November 12, 2009

The California Chamber of Commerce is urging businesses to review the important tax changes resulting from this year’s budget agreements.

Changes include estimated tax payments, income tax withholding, and use tax registration and reporting. The information is technical in nature and may require additional assistance from a tax professional or accountant.

Following is a look at some key tax provisions. For more information about the new jobs credit, see the full version of this article by Gina Rodriguez of tax specialists Spidell Publishing, Inc. on HRCalifornia.com.

Estimated Taxes
Instead of paying 25 percent of the annual required payment each quarter, both corporations and individuals must make accelerated estimated tax payments for the 2009 and 2010 taxable years (see left side of chart).

The budget also creates a new non-conformity provision to the federal exception to the underpayment penalty. The annualized installment method, or full payment spread throughout the year, allows taxpayers to compute estimated taxes based on annualizing actual taxable income earned over the months in the taxable year ending before the due date for the installment over any amount paid in prior installments.

These percentages have changed as well. When using the annualized installment method, taxpayers must use an accelerated payment scheme for both the 2009 and 2010 taxable years (see right side of chart).

Income Tax Withholding
The budget increases withholding for certain payments made on or after November 1, 2009:

• Withholding on wages increases by 10 percent.

• Withholding on supplemental wages increases from 6 percent to 6.6 percent.

• Withholding on stock options and bonus payments increases from 9.3 percent to 10.23 percent.

The Legislature revised the state’s withholding tables once already in April 2009 to reflect the February 2009 budget changes—an 0.25 percent across-the-board increase and a reduction in the dependent exemption credit of about $210 per dependent.

The 10 percent increase in withholding on wages is “optional,” meaning employees may file a new Form DE 4, Employee’s Withholding Allowance Certificate, with their employer to change their withholding. An employee may change his/her withholding at any time, and as often as needed.

Backup Withholding
The budget also conforms, with modifications, to Internal Revenue Code Section 3406 federal backup withholding rules. For payments made on or after January 1, 2010, the budget requires:

• Backup withholding at a rate of 7 percent for California whenever required for federal purposes; and

• The Social Security number or other taxpayer identification number of the recipient of income to be furnished on demand of the person paying the income.

For purposes of backup withholding, the budget requirement includes only payments of income defined in California’s withholding-at-source statute, with respect to rents, prizes, compensation for services and other fixed or determinable annual or periodic income.

The budget specifically excludes from California’s backup withholding rules interest and dividends and any release of loan funds made by a financial institution in the normal course of business.

California’s backup withholding provisions supersede any other withholding provision required under the administrative provisions of the Revenue and Tax Code. Also, the payer required to withhold must notify the payee of the withholding in the form and manner prescribed by the Franchise Tax Board (FTB).

The FTB made more information available at the beginning of October through its web page, www.ftb.ca.gov, and “Tax News” newsletter. The backup withholding obligation will begin January 1, 2010.

Use Tax Registration/Reporting
The budget requires qualified purchasers to register with the Board of Equalization (BOE) and report and pay any use tax owed for purchases made in the preceding year. The first use tax returns will be due on April 15, 2010, for untaxed purchases made in 2009.

A qualified purchaser is a business that meets all these tests:
• Is not required to hold a seller’s permit with the BOE.
• Is not required to be registered and is not otherwise registered with the BOE.
• Is not a holder of a use tax direct payment permit (see Revenue and Taxation Code, Section 7051.3).
• Receives at least $100,000 in gross receipts per year from business operations worldwide.

The primary change under this new budget is the requirement to file with the BOE. Before this law, only retailers selling tangible personal property were required to register.

The BOE planned on mailing notification letters to businesses potentially subject to the new registration requirement starting in September 2009 using data from 2007 IRS tax returns to target its audience.

Once a business replies to the letter, the BOE will send the business an account number and log-in code for e-filing purposes (which the BOE expects to be available in March 2010).

If a business fails to respond to the letter, the BOE will register the business automatically and mail it an account number. Once registered, the BOE will ask for 2007 and 2008 tax returns. The BOE is likely to waive any penalties on unpaid use tax, but businesses must pay interest.

Registered businesses must file a sales-and-use-tax return with the BOE, and may not report any use tax liability on their income or franchise tax return filed with the FTB. All businesses required to register with the BOE under this new program must file a return with the BOE, even if there is no use tax liability.

Companies face no penalty for not registering with the BOE or for failing to file when no use tax liability exists. If payment is late, however, a business may owe a penalty equal to 10 percent of the use tax liability.

It is important to note that the use tax has been in effect in California since 1935, and applies to purchases made from out-of-state sellers. A taxpayer may have a use tax liability when making purchases from an out-of-state retailer if the seller does not collect California sales or use tax or if the buyer uses, gives away, stores or consumes the item in California.

Reprinted with permission from the California Chamber of Commerce. 

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