Bill Id (DOC) by vivi07


									AB 469 Page 1 Date of Hearing: April 27, 2009 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Charles M. Calderon, Chair AB 469 (Eng) – As Amended: April 2, 2009 Majority vote. Fiscal committee. SUBJECT: Sales and use taxes: qualified use tax payment SUMMARY: Eliminates the election to report and pay qualified use tax (QUT) on an acceptable tax return (Return), and instead, requires any taxpayer who fails to report and pay QUT pursuant to the Sales and Use Tax (SUT) Law to report and remit the QUT on a Return. Specifically, this bill: 1) Provides that, for “one or more single nonbusiness purchases of individual items” of tangible personal property (TPP) with a sales price of less than $1,000, the term QUT means either of the following: a) The use tax imposed under the SUT Law, the California Constitution, the Bradley-Burns Uniform Local SUT Law, or the Transactions and Use Tax (TUT) Law, that has not been paid to a retailer holding a seller’s permit or certificate of registration-use tax; or, b) The estimated amount of use tax due based on the person’s California taxable income as reflected in the use tax table shown in the accompanying instructions of the Return. 2) Specifies that, for one or more single nonbusiness purchases of individual items of TPP with a sales price of $1,000 or more, or for any TPP purchased for use in a trade or business, QUT means the amount of use tax imposed under the SUT Law, the California Constitution, the Bradley-Burns Uniform Local SUT Law, or the TUT Law, that has not been paid to a retailer holding a seller’s permit or certificate of registration-use tax. 3) Specifies that QUT does not include use tax imposed on a purchase of cigarettes, tobacco products, or cigarettes and tobacco products for which the purchaser is registered with the Board of Equalization (BOE) as a cigarette consumer, a tobacco products consumer, or a cigarette and tobacco products consumer. 4) Provides that a person required to report QUT on a Return shall report and remit the QUT by reporting the amount due based on all taxable purchases of TPP made during the taxable year for which the Return is required to be filed. Provides that a person that has made one or more single nonbusiness purchases of individual items of TPP each with a sales price of less than $1,000 may satisfy his/her tax liability for those purchases by using the use tax table shown in the accompanying instructions of the Return. 5) Specifies that, with respect to one or more single nonbusiness purchases of individual items of TPP with a sales price of less than $1,000, BOE shall be precluded from making any understatement determination against any person that uses the use tax table in accordance

AB 469 Page 2 with the accompanying instructions. 6) Applies to purchases of TPP made on or after January 1, 2010, in taxable years beginning on or after January 1, 2010. 7) Makes other conforming changes to the Revenue and Taxation Code. 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 gross receipts from the sale of TPP in this state. 2) Imposes a use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer for storage, use, or other consumption in this state, absent a specific exemption. 3) Authorizes a person to make an irrevocable election to report QUT on that person’s income tax return. 4) Requires the Franchise Tax Board (FTB) to include space on income tax returns to allow a person to report and remit QUT to the FTB. The FTB, in turn, is required to remit the QUT collected to BOE. FISCAL EFFECT: BOE estimates that this bill would result in the collection of approximately $13.75 million in use tax revenues. FTB, in turn, notes that this bill would not impact state income tax revenues. COMMENTS: 1) The author states, “According to the BOE, California loses over $1 Billion every year as a result of unreported use tax from the purchase of electronic and mail-order goods. By increasing compliance and capturing a portion of that unreported tax revenue, we could help prevent the unnecessary elimination or reduction of core state services, such as education, public transportation, and assistance for the blind, disabled and elderly.” 2) BOE, which is sponsoring this bill, states: While the use tax law was enacted in 1935, the most costly area of tax noncompliance consists of purchases made from out-of-state vendors without payment of use tax – [BOE] has estimated that California is losing over one billion dollars annually attributable to these purchases. Closing this tax gap is a priority of [BOE’s], and we believe this measure brings us one step closer by strengthening the laws applicable to the reporting of use tax. Instead of having an option to either report to [BOE] or to [FTB], as the law currently provides, this measure would require consumers (including businesses that aren’t already registered with [BOE]) to report their use tax obligations on their [FTB] income tax return, if they failed to report the tax to [BOE] during the preceding year. With these changes, we hope that we can achieve a greater level of compliance from taxpayers, as well as enhanced cooperation from tax practitioners, by making it perfectly clear that the use tax is required to be paid on untaxed purchases made from

AB 469 Page 3 out-of-state retailers. 3) BOE also notes: a) “In an effort to increase the public’s awareness of the use tax and to encourage voluntary compliance in reporting the use tax, legislation enacted in 2003 (SB 1009, Ch. 718), required the FTB to revise the personal income tax and corporations tax returns to add a separate line for use tax reporting. While the use tax law was enacted in 1935, this was the first time a line to report use tax appeared on the state’s income tax returns. This legislation allowed consumers to elect to report use tax on their income tax returns for purchases made on or after January 1, 2003, and through December 31, 2009, as an alternative to reporting the tax to the [BOE] (certain consumers and retailers already registered with the [BOE], however, may not use this alternative).” b) “In an FTB analysis of individual returns from tax year 2008, FTB found that taxpayers who self-prepared their returns were three times more likely to declare use tax than those who used a tax practitioner. Nearly 64 percent of all individual returns FTB received were practitioner-prepared. Yet only 23 percent of all use tax declarations were made on practitioner-prepared returns. While the dollar amount of use tax reported on the FTB returns is increasing (in 2004, use tax of $2.8 million was reported, in 2005, $4.6 million, in 2006 and 2007, $5.5 million each year was reported, and in 2008, $9 million was reported), voluntary compliance is still very low. [BOE] has estimated that the total annual dollar amount of unreported use tax is over $1.1 billion (unreported use tax by consumers is estimated to be over $400 million, and for businesses not registered with [BOE], over $600 million).” c) “One of the reasons that practitioner-prepared returns do not reflect use tax is that some tax practitioners believe that they can disregard their ethical obligation to inquire about a client’s use tax obligation when preparing a client’s income tax returns, since the income tax return form and instructions simply provide for an election to report the tax. This bill is seeking to dispel this misconception by eliminating the election to report on the FTB return. Instead, the bill would specify that the tax is required to be reported on that return if the purchaser failed to already report the tax to [BOE].” d) “It is anticipated that these proposed changes would enable tax practitioners, consumers, and business entities not registered with the [BOE] to have a better understanding of their obligation to properly report use tax liabilities. In return, the competitive disadvantage in-state retailers have compared to out-of-state retailers that are not required to collect the California use tax may be improved.” e) “A use tax table would make compliance with reporting use tax more convenient for taxpayers who know they have made untaxed purchases but have not kept receipts from those purchases. For individual purchases of less than $1,000, the table would reflect the amount of use tax due based on the person’s California taxable income as shown in the instructions in the state income tax booklet. For individual purchases of $1,000 or more, taxpayers would be required to report the actual amount of use tax due.” f) “Of the 38 states that impose both an income tax and a use tax on purchases of [TPP], 21 states provide for individuals to report their use tax obligations on their income tax

AB 469 Page 4 return. Nine of those states incorporate a use tax table, and according to a November 2007 report prepared by the Research Department of the Minnesota House of Representatives, Use Tax Collection on Income Tax Returns in Other States, many of those states that allow purchasers to report their use tax obligations using the tables have higher participation rates. Although those states collect less use tax per return than do states without lookup tables, the greater participation rate in those states overwhelms the effect of lower average use tax reporting per return.” 4) Proponents state, “This legislation is of growing importance in an economy where purchases increasingly occur on the Internet – where sales taxes are not collected, but use taxes, of the same amount, are owed by the purchaser. Improved collection of these revenues is important for funding vital state and local programs.” 5) FTB notes that, “Under this bill, administrative functions regarding the use tax would remain divided between FTB and BOE. FTB would process and collect use tax reported on the Personal Income Tax return, while BOE would retain responsibilities for auditing, collecting, and processing claims for refund of the use tax.” 6) Committee Staff Comments a) A timely measure: With the increased SUT rate that became effective on April 1 of this year, there are concerns that some consumers may seek to avoid their SUT obligations by purchasing TPP from out-of-state retailers that are not required to collect California’s use tax – further increasing the already substantial tax gap. Moreover, many consumers simply believe, incorrectly, that SUT does not apply to any purchase made over the Internet. This bill would make it clear, to consumers and tax practitioners alike, that paying use tax is not elective. b) What would the use tax table look like?: This bill does not incorporate a specific use tax table for taxpayers to use in determining their use tax liability. BOE has stated that it would determine the applicable use tax amount that is commensurate with varying levels of taxable income, and that the table would likely be similar to those used by other states. c) Greater compliance at the expense of accuracy: Under this measure, as long as a person’s use tax liability arose from single non-business purchases of individual items of TPP sold for less than $1,000, the individual could satisfy his/her use tax liability using the contemplated table. They could apparently do so without regard to the number of such individual purchases, as the liability would be based on their taxable income. a) Prior legislative efforts: i) SB 1009 (Alpert), Chapter 718, Statutes of 2003, added the election for taxpayers to report and pay use tax on their state income tax returns. ii) AB 969 (Eng), introduced in the 2007 legislative session, would have replaced the current option for a taxpayer to report use tax on the state income tax return with a requirement to report use tax. AB 969 was vetoed by the Governor, who noted his concern that the bill’s effective date was too soon for taxpayers to compile adequate records of purchases subject to use tax. He also stated, “I would like to see a plan to

AB 469 Page 5 better educate taxpayers on the use tax, as I suspect that many taxpayers have little knowledge of the tax and may unknowingly fail to pay it.” iii) AB 1957 (Eng), introduced in the 2008 legislative session, would have also replaced the election with a mandatory reporting requirement. AB 1957 failed in the Senate Committee on Revenue and Taxation. REGISTERED SUPPORT / OPPOSITION: Support Board of Equalization (sponsor) California Professional Firefighters California School Employees Association, AFL-CIO California State Association of Counties CALPIRG League of California Cities Opposition None on file Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

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