Request for Permission to Proceed with the Formal Regulatory Process for Proposed Amendments to California Code of Regulations, Title 18, Sections 18662-0 through

18662-6, and Section 18662-8, Relating to Nonresident and Real Estate Withholding

Withholding at source is an essential part of the Franchise Tax Board's (FTB) Tax Gap Compliance Initiative. The ultimate goal of withholding is to facilitate fair and efficient tax compliance and administration by requiring payers to remit a portion of payments due to payees directly to FTB to pay amounts approximating the tax due with respect to the income from the payment. Thus, withholding at source benefits the state by reducing the risk that the income and resulting tax will not be reported and paid, and encouraging the filing of returns to report taxable income and claim credit for the withheld amounts.

California Revenue and Taxation Code (RTC) section 18662 sets forth the general withholding requirement scheme for nonresident and real estate withholding, and requires FTB to issue regulations to implement the withholding at source statutory requirements. (RTC section 18662, subdivision (a).) The corresponding regulations at California Code of Regulations, Title 18 (18 CCR), Sections 18662-0 through 18662-6 and 18662-8 (Withholding Regulations) provide more specific guidelines with respect to California's nonresident and real estate withholding procedures. The Withholding Regulations were last amended in 2014, operative on July 1, 2014, and can be .accessed on FTB's web page at https://www.ftb.ca.gov/Law/regs/18662 Combined Final Regulations.PQ.f. Subsequent to these amendments, the FTB determined that the Withholding Regulations may require additional updates based on feedback from industry and taxpayer representatives.

Background

FTB held a first Interested Parties Meeting (1PM) on October 12, 2015. The purpose of the meeting was to provide the public with an opportunity to discuss and provide comments on possible amendments to the Withholding Regulations, and to suggest various technical changes to the Withholding Regulations, including changes to terminology in the current regulatory language. In addition, the purpose was to discuss possible amendments to the Withholding Regulations related to domestic pass-through entity (PTE) withholding filing requirements. A summary of the first 1PM was thereafter made available to the public and can be accessed at httRs://www.ftb.ca.gov/law/regs/18662-0 through 8/10122015Summary-First Interested Parties Meeting.pdf. As set forth in the summary, numerous topics were discussed at this first 1PM and staff took that input to produce draft proposed regulatory language.

FTB held a second 1PM on July 11, 2016, at which the draft proposed regulatory language was discussed. The purpose of the meeting was to provide participants with an opportunity to discuss and provide comments on the proposed language amending the Withholding Regulations, which would make various substantive and technical changes. The summary of the second 1PM was thereafter made available to the public and can be accessed at https://www.ftb.ca.gov/law/regs/18662-0 through 8/07112016-Second-lPMSummary.pdf. In addition, the Background and Explanations of the Proposed Draft

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https://www.ftb.ca.gov/law/regs/18662-0https://www.ftb.ca.gov/Law/regs/18662

Language was also made available to the public, and can be accessed at https://www.ftb.ca.gov/law/regs/18662-0 through 8/07112016 Background.pdf.

The Proposed Regulatory Text

After the second 1PM, staff considered public comments and made further changes to the proposed regulatory language, incorporating and adopting some of the suggestions made by the public and other changes as a result of further staff review of the Withholding Regulations.

As detailed in the Second 1PM Summary, a participant suggested that the term "payee" in 18 CCR Section 18662-8, subsection (b)(2)(B), should be changed to the term "seller/transferor" for consistency with 18 CCR Section 18662-8, subsection (d)(2)(D)(2), which states that the. withholding agent is to provide the FTB Form 593 to the "seller/transferor." After consideration of the comment, FTB has made changes to the proposed regulatory language to change the term "payee" in 18 CCR 18662-8, subdivision (b)(2)(B) to the term "seller/transferor" to make this subsection consistent with 18 CCR Section 18662-8, subsection (d)(2)(D)(2).

As also set forth in the Second 1PM Summary, a participant noted that revised 18 CCR Section 18662-3, subsection (h)(10), which requires the dated signature of the seller's/transferor's spouse/RDP, should clarify that the signature of the seller's/transferor's spouse/RDP is only necessary if the spouse/RDP is also a record title holder of the real property in question. Given the space limitations on the FTB Forms where withholding information is collected, the FTB will now explain in the Instructions to new FTB Form 593 that the signature of the seller's/transferor's spouse/RDP will be required only if the spouse/RDP is a record title holder of the real property in question. As detailed in the FTBs summary of the First 1PM, FTB is proposing the revision of Form 593 because of duplications in existing forms.

In response to a number of technical comments from participants who suggested making certain revisions to 18 CCR Section 18662-6, and a request that FTB provide examples to certain subsections in the newly-revised 18 CCR Section 18662-6, subsection (a)(2)(A) (dealing with exemptions on payments made to entertainer's agents and promoters) and Section 18662-6, subsection (a)(1)(C) (dealing with payments made to reimburse expenses). FTB incorporated and adopted several further proposed changes in the proposed regulatory language including additional examples in both of those requested subsections.

In addition to public comments, during the course of reviewing the proposed language for consistency, staff also identified several provisions which were unclear or inconsistent with respect to filing deadlines contained in current forms. Specifically, in 18 CCR 18662-8, subsection (b)(2)(B), the text states that "An FTB Form 593 stating the amount of the real estate withholding shall be provided to the payee either at the time of sale or not later than January 31st of the following calendar year ...." However, this date is not the filing deadline for FTB Form 593 but rather is the filing deadline for FTB Form 592, as set forth in revised 18 CCR 18662-8, subsection (c)(2)(8), which states that the new FTB Form 592-PTE must be filed on an "annual basis no later than January 31st of the year following the year for which such withholding was required to be remitted to the Franchise Tax Board." For FTB Form 593, the proper due date is the 20th day of the calendar month following the month in which escrow closes, as 18 CCR 18662-8, subsection (b)(1)-the subsection immediately

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https://www.ftb.ca.gov/law/regs/18662-0

preceding 18662-8, subsection (b)(2)(B)-clearly notes ("Real estate withholding is due by the 20th day of the calendar month following the month escrow closes."). As a result, the proposed regulatory language at 18 CCR 18662-8, subsection (b)(2)(B) has been changed from "not later than January 31st of the following calendar year" to "not later than the 20th day following the month in which escrow closes."

In addition, staff determined that at 18 CCR 18662-8, subsection (b)(1), it is unclear whether the filing deadline for Section 1031 like-kind exchanges-as set forth in that subsection-is also the deadline for non-like-kind property from the sale (boot) in excess of $1,500 disbursed to the seller/transferor. As a result, the proposed regulatory language at 18 CCR 18662-8, subsection (b)(1) has been revised to make it clear that the payment of withholding on non-like-kind property from the sale (boot) in excess of $1,500 disbursed to the seller/transferor is due on the 20th day of the calendar month following the month in which the boot was disbursed.

Staff believes that the proposed regulation provides appropriate criteria and guidance in implementing the Withholding Regulations provided for in RTC Section 18662, and now requests permission to commence the formal regulatory process under the Administrative Procedure Act.

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California Code of Regulations Title 18

Division 3, Chapter 2.6, Subchapter 2,

Article 5, Withholding

Amend Sections 18662-0, 18662-1, 18662-2, 18662-3,

18662-4, 18662-5, 18662-6, and 18662-8

Text of Proposed Regulations

Regulation Section 18662-0 is amended to read:

18662-0. Table of Contents - Regulation Sections 18662:J-Jhrough 18662-8. ,z,;;;;

MOO Transferee. WOO Transferor. Mm WithholdingAgent.

18662-3. Real Estate Withholding.

(a) General. (b) Statutory Basis and Rates.

(c) Who Must Withhold - Required Notification and Responsibility.

(1) Notification. (2) Penalties for Failure to Provide Notice. / (3) The Real Estate Escrow Person May Assist C ~;:

Buyer's/Transferee's Withholding Obligations:,,:l,,,w)' ..

(d) Exemption and Withholding Requirements ..,,,. {'.iJ';l' (1) Full Exemption Under FTB Form 59~,~i~} (2) Transfers Requiring an ExemptiqpftJ~}tificate to

Withholding on FTB Form 593-G. ,,, "'

(3) Transfers That May Partially or Ful y]f~.empt the,, ale from (e) Withholding on Special Entities. ',~~~}};~,,,, ,,

(1) Grantor Trusts. ""'''" ',t,,,,, (2) Trusts. (3) Bankruptcy Trusts and

( 4) Estates.

(5) Conservator:snimsand

''f,'v,,~, Z, ~~~ t'""""'

(6) Relocati,on:Gompadh~s. (f) r1rcei~:~s~1:!t\~ficat:1d Esti ~ ,r~~~~Iii~1}l0 n:"'f;f! . . , , ,,, .. ,~ ElectirfgJbe /\ltetJ\~te '-"-""'"-'--""""'~"''.::;;"';,;".,,',{,'.::: ing Calculation.

(g) ~1\1~i~.:gJt;~'~!Jtf~::,,,~p~,~,~~~\~~~ F~ 1

(2) ,~K,tJ~ple Sellers/cn_i:~.nsferof:~i~k (3) S~ff~'t!Transferor~t~[l Title fo"r Incidental Purposes. (4) Sale''crtf~J!ltiple Pafi[~ls.

(5) Leaseho19:~Pptiq_q~jp'

(6) Personal Pr~fu'r::t~~!Ffoluded in Real Estate Transaction. (7) Short Sale Tra'q]'actions.

(h) FTB Form 593 E, Real Estate VVithholding Computation of Estimated Gain or Loss. (i) FTB Form 593 C, Real Estate Withholding Exemption Certificate.

ffi!.hl FTB Form 593, Real Estate Withholding Statement.

Will FTB Form 593-V, Payment Voucher for Real Estate Withholding.

(I) FTB Form 593 I, Real Estate \"iithholding Installment Sale /\clrnowledgement.

18662-4. Withholding on Payments (Nonresident Withholding)- General.

(a) Nonresident Individuals and Non-California Business Entities; De Minimis Amounts;

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and Rate. (1) Nonresident Individuals and Non-California Business Entities. (2) De Minim is Amounts. (3) Rate.

( 4) Cross-References.

(b) Optional Withholding or No Withholding Required. (1) California Residents. (2) California Business Entities. (3) Tax Exempt Organizations. (4) California Estates and Trusts. (5) Banks and Banking Associations. (6) Sale of Goods. (7) Services of a Nonresident Outside of ca1t (8) Intangible Personal Property. e~{;1' (9) Motor Carrier Compensation. (10) Wages Paid to Employees. (11) Nonresident Corporate Di (12) Insurance Companies, Individual

Plans. .,.

(13) Income from Qualified

(6) Services in Connection With the Sale of Goods. (b) Payments to Independent Contractors. (c) Payments to Nonresident Subcontractors.

(1) Withholding Requirements. (2) Payments to California Residents. (3) General Contractor Obligations. (4) Multi pie Contractors/Contractor-of-Record.

(d) Rent or Lease Payments to Nonresidents. (1) Rent or Lease Payments Made to Nonresidents. (2) Types of Rental or Leased Property Subject to Wi t;iJ10lding.

(e) Royalty Payments Made to Nonresidents. ,i -~~'i1

(1) Compensation for the Right to Use Natural.,@,~,.,,.:," ces. (2) Compensation for Services Derived from .. , ...,rllW;5 e Property Having a Taxable or Business Situs in California. .,,

(f) Payments to Corporate Directors. (1) Withholding Not Required. (2) Filing of Information Return. .....

(g) Seminar Speakers and Expert Witnesses:'\fi;},,,,.

(h) 1~~fm~~~~i=i~~~t Contractd1'!{ ''",,. c:z;~;~li;,., (2) Rel ia nee on Allocations~ 1;;;:,:,Y ij;~~,..by Payee~1J~~~". ,.. (3) Allocation Based on Time'f1il,. "''-~"\',,,,, ,.. - ,,,,, (4) Reasonable Method of Alloe:~J~on Ba f, (l Goo

. "-!~tJ;;}~._. \.~i~~~;;,, ' ,":~..( ) 5 A11 ocat1on_ ;1~t t1ons. 'i!frlt Wt,;,"', (i) FTB Form 58,;J!h,,: ~7es '',i*'"Withhol~I~""~'~~

(1) Duty Days. (2) Performance and Signing Bonuses.

(g) FTB Form 590, Withholding Exemption Certificate. (h) FTB Form 592, Resident and Nonresident Withholding Statement. (i) FTB Form 588, Nonresident Withholding Waiver Request. U) FTB Form 589, Nonresident Reduced Withholding Request.

18662-8. Reporting and Remitting Amounts Withheld, Penalties, and Interest; Other Procedures.

(a) General.

(b) Real Estate Sales - Information Returns. (1) Payment Due Dates and Form. (2) Reporting.

(c) Withholding From Payments Other Than R -'" (1) Payment Due Dates.

f7.(2l Reporting.

f41QJ. Electronic and

ftH.l Withholding Adj

(d) Interest and Penalties. ( 1) Interest. (2) Penalties and Liabilities.

__,,_'\'.{7,&:>;:-.7

Regulation Section 18662-1 is amended to read:

18662-1. Withholding - Generally.

(a) Types of Withholding-Application of Regulation sections 18662-0 through 18662-8.

(1) Overview. California law requires withholding of tax by persons having the control, receipt, custody, disposal, or payment of items of income, commonly termed "withhold at source." Regulation sections 18662-0 through 18662-8 apply to withholding of tax at source and do not apply to wage withholding, withholding orders for delinquent taxes, withholding on foreign (non-U.S.).;:Ji~.@ners and members (except with res ect to the re ortin on and filin of infor ,::J1~Yreturns and remittance of

a ments as set forth in Re ulation sections 1 . ,,and 18662-8 , backup withholding, or tax collection through the inter "~i'f.Fte~cept program.

(A) V\:ithh?lding Tax on Wages. Wit2:~J~L~JH~ tax o.n w~g1t(l~iffquired by ~ivision 6 of the Cal1forn1a Unemployment lnsuraJ;ice;Code (section 13000,etseq.) and 1s

t~!"''?~;~:-i,{' '-\:;~:~~W:f, administered by the Employment DeV~Lopment Department. (Se~IR~venue and Taxation Code section 18632.) Regulation sectitf,i:- .. 8662-0J~~ough 1866~t ;,,go not cover withholding tax on wages. ,,,1,fc:ti~;;t ,,,'c ..

~if~llr:,,.. ,,J~it;~?i!i~fFP" (B) Withholding Orders f0,~l(Je,[il1quent Taxes:",\.\Vftl:)holding orders for delinquent taxes may be issued pursuant to l~'i~i,l}tJ~rn:J Taxatiorf':ijg:t~ section 18670 and other statutes relating to involuntary29pllectiB:g}~L~yies, an'81'l2ge garnishments. Regulation sections 18662,,~h.tl:Jrough 186&~},S do nbt~r;>,y.ex withn01ltllg orders for delinquent taxes.

,, llJl!ilJifil~ft1~tt.h,,. '~}J, ....,~Tutf~!\iifK~tJ,,.. t::,t'.'1 (C) Fore'.i on-U'.SJ):i,f,,~rtners at),~~~iWJ>ers. 'F{e&~@I:Je and Taxation Code section 18666 an {"'""" ral pro'1@~ns incorp'q[ijJea by refererfee apply to withholding on foreign (non-U.S.) pe{~l)'@r,,,s and g!{mbers who\~:ijxe allocable amounts of effectively connected

to a Cali .,t(~}~l@tiR,!,JSinessl~l~~gulation sections 18662-0 through 18662-8 ,.",~~ ~\)',~ r,-'",-,.,-,,--,'4o..'m.-s;;?. '.,~"-,',;',?-'.

r with Ii ''i!t1km~?Qii'fofe:~~~fJi~~-l:J\~~J p~rtners and member~, except with ec r,e ortin 'i0n and f1l1l1 mfii1nfom1at1on returns and remittance of a ments

,;;s,,,,,.,.as set forth in~/fe'gulatid~\~~ections 186t5~':4 and 18662-8. (See Treasury Regulation _,,(~~}!;~,2tion 1.1446":'~!~.~eq. ~"r\'~liiternal Revenue Service (IRS) publications.)

~(~t\}:~. ,~fs$]it)~ -;~~?~~}} (D)~!.~{!3ackup Withhoming. Witl'Fcertain limited exceptions (which include payment of interer!t?/110.d dividend~{f~,nd any release of loan funds made by a financial institution in the norrft~~19urse of,.~Q~iness as stated in Revenue and Taxation Code section 18664, subdivisiort11(~'~J?)),,,,1:?;ac~Lp withholding is required by Revenue and Taxation Code section 18664 on payl!;\~J;!~~;where federal backup withholding is required. Regulation sections 18662-0 througH.tW8662-8 do not cover with holding taxes on backup withholding.

(E) lnteragency Intercept Program. Government Code section 12419.5 authorizes the State Controller's Office to collect money owed to one state agency by a person or entity by deducting the amount owed from any money to be paid to such person or entity by another state agency. This procedure is called an interagency intercept. Payments to a person or entity by the State include but are not limited to a refund of a tax, license, or fee, or a payment for services rendered. Regulation sections 18662-0 through 18662-8 do not cover interagency intercepts.

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http:s,,,,,.,.ashttp:nbt~r;>,y.exmailto:non-U.S.).;:Ji~.@ners

(b) Withholding of Tax at Source.

(1) General. Non-wage withholding is administered by the Franchise Tax Board under Article 5 of Chapter 2 of Part 10.2 of Division 2 of the Revenue and Taxation Code, section 18661, et. seq., and federal provisions incorporated by reference. Subject to certain exceptions specified in Revenue and Taxation Code section 18662, subdivision (e)(3), withholding of tax at source is required from payments derived from California sources and from the sale of any California real property. Withholding is also required when the Franchise Tax Board has notified the payer to withhold.

(2) Real Estate Withholding. Withholding of tax at sourceJl?. required from the sale or exchange of California real estate by a seller/transferorCJ:lijfm)~fa resident and nonresident individuals and non California business entities, unless{(fe'f;ta'in exceptions specified in Reve~ue and Taxat_ion Code section. ~8.662, subdivJf,Jfijf~J,~fi).: are .met. (See Revenue and Taxation Code section 18662, subd1v1s1on (e), a~,di,golat10Ql~~ct1on 18662-3.)

/.)ttl[~;l ~1~ijI1Jt;;.,(3) Withholding by Withholding Agent. .;;(':f;;rf,":"' \)}?::::

ti(fJ}J;t \\f'.;!Jlt'.J\.\

(A) Withholding of tax at source'if~ll~quired by persons h~'~jQg the control, receipt, custody, disposal, or payme'rftfif}jtems.,ofi{i,pcome macr~i\il.nonresident individuals and non-Cal!f9rr1ia business"e~m.titi Withholding is a'l~Gtrequired where the payee is unk~Qwb~px unidentifi " . fails or refuses to provide the payer with the informatio%lJovided bypt~gulation sections 18662-0 through 18662-8 to deterri'tJt:~ lf0W~fi~J>J.ding iii'f~~.&1:ired. (B) Cros~iJ1l~tif(~$.~.? Wit~W~l~Jn~";,rifttri, .. qt:'.t'f!:t,Regulation section 18662-4:t~:~Fcfefinitio:~;t. See Re'g:m2lgJt~1ifs'~c (8&362-3 for rules relating to real estate wiffi'.fi;

ticket sales and commissions, for this performance. In this situation, both the promoter and the venue owner/operator are withholding agents.

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.

Page 8

(h)

Regulation Section 18662-2 is amended to read:

18662-2. Definitions.

(a) Buyer. The term "buyer" includes the buyer or any other transferee of property.

(b) California Business Entity. For purposes of withholding, the term "California business entity" is a business entity as defined in Regulation section 23038(b)-2, subsection (a), that is incorporated, organized, or formed, and existing under the laws of California, or is qualified through the Office of the Secretary of State to transact intrastate business. A business entity that has not qualified to transact intrastate business (such as a corporation engaged exclw8J)fely in interstate commerce) will be considered as having a permanent place of business in Calito{lll~'only if it maintains an office in

'.::-; ,J~f;t}J '''it,l~i1},.,

(d) California Resident. The term ",~Jifg,rnia residenl1't{Q,,9J,Q:~~"every individual\{5-0 is in California for other than a temporary or transito~iRfffpose, and any'trrql~i.dual domiciled in California who is

ip;>,0\,:4.:;._.,:,,..-.::,;,:.,:.;~\,. -'-\11">"";:"{Y,.

absent for a temporary or transitory pu(~

U) Nonresident. A "nonresident" or "nonresident individual" is an individual who does not meet the requirements of a California resident as set forth in subsection (d), herein.

(k) Nonresident alien. "Nonresident alien" has the same meaning as defined in Internal Revenue Code section 7701(b)(1)(B).

(I) Nonresident Estate or Trust. For purposes of withholding, the term "nonresident estate or trust" means an estate or trust that does not meet the requirements to be a California estate or trust as set forth in subsection (e), herein.

(m) [Reserved].

(n) Partner. The term "partner" has the same meagJtf~,;~.i;flefined in Revenue and Taxation Code section 17008. For purposes of with,fil!{trfng:~ig'.t~,rnbers of limited liability companies classified as partnerships and owner:$1~{multiple~owh~r entities are included in the term "partner" under Regulation section , t::j62-0 through ,~~f12-8.

1

(o) Partnership. The term "partnership" h,~",it;~ same m~aning : i}Ju~d in Revenue and :l1 Taxation Code section 17008. This includes a 'sySv,\ icateJtglW"\JP, pool, jolmt~'~,nture, or other unincorporated organization, throl};gQ,Qr by means''" '';''''.fany business, ffn'.~tr:icial operation, or venture is carried on~~i:fni:ll'i:YQ,iCh is not c::L,,, 'estate, or corporation. For purposes of withholding, limited lia1:W\l}y"'t5o"}'.hpqnies clakstf~,d as partnerships, limited partnerships, and limited liability par{A~f~hTpff!t~JreatedtaJ!ti;>,artnerships under Regulation

~:)cti~::::::::o t;l~~it~ '~\\\~:; ' (q) Payee. The term ~R'.ijy(:;)e" il)0'~,ges, but is\,,.~., limited to, any person, partner, member, corporation,,dLmited liabillt~1;60 ' y~~fpartners~1~"fiduciary, business entity, association, 0 joint V{~,ptf:~J(W#il~:~11g[ not11~'l,,, ifiecl~it~}gJ~Ie'litded entity for tax purposes), estate, trust, t~,~;i,gn entity, eftt~~~X: orlS'~DHpal subdiii~f~n that receives payments from a payer. The term!Y:Q~yee" also in~~rson who receives payments or distributions from a pass-th rciCT~~:ity, estatOr"'\r~st.~'I,. (r) Payer. Thei~~:tfil "payer" mr"'Elns the person who makes a payment or a distribution to a payee. The payer includes"afni:!:J:1holding{~g~nt. The term also includes any person making a payment to an intermediary, pass-thrb','gg, entitsilQ,r person to the extent the intermediary, pass-through, or person provides a Form W-9 or dt~~f,~~,r6priate information relating to a payee so that the payment can be reported under Chapter 61 o_f~the Internal Revenue Code.

(s) Permanent Place of Business. A business entity has a "permanent place of business" in California if it is organized and existing under the laws of California or, if a foreign corporation, it has qualified through the Office of Secretary of State to transact intrastate business. A business entity that has not qualified to transact intrastate business, for example, a corporation engaged exclusively in interstate commerce, will be considered as having a permanent place of business in California only if it maintains a permanent office in California permanently staffed by its employees.

Page 10

(t) Person. The term "person" has the same meaning as defined in Revenue and Taxation Code section 17007, and includes Individuals as well as business entities.

(u) Real Estate Escrow Person. The term "real estate escrow person" has the same meaning as defined in Revenue and Taxation Code section 18662, subdivision (e)(6), plus Regulation sections 18662-0 through 18662-8, and includes any attorney, escrow company, or title company, responsible for closing the transaction, or any other person who receives and disburses the consideration or value for the interest or property conveyed.

(v) Remitter. The term "remitter" means any person who is.required under Revenue and Taxation Code section 18662 and Regulation sections 18662~0 through 18662-8 to remit an tax withheld on an dis osition from the sale or ex t:frr;, ..E'fof California real estate b California resident and nonresident individuals and @~lifornia business entities to the Franchise Tax Board on or before the due dates re -'i'. -. b"""~R'.e ulation sections 18662-0 through 18662-8, and who is required to maketfi'}i.nTormatio~~':W'eturns prescribed under forms and instructions by the Franchise TaxB0'~laT::-'The term "remitter" applies to the person who will remit the withheld tax on any dispo'itt&X' from the sale or eX'~f-range of California real estate and file the rescribed forms on {1,ifelhu er's tra sferee's b'@fialf.

'f.~;z~~~4,. ,,.,, ~:x~~i,,,Moo Seller. The term "seller" in s the selle(&r? 'her transferor oP'i:&'al property.

'1"~'" ::~1,~,/~f;,,, . .;,,t ' fwtW Transferee. The term "transfeti~"''or/t~el property4c~gJhe same meaning as in

S / '\l.. -L,) \.;rr.~,,:c;'t-,' , ~,,,.,,~.,:ex,'.,_

Revenue and Taxation Code section 1~j9.2, s'Hq;pJy:J?ion (e)'j~J!'R.Q includes the buyer of the real prop~rty, and, in ,~~Wl:l~i~It~~ exchan~,~t~n in'll)~,gj~_ry o.tt~l~,hange accommodator as set forth 1n Revenue.,,~rr:io/'fa*aJ1QIJ Code se:gt ' , 62ff~}.1,g91v1s1on (e).

(lt~i1{J;;7 ~ .,;;'.{~;~ft ;:~~: . ',::,~Ttf1l\\} WM Transferor. Tt{~?ft~ET "tra~lt~ror" of r~ ,1,,/operty has.the same meaning as in Revenue and Taxation CO,Qt~,sectioJj..J662, sup'.g,,ivision (e), and includes the seller of the real prop~-rlflt~KID:mt;iita del~t tMl'~'~~-l,;,~n in't'trwediary or exchange accommodator as

set fol!~:{.":1.

The term "withholdlrrg;"~gent" als~;.m~ans the person charged by the law or by the Franchise Tax Board's order or reguf~'{/12n,,wit~,ifu:itauty to withhold any tax, interest or penalties from payments to the taxpayer and to remif$'.4GM'fa'ro'6unts over to the Franchise Tax Board.

'i:,_:.,.:-.~:r4;;t

,_;{:i~\:,

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.

Page 11

Regulation section 18662-3 is amended to read:

18662-3. Real Estate Withholding.

(a) General. Withholding of tax at source is required on any disposition from the sale or exchange of California real estate by a seller/transferor California resident and nonresident individuals and non California business entities. The rate of withholding is 3 1/3 percent of the sales price, but the seller/transferor may elect an alternate alternative withholding calculation based on the gain required to be recognized from the sale as set forth in FTB Form 593-E, Real Estate Withholding StatementGomputation of Estimated Gain or Loss, or any successor form designated by the Franchise Tax Board on its website at www.ftb.ca.gov ("FTB Form, 93-E"). The required information specified in FTB Form 593-E is set forth in subsection (h), below - -;~ requirement to withhold is the responsibility of the buyer/transferee, but may be performe real estate escrow person on the buyer's/transferee's behalf. No withholding is required u --" .. visions set forth in Revenue and Taxation Code section 18662, subdivision (e)(3), or if ~n('.t,~'"' 593 C is set forth in subsection (i}, below-.. Fore ;,,,:fi1Je, the seller/transferof(Q'J~qy certify on FTB Form 593-G that the property was the seller's/trans'fe'ror's princi --'c;l) residence~~6fJ:~mc:it no gain is recognized from the sale. The Franchl~,tTax Board m'a'-"l' /rbw document~ftgti~rify com p Iiance. Jf~i~i;\'Il'"' "-,::,,

s;, fill,}:;;;,,_ - f:j-,, (b) Statutory Basis and Rates. Reven ,vs,na'J'm~igiJion Codes'g'?;ti_on 18662, subdivision (e), requires withholding of tax at source from~~~( dispo~(t\~~i,sale offff~p~s'.er ~f California real property at an amount equal to 3 Ji~{e~!~,~nt of the:~~JJ?S price/" - s an e1Ef~\l9n 1s made to use an alternative withholdin q_aJofJla'HqJtl~flsed on gijira r !;lit.. '> cogrffzed from the sale on FTB Form 593-E. The alt , ,, e withff'irJ]brig calcufa'~ ''''~ff be ..,,:..:;. n the maximum applicable tax rate under Revenue arf'a';fuaxation Co.$~ sections\ , _ 1, 23151, and 23186.

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(3) The Real Estate Escrow Person May Assist the Buyer/Transferee With the Buyer's/Transferee's Withholding Obligations. Once the buyer/transferee is notified, it is the buyer's/transferee's responsibility to withhold. However, the real estate escrow person may assist the buyer/transferee in complying with the withholding requirements by performing or assisting in the withholding, remitting the required withholding, and completing FTB Form 593, Real Estate Vi/ithholding Statement, or any suocessor form designated by the Franchise Tax Board on its website at www.--ftb.ca.gov ("FTB Form 593"), and FTB Form 593-V, Payment Voucher for Real Estate Withholding, or any successor form designated by the Franchise Tax Board on its website at www.ftb.ca.gov ("FTB Form 593-V"). The required information specified

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in FTB Form .593 and FTB Form 593-V is set forth in subsection illLW. and subsection Will, respectively, below. The real estate escrow person may charge a fee for this assistance not to exceed the amount set forth in Revenue and Taxation Code section 18662, subdivision (e).

(d) Exemption and Withholding Requirements. No withholding is required if the seller/transferor establishes one of the following under subsection (d)(1) or (d)(2):

(1) Full Exemption Under FTB Form 593-G. The Franchise Tax Board on FTB Form 593-G may establish that no withholding is required in the following instances:

(A) Seller/Transferor is a Corporation or Partnershiqy1(:Jo withholding is required for a corporation or partnership incorporated or qualifiec;tJ~r~:o~ business in California (or where the entity continues to have a permanent place qJJg'Ji'ness and maintains a permanent staff within California after the sale.) Where tb~1{~1[~,/'.transferor is a disregarded entity for tax purposes, no withholding is require9 itt([gi'owri%~Jg.;tthe disregarded entity is incorporated or qualified to do businessJl!)'r;Qsifffornia or1'.$tiJinues to have a permanent place of business and maintains a per, "s,,,::,:;~r'it staff withins:'@'lltornia after the sale.

rY- . ., ~{~1tl~: (B) Total-Sales Price of $100,000 L~$S. No withholding is leJf~i.red unless the sales price of the real property conveyed exc~~i~~$100,9,~J~-~..~ Th;'i~J1!Rg price 11 is normally the same amountqs the "gross ptcf&eeds!~f:~'q'uired for inforTrf~:Uon reporting purposes as shown on th . :,,., I form 1099~~:~~~-Treasury RegulatfaWsection 1.6045-4.) "\11~!:0

.;,tib, i,~;i\)~., . 1~ .. (C) Deferred Exchange. No WitbholdihgEi~)tequired . ::e.r than by an intermediary or an

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Code, or that the last use of the property was as the seller's/transferor's principal residence.

1. Generally, a home will qualify as a principal residence if, during the five-year period ending on the date of sale, the seller/transferor owned and used the property as his or her main home for at least two years. 2. There are exceptions to the two-year rule if the primary reason the seller/transferor is selling the home is due to a change in the place of employment, health, or other unforeseen circumstance, such as death, divorce, or loss of job. (See Internal Revenue Code section 121 and Treasury Regulation sections 1.121-1 through 1.121-5.) 3. If the property does not qualify for an e~ under Internal Revenue Code section 121, the seller/transferor may clai clusion from withholding if the property was last used as the seller's tra, ._ , . ., principal residence within the meaning of Internal Revenue Code se i:l1f5:t:r2r}~iiJbout regard to the two-year time period. ,i,:~i~\\~}, "*::~ ~~fflltt,.. 4. Where California law diffe,r$Jff'g'm'federal law, c1Jlt~rnia law applies:

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Code1$'.~.ction 351 (pr;epE;irty transferred to a corporation controlled by the transferor) or lnternlW~~~yenue Cod~fi;ection 721 (property contributed to a partnership in exchange for a partt.t~x'tiip intE?.t~it).

~'(j~~/(,c;,;-, .-_ .~~~,;,;? (E) Seller/Tr~"AfT~Va~ is a Corporation. No withholding is required if the seller/transferortl~'rtifies on FTB Form 593-G that it has either qualified with the California Secretary of State or has a permanent place of business in California. This includes a limited liability company (LLC) taxable as a corporation for federal and California income tax purposes.

(F) Real Estate Investment Trusts (REITs). No withholding is required if the

seller/transferor certifies on FTB Form 593-G that it is a REIT that is treated as a

corporation and that the REIT has a permanent place of business in California.

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(G) Seller/Transferor is a Partnership. No withholding is required if the seller/transferor certifies on FTB Form 593-G it is a California partnership, or qualified to do business in California (or an LLC that is classified as a partnership for federal and California income tax purposes1 that is not a single member LLC that is disregarded for federal and California income tax purposes}.

(H) Tax Exempt Entities. No withholding is required if the seller/transferor certifies on FTB Form 593-G that it is a tax-exempt entity under California or federal law (e.g., government agency, Resolution Trust Corporation, or exempt, charitable, religious, or educational organization).

(I) Insurance Companies. No withholding is reqyJr~~ltfr the seller/transferor certifies on FTB Form 593-G that it is an insurer within the/me""aning ofSection 28 of Article XIII of the California Constitution that pays the Calif9r,l~;~~l!9~\~ premiums tax.

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subsection (I), below. The buyer/transferee must provide give FTB Form 593 I, along \Vith the installment agreement terms and give a copy of the promissory note, to the real estate escrow person to remit G-A-With FTB Form 593 and FTB Form 593V to the Franchise Tax Board.

2.,__The buyer/transferee must withhold and remit 3 1/3 percent or the alternative withholding calculation certified on FTB Form 593 on the principal portion of all subsequent installment payments following the close of escrow.

2-.-3. Installment Sale Payoff. The buyer/transferee real estate escrow person must withhold 3 1/3 percent or the alternative WiJbholding calculation certified on FTB Form 593 on the principal portion of a seJJ:$1tf'Pansferor-financed installment sale payoff or prepayment in escrow upon .. ,,i;x':

(e) Withholding on Special Entities.

(1) Grantor Trusts. If the trust is a granto nsferor is the grantor and withholding is required, unless an exempt plies under FTB Foft.Qj~~3-G. A grantor trust is a trust where the grantor retains substanti ,,:.ADtrol and remains the'o

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"' r (e.g., the right to cancel or revoke the trust). A grantor trust is a1~t.~gardedJ@:Mederal an \. ornia income tax purposes. Where the seller tran f ror is the gnlf1{qr:4ryeyfl!r,l'tf unless an ex ,,'~Jjon applies

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under FTB Form 593--G, withhol is. remitted on 'RTBJl;G>rm 593 and FTB Form 593-V and credited to the grantor. Where ap. .. ~m.f~,,JTB Form5~~1and FTB Form 593-V, FTB Form 693 C, FTB Form 593 E, and FTB Form''&'.~?'i'sH~!:!1.s:J be compi~l~ct using the individual's (grantor's)

information. .--~;::}~t;;\;;\,:. ,{)trt. '?it:ffJ);~}il;il"~,. "'"(:t~J: \,, (2) Trusts. If ~h$~[;usris,;2,1!1~r than a'~}~leg~-'~~,8ligt~;g,S,~~yu ; then the seller/transferor is the trust and w(tlib:olding isl~!;fi;Jired, unl[~s;,cfl:W~xemptiont.a'!1IP1ies under FTB Form 593--G.

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Where applicable\\l.EIS Form 5~@, and FTB"P~Q.fm 593-V, FTB Form 693 C, FTB Form 593 E, and FTB Form 593 I sh6~)~7,l;>_e corpp[~t~d using tfi~.~name of the trust and the trust's federal

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