BILL ANALYSIS �
AB 2429
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Date of Hearing: April 7, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2429 (Patterson) - As Introduced: February 21, 2014
SUBJECT : State Board of Equalization: administration:
interest
SUMMARY : Applies the same interest rate to both late tax
payments and overpayment refunds, for purposes of the tax and
fee programs administered by the State Board of Equalization
(BOE). Specifically, this bill :
1)Amends Revenue and Taxation Code Section 6591.5 to provide a
uniform definition of "modified adjusted rate per annum."
2)Provides that the rate shall be determined by adding three
percentage points to the rate specified in Internal Revenue
Code (IRC) Section 6621(a)(2), which establishes the IRC
underpayment rate.
3)Results in interest on overpayments being determined in the
same manner that interest on underpayments is now determined.
EXISTING LAW :
1)Requires those who are late in paying their BOE-administered
taxes, fees, or surcharges to pay a penalty equal to 10% of
the tax, plus interest on the unpaid tax, from the date the
tax became due. The underpayment interest rate is established
by adding three percentage points to the rate specified in IRC
Section 6621, and is adjusted semiannually. The underpayment
rate is currently 6%.
2)Grants credit interest to those who have overpaid their
BOE-administered taxes, as long as the overpayment was not
intentional or a result of carelessness. The overpayment
interest rate is based on 13-week treasury bills auctioned,
adjusted semiannually, and rounded to the nearest full
percent. Since July 2009, that rate has been 0%.
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FISCAL EFFECT : Assuming an overpayment interest rate of 6%, the
BOE estimates state and local revenues losses of $2.6 million in
Fiscal Year (FY) 2014-15, $9.5 million in FY 2015-16, $21.5
million in FY 2016-17, and $21.9 million in FY 2017-18.
COMMENTS :
1)The Author's Statement . The author has provided the following
statement in support of this bill:
We should not hold the government to a different standard
than taxpayers. Allowing the BOE to pay taxpayers interest
on their overpayments at the same rate as the interest rate
these taxpayers are charged when they are late in paying
their taxes is not only a taxpayer friendly concept, but it
is a matter of principle and fairness.
2)Arguments in Support . Proponents of this bill note:
The interest rate paid on overpayments was always the same
as the interest rate assessed on late payments until 1991.
In 1991, the Legislature significantly reduced the interest
rate on overpayments to avoid substantial interest payments
on refunds owed to the federal government and defense
contractors as a result of an unfavorable court decision.
The state paid these refunds many years ago, yet the
inequity in the interest rates remains. This bill is
intended to eliminate the disparity that often becomes the
subject of controversy between taxpayers and the BOE, and
there is simply no justification now to have a discrepancy
in the credit interest rate. This bill would put an end to
this unfairness, so that the same rate of interest is
applied to both late payments and overpayments in all the
BOE's tax and fee programs.
Interest is supposed to be compensation for the use of
money, not a revenue-raising function or an additional
penalty on taxpayers. Current law effectively creates an
indefensible double standard benefiting the state.
3)Identifying the Problem . From 1937 through 1991, the BOE's
overpayment and late payment interest rates were the same.
But, in 1991, the Legislature reduced the rate paid on
overpayments dramatically because of an unfavorable court
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decision in Aerospace Corporation v. State Board of
Equalization (1990) 218 Cal.App.3d 1300, which required the
state to refund significant amounts with interest. The
Aerospace refunds have long since been paid, and some argue
that it is time to end this significant disparity that has
existed for two decades.
4)Interest is not a Penalty : The BOE staff, in its analysis of
this bill, notes that the law "imposes penalties for late
payments of tax, fees or surcharges. Interest, however,
represents a charge for the use of funds. In the same manner
the state charges interest when a taxpayer makes a late
payment, the state too should pay interest when taxpayers
overpay."
5)The Overpayment Interest Rate: the Internal Revenue Service
(IRS) and Franchise Tax Board (FTB) . The IRS and the FTB do
not have disparate interest rates on non-corporate
overpayments and underpayments. For corporation overpayments,
however, the IRS has a 1% disparity (the disparity is higher
if the corporate underpayment is over $100,000 or the
corporate overpayment [exceeds $10,000]). The FTB has a 4%
disparity for corporate overpayments. The Committee may wish
to consider adjusting the overpayment interest rate for the
BOE's tax programs to bring it in line with the rates used by
the IRS and the FTB.
6)Committee staff recognizes the potential unfairness posed by a
significant interest rate disparity between overpayments and
underpayments, and appreciates the author's effort to
eliminate controversy between taxpayers and the BOE. Despite
this laudable purpose, critics contend that it would be
fiscally detrimental to California to adopt such a proposal at
this time. Since 1992, 15 prior bills have sought to
equalize the interest rates on overpayments and underpayments.
Only one bill made it to the Governor's desk, and was
subsequently vetoed by Governor Wilson. Governor Wilson noted
the following in his veto message:
Imposing a lower rate for refunds minimizes the impact on
the state in the event of large taxpayer refund liability.
Imposing a higher rate on amounts owed by taxpayers serves
as an incentive for taxpayers to remit those amounts in a
timely manner as well as to comply with the law. I do not
wish to change these incentives.
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7)Related legislation : As noted above, since 1992, several
bills have been introduced to address the interest rate
disparity between underpayments and overpayments. The five
most recent bills are listed below:
a) AB 1049 (Harkey), of the 2013-14 Legislative Session,
contained provisions identical to this bill. AB 1049 was
held in this Committee.
b) AB 2048 (Donnelly), of the 2011-12 Legislative Session,
contained provisions nearly identical to this bill. AB
2048 was held in the Assembly Appropriations Committee.
c) SB 421 (Correa), of the 2011-12 Legislative Session,
would have reduced the interest rate on underpayments by
3%. SB 421 was held in the Senate Appropriations
Committee.
d) AB 1926 (Horton), of the 2007-08 Legislative Session,
would have equalized the underpayment and overpayment
interest rates. AB 1926 was held in this Committee.
e) AB 1589 (Villines), of the 2005-06 legislative session,
would have equalized the underpayment and overpayment
interest rates. AB 1589 was held in the Assembly
Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
CalChamber
California Taxpayers Association
State Board of Equalization
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
AB 2429
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