The state of California will be delaying tax refunds along with other payments, effective for California tax returns that are processed by the state on or after October 7, 2010. "There is not enough money in the treasury to meet all of the State's current payment obligations," reports the California State Controller's Office, which has published a set of frequently asked questions about the delayed payments. The Franchise Tax Board, the state tax agency for California, has likewise issued an advisory notice.
This is now the second time in two years that California has delayed tax refunds as a cash management tactic. Previously, California delayed refunds from January through April 2009 and issued taxpayers registered warrants promising future payment. This time around, the state does not plan to issue registered warrants just yet. "While the Controller does not believe IOUs are warranted at this time, they are still a possibility, depending on how October and November receipts and expenditures compare to budget projections, whether there are elements in the newly-enacted budget that will provide cash to the State, how big an external borrowing will be required, and how quickly that borrowing can be secured," the Controller's Office stated in their notice.
Individuals might be eligible to earn interest on their delayed refunds. "Once there are sufficient funds in the state Treasury, personal and business income tax refunds will be paid. If personal income tax refunds are not paid by November 30, and the tax returns were filed by October 15, they will accrue interest at a 4% rate. No interest accrues on delayed corporate income tax refunds," according to the Controller's Office.
The state will issue refunds based on the delivery method indicated on the tax return: either through direct deposit or by check. The state will also apply refunds towards next year's estimated taxes if that option was indicated on the return.
As a personal opinion, I suspect that the cash situation California finds itself in was engineered in part by last year's budget. The budget for 2009/2010 made a number of tax changes. One notable change: estimated tax payments for California were re-structured to require 70% of tax to be paid in by June 15, eliminated the requirement to send in a September 15th payment, with the remaining 30% of tax due in January. Thus it's little wonder to me that California faces a cash crunch at exactly this time of year.