BILL ANALYSIS
SB 1028
Page 1
Date of Hearing: June 28, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony Portantino, Chair
SB 1028 (Correa) - As Introduced: February 12, 2010
Majority vote. Fiscal committee.
SENATE VOTE : 30-0
SUBJECT : Administration of interest: late payments, or
prepayments, of taxes, fees, and surcharges.
SUMMARY : Authorizes the members of the State Board of
Equalization (BOE) to impose interest on a daily basis in the
case of a late payment, or prepayment, of a tax, fee, or
surcharge, provided that the payment or prepayment is only one
day late. Specifically , this bill:
1)Authorizes the members of BOE, after meeting as a public body
and taking into account all facts and circumstances, to
determine whether it is equitable to compute interest on a
late payment, or prepayment, of a specified tax, fee, or
surcharge at a modified adjusted rate per month or a modified
adjusted daily rate.
2)Specifies the following additional conditions that must be
satisfied before interest imposed on a late payment or
prepayment may be computed at the modified adjusted daily
rate, instead of the modified adjusted rate per month:
a) The payment of tax, fee, or surcharge or the prepayment
of tax was made by a person one business day after the date
the tax, fee, or surcharge, or prepayment was due;
b) The person was granted relief from all penalties that
applied to that payment of tax, fee, or surcharge, or
prepayment; and,
c) The person has filed a request for an oral hearing
before BOE.
3)Defines the terms "modified adjusted daily rate" and "modified
adjusted rate per month" by reference to the Revenue and
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Taxation Code (R&TC) Section 6591.5.
4)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 issued by BOE.
5)Applies to payments or prepayments of tax, and payments of the
fees and surcharges imposed, respectively, pursuant to the
Sales and Use Tax (SUT) Law, Motor Vehicle Fuel Tax Law,
Diesel Fuel Tax Law, Use Fuel Tax Law, Cigarette and Tobacco
Products Tax Law, Alcoholic Beverage Tax Law, Hazardous
Substances Tax Law, Integrated Waste Management Fee Law, Oil
Spill Response, Prevention, and Administrative Fees Law,
Underground Storage Tank Maintenance Fee Law, Fee Collection
Procedures Law, Energy Resources Surcharge Law, Emergency
Telephone Users Surcharge Act, and the law governing the
taxation of specified insurance companies.
6)Declares the legislative intent that BOE exercise its
authority to change the method of computing interest only in
special circumstances and on a case-by-case basis.
EXISTING LAW imposes a penalty for a late payment or late
prepayment of tax, fee or surcharge administered by BOE. The
penalty for a late payment is 10% of the amount of tax, fee, or
surcharge due, plus monthly, simple interest on the unpaid tax,
fee or surcharge obligation. In the case of a late prepayment,
existing law imposes a 6% penalty. Currently, the rate of
interest for late payments is set at 7%, where the interest
accrues on any unpaid tax liability on a monthly basis.
Therefore, regardless of whether a taxpayer makes a payment two
days after the due date of a return, or at the end of the month
following the due date, the taxpayer is charged interest for the
entire month. In the case of payments remitted electronically,
i.e. electronic funds transfers, a payment made on the due date,
but after 3 p.m., is also subject to an entire month's interest
charge. Interest on tax deficiency is not a "penalty" but is
simply compensation for a taxpayer's use of money after the due
date of the tax. (In re Vignola, Bkrtcy. N. D. Cal.2007, 377 B.
R. 271).
While BOE has authority to relieve a person from a late payment
penalty when BOE finds that the person's failure to make a
timely payment was due to reasonable cause and circumstances, it
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generally does not have the same authority to relieve the person
of the interest on that late payment, except in very limited
circumstances. Specifically:
1)BOE may relieve interest only in cases where a person's
failure to make a timely return or payment is due to a
disaster, defined as circumstances beyond the person's
control.
2)The SUT Law allows BOE to relieve interest imposed in cases
where the failure to file or pay fees is due, in whole or in
part, to an unreasonable error or delay by an employee of BOE
acting in his/her official capacity.
3)Government Code Section 15620.5, which was added by AB 1638
(Committee on Revenue and Taxation), Chapter 929, Statutes of
1999, authorizes BOE to establish a uniform policy for the
acceptance of payments or prepayments that are delivered to
BOE via the United States (U.S.) mail or a bona fide
commercial delivery service . In accordance with this section,
BOE has implemented a policy allowing taxpayers a uniform
one-day grace period in cases where a mailing of a return or
payment was postmarked one day after the due date. Prior to
1997, a similar administrative policy was in place for 47
years but that policy was initially eliminated after BOE's
legal staff had reviewed the policy and found no legal basis
for such policy.
FISCAL EFFECT : Insignificant. BOE estimates that the limited
interest relief provided by this measure will result in an
annual revenue loss of less than $10,000.
COMMENTS :
1)According to the author's office, this bill is intended to
give 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. SB 1029 encourages timely payments
of taxes, fees and surcharges, while providing taxpayers with
fairness and relief in specified circumstances.
2)This bill is sponsored by BOE. According to the sponsor, the
purpose of this bill is "to provide some limited flexibility
for the members of BOE to address the inequity of applying an
entire month's interest to a liability when the liability is
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paid only one day late and the late payment is due to
reasonable cause or circumstances beyond the taxpayer's
control."
3)Should electronic payments of tax be treated differently than
payments made by mail?
If a taxpayer decides to pay his/her tax electronically and
inadvertently misses the 3 p.m. deadline applicable to
electronic payments, even by 10 minutes, he/she will
automatically be penalized with an entire month's interest
charge, currently set at a 7% annual rate. However, if the
same taxpayer chooses the U.S. Postal Service or a bona fide
commercial delivery service and mails the payment on the day
after the due date, he/she will not be subject to the 7%
interest charge. In fact, that taxpayer does not even have to
ask BOE for the relief - it is automatic. In 2000, BOE
reinstated its prior practice of allowing taxpayers a uniform
one-day grace for remittances, claims for credit or refund,
documents, or returns that are delivered to BOE by U.S. mail
or commercial delivery service, provided that the envelope
containing the payment is postmarked one day after the due
date for the payment. This policy, however, does not apply to
electronic payments of tax, even though some taxpayers are
required to remit their payments to BOE electronically. For
example, any taxpayer whose average monthly tax payments are
$17,000 or more is required to pay the sales and use tax
electronically. Those taxpayers do not have a choice but to
remit tax payments electronically. BOE has recognized that
electronic payments of tax should not be treated differently
from tax payments mailed via U.S. Postal Service or commercial
delivery service and sponsored this bill to provide relief,
primarily, to those taxpayers that are required file their
taxes electronically.
4)Does this bill apply only to electronic payments? It is
unclear. The plain language of this bill does not limit its
application only to electronic remittances of tax, fee, or
surcharge. Thus, arguably, if this bill were to become law, a
taxpayer who has mailed a payment or prepayment of tax
postmarked one day after the due date for the payment would be
subject to all of the applicable requirements to be eligible
for the interest relief. However, under BOE's internal
policy, the taxpayer's payment, most likely, would be accepted
as timely. To eliminate the ambiguity, Committee staff
suggests that this bill be amended to limit its application
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only to electronic payments or prepayments of tax, fee, or
surcharges.
5)Is it too easy to qualify for the relief provided by this
bill? No. Unlike BOE's uniform grace day policy for
mailed-in payments, the interest relief proposed by this bill
is not available to a person unless, in addition to all other
requirements, BOE relieves the person from all penalties that
applied to the payment of tax, fee or surcharge. Generally,
in order to relieve a taxpayer from the penalties, BOE must
find that the person's failure to make a payment in a timely
manner was due to reasonable cause and circumstances beyond
the person's control, and occurred notwithstanding the
exercise of ordinary care and the absence of willful neglect.
In addition to being relieved from all penalties, the person
must request an oral hearing before BOE. If BOE, taking into
account all facts and circumstances, determines that it is
inequitable to compute interest on a monthly basis, interest
will be computed on a daily basis. A "facts and
circumstances" test is routinely used by BOE in other cases to
provide relief to taxpayers. For example, BOE is authorized,
using the same "facts and circumstances" test, to relieve from
tax liability or penalty an innocent spouse. (R&TC Section
6456).
6)Why are the requirements for tax relief in the case of
electronic payments more stringent? Under BOE's internal
schedule, a payment that is postmarked one day after the due
date will be accepted as timely. Taxpayers are not required
to request an oral hearing before BOE nor do they need to be
relieved of all the penalties that otherwise may be applicable
to the payment. The practice of automatically allowing a
taxpayer a grace day for his/her filing was originally adopted
by BOE because it recognized that the taxpayer has no control
over the delivery process once the payment is entrusted to the
U.S. Postal Service or any other delivery service. In the
case of an electronic payment, no such problem exists - the
taxpayer is in control of the process until the payment is
submitted to BOE. Arguably, the more stringent requirements
of the proposed uniform grace day policy for electronic
payments are justified because taxpayers cannot blame a third
party for the delay. However, would not those requirements
discourage people from remitting tax payments electronically?
It seems that taxpayers will choose to mail their tax, fee or
surcharge payments, unless they are required by law to submit
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those payments to BOE electronically.
7)Does this bill create a financial incentive for a taxpayer to
pay late? It is unlikely that this bill would encourage
taxpayers to delay the remittance of payments because the
delinquent taxpayer will not be relieved by this bill of the
most severe delinquency charges, i.e. a 10% penalty for late
payments and a 6% penalty for late prepayments, unless the
taxpayer's failure to make a timely payment is due to
reasonable cause and circumstances beyond the person's
control. A conscious decision by a person to be late on the
payment or prepayment of tax, fee, or surcharge does not
qualify as a reasonable cause or circumstance beyond the
person's control. Therefore, this bill is not likely to
encourage late payments or late prepayments, and, in fact,
does provide an incentive for taxpayers and fee payers to make
payments and prepayments as soon as possible.
8)Franchise Tax Board (FTB) Practice. If a taxpayer does not
pay the amount of tax reported on his/her income tax return by
the original due date, or if FTB assesses additional tax that
becomes due and payable, FTB will charge interest on the
balance due, compounded daily. The interest is calculated at
the adjusted annual rate established under R&TC Section 19521
for the period from the due date until the date paid. (R&TC
Section 19101). The interest may be abated under specified
circumstances including, among others, extreme financial
hardship, erroneous refund, or reliance on formally requested
written advice.
9)What is so magical about one day as opposed to two days? The
relief afforded to a taxpayer by this bill is based on the
assumption that the taxpayer's payment was only one day late.
Why is computing interest on a daily basis "equitable" for a
payment that is one day, and not two days, late? And why is a
two-day late payment less deserving of the relief? As noted
in the analysis of this bill by the Senate Committee on
Revenue and Taxation, if SB 1028 is aimed at addressing an
inequity that exists within the process, consistency may
require treating all taxpayers who pay late due to reasonable
cause or circumstance beyond their control equally. Thus, as
an alternative to our suggestion in comment 4, the Committee
may wish to consider amending this bill to follow FTB's
current practice of calculating interest on a daily, instead
of monthly, basis until the payment is received.
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10)Legislative History. Similar bills were sponsored by BOE
for the last two years: AB 693 (Silva) and AB 1901 (Silva).
AB 693, which was introduced in the 2009-10 legislative
session, died in this Committee, and AB 1901, which was
introduced in the 2007-08 Legislative Session, passed out of
the Assembly but failed passage in the Senate Revenue and
Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
State Board of Equalization (sponsor)
California Chamber of Commerce
California Business Properties Association
California Manufacturers and Technology Association
California Taxpayers' Association
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098