BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 421 HEARING: 4/27/11
AUTHOR: Correa FISCAL: Yes
VERSION: 3/22/11 TAX LEVY: No
CONSULTANT: Miller
SALES AND USE TAXES: OVERPAYMENT INTEREST
Equalizes under- and over-payment of interest at the Board
of Equalization.
Background and Existing Law
Under existing law, persons who are late in payment of
their tax, fee or surcharge (tax) obligations must to pay a
penalty of 10 percent of the tax, plus interest on those
unpaid taxes from the date the tax was due to the date upon
which they are paid. Interest on a late payment of tax is
calculated using the Internal Revenue Service (IRS) rate
pursuant to provisions of the Internal Revenue Code, plus
three percent, currently seven percent.
Existing law also provides for interest to be granted to
persons who have overpaid their tax or fees (when it is
determined that the overpayment was not intentional or a
result of carelessness). Interest on overpayments is
calculated differently than it is for late payments. For
overpayments, the law specifies that interest be calculated
based on the bond equivalent rate of 13-week treasury bills
auctioned, rounded to the nearest full percent (or if that
rate is a multiple of of one percent, the rate is
increased to the next highest full percent). Recently, the
bond equivalent rate of 13-week treasury bills has been so
low that, when rounded to the nearest full percent, the
rate is actually 0 percent for purposes of the credit
interest rate on overpayments. Consequently, no interest
has been granted on overpayments of tax made for any period
starting July 1, 2009 through today.
Prior to July 1, 1991, there was no difference between the
rate of interest paid by the BOE to taxpayers on
overpayments and late payments. However, in order to
address the budget shortfall at the time, the Legislature
SB 421 -- 3/22/11 -- Page 2
significantly changed the computation of credit interest on
overpayments of tax (AB 2181 and SB 179, 1991). Instead of
using the IRS rate plus three percent for overpayments, the
law required that interest on overpayments be based on the
bond equivalent rate of 13-week treasury bills auctioned -
a rate that is generally six to eight percent lower.
Therefore, under current law, there is significant
difference in the rate of interest paid on overpayments and
the rate of interest assessed on late payments.
Proposed Law
Senate Bill 421 specifies that the rate established for
interest payable by the state upon overpayments of tax
shall be equal to the rate assessed by the BOE on late
payments. The bill would become effective on January 1,
2012.
State Revenue Impact
BOE estimates that this bill will result in a $26 million
revenue loss annually.
Comments
1. Purpose of the bill . According to the author, even in
1937, in the middle of the Great Depression, a law to amend
the BOE's major tax program at the time - the Sales and Use
Tax program - was enacted to allow interest on overpayments
at the rate of 6 percent per year, which also matched the
rate of interest on late payments. From 1937 through 1991,
the interest rates for overpayments and underpayments for
the BOE programs were the same. But, in 1991, the
Legislature reduced the rate paid on overpayments
dramatically because of an unfavorable court decision which
required the state to refund significant amounts with
interest. All those refunds have been paid for years now,
and it is time to end this significant disparity that has
been going on for two decades.
2. Every dollar counts. With a $28 billion budget
shortfall, this may not be the best time to reduce the
SB 421 -- 3/22/11 -- Page 3
state's budget by an additional $26 million annually. The
disparity between under- and over- payments began in the
early 90's to account for the budget shortfall at the time.
Since the state's budget and the overall economy are worse
today than they were then, the Committee may wish to
consider whether the time to equalize the interest rates is
now or when the economy improves.
3. What in this picture does not belong? The IRS and the
FTB have no disparity in interest rates for non-corporate
overpayments and underpayments. The IRS has only a one
percent disparity for corporate overpayments (the disparity
is higher if the corporate underpayment is over $100,000 or
the corporate overpayment is exceeds $10,000). For
corporate overpayments, the FTB has a four percent
disparity. The Committee may wish to consider adjusting
the overpayment interest rate to fall below the
underpayment rate similar to the other tax agencies instead
of equalizing the rates all together.
4. Taxpayers + BOE="like". This bill, sponsored by the
BOE, is intended to eliminate the disparity that often
becomes the subject of controversy between taxpayers and
the BOE, and according to the BOE, "there is simply no
justification now to have the 7-point discrepancy in the
credit interest rate." This bill would put an end to this
unfairness, by amending the law so that the same rate of
interest is applied to both late payments as well as
overpayments in all the BOE's tax and fee programs. The
California Taxpayers Association adds that the bill is
about fairness in tax administration and that interest is
supposed to be compensation for the use of money, not a
revenue raising function or an additional penalty on the
taxpayer.
Support and Opposition (4/21/11)
Support : Board of Equalization (sponsor); California
Taxpayers Association.
Opposition : Unknown.