BILL ANALYSIS �
SB 506
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Date of Hearing: June 27, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
SB 506 (Simitian) - As Amended: June 21, 2011
Majority vote. Fiscal committee.
SENATE VOTE : 39-0
SUBJECT : State finance: warrants
SUMMARY : Revises the statutory provisions that allow any
taxpayer named as a payee on a registered warrant (RW) to
satisfy certain tax liabilities by issuing a check that cannot
be cashed until the RW is redeemable. Specifically, this bill :
1)Provides that, if the state issues a RW to pay principal or
interest on a "state bond" that is held in book entry form by
a securities settlement system, the bond's beneficial owner
shall be deemed to be the taxpayer permitted to submit a check
to pay taxes owed.
2)Allows the bond's beneficial owner to submit a check to the
appropriate state agency in payment of a tax liability. Such
a check must be accompanied by evidence of bond ownership and
such other information as the State Controller prescribes.
3)Bars the state from cashing the beneficial owner's check until
the RW is payable.
4)Bars any beneficial owner who submits such a check from
receiving interest accruing on the RW after the date of the
check's submission. Moreover, the beneficial owner must
promptly repay the state any interest accruing on the RW after
the date of submission that may be paid to or ultimately
received by the beneficial owner.
5)Provides that, upon submitting such a check to the state in
payment of a tax liability, the beneficial owner shall not be
permitted to sell, transfer, or assign its beneficial
ownership of the "state bond " until the RW has been redeemed
by the state and the beneficial owner has repaid any interest
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received that is attributable to the period after the check's
submission.
6)Defines a "state bond" as any general obligation bond or
revenue anticipation note issued by the state.
7)Authorizes the State Controller to promulgate implementing
regulations.
8)Specifies that no state entity shall take any action that
would materially adversely impair, limit, or restrict the
rights of a beneficial owner of a state bond, as set forth in
Government Code (GC) Section 17280.1, or any successor
provision, as that provision was in effect when the person or
party became a beneficial owner of the state bond, until the
state bond is fully paid.
9)Makes other conforming changes to the GC.
EXISTING LAW :
1)Allows any taxpayer named as a payee on a RW to satisfy their
liability for certain taxes by issuing a check in an amount no
greater than the RW, exclusive of any interest thereon. In
such cases, the state may not present the check for payment
until the RW is payable upon its presentation to the State
Treasurer. These provisions apply only to liabilities for
personal income taxes and bank and corporation taxes. �GC
Section 17280.1(a)]
2)Precludes any taxpayer who submits a check pursuant to the
above provisions from receiving interest on the RW from the
date the check is submitted. �GC Section 17280.1(b)]
3)Provides that, if a tax liability is paid with a RW that is
redeemable at the time the tax liability is paid, specified
interest shall be credited to the taxpayer's account. �GC
Section 17280.2]
FISCAL EFFECT : Unknown
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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Some major corporations in California are currently
precluded from investing in California debt because
California debt does not meet the companies' investment
criteria. A remedy to this problem exists in current law
but the statute needs to be updated.
In the past, ownership of bonds was in a paper form. Now,
those documents are in electronic form. This bill defines
the beneficial owner of a registered warrant, issued for
the principal or interest due on a state bond that is held
in book entry by a security settlement system, to be the
taxpayer who is permitted to submit the check in payment of
existing taxes.
The original statute was drafted during a time when most
bond owners had paper certificates showing that they own
the bonds. As advancements have been made, electronic
systems have been created so that the owner no longer has a
"coupon" to clip.
While this is a technical issue the clarification will
remove an impediment so that California corporations can
invest in California bonds in the unlikely event that a
registered warrant is ever issued for its bond obligation,
the corporation can use the warrant to offset tax
liabilities.
2)Proponents state:
Due to concerns over the state's fiscal condition, many
Fortune 500 companies are limited in their ability to
invest in California state-issued bonds. Corporate
treasuries are bound by strict investment criteria to
ensure good returns to shareholders at a minimum risk. SB
506 will help to improve the attractiveness of these
investments by allowing warrants to be used to pay taxes,
providing greater investment certainty. This process will
provide the security necessary for these firms �to] invest
in California debt, thereby bringing potential new buyers
to market.
3)Committee Staff Comments:
a) RWs : In normal times, the state issues warrants to
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satisfy its obligations to vendors, contractors, hospitals,
workers, and other entities. Warrants are the government
equivalent of checks, and are issued by the State
Controller. During periods of serious cash shortfalls,
however, the state may have to issue RWs. This occurs
when, after ranking all of the state's obligations and
setting aside money that must be set apart for higher
ranking obligations, the State Controller determines that
there are insufficient funds to pay a warrant. In such
cases, a warrant is registered, and the state promises to
pay the face value as soon as money is available.
b) When did the State Controller last issue RWs? : On June
24, 2009, the State Controller announced plans to issue RWs
in an effort to manage the state's cash crisis. To ensure
the General Fund's ability to make priority status
payments, the State Controller's Office began issuing RWs
(also known as IOUs) on July 2, 2009, for all General Fund
payments without priority status under the Constitution,
federal law, or court order. These RWs earned interest at
a rate of 3.75% as determined by the State Pooled Money
Investment Board.
c) RWs and tax liabilities : Since 1983, state law has
allowed any taxpayer named as a payee on a RW to satisfy
their liability for certain taxes by issuing a check in an
amount no greater than the RW, exclusive of any interest
thereon. In such cases, the state may not present the
check for payment until the RW is payable upon its
presentation to the State Treasurer. These provisions
currently apply only to liabilities for personal income
taxes and bank and corporation taxes.
d) What would this bill do ?: This bill provides that, in
the unlikely event the state issues RWs to pay interest or
principal owed on state bonds, the beneficial owners<1> of
those bonds will be able to satisfy certain tax liabilities
by issuing a check, which the state may not cash until the
RWs are redeemable.
--------------------------
<1> While not explicitly defined in this bill, the term
"beneficial owner" describes a situation where specific property
rights in equity belong to a person even though legal title to
the property belongs to another (i.e., a financial intermediary
holding bonds for another's benefit).
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e) Arguments in support : Many companies are apparently
reluctant to invest in California bonds, given concerns
over the state's creditworthiness. If the state were ever
forced to issue RWs to pay bondholders, this bill would
enable the beneficial bond owners (and not the financial
intermediaries who may hold legal title) to use the RWs to
satisfy existing tax liabilities. Proponents argue that
this assurance will incentivize additional investment in
California debt.
f) Unintended consequences? :
i) Given existing concerns over the value of
California's bonds, the Senate Governance and Finance
Committee questioned whether the state should "put into
practice a statutory process that assumes bondholders
will be paid in warrants, something that's never happened
before and could only come to pass in apocalyptic
circumstances�.]" The analysis further states, "The
measure may give current and future investors in the
state's debt caution when they see that the state is
explicitly creating a process not to pay in the
accustomed medium of cash." Proponents of this bill,
however, counter that existing law already contemplates
the issuance of RWs to pay state bonds. Specifically,
they point to GC Section 17280, which provides in full:
If at any time it is necessary to register warrants
for the payment of principal and interest on State
bonds, warrants so registered have a prior lien in the
order of their issuance on any money thereafter
received into the General Fund, and shall be paid
before any other warrants regardless of the prior
issuance of the latter.
ii) Committee staff fully appreciates that this bill is
designed to alleviate the concerns of certain
corporations that are hesitant to invest in California
bonds. Nevertheless, it seems highly improbable that the
state would ever attempt to satisfy its bond payment
obligations by issuing RWs. If California were to reach
this "apocalyptic" scenario, allowing large companies to
satisfy their corporate tax liabilities through RWs would
only exacerbate an already dire situation. Then again,
proponents note that this bill really only clarifies that
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beneficial bond owners (and not the financial
intermediaries who hold legal title) shall be able to
take advantage of existing tax payment provisions for RW
recipients. Absent this bill, if the state were to issue
RWs to the financial intermediaries directly, they could
conceivably use the RWs to satisfy their own tax
liabilities.
g) Open questions and conflicting legislation : Currently,
the special tax payment provisions available to RW
recipients only apply to personal income tax and
corporation tax liabilities. Earlier this year, however,
this Committee heard AB 1044 (Butler), which would expand
these provisions to cover taxes, fees, and surcharges paid
to the State Board of Equalization (BOE), provided certain
conditions are met.
AB 1044 would also delete the somewhat cumbersome
provisions requiring the submission of a check. Instead,
AB 1044 would allow entities to satisfy tax and fee
liabilities by simply submitting the original RW, signed on
the reverse side by the payee and endorsed as payable to
the agency to which the liability is owed.
Finally, AB 1044 would codify apparent tax agency practice
by precluding those who submit a RW from receiving interest
on the warrant except in cases where the warrant is
redeemable at the time of its submission.
AB 1044 was voted out of this Committee on a 9-0 vote on
May 2, 2011, and is currently pending in the Senate
Governance and Finance Committee.
SB 506 seeks to amend two of the very same code sections
amended by AB 1044 - GC Sections 17280.1 and 17280.2. SB
506, however, is inconsistent with AB 1044 in the following
three respects:
i) SB 506 retains the check submission procedures
outlined in current law, while AB 1044 provides for the
endorsement of the original RW. This inconsistency could
potentially be resolved by allowing beneficial bond
owners to submit checks (because they may not have
physical possession of the RW) and by requiring all other
taxpayers to endorse their original RW.
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ii) SB 506 repeatedly provides that a taxpayer shall not
be entitled to any interest accruing on the RW "after the
date the taxpayer �submits] the check . . . ." The
logical inference is that the taxpayer is, in fact,
entitled to interest for the period from the RW's
issuance to its submission. AB 1044, however, eases tax
agency administration by providing that a taxpayer shall
only be entitled to interest on a RW if the RW is
redeemable when presented.
iii) Finally, while AB 1044 would extend the special tax
payment provisions to taxes and fees owed to the BOE, SB
506 retains the provisions limiting eligible liabilities
to personal and corporation tax liabilities. SB 506
does, however, modify GC Section 17280.1 to provide that
checks shall be submitted "to the appropriate state
agency responsible for collection of �the] tax . . . ."
Given that one agency, the Franchise Tax Board, is
charged with collecting both personal and corporation tax
liabilities, this language may lead to inadvertent
confusion on the part of some taxpayers, unless the bill
is, in fact, expanded to other tax liabilities.
h) Double-referral : This bill was double referred with the
Assembly Committee on Banking and Finance, which passed the
bill out on a 9-0 vote on June 20, 2011. For additional
discussion of this bill, please refer to that committee's
analysis.
REGISTERED SUPPORT / OPPOSITION :
Support
Apple Inc.
Cisco Systems, Inc.
eBay Inc.
Google Inc.
Oracle Corporation
Qualcomm Inc.
TechAmerica
TechNet
Opposition
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None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098