BILL ANALYSIS
RECONSIDERATION - VOTE ONLY
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 2375 - Knight
Amended: April 29, 2010
Hearing: July 1, 2010 Fiscal: Yes
SUMMARY: Grants the State Board of Equalization (BOE),
Meeting as a Public Body, Discretion to Relieve
Interest Under Specified Circumstances.
EXISTING LAW provides that persons who are late in
payment of their sales and use tax obligations are required
to pay a penalty, plus monthly, simple interest on those
unpaid taxes from the date the tax is due to the date upon
which they are paid. The rate of interest for late
payments is currently 7 % percent annually. Whether a
payment is one day late or 29 days late, an entire month's
interest is charged for late payments.
The BOE has authority to relieve a late payment
penalty when the BOE finds that the taxpayer's failure to
make a timely payment is due to reasonable cause and
circumstances beyond the taxpayer's control, and occurred
notwithstanding the exercise of ordinary care and the
absence of willful neglect. However, interest on a late
payment is generally not relievable (except in cases of a
disaster or where the failure to pay the tax on time was
due to an unreasonable error or delay by a Board employee).
A "disaster" is defined in the Board's Regulation 1703 to
mean fire, flood, storm, tidal wave, earthquake or similar
public calamity, whether or not resulting from natural
causes.
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Government Code Section 8558 specifies three
conditions or degrees of emergency: state of war, state of
emergency, and local emergency.
THIS BILL authorizes the BOE, meeting as a public
body, to relieve all or any part of interest imposed, not
to exceed $50,000 during any 12-month period, on a late
payment if the BOE finds that a person's late payment was
due to extraordinary circumstances and that it is
inequitable to compute interest as the law requires, when
all of the following apply:
1)The person was granted relief from all penalties that
applied to the late payment.
2)The person has paid the tax on which the interest is
imposed, or, in the case of an unpaid tax liability for
which a petition for redetermination is pending, the
person pays the tax on which the interest is imposed
within 30 days from the date the final decision of the
Board issued that petition.
3) The person files a request for an oral hearing
before the Board.
4)The person files a statement with the Board under penalty
of perjury setting forth the facts upon which the claim
for relief is based and any other information the Board
may require.
Defines "extraordinary circumstances" to mean any of
the following:
a. The occurrence of a death or serious
illness of the person or the person's next of kin
that caused the person's failure to make a timely
payment.
b. The occurrence of an emergency, as
defined in Section 8558 of the Government Code,
that caused the person's failure to make a timely
remittance.
c. Criminal misconduct by a person, other
than the person who failed to make a timely
payment, that caused the person's failure to make
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a timely payment.
Allows the interest liability to be reestablished if
the person fails to pay the tax in accordance with the
provisions of the bill.
Specifies that the $50,000 limitation does not apply
to relief of interest granted by the BOE pursuant to
Section 6593 under the Sales and Use Tax (SUT) Law, related
to disasters.
FISCAL EFFECT:
The BOE states that it is difficult to determine
with any degree of certainty to what extent the Board would
have provided relief, and to what extent relief of interest
would be sought by taxpayers in general under the
provisions of this bill. Therefore, the interest revenue
loss related to this bill is indeterminable; however, under
the terms of the bill, the loss would not exceed $50,000
during any 12-month period.
COMMENTS:
A. Purpose of the bill
According to the sponsor, this bill is necessary in
order to give members of the BOE some limited flexibility
to provide relief of interest in those unusual cases that
come before it, such as the case described in the
Background section below.
The author provides the following statement:
It is important that we allow the BOE members
flexibility in issues that come before them where it
has been determined that the taxpayer is not the one
immediately at fault and has an exemplary record of
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timely payments of sales and use tax. It is an
unfortunate event when companies unknowingly have an
employee embezzling from them, but it is even more
unfortunate when they are penalized for that act of
fraud by the Board for tax reasons
B. Background
This bill was prompted by a SUT case that was heard
by the Board at its December 2009 public hearing. In this
particular case, the taxpayer's bookkeeper revised the
taxpayer's computerized accounting records and embezzled a
substantial amount of sales tax reimbursement collected
from the taxpayer's customers. Although the bookkeeper was
fired and prosecuted and is currently serving a prison
sentence, under the law, the taxpayer remains liable for
the tax and interest. And, even though the taxpayer
previously had an excellent record of payment of sales and
use taxes, and acted swiftly and appropriately upon
discovery of the embezzlement, the fact that the taxpayer
was a victim of such a crime is not a basis for relief.
The law does not provide relief from tax or interest based
on a loss of the funds after the sale, by embezzlement or
otherwise.
C. Tax Interest Abatement
As noted above, under existing law interest on a late
payment is generally not relievable, except in cases of a
disaster or where the failure to pay the tax on time was
due to an unreasonable error or delay by a BOE employee.
This is also generally true at the federal level, where the
Internal Revenue Service (IRS) does not easily grant an
interest abatement request. The IRS generally does not
grant interest abatement if the error or delay can be
attributed to the taxpayer involved.
This raises the question as to whether the BOE's
authority should be expanded to allow BOE members broad
discretion in waiving interest in a number of situations.
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There have been extraordinary cases in the past where
charging interest on a late payment seemed severe. For
example, there have been situations where taxpayers
documented medical emergencies or family deaths that
occurred the day the returns were due, and even though
returns were filed only a day or two late, monthly interest
was still imposed. Furthermore, AB 2375 provides three
specific circumstances that would warrant the granting of
interest relief and this could have the potential of
disallowing relief for other equally compelling
circumstances that led to a late payment. Therefore, the
committee may wish to consider if this bill would lead to a
"slippery slope" that would eventually result in the BOE
having too much flexibility in providing relief of interest
in some circumstances of taxpayers and not others.
D. Related Legislation
SB 1028 (Correa) would enable BOE members, meeting as a
public body, to compute daily, rather than monthly
interest, on a payment that is only one day late, under
specified circumstances. This Committee passed SB 1028
5-0, which later passed the Senate and is currently
awaiting action in the Assembly Revenue and Taxation
Committee.
Support and Opposition
Support:Michelle Steel, Board Member, State Board of
Equalization (sponsor), California Black Chamber of
Commerce, Barbara Alby, Acting Board Member, State Board of
Equalization, California Taxpayers' Association, Howard
Jarvis Taxpayers Association
Oppose: None received.
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Consultant: Meg Svoboda