The State Board of Equalization voted unanimously on Tuesday to eliminate the agency’s automatic security deposit requirement and begin the process of releasing over $296 million to small-business owners.
“This is a great victory for taxpayers and small businesses,” said the board's Vice Chair Michelle Steel. “Ending this program will allow new businesses across the state to keep capital in their pockets, available to invest in their businesses or to support their families, instead of having to send a large security deposit to the state.”
“The elimination of unnecessary security deposits is the right thing to do,” said Teresa Casazza, president of the California Taxpayers Association. “This state is a notoriously tough place to run a business, especially for small business owners who struggle to keep up with California’s costly taxes, fees and regulations. There is simply no need for the state to hold on to millions of taxpayer dollars. We thank BOE Vice Chair Steel and the entire board for voting to return this money to the taxpayers.”
Vice Chair Steel, who heads the Board’s Customer Service and Administrative Efficiency Committee and requested that this matter be heard, was responsible in 2007 for finding a multi-million dollar mistake in the Security Deposit program and returning $42 million to over 5,500 small-business owners whose refunds had been delayed for years. Steel then changed procedures at the Board to ensure timely review and return of security deposits to taxpayers.
The Board’s action followed staff review of statistics which showed declining benefits of requiring security deposits from taxpayers compared with the cost of administering the program.
Beginning in February of 2014, staff will begin to release over $296 million in existing security deposits – more than $67 million of which is in cash and other liquid assets – after applying any outstanding liabilities, starting with the oldest deposits first.
Under state law, certain businesses can be required to post and maintain a tax security deposit for their first three years of operation. The agency has been obtaining security deposits when a new business owner registers for a seller’s permit. Deposits have been automatically required for corporations and LLC’s.
Security deposits are meant to act as collateral against any potential tax liabilities. But staff has found that, on average, less than 1 percent of security held by the agency is actually applied to a liability. Security deposits that are not applied to a liability do not count as state revenue.
With Tuesday's vote, the Board eliminated the automatic application of security deposits when registering for a seller’s permit. The Board’s action allows security deposits to be collected for high-risk accounts, particularly for taxpayers with a previous history of non-payment. Staff estimates the programming changes required to update the agency’s online registration program will be completed by March 2014. Until then staff will manually inform taxpayers that a security deposit is no longer necessary.