The Sales and Use Tax Law generally provides, for a transaction not subject to sales tax, that every person storing, using, or otherwise consuming in this state tangible personal property purchased from a retailer for storage, use, or other consumption in this state is liable for use tax, and must pay the use tax to the State Board of Equalization, unless that person has paid the use tax to a retailer registered to collect the tax. Existing law authorizes a person to make an irrevocable election to report qualified use tax, as defined, on that persons income tax return.

Existing law, commencing July 1, 2017, provides that the California Department of Tax and Fee Administration is responsible for the administration of the Sales and Use Tax Law, which was previously administered by the State Board of Equalization.

This bill would require the Franchise Tax Board to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax return and to indicate in a prescribed manner either that the taxpayer owes no use tax or that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the department.

The Sales and Use Tax Law generally provides, for a transaction not subject to sales tax, that every person storing, using, or otherwise consuming in this state tangible personal property purchased from a retailer for storage, use, or other consumption in this state is liable for use tax, and must pay the use tax to the State Board of Equalization, unless that person has paid the use tax to a retailer registered to collect the tax. Existing law authorizes a person to make an irrevocable election to report qualified use tax, as defined, on that persons income tax return.

Existing law, commencing July 1, 2017, provides that the California Department of Tax and Fee Administration is responsible for the administration of the Sales and Use Tax Law, which was previously administered by the State Board of Equalization.

This bill would require the Franchise Tax Board to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax return and to indicate in a prescribed manner either that the taxpayer owes no use tax or that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the department.

The Sales and Use Tax Law generally provides, for a transaction not subject to sales tax, that every person storing, using, or otherwise consuming in this state tangible personal property purchased from a retailer for storage, use, or other consumption in this state is liable for use tax, and must pay the use tax to the State Board of Equalization, unless that person has paid the use tax to a retailer registered to collect the tax. Existing law authorizes a person to make an irrevocable election to report qualified use tax, as defined, on that persons income tax return.

This bill would require the Franchise Tax Board to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax return and to indicate in a prescribed manner either that the taxpayer owes no use tax or that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the State Board of Equalization.

 THIRD READING  

Bill No: AB 1593

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 6-1, 6/28/17

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

NOES: Nguyen

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 53-23, 5/31/17 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill requires the Franchise Tax Board (FTB) to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax return and to indicate in a prescribed manner either that the taxpayer owes no use tax or that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the State Board of Equalization (BOE).

ANALYSIS:

Existing law:

1. Requires FTB to add a line or lines to the state's income tax forms allowing taxpayers to self-report their use tax liabilities (SB 1009, Alpert, Chapter 718, Statutes of 2003).  This provision sunset at the end of 2009 but was extended permanently in a trailer bill to the 2010-11 State Budget (SB 858, Committee on Budget and Fiscal Review, Chapter 721, Statutes of 2010). 
2. Does not require a taxpayer to enter a number into the use tax line on the income tax form.

This bill requires the FTB to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax return and to indicate in a prescribed manner either that the taxpayer owes no use tax or that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the BOE.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 7/12/17)

None received

OPPOSITION: (Verified 7/12/17)

None received

ASSEMBLY FLOOR: 53-23, 5/31/17

AYES: Aguiar-Curry, Arambula, Berman, Bloom, Bocanegra, Bonta, Burke, Caballero, Calderon, Cervantes, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Frazier, Friedman, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Holden, Jones-Sawyer, Kalra, Levine, Limón, Low, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Quirk, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Mark Stone, Thurmond, Ting, Weber, Wood, Rendon

NOES: Acosta, Travis Allen, Baker, Bigelow, Brough, Chávez, Cunningham, Dahle, Flora, Fong, Gallagher, Harper, Irwin, Kiley, Lackey, Maienschein, Mathis, Mayes, Obernolte, Patterson, Steinorth, Voepel, Waldron

NO VOTE RECORDED: Chen, Choi, Eggman, Melendez

Prepared by:

7/12/17 15:29:40

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Personal income tax

Requires the Franchise Tax Board (FTB) to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax (PIT) return.

Background

Since 1933, California has imposed a sales tax on retailers for the privilege of selling tangible personal property (TPP) in this state, absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California. 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 Board of Equalization (BOE).

Historically, use tax compliance has been low except where the state can compel out-of-state retailers to collect the use tax on its behalf at the time of sale. But the ability of states to compel out-of-state retailers to collect use taxes on their behalf is constrained by the commerce clause of the U.S. Constitution, which 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 held that 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. The Legislature responded by expanding the statutory definition of a retailer “engaged in business in this state” for the purpose of establishing nexus and the use tax collection obligation in AB 155, (Calderon), 2012.

Use tax reporting on income tax returns. In 2003, the state first required FTB to add a line or lines to the state's income tax forms allowing taxpayer to self-report their use tax liabilities (SB 1009, Alpert, 2003). This provision sunset at the end of 2009 but was extended permanently in a trailer bill to the 2010-11 state budget (SB 858, Committee on Budget and Fiscal Review, 2010).

Despite these efforts, many taxpayers fail to self-report their use tax obligations on their income tax forms, often leaving the line on the form blank. BOE estimates that the state is failing to collect more than $1 billion each year in use tax that it legally owed by purchasers. The author wants to require taxpayers to enter a number on the use tax line of the tax form to improve compliance.

Proposed Law

Assembly Bill 1593 requires the FTB to revise the tax returns, and the accompanying instructions for filing those returns, to require the following:

• That a taxpayer enter a number on the use tax line of the PIT return; and,
• That a taxpayer who enters the number zero on the use tax line of the PIT return check one of two boxes, the first of which must indicate that the taxpayer owes no use tax, and the second of which shall indicate that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the BOE.

AB 1593 specifies that these provisions shall apply to returns filed for taxable years beginning on and after January 1, 2017.

State Revenue Impact

BOE estimates a state and local revenue gain of $12.7 million annually.

Comments

1. Purpose of the bill. According to the author, “This bill takes a modest but important step forward in California's ongoing effort to close the use tax gap. Specifically, this bill would direct the Franchise Tax Board to revise the personal income tax return to require taxpayers to enter a number on the use tax line. Currently, many taxpayers simply leave this line blank. In such cases, it is difficult to tell whether the taxpayer owes no tax, has reported the tax directed to the State Board of Equalization, or is simply unaware of his or her obligation to pay. This bill would promote consumer awareness of the tax, and further the state's efforts to better implement a tax that has been in place since 1935.”

2. Research on use tax compliance. In 2015, the Minnesota House of Representatives Research Department surveyed use tax remittance procedures on income tax returns among applicable states. This survey found significant differences in the number of taxpayers reporting use tax and the average use tax paid per return for states that required entering a number on the PIT return compared to states that had no such requirement. According to the Minnesota analysis, the use tax participation rate among personal income tax filers was 18% higher for states that required a number on the return compared to states without this requirement. However, the average reported use tax amount per return was 48% higher for states requiring a numerical entry. The Minnesota study demonstrated that requiring taxpayers to enter a number on the tax return significantly improved use tax compliance.

AB 1503 would implement demonstrated best practices by requiring the FTB to revise the PIT return to require a taxpayer to enter a number on the use tax line. Moreover, if that number is zero, the taxpayer would have to indicate either that the taxpayer owes no use tax or that the taxpayer has remitted the tax to the BOE. This bill is designed to increase consumer awareness of the use tax and the obligation to pay and report the tax. In this manner, this bill takes another step in California's ongoing efforts to close the use tax gap and ensure compliance with a tax that has been in effect since 1935.

4. Sales and use tax administration transferring to new California Department of Tax and Fee Administration (CDTFA). Effective July 1, 2017, the responsibility for administering the sales and use tax will transfer from BOE to the new CDTFA if the Governor signs, as expected, AB 102, (Committee on Budget), a trailer bill to the 2017 State Budget Act.

Assembly Actions

Assembly Revenue and Taxation 7-3

Assembly Appropriations 12-5

Assembly Floor 53-23

Support and Opposition

(6/21/17)

Support: Unknown.

Opposition: Unknown.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1593

Author:(Ridley-Thomas)

As Introduced Ver:February 17, 2017

Majority vote

SUMMARY: Requires the Franchise Tax Board (FTB) to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax (PIT) return. Specifically, this bill:

1. Requires the FTB to revise the returns, and the accompanying instructions for filing those returns, to require the following:
   1. That a taxpayer enter a number on the use tax line of the PIT return; and,
   2. That a taxpayer who enters the number zero on the use tax line of the PIT return check one of two boxes, the first of which shall indicate that the taxpayer owes no use tax, and the second of which shall indicate that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the State Board of Equalization (BOE).
2. Specifies that these provisions shall apply to returns filed for taxable years beginning on or after January 1, 2017.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and 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.
3. Authorizes a person to make an irrevocable election to report qualified use tax, as defined, on that person's income tax return.

FISCAL EFFECT: According to the Assembly Appropriations Committee:

1. An increase in collected state revenue of approximately $6.1 million (General Fund) annually.
2. Unknown, but likely minor costs (General Fund), for the FTB to update the PIT return.

COMMENTS:

1. The author has provided the following statement in support of this bill:

This bill takes a modest but important step forward in California's ongoing effort to close the use tax gap. Specifically, this bill would direct the Franchise Tax Board to revise the personal income tax return to require taxpayers to enter a number on the use tax line. Currently, many taxpayers simply leave this line blank. In such cases, it is difficult to tell whether the taxpayer owes no tax, has reported the tax directed to the State Board of Equalization, or is simply unaware of his or her obligation to pay. This bill would promote consumer awareness of the tax, and further the state's efforts to better implement a tax that has been in place since 1935.

1. The BOE notes the following in its staff analysis of this bill:
   1. Effect of the bill: "Requires eligible purchasers that file personal income tax returns to enter some amount on the use tax line or indicate whether they've paid the BOE the tax or don't owe it at all."
   2. Use tax lines are on other FTB returns: "The bill's provisions are limited to personal income tax returns. However, a use tax line is also on other business entity returns (limited liability companies, corporations, fiduciaries, partnerships, etc.). In fiscal year 2015-16, the FTB processed 1.7 million business entity returns, with use tax reported on only 740 returns. Consideration should be given to including these returns as well. This could be accomplished by striking ‘personal income tax’ in proposed subsections (i) and (ii) of proposed subparagraph (B)."
2. Revenue and Taxation Committee Staff Comments:
   1. 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 California. 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.

• 1. 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 some 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 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 North Dakota 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.

• 1. 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 (Budget and Fiscal Review), Chapter 721, Statutes of 2010,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.

Existing law also allows eligible purchasers to use a "look-up" table when they report their use tax obligations on their state income tax returns. The BOE annually calculates the "look-up" table based on the estimated use tax due for various adjusted gross income ranges and makes the table available to the FTB. The FTB then incorporates the table into its instructions for filing state income tax returns.

Despite these efforts, the BOE estimates that, on an annual basis, the state is still failing to collect over $1 billion in use tax that is legally owed by purchasers.

• 1. What is the problem and how does this bill address it? Under current law, taxpayers are not required to enter a number on the use tax line of the PIT return. Instead, many taxpayers simply leave the line blank. In such cases, it is not clear if the line is left blank because the taxpayer owes no use tax, has remitted his or her use tax directly to the BOE, or has simply failed to report owed use tax altogether.

In 2015, the Minnesota House of Representatives Research Department surveyed use tax remittance procedures on income tax returns among applicable states. This survey found significant differences in the number of taxpayers reporting use tax and the average use tax paid per return for states that required entering a number on the PIT return compared to states that had no such requirement. As noted by the BOE:

According to the Minnesota analysis, the use tax participation rate among personal income tax filers was 18% higher for states that required a number on the return compared to states without this requirement. However, the average reported use tax amount per return was 48% higher for states requiring a numerical entry.

This bill would implement demonstrated best practices by requiring the FTB to revise the PIT return to require a taxpayer to enter a number on the use tax line. Moreover, if that number is zero, the taxpayer would have to indicate either that the taxpayer owes no use tax or that the taxpayer has remitted the tax to the BOE. This bill is designed to increase consumer awareness of the use tax and the obligation to pay and report the tax. In this manner, this bill takes another step in California's ongoing efforts to close the use tax gap and ensure compliance with a tax that has been in effect since 1935.

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0000589

Date of Hearing: April 26, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 1593

Author:(Ridley-Thomas) – As Introduced Ver:February 17, 2017

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

SUMMARY:

This bill requires the Franchise Tax Board (FTB), beginning on taxable years starting on or after January 1, 2017, to revise personal income tax (PIT) returns to require taxpayers to enter a number on the use tax line. Taxpayers who enter zero on the use tax line must indicate that either they owe no use tax or that they submitted use tax obligations directly to the Board of Equalization (BOE).

FISCAL EFFECT:

1. An increase in collected state revenue of approximately $6.1 million (GF) annually.
2. Unknown, but likely minor costs (GF), for FTB to update PIT returns.

COMMENTS:

1. California's Use Tax. Since 1933, the state has imposed a sales tax on California retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California. 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.
2. Use Tax Collections. 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 some ambiguity surrounding the circumstances under which a state may legally compel an out-of-state retailer to collect use tax on its behalf. As a result, the use tax is collected through taxpayers either submitting us tax obligations directly to BOE or reporting their use tax obligations on their PIT returns.
3. Purpose. According to the author, AB 1593 will help close the “use tax gap” and promote consumer awareness of the use tax. Under current law, taxpayers are not required to enter a number on the use tax line of the PIT return. Instead, many taxpayers simply leave the line blank. In such cases, it is not clear if the line is left blank because the taxpayer owes no use tax, has remitted his or her use tax directly to the BOE, or has simply failed to report owed use tax altogether.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 17, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 1593 (

Author:Ridley-Thomas) – As Introduced Ver:February 17, 2017

Majority vote. Fiscal committee.

SUBJECT: Personal income tax

SUMMARY: Requires the Franchise Tax Board (FTB) to revise the income tax returns to require a taxpayer to enter a number on the use tax line of the personal income tax (PIT) return. Specifically, this bill:

1. Requires the FTB to revise the returns, and the accompanying instructions for filing those returns, to require the following:
   1. That a taxpayer enter a number on the use tax line of the PIT return; and,
   2. That a taxpayer who enters the number zero on the use tax line of the PIT return check one of two boxes, the first of which shall indicate that the taxpayer owes no use tax, and the second of which shall indicate that the taxpayer has remitted his or her use tax obligation for the taxable year directly to the State Board of Equalization (BOE).
2. Specifies that these provisions shall apply to returns filed for taxable years beginning on or after January 1, 2017.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and 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.
   
3. Authorizes a person to make an irrevocable election to report qualified use tax, as defined, on that person's income tax return.

FISCAL EFFECT: The BOE estimates that this bill would increase state and local revenues by $12.7 million annually.

COMMENTS:

1. The author has provided the following statement in support of this bill:

This bill takes a modest but important step forward in California's ongoing effort to close the use tax gap. Specifically, this bill would direct the Franchise Tax Board to revise the personal income tax return to require taxpayers to enter a number on the use tax line. Currently, many taxpayers simply leave this line blank. In such cases, it is difficult to tell whether the taxpayer owes no tax, has reported the tax directed to the State Board of Equalization, or is simply unaware of his or her obligation to pay. This bill would promote consumer awareness of the tax, and further the state's efforts to better implement a tax that has been in place since 1935.

1. The BOE notes the following in its staff analysis of this bill:
   1. Effect of the bill: "Requires eligible purchasers that file personal income tax returns to enter some amount on the use tax line or indicate whether they've paid the BOE the tax or don't owe it at all."
   2. Use tax lines are on other FTB returns: "The bill's provisions are limited to personal income tax returns. However, a use tax line is also on other business entity returns (limited liability companies, corporations, fiduciaries, partnerships, etc.). In fiscal year 2015-16, the FTB processed 1.7 million business entity returns, with use tax reported on only 740 returns. Consideration should be given to including these returns as well. This could be accomplished by striking ‘personal income tax’ in proposed subsections (i) and (ii) of proposed subparagraph (B)."
2. Committee Staff Comments:
   1. 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 California. 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.

• 1. 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 some 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 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 North Dakota 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.

• 1. 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 str Bill Id:SB 858 (Committee on Author: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.

Existing law also allows eligible purchasers to use a "look-up" table when they report their use tax obligations on their state income tax returns. The BOE annually calculates the "look-up" table based on the estimated use tax due for various adjusted gross income ranges and makes the table available to the FTB. The FTB then incorporates the table into its instructions for filing state income tax returns.

Despite these efforts, the BOE estimates that, on an annual basis, the state is still failing to collect over $1 billion in use tax that is legally owed by purchasers.

• 1. What is the problem and how does this bill address it? Under current law, taxpayers are not required to enter a number on the use tax line of the PIT return. Instead, many taxpayers simply leave the line blank. In such cases, it is not clear if the line is left blank because the taxpayer owes no use tax, has remitted his or her use tax directly to the BOE, or has simply failed to report owed use tax altogether.

In 2015, the Minnesota House of Representatives Research Department surveyed use tax remittance procedures on income tax returns among applicable states. This survey found significant differences in the number of taxpayers reporting use tax and the average use tax paid per return for states that required entering a number on the PIT return compared to states that had no such requirement. As noted by the BOE:

According to the Minnesota analysis, the use tax participation rate among personal income tax filers was 18% higher for states that required a number on the return compared to states without this requirement. However, the average reported use tax amount per return was 48% higher for states requiring a numerical entry.

This bill would implement demonstrated best practices by requiring the FTB to revise the PIT return to require a taxpayer to enter a number on the use tax line. Moreover, if that number is zero, the taxpayer would have to indicate either that the taxpayer owes no use tax or that the taxpayer has remitted the tax to the BOE. This bill is designed to increase consumer awareness of the use tax and the obligation to pay and report the tax. In this manner, this bill takes another step in California's ongoing efforts to close the use tax gap and ensure compliance with a tax that has been in effect since 1935.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098