BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 884- Ashburn
Amended: June 16, 2010
Hearing: July 1, 2010 Urgency Fiscal: Yes
SUMMARY: Makes Several Changes to the 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.
THIS BILL would make several changes related to the
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use tax registration program enacted by last year's ABX4
18. Specifically, this bill would:
Eliminate the April 15 due date for qualified
purchasers and give the BOE the authority to establish
calendar year or fiscal year reporting bases for these
qualified purchasers - as the Board currently has for
most sales and use tax taxpayers. Accordingly, the
returns and due dates of the use tax would either be
on January 31 following the calendar year for those
taxpayers the Board designates to be on a calendar
year reporting basis, or July 31 for those taxpayers
the Board designates to be on a fiscal year (July 1 to
June 30) basis.
Authorize the Board to grant a reasonable extension
of time for filing 2009 returns pursuant to this
program up to six months, as specified.
Waive all penalties for reporting periods 2007,
2008 and 2009 provided that the qualified purchaser
pays all use tax liability for those periods by March
15, 2011, and require the BOE to make refunds of any
penalties paid by qualified purchasers for the 2007,
2008 and 2009 reporting periods, as specified.
FISCAL EFFECT:
According to the BOE, to the extent some taxpayers
delay remitting their use tax until March 15, 2011, some
shifting of revenues from fiscal year 2009-10 to 2010-11
could occur. There could also be some foregone penalty
revenue attributable to those taxpayers who voluntarily
remitted the penalty and did not request relief. BOE states
that the amount of revenue shifting is indeterminable at
this time. However, the amount of foregone penalty revenue
would amount to $ 991,144, as BOE would have refunded this
penalty revenue "as promptly as feasible" under SB 884.
COMMENTS:
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A. Purpose of the Bill
The author provides the following statement:
Assembly Bill X4 18, which passed last year, required
residents who receive $100,000 in gross receipts in
business operations, who are not registered with the
board as retailers, to register and file a use tax
return by April 15. This new filing requirement has
created some confusion among tax payers. The
requirement to register for use tax was signed by the
Governor in July of 2009 which gave the Board of
Equalization less than 6 months to notify taxpayers of
the mandate. As a result not all applicable taxpayers
were informed or have had adequate time to prepare for
this year's first time filing. Moreover, the April
deadline is different from the fiscal year calendar by
which many taxpayers file with the FTB. Consequently,
taxpayers may be unfairly penalized for this year's
missed deadline.
[SB 884] will extend the April 15th use tax filing
deadline for personal income and corporate tax filers.
This legislation will also allow the Board of
Equalization to exempt use tax filers from the
penalties that could result from confusion related to
the current filing deadlines. The extension of the use
tax filing deadline and the ability to exempt filers
from penalties will allow the state the time necessary
to implement this new requirement and properly notify
the affected taxpayers.
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
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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 pay the tax, states
have been unable to impose a similar compliance and
collection requirement on out-of-state retailers (an
out-of-state retailer must 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
on the state income tax return with accompanying
instructions in the booklet for a simple, convenient way to
report use tax, 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 $1.1
billion annually is attributable to unreported California
use tax by both businesses and individual consumers. For
2009, the Franchise Tax Board (FTB) processed over 18.2
million returns, yet only 50,540 state income tax returns
had use tax reported yielding only $10 million in state and
local use tax revenues. Individuals report a much greater
proportion of the tax than businesses (in 2009, for
example, businesses only reported $1.7 million of the total
$10 million).
ABX4 18 was a budget revision measure signed into law
on July 28, 2009. This measure was enacted in an effort to
minimize this competitive advantage many out-of-state
retailers have over in-state retailers, and to increase the
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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.
More than 198,000 taxpayers have been registered by
the BOE pursuant to these provisions and have been notified
to report and pay their use tax liability for purchases
subject to use tax for the 2009 calendar year by April 15,
2010. Additionally, the BOE is also requiring that these
taxpayers file use tax returns for calendar years 2007 and
2008 for their untaxed purchases.
Beginning in September 2009, the BOE sent these
taxpayers an initial notification letter informing them of
the new law. The letters further explained that the BOE is
creating an account for recipients so that they can report
and pay their use tax liabilities online. Although returns
and payments may all be done online, the registration form
(a simple one-page form) must be mailed, as well as any
requests for relief of penalty.
As of June 14, 2010, the BOE has received over 245,000
returns by nearly 88,000 qualified purchasers, with
payments totaling over $25 million. Penalty revenue of
$991,144 has also been collected.
C. Is this bill too generous in its penalty relief?
SB 884 automatically relieves "qualified purchasers"
of penalties of late use tax payments for three
years--2007, 2008 and 2009--even if they have had prior
contact with the BOE. Many of these "qualified purchasers"
are tax preparers and, as such, have been targeted as a
specific group of taxpayers that the BOE has stepped up its
outreach efforts to regarding their current use tax
liabilities. For example, in early 2008, the BOE sent
information about use tax reporting state income tax
returns to 71,000 tax professionals in order to encourage
them to consider their clients' use tax liability when
preparing their year-end tax returns. BOE's mailing list
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included certified public accountants, enrolled agents, and
members of the California Tax Education Council. Yet even
with this direct contact by the BOE, these "qualified
purchasers" are granted 3 years of penalty relief under SB
884.
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
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. In fact, currently the BOE is
allowing taxpayers to submit one form to request relief of
penalty for 2007, 2008 and 2009 returns, and the BOE has
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.
Thus, given the penalty relief that may be provided
under existing law as well as the direct contact by the BOE
informing "qualified purchasers" of their use tax
liabilities, SB 884's generous penalty relief is called
into question. The committee may wish to consider whether
such penalty abatement is too generous and even unnecessary
given BOE's current authority and efforts aimed at easing
the burden on use taxpayers under the new use tax
registration program.
D. Does this bill create inequity among use
taxpayers?
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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
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, California Society of Enrolled
Agents,
Betty Yee, Chairwoman, State Board of Equalization
Oppose: None received
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Consultant: Meg Svoboda
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