BILL ANALYSIS �
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THIRD READING
Bill No: AB 658
Author: Charles Calderon (D)
Amended: 8/20/12 in Senate
Vote: 21
PRIOR VOTES NOT RELEVANT
SUBJECT : State Board of Equalization: administration
SOURCE : Author
DIGEST : This bill overturns a recently issued Superior
Court decision that deemed specified transactions subject
to local sales tax instead of local use tax, and resolves
conflicts with SB 1548 (Wyland) relating to offers in
compromise.
Senate Floor Amendments of 8/20/12 delete the prior version
of the bill, make technical, non-substantial changes to the
Revenue and Tax Code and replace it with the above
language.
ANALYSIS :
I. Sales and Use Tax Portion of This bill
In 1933, California enacted its sales tax, and followed
it with the use tax two years later. Charter Cities
began applying their own sales taxes soon after,
commencing with the City of San Bernardino in 1945. The
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Legislature also first authorized general law cities to
levy their own sales and use taxes by statute in 1949.
In 1955, the Legislature enacted the Bradley Burns Local
Sales and Use Tax Law, which allowed counties to levy
its own tax of 1%, with city taxes counting as a credit
for the taxpayer against the county tax, ensuring that
the overall rate doesn't exceed one percent. The
measure centralized administration, collection, and
audit with the Board of Equalization (BOE), replacing
the previous system where each city implemented its own
tax. As a uniform act, it required all counties to
enact an ordinance imposing the tax on transactions
anywhere in the county, and cities had to follow by
approving its own ordinance providing that its tax of
one percent or less must count as a credit against the
county's tax. Both ordinances must contain provisions
identical to the uniform act, and agencies must contract
with the BOE to administer the tax on its behalf for its
tax to be valid.
The law contains one "place of sale rule" for the state
sales and use tax, but a different one for the local
sales and use tax. For state purposes, the physical
location of the property at the time of sale determines
whether the sales or use tax applies: the sales tax
applies when the property was inside the state at the
time of sale, if outside, the use tax likely applies.
However, the law states that, "all retail sales are
consummated at the place of business of the retailer,"
for local tax purposes.
Despite the two different place of sale rules in
statute, BOE Regulation 1803 states that the local sales
tax cannot apply when the state tax does not, creating
an apparent conflict between law and regulation whenever
a consumer purchases an item from a retailer in a city,
but the product is physically located outside the state
at the time of purchase; for example, the purchase of a
television set at a local store that is shipped to the
consumer from a warehouse in Nevada. The state rule
deems the transaction subject to use tax because the
property was out-of-state at the time of purchase, but
the local rule would appear to treat it as a sales tax
because the sale was consummated a retailer's place of
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business. However, Regulation 1803 has always treated
the transaction as use tax by applying the state place
of sale rule, and prohibiting the transaction to being
treated both as a sales tax for local purposes and
subject to use tax under the state law.
Because state law allocates sales tax to the
jurisdiction where the transaction took place, and use
tax is instead allocated to a pool in the county where
the transaction took place, the revenue effects of
allocation are significant. In 1995, cities that would
benefit from changing the treatment of these
transactions from use tax to sales tax retained
MuniServices, LLC to petition BOE to reallocate the tax.
BOE denied the petitions in 2010, but affected cities
filed suit in court against BOE.
On July 31st of this year, the Superior Court in the
City and County of San Francisco issued a decision that
determined that Regulation 1803 violates and is
inconsistent with state law, and ordered BOE to
reallocate tax prospectively commencing in the first
quarter of 2013 (Case Nos. CPF-09-509231, CPF-09-509232,
and CPF-09-509234). BOE is expected to appeal the
decision, and the Appellate Court is expected to stay
the reallocation order required by the Superior Court
decision.
II. SB 1548 Conflict
The Legislature first allowed the Franchise Tax Board
(FTB) to accept offers in compromise (SB 94 (Chesbro),
Chapter 931, Statutes of 1999), then later authorized
the BOE to do so for final tax liabilities for owners of
defunct businesses under the Sales and Use Tax Law, the
Use Fuel Tax Law, and the Underground Storage Tank
Maintenance Fee Law (AB 1458 (Kelley), Chapter 152,
Statutes of 2002). The Legislature then extended the
authority for the BOE to make offers in compromise for
final tax liabilities under the Cigarette and Tobacco
Products Law, Alcoholic Beverage Tax Law, Timber Yield
Tax Law, Energy Resources Surcharge Law, Emergency
Telephone Users Surcharge Law, Hazardous Substances Tax
Law, Integrated Waste Management Fee Law, Fee Collection
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Procedures Law, Diesel Fuel Tax Law, and the Oil Spill
Response Prevention and Administration Fees law (AB 3076
(Assembly Revenue and Taxation Committee), Chapter 364,
Statutes of 2006).
Under the BOE and FTB programs, the taxpayer must
establish that the amount offered in payment is the most
that can be expected to be paid or collected and they do
not have reasonable prospects of acquiring increased
income or assets that would enable them to satisfy a
greater amount of the tax liability than the amount
offered. BOE and FTB can reestablish the final tax
liability should the taxpayer have sufficient annual
income during the succeeding five-year period following
the date of the compromise. When BOE and FTB determine
that a taxpayer concealed assets or falsified, withheld,
destroyed, or mutilated any book, document, or record
relating to their financial condition, they may
reestablish all compromised liabilities and the taxpayer
may be found guilty of a felony crime, fined up to
$50,000, and imprisoned.
In 2007, the Legislature expanded the program to allow
BOE to accept offers in compromise for businesses
currently in operation, as many taxpayers were surprised
when BOE audits uncovered transactions that the taxpayer
did not know were taxable, so they never charged
consumers the tax (AB 2047 (Horton), Chapter 222,
Statutes of 2008).
SB 1548, which is in enrollment, extends the sunset,
from January 1, 2013 to January 1, 2018, on the BOE's
authority to accept offers in compromise from firms
currently in operation. The bill applies to the Sales
and Use Tax Law, Cigarette and Tobacco Products Law, Use
Fuel Tax Law, Alcoholic Beverage Tax Law, Emergency
Telephone Users Surcharge Law, Fee Collection Procedures
Law, Diesel Fuel Tax Law, and the Oil Spill Response
Prevention and Administration Fees law.
Comments
When the Senate Revenue and Taxation Committee, the
predecessor to the Senate Governance and Finance Committee,
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approved AB 2047 in 2008, it inserted a sunset to review
the authority granted by the bill to accept offers from
firms still in operation. According to BOE, they have
accepted a total of eight offers from firms that were not
defunct when they made the offer, seven of which are still
in operation. The total amount collected was $532,668,
and the BOE forgave approximately $357,000 when accepting
those offers.
This bill resolves conflicts with SB 1548.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 8/21/12)
---
OPPOSITION : (Verified 8/21/12)
City of Roseville
ARGUMENTS IN OPPOSITION : The City of Roseville states:
The bill is an ill-considered attempt to circumvent a
trial court decision that has not yet been reviewed on
appeal. On July 31, 2012, the San Francisco Superior
Court entered a 78-page Final Statement of Decision
(Case Nos. CPF-09-509231, 509232 and 509234) determining
that the State Board of Equalization has been
incorrectly applying the Bradley-Burns Act to certain
local sales tax transactions in which the goods were
shipped into California from out-of-state locations.
The proponents of the Bill were on the "losing side" of
the court decision about how the Bradley-Burns Act, as
enacted by the Legislature, must be interpreted. They
now are seeking a "Legislative fix" even though the
trial court's ruling is certain to be reviewed by the
Court of Appeal. If the Court of Appeal (or California
Supreme Court) agree with the proponents of the Bill
about the current meaning of the Bradley-Burns Act and
overturn the trial court's decision; then the Bill is
unnecessary. If the courts affirm the trial court's
decision, then the Bill is unconstitutional because it
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would change the Bradley-Burns Act in violation of
Proposition 1A.
The Bill seeks to affect in a single stroke the outcome
of complex and ongoing administrative and court
proceedings in the "interstate shipment" (aka "Mass
Appeal") local sales tax cases. These cases have been
pending, in most cases, for more than 15 years, first
before the Board of Equalization and now before the
courts. The only appropriate way to resolve these cases
is to let the court system do its job of applying the
Bradley-Burns Act. For both Constitutional and
common-sense reasons, the Legislature should not try to
intervene, especially while the cases are still before
the courts.
Roseville stands to lose a significant amount of revenue
annually if an appeal is not successful, but the bill
has been enacted.
AGB/DW/RG:k 8/21/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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