensee who has failed to pay
outstanding tax liabilities and that licensee's name is on a
certified list, as specified.
2)Defines SGLE to mean the entities under the Department of
Consumer Services, the Office of the Attorney General, the
Department of Insurance, the State Bar of California, the
Department of Real Estate, and any other state agency, board,
or commission that issues a license, certificate, or
registration authorizing an individual to engage in a
profession or occupation. Exempts the Department of Motor
Vehicles from the definition of SGLE.
3)Requires that a license of an entity, with whom the licensee
whose license has been suspended due to tax liabilities is
affiliated with, to be suspended until the licensee satisfies
his/her tax liabilities or disassociates himself/herself from
that entity.
4)States that no provision of this bill should be interpreted to
allow a court to review and prevent the collection of income
taxes prior to the payment of those taxes in violation of the
California Constitution.
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5)Requires all SGLEs to collect social security numbers or
taxpayer identification numbers from all applicants for the
purposes of matching names to the certified list provided by
FTB.
6)Requires FTB to immediately send a release to the appropriate
SGLE and the applicant or licensee, if any of the following
conditions are met:
a) The applicant or licensee has entered into an
installment payment agreement, as specified;
b) The applicant or licensee has submitted a request for
release no later than 45 days after receipt of a
preliminary notice, but FTB will be unable to complete the
release review and send notice of its findings to the
applicant or licensee and the SGLE within 45 days after
FTB's receipt of the applicant's or licensee's request for
release; or,
c) The applicant or licensee would experience financial
hardship, as determined by FTB. Requires FTB, if a licensee
requests in writing, to provide for an administrative
hearing within 30 days from the mailing date of the FTB's
preliminary notice of suspension, to determine if a
licensee will experience financial hardship.
7)Requires a SGLE that has not denied or suspended a license
within 90 days of mailing a preliminary notice, to promptly
notify FTB and the licensee to state the reason why no action
was taken.
8)The SGLE is required to promptly notify the FTB and the
licenses if the SGLE has not denied or suspended the license
within 90 days of mailing a preliminary notice.
9)Allows FTB to suspend an occupational or professional license
of a licensee if both of the following conditions are
satisfied:
a) The licensee fails to pay taxes for which a notice of
state tax lien has been recorded in any county recorder's
office in California.
b) The license has not been suspended, revoked, or denied
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by the applicable SGLE. For purposes of this provision,
excludes the State Bar of California from the definition of
"state governmental licensing entity."
10)Requires FTB to mail a preliminary notice of suspension to a
licensee, at least 60 days prior to the effective date of the
suspension, indicating that the license will be suspended by a
certain date.
11)If the licensee fails to either pay the unpaid taxes or enter
into an installment payment agreement to satisfy the unpaid
taxes on time, his/her license will be automatically suspended
and the FTB must provide a notice of suspension to the
applicable SGLE and mail a notice of suspension to the
licensee.
12)If a licensee complies with the tax obligation, requires FTB
to notify both the licensee and the applicable SGLE within 10
days of the licensee satisfying the tax debt by either making
a full payment or signing an installment payment agreement.
13)Permits FTB to defer or cancel any license suspension if the
suspension would cause a licensee to experience substantial
financial hardship, provided that the licensee substantiates
his/her claim of a substantial financial hardship and agrees
to an acceptable payment arrangement. Allows the affected
licensee to request, in writing, a hearing within 30 days from
the mailing date of the preliminary notice and requires FTB to
conduct a hearing within 30 days after receipt of that
request.
14)Defines the term "financial hardship" as financial hardship
as determined by FTB, where the licensee is financially unable
to pay any part of the amount of the outstanding tax liability
and is unable to qualify for an installment payment
arrangement. In order to establish financial hardship, the
licensee shall submit any information to the FTB for the
purpose of making that determination.
15)Requires FTB to mail a release form to the applicant or
licensee and the SGLE when the applicant or licensee enters
into an installment payment agreement, and requires the SGLE
to process the release within five business days of receipt.
16)Requires FTB, if a licensee who has entered into an
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installment payment agreement and is non-compliant, to suspend
the license 30 days after the date of termination of the
installment payment agreement and notify the applicable SGLE
and the licensee.
17)Requires FTB to suspend a license if a suspension deferral is
no longer operative and the licensee has unpaid tax
liabilities, and requires FTB to provide a notice of license
suspension to the SGLE and the licensee.
18)Authorizes FTB to develop an automated process for notifying
the SGLE on a licensee's non-compliance with an installment
payment agreement or repetitive non-payment of tax
liabilities. Upon receipt of the notice, the SGLE shall send
a preliminary notice to the licensee stating that the license
will be suspended on a specific date (which shall be no longer
than 30 days from the date the form is mailed), unless a new
release is issued by FTB.
19)Prohibits any current or former state employee, officer,
entity, or agent from disclosing or using any information
obtained from FTB for anything other than the stated purposes.
20)Authorizes FTB and SGLEs to adopt necessary regulations to
implement this bill.
21)States the validity of this bill's provisions are severable.
22)Makes legislative findings and declarations that the
suspension of a professional or occupational license for
failure to pay delinquent taxes is a legislative act, for
which due process is satisfied by the legislative notice and
hearing procedures.
23)Makes technical changes.
EXISTING LAW :
1)Provides that, if a taxpayer has delinquent tax amounts, a tax
lien automatically arises by operation of law for that amount,
known as a statutory tax lien. A statutory tax lien is a
claim upon real and personal property for the satisfaction of
a tax debt. A statutory tax lien arises automatically when
the debt becomes final and exists for 10 years, unless the
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liability becomes satisfied or, if the debt remains unpaid, a
notice of state tax lien is recorded. The recording of the
notice provides notice to the world of the debt against all
real and personal property belonging to the taxpayer and
located in the California county where recorded.
2)Authorizes FTB to use several collection tools to collect
delinquent tax liabilities, including an Order to Withhold
that is issued to third parties in possession of funds or
properties of the debtor, a warrant to seize property, which
is enforced by a marshal and an Earnings Withholding Order for
Taxes, which is continuing wage garnishment.
3)Authorizes the registrar of the Contractor's State License
Board (CSLB) to suspend an existing license or to refuse the
issuance, reinstatement, reactivation, or renewal of a
contractor's license if a licensee fails to resolve all
outstanding final liabilities, including taxes and fees, and
permits the disclosure of certain information from the
licensing agency to FTB.
4)Authorizes professional license denial and suspension for
failure to pay court-ordered child support debt.
5)Permits the registrar of the CSLB to refuse to issue,
reinstate, reactivate, renew, or suspend a contractor's
license due to unpaid financial liabilities, including taxes.
6)Permits the disclosure of certain information on all licensees
from a SGLE to FTB.
7)Authorizes many SGLEs to impose fees on their licensees to
cover administrative costs.
FISCAL EFFECT : FTB staff estimates a revenue gain of $12.5
million in fiscal year (FY) 2010-11, $18.5 million in FY
2011-12, and $18.4 million in FY 2012-13.
FTB staff also project a one-time cost of approximately $2.4
million to program, develop, and test a new process within
existing systems and add collection staff to review, process,
and suspend accounts that have been matched to licensees. In
addition, FTB staff estimates ongoing annual costs of
approximately $1.1 million for mailing notices and responding to
taxpayer inquiries resulting from those notices.
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COMMENTS :
1)The Author's Statement . The author states that, "California
loses approximately $1.4 billion annually as a result of
uncollected tax liabilities that apply to professional and
occupational licensees. AB 2038 helps increase compliance
among tax scofflaws that are licensed by the Department of
Consumer Affairs (DCA) by simply authorizing the FTB to notify
occupational and professional licensing agencies regarding a
licensee's failure to pay tax liabilities, for license
suspension purposes. These tax cheats are habitual debtors
with large delinquent amounts who have received numerous
notices of its delinquent account and still fail to provide
any form of payment.
"Generally, FTB is successful in collecting these debts by
intrusive and expensive methods (seizure of assets) or legal
actions (Notice of Tax Lien, nominee assessments) when the
individual has real property. However, FTB has found it very
difficult to utilize these effective tools to collect
delinquent liabilities from individuals who operate on a cash
basis.
"The intent of this measure is to motivate delinquent taxpayers
to keep their licenses and comply with their state tax
obligation - not to deny the ability of the licensee to earn
income?. Increased compliance in this area of tax law will
result in higher revenues for the state, which will prevent
the unnecessary elimination or reduction of core state
education, health and public safety programs during the
current year fiscal crisis, without proposing new tax burdens
on business and working families."
2)The Purpose of this Bill . The purpose of this proposal is to
reduce the "tax gap" by increasing enforcement measures to
collect outstanding taxes due. According to FTB, the annual
income tax gap for California is estimated to be $6.5 billion
and is based in part upon estimates of the federal gap. The
Internal Revenue Service (IRS) estimates underreporting of
business income by personal income taxpayers makes up nearly
70% of the total tax gap. It is estimated by the IRS that the
majority of this underreported income is from business sectors
that do business largely in cash. FTB estimates that
California loses approximately $1.4 billion annually as a
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result of uncollected tax liabilities that apply to
professional and occupational licensees.
Current data indicates that there are over 25,000 delinquent
taxpayers who hold an occupational or professional license. A
licensee who fails to pay the correct amount of income tax has
a competitive advantage over other businesses that report and
pay the correct amount of tax. It is presumed that the
possibility of losing, and the actual loss of, the privilege
to hold an occupational or professional license would be an
effective collection tool to assure payment of income tax
debts by licensees who do businesses in cash.
3)Arguments in Support . The proponents of this bill state that
current law lacks an effective method to collect from a tax
debtor who is an individual licensed to engage in a profession
or occupation operating on a cash basis. Cash businesses lack
a paper trail that can be used to verify income information
and to identify assets for collection purposes. In addition,
cash basis [licenses do not have] salaries that can be subject
to garnishment, which is the state's most effective collection
method for income tax debts. AB 2038 would increase the
state's effectiveness for collecting tax debts from licensees
operating on a cash basis because licensees will be motivated
to pay their tax debts to protect their licenses.
4)Arguments in Opposition . The opponents of this bill argue
that this measure "is broad and heavy-handed, applying to
professional licensees, certificates, registrations and
permits of those ranging from physicians to hair stylists to
teachers. Professional licenses provide taxpayers with the
income necessary to pay their tax debts. Suspending the
taxpayers' ability to earn a living to force payment of tax
delinquencies is counterintuitive. Taxpayers would be able to
pay even more toward the tax debt if their ability to earn a
living remained intact." Finally, the opponents believe that,
"while the threat of license suspension may frighten a
licensee into paying back taxes, it is equally plausible that
this measure will push well-intentioned licensees into
bankruptcy, in which case no taxes will be collected and more
jobs will be lost."
5)Background . FTB is responsible for administering two of
California's major tax programs, the Personal Income Tax and
the Corporation Tax. While FTB has an automated tax
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collection system to search records and locate delinquent
assets, this system is largely ineffective against taxpayers
who operate on a cash basis because current information on
their income is unavailable. FTB states that there are
approximately 25,000 delinquent taxpayers with a state-issued
occupational or professional license; this figure excludes
taxpayers that have filed for bankruptcy or those who agreed
to a payment installation plan and are working to pay off
their tax liability.
Currently, there is a due process procedure in place for FTB to
notify individuals of his/her tax liability and the
opportunity for the individual to respond or dispute the
amount, depending on whether they filed a tax return. If the
taxpayer has not filed a tax return and neglected to report
income, FTB sends a Filing Enforcement Letter to the
individual specifying his/her estimated tax liability. If the
taxpayer has filed a tax return and is audited, FTB provides
the individual with a Notice of a Proposed Assessment and
allows him/her 60 days to protest the amount or respond.
If the taxpayer continues to fail to pay his/her tax
liabilities, FTB may send the case to collections and send the
taxpayer up to three notices of action or corresponding
escalation: Statement of Taxes Past Due, Final Notice Before
Levy, and an Order to Withhold, before filing a tax lien
against an individual's property or levying and seizing
property.
6)The Power to Suspend One's License . AB 2038 expands FTB's
power to suspend professional and occupational licenses of
delinquent taxpayers, enhancing its tax enforcement powers.
Currently, only the appropriate regulatory boards and
commissions may take disciplinary actions against those
licensees. In some cases, based on a referral from local
child support agencies, boards and commissions may suspend or
decide to deny renewal of licenses for individuals who fail to
pay child support. The power to suspend licenses would
certainly enhance tax compliance and reduce the "tax gap."
However, the suspension of licenses would also create a
precedent for extending FTB's tax enforcement powers beyond
frozen bank accounts and garnished wages to the privilege of
holding an occupational or professional license.
7)Business License vs. Professional or Occupational License .
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Under this bill, a license to operate a gambling establishment
or a license to sell alcohol is not subject to suspension even
if the licensee has failed to pay taxes. It is Committee
staff's understanding that the reason these licenses are not
included in the provisions of this bill is because they are
considered to be business licenses, in contrast to
professional or occupational licenses. However, it is unclear
why a business license, especially a license to operate a
gambling establishment, should be treated any different from a
professional or occupational license.
8)The Sunset Date . AB 2038 provides discretionary authority to
a SGLE, until January 1, 2016, to withhold issuance or renewal
of the license to an applicant or to suspend the license of a
licensee that is on a certified list provided by the FTB.
However, the provisions granting FTB similar authority to
suspend a professional or occupational license do not include
a sunset date. Unless there is a valid reason for treating
SGLEs and FTB differently, the Committee may wish to consider
amending this bill to either extend the sunset date to FTB's
power to suspend licenses or to eliminate the current sunset
date that applies to SGLE's authority.
9)Due Process . This bill would apply retroactively, thus
affecting the rights of licensees who have failed to pay
applicable taxes or fees for which a notice of state tax lien
has been recorded prior to January 1, 2011. While this
measure does provide for a notice to such licensees and a
hearing regarding a possible suspension of their licenses, it
limits the scope of the hearing to the issue of whether the
licensee would experience financial hardship from the
suspension of the license. The court in Gallo v. United
States District Court (9th Cir. 2003) 17 Cal.App.3d 1, 20,
however, upheld the suspension of a professional or
occupational license for failure to pay taxes reasoning that
the government action in that case was a legislative act for
which due process was satisfied by the legislative notices and
hearing procedures. Similarly, AB 2038 applies to
unspecified, unnamed individuals, and not anyone specific,
and, arguably, is unlikely to deprive taxpayers of due process
of law.
10)Implementation Concerns . Some state government licensing
entities have expressed concern that the implementation of the
provisions in this bill will take more than a few months to
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get online and suggested that this bill become operative for
suspension of licenses on or after January 1, 2012.
11)Double-Referred . This bill was double-referred with the
Business and Professions Committee and passed out of that
committee by a vote of 7 to 4 on April 14, 2010. For a more
comprehensive discussion of this bill, refer to that
committee's analysis.
12)Related Legislation .
ABX8 8 (Budget Committee), introduced in the current legislative
session, would permit the state to suspend state occupational
and professional licenses due to unpaid income tax
liabilities. This bill was held in the Assembly Rules
Committee.
SBX8 8 (Budget and Fiscal Review), introduced in the current
legislative session, would permit the state to suspend state
occupational and professional licenses due to unpaid income
tax liabilities. This bill was held on the Assembly Floor.
ABX3 19 (Evans), introduced in the 2009 legislative session,
would permit the state to suspend state occupational and
professional licenses because of unpaid income tax
liabilities, and allow taxpayers to avoid suspension by
entering into an installment agreement with FTB. This bill
was held under submission in the Assembly Rules Committee.
SBX3 17 (Ducheny), introduced in the 2009 legislative session,
would permit the state to suspend state occupational and
professional licenses because of unpaid income tax
liabilities, and allow taxpayers to avoid suspension by
entering into an installment agreement with FTB. This bill
was vetoed.
AB 484 (Eng), introduced in the 2009 legislative session, would
permit FTB to suspend state occupational and professional
licenses because of unpaid tax liabilities. This bill was
held under submission in the Assembly Business and Professions
Committee.
AB 1925 (Eng), introduced in the 2008 legislative session, would
permit FTB to suspend state occupational and professional
licenses because of unpaid tax liabilities. This bill was
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held under submission in the Senate Revenue and Taxation
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Franchise Tax Board (FTB) (sponsor)
California Tax Reform Association
Opposition
California Landscape Contractors Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098