BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 1028 - Correa
As Introduced February 12, 2010
Hearing: April 14, 2010 Fiscal: Yes
SUMMARY: Allows the Board of Equalization to impose
interest on a daily basis on a late payment, or
late prepayment, of a tax, fee or surcharge
provided the late payment or prepayment is only
one day late.
EXISTING LAW imposes penalties and interest on persons
who pay their tax and fee obligations after the due date.
The penalty is 10 percent of the tax, plus monthly, simple
interest on those unpaid taxes from the date the tax was
due to the date it was paid. In the case of a late
prepayment, the law imposes a 6 percent penalty. As of
January 1, 2010, the interest rate for late payments is 7
percent. Interest accrues on any unpaid tax on a monthly
basis regardless if the payment is late three days or 29
days. In other words, if a taxpayer is three days late on
a tax payment interest accrues for the entire month, not
for just the three days.
EXISTING LAW authorizes the Board of Equalization
(BOE) to relieve a late payment penalty when the Board
finds that the taxpayer's failure to make a timely payment
was due to reasonable cause and circumstances beyond the
person's control.
EXISTING LAW, generally, does not allow the BOE to
relieve accrued interest on late payments. However, the
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BOE may relieve interest in cases of a disaster or where
the failure to pay the tax in a timely manner was due to an
unreasonable error or delay by a BOE employee.
Additionally, existing law authorizes the BOE to deem
timely tax payments sent via the United States Postal
Service or through a bona fide commercial delivery service
if those payments are one day late, thereby relieving the
taxpayer of the monthly interest.
THIS BILL authorizes the BOE to modify, after meeting
as a public body and taking into account all facts and
circumstances, the method of computing interest on a late
payment, or prepayment, of a tax, fee, or surcharge by
accruing interest on a daily basis, instead of monthly,
provided:
1. The payment or prepayment of the tax was
made one, and only one, day after the date the
tax or prepayment was due.
2. The person was granted relief from all
penalties that applied to that payment of tax or
prepayment.
3. The person files a request for an oral
hearing before the BOE.
THIS BILL disallows the modification of interest
computation for any payment made pursuant to a deficiency
determination, a determination where no return has been
filed, or a jeopardy determination. Furthermore, the bill
defines "modified adjusted daily rate" in accordance with
the definition of "adjusted rate per annum" as defined by
Revenue and Taxation Code divided by 365.
FISCAL EFFECT:
The BOE estimates that this bill results in a revenue
loss of less than $ 10,000 annually.
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COMMENTS:
A. Purpose of the Bill
According to the author's office, this bill gives the
BOE authority to impose only one day's interest on a
payment made only one day late, in special circumstances
and on a case-by-case basis. This bill is intended to
encourage timely payments of taxes, fees and surcharges
while providing taxpayers with fairness and relief in
specified circumstances.
B. Background
According to the BOE, for 47 years its administrative
policy allowed a 1 day grace period in cases where a
mailing of a payment was postmarked one day late. Upon
learning they did not have the legal authority to provide
this 1 day grace period, the BOE ended this practice. AB
1638 (Assembly Committee on Revenue and Taxation, 1999)
authorized the BOE to continue their 47 year old policy.
However, AB 1638 contained a caveat: the one day grace
period applies only to payments made by mail or commercial
delivery service. Accordingly, late electronic payments
are not eligible for the one day grace period provided
under current law.
The BOE states that this bill targets those taxpayers
that are required by law to remit their tax payments to the
BOE electronically. This is because, unlike income tax
return due dates, most of these taxpayers are required to
make electronic payments each month to the BOE, and the due
dates of these payments vary. For example, for sales tax
payments, a payment is required every month, and for seven
months of the year, the due date is the 24th of the month.
For four of the months, the due date is the end of the
month. And for the June payment, the due date is the 15th
of the month. A payment of only 10 minutes late for these
taxpayers automatically results in an entire month's
interest charge - currently at a seven percent annual rate.
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Moreover, BOE points out that for a late income tax
payment, the Franchise Tax Board (FTB) computes interest on
a daily, rather than a monthly basis. Therefore, allowing
the BOE to compute interest on the liability for the one
day the taxpayer was late (if the other criteria in the
bill is met), would be consistent with the general interest
provisions administered by the FTB for all late payments.
C. Prompt Payment Incentive
The BOE contends that taxpayers who are one day late,
generally, do not make a conscious decision to be late and
that late payments are usually a result of inadvertent
errors or circumstances beyond the taxpayer's control.
Furthermore, this bill provides an incentive for those
taxpayers who happen to be a day late to remit their
payment sooner rather than later as presently taxpayers are
charged the same amount of interest regardless of being one
day or 29 days late. Accordingly, this bill may not
undermine the filing deadline but could encourage late
taxpayers to pay promptly.
D. Is the one-day standard equitable?
This bill provides that if the BOE, after taking into
account all facts and circumstances, finds "that it is
inequitable" to compute interest at a monthly rate, it may
compute interest on a daily basis provided the taxpayer is
only one day late. The one day standard, however, is
arbitrary. Why is computing interest on a daily basis
"equitable" for a payment that is one day, and not two
days, late, especially if being late was beyond a
taxpayer's control? And why is a two-day late payment less
deserving of the relief? To encourage the timely remittance
of taxes, California imposes penalties and interest to late
payments. The line of demarcation between timely and
untimely is the due date. If SB 1028 is aimed at
addressing an inequity that exists within the process,
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consistency may require treating all taxpayers who pay late
due to reasonable cause or circumstance beyond their
control equally.
Support and Opposition
Support: Board of Equalization (Sponsor)
Cal-Tax
California Chamber of Commerce
California Business Properties Association
California Manufacturers and Technology
Association
Michelle Steel, Board Member, Third District,
Board of Equalization
Oppose: None registered.
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Consultant: Meg Svoboda