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When last we met, the news was that CEA would be working with CLTA to amend AB 1338, relating to Cal-FIRPTA. The plan was to address three withholding issues in the bill: clarifying that principal residences are exempt from withholding,no matter how long the period of residence; exempting foreclosure sales from withholding in all circumstances; and giving escrow the option of batching and remitting funds to the Franchise Tax Board on a monthly basis, as the FTB prefers, or on a per transaction basis at the close of escrow. The good news is that AB 1338 was in fact amended as planned, and passed by the Senate Revenue and Taxation Committee on July 1. Unfortunately, the portion of the bill relating to principal residences was estimated to result in a revenue loss to the state of approximately $1.5 million; in spite of the basic fairness of the proposal, with which no one disagreed, a revenue loss of that magnitude would be fatal to the bill. So the principal residence feature was amended out of AB 1338, and our three-part bill became a two-part bill. Our little Cal-FIRPTA saga, our little attempt to just send money in to our cash-strapped state, is not over, however. After the Senate Revenue and Taxation Committee, AB 1338 was referred to the Senate Appropriations Committee for another hearing. In each house, the Appropriations committees are charged with evaluating fiscal issues in bills, or put more simply, whether the bills cost money and whether the state can afford the cost. Many bills which have no real policy controversy nonetheless die in the Appropriations committees because of cost. Of the two remaining elements of AB 1338, the foreclosure piece apparently carries no cost, because no one is aware of withholding ever having been done on a foreclosure. Lawyers could sit and debate, for example, who the buyer and seller even are in a foreclosure sale, and in any event, there would usually be no funds to withhold, when lenders take properties back on credit bids. The fact that some foreclosure sales appear to require withholding under current law simply means that the law was poorly drafted in this area back in 1993. With regards to the escrow element of AB 1338, however, the Franchise Tax Board has indicated that providing an option to send withholding in immediately, rather than on a batched, monthly basis, would require an extra six, as in a half-dozen, extra people. In government-speak these six people are known as “PYs”, for “personnel years”. The Board puts the cost of six PYs at $375,000, and that is the cost estimate that they have provided to the Senate Appropriations Committee for AB 1338. In response, CEA and CLTA have made a variety of arguments. First, we argue that there is, in fact, no cost to AB 1338 because the bill will simply permit escrow officers to do exactly what they are doing right now. That is, two companies are choosing to remit on a monthly basis and the rest are continuing to remit upon close of escrow. The bill does not add cost, but merely continues current practice. Second, we have argued that the “costs” were really imposed by AB 2065 two years ago, when the state greatly expanded the withholding program to cover residents as well as non-residents. Third, we have questioned the cost estimate itself: does it really require six extra people simply to process the additional checks per transaction remittances, since the back-up documentation will be required in both cases anyway? Finally, we have argued that the entire point of Cal-FIRPTA has always been to send money in to the state earlier, rather than later. The main benefit to the state relates to the time value of money, or put less delicately, float. Any system which results in money coming in slower reduces interest revenue to the state, and therefore misses the point of withholding. This reduced interest revenue, by the way, is not part of the FTB’s cost estimate for AB 1338. Thus far, legislators seem to understand and appreciate our basic message: escrow officers would simply like to really close escrows and send withholding to its rightful owner, the FTB. By the next issue of CEA News, we will know what the legislature has decided to do with the $375,000 revenue loss argument. |
by Michael D. Belote
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