Taxing issues: do your clients pay use tax?

CalCPA's Committee on Taxation identified issues with AB 969 (Eng) requiring individuals to pay use tax obligations with their California individual income tax return.

Taxpayers are required to file and pay the use tax to the California Board of Equalization on the last day of the month following the quarterly period when the purchase was made. Alternatively, the use tax due can be voluntarily paid with their individual California return.

There is a separate line on Page 2 of Form 540 asking for the amount of use tax due. The requirement that a line for payment of use tax be included on state tax forms is due to sunset Jan. 1, 2009.

AB 969 would eliminate the sunset and mandate that all taxpayers who have not already filed the required use tax return with the BOE to pay the tax with their personal income tax return. Failing to comply will subject taxpayers to a 10 percent penalty, plus interest, which is consistent with current law.

AB 969 would be effective Jan. 1, 2008, for purchases made in 2007. The COT has concerns relative to some of the bill's language that arises when income tax and sales/use taxes become intertwined.

According to the bill's author, "Currently, if consumers fail to report their use tax liability directly to the Board, they can 'elect' to report their liability on their income tax returns. The term 'elect,' however, is misleading and adds to the misconception that reporting use tax liabilities on income tax returns is optional."

The thought is, by clarifying that taxpayers are required to report use tax liabilities on their income tax returns after failing to pay the BOE directly will enable tax practitioners and taxpayers to have a better understanding of their obligation to properly report use tax liabilities.

According to a legislative analysis of the bill, "The Franchise Tax Board analyzed data on use tax payments reported on personal income tax returns. In 2003, the FTB discovered that 63 percent of all individual returns were practitioner-prepared, yet only 16.6 percent of all use tax declarations were made on practitioner-prepared returns. Individuals who self-prepared were nearly eight times more likely to declare use tax than those who used a tax practitioner. One possible explanation for this is that payment of the use tax on an income tax return is voluntarily."

Unstated is the assumption that tax practitioners may be failing to ask their clients about purchases subject to use tax. The BOE estimates that use tax is underreported in California by $1 billion annually.

The bill is supported by several large unions and the BOE. It is unclear what the next steps will be if the rate of use tax declarations is not increased. Taxpayers and practitioners may find themselves in uncharted territory if the BOE strictly enforces the statute.

CalCPA's Committee on Taxation would like to see the BOE educate taxpayers about the application of the use tax and their reporting requirements.

See. 1031 Exchange Facilitators License Required

SB 1007 (Machado) was amended May 29, 2007, to require that the Commissioner of Corporations license and regulate exchange facilitators. An exchange facilitator would be anyone who facilitates, for a fee, an exchange of like-kind property.

This is usually done by the facilitator entering into an agreement with a taxpayer by which the exchange facilitator acquires the taxpayer's contractual rights to sell the taxpayer's relinquished property. The facilitator then transfers a replacement property to the taxpayer as a qualified intermediary as that term is defined in Treasury Regs.

The licensing requirements also would apply to anyone who maintains an office in California for the purpose of soliciting business as an exchange facilitator or holds out as a qualified intermediary by advertising or soliciting the general public.

Excluded from the definition and the licensing requirement would be the taxpayer or disqualified persons as defined in Treas. Reg. Sec. 1.103(k)-1(k) seeking to qualify for the non-recognition provisions of Sec. 1031 of the IRS Code of 1986 as amended.

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Financial institutions also would be exempted--as long as their only activity is as a depository for exchange funds.

Individuals whose only activity is teaching seminars for accountants, attorneys, real estate professionals or tax or other professionals or tax or other professionals when the primary purpose is to teach them about tax-deferred exchanges or train them to be exchange facilitators would be exempted.

CalCPA is working with the bill's author to ensure that practicing CPAs would not inadvertently be included in the class of people required to be licensed by simply informing their clients about 1031 exchanges. CPAs and other professionals acting as exchange facilitators would be required to become licensed.

50 Employees or More? New Fee & reporting requirement

Effective Jan. 1, 2007, California employers with 50 or more employees who work more than 500 hours per year are required to file an environmental fee return and pay a fee based on the number of employees in California unless specifically exempted.

The return must be filed, with the payment, with the BOE. Businesses previously registered with the BOE should have received notice and a return from the board. However, some employers have not received the notice and are unaware of their obligation.

The return and fees were due to the BOE on the last day of Feb. 28 If they failed to file they are subject to a 10 percent penalty, plus interest. Additional information is available at www.boe.ca.gov/pdf/pub90.pdf.

The fees start at $262 and are capped at $12,522 if the employer has 1,000 or more California employees working more than 500 hours annually.

This fee was enacted last year as part of the budget package.

Bruce C. Allen is CalCPA's director of government relations.