BILL ANALYSIS �
AB 2080
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Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2080 (Donnelly) - As Introduced: February 20, 2014
Majority vote. Fiscal committee.
SUBJECT : Personal income taxes: unemployment insurance: tips
SUMMARY : Excludes tips from gross income for purposes of the
Personal Income Tax (PIT) Law and from the definition of wages
paid for the purposes of income tax withholding and for the
purposes of unemployment insurance tax. Specifically, this
bill :
1)Provides, under the Personal Income Tax (PIT) Law, that tips
will be treated as property transferred by gift, and excludes
tips from gross income under the PIT, beginning on or after
January 1, 2015.
2)Defines "tips" as any gratuity provided by a customer or
client of the employer's business under the PIT.
3)Provides that "tips," included in a written statement
furnished to an employer by the employee, will not be included
as part of gross income at the time the statements are
furnished to the employer, beginning on or after January 1,
2015.
4)Provides that Internal Revenue Code (IRC) Section 6041(e),
relating to information returns, shall not apply beginning on
or after January 1, 2015.
5)Provides, that "supplemental wages" does not include tips,
beginning on or after January 1, 2015.
6)Provides that penalties for failure to provide correct
information returns and failure to file correct payee
statements, shall not apply beginning on or after January 1,
2015.
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7)Provides that "wages" shall not include "tips" that are in a
written statement furnished to an employer under the
Unemployment Insurance Code (UIC), beginning on or after
January 1, 2015.
8)Repeals UIC Section 927, which defines "wages" as including
tips pursuant to IRC Section 6053(a).
9)Repeals UIC Section 987.7, relating to contributions to the
Unemployment Fund with respect to tips.
10)Provides, under the UIC, that the definition of "wages" does
not include tips received by an employee in the course of
employment.
11)Repeals UIC Section 13027, relating to tips that are included
in a written statement furnished to the employer, for purposes
of calculating withholdings.
12)Repeals UIC Section 13055, relating to tips that are required
to be furnished to an employer, for purposes of providing an
employee an annual statement.
EXISTING FEDERAL LAW :
1)Defines "gross income" as all income from all sources, such as
compensation for services, business income, interest, rents,
dividends, and gains from the sale of property. Only items
that are specifically exempt may be excluded from gross
income. There is no specific exemption for tips. [Internal
Revenue Code (IRC) Section 61.]
2)Requires all persons engaged in a trade or business and making
payment in the course of such trade or business to another
person of $600 or more in any taxable year shall render a true
and accurate return setting forth the amount of such gains,
profits, and income, and the name and address of the recipient
of such payment. (IRC Section 6041.)
3)Requires an employee, who in the course of employment,
receives in any calendar month cash tips of $20 or more that
are wages or that are compensation to report all such tips in
one or more written statement furnished to their employer on
or before the tenth day following such month. (IRC Section
6053.)
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4)Requires employers, under certain circumstances, to provide an
information return to report an allocation of tips in large
food or beverage establishments. If an employee of a large
food or beverage establishment reports tips aggregating more
than 8% of the gross receipts of the establishment, then no
reporting of the tip allocation is required. However, if the
8% reporting threshold is not met, the employer must allocate
an amount equal to the difference between 8% of gross receipts
and the aggregate amount reported by employees. (IRC Section
6053.)
5)Requires large food or beverage establishments to file a
separate information return for each year that it has
employees. The information return is required to include the
establishment's gross receipts from food or beverages (other
than non-allocable receipts), the aggregate amount of charged
receipts (other than non-allocable receipts), the aggregate
amount of charged tips shown on such charged receipts, the
aggregate amount of tips actually received by the
establishment's food or beverage employees and reported to the
employer under IRC section 6053, and the aggregate amount the
employer is required to report under IRC section 6051 with
respect to service charges of less than ten percent. (IRC
Section 6051.)
6)Defines "wages" as all remuneration for services performed by
an employee. (IRC Sections 3121 and 3401.)
7)Provides an exclusion from "wages" for tips paid in any medium
other than cash, and an exclusion from "wages" for cash tips
received by an employee in any calendar month in the course of
the employee's employment by an employer unless the amount of
the cash tips is $20 or more. (IRC Section 3121.)
8)Imposes a penalty on any person who is required to file a
correct information return and fails to do so on or before the
prescribed filing date. If a person files a correct
information return after the prescribed filing date but on or
before the date that is 30 days after the prescribed filing
date, the amount of the penalty is $15 per return (the
"first-tier penalty"), with a maximum penalty of $75,000 per
calendar year. If a person files a correct information return
after the date that is 30 days after the prescribed filing
date but on or before August 1, the amount of the penalty is
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$30 per return (the "second-tier penalty"), with a maximum
penalty of $150,000 per calendar year. If a correct
information return is not filed on or before August 1 of any
year, the amount of the penalty is $50 per return (the
"third-tier penalty") with a maximum penalty of $250,000 per
calendar year. If a failure is due to intentional disregard
of a filing requirement, the minimum penalty for each failure
is $100, with no calendar-year limit. (IRC Section 6721.)
9)Imposes penalties for failure to furnish correct payee
statements of $50, up to a maximum of $100,000. If the
failure is due to intentional disregard, the amount of the
penalty per failure is increased and the cap on the penalty is
not applicable. (IRC Section 6722.)
10)Requires that the tips reported by an employee to the
employer in a written statement furnished to the employer be
included in the employee's gross income for the taxable year
in which the written statements are furnished to the employer.
(IRC Section 451.)
EXISTING STATE LAW :
1)Conforms, with some modifications, to the federal definition
of gross income, and like federal law, tips are includible in
California gross income. [Revenue and Taxation Code (R&TC)
Section 17071.]
2)Provides that the Franchise Tax Board (FTB) may request a copy
of the federal information return that is required for federal
purposes under IRC Section 6041. (R&TC Section 18631.)
3)Conforms, generally, to the penalties imposed for failure to
file correct information returns in accordance with IRC
Section 6721. (R&TC Section19183.) However, California does
not conform to the penalties for the failure to file correct
information returns required under IRC Section 6053(c)(1),
relating to reporting requirements of certain large food or
beverage establishments. (R&TC Section 19183.)
4)Conforms, generally, to the federal penalties imposed for
failure to furnish correct payee statements as required by IRC
Section 6722. (R&TC Section 19183.) However, California does
not conform to the penalties for failure to furnish correct
payee statements required under IRC Sections 6053(b) and
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6053(c), relating to reporting tips. (R&TC Section 19183.)
5)Conforms, generally, to the federal taxable-year-of-inclusion
rules that apply to certain tips. Specifically, tips included
in a written statement and furnished to an employer by an
employee shall be deemed to have been received at the time the
written statement including such tips is furnished to the
employer. (R&TC Section 17551.)
6)Requires the FTB to annually provide the Employment
Development Department (EDD) with wage withholding tables to
be used by employers to withhold taxes on wages paid to their
employees. The tables are based on the estimated amount of
tax due on the wages paid by the employer. In addition,
employers required to withhold tax on supplemental wages can
use a method that applies a fixed rate of 6.6% to the
supplemental wage amount. (R&TC Section 18663.)
FISCAL EFFECT : The FTB estimates that this bill will reduce
General Fund revenues by $33 million in Fiscal Year (FY)
2014-15, $60 million in FY 2015-16, and $65 million in FY
2016-17.
COMMENTS :
1)The author states "as the cost of living in our state
continues to increase and the need for a living wage
continues, this bill will help our struggling families keep
more of the money they have earned in occupations that
typically have lower salaries. The 'tips' left behind by
customers for the extra service provided should not be
included as the taxable 'wages earned.' These 'tips' are not
guaranteed as part of the employees wage paid for by the
employer, therefore they should be considered gifts instead of
wages earned."
2)Opponents state that this bill fails to help those to whom it
seeks to provide assistance because struggling families "do
not earn enough income to meet the filing requirement in
California, and therefore do not pay income taxes.
Furthermore, this bill would define 'tips' vaguely as any
gratuity provided by a customer or client of the employer's
business and would exclude tips from supplemental wages for
payroll tax purposes. However, tips are currently not
included in supplemental wages; tips are included in normal
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wages. The vague definition could cause disputes between the
[FTB] and taxpayer regarding the amount of money which could
be claimed as 'tips.' This new definition would also remove
California from conformity with federal law which would create
additional administrative burdens." Additionally, opponents
state that "all income should be treated equally - whether
dividends, capital gains, labor income, or, in this case,
tips. Efforts to reclassify income into different types,
particularly when it is legitimate income, only increase tax
avoidance by leading to-redefinitions of income."
3)Committee Staff Notes:
a) Conformity Issues . As noted above, California conforms,
in general, to federal treatment of "tips" for wages and
gross income. State conformity with federal law promotes
greater simplicity and eases administration of complex tax
laws. The Federal Government includes tips as part of
gross income. By creating a new definition for "tips" and
by excluding tips from gross income, this bill would move
California out of conformity with the federal law and
create additional administrative burdens.
b) May Not Provide Much Help . This bill excludes tips from
gross income as a way of allowing struggling families to
keep more of the money they have earned. Unfortunately,
many families may not receive the intended benefits of this
bill, especially those making at or just above the minimum
wage. For example, an individual with one dependent and
gross income of less than $26,569 per year does not have a
filing requirement in California and, therefore, does not
pay income tax in California. In addition to a lack of
filing requirement for certain taxpayers, the IRS has
repeatedly made clear that a large portion of tips go
unreported. In 1982, the IRS estimated that only 15% of
tips were reported. (Edward Cowen, Bill Aimed at Closing
'Tax Gap', New York Times, May, 1982.) In 1998, after
enacting reforms, the IRS estimated that less than 40% of
tips were reported, or about $9 to $12 billion; in 2010,
the IRS estimated that it received only about one-quarter
of all tip disclosures that it was supposed to receive.
(John Robertson, Unreported Tip Income: A Taxing Issue,
CPA Journal, Dec., 2006. John Dimsdale, The IRS Keeps Tabs
on Restaurants, Bar Tips, Marketplace, June, 2010.)
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c) Higher Wages Instead of Tips . Tipping used to be
thought of as something that was at the customer's
discretion. However, in today's society, tips are
considered mandatory, not for a job well done, but because
workers depend on tips in order to make a living. (Jeanne
Sahadi, Tipping Not Optional, CNN/Money, June 2003. Bonnie
Kavoussi, 15 Types of Workers Living Off Tips, Huffington
Post, Nov., 2012.) This is especially true in the
restaurant industry where 39% of workers earn at or below
the minimum wage, and for many of these workers, tips and
commissions supplement the hourly wage. (Bureau of Labor
Statistics, Characteristics of Minimum Wage Workers, 2010.)
The issue of service workers not earning a livable wage
could be offset by doing away with tips all together. In
fact, some restaurants have adopted a "no tip" policy and
made adjustments for the revenue loss by increasing menu
prices or imposing an automatic service charge. (Jay
Porter, What Happens When You Abolish Tipping, Slate, Aug.,
2013.) In addition to increased menu prices, workers are
paid higher wages or are put on salary, which means that
employees are less susceptible to the volatility of
tipping. For struggling families, steady and predictable
wages may be much more desirable than not having to pay
taxes on tips. Unfortunately, by excluding tips from gross
income, this bill may further encourage the use of tipping.
d) Administrative Difficulty . This bill excludes "tips"
from "gross income" and "wages." However, this bill
defines a "tip" as any gratuity provided by a customer or
client of the employer's business. This definition is
extremely vague and provides little guidance to employers
and employees. Creating a vague definition may also
increase disputes between the FTB and taxpayers as to how
much of the claimed "tips" are excluded from gross income.
The FTB, in its staff analysis, suggests using the amount
of tips an employee is required to report under IRC Section
6053 as a point of reference. Employees already report
such tips under federal law and this modification would
provide clear guidance as to exactly how much should
properly be excluded from gross income.
As currently written, this bill excludes tips from
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"supplemental wages" for payroll tax purposes. However,
tips are currently not included in "supplemental wages;"
tips are included in normal wages. By not excluding tips
from normal wages, tips will continue to be included in
calculating withholdings for payroll tax purposes.
However, even if "tips" were properly excluded from wages
for payroll tax purposes, the ambiguity of the definition
of "tips" provides serious administrative concerns. It is
unclear as to how much should be excluded for payroll tax
purposes. As noted above, if the author wishes to ease the
administrative burden on the employer, the FTB, the EDD,
and taxpayers, the author should adopt a definition of
"tips" that provides guidance to all parties.
e) Technical Issues . As noted by FTB's staff, "[t]his bill
would provide that tips would be treated as "property
transferred by gift." For consistency with IRC section
102(a), the reference should instead be "property acquired
by gift."
Additionally, FTB's staff explains that "[t]his bill would
provide that the penalty under IRC section
6724(d)(1)(B)(xvi) for the failure of certain large food or
beverage establishments to provide correct information
returns would not apply, and that the penalty under IRC
section 6724(d)(2)(X) for the failure to file correct payee
statements would not apply; however, these provisions would
be unnecessary as California law currently provides that
such penalties do not apply. Thus, the author may want to
consider removing Section 7 from this bill."
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
American Federation of State, County, and Municipal Employees
California Tax Reform Association
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098
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