Under the Sales and Use Tax Law, any amount collected or paid in excess of what is due under that law is required to be credited by the State Board of Equalization against any other amounts due and payable from the person from whom the excess amount was collected or by whom it was paid, and the balance refunded to the person, as provided. Under existing law, when an amount represented by a person to a customer as constituting reimbursement for taxes due under the Sales and Use Tax Law is computed upon an amount that is not taxable or is in excess of the taxable amount and is actually paid by the customer to the person, the amount paid is required to be returned by the person to the customer upon notification by the board or by the customer that this excess has been ascertained.

This bill would authorize a person that has paid the tax to make an irrevocable election to assign to the customer the right to file a claim for refund to receive the amount that would be refunded to the person, provided specified conditions are met, including that the amount be $50,000 of tax or more. This bill would authorize the board to make a payment to the customer of the balance of any excess amount collected or paid, after any amounts due and payable from the person or customer are credited against that excess amount. This bill would also require an amount subject to refund that is credited to the person that paid the tax and not refunded to the customer to be paid by that person directly to the customer.

Under the Sales and Use Tax Law, any amount collected or paid in excess of what is due under that law is required to be credited by the State Board of Equalization against any other amounts due and payable from the person from whom the excess amount was collected or by whom it was paid, and the balance refunded to the person, as provided. Under existing law, when an amount represented by a person to a customer as constituting reimbursement for taxes due under the Sales and Use Tax Law is computed upon an amount that is not taxable or is in excess of the taxable amount and is actually paid by the customer to the person, the amount paid is required to be returned by the person to the customer upon notification by the board or by the customer that this excess has been ascertained.

This bill would authorize a person that has paid the tax to make an irrevocable election to assign to the customer the right to file a claim for refund to receive the amount that would be refunded to the person, provided specified conditions are met, including that the amount be $50,000 or more. This bill would authorize the board to make a payment to the customer of the balance of any excess amount collected or paid, after any amounts due and payable from the person or customer are credited against that excess amount. This bill would also require an amount subject to refund that is credited to the person that paid the tax and not refunded to the customer to be paid by that person directly to the customer.

Date of Hearing: April 26, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 433

Author:(Bocanegra) – As Amended Ver:April 3, 2017

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

SUMMARY:

This bill authorizes a retailer to make an irrevocable election to assign the right to file a claim for refund of excess sales tax reimbursement in the amount of $50,000 or greater to a single customer so that the Board of Equalization (BOE) may make a direct refund to the customer. This bill also allows a customer to seek a refund directly from the BOE, if, after 60 days, the retailer denies an election, or the retailer is no longer in business, or the customer cannot locate the retailer.

FISCAL EFFECT:

1. Significant one-time administrative costs of approximately $400,000 in 2017-18 to develop the new refund program, and ongoing annual administrative costs of approximately $500,000 thereafter to track and issue refunds.
2. To the extent that this new program generates refund opportunities for taxpayers that otherwise wouldn’t exist, there will a loss in sales tax revenue. For example, AB 433 will allow a taxpayer to more easily receive a tax refund even after a retailer goes out of business. The specific revenue impact is unknown.

COMMENTS:

1. Purpose. According to the author, AB 433 will help customers receive sales tax refunds more quickly and will ease the workload for retailers. The California Retailers Association states that this new refund process is a common sense measure that alleviates an administrative burden for taxpayers who are owed a reimbursement of sales tax.
2. Who benefits? AB 433 is partly a response to a California Supreme Court decision that held customers cannot challenge a retailer's sales tax determination because the retailer, and not the customer, is the legal taxpayer. This bill provides customers an opportunity to receive a refund directly, but it limits the opportunity to instances in which the excess sales tax exceeds $50,000 and the entire claim amount is owed to a single customer. As a result, the bill specifically excludes everyday customers and ordinary transactions, and may limit retailers' ability to claim refunds for excess taxes relating to multiple customers. Instead, this bill is likely to most benefit businesses that make purchases generating substantial sales tax, like capital equipment.
3. Previous legislation. AB 433 is similar to previous bills that tried to create a process by which customers could receive a refund directly from BOE. Those bills include:
   1. SB 640 (Beall), of the 2015-16 Legislative Session, would have allowed a customer to file a claim for refund without an irrevocable election for excess tax reimbursement for amounts of $1,000 or greater. SB 640 was held this committee’s Suspense File.
   2. AB 43 (Bocanegra), of the 2013-14 Legislative Session, would have permitted a retailer to assign the right to file a claim for excess tax reimbursement in the amount of $50,000 or more to the customer, and not simply the right to receive a refund payment. These amendments increased the BOE’s administrative costs considerably. AB 43 was held on the Senate Committee on Appropriations’ Suspense File.
4. BOE Workload. AB 433, compared to previous iterations of this bill, imposes a less burdensome workload requirement for BOE. However, significant staff work will still be required in order to administer the new refund program. For example, BOE will still need to validate a customer’s claim for a refund, and documentation will still need to be collected from both the retailer and the customer in order to assess refund claims.

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

Date of Hearing: March 27, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 433 (

Author:Bocanegra) – As Introduced Ver:February 13, 2017

Majority vote. Fiscal committee.

SUBJECT: Sales and use taxes: claim for refund: customer refunds

SUMMARY: Authorizes a person (i.e., a retailer) to make an irrevocable election to assign the right to file a claim for refund of excess tax reimbursement in the amount of $50,000 or more to a single customer so that the State Board of Equalization (BOE) may make a direct refund to the customer. Specifically, this bill:

1. Allows a retailer that paid the tax to make an irrevocable election to assign to the customer the right to file a claim for refund and receive the amount refunded if all of the following conditions are met:
   1. The entire amount represents excess tax reimbursement that is required to be paid by the retailer to a single customer;
   2. The amount to be refunded is $50,000 or more;
   3. The customer procures a statement evidencing that an irrevocable election has been signed by the retailer and the customer, giving the customer the right to file a claim for refund and receive the amount refunded. Within 60 days of a written request, if a retailer denies an election as requested by the customer, the customer is unable to locate the retailer, or the retailer is no longer in business, the customer may submit a signed statement confirming the efforts that the customer has made to obtain the irrevocable election; and,
   4. The signed statement is provided to the BOE in conjunction with the claim for refund.
2. Requires a retailer that paid the tax and collected the excess tax reimbursement to make its records available for inspection by the BOE to verify the refund, and no refund shall be payable until the BOE verifies by audit or other means that the amounts are properly due for refund.
3. Provides that the excess amount collected or paid shall be credited on amounts due and payable from the retailer that paid the tax or for amounts for which a notice of determination has been issued to the retailer that paid the tax, and amounts due and payable from the customer from which the excess tax reimbursement was collected. The balance shall be refunded to the customer that paid the excess tax reimbursement.
4. Requires the retailer to pay the refund directly to the customer if the amount subject to the refund was credited to the retailer that paid the tax but was not refunded to the customer that paid the excess tax reimbursement. If the retailer does not make that payment, the credit that was on the amount due from the retailer shall be reversed.
5. Requires any proposed determination by the BOE in excess of $50,000 to be made available as a public record for at least 10 days prior to the effective date of that determination.
6. Defines a “person that paid the tax” as a single “person” as defined under Revenue and Taxation Code (R&TC) Section 6005.
7. Defines a “customer” as a single “person” as defined by R&TC Section 6005.

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 California.
2. Imposes a complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to a retailer registered to collect the California use tax, the purchaser remains liable for the tax, unless the use is exempted. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the BOE.
3. Provides that any amount collected or paid in excess of what is due under the Sales and Use Tax (SUT) Law must be credited by the BOE against any other amounts due from the person from whom the excess amount was collected or by whom it was paid, and the balance refunded, as specified.
4. Provides that, when an amount represented to a customer as SUT reimbursement is computed upon an amount that is not taxable or is in excess of the taxable amount and is actually paid by the customer, the amount paid must be returned to the customer upon notification by the BOE or by the customer that this excess has been ascertained.
5. Provides that if the BOE determines that the retailer has paid any amount of sales tax more than once or has erroneously or illegally collected or computed the sales tax, the BOE must note the amount in its records, credit the amount to the retailer’s other BOE liabilities, and refund the balance to the retailer, or to the retailer’s successor, administrator, or executor. To obtain a sales tax refund, the retailer must submit a claim for refund to the BOE. The BOE is required to refund any overpayment of use tax directly to the purchaser, even though the retailer collected and remitted the tax. In sum, while the statute allows the BOE to refund excess use tax directly to the purchaser, the BOE may issue a refund for excess sales tax reimbursement only to the retailer.
6. Provides that the BOE may refund to the retailer excess sales tax reimbursement upon submission of sufficient evidence that the excess tax reimbursement has been or will be returned to the customer. If a retailer has not refunded excess tax reimbursement to the customer, but would rather do so than incur an obligation to the state, the retailer must: (a) inform the customer in writing that excess tax reimbursement was collected and that the excess amount will be refunded or credited to the customer; and (b) obtain and retain for verification by the BOE an acknowledgement from the customer that the customer has received notice of the amount of indebtedness of the retailer to the customer.

FISCAL EFFECT: According to the BOE, “[t]he bill’s actual revenue impact is indeterminable. However, to the extent that additional claims involving excess sales tax reimbursement would be filed, this could result in a state and local revenue loss.”

COMMENTS:

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

Certain tax exemptions, including exemptions for agriculture businesses, manufacturing exemptions, and medical exemptions, are cumbersome, time consuming, and fact-driven. Under existing law, if a customer is owed a sales tax exemption by the Board of Equalization (BOE), a customer may only appeal to the BOE only through the retailer from which it bought the product. For a retailer who has neither the time nor the expertise to serve as the middleman for a customer in an appeal, a customer could be out thousands of dollars in over-paid sales tax. Vendor assignment would shorten the refund process by approximately two to three months and eliminate processing by the retailer as the middleman, permitting a customer to represent itself and present its own facts and arguments to the Board of Equalization. This bill will enable customers to receive refunds in a more expeditious fashion and ease the workload of certain retailers who will no longer be required to issue refund checks themselves, nor file a claim for refund on the customer’s behalf. AB 433 is a common sense measure that authorizes a retailer to assign to a customer the right to file for and receive a direct refund of excess sales tax reimbursement.

1. The California Retailers Association states that the refund process in this bill “is a common sense measure, which helps to alleviate an administrative burden in reimbursement of sales tax rightfully owed to a taxpayer.”
2. Committee Staff Comments:
   1. Genesis of the Bill: The Gap, Inc., a clothing store, was seeking a refund of taxes paid from a photographer. The photographer filed a claim for refund with the BOE, but instead of forwarding the refund to the Gap, the photographer kept the amount, which was more than $700,000. Although it is unclear why the photographer failed to refund the sales tax to the Gap, a dispute between the two parties is believed to have played a role.
   2. Do Retailers Get Dragged In? The author states that this bill would expedite the refund process by eliminating the middleman (i.e., retailer). It appears, however, that access to the retailer’s records is required to verify payment. According to the BOE’s analysis of this bill, before providing a refund, the BOE would have to first request documents from the customer to determine that the sales tax reimbursement was paid and then verify that the tax was remitted by the retailer to the BOE. In order to satisfy the second requirement, BOE staff would likely need to contact the retailer to obtain the necessary documentation, and would need to review the retailer’s records to ensure that a credit for the excess tax reimbursement was not provided by the retailer to the customer on a subsequent transaction. In some cases, this could involve setting up appointments to visit the retailer’s place of business. However, because this bill began with a conflict between the Gap and a photographer; because this bill allows a customer to move forward with a claim for refund of excess tax reimbursements even if the retailer denies the election, it may become administratively difficult for the BOE to properly verify payment.

The refusal to assign the right to a customer may occur for a number of reasons. The retailer may be in contractual disputes with the customer, the retailer may be worried that an examination may interrupt business operations, or the retailer may not want to be found liable for inadvertently miscalculating a sales tax. Irrespective of the many reasons why a retailer may decide to refuse to make an irrevocable assignment, the provisions of this bill are clear in that refunds will not be made until the BOE verifies that the retailer paid the tax.

Other complications arise when the customer is unable to obtain consent from the retailer. This bill allows a customer to submit a signed statement confirming the efforts made to obtain the irrevocable election but the bill lacks a standard by which the BOE may judge those written statements. The BOE has suggested, in their analysis of this bill, that statements be submitted under penalty of perjury, which is in line with other statutes.

• 1. Taxability of Coffee: In a 4-3 decision, the California Supreme Court held that the reach of state consumer protection laws does not extend to sales tax disputes. Specifically, the Court found that customers have no recourse to challenge a retailer’s sales tax determination because only the retailer, who is the taxpayer, can seek an official determination of whether sales tax is actually owed. In Loeffler v. Target, Target had charged its customers sales tax reimbursement on all sales of coffee even though, arguably, not all sales were subject to tax. (58 Cal. 4th 1081 (2014).) Specifically, Target did not seek a determination from the BOE on whether “to go” coffee was subject to sales tax. Instead, Target paid the BOE the sales tax on all hot coffee sold in its stores, and then charged all of its customers a sales tax reimbursement. Specifically, once a retailer has remitted a customer’s sales tax reimbursement to the BOE, the retailer is the only individual that can claim a refund. Existing law does not allow a customer the right to dispute the application of sales tax.

At first glance, it appears that this bill might provide some recourse to customers who have unknowingly been charged excess sales tax reimbursement. However, most customers are barred from seeking relief because this bill only applies to claims for refund in excess of $50,000. These limitations appear to specifically exclude everyday customers and even larger businesses from seeking relief. Previous iterations of this bill allowed a claim for refund to be made for excess tax reimbursement in the amount of $1,000 or more. The lowering of the threshold to $1,000 was added in part to allow customers other than just big corporations to take advantage of this refund process. The Committee may wish to consider whether it is appropriate to provide a solution to a problem that helps very few individuals but affects almost everyone. One way of addressing the problem without creating large workload for the BOE would be to allow a class of people dealing with the same legal issue to move forward with a claim for refund if the amounts in controversy are in excess of $50,000.

• 1. Administratively Burdensome: The requirement that the excess tax reimbursement be paid by the retailer to a single customer may be administratively burdensome. Existing law allows a retailer to claim a refund for excess taxes that relate to multiple customers, which allows BOE staff to conduct a single examination of records instead of conducting separate examinations for each individual claim. This specifically prevents the BOE from resolving issues like those found in Loeffler v. Target where the same legal issues applied to thousands of customers.
  2. Legislative History:
     1. AB 43 (Bocanegra), of the 2013-14 Legislative Session, would have permitted a retailer to assign the right to file a claim for excess tax reimbursement in the amount of $50,000 or more to the customer, and not simply the right to receive a refund payment. These amendments increased the BOE’s administrative costs considerably. AB 43 was held on the Senate Committee on Appropriations’ Suspense File.
     2. SB 640 (Beall), of the 2015-16 Legislative Session, which was similar to AB 43, would have permitted a retailer to assign the right to file a claim for excess tax reimbursement for amounts of $1,000 or greater and allowed a customer to file a claim for refund without an irrevocable election. SB 640 was held on the Assembly Committee on Appropriations’ Suspense File.

1. The BOE has outlined the following issues in its staff analysis:
   1. Right to a refund is contingent upon a retailer making the books and records available: What if the retailer resists or refuses to cooperate? What if the retailer is no longer in business? It is not readily clear how to address these issues. Additionally, staff anticipates the tendency to file fraudulent claims when the retailer is no longer in business and staff cannot verify the refund. BOE staff would expect these situations to increase administrative costs. However, by what amount is difficult to determine.
   2. Delayed operative date: To effectively implement this bill, the BOE would develop an invoice repository to track refunds more carefully, avoid duplicative tax refunds and other issues. In addition, BOE staff would need to modify various screens in registration, returns, and payment subsystems. These functions would need to take place before customers begin filing claims for refund. While the current effective date of January 1, 2018, typically offers sufficient lead time, the BOE requires an additional three months for these changes to be made at the same time that the BOE’s Centralized Revenue Opportunity System (CROS) GenTax Rollout 2 goes live. The CROS GenTax R2 is scheduled for implementation on April 1, 2018. Rollout 2 includes the Sales and Use Tax subsystems Registration, Returns, Payments, and Audit. BOE staff suggests a delayed operative date of April 1, 2018, for necessary programming to be made concurrently with the GenTax Rollout 2.
   3. Customers’ statements signed under penalty of perjury to certify information provided is correct: Customers who are unable to obtain an assignment are required to submit a statement confirming the efforts to obtain one. These customers would be required to explain in writing why the retailer objects to the assignment and the actions taken to locate the retailer if the retailer is no longer in business or has moved. BOE staff would consider the customer’s statement to determine how to verify the refund. Requiring that the statement be filed under penalty of perjury would allow BOE staff to place greater trust in the statement provided. Current Sales and Use Tax Law provides relief from penalties, collection cost recovery fees, and interest charges. These statutes require that a taxpayer requesting relief file a written statement signed under penalty of perjury to certify that the statements are true and correct.

In addition, BOE staff surveyed several states that authorize an assignment of a right to a tax refund. Some of these states also allow consumers to request a direct refund when the consumer is unable to obtain an assignment from the retailer. With the exception of one state, both retailers and customers are required to submit an assignment or refund application under penalty of perjury.

• 1. Suggested Technical Amendments:
     1. The $50,000 threshold in the bill is intended to apply to tax only. Subdivision (b)(1)(A) states that “[t]he entire amount represents excess tax reimbursement.” Subdivision (b)(1)(B) states that “[t]he amount to be refunded is fifty thousand dollars ($50,000) or more.” To eliminate any ambiguity that the refund amount (threshold) represents tax only, BOE staff recommends (b)(1)(B) be amended to read, “[t]he amount to be refunded is fifty thousand dollars ($50,000) of tax or more.”
     2. Additionally, to make the first sentence of subdivision (b)(3) consistent with itself, staff recommends that (b)(3) be amended as follows:

The excess amount collected or paid shall be credited by the board on any amounts then due and payable from the person that paid the tax or amounts for which a notice of determination has been issued to the person that paid the tax, and amounts due and payable from the customer from which the excess tax reimbursement was collected or paid.

REGISTERED SUPPORT / OPPOSITION:

Support

California Chamber of Commerce

California Manufacturers and Technology Association

California Taxpayer’s Association

California Retailers Association

National Federation of Independent Businesses

Orange County Business Council

Orange County Taxpayers Association

Ryan, Inc.

TechNet

West Coast Lumber & Building Material Association

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098