Existing law authorizes, until January 1, 2019, a city that has entered into a reciprocal agreement, as defined, with the Franchise Tax Board to exchange tax information, as provided. Existing law requires, until January 1, 2019, upon the request of the Franchise Tax Board, each city that assesses a city business tax or requires a city business license to annually submit to the board specified information relating to the administration of the citys business tax program. Existing law defines the term city to include, among others, a city and county. Existing law limits the collection and use of this information and provides that any unauthorized use of this information is punishable as a misdemeanor.

This bill would expand these provisions to additionally apply to a county. By expanding the scope of a crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law authorizes, until January 1, 2019, a city that has entered into a reciprocal agreement, as defined, with the Franchise Tax Board to exchange tax information, as provided. Existing law requires, until January 1, 2019, upon the request of the Franchise Tax Board, each city that assesses a city business tax or requires a city business license to annually submit to the board specified information relating to the administration of the citys business tax program. Existing law defines the term city to include, among others, a city and county. Existing law limits the collection and use of this information and provides that any unauthorized use of this information is punishable as a misdemeanor.

This bill would expand these provisions to additionally apply to a county. By expanding the scope of a crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law authorizes, until January 1, 2019, a city that has entered into a reciprocal agreement, as defined, with the Franchise Tax Board, to exchange tax information, as provided. Existing law requires, until January 1, 2019, upon the request of the Franchise Tax Board, each city that assesses a city business tax or requires a city business license to annually submit to the board specified information relating to the administration of the citys business tax program. Existing law defines the term city to include, among others, a city and county. Existing law limits the collection and use of this information and provides that any unauthorized use of this information is punishable as a misdemeanor.

This bill would expand these provisions to additionally apply to a county. By expanding the scope of a crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

 THIRD READING  

Bill No: AB 279

Author: Dodd (D)

Introduced: 2/11/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-1, 6/17/15

AYES: Hertzberg, Beall, Hernandez, Lara, Moorlach, Pavley

NOES: Nguyen

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 67-9, 5/14/15 - See last page for vote

SUBJECT: Tax administration: disclosure of information: Franchise Tax Board and cities and counties

SOURCE: Author

DIGEST: This bill extends the state-local tax information sharing program (program) to counties, and to a city and county.

ANALYSIS:

Existing law:

1. Prohibits disclosure or inspection of any income tax return information, and applies criminal sanctions, including imprisonment, to Franchise Tax Board (FTB) personnel convicted of unlawful disclosure or inspection of tax records.

2. Allows city tax officials to obtain state income tax information subject to a written agreement between FTB and the taxing authority of a city to assist in enforcing its business license taxes, but required cities to pay FTB’s costs (AB 63, Cedillo, Chapter 915, Statutes of 2001).

3. Provides that cities could offset the cost by entering into a reciprocal agreement with FTB to share its business license tax information. (SB 1146, Cedillo, Chapter 345, Statutes of 2008).

4. Sunsets the program on January 1, 2019 (SB 211, Price, Chapter 513, Statutes of 2013).

5. Limits, under the program, information that FTB can share to a taxpayer’s name, address, social security or taxpayer identification number, and business activity code.

6. Allows city officials to request additional information by affidavit, so long as they notify the person whose information is the subject of the request, and provide them a copy of the affidavit.

7. Limits the use of tax information provided to the city solely to city officials, and only for tax collection purposes.

8. Requires, as a condition of participation, city officials to:

1. Complete a data exchange security questionnaire before the data exchange,

2. Direct tax officials to agree to on-site reviews from FTB as a condition of participation,

3. Complete FTB disclosure training, and

4. Have all employees who receive the information sign a confidentiality statement acknowledging their awareness of data security requirements, and penalties for unlawful disclosure.

9. Requires city tax officials to notify FTB within 24 hours of any suspected instance of unlawful inspection or disclosure, and destroy an individual record in a manner to make them unreadable and unusable.

This bill extends the state-local tax information sharing program to allow a county, and a city and county, to enter into a reciprocal agreement to share tax information with FTB.

Comments

FTB has maintained the integrity of taxpayer information since the inception of the tax-sharing information program. Any improper usage or disclosure of this information carries certain civil and criminal liabilities. In 2013, the Legislature modified the program to, among other things, create additional safeguards to protect taxpayer information from unauthorized disclosure. Currently, every reciprocal agreement must include provisions ensuring that taxpayer data is safeguarded. The city must complete and submit a Safeguard Questionnaire to the FTB to ensure that the data is used only for the tax administration within the city, and destroy the data as mandated after three years. In addition, only city employees named in the confidentiality statement may have access to the data and each of those employees must complete an annual City Business Tax Disclosure training.

FTB states that it currently has a reciprocal agreement with 102 cities in California, which costs $718,000 annually. The following cities reported the following revenue amounts due to the program:

• City of Los Angeles ($13.9 million)

• City of San Diego ($1.1 million)

• City of Newport Beach ($360,000)

• City of Oakland ($260,000)

• City of Menlo Park ($172,000)

• City of Concord ($154,000)

• City of Sunnyvale ($131,000)

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT: (Verified 7/1/15)

California Association of County Treasurer-Tax Collectors

California State Association of Counties

El Dorado County Board of Supervisors

Humboldt County Board of Supervisors

Mono County Board of Supervisors

Rural County Representatives of California

OPPOSITION: (Verified 7/1/15)

None received

ARGUMENTS IN SUPPORT: According to the author, AB 279 is a modest extension to an existing program. By granting approval for information sharing agreements between the FTB and counties, counties will be able to more efficiently collect back taxes.

ASSEMBLY FLOOR: 67-9, 5/14/15

AYES: Achadjian, Alejo, Bigelow, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman, Frazier, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Hadley, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Weber, Williams, Wood, Atkins

NOES: Travis Allen, Baker, Brough, Beth Gaines, Grove, Harper, Kim, Mayes, Wagner

NO VOTE RECORDED: Dahle, Patterson, Waldron, Wilk

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

7/1/15 16:37:20

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

TAX ADMINISTRATION: DISCLOSURE OF INFORMATION: FRANCHISE TAX BOARD AND CITIES AND COUNTIES

Extends the state-local tax information sharing program to counties, and to a city and county.

Background and Existing Law

Existing state and federal laws generally prohibits disclosure or inspection of any income tax return information. Criminal sanctions, including imprisonment, apply to FTB personnel convicted of unlawful disclosure or inspection of tax records. The Franchise Tax Board (FTB) must notify a taxpayer if criminal charges have been filed for willful unauthorized inspection or disclosure of their tax data.

Tax information sharing between the state and local agencies dates back to 1984, when FTB first sponsored legislation mandating California cities to annually report information obtained from businesses they licensed. FTB used the information to identify new businesses that were obtaining local business licenses and paying business license taxes, but may not have been filing state income tax returns. While the program generated revenue, the Legislature repealed the program in 1999 because the cost of state reimbursed mandate claims from local agencies grew too large, making the program no longer worth its cost.

In 2001, the Legislature reenacted the program, but in the reverse: it allowed city tax officials to obtain state income tax information subject to a written agreement between FTB and the taxing authority of a city to assist in enforcing its business license taxes (AB 63, Cedillo, 2001). FTB charged cities for its costs for collecting and sending the information. The Legislature extended the program in 2006 until 2011 (SB 1374, Cedillo). In 2008, the Legislature again extended the program until 2014, but instead of paying for the information, allowed cities to offset costs by entering into a reciprocal agreement to provide its business license tax information to FTB (SB 1146, Cedillo). The Legislature again extended the program until January 1, 2019 (SB 211, Price, 2013).

Under the program, FTB may give a city information limited to a taxpayers’ name, address, social security or taxpayer identification number, and business activity code. However, city officials may request additional information by affidavit, so long as they notify the person whose information is the subject of the request, and provide them a copy of the affidavit. Only city employees may use the tax information provided to the city, and they can only use it for tax collection purposes. The program applies criminal sanctions in current law to any unlawful inspection or disclosure.

As a condition of participation, city officials must:

• Complete a data exchange security questionnaire before the data exchange,

• Direct tax officials to agree to on-site reviews from FTB as a condition of participation,

• Complete FTB disclosure training,

• Have all employees who receive the information sign a confidentiality statement acknowledging their awareness of data security requirements, and penalties for unlawful disclosure.

Additionally, city tax officials must notify FTB within 24 hours of any suspected instance of unlawful inspection or disclosure, and destroy an individual record in a manner to make them unreadable and unusable. Before FTB incurs any cost, cities must consent to fund FTB’s first-year costs as a condition of any agreement to share the information, and deposit amounts equal to those costs with FTB. However, FTB may waive any reimbursement if a city enters into a reciprocal agreement. Counties don’t generally license as many businesses as cities do, but given cities’ success collecting unpaid tax as a result of FTB information, counties would like to be authorized to participate in the tax information sharing program too.

Proposed Law

Assembly Bill 279 extends the state-local tax information sharing program to allow a county, and a city and county, to enter into a reciprocal agreement to share tax information with FTB.

State Revenue Impact

According to FTB, AB 279 results in revenue gains of $80,000 in 2015-16, $500,000 in 2016-17, and $800,000 in 2017-18, as a result of FTB receiving information regarding non-filers from counties.

Comments

1. Purpose of the bill. According to the author, “AB 279 is a modest extension to an existing program. By granting approval for information sharing agreements between the FTB and counties, counties will be able to more efficiently collect back taxes.”

2. Information security. The FTB has maintained the integrity of taxpayer information since the inception of the tax-sharing information program. Any improper usage or disclosure of this information carries certain civil and criminal liabilities. In 2013, the Legislature modified the program to, among other things; create additional safeguards to protect taxpayer information from unauthorized disclosure. Currently, every reciprocal agreement must include provisions ensuring that taxpayer data is safeguarded. The city must complete and submit a Safeguard Questionnaire to the FTB to ensure that the data is used only for the tax administration within the city, and destroy the data as mandated after three years. In addition, only city employees named in the confidentiality statement may have access to the data and each of those employees must complete an annual City Business Tax Disclosure training.

3. Get some. FTB states that it currently has a reciprocal agreement with 102 cities in California, which costs $718,000 annually. The following cities reported the following revenue amounts due to the program:

• City of Los Angeles ($13.9 million)

• City of San Diego ($1.1 million)

• City of Newport Beach ($360,000)

• City of Oakland ($260,000)

• City of Menlo Park ($172,000)

• City of Concord ($154,000)

• City of Sunnyvale ($131,000)

Assembly Actions

Assembly Floor 67-9
Assembly Appropriations 16-1
Assembly Revenue and Taxation 6-3

Support and Opposition

(6/11/15)

Support: California Association of County Treasurer-Tax Collectors, California State Association of Counties, El Dorado County Board of Supervisors, Mono County Board of Supervisors, Humboldt County Board of Supervisors, Rural County Representatives of California.

Opposition: Unknown.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 279

Author:(Dodd)

As Introduced Ver:February 11, 2015

Majority vote

SUMMARY: Expands the existing tax data-sharing program between the Franchise Tax Board (FTB) and cities to include counties. Specifically, this bill:

1. Authorizes FTB to permit tax officials of any county to enter into a reciprocal agreement with the FTB to obtain tax information from the FTB, as specified.

2. Limits the information that may be furnished by the FTB to a county to a taxpayer's name, address, Social Security or taxpayer identification number, and principal business activity code.

3. Specifies that a county is only authorized to receive information related to taxpayers who operate within the jurisdictional boundaries of the county or city and county and report income from a trade or business to the FTB.

4. Prohibits any person other than an employee of the taxing authority of a county from receiving or using tax information received from the FTB.

5. Requires the tax information to be utilized by a county in a form and manner as required by the FTB in order to safeguard the information.

6. Provides that the tax information furnished to tax officials of a county is subject to Revenue and Taxation Code Section 19542, which makes it a misdemeanor to disclose confidential tax information. Specifically, the information may only be used for the county's or city and county's tax enforcement, or as otherwise authorized by state or federal law.

7. Provides that any information, other than the limited type of tax information specified above, may be requested by a county's tax officials by affidavit.

8. Requires a county that either assesses a business tax or requires a business license to submit to FTB, upon request, certain specified information collected by the county in the course of administering its business tax or business license program. Also, requires a city to submit the same information collected in the course of administering the city's business license program. This information shall be furnished to FTB at a time and in the form that the FTB prescribes.

9. Provides that no reimbursement is required by this bill because the only costs that may be incurred by a local agency or school district will be incurred because this bill creates a new crime or infraction, as provided.

10. Becomes effective and operative on January 1, 2016.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1) Minor and absorbable administrative costs to FTB.

2) Estimated General Fund revenue gains of $80,000, $500,000, and $800,000 in Fiscal Year (FY) 2015-16, FY 2016-17.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:

AB 279 is a modest extension to an existing program. By granting approval for information sharing agreements between the FTB and counties, counties will be able to more efficiently collect back taxes.

2. Arguments in Support. According to the Humboldt County Board of Supervisors and the California Association of County Treasurers and Tax Collectors that, given "the inextricable financial ties between counties and the state, it seems a logical and efficient addition to the statute to permit county tax collectors and their state counterpart to closely coordinate and share information, so as to ensure timely, efficient and accurate tax collection." The proponents believe that the enhanced information sharing between counties and the state "would be mutually beneficial" and will "maximize tax collection dollars from those taxpayers and businesses" that owe money either to the state or a county."

3. Program Background. The current tax-sharing information program authorizes the FTB to enter into agreements with cities to exchange tax data. As noted in the FTB's staff analysis of this bill, these agreements can either require a city to reimburse the FTB's costs for providing the data or allow for a waiver of the FTB's costs if the city agrees to provide its tax data at no cost to FTB. Cities providing tax data to the FTB without also receiving tax data from the FTB are required to be reimbursed by the FTB at a maximum rate of $1 per usable record. The FTB can only provide tax information that contains an address within the city's jurisdiction. The information is limited, unless agreed to otherwise, to the taxpayer's name, taxpayer's address, taxpayer's Social Security or taxpayer identification number, and the principal business activity. The program on the reciprocal sharing of tax information between the FTB and a city's tax official was originally enacted by the Legislature in 2008 and subsequently extended until January 1, 2019.

FTB compiles information from many sources including employers, financial institutions, and federal and state entities for purposes of ensuring compliance with the state’s income tax laws. When the FTB receives information indicating that a tax return should be filed for a taxable year and has no record of a return, the FTB may contact the taxpayer to request that the taxpayer file a return or explain why no return is required. When a taxpayer is required to file a return and fails to do so, the FTB is authorized to assess tax based on reported and estimated income from all available sources. Additionally, FTB may use data obtained from cities to ensure compliance with state income tax requirements. In turn, cities use data obtained from the FTB to ensure compliance with city business tax requirements.

4. What Does This Bill Do? This bill would extend the application of the current tax-sharing information program, with all of the existing requirements and limitations, to counties by authorizing the FTB to enter into a reciprocal agreement with a county or city or county.¹ According to the author, counties will use this information to identify delinquent taxpayers, unclaimed property, and businesses that are located within the county's jurisdiction. In return, the FTB would receive information identifying businesses that are licensed within the counties. This information, consistent with the existing program, would include the names and residences of business owners, federal employer identification numbers or Social Security numbers, and industry classification codes. This county data arguably would help FTB to identify self-employed individuals who are not filing required individual and business entity income tax returns. This bill would also require a city to share with the FTB additional information collected in the course of the city's administration of its business license program.

5. The Reason for the Bill. The author believes that this bill is needed to help both counties and the FTB to collect delinquent taxes from individuals and businesses. Apparently, while not as common, "many counties license businesses to operate in unincorporated territory." Similar to cities, those counties are faced with a problem of identifying parties responsible for paying the local business taxes. According to the author, this bill is needed to provide counties "with a defined methodology to collect identifying information so that they may recover the taxes." The State would also benefit from the expanded information sharing program by receiving additional information regarding the businesses that are licensed by counties, and not cities.

6. Increased Security Risk: In July 2013, the Office of the Attorney General released the first report detailing 131 data breaches that occurred in 2012. The breaches compromised the personal information of 2.5 million Californians.² Out of the 131 breaches, state government held responsibility for 8%.³

In October 2014, the Office of the Attorney General issued its second report on data breach. Thus, in 2013, Attorney General Office received information on 167 data breaches, affecting personal information of more than 18.5 million California residents, constituting a 28% increase over the 131 breaches reported in 2012.⁴ According to the report, errors were responsible for 53 breaches or 18% of the total. The government sector accounted for 19% of this type of breach.

The report recommends that the California Legislature consider amending the breach notice law to strengthen the substitute notice procedure, clarify the roles and responsibilities of data owners and data maintainers, and require a final breach report to the Attorney General. The 2013 report also recommended that government agencies and companies offer mitigation products like credit monitoring services or a security freeze when such incidents occur.

7. How is the Taxpayer Information Protected in the Existing Program? The FTB has maintained the integrity of taxpayer information since the inception of the tax-sharing information program. Any improper usage or disclosure of this information carries certain civil and criminal liabilities. In 2013, the Legislature modified the program to, among other things, create additional safeguards to protect taxpayer information from unauthorized disclosure. Currently, every reciprocal agreement must include provisions ensuring that taxpayer data is safeguarded. Thus, the city must complete and submit a Safeguard Questionnaire to the FTB, ensure that the data is used only for the tax administration within the city, and destroy the data as mandated after three years. In addition, only city employees named in the confidentiality statement may have access to the data and each of those employees must complete an annual City Business Tax Disclosure training.

Expanding the number of entities and people eligible to receive confidential taxpayer information, however, may increase the likelihood of data breaches. Even though certain penalties apply to local cities and agents under current law, those penalties do little for taxpayers who must spend time and money rectifying actual and potential identity theft.

8. The Operative Date. This bill will become operative and effective on January 1, 2016. Should it become law, the FTB will be able to start entering into reciprocal agreements with counties on that date.

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0000353

Date of Hearing: May 6, 2015

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Jimmy Gomez, Chair

ABPCA Bill Id:AB 279

Author:(Dodd) – As Introduced Ver:February 11, 2015

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill expands the existing data sharing program between the Franchise Tax Board (FTB) and cities to include counties, authorizing FTB and county tax officials to enter into reciprocal agreements to share tax information, subject to specific limitations on the type, manner, and use in order to safeguard taxpayer information.

FISCAL EFFECT:

1) Minor and absorbable administrative costs to FTB.

2) Estimated GF revenue gains of $80,000, $500,000, and $800,000 in FY 2015-16, FY 2016-17, and FY 2017-18, respectively, as a result of more effective filing notice and enforcement.

COMMENTS:

1) Purpose. According to the author, allowing information sharing agreements between FTB and counties will allow the FTB and counties to more effectively collect back taxes. Supporters, including the California Association of County Treasurers and Tax Collectors, argue the strong financial ties between the counties and the state merit closer coordination and sharing of information to ensure timely, efficient, and accurate tax collection.

2) Tax Sharing With Cities. Existing law permits FTB and cities to enter into tax information sharing agreements. FTB compiles information from many different sources, such as employers, financial institutions, and federal and other state agencies for purposes of ensuring compliance. When FTB receives information indicating a tax return should be filed, FTB is able to follow up with that taxpayer. Information sharing agreements allow FTB to use data from cities for this purpose as well as share taxpayer data with cities to ensure local business taxes are being paid.

The information sharing agreements generally come in three varieties: (i) those in which FTB provides data to cities in exchange for reimbursement of any FTB costs; (ii) those in which both FTB and the cities provide data to one another at no cost to either; and (iii) those in which FTB receives data only from cities and reimburses the city up to $1 per usable record. Information shared is typically limited to taxpayer names, addresses, social security or taxpayer identification numbers, and principal business activities, and can only be shared for taxpayers located within the city's jurisdiction.

3) Data Security. FTB is required to maintain the integrity of taxpayer information, and the Legislature modified the program in 2013 to create additional safeguards to protect taxpayer information from unauthorized disclosure. These additional safeguards must be included in every tax sharing agreement, requiring cities to limit access to the data to only those city employees subject to confidentiality agreements and specialized training, and destroy the data received after three years, among others.

Though data security agreements would be required as part of any data sharing with counties, expanding the number of entities and persons eligible to receive confidential taxpayer information may increase the chance of a data breach. The current safeguards impose penalties on cities and agents responsible for any mishandling or breach of confidential taxpayer data, however these penalties provide little to individual taxpayers, who must invest time and money to resolve any harms caused to them by a breach.

Analysis Prepared by: Joel Tashjian / APPR. / (916) 319-2081

Date of Hearing: April 27, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 279

Author:(Dodd) – As Introduced Ver:February 11, 2015

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Tax administration: disclosure of information: Franchise Tax Board and cities and counties

SUMMARY: Expands the existing tax data-sharing program between the Franchise Tax Board (FTB) and cities to include counties. Specifically, this bill:

1. Authorizes FTB to permit tax officials of any county to enter into a reciprocal agreement with the FTB to obtain tax information from the FTB, as specified.

2. Limits the information that may be furnished by the FTB to a county to a taxpayer's name, address, Social Security or taxpayer identification number, and principal business activity code.

3. Specifies that a county is only authorized to receive information related to taxpayers who operate within the jurisdictional boundaries of the county or city and county and report income from a trade or business to the FTB;

4. Prohibits any person other than an employee of the taxing authority of a county from receiving or using tax information received from the FTB.

5. Requires the tax information to be utilized by a county in a form and manner as required by the FTB in order to safeguard the information.

6. Provides that the tax information furnished to tax officials of a county is subject to Revenue and Taxation Code (R&TC) Section 19542, which makes it a misdemeanor to disclose confidential tax information. Specifically, the information may only be used for the county's or city and county's tax enforcement, or as otherwise authorized by state or federal law.

7. Provides that any information, other than the limited type of tax information specified above, may be requested by a county's tax officials by affidavit.

8. Requires a county that either assesses a business tax or requires a business license to submit to FTB, upon request, certain specified information collected by the county in the course of administering its business tax or business license program. Also, requires a city to submit the same information collected in the course of administering the city's business license program. This information shall be furnished to FTB at a time and in the form that the FTB prescribes.

9. Provides that no reimbursement is required by this bill because the only costs that may be incurred by a local agency or school district will be incurred because this bill creates a new crime or infraction, as provided.

10. Becomes effective and operative on January 1, 2016.

EXISTING LAW:

1. Authorizes FTB to permit tax officials of a city to enter into a reciprocal tax sharing information agreement with FTB, as specified. The information that may be furnished to a city's tax officials is subject to the following limitations:

   1. The city is only authorized to receive information related to taxpayers who operate within the city and who report income from a trade or business to the FTB;

   2. The information is limited to a taxpayer's name, address, social security or taxpayer identification number, and principle business activity code;

   3. Tax information provided to a city's taxing authority may not be furnished to, or used by, any person other than an employee of that taxing authority; and,

   4. The information provided to a city's tax officials is subject to R&TC Section 19542, which makes it a misdemeanor to disclose confidential tax information. Specifically, the information may only be used for the city's tax enforcement, or as otherwise authorized by state or federal law.

2. Requires that tax information provided to a city shall be utilized in a form and manner to safeguard the tax information as required by the FTB, including, but not limited to:

1. The completion of a data exchange security questionnaire provided by the FTB prior to approval of a data exchange by the FTB;

2. The authorization of the FTB by a tax official or agent of the city to conduct an onsite safeguard review;

3. The completion of disclosure training provided by the FTB and a confidentiality statement signed by all employees or agents with access to information provided by the FTB confirming the requirement of data security with respect to that information and acknowledging awareness of penalties for unauthorized access or disclosure under Revenue and Taxation Code (R&TC) Sections 19542 and 19552, and Penal Code Section 502;

4. The notification of the FTB by the tax official or the agent of a city within 24 hours upon discovery of any incident of unauthorized or suspected unauthorized access or disclosure of the tax information and provide a detailed report of the incident and the parties involved; and,

5. The destruction of all records received by the tax officials of a city or its agents in a manner to make them unusable or unreadable so an individual record may no longer be ascertained in a timeframe specified by the FTB.

3. Provides that any information, other than the limited type of tax information specified above, may be requested by a city's tax officials by affidavit.

4. Requires a city that assesses a business tax or licenses a business to share with the FTB, upon request, the information collected in the course of administration of the city's business tax program. Limits this information to the following:

   1. The name of business if it is a corporation, partnership, or limited liability company, or the owner's name if it is a sole proprietorship;

   2. Business mailing address;

   3. Federal employer identification number, if applicable, or the business owner's social security number;

   4. Standard Industry Classification Code or North American Industry Classification System Code;

   5. Business start date;

   6. City number; and,

   7. Ownership type.

5. Provides for the automatic repeal of the tax information sharing program on January 1, 2019.

FISCAL EFFECT: The FTB staff estimates that this bill will result in an annual General Fund revenue gain of $80,000 in the fiscal year (FY) 2015-16, $500,000 in FY 2016-17, and $800,000 in FY 2017-18.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:

"AB 279 is a modest extension to an existing program. By granting approval for information sharing agreements between the FTB and counties, counties will be able to more efficiently collect back taxes."

2. Arguments in Support. According to the Humboldt County Board of Supervisors and the California Association of County Treasurers and Tax Collectors that, given "the inextricable financial ties between counties and the state, it seems a logical and efficient addition to the statute to permit county tax collectors and their state counterpart to closely coordinate and share information, so as to ensure timely, efficient and accurate tax collection." The proponents believe that the enhanced information sharing between counties and the state "would be mutually beneficial" and will "maximize tax collection dollars from those taxpayers and businesses" that owe money either to the State or a county."

3. Program Background. The current tax-sharing information program authorizes the FTB to enter into agreements with cities to exchange tax data. As noted in the FTB's staff analysis of this bill, these agreements can either require a city to reimburse the FTB's costs for providing the data or allow for a waiver of the FTB's costs if the city agrees to provide its tax data at no cost to FTB. Cities providing tax data to the FTB without also receiving tax data from the FTB are required to be reimbursed by the FTB at a maximum rate of $1 per usable record. The FTB can only provide tax information that contains an address within the city's jurisdiction. The information is limited, unless agreed to otherwise, to the taxpayer's name, taxpayer's address, taxpayer's Social Security number or taxpayer identification number, and the principal business activity. The program on the reciprocal sharing of tax information between the FTB and a city's tax official was originally enacted by the Legislature in 2008 and subsequently extended until January 1, 2019.

FTB compiles information from many sources including employers, financial institutions, and federal and state entities for purposes of ensuring compliance with the state’s income tax laws. When the FTB receives information indicating that a tax return should be filed for a taxable year and has no record of a return, the FTB may contact the taxpayer to request that the taxpayer file a return or explain why no return is required. When a taxpayer is required to file a return and fails to do so, the FTB is authorized to assess tax based on reported and estimated income from all available sources. Additionally, FTB may use data obtained from cities to ensure compliance with state income tax requirements. In turn, cities use data obtained from the FTB to ensure compliance with city business tax requirements.

4. What Does This Bill Do? This bill would extend the application of the current tax-sharing information program, with all of the existing requirements and limitations, to counties by authorizing the FTB to enter into a reciprocal agreement with a county or city or county.¹ According to the author, counties will use this information to identify delinquent taxpayers, unclaimed property, and businesses that are located within the county's jurisdiction. In return, the FTB would receive information identifying businesses that are licensed within the counties. This information, consistent with the existing program, would include the names and residences of business owners, federal employer identification numbers or Social Security numbers, and industry classification codes. This county data arguably would help FTB to identify self-employed individuals who are not filing required individual and business entity income tax returns. This bill would also require a city to share with the FTB additional information collected in the course of the city's administration of its business license program.

5. The Reason for the Bill. The author believes that this bill is needed to help both counties and the FTB to collect delinquent taxes from individuals and businesses. Apparently, while not as common, "many counties license businesses to operate in unincorporated territory." Similar to cities, those counties are faced with a problem of identifying parties responsible for paying the local business taxes. According to the author, this bill is needed to provide counties "with a defined methodology to collect identifying information so that they may recover the taxes." The State would also benefit from the expanded information sharing program by receiving additional information regarding the businesses that are licensed by counties, and not cities.
   
   

6. Increased Security Risk: In July 2013, the Office of the Attorney General released the first report detailing 131 data breaches that occurred in 2012. The breaches compromised the personal information of 2.5 million Californians.² Out of the 131 breaches, state government held responsibility for 8%.³

In October 2014, the Office of the Attorney General issued its second report on data breach. Thus, in 2013, Attorney General Office received information on 167 data breaches, affecting personal information of more than 18.5 million California residents, constituting a 28% increase over the 131 breaches reported in 2012.⁴ According to the report, errors were responsible for 53 breaches or 18% of the total. The government sector accounted for 19% of this type of breach.

The report recommends that the California Legislature consider amending the breach notice law to strengthen the substitute notice procedure, clarify the roles and responsibilities of data owners and data maintainers, and require a final breach report to the Attorney General. The 2013 report also recommended that government agencies and companies offer mitigation products like credit monitoring services or a security freeze when such incidents occur.

7. How is the Taxpayer Information Protected in the Existing Program? The FTB has maintained the integrity of taxpayer information since the inception of the tax-sharing information program. Any improper usage or disclosure of this information carries certain civil and criminal liabilities. In 2013, the Legislature modified the program to, among other things, create additional safeguards to protect taxpayer information from unauthorized disclosure. Currently, every reciprocal agreement must include provisions ensuring that taxpayer data is safeguarded. Thus, the city must complete and submit a Safeguard Questionnaire to the FTB, ensure that the data is used only for the tax administration within the city, and destroy the data as mandated after three years. In addition, only city employees named in the confidentiality statement may have access to the data and each of those employees must complete an annual City Business Tax Disclosure training.

Expanding the number of entities and people eligible to receive confidential taxpayer information, however, may increase the likelihood of data breaches. Even though certain penalties apply to local cities and agents under current law, those penalties do little for taxpayers who must spend time and money rectifying actual and potential identity theft. The Committee may wish to consider whether the benefits of expanding the program to counties outweigh the downside of a potential increase in data breach.

8. The Operative Date. This bill will become operative and effective on January 1, 2016. Should it become law, the FTB will be able to start entering into reciprocal agreements with counties on that date.

REGISTERED SUPPORT / OPPOSITION:

Support

California State Association of Counties

County Treasurers and Tax Collectors

Humboldt County Board of Supervisors
Rural County Representatives of California

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098

Date of Hearing: April 13, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 279

Author:(Dodd) – As Introduced Ver:February 11, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Tax administration: disclosure of information: Franchise Tax Board and cities and counties

SUMMARY: Expands the existing tax data-sharing program between the Franchise Tax Board (FTB) and cities to include counties. Specifically, this bill:

1. Authorizes FTB to permit tax officials of any county to enter into a reciprocal agreement with the FTB to obtain tax information from the FTB, as specified.

2. Limits the information that may be furnished by the FTB to a county to a taxpayer's name, address, Social Security or taxpayer identification number, and principal business activity code.

3. Specifies that a county is only authorized to receive information related to taxpayers who operate within the jurisdictional boundaries of the county or city and county and report income from a trade or business to the FTB;

4. Prohibits any person other than an employee of the taxing authority of a county from receiving or using tax information received from the FTB.

5. Requires the tax information to be utilized by a county in a form and manner as required by the FTB in order to safeguard the information.

6. Provides that the tax information furnished to tax officials of a county is subject to Revenue and Taxation Code (R&TC) Section 19542, which makes it a misdemeanor to disclose confidential tax information. Specifically, the information may only be used for the county's or city and county's tax enforcement, or as otherwise authorized by state or federal law.

7. Provides that any information, other than the limited type of tax information specified above, may be requested by a county's tax officials by affidavit.

8. Requires a county that either assesses a business tax or requires a business license to submit to FTB, upon request, certain specified information collected by the county in the course of administering its business tax or business license program. Also, requires a city to submit the same information collected in the course of administering the city's business license program. This information shall be furnished to FTB at a time and in the form that the FTB prescribes.

9. Provides that no reimbursement is required by this bill because the only costs that may be incurred by a local agency or school district will be incurred because this bill creates a new crime or infraction, as provided.

10. Becomes effective and operative on January 1, 2016.

EXISTING LAW:

1. Authorizes FTB to permit tax officials of a city to enter into a reciprocal tax sharing information agreement with FTB, as specified. The information that may be furnished to a city's tax officials is subject to the following limitations:

   1. The city is only authorized to receive information related to taxpayers who operate within the city and who report income from a trade or business to the FTB;

   2. The information is limited to a taxpayer's name, address, social security or taxpayer identification number, and principle business activity code;

   3. Tax information provided to a city's taxing authority may not be furnished to, or used by, any person other than an employee of that taxing authority; and,

   4. The information provided to a city's tax officials is subject to R&TC Section 19542, which makes it a misdemeanor to disclose confidential tax information. Specifically, the information may only be used for the city's tax enforcement, or as otherwise authorized by state or federal law.

2. Requires that tax information provided to a city shall be utilized in a form and manner to safeguard the tax information as required by the FTB, including, but not limited to:

1. The completion of a data exchange security questionnaire provided by the FTB prior to approval of a data exchange by the FTB;

2. The authorization of the FTB by a tax official or agent of the city to conduct an onsite safeguard review;

3. The completion of disclosure training provided by the FTB and a confidentiality statement signed by all employees or agents with access to information provided by the FTB confirming the requirement of data security with respect to that information and acknowledging awareness of penalties for unauthorized access or disclosure under Revenue and Taxation Code (R&TC) Sections 19542 and 19552, and Penal Code Section 502;

4. The notification of the FTB by the tax official or the agent of a city within 24 hours upon discovery of any incident of unauthorized or suspected unauthorized access or disclosure of the tax information and provide a detailed report of the incident and the parties involved; and,

5. The destruction of all records received by the tax officials of a city or its agents in a manner to make them unusable or unreadable so an individual record may no longer be ascertained in a timeframe specified by the FTB.

3. Provides that any information, other than the limited type of tax information specified above, may be requested by a city's tax officials by affidavit.

4. Requires a city that assesses a business tax or licenses a business to share with the FTB, upon request, the information collected in the course of administration of the city's business tax program. Limits this information to the following:

   1. The name of business if it is a corporation, partnership, or limited liability company, or the owner's name if it is a sole proprietorship;

   2. Business mailing address;

   3. Federal employer identification number, if applicable, or the business owner's social security number;

   4. Standard Industry Classification Code or North American Industry Classification System Code;

   5. Business start date;

   6. City number; and,

   7. Ownership type.

5. Provides for the automatic repeal of the tax information sharing program on January 1, 2019.

FISCAL EFFECT: The FTB staff estimates that this bill will result in an annual General Fund revenue gain of $80,000 in the fiscal year (FY) 2015-16, $500,000 in FY 2016-17, and $800,000 in FY 2017-18.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:

"AB 279 is a modest extension to an existing program. By granting approval for information sharing agreements between the FTB and counties, counties will be able to more efficiently collect back taxes."

2. Arguments in Support. According to the Humboldt County Board of Supervisors and the California Association of County Treasurers and Tax Collectors that, given "the inextricable financial ties between counties and the state, it seems a logical and efficient addition to the statute to permit county tax collectors and their state counterpart to closely coordinate and share information, so as to ensure timely, efficient and accurate tax collection." The proponents believe that the enhanced information sharing between counties and the state "would be mutually beneficial" and will "maximize tax collection dollars from those taxpayers and businesses" that owe money either to the State or a county."

3. Program Background. The current tax-sharing information program authorizes the FTB to enter into agreements with cities to exchange tax data. As noted in the FTB's staff analysis of this bill, these agreements can either require a city to reimburse the FTB's costs for providing the data or allow for a waiver of the FTB's costs if the city agrees to provide its tax data at no cost to FTB. Cities providing tax data to the FTB without also receiving tax data from the FTB are required to be reimbursed by the FTB at a maximum rate of $1 per usable record. The FTB can only provide tax information that contains an address within the city's jurisdiction. The information is limited, unless agreed to otherwise, to the taxpayer's name, taxpayer's address, taxpayer's Social Security number or taxpayer identification number, and the principal business activity. The program on the reciprocal sharing of tax information between the FTB and a city's tax official was originally enacted by the Legislature in 2008 and subsequently extended until January 1, 2019.

FTB compiles information from many sources including employers, financial institutions, and federal and state entities for purposes of ensuring compliance with the state’s income tax laws. When the FTB receives information indicating that a tax return should be filed for a taxable year and has no record of a return, the FTB may contact the taxpayer to request that the taxpayer file a return or explain why no return is required. When a taxpayer is required to file a return and fails to do so, the FTB is authorized to assess tax based on reported and estimated income from all available sources. Additionally, FTB may use data obtained from cities to ensure compliance with state income tax requirements. In turn, cities use data obtained from the FTB to ensure compliance with city business tax requirements.

4. What Does This Bill Do? This bill would extend the application of the current tax-sharing information program, with all of the existing requirements and limitations, to counties by authorizing the FTB to enter into a reciprocal agreement with a county or city or county.¹ According to the author, counties will use this information to identify delinquent taxpayers, unclaimed property, and businesses that are located within the county's jurisdiction. In return, the FTB would receive information identifying businesses that are licensed within the counties. This information, consistent with the existing program, would include the names and residences of business owners, federal employer identification numbers or Social Security numbers, and industry classification codes. This county data arguably would help FTB to identify self-employed individuals who are not filing required individual and business entity income tax returns. This bill would also require a city to share with the FTB additional information collected in the course of the city's administration of its business license program.

5. The Reason for the Bill. The author believes that this bill is needed to help both counties and the FTB to collect delinquent taxes from individuals and businesses. Apparently, while not as common, "many counties license businesses to operate in unincorporated territory." Similar to cities, those counties are faced with a problem of identifying parties responsible for paying the local business taxes. According to the author, this bill is needed to provide counties "with a defined methodology to collect identifying information so that they may recover the taxes." The State would also benefit from the expanded information sharing program by receiving additional information regarding the businesses that are licensed by counties, and not cities.
   
   

6. Increased Security Risk: In July 2013, the Office of the Attorney General released the first report detailing 131 data breaches that occurred in 2012. The breaches compromised the personal information of 2.5 million Californians.² Out of the 131 breaches, state government held responsibility for 8%.³

In October 2014, the Office of the Attorney General issued its second report on data breach. Thus, in 2013, Attorney General Office received information on 167 data breaches, affecting personal information of more than 18.5 million California residents, constituting a 28% increase over the 131 breaches reported in 2012.⁴ According to the report, errors were responsible for 53 breaches or 18% of the total. The government sector accounted for 19% of this type of breach.

The report recommends that the California Legislature consider amending the breach notice law to strengthen the substitute notice procedure, clarify the roles and responsibilities of data owners and data maintainers, and require a final breach report to the Attorney General. The 2013 report also recommended that government agencies and companies offer mitigation products like credit monitoring services or a security freeze when such incidents occur.

7. How is the Taxpayer Information Protected in the Existing Program? The FTB has maintained the integrity of taxpayer information since the inception of the tax-sharing information program. Any improper usage or disclosure of this information carries certain civil and criminal liabilities. In 2013, the Legislature modified the program to, among other things, create additional safeguards to protect taxpayer information from unauthorized disclosure. Currently, every reciprocal agreement must include provisions ensuring that taxpayer data is safeguarded. Thus, the city must complete and submit a Safeguard Questionnaire to the FTB, ensure that the data is used only for the tax administration within the city, and destroy the data as mandated after three years. In addition, only city employees named in the confidentiality statement may have access to the data and each of those employees must complete an annual City Business Tax Disclosure training.

Expanding the number of entities and people eligible to receive confidential taxpayer information, however, may increase the likelihood of data breaches. Even though certain penalties apply to local cities and agents under current law, those penalties do little for taxpayers who must spend time and money rectifying actual and potential identity theft. The Committee may wish to consider whether the benefits of expanding the program to counties outweigh the downside of a potential increase in data breach.

8. The Operative Date. This bill will become operative and effective on January 1, 2016. Should it become law, the FTB will be able to start entering into reciprocal agreements with counties on that date.

REGISTERED SUPPORT / OPPOSITION:

Support

California State Association of Counties

County Treasurers and Tax Collectors

Humboldt County Board of Supervisors
Rural County Representatives of California

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098