For the first time in twenty years, California is offering amnesty to taxpayers who wish to come into compliance for purposes of both the franchise tax and the sales/use tax. The amnesty period began on February 1 and will run through March 31, 2005. But some of the terms of the so-called "amnesty" are so onerous that every company with potential California liabilities should carefully review their options. Beware— a failure to take advantage of amnesty now may result in stiff penalties down the road.
The Good News: Civil And Criminal Penalties Waived
On August 16, 2004, Governor Schwarzenegger approved Senate Bill 1000 (2004 Cal. Stat. Ch. 226), which required both the California State Board of Equalization ("SBE") and the Franchise Tax Board ("FTB") to develop and administer tax amnesty programs in accordance with the guidelines set forth in the statute. Under the amnesty, taxpayers are given the opportunity to pay back taxes and interest without civil or criminal penalty. The program applies to tax liabilities due and payable for tax reporting periods beginning before January 1, 2003.
Who is Eligible?
The amnesty program is so broad that it applies to virtually any company with California tax obligations - even if they don’t quite it know it yet. The California amnesty net is cast wide enough to cover companies that are registered and underreport or underpay, companies that are not registered and should be, and those that are under audit or in the process of settlement or litigation. It applies to those companies with known liabilities and those whose liabilities are as of yet unknown or undetermined. In short, almost any company that might have a California tax obligation should sit up and take notice.
Eligible taxpayers electing amnesty must file a completed amnesty application before March 31. (This application is available on the SBE’s and FTB’s websites). The taxpayer will then have sixty days (until June 1) to file completed tax returns and pay all taxes, plus interest, for all tax reporting periods for which amnesty is requested. The legislation does authorize an installment payment plan, under which the taxpayer may be given until June 30, 2006 to pay in full.
The Bad News: Tough Sanctions For Those Who Don’t Apply
Unlike many amnesty programs - which are often designed to encourage taxpayers to come forward by reducing penalties or softening consequences for past failure to comply - the California program imposes harsh consequences for those who do not take advantage of the amnesty offer. For example, if the state later determines that a taxpayer has pre-2003 liabilities and didn’t take part in the amnesty, the taxpayer will face additional penalties at twice the normal rate and additional penalties equal to 50% of the interest due.
The new law also seems to expand the statute of limitations by providing that after the expiration of the amnesty period, the board may issue a deficiency determination "within 10 years from the last day of the calendar month" following the period for which the amount is proposed to be determined. It is unclear exactly how such a farreaching provision would be applied.
Conclusion
The California amnesty program does more than just encourage wrong-doers or those with clear-cut liabilities to come forward. Instead, it forces taxpayers that may or may not have a liability to carefully consider the state’s "register or else" philosophy. Remote vendors that sell into California and whose in-state contacts fall into the gray area of nexus could face stiff penalties if they elect not to register and are later found to have nexus. Companies that may have incurred past California liabilities should therefore weigh the benefits and risks associated with the amnesty program. In short, any company that has ties with California should carefully evaluate their risks and determine whether amnesty participation makes sense.
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