Proposal 3 Page 1 of 7

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1 Proposal 3 Page 1 of 7 Amend Revenue and Taxation Code Sections 7360, 8651, and of the Motor Vehicle Fuel Tax Law, Use Fuel Tax Law, and Diesel Fuel Tax Law, respectively, to specify the effective dates related to state fuel tax rates when triggered by a reduction or elimination of the federal fuel taxes (Housekeeping). Source: Special Taxes and Fees Department Existing Law. Under California s three fuel tax programs (motor vehicle fuel, diesel fuel, and use fuel), 1 the statutes require the state excise tax rates to increase if the federal fuel tax is reduced below amounts cited in each statute. However, the statutes do not specify when the state excise tax rate adjustment becomes effective or when and under what circumstances the state excise rate adjustment would expire, causing the state rate to revert to the original, unadjusted rate. Background. In the last few years, Congress has reauthorized the federal transportation program, including federal fuel taxes and federal financial allocations, several times. 2 In both March and June 2012, just before the expiration of the federal fuel taxes, the BOE issued Special Notices 3 to advise certain stakeholders of the possible increase in state tax rates if Congress failed to reauthorize the federal transportation program. 4 Congress authorized the federal transportation program in July 2012, but it is now set to expire on September 30, Even a temporary lapse in the federal fuel tax could result in a loss of millions in federal transportation funding to the state. The current trigger mechanism is not consistent among the three fuel tax statutes and none of the current statutes specifies when a potential rate increase would take effect. These statutes also fail to specify at which point, if any, the rates would revert back to the state rate in effect before the rate increase. This Proposal. This proposal would amend Sections 7360, 8651, and of the Motor Vehicle Fuel Tax Law, Use Fuel Tax Law, and Diesel Fuel Tax Law, to specify when the state excise tax rates for gasoline, use fuel, and diesel fuel become effective upon a reduction or elimination of the federal fuel taxes. This proposal would also specify when and how the state tax rate would revert back to the unadjusted rate. 1 The statutes are detailed later in this document. 2 Center for Climate and Energy Solutions A Primer on Federal Surface Transportation Reauthorization and the Highway Trust Fund. January Accessed October 15, BOE Special Notice: Increase in State Fuel Taxes Triggered if Congress Fails to Reauthorize Federal Tax, and, Special Notice: Increase in State Fuel Taxes Triggered if Congress Fails to Reauthorize Federal Tax by June 30, March 2012, and June Accessed October 15, BOE staff was contacted by several state level stakeholders, including the Department of Finance, CalTrans, the State Transportation Commission, the Legislative Analyst Office, and the Senate Office of Research, to discuss how the BOE would implement a rate adjustment if the federal fuel tax expired. Several stakeholders, including industry representatives and legislative committee staff, observed that the current statutes do not specify the rate adjustment effective dates.

2 Proposal 3 Page 2 of 7 This proposal does not alter fuel tax rates. The proposal is intended to provide guidance to the BOE and taxpayers regarding the specific how and when the fuel tax rate increase provided for in existing law would increase and then revert back to the unadjusted rate. Specifics of Current Law Motor Vehicle Fuel Tax Law. Under existing law, a state excise tax of eighteen cents ($0.18) and a surtax of eighteen cents ($0.18) are imposed upon each gallon of gasoline. 5 The surtax is subject to an annual adjustment, as specified, that seeks to balance the revenues from the additional excise taxes on gasoline against the state General Fund sales and use tax rate exemption on gasoline. 6 If the federal fuel tax is reduced below the rate of nine cents ($0.09) per gallon and federal transportation-related funding to this state for is reduced or eliminated, the state excise tax rate of eighteen cents ($0.18) is recalculated, so that the total combined state and federal tax rate per gallon equals twenty-seven cents ($0.27). Upon the federal excise tax rate reduction, the surtax of eighteen cents ($0.18) per gallon would be added onto this recalculated combined state and federal rate. However, the law does not specify when the state excise rate adjustment becomes effective or when and under what circumstances the state excise rate adjustment would expire so that the state rate would revert to the original, unadjusted rate. Diesel Fuel Tax Law. Under existing law, a state excise tax of eleven cents ($0.11) is imposed upon each gallon of diesel fuel. 7 The state excise tax rate is also subject to an annual adjustment, as specified, that seeks to balance the revenues from the additional sales and use tax rate against the reduced excise tax rate on diesel. 8 The state excise tax rate of eleven cents ($0.11), 9 including any annual adjustment, as specified, is recalculated if the federal fuel tax rate sinks below fifteen cents ($0.15) per gallon and federal transportation-related funding is reduced or eliminated correspondingly, so that the combined state and federal tax rates per gallon equal what it would have been in the absence of the federal reduction. 10 Like the gasoline tax statutes, the diesel fuel tax statutes do not address the timing or circumstances of any rate increase and subsequent rate reduction. 5 Subject to the tax in Sections 7362, 7363, and In 2010, two fuel tax swap measures (ABx8 6, (Ch. 11, Stats. 2010) and SB 70 (Ch. 9, Stats. 2010), reenacted in 2011 by AB 105 (Ch. 6, Statutes 2011)). These measures increased the excise tax rate and reduced the sales tax on motor vehicle fuel. Under the law, BOE annually must adjust the excise tax rate on motor vehicle fuel to ensure that the state collects no more under the increased excise tax than it would have collected under the prior sales tax rate. Conversely, the fuel tax swap measures lowered the excise tax rate on diesel fuel and increased the sales and use tax rate. The BOE also must adjust the diesel fuel tax rate annually to maintain revenue neutrality. The gasoline tax changes became operative on July 1, 2010, and the diesel fuel tax changes became operative July 1, Subject to the tax in Revenue and Taxation Code Sections 60051, 60052, and See note 6 describing the fuel tax swap. 9 Effective date of July 1, 2014 to June 30, The diesel fuel trigger provision was structured differently than the gasoline trigger provision since the state diesel fuel tax rate was reduced and the cap amount was eliminated.

3 Proposal 3 Page 3 of 7 Use Fuel Tax Law. These fuels are defined as all other combustible liquid besides gasoline and diesel fuel. 11 A state excise tax of eighteen cents ($0.18) is imposed on each gallon for the use of fuel. If the federal diesel fuel tax is reduced below the rate of fifteen cents ($0.15) per gallon and federal transportation-related funding correspondingly is reduced or eliminated, the tax rate is recalculated so that the combined state and federal tax rates per gallon equal thirty-three cents ($0.33). Section 7360 of the Revenue and Taxation Code is amended to read: (a) (1) A tax of eighteen cents ($0.18) is hereby imposed upon each gallon of fuel subject to the tax in Sections 7362, 7363, and (2) If the rate of federal fuel tax imposed on motor vehicle fuel is reduced below the rate of nine cents ($0.09) per gallon and federal financial allocations to this state for highway and exclusive public mass transit guideway purposes are reduced or eliminated correspondingly, the state tax rate imposed by paragraph (1), on and after the date of the reduction, shall be recalculated by an amount so that the combined state tax rate under paragraph (1) and the federal fuel tax rate per gallon equals twenty-seven cents ($0.27). (3) If any person or entity is exempt or partially exempt from the federal fuel tax at the time of a reduction, the person or entity shall continue to be so exempt from the increase in the state rate calculated under this section paragraph (2). (4) The state tax rate calculated under paragraph (2) shall become effective: (A) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes wholly or in part expire, the first day of the month commencing not less than thirty (30) days after the date the federal fuel tax rate is reduced, and the increase shall remain in effect through the last day of the month in which the federal fuel tax is reinstated. (B) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes are affirmatively repealed or reduced by an act of Congress, immediately upon the date the federal fuel tax rate is reduced. (C) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes are affirmatively suspended, either wholly or in part, by an act of Congress, immediately upon the date the federal fuel tax rate is reduced, and the increase shall remain in effect through the last day of the month in which the federal fuel tax is reinstated. (5) In the event the federal fuel tax rate is temporarily increased by an act of Congress: 11 By whatever name the gas or liquid may be known or sold, of a kind used in an internal combustion engine for the generation of power to propel a motor vehicle on the highways, except fuel that is subject to the diesel fuel tax and motor vehicle fuel tax.

4 Proposal 3 Page 4 of 7 (A) Recalculation of the state tax rate, as set forth in paragraph (2), shall not occur when the federal fuel tax rate is subsequently reduced to a level at or above where it was before it was temporarily increased. (B) If the federal fuel tax rate is subsequently reduced to a level below where it was before the temporary rate increase and the federal financial allocation to this state for highway and exclusive public mass transit guideway purposes is reduced or eliminated correspondingly, the state tax rate shall be recalculated, as set forth in paragraph (2), so that the state tax rate combined with the federal fuel tax rate per gallon equals what the combined state and federal fuel tax rate was prior to the temporary increase in the federal fuel tax rate. (b) (1) On and after July 1, 2010, in addition to the tax imposed by subdivision (a), a tax is hereby imposed upon each gallon of motor vehicle fuel, other than aviation gasoline, subject to the tax in Sections 7362, 7363, and 7364 in an amount equal to seventeen and three-tenths cents ($0.173) per gallon. (2) For the fiscal year and each fiscal year thereafter, the board shall, on or before March 1 of the fiscal year immediately preceding the applicable fiscal year, adjust the rate in paragraph (1) in that manner as to generate an amount of revenue that will equal the amount of revenue loss attributable to the exemption provided by Section , based on estimates made by the board, and that rate shall be effective during the state's next fiscal year. (3) In order to maintain revenue neutrality for each year, beginning with the rate adjustment on or before March 1, 2012, the adjustment under paragraph (2) shall also take into account the extent to which the actual amount of revenues derived pursuant to this subdivision and, as applicable, Section , the revenue loss attributable to the exemption provided by Section resulted in a net revenue gain or loss for the fiscal year ending prior to the rate adjustment date on or before March 1. (4) The intent of paragraphs (2) and (3) is to ensure that the act adding this subdivision and Section does not produce a net revenue gain in state taxes. Section 8651 of the Revenue and Taxation Code is amended to read: (a) An excise tax of eighteen cents ($0.18) is hereby imposed on each gallon of fuel for the use of such fuel as defined in section 8604.at the following rate per gallon: (1) Fourteen cents ($0.14) during 1990, on and after August 1. (2) Fifteen cents ($0.15) during (3) Sixteen cents ($0.16) during (4) Seventeen cents ($0.17) during (5) Eighteen cents ($0.18) on and after January 1, (b) If the rate of federal fuel tax imposed on diesel and kerosene is reduced below the rate of fifteen cents ($0.15) per gallon and federal financial allocations to this state for highway and exclusive public mass transit

5 Proposal 3 Page 5 of 7 guideway purposes are reduced or eliminated correspondingly, the state tax rate imposed by this section, on and after the date of the reduction, shall be increased recalculated by an amount so that the combined state tax rate and the federal fuel tax rate per gallon equals the following: thirty-three cents ($0.33). (1) Twenty-nine cents ($0.29) during 1990, on and after August 1. (2) Thirty cents ($0.30) during (3) Thirty-one cents ($0.31) during (4) Thirty-two cents ($0.32) during (5) Thirty-three cents ($0.33) on and after January 1, (c) If any person or entity is exempt or partially exempt from the federal fuel tax at the time of a reduction, the person or entity shall continue to be exempt from the increase in the state rate calculated under this section subdivision (b). (d) The state tax rate calculated under subdivision (b) shall become effective: (1) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes wholly or in part expire, the first day of the month commencing not less than thirty (30) days after the date the federal fuel tax rate is reduced, and the increase shall remain in effect through the last day of the month in which the federal fuel tax is reinstated. (2) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes are affirmatively repealed or reduced by an act of Congress, immediately upon the date the federal fuel tax rate is reduced. (3) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes are affirmatively suspended, either wholly or in part, by an act of Congress, immediately upon the date the federal fuel tax rate is reduced, and the increase shall remain in effect through the last day of the month in which the federal fuel tax is reinstated. (4) In the event the federal fuel tax rate is temporarily increased by an act of Congress: (A) Recalculation of the state tax rate, as set forth in subdivision (b), shall not occur when the federal fuel tax rate is subsequently reduced to a level at or above where it was before it was temporarily increased. (B) If the federal fuel tax rate is subsequently reduced to a level below where it was before the temporary rate increase and the federal financial allocation to this state for highway and exclusive public mass transit guideway purposes is reduced or eliminated correspondingly, the state tax rate shall be recalculated, as set forth in subdivision (b), so that the state tax rate combined with the federal fuel tax rate per gallon equals what the combined state and federal fuel tax rate was prior to the temporary increase in the federal fuel tax rate.

6 Section of the Revenue and Taxation Code is amended to read: Proposal 3 Page 6 of (a) (1) A tax of eighteen cents ($0.18) is hereby imposed upon each gallon of diesel fuel subject to the tax in Sections 60051, 60052, and (2) If the rate of federal fuel tax imposed on diesel fuel is reduced below the rate of fifteen cents ($0.15) per gallon and federal financial allocations to this state for highway and exclusive public mass transit guideway purposes are reduced or eliminated correspondingly, the state tax rate imposed by paragraph (1), including any reduction or adjustment to the state tax rate pursuant to subdivision (b), on and after the date of the reduction, shall be increased recalculated by an amount so that the combined state tax rate under paragraph (1) andcombined with the federal fuel tax rate per gallon equals what it would have been in the absence of the federal reduction. (3) If any person or entity is exempt or partially exempt from the federal fuel tax at the time of a reduction, the person or entity shall continue to be exempt from the increase in the state rate calculated under this section paragraph (2). (4) The state tax rate calculated under paragraph (2) shall become effective: (A) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes wholly or in part expire, the first day of the month commencing not less than thirty (30) days after the date the federal fuel tax rate is reduced, and the increase shall remain in effect through the last day of the month in which the federal fuel tax is reinstated. (B) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes are affirmatively repealed or reduced by an act of Congress, immediately upon the date the federal fuel tax rate is reduced. (C) In the event that the federal fuel tax and federal allocations for state highway and exclusive public mass transit guideway purposes are affirmatively suspended, either wholly or in part, by an act of Congress, immediately upon the date the federal fuel tax rate is reduced, and the increase shall remain in effect through the last day of the month in which the federal fuel tax is reinstated. (5) In the event the federal fuel tax rate is temporarily increased by an act of Congress: (A) Recalculation of the state tax rate, as set forth in paragraph (2), shall not occur when the federal fuel tax rate is subsequently reduced to a level at or above where it was before it was temporarily increased. (B) If the federal fuel tax rate is subsequently reduced to a level below where it was before the temporary rate increase and the federal financial allocation to this state for highway and exclusive public mass transit guideway purposes is reduced or eliminated correspondingly, the state tax rate shall be recalculated, as set forth in paragraph (2), so that the state tax rate combined with the federal fuel tax rate per gallon equals what the combined state and federal fuel tax rate was prior to the temporary increase in the federal fuel tax rate.

7 Proposal 3 Page 7 of 7 (b)(1) On July 1, 2011, the tax rate specified in paragraph (1) of subdivision (a) shall be reduced to thirteen cents ($0.13) and every July 1 thereafter shall be adjusted pursuant to paragraphs (2) and (3). (2) For the fiscal year and each fiscal year thereafter, the board shall, on or before March 1 of the fiscal year immediately preceding the applicable fiscal year, adjust the rate reduction in paragraph (1) in that manner as to result in a revenue loss attributable to paragraph (1) that will equal the amount of revenue gain attributable to Sections and , based on estimates made by the board, and that rate shall be effective during the state's next fiscal year. (3) In order to maintain revenue neutrality for each year, beginning with the rate adjustment on or before March 1, 2013, the adjustment under paragraph (2) shall take into account the extent to which the actual amount of revenues derived pursuant to Sections and and the revenue loss attributable to this subdivision resulted in a net revenue gain or loss for the fiscal year ending prior to the rate adjustment date on or before March 1. (4) The intent of paragraphs (2) and (3) is to ensure that the act adding this subdivision and Sections and does not produce a net revenue gain in state taxes.

8 Proposal 2 Page 1 of 2 Amend the Revenue and Taxation to impose sales tax on a person s retail sales of vehicles, when that person fails to hold a dealer s license required under the Vehicle Code at the time of sale. Source: Sales and Use Tax Department Existing Law. Vehicle Code. Under existing law, 1 the Department of Motor Vehicles (DMV) licenses and regulates those involved in motor vehicle sales in California, including vehicle dealers, manufacturers, distributors, and transporters. Under the law, 2 no person may act as a California vehicle dealer without first receiving a license or temporary permit from the DMV. Existing law 3 defines a dealer as a person who: (a) For commission, money, or other thing of value, sells, exchanges, buys or offers for sale, negotiates or attempts to negotiate, a sale or exchange of an interest in a vehicle subject to registration or a motorcycle, snowmobile, subject to identification under the Vehicle Code, or induces or attempts to induce any person to buy or exchange an interest in a vehicle and, who receives or expects to receive a commission, money brokerage fees, profit, or any other thing of value, from either the vehicle seller or purchaser; or (b) Is engaged wholly or in part in the business of selling vehicles or buying or taking in trade, vehicles for the purpose of resale, selling, or offering for sale, or consigned to be sold, or otherwise dealing in vehicles, whether or not the person owned those vehicles. Revenue and Taxation Code (RTC). Existing law 4 provides, in part, that every person making any retail sale of a vehicle is a retailer of the vehicle (with certain exceptions). However, existing law exempts vehicle sales from sales tax when the retailer is not licensed as a vehicle dealer by the DMV. Existing law 5 also provides that when an unlicensed vehicle dealer sells a vehicle at retail, the dealer is neither required nor authorized to collect the use tax from the purchaser. Instead, the law requires the purchaser to pay the use tax to the DMV who acts on behalf of the BOE. If the purchaser does not pay the use tax, or fails to pay the proper amount, the BOE must collect the use tax from the purchaser for the unpaid use tax portion, along with interest and penalties due. For an unlicensed vehicle dealer s sales, the BOE must assess and collect use tax against each individual purchaser, rather than assess the sales tax on the unlicensed vehicle dealer s sales. Even when the person holds a valid seller s permit, existing law allows a retailer who is illegally operating without a dealer s license, to avoid any responsibility for sales or use tax on their vehicle sales. This Proposal. This staff proposal derives from an audit of a truck retailer. The retailer properly held a BOE-issued seller s permit, but sold numerous trucks illegally, without a DMV-issued dealer license. Since the law does not require a non-licensed dealer to collect tax, the truck retailer did not report the tax on any of its truck sales. The BOE was required to review DMV s records and pursue collection against purchasers who failed to remit the proper use tax amount (many either didn t pay the tax or declared a lower purchase price 1 Article 2 (commencing with Section 1500) of Chapter 1 of Division 2 of the Vehicle Code. 2 Article 1 (commencing with Section 11700) of Chapter 4 of Division 5 of the Vehicle Code. 3 Section 285 of the Vehicle Code. 4 Section 6282 of the RTC. 5 Section 6292 of the RTC.

9 Proposal 2 Page 2 of 2 than the actual price paid). Although the retailer acted as a vehicle dealer subject to the DMV s dealer license requirement, without a dealer s license, he was exempted from any tax collection responsibility. This proposal would allow the BOE to assess unpaid sales tax, penalties, and interest against a retailer who fails to register with the DMV as a licensed vehicle dealer, when the DMV determines that, at the time of sale, the retailer should have held a vehicle dealer license. The retailer would be allowed a credit for any purchasers related use tax payments. This proposal intends to reduce the staff hours devoted to assessing and collecting the use tax from multiple purchasers in these situations, and allow the BOE to pursue tax collection from the unlicensed retailer if the retailer is required to be licensed. Additionally, the proposal may assist DMV s efforts to stop curbstoning. Curbstoning is the repeated, unlicensed flipping of used cars for profit by unlicensed dealers who pretend to be private parties. Often, customers unknowingly buy damaged, dangerous, or uninsurable vehicles. Curbstoning is illegal in many states, including California, and defrauds thousands of unwary consumers every year. DMV has been actively involved in investigations of curbstoners. For example, an April 12, 2014 investigation resulted in 93 citations, 68 warnings, 109 impounded vehicles, and four individual arrests on outstanding warrants during the operation. Frequently, curbstoners sell vehicles with hidden problems rejected by reputable dealers. Customers become victims of fraud when they purchase vehicles from curbstoners that tamper with odometers, hide frame damage or rebuild salvage vehicles, sell vehicles with faulty safety devices and those that are subject to mechanics or promissory liens, as well as vehicles that have other problems that are undisclosed at the time of sale. By imposing tax on these curbstoners, their profits are reduced, which reduces the incentive to continue this illegal activity.

10 Proposal 1 Page 1 of 4 Add Government Code Section and Revenue and Taxation Code Section 6836 to authorize the Board of Equalization (BOE) to enter into a reciprocal agreement with the United States Department of the Treasury's Bureau of the Fiscal Service (BFS) to collect delinquent tax debt owed to the BOE by offset of federal vendor payments. In return, allow the federal government to collect delinquent federal non-tax debt by offset of BOE tax refund and vendor payments. Source: Sales and Use Tax Department Existing Law. Government Code Section provides that the state has a lien for any taxes due the state from any person or entity, upon any and all personal property belonging to such person or entity and held by the state or amount owed to such person or entity by the state. The lien applies to all such property held or such amount owed by an agency of the state while such person or entity owes any taxes to that agency or another agency of the state. This lien does not apply to salary or wages owing to officers or employees of the state. An offset procedure is used by BOE as a last resort when all other collection avenues have been unsuccessful. The BFS serves as the federal government s central debt collection agency, and administers centralized offset through the Treasury Offset Program. Pursuant to federal law, offset occurs when the federal government withholds part or all of a debtor s federal payment to satisfy the debtor s delinquent federal or participating state debt. The Treasury Offset Program includes the State Income Tax Program, State Reciprocal Program, and the Unemployment Insurance Compensation Program. In 2008, the California Franchise Tax Board joined the State Income Tax Program, while in 2013, the Employment Development Department began participating in the Unemployment Insurance Compensation Program. Under federal law, the State Reciprocal Program 1 allows states to enter into reciprocal agreements with the Treasury to collect unpaid state debt by offset of federal non-tax payments and in return, the federal government collects delinquent non-tax debt by offset of state payments. Federal regulation 31 CFR sets forth state debt offset requirements under the State Reciprocal Program. State debts must be: Delinquent Legally enforceable More than $25, or such other amount as Financial Management Service may prescribe, and Not secured by collateral subject to a pending foreclosure action Not bankruptcy In addition, Section requires federal debt offsets to be contained in the reciprocal agreement. The regulation also specifically excludes from offset: Payments exempt under 31 CFR (e)(2): o Black Lung Part C benefit payments, o Tier 2 Railroad Retirement benefit payments, o Payments made under the tariff laws of the United States, o Veterans Affairs benefit payments, o Payments made under any program administered by the Secretary of Education under title IV of the Higher Education Act of 1965, 1 Title 31, United States Code, Section 3716; and, Title 31, Code of Federal Regulations, Section 285.6

11 Proposal 1 Page 2 of 4 o Payments made under any other Federal law if offset is expressly prohibited by Federal statute, o Payments made under any program for which the Secretary of the Treasury has granted an exemption, as specified, and o Federal loan payments other than travel advances. Payments due an individual under the Social Security Act; Payments due an individual pursuant to Part B of the Black Lung Benefits Act; Payments due an individual pursuant to any law administered by the Railroad Retirement Board; Federal tax refunds; Federal salary payments; and, Other payments specified in the reciprocal agreement. According to the BFS, the types of payments subject to offset under the State Reciprocal Program are primarily federal vendor payments. Federal law requires state legislation granting states the authority to enter into and abide by the reciprocal agreements. Currently, there are seven states and the District of Columbia that participate in the State Reciprocal Program: Kentucky, Maryland, Minnesota, New Jersey, New York, West Virginia, and Wisconsin. Kansas, Louisiana, and Indiana have enacted legislation and plan to begin participation by the end of Background. Under the State Income Tax Offset Program, which the Franchise Tax Board joined in 2008, states are allowed to refer delinquent income tax debts to the BFS for offset against federal tax refund payments only. To date, 40 states participate in this program. In fiscal year 2013, California collected $64.8 million through the State Income Tax Program, the most collected by any participating state. The other seven states that have entered into reciprocal agreements and the District of Columbia recovered over $37.9 million in fiscal year In May 2014, the BOE submitted a file of delinquent tax and fee debts, which met the criteria established under federal law. The BFS then conducted a simulated test match of BOE delinquent tax and fee debts to federal vendor payments. The results of the simulation revealed that if BOE were participating in the State Reciprocal Program, it would have offset 744 federal vendor payments totaling over $31.5 million. The simulation also revealed a partial match of an additional 4,331 accounts. According to the BFS, these partial matched accounts could result in additional collections, but would require further processing. Moreover, when BFS conducted the simulation, they were unable to to match BOE tax and fee debts against Non-Treasury Disbursed Offices databases, such as the United States Department of Defense. According to the BFS, a simulation of these databases typically results in approximately 15% to 25% in additional offsets. This Proposal. This proposal would authorize the BOE to enter into a reciprocal agreement with the BFS for the offset of federal nontax payments to collect tax debts owed to the BOE and the offset of the BOE s tax refund payments and vendor payments to collect nontax debts owed to the federal government. Comparable statutes would also be added to the BOE-administered special tax and fee laws.

12 Section is added to the Government Code to read: Proposal 1 Page 3 of (a) (1) The Controller shall, upon execution of a reciprocal agreement between the State Board of Equalization and the United States Department of the Treasury s Bureau of the Fiscal Service offset any federal nontax obligation due to the United States Department of the Treasury s Bureau of the Fiscal Service (or federal Department of the Treasury) from a person or entity, against any refund under the Sales and Use Tax Law, Motor Vehicle Fuel Tax Law, Use Fuel Tax Law, Cigarette and Tobacco Products Tax Law, Alcoholic Beverage Tax Law, Energy Resources Surcharge Law, Emergency Telephone Users Surcharge Law, Hazardous Substances Tax Law, Integrated Waste Management Fee Law, Oil Spill Response, Prevention, and Administration Fees Law, Underground Storage Tank Maintenance Fee Law, Fee Collections Procedures Law, and Diesel Fuel Tax Law owed to that person or entity. (2) Standards and procedures for submission of requests for offsets shall be as prescribed by the Controller in conjunction with the State Board of Equalization. (3) Payment of the offset amount shall occur only after other offset requests for debts owed by a person or entity to this state have been satisfied in accordance with the priority established under Section (b) The Controller shall deduct and retain from any amount offset pursuant to this section an amount sufficient to reimburse the Controller and the State Board of Equalization for their administrative costs of processing the offset payment. Section 6836 is added to the Revenue and Taxation Code to read: (a) (1) The board may enter into an agreement with the United States Department of the Treasury s Bureau of the Fiscal Service (or federal Department of the Treasury) that provides for offsetting of a sales and use tax refund against a federal nontax obligation. The agreement shall provide for offsetting a federal nontax payment, as authorized by federal law, against a delinquent sales and use tax debt. The agreement shall provide that the United States Department of the Treasury s Bureau of the Fiscal Service (or federal Department of the Treasury) may deduct a fee from each administrative offset and sales and use tax refund offset. (2) Offsets to collect state and other entity obligations under Government Code Section shall occur before a sales and use tax refund offset. For purposes of this paragraph, administrative offset is any offset of a federal nontax payment to collect a delinquent sales and use tax debt and sales and use tax refund offset is any offset of a sales and use tax refund, issued pursuant to Section 6901, to collect a federal nontax debt. (b) For purposes of this section, a delinquent sales and use tax debt means an amount owed to the board which is all of the following: (1) Based on a determination made under Article 2 (commencing with Section 6481) or Article 3 (commencing with Section 6511) of Chapter 5 deemed final pursuant to Article 5 (commencing with Section 6561) of Chapter 5, or that is due and payable under Article 4 (commencing with Section 6536) of Chapter 5, or self-assessed by the taxpayer. (2) For an amount of tax delinquent for more than 90 days (or 180 days). (c) For purposes of this section, a delinquent sales and use tax debt does not include any of the following: (1) A delinquency that is under litigation in a court of law.

13 Proposal 1 Page 4 of 4 (2) A delinquency for which payment arrangements have been agreed to by both the taxpayer and the board and the taxpayer is in compliance with the arrangement. (3) A delinquency for which the taxpayer has filed for bankruptcy protection pursuant to Title 11 of the United States Code. (d) Prior to submitting a delinquent sales and use tax debt for administrative offset, the board shall provide a preliminary written notice to the debtor or debtors liable for the tax. If within 60 days after issuance of the notice, the debtor or debtors do not remit the amount due or make arrangements with the board for payment of the amount due, the tax delinquency shall be submitted for administrative offset. (e) The board may charge a debtor a fee for the processing of a sales and use tax refund offset for the recovery of a federal nontax debt or the processing of a federal nontax payment offset for the recovery of a delinquent sales and use tax debt. The fee is a separate debt and may be withheld from any refund.

14 Proposal 4 PAGE 1 OF 2 Amend Revenue and Taxation Code Sections 7510, 8707, 8714 and to increase the reinstatement fee on motor vehicle fuel, use fuel and diesel fuel accounts from $50 to $100 to adjust for inflation and be consistent with both the Sales and Use Tax Law and the Cigarette and Tobacco Products Licensing Act Law. Source: Special Taxes and Fees Policy and Compliance Division Existing Law. Under existing law 1, a person required to be licensed under the Motor Vehicle Fuel Tax Law or the Diesel Fuel Tax Law, or hold a permit under the Use Fuel Tax Law, is required to pay a $50 fee to reinstate a revoked license or permit. The amount of the reinstatement fee for the BOE s fuel tax programs is inconsistent with the $100 reinstatement fees under the Sales and Use Tax Law and the Cigarette and Tobacco Products Licensing Act Law. 2 The sales tax reinstatement fee for a seller s permit was increased from $50 to $100, effective January 1, The $100 reinstatement fee for retailers of cigarette and tobacco products was imposed in The related fuel tax reinstatement fee statutes were first added to the law in the years 1953 (use fuel vendor), 1955 (use fuel user), 1995 (diesel fuel) and 2000 (motor vehicle fuel) and were set at $5 to $50. The fees have increased for the use fuel user and vendor in 1959 to $10, 1966 to $15, and to $50 in years 1989 and 1991, respectively. The BOE s current estimated cost to reinstate a permit is $232, which exceeds the current reinstatement fee by $182. Approximately 963 of the 2,362 revoked permits were reinstated last year, leaving the BOE with approximately $175,000 in unreimbursed costs. Based on the rate of inflation from 1989 to 2000, the equivalent fuel reinstatement fees would be about $71 to $97 today. Although a $100 reinstatement fee still falls short of the fee necessary to fully reimburse BOE s costs, it is consistent with the rate of inflation since the last increase. In addition, the $100 fee will bring consistency among BOE administered tax programs. These consistencies will ease implementation of the BOE s new revenue data system. This Proposal. This proposal would amend RTC Sections 7510 (Motor Vehicle Fuel Tax Law), 8707 (use fuel tax user), 8714 (use fuel tax vendor), and (Diesel Fuel Tax Law) to increase the reinstatement fee from $50 to $ Revenue and Taxation Code (RTC) Sections 7510, 8707, 8714 and RTC Section 6069, and Section 22973(d)(2) of the Business and Professions Code (BPC), respectively. 3 Assembly Bill 1547 (Ch. 545, Stats. 2009). 4 Assembly Bill 71 (Ch.890. Stats. 2003), established BPC Section (d)(2).

15 Proposal 4 PAGE 2 OF 2 This provision is intended both to encourage timely filing of returns and payment of fuel tax liabilities, as well as to defray the BOE s costs associated with reinstating fuel tax permits. Section 7510 of the Revenue and Taxation Code is amended to read: Subsequent to the revocation of the license of a person, the board shall reinstate the permit when the person pays the amount of tax determined, together with interest and penalties, fully complies with this part, and pays a fee of fifty dollars ($50) one hundred dollars ($100) to the board for reinstatement. The fee shall not be subject to refund except as provided in Section Section 8707 of the Revenue and Taxation Code is amended to read: Subsequent to the revocation of the permit of a user the board shall reinstate the permit when the user pays the amount of excise tax determined, together with interest and penalties, fully complies with the provisions of this part, and pays a fee of fifty dollars ($50) one hundred dollars ($100) to the board for reinstatement. The fee shall not be subject to refund except as provided in Section Section 8714 of the Revenue and Taxation Code is amended to read: Whenever any vendor fails to comply with any provision of this part or any rule or regulation of the board prescribed and adopted under this part, relating to fuel vendors, the board upon hearing, after giving the vendor at least 10 days' notice in writing specifying the time and place of hearing and requiring the vendor to show cause why his or her permit should not be revoked, may revoke or suspend the permit held by the vendor. The board shall give to the person written notice of the suspension or revocation of his or her permit. The notices may be served personally or by mail in the manner prescribed for service of notice of a deficiency determination. The board shall not issue a new permit to a vendor whose permit has been revoked or reinstate the permit of a vendor whose permit has been suspended or revoked unless it is satisfied that he or she will comply with the provisions of this part and the rules and regulations of the board, and the vendor pays to the board a fee of fifty dollars ($50) one hundred dollars ($100) for the reinstatement or issuance of a permit. The fee shall not be subject to refund except as provided in Section Section of the Revenue and Taxation Code is amended to read: Subsequent to the revocation of the license of a person, the board shall reinstate the permit when the person pays the amount of tax determined, together with interest and penalties, fully complies with this part, and pays a fee of fifty dollars ($50) one hundred dollars ($100) to the board for reinstatement. The fee shall not be subject to refund except as provided in Section