Governor’s Executive Orders Impact State Tax Obligations

On March 30, 2020, Governor Gavin Newsom issued Executive Order N-40-20 which is intended to “provide relief to California small businesses.” This particular Executive Order (EO) has a number of provisions related to state tax laws which are intended to provide tax extensions for businesses.

On March 4, Governor Newsom proclaimed the State of Emergency currently in effect in the entire State of California due to the threat of COVID-19. The California Emergency Services Act provides that, pursuant to Government Code Section 8571, the Governor can waive certain statutes and regulations that would “prevent, hinder, or delay appropriate actions” to preclude and mitigate the effect of the COVID-19 pandemic in this state.

Among numerous other provisions, the EO allows the California Department of Tax and Fee Administration (CDTFA) to offer a 90-day extension for tax returns and tax payments for all businesses filing a return for less than $1 million in taxes. Note this threshold is based upon the amount of taxes, rather than a gross receipts amount or employee threshold.

Specifically, the provisions of the California Revenue and Taxation Code (CRTC) that apply to the taxes and fees administered by the CDTFA requiring a request for an extension and the filing of a statement under penalty of perjury may be suspended by the CDTFA for a period of up to three months after the due date of the return or payment for individuals or businesses filing a return for less than $1,000,000 in tax. This time extension remains in effect through the reporting of taxes or fees due or the payment of taxes that are due on or by July 31, 2020.

According to CDTFA, “If your tax liability is $1 million or more, you may still request an extension if you are unable to file and pay timely. These requests will be evaluated on a case-by-case basis and taxpayers will be notified if their extension has been approved or denied.”

In addition, the EO extends the statute of limitations to file a claim for refund by 60 days to accommodate tax and fee payers. Specifically, the provisions of the CRTC that apply to the taxes and fees administered by the CDTFA and specify the statute of limitations to file a claim for refund for the taxes and fees administered by the CDTFA are extended for a period of 60 days for individuals who or businesses that are unable to file a timely claim for refund as a result of this emergency. This time extension remains in effect through the reporting of taxes or fees due or the payment of taxes that are due on or by July 31, 2020.

Moreover, the provisions of the California Department of Tax and Fee Administration’s Rules for Tax Appeals that interpret and apply the CRTC to the taxes and fees administered by the CDTFA and that provide a 30-day period to file an administrative appeal with the Office of Tax Appeals are extended for a period of 60 days for individuals who or businesses that are unable to file a timely administrative appeal as a result of this proclaimed emergency. This time extension remains in effect through the reporting of taxes or fees due or the payment of taxes that are due on or by July 31, 2020.

Finally, under the purview of CDTFA, effective April 2, 2020, small business taxpayers, which are defined as those with less than $5 million in taxable annual sales, can take advantage of a 12-month, interest-free, payment plan for up to $50,000 of sales and use tax liability.

The Governor’s EO also extends the deadline specified in CRTC Section 19522(a)(1), related to the submission by the Franchise Tax Board (FTB) of an annual report to the Legislature on all changes to the Internal Revenue Code enacted into law in 2019. This is the annual tax conformity report compiled by the FTB staff. The report is not due for an additional 60 days.

On March 18, the Franchise Tax Board announced updated special tax relief for all California taxpayers due to the COVID-19 pandemic. Specifically, the FTB postponed until July 15 the filing and payment deadlines for all individuals and business entities for:

2019 tax returns
2019 tax return payments
2020 1st and 2nd quarter estimate payments
2020 LLC taxes and fees
2020 Non-withholding payments

According to the FTB, “To give taxpayers a deadline consistent with that of the Internal Revenue Service (IRS) without the federal dollar limitations, FTB is following the federal relief described in Notice 2020-17. Since California conforms to the underlying code sections that grant tax postponements for emergencies, FTB is extending the relief to all California taxpayers. Taxpayers do not need to claim any special treatment or call FTB to qualify for this relief.”

Thereafter, on March 30, the FTB announced an extension of time until July 15, 2020 for California taxpayers to complete certain time sensitive acts pertaining to state taxes due to the COVID-19 pandemic. FTB issued Notice- 2020-02, which details the new deadlines to file for:

Claims for refunds with the FTB
Protests of proposed tax assessments with the FTB
Appeals to the Office of Tax Appeals of Notices of Action denying claims for refund or affirming tax assessments

These announcements stem from Governor Newsom’s Executive Order N-25-20, which was issued on March 12, for the FTB to use its administrative powers to provide extensions of time to individuals and businesses affected by complying with state and local public health officials’ imposition or recommendation of social distancing measures related to COVID-19.

According to the FTB, “California Revenue and Taxation Code (RTC) Section 18572, which incorporates Internal Revenue Code (IRC) Section 7508A, gives FTB the authority to postpone these deadlines in accordance with the governor’s orders. Notice 2020-02 also gives FTB until July 15, 2020, to issue a proposed tax assessment for years where the statute of limitations expires during the March 12 to July 15, 2020, postponement period.”