BILL ANALYSIS �
AB 2175
Page 1
Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2175 (Harkey) - As Introduced: February 23, 2012
VOTE ONLY
Majority vote. Fiscal committee.
SUBJECT : Taxation: state tax liens
SUMMARY : Grants the State Board of Equalization (BOE)
discretion to withdraw notice of a state tax lien if the
underlying liability (including interest, penalties, and fees)
is fully paid. Specifically, this bill :
1)Provides that any such withdrawal shall be applied as if
notice of the state tax lien had never been filed.
2)Provides that, upon written request of a taxpayer granted this
relief, the BOE must make reasonable efforts to notify credit
reporting agencies of the withdrawal. The BOE must also seek
to notify any financial institution or creditor whose name and
address are specified in the taxpayer's request.
3)Grants the BOE withdrawal authority for state tax liens filed
pursuant to the:
a) Sales and Use Tax Law;
b) Use Fuel Tax Law;
c) Private Railroad Car Tax Law;
d) Cigarette and Tobacco Products Tax Law;
e) Alcoholic Beverage Tax Law;
f) Timber Yield Tax Law;
g) Energy Resources Surcharge Law;
h) Emergency Telephone Users Surcharge Act;
AB 2175
Page 2
i) Hazardous Substances Tax Law;
j) Integrated Waste Management Fee Law;
aa) Oil Spill Response, Prevention, and Administration Fees
Law;
bb) Underground Storage Tank Maintenance Fee Law;
cc) Fee Collection Procedures Law; and,
dd) Diesel Fuel Tax Law.
4)Grants the State Controller identical authority under the
Motor Vehicle Fuel Tax Law.
EXISTING LAW :
1)Requires the payment of various taxes, fees, and surcharges
administered by the BOE.
2)Provides for the creation of state tax liens that attach to
the property of any person who fails to pay any tax or fee
amount owed. Such state tax liens continue in effect for 10
years unless sooner released or discharged, or unless a notice
of state tax lien is filed, as provided.
3)Provides that notices of federal tax liens must be filed in
accordance with the Uniform Federal Lien Registration Act
(Act). Pursuant to the Act, notices of federal liens upon
real property must be filed in the recorder's office for the
county in which the real property subject to lien is situated.
FISCAL EFFECT : Unknown. The BOE states, "Enactment of this
bill could have a positive impact to state and local revenues to
the extent taxpayers would have an incentive to clear their tax
debts more quickly." The BOE goes on to note, "This effect,
however, is difficult to quantify."
COMMENTS :
1)The author has provided the following statement in support of
this bill:
AB 2175
Page 3
Taxpayers with outstanding liabilities can incur a lien put
against them by the taxing agency. Liens decrease the
credit rating of the taxpayer to which they are applied.
Even after outstanding liabilities are paid the lien can
remain on a taxpayer's record for ten years, hampering
their financial recovery unless the lien is withdrawn.
Under current law the Board of Equalization may only
withdraw a lien if it was issued in error. If a taxpayer
fully pays their outstanding liabilities the Board of
Equalization may only release the lien. However releasing
the lien does not remove it from the taxpayer's record
causing continued depression of a taxpayer's credit rating.
Granting the Board of Equalization the authority to
withdraw a lien if the tax liability has been paid in full
provides an incentive for delinquent taxpayers to pay. It
will also assist struggling taxpayers obtain a fresh start
with their tax liabilities.
2)Proponents state:
Tax liens are intended to improve compliance, and once a
taxpayer meets his or her tax obligations, the lien should
be withdrawn. The IRS is withdrawing federal liens, and
California should not subject its taxpayers to a lien
record when no such record exists for the much larger
federal liability. IRS Commissioner Doug Shulman said that
this is "good for people facing tough times, and reflect�s]
a responsible approach for the tax system.�"] AB 2175 may
have a positive impact to state revenues to the extent
taxpayers would have an incentive to clear their tax debts
more expeditiously.
The bill, however, only authorizes the Board of
Equalization and the state controller to release liens once
a taxpayer has paid in full. The Franchise Tax Board
issues more liens �than] the Board of Equalization and the
state controller combined, and should be included in this
bill. The Franchise Tax Board's accounts receivable was
close to $13 billion as of June 2010, and this bill would
serve to reduce that number by eliminating the adverse
effects of a lien record.
AB 2175
Page 4
�. . .]
As a technical matter, the bill overlooks necessary
corresponding changes that need to be made to Government
Code Sections 7171, 7174, 7223 and 7223 �sic]. These
conforming amendments would address lien documents filed
with county recorders and the secretary of state. Failure
to make such conforming amendments would undoubtedly
complicate the administration of lien withdrawals for tax
agencies.
3)Opponents state:
Your bill would require the State Board of Equalization and
Controller's Office, upon written request by the taxpayer,
to notify credit reporting agencies about the withdrawal of
tax liens. The state should not be put in this position if
a taxpayer fails to pay their taxes due and does not
respond to failure to pay notices. Other creditors are not
subject to such a requirement and the state should not be
made subject to such a requirement. This should remain the
taxpayers' responsibility since they were the one who
failed to pay the bill.
Your bill would also provide that state tax liens could be
withdrawn as if they have never been filed if all the fees
and penalties are paid in full. The whole intent of tax
liens is to encourage taxpayers to pay their taxes in a
reasonable amount of time. The record of state tax liens
is an important deterrent to encourage taxpayers to pay
their taxes. Removing this record would serve to weaken
the state's tax enforcement tool.
4)The BOE notes the following in its staff analysis of this
bill:
a) Sponsor and Purpose : This bill is sponsored by the BOE.
It was prompted by an announcement last year by the
Internal Revenue Service (IRS) regarding its efforts to
help struggling taxpayers obtain a fresh start with their
tax liabilities. Part of this effort includes making
changes to its lien filing practices, including withdrawing
a lien when a taxpayer resolves his or her outstanding
liability with the IRS. The IRS has determined that this
approach is in the best interest of the government, and the
AB 2175
Page 5
Members of the BOE believe this approach should be made
part of California's tax, fee and surcharge laws.
Currently, even when a liability is paid in full, a tax
lien can remain in a taxpayer's credit history for up to
ten years and will only be shown as "released." And, a
released tax lien can affect a taxpayer's credit just as an
unpaid tax lien can. Under this bill, if a taxpayer pays
the liability in full, the withdrawn lien may be removed
from the taxpayer's credit history much sooner, and, thus,
would promote the taxpayer's financial recovery. In
addition, this bill would provide a significant incentive
for taxpayers to resolve their tax debts more
expeditiously.
b) Bill would have some impact on workload : Over the
course of a year, the BOE releases about 3,000 state tax
liens due to a taxpayer's resolution of his or her
liabilities. Enactment of this bill would increase workload
attributable to issuing withdrawals and notifying credit
reporting agencies, financial institutions, and creditors.
However, these tasks could be performed with existing
staff.
c) Previous legislation : This bill is similar to last
year's SB 228 (Wyland), which was sponsored by Board Member
George Runner. That measure was held in the Senate
Appropriations Committee.
5)Committee Staff Comments :
a) Overview of existing state law : In general, when a tax,
fee, or surcharge liability becomes due and payable but
remains unpaid, a perfected and enforceable state tax lien
is created for the amount due (including penalties,
interest, and costs). The lien attaches to both the real
and personal property of the taxpayer, and continues in
effect for 10 years from the date of its creation unless
sooner released or otherwise discharged. The lien expires
automatically after 10 years unless a "notice of state tax
lien" is recorded with the county recorder's office (for
real property) or the Secretary of State (for personal
property). When a notice of state tax lien is recorded,
the taxpayer's creditors are publicly notified that the
applicable state agency (i.e., the BOE) has a claim against
the taxpayer's real and personal property, including
AB 2175
Page 6
property acquired after the lien is recorded.
The BOE notes that, under the law, it is required to mail a
preliminary notice to the taxpayer at least 30 days before
filing a lien with the county recorder or Secretary of
State. A preliminary notice, in turn, contains the
following information: (1) the statutory authority for
filing the lien; (2) the earliest date on which the lien
may be recorded; and, (3) the remedies available to the
taxpayer to prevent the filing of a lien.
b) But what about the feds ?: A federal tax lien arises
automatically when a taxpayer fails to pay taxes owed
within 10 days of an IRS demand for payment. The federal
government may also file a notice of federal tax lien,
which publicly notifies the taxpayer's creditors that the
IRS has a claim against the taxpayer's property, including
property acquired after the notice is filed. Once a lien
arises, the IRS generally cannot release the lien until all
taxes, penalties, interest, and recording fees are paid in
full or until the IRS may no longer legally collect the
tax.
The IRS also has the power to "withdraw" a notice of
federal tax lien under certain circumstances. For example,
the IRS will withdraw any notice filed while a bankruptcy
automatic stay was in effect. In addition, the IRS may
withdraw a notice if: (1) the IRS determines that the
notice was filed prematurely; (2) the taxpayer enters into
an installment agreement to satisfy the liability; (3)
withdrawal will allow the taxpayer to pay taxes more
quickly; or, (4) withdrawal is in the taxpayer's best
interest, as determined by the National Taxpayer Advocate,
and the best interest of the federal government.
c) Unanswered questions : This bill would allow the BOE to
withdraw notice of a state tax lien if the underlying
liability is fully paid. This bill, however, leaves a
number of questions unanswered. For example, would such
withdrawals be granted to all taxpayers as a matter of
course, including habitual delinquents who have repeatedly
failed to pay their tax liabilities in the past?
Alternatively, would withdrawals be granted to taxpayers on
a discretionary basis? If so, would this discretion be
wielded by BOE staff or the BOE's elected members?
AB 2175
Page 7
Moreover, what criteria would be applied in the
decision-making process? As it stands, this bill appears
to vest BOE with unfettered discretion to grant withdrawals
in any manner it sees fit.
d) What kinds of liabilities are we talking about? : This
bill applies only to taxes and fees administered by the BOE
and the State Controller. Thus, the relief provisions
would apply largely to liabilities arising under the
state's Sales and Use Tax Law. Most retailers that report
sales tax, however, collect sales tax reimbursement from
their customers, and essentially hold these funds in trust
for the state. Thus, this bill would allow the BOE to
withdraw a lien filed against a retailer that failed to
turn over funds already collected but would provide no
relief to individuals and small businesses that have had a
lien filed against them for unpaid income taxes.
e) The law of unintended consequences : As noted, this bill
would permit the withdrawal of certain state tax liens.
Upon the written request of a taxpayer, the BOE would then
have an affirmative duty to inform credit reporting
agencies of the withdrawal. Thus, this bill appears
predicated on the assumption that credit reporting agencies
would process these withdrawals as they currently process
notices that a lien was recorded in error (i.e., by
removing it from the taxpayer's credit report). Assuming
this is the case, is it fair to place someone who had a
legitimate tax lien recorded against them in the very same
position as a taxpayer who had an erroneous lien filed
against them?
Moreover, under current practice, a host of unpaid
liabilities are routinely reported to credit agencies. If
a homeowner misses a mortgage payment or a small business
owner fails to pay a credit card bill, these missed
payments will most likely appear on the individual's credit
report for a number of years with no prospect for removal,
even if the underlying liability is fully paid. Should tax
debts be withdrawn from credit reports when other debts
remain? Obviously, if all past liabilities were
automatically removed from credit reports upon payment,
this would render such reports useless as a mechanism for
assessing a person's creditworthiness.
AB 2175
Page 8
f) Related legislation : SB 228 (Wyland), as heard in
committee, would have allowed the BOE and the Franchise Tax
Board to withdraw fully paid tax liens. SB 228 was held in
the Senate Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
State Board of Equalization (sponsor)
California Taxpayers Association
Howard Jarvis Taxpayers Association
Opposition
American Federation of State, County and Municipal Employees,
AFO-CIO
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098