BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 884- Ashburn
Amended: April 22, 2010
Hearing: April 28 Urgency Fiscal: Yes
SUMMARY: Makes Several Changes to Use Tax Registration
Program including Return Due Date Extension and
Delaying Penalties
EXISTING LAW imposes a use tax on the storage, use, or
other consumption in California of tangible personal
property purchased from any retailer. The use tax is
imposed on the purchaser, and unless that purchaser pays
the use tax to a retailer registered to collect the
California use tax, the purchaser is liable for the tax,
unless the use of that property is specifically exempted or
excluded from tax. The use tax is the same rate as the
sales tax. Generally, a use tax liability occurs when a
California consumer or business purchases tangible items
for their own use from an out-of-state retailer that is not
registered with the Board of Equalization (BOE) to collect
the California use tax.
EXISTING LAW requires "qualified purchasers" to
register with the BOE and report and pay by April 15, the
use tax owed for purchases made during the preceding
calendar year (AB x4 18, Committee on Budget, 2009). That
bill defines "qualified purchaser" as a person not required
to hold a seller's permit, not already otherwise registered
or required to register with the BOE, and that receives at
least $100,000 in gross receipts from business operations
per calendar year.
SB 884 - Ashburn
Page 4
THIS BILL specifies that a qualified purchaser subject
to the personal income tax who files a use tax return on a
calendar year basis, shall file the return by April 15
following the close of the calendar year, and a return made
on the basis of a fiscal year shall be filed on or before
the 15th day of the fourth month following the close of the
fiscal year. The measure specifies that a qualified
purchaser subject to the corporation tax who files a use
tax return on a calendar year basis, shall file the return
by March 15 following the close of the calendar year, and a
return made on the basis of a fiscal year shall be filed on
or before the 15th day of the third month following the
close of the fiscal year.
THIS BILL allows BOE to grant a reasonable extension
of no more than six months for filing a return, except for
taxpayers residing or traveling abroad, who have until no
later than the 15th day of the sixth month following the
close of the taxable year, unless the requirements for an
extension have been fulfilled on or before that date. The
bill specifies that a reasonable extension for payment of
tax required by the use tax registration program may be
granted by the BOE whenever in its judgment good cause
exists, and that the extension of time granted to file the
return is not an extension of time to pay, and that
penalties shall be imposed as provided by law without
regard to any extension granted.
THIS BILL delays any penalties on the use tax
registration program until on or after March 16, 2011.
FISCAL EFFECT:
The BOE states that enactment of this bill would
increase its administrative costs due to the processing of
refunds for payments of the penalty filed late for the
2007, 2008 and 2009 reporting periods, notifying affected
purchasers, and revising publications and the BOE's
website. An estimate of these costs is pending.
SB 884 - Ashburn
Page 4
BOE estimates that some shifting of revenues from
fiscal year 2009-10 to 2010-11 could occur from this bill
to the extent some taxpayers delay remitting their use tax
until March 15, 2011. There could also be some foregone
penalty revenue attributable to those taxpayers that
voluntarily remitted the penalty and did not request
relief. The amount of shifting and the amount of foregone
penalty revenue is indeterminable at this time.
COMMENTS:
A. Purpose of the Bill
According to the author "the requirement to register
for use tax was approved by the Legislature and signed by
the Governor in July 2009; therefore, the BOE was given
less than 6 months to notify taxpayers of the use tax
registration mandate, and not all taxpayers were informed
for this year's first time filing, which was on April 15th.
Moreover, the lack of time and notification has provided
insufficient time for taxpayers to gather receipts for the
new filing deadline, a deadline that is generally different
from the returns that they file with the FTB. Consequently,
taxpayers may be penalized for this year's missed
deadline."
"SB 884 would amend the use tax filing deadlines
for personal income and corporate tax filers to allow them
an automatic extension of the filing due date from April 15
to October 15. Taxpayers are currently allowed an
automatic filing extension for income and franchise tax
returns with the Franchise Tax Board (FTB) and should be
allowed a similar extension for use tax returns. Allowing
an extended due date for BOE returns that is aligned with
FTB extended due dates, will allow businesses to file their
use tax returns at the same time as their income and
franchise tax returns."
SB 884 - Ashburn
Page 4
Besides allowing a six-month automatic extension,
SB 884 grants penalty abatement under the use tax program
because the author believes there should be legislative
forgiveness of penalties for the first year because many
taxpayers are not aware of the use tax registration
requirement. The author notes that this change should
result in an increase in use tax compliance.
B. Background: Use Tax
The BOE offers the following background on the use
tax:
"In 1933, California enacted its first retail sales
tax. Within a few years of the adoption of the sales tax,
California retailers believed they were facing unfavorable
competition from retailers in states that had not adopted a
sales tax. Customers could choose to go to a neighboring
state without a sales tax and avoid paying the tax on their
purchases. California responded to this challenge in 1935
by adopting a use tax. The use tax is virtually identical
to the sales tax, except it is imposed on the storage, use
or consumption of the goods; and the tax is imposed on the
sales price of the good. The intent of a use tax is to
offset the incentive to purchase from retailers in other
states with low sales tax rates or no sales tax.
Although every state that has a sales tax imposes the
use tax, there has been limited success in collecting the
use tax from individual purchasers. Unlike the retail sales
tax that requires in-state retailers to collect the tax,
states have been unable to impose a similar compliance and
collection requirement on out-of-state retailers (an
out-of-state retailer is required to have physical presence
in a state in order to require that retailer to collect the
use tax).
Therefore, California must rely on purchasers to
report their use tax obligations on their out-of-state
purchases, such as those made over the Internet or through
mail order. And, even though a separate line is currently
SB 884 - Ashburn
Page 4
on the state income tax return with accompanying
instructions in the booklet for use tax reporting, the
compliance rate has been low. Unreported use tax is the
largest area of noncompliance in California's sales and
use tax program - an estimated $1.2 billion annually is
attributable to unreported California use tax by both
businesses and individual consumers. For 2008, the
Franchise Tax Board processed over 18.5 million returns,
yet only 44,114 state income tax returns had use tax
reported yielding only $9 million in state and local use
tax revenues.
Use tax is the complement to the state's sales tax
and was enacted in 1935 to ensure California merchants are
not operating at a competitive disadvantage to their
out-of-state competitors with low sales tax rates or no
sales tax. Today, with the convenience of Internet
shopping, and the states' inability to require a use tax
collection requirement on many out-of-state retailers, the
competitive disadvantage many California retailers
experience is exacerbated."
ABx4 18 required businesses that have annual gross
receipts of $100,000 or more and that are not already
registered with the BOE, to register with the BOE and file
an annual return to report their use tax liabilities on
their taxable purchases. This measure is aimed at
minimizing the competitive disadvantage many out-of-state
retailers have over in-state retailers, and to increase the
collection of use taxes owed by the larger California
businesses that do not make sales of tangible personal
property, but that may be incurring a use tax liability
(such as real estate firms, law and accounting firms, and
medical and dental offices).
C. Some relief is already provided?
While it is true that some businesses may not have
heard about the new requirement under ABx4 18 that requires
taxpayers to now register and make use tax payments
directly to the BOE, the BOE already has the general
SB 884 - Ashburn
Page 4
authority under current law to extend for up to one month
for good cause the time for making any return or payment.
Existing law also authorizes the BOE to relieve a person of
the late payment penalty, when it finds that a person's
failure to make a timely return or payment is due to
reasonable cause and circumstances beyond the person's
control, as specified.
At its March, 24, 2010 board meeting, members of
the BOE heard from the taxpayer community that the April 15
deadline for filing is creating hardship for many
businesses. The Members directed BOE staff to make it clear
to taxpayers that they may request relief from penalty or
request a 30-day extension. In response, BOE staff has
placed forms for both requests on the home page of the
Board's website and other locations convenient for the
taxpayer. Also, to ease the burden on taxpayers, the staff
is allowing taxpayers to submit one form to request relief
of penalty for 2007, 2008 and 2009 returns, and staff
indicated that it would be open to relieving taxpayers from
the penalty, when there is reasonable cause related to the
late filing. This would essentially buy taxpayers the
additional time they may need to file their returns without
incurring a penalty. The committee may wish to consider
letting these current solutions work to ease the burden on
taxpayers before adopting the additional penalty abatement
and deadline extensions this bill offers.
D. Does this bill create an inequity among use taxpayers?
The BOE has instituted various programs that
encourage compliance with the use tax law. For example,
before enactment of ABX4 18, the BOE instituted a statewide
compliance outreach effort. Under this ongoing effort, the
BOE continually identifies purchasers (outside the scope of
ABX4 18, such as non-businesses that do not receive at
least $100,000 in gross receipts) that are liable for use
tax. The liability for use tax has surprised many of these
California purchasers, but they are not covered under this
SB 884 - Ashburn
Page 4
bill and therefore would still have to report their use tax
obligations for the past three years and be subject to the
current penalties and interest for late payments. Thus, SB
884 automatically waives all penalties for one group of
taxpayers and not others thereby creating inequity within
this program. The committee may wish to consider if all
California purchasers who are billed for use tax should be
included in this bill.
Support and Opposition
Support: Spidell Publishing, Inc.
(Sponsor), Cal Chamber of Commerce, California Taxpayers'
Association
Oppose: None received
---------------------------------
Consultant: Meg Svoboda