BILL ANALYSIS �
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Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2758 (Committee on Revenue and Taxation) - As Amended:
April 10, 2014
Majority vote. Fiscal committee.
SUBJECT : Sales and use taxes: administration: qualified use
tax: acceptable tax return
SUMMARY : Provides that an amount equal to the qualified use tax
a taxpayer reports on an acceptable tax return filed with the
Franchise Tax Board (FTB) shall be applied to that taxpayer's
use tax liability. Specifically, this bill :
1)Deletes the current statutory provisions requiring payments
and credits shown on the return of a taxpayer electing to
report qualified use tax to be first applied to liabilities
arising under the Personal Income Tax (PIT) Law and the
Corporation Tax (CT) Law.
2)Applies to purchases of tangible personal property (TPP) made
on or after January 1, 2014, in taxable years beginning on or
after January 1, 2014.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
retailer's gross receipts from TPP sales in this state.
2)Imposes, on transactions not subject to sales tax, a
complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
California's use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must generally be
remitted to the State Board of Equalization (BOE).
3)Authorizes a person to make an irrevocable election to report
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qualified use tax, as defined, on that person's income tax
return.
4)Provides that any payments and credits shown on the return of
a person reporting qualified use tax shall be applied in the
following order:
a) Taxes imposed under the PIT Law or the CT Law, including
penalties and interest, if any; and,
b) Qualified use tax reported.
FISCAL EFFECT : The BOE's revenue estimate for this bill is
pending. The FTB, in turn, estimates revenue losses of $60,000
in fiscal year (FY) 2014-15, $40,000 in FY 2015-16, and $30,000
in FY 2016-17.
COMMENTS :
1)The BOE notes the following in its staff analysis of this
bill:
Bill would reduce taxpayer confusion and create
efficiencies : "The provision that specifies that use tax
payments included with the FTB returns shall be applied
first to FTB taxes, interest, and [penalties] was included
in the original legislation that allowed for reporting of
use tax on the FTB returns. However, this payment order
has resulted in considerable confusion in situations where
a taxpayer fails to remit the proper amount when filing his
or her return with the FTB.
"On occasion, taxpayers make underreporting errors while
preparing their income tax returns, or they file late and
incur penalty and interest charges. This results in an
FTB-related return payment shortage. When a shortage
occurs, the law requires FTB to apply the amount paid with
the return (even the amount the taxpayer designated as use
tax) first to amounts owed to the FTB. When this occurs,
the FTB notifies the BOE so that the BOE can send a tax
shortage notice to the taxpayer, explain the issue, and
request payment of the use tax and penalty. In these
situations, the taxpayer usually also receives a billing
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from FTB, as generally, there is further outstanding
liability due the FTB arising from the return filed. As a
result, the taxpayer often ends up with two shortage
notices - on from each tax agency. Taxpayers are
frequently frustrated as to why they receive a BOE tax
shortage notice for the use tax, with an added penalty for
late payment, when they believed the use tax was already
timely paid to the FTB.
"Since the use tax liability is generally much lower than
the income tax liability, requiring the payment allocation
to the use tax liability first makes more sense. It
minimizes the BOE's workload associated with the necessary
additional correspondence and billing for the use tax and
penalty, and also eliminates the confusion this law
generates for taxpayers."
2)Committee Staff Comments:
a) California's use tax : Since 1933, the state has imposed
a sales tax on California retailers for the privilege of
selling TPP, absent a specific exemption. The tax is based
upon the retailer's gross receipts from TPP sales in this
state. In 1935, California adopted a complementary "use
tax" on the storage, use, or other consumption of TPP
purchased out-of-state and brought into California. The
use tax was designed to protect California merchants who
would otherwise be at a competitive disadvantage when
out-of-state retailers sell to California customers without
charging tax.
Unlike the sales tax, the use tax is imposed on the
purchaser and not the retailer. Unless the purchaser pays
the use tax to an out-of-state retailer registered to
collect California's use tax, the purchaser remains liable
for the tax. The use tax is set at the same rate as the
state's sales tax and must generally be remitted to the
BOE.
b) Impediments to collection : The most practical way for a
state to enforce its use tax is to have retailers collect
the tax at the time of sale. However, there is
considerable ambiguity surrounding the circumstances under
which a state may legally compel an out-of-state retailer
to collect use tax on its behalf. This ambiguity has its
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origins in the commerce clause of the U.S. Constitution,
which charges Congress with regulating commerce among the
several states. The U.S. Supreme Court has held that, by
implication, the commerce clause also prohibits states from
enacting laws that unduly burden interstate commerce.
In Quill Corp. v. North Dakota (1992), 504 U.S. 298, the
U.S. Supreme Court was asked to decide the
constitutionality of a North Dakota law that imposed a use
tax collection obligation on out-of-state retailers that
advertised in the state three or more times in a single
year. The Court invalidated the law, holding that, under
the negative commerce clause, a retailer must have a
"physical presence" in a state before that state can
require the retailer to collect its use tax.
The "physical presence" test affirmed in Quill has
complicated California's efforts to collect its use tax.
For example, when a California consumer purchases a coat
from an out-of-state retailer through its catalog or online
store, the consumer's use of the coat in California
triggers a use tax liability. If the out-of-state retailer
lacks a "physical presence" in California, however,
California is constitutionally prohibited from requiring
the retailer to collect the tax. If the consumer fails to
remit the tax, the purchase completely escapes taxation.
c) Recent legislative efforts focused on increasing use tax
collections : In recent years, California has taken several
steps to increase use tax compliance. Chief among these
efforts was the inclusion of a use tax line on the state's
income tax returns. In 2010, Governor Schwarzenegger
signed SB 858 (Committee on Budget and Fiscal Review),
Chapter 721, into law as part of the FY 2010-11 Budget
Agreement. Among other things, SB 858 provided for the
permanent inclusion of a use tax line on the state's income
tax returns, thereby allowing income tax filers to fill-in
the amount of use tax due on their returns.
d) "Me first" : When a taxpayer reports qualified use tax
on an income tax return, existing law requires the FTB to
apply payments and credits shown on the return in a certain
order. Specifically, payments and credits are first used
to satisfy any liabilities arising under the PIT Law or CT
Law, as applicable, and only then are applied to the
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taxpayer's use tax liability. The Committee has introduced
this bill to ensure that highly conscientious taxpayers who
self-report a use tax liability on their income tax return
are not faced with a late payment penalty because their use
tax payments were applied to other tax liabilities.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098