Existing sales and use tax laws impose taxes on retailers measured by the gross receipts from the sale of tangible personal property sold at retail in this state, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state, and provides various exemptions from the taxes imposed by those laws.

This bill would exempt from those taxes the gross receipts from the sale of, and the storage, use, or other consumption of, tangible personal property sold by, or purchased from, a retailer that is a small business, as defined, on the Saturday following Thanksgiving beginning in 2016.

The Bradley-Burns Uniform Local Sales and Use Tax Law authorizes counties and cities to impose local sales and use taxes in conformity with the Sales and Use Tax Law, and existing law authorizes districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which conforms to the Sales and Use Tax Law. Exemptions from state sales and use taxes are incorporated into these laws.

This bill would specify that this exemption does not apply to local sales and use taxes and transactions and use taxes.

This bill would take effect immediately as a tax levy. However, the provisions of this act shall become operative on January 1, 2016.

Date of Hearing: May 18, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1280 (

Author:Maienschein) – As Introduced Ver:February 27, 2015

SUSPENSE

Majority vote. Fiscal committee. Tax levy.

SUBJECT: Sales and use taxes: exemption: tax holiday: small businesses.

SUMMARY: Establishes a partial sales and use tax (SUT) exemption for tangible personal property (TPP) sold by, or purchased from, a retailer that is a "small business", for the one-day period beginning at 12:01 a.m. on the Saturday following Thanksgiving and ending at midnight on the same day. Specifically, this bill:

1. Defines a "small business" as a retailer that remitted to the State Board of Equalization (BOE) less than $200,000 in tax for the previous four calendar quarters.

2. Provides that a "small business" also means a retailer that has been in operation for less than four calendar quarters and remitted less than an average of $50,000 in tax for each calendar quarter of operation.

3. Provides that, notwithstanding any provision of the Bradley-Burns Uniform Local SUT Law or the Transactions and Use Tax Law, this bill's exemption shall not apply with respect to any tax levied by a county, city, or district pursuant to either law.

4. Takes immediate effect as a tax levy, but becomes operative on January 1, 2016.

EXISTING LAW imposes a:

1. Sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California.

2. Complimentary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to a retailer registered to collect California's use tax, the purchaser remains liable for the tax, unless the use is exempt. The use tax is set at the same rate as California's sales tax and must generally be remitted to the BOE.

FISCAL EFFECT: The BOE estimates that this bill would reduce SUT revenues by roughly $24 million annually.

COMMENTS:

1. The author has provided the following statement in support of this bill:

AB 1280 allows a one-day sales and use tax exemption annually for small businesses that remit less than $200,000 over four quarters to the State Board of Equalization. AB 1280 will go a long way toward stimulating local economies, and the state economy as a whole, while sending a message to small businesses that they are not overlooked as the leading job creators.

2. This bill is sponsored by Small Business California, which notes:

California is a heavily taxed and regulated state, making it extremely difficult for small business owners to meet their obligations under the current law. Most do not have in-house accountants and legal representatives. Consequently, it costs small businesses almost three times more to comply with our state's tax laws than larger businesses.

3. Proponents of this bill note the following:

California is often a difficult place in which to do business. High taxes and heavy regulations make it extremely difficult for small business owners to meet their obligations under the law. Many of them are struggling to generate the revenue needed to keep their doors open and retain staff, and it seems that more requirements are placed on them every year.

AB 1280 sends a strong message to these vital contributors to our state's economy that they are important. California needs small businesses to thrive and create desperately needed jobs, as well as generate critical tax revenue year round. This measure will help to draw attention to small businesses as viable places to shop, and will be a huge incentive for consumers to turn out and support their local "mom and pop" stores.

4. Opponents of this bill note the following:

Despite their political popularity, sales tax holidays are based on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform. Sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy. They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers.

5. The BOE notes the following in its staff analysis of this bill:

   1. Definition of "small business": "The definition of 'small business' may benefit certain larger businesses that remit less sales tax in proportion to their total sales as a result of their nontaxable sales, such as sales for resale (wholesale sales) or sales made in interstate commerce. These larger businesses may qualify as a 'small business,' and thus benefit from the sales tax holiday. To accomplish the author's intent, further limits on the definition of 'small business' may be needed.

"In addition, the bill defines 'small business' as one that remitted to the BOE less than $200,000 in tax for the previous four calendar quarters. Retailers that remitted no taxes due to delinquency would qualify as small businesses. Similarly, a retailer that reports $1 million in taxes due, but only remits $199,999 in the previous four calendar quarters, may qualify. BOE staff is available to work with the author's office to resolve this concern.

"This bill should also clarify whether a retailer with multiple locations qualifies under the aggregate for all business locations."

2. Exemption will not apply to next day merchandise exchanges and rain checks: "Under current law, merchandise exchanges are considered two separate transactions: a rescission of the original sale and a sale of the replacement merchandise. For example, if a customer purchases a medium-sized shirt and exchanges it for a small-sized shirt, the transaction is regarded as a separate sale of the small-sized shirt and a rescission of the original sale of the medium-sized shirt. The retailer is allowed to deduct from taxable sales an amount for the sales price of the medium-sized shirt, and is also required to include in the taxable sales amount, the sales price of the small-sized shirt. Under the proposed holiday period, if the medium-sized shirt is purchased during the sales tax holiday period, and is exchanged for the small-sized shirt after the holiday period, the proposed exemption would not apply to the small-sized shirt, since that transaction occurred after the exempt holiday period. This may result in reporting errors by retailers and added customer inquiries and confusion.

"Rain checks similarly cause confusion. A retailer's rain check does not constitute a sale. Therefore, a rain check redeemed for taxable property outside the proposed holiday period would not be eligible for the exemption."

3. Partial exemptions complicate administration: "Currently, most sales and use tax exemptions are applied to the total applicable sales and use tax. However, a few partial exemptions exist in which only the state tax portion of the sales and use tax rate is exempted, such as the farm equipment and teleproduction equipment exemptions. These partial exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently. This results in additional return processing workload for the BOE."

4. Other states: "Fifteen states will hold a sales tax holiday in 2015: Alabama, Arkansas, Connecticut, Georgia, Iowa, Louisiana, Maryland, Mississippi, Missouri, New Mexico, Oklahoma, South Carolina, Tennessee, Texas, and Virginia. Eligible items include clothing, computers, school supplies, energy star products, firearms and hunting supplies, hurricane preparedness items, and severe weather preparedness kits. For most states, the exemption applies to specified items. Most states also place dollar limits on the amount exempt from sales tax.

"Only Louisiana exempts most individual tangible personal property purchases. The exemption applies to the first $2,500 spent on individual items of tangible personal property for non-business use. Vehicles and meals are excluded from the exemption."

6. Committee Staff Comments

   1. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). This bill would enact a new tax expenditure, in the form of an annual SUT holiday for "small businesses" on the Saturday immediately following Thanksgiving.

2. How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining a part of the tax code without demonstrating any public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote. To that end, the author may wish to consider adding an appropriate sunset date to this bill to allow the Legislature to review this tax expenditure in the future.
   
   

3. Incentive or reward? California currently exempts certain sales, either partially or completely, from the SUT. Each additional exemption further erodes the tax base and reduces governmental revenues. Because individual exemptions establish a precedent for future legislation, it is important to examine whether a particular tax expenditure actually changes behavior or simply subsidizes existing behavior. While a state SUT holiday may induce consumers to spend more on a particular day, it is unclear whether this exemption would increase the overall number of sales during the calendar year. Put differently, the proposed exemption may incentivize consumers to buy things they would have bought anyway but on a different day.
   
   

4. This bill provides a very broad exemption: This bill's proposed exemption is very broad in scope as it applies to every conceivable item of TPP, from vehicles to luxury watches, (assuming the items are purchased from a qualifying "small business"). In addition, this exemption is not targeted to low- and moderate-income consumers, but is available to all consumers regardless of income. This Committee may wish to consider excluding purchases of certain expensive items from this SUT exemption.

5. No price cap: This bill does not limit the amount of the purchase price that would be exempt from the SUT. Without such a price cap, consumers would likely delay purchasing expensive items, such as appliances or jewelry, until the annual tax holiday. The perceived tax savings for such large purchases would be so great that many taxpayers would simply forego making such purchases any other day of the year. A price cap would not impact low-income consumers as greatly as their higher income peers and would introduce a measure of progressivity into the state SUT. Most of the states that offer sales tax holidays place dollar limits on the amount exempt from the sales tax.
   
   This Committee has considered similar bills in the past that included price caps ranging from $100 to $500. The Committee may wish to consider imposing a cap on the purchase amount that would be eligible for the sales tax exemption.

6. California has little cross-border retail competition: Many states with higher sales tax rates than their neighbor states have enacted sales tax holidays to combat cross-border retail competition. Unlike such states, California lacks significant cross-border retail competition for its physical businesses. California's large population centers are far from neighbors with lower sales tax rates. For example, New York has sales tax holidays. The New York City metropolitan area is adjacent to both New Jersey and Connecticut and the Albany metropolitan area is adjacent to Massachusetts. In contrast, Los Angeles and San Francisco are over 100 miles away from California's neighbors. New York faces a near-constant battle to encourage its residents to shop in-state. California does not. For this reason, the sales tax holiday provided by this bill is unlikely to impact Californians' geographical decisions about where to shop or draw consumers from out-of-state.

7. A burden on retailers: This bill creates a one-day SUT holiday. The administrative burden on retailers is quite high with short-term exemptions as retailers must change the tax rate twice in a single week.

8. Related legislation:

   1. AB 718 (Melendez), of the 2013-14 Legislative Session, would have provided an annual sales tax exemption for TPP sold on April 15. AB 718 was held on this Committee's Suspense File.

   2. AB 1007 (Cook), of the 2011-12 Legislative Session, would have provided a sales tax holiday for specified back-to-school products. AB 1007 was held on the Assembly Committee on Appropriations' Suspense File.

   3. AB 548 (Garcia), of the 2005-06 Legislative Session, would have provided a sales tax holiday for specified back-to-school products. AB 548 was held on this Committee's Suspense File.

   4. AB 1185 (Mountjoy), of the 2001-02 Legislative Session, would have provided a partial sales tax exemption for clothing or footwear sold during a specified annual period. AB 1185 was held by this Committee.

   5. AB 944 (Cardenas), of the 1999-2000 Legislative Session, would have established a three-day sales tax holiday for specified articles of clothing and footwear purchased for $100 or less. AB 944 was never heard by the Senate Committee on Revenue and Taxation.

   6. AB 1320 (Ashburn), of the 1999-2000 Legislative Session, would have provided a one-week sales tax holiday for any item of TPP purchased for less than $500. AB 1320 failed passage in this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Small Business California (Sponsor)

California Asian Pacific Chamber of Commerce (Co-Sponsor)

National Federation of Small Business (Co-Sponsor)

Opposition

American Federation of State, County and Municipal Employees, AFL-CIO

California Retailers Association

California Tax Reform Association

Service Employees International Union

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

Date of Hearing: April 20, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1280

Author:(Maienschein) – As Introduced Ver:February 27, 2015

SUBJECT: Sales and use taxes: exemption: tax holiday: small businesses

SUMMARY: Establishes a partial sales and use tax (SUT) exemption for tangible personal property (TPP) sold by, or purchased from, a retailer that is a "small business", for the one-day period beginning at 12:01 a.m. on the Saturday following Thanksgiving and ending at midnight on the same day. Specifically, this bill:

1. Defines a "small business" as a retailer that remitted to the State Board of Equalization (BOE) less than $200,000 in tax for the previous four calendar quarters.

2. Provides that a "small business" also means a retailer that has been in operation for less than four calendar quarters and remitted less than an average of $50,000 in tax for each calendar quarter of operation.

3. Provides that, notwithstanding any provision of the Bradley-Burns Uniform Local SUT Law or the Transactions and Use Tax Law, this bill's exemption shall not apply with respect to any tax levied by a county, city, or district pursuant to either law.

4. Takes immediate effect as a tax levy, but becomes operative on January 1, 2016.

EXISTING LAW imposes a:

1. Sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California.

2. Complimentary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to a retailer registered to collect California's use tax, the purchaser remains liable for the tax, unless the use is exempt. The use tax is set at the same rate as California's sales tax and must generally be remitted to the BOE.

FISCAL EFFECT: The BOE estimates that this bill would reduce SUT revenues by roughly $24 million annually.

COMMENTS:

1. The author has provided the following statement in support of this bill:

AB 1280 allows a one-day sales and use tax exemption annually for small businesses that remit less than $200,000 over four quarters to the State Board of Equalization. AB 1280 will go a long way toward stimulating local economies, and the state economy as a whole, while sending a message to small businesses that they are not overlooked as the leading job creators.

2. This bill is sponsored by Small Business California, which notes:

California is a heavily taxed and regulated state, making it extremely difficult for small business owners to meet their obligations under the current law. Most do not have in-house accountants and legal representatives. Consequently, it costs small businesses almost three times more to comply with our state's tax laws than larger businesses.

3. Proponents of this bill note the following:

California is often a difficult place in which to do business. High taxes and heavy regulations make it extremely difficult for small business owners to meet their obligations under the law. Many of them are struggling to generate the revenue needed to keep their doors open and retain staff, and it seems that more requirements are placed on them every year.

AB 1280 sends a strong message to these vital contributors to our state's economy that they are important. California needs small businesses to thrive and create desperately needed jobs, as well as generate critical tax revenue year round. This measure will help to draw attention to small businesses as viable places to shop, and will be a huge incentive for consumers to turn out and support their local "mom and pop" stores.

4. Opponents of this bill note the following:

Despite their political popularity, sales tax holidays are based on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform. Sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy. They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers.

5. The BOE notes the following in its staff analysis of this bill:

   1. Definition of "small business": "The definition of 'small business' may benefit certain larger businesses that remit less sales tax in proportion to their total sales as a result of their nontaxable sales, such as sales for resale (wholesale sales) or sales made in interstate commerce. These larger businesses may qualify as a 'small business,' and thus benefit from the sales tax holiday. To accomplish the author's intent, further limits on the definition of 'small business' may be needed.

"In addition, the bill defines 'small business' as one that remitted to the BOE less than $200,000 in tax for the previous four calendar quarters. Retailers that remitted no taxes due to delinquency would qualify as small businesses. Similarly, a retailer that reports $1 million in taxes due, but only remits $199,999 in the previous four calendar quarters, may qualify. BOE staff is available to work with the author's office to resolve this concern.

"This bill should also clarify whether a retailer with multiple locations qualifies under the aggregate for all business locations."

2. Exemption will not apply to next day merchandise exchanges and rain checks: "Under current law, merchandise exchanges are considered two separate transactions: a rescission of the original sale and a sale of the replacement merchandise. For example, if a customer purchases a medium-sized shirt and exchanges it for a small-sized shirt, the transaction is regarded as a separate sale of the small-sized shirt and a rescission of the original sale of the medium-sized shirt. The retailer is allowed to deduct from taxable sales an amount for the sales price of the medium-sized shirt, and is also required to include in the taxable sales amount, the sales price of the small-sized shirt. Under the proposed holiday period, if the medium-sized shirt is purchased during the sales tax holiday period, and is exchanged for the small-sized shirt after the holiday period, the proposed exemption would not apply to the small-sized shirt, since that transaction occurred after the exempt holiday period. This may result in reporting errors by retailers and added customer inquiries and confusion.

"Rain checks similarly cause confusion. A retailer's rain check does not constitute a sale. Therefore, a rain check redeemed for taxable property outside the proposed holiday period would not be eligible for the exemption."

3. Partial exemptions complicate administration: "Currently, most sales and use tax exemptions are applied to the total applicable sales and use tax. However, a few partial exemptions exist in which only the state tax portion of the sales and use tax rate is exempted, such as the farm equipment and teleproduction equipment exemptions. These partial exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently. This results in additional return processing workload for the BOE."

4. Other states: "Fifteen states will hold a sales tax holiday in 2015: Alabama, Arkansas, Connecticut, Georgia, Iowa, Louisiana, Maryland, Mississippi, Missouri, New Mexico, Oklahoma, South Carolina, Tennessee, Texas, and Virginia. Eligible items include clothing, computers, school supplies, energy star products, firearms and hunting supplies, hurricane preparedness items, and severe weather preparedness kits. For most states, the exemption applies to specified items. Most states also place dollar limits on the amount exempt from sales tax.

"Only Louisiana exempts most individual tangible personal property purchases. The exemption applies to the first $2,500 spent on individual items of tangible personal property for non-business use. Vehicles and meals are excluded from the exemption."

6. Committee Staff Comments

   1. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). This bill would enact a new tax expenditure, in the form of an annual SUT holiday for "small businesses" on the Saturday immediately following Thanksgiving.

2. How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining a part of the tax code without demonstrating any public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote. To that end, the author may wish to consider adding an appropriate sunset date to this bill to allow the Legislature to review this tax expenditure in the future.
   
   

3. Incentive or reward? California currently exempts certain sales, either partially or completely, from the SUT. Each additional exemption further erodes the tax base and reduces governmental revenues. Because individual exemptions establish a precedent for future legislation, it is important to examine whether a particular tax expenditure actually changes behavior or simply subsidizes existing behavior. While a state SUT holiday may induce consumers to spend more on a particular day, it is unclear whether this exemption would increase the overall number of sales during the calendar year. Put differently, the proposed exemption may incentivize consumers to buy things they would have bought anyway but on a different day.
   
   

4. This bill provides a very broad exemption: This bill's proposed exemption is very broad in scope as it applies to every conceivable item of TPP, from vehicles to luxury watches, (assuming the items are purchased from a qualifying "small business"). In addition, this exemption is not targeted to low- and moderate-income consumers, but is available to all consumers regardless of income. This Committee may wish to consider excluding purchases of certain expensive items from this SUT exemption.

5. No price cap: This bill does not limit the amount of the purchase price that would be exempt from the SUT. Without such a price cap, consumers would likely delay purchasing expensive items, such as appliances or jewelry, until the annual tax holiday. The perceived tax savings for such large purchases would be so great that many taxpayers would simply forego making such purchases any other day of the year. A price cap would not impact low-income consumers as greatly as their higher income peers and would introduce a measure of progressivity into the state SUT. Most of the states that offer sales tax holidays place dollar limits on the amount exempt from the sales tax.
   
   This Committee has considered similar bills in the past that included price caps ranging from $100 to $500. The Committee may wish to consider imposing a cap on the purchase amount that would be eligible for the sales tax exemption.

6. California has little cross-border retail competition: Many states with higher sales tax rates than their neighbor states have enacted sales tax holidays to combat cross-border retail competition. Unlike such states, California lacks significant cross-border retail competition for its physical businesses. California's large population centers are far from neighbors with lower sales tax rates. For example, New York has sales tax holidays. The New York City metropolitan area is adjacent to both New Jersey and Connecticut and the Albany metropolitan area is adjacent to Massachusetts. In contrast, Los Angeles and San Francisco are over 100 miles away from California's neighbors. New York faces a near-constant battle to encourage its residents to shop in-state. California does not. For this reason, the sales tax holiday provided by this bill is unlikely to impact Californians' geographical decisions about where to shop or draw consumers from out-of-state.

7. A burden on retailers: This bill creates a one-day SUT holiday. The administrative burden on retailers is quite high with short-term exemptions as retailers must change the tax rate twice in a single week.

8. Related legislation:

   1. AB 718 (Melendez), of the 2013-14 Legislative Session, would have provided an annual sales tax exemption for TPP sold on April 15. AB 718 was held on this Committee's Suspense File.

   2. AB 1007 (Cook), of the 2011-12 Legislative Session, would have provided a sales tax holiday for specified back-to-school products. AB 1007 was held on the Assembly Committee on Appropriations' Suspense File.

   3. AB 548 (Garcia), of the 2005-06 Legislative Session, would have provided a sales tax holiday for specified back-to-school products. AB 548 was held on this Committee's Suspense File.

   4. AB 1185 (Mountjoy), of the 2001-02 Legislative Session, would have provided a partial sales tax exemption for clothing or footwear sold during a specified annual period. AB 1185 was held by this Committee.

   5. AB 944 (Cardenas), of the 1999-2000 Legislative Session, would have established a three-day sales tax holiday for specified articles of clothing and footwear purchased for $100 or less. AB 944 was never heard by the Senate Committee on Revenue and Taxation.

   6. AB 1320 (Ashburn), of the 1999-2000 Legislative Session, would have provided a one-week sales tax holiday for any item of TPP purchased for less than $500. AB 1320 failed passage in this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Small Business California (Sponsor)

California Asian Pacific Chamber of Commerce (Co-Sponsor)

National Federation of Small Business (Co-Sponsor)

Opposition

American Federation of State, County and Municipal Employees, AFL-CIO

California Tax Reform Association

Service Employees International Union

Analysis Prepared by: David Ruff / REV. & TAX. / (916) 319-2098

Date of Hearing: April 13, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1280

Author:(Maienschein) – As Introduced Ver:February 27, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: tax holiday: small businesses

SUMMARY: Establishes a partial sales and use tax (SUT) exemption for tangible personal property (TPP) sold by, or purchased from, a retailer that is a "small business", for the one-day period beginning at 12:01 a.m. on the Saturday following Thanksgiving and ending at midnight on the same day. Specifically, this bill:

1. Defines a "small business" as a retailer that remitted to the State Board of Equalization (BOE) less than $200,000 in tax for the previous four calendar quarters.

2. Provides that a "small business" also means a retailer that has been in operation for less than four calendar quarters and remitted less than an average of $50,000 in tax for each calendar quarter of operation.

3. Provides that, notwithstanding any provision of the Bradley-Burns Uniform Local SUT Law or the Transactions and Use Tax Law, this bill's exemption shall not apply with respect to any tax levied by a county, city, or district pursuant to either law.

4. Takes immediate effect as a tax levy, but becomes operative on January 1, 2016.

EXISTING LAW imposes a:

1. Sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California.

2. Complimentary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to a retailer registered to collect California's use tax, the purchaser remains liable for the tax, unless the use is exempt. The use tax is set at the same rate as California's sales tax and must generally be remitted to the BOE.

FISCAL EFFECT: The BOE estimates that this bill would reduce SUT revenues by roughly $24 million annually.

COMMENTS:

1. The author has provided the following statement in support of this bill:

AB 1280 allows a one-day sales and use tax exemption annually for small businesses that remit less than $200,000 over four quarters to the State Board of Equalization. AB 1280 will go a long way toward stimulating local economies, and the state economy as a whole, while sending a message to small businesses that they are not overlooked as the leading job creators.

2. This bill is sponsored by Small Business California, which notes:

California is a heavily taxed and regulated state, making it extremely difficult for small business owners to meet their obligations under the current law. Most do not have in-house accountants and legal representatives. Consequently, it costs small businesses almost three times more to comply with our state's tax laws than larger businesses.

3. Proponents of this bill note the following:

California is often a difficult place in which to do business. High taxes and heavy regulations make it extremely difficult for small business owners to meet their obligations under the law. Many of them are struggling to generate the revenue needed to keep their doors open and retain staff, and it seems that more requirements are placed on them every year.

AB 1280 sends a strong message to these vital contributors to our state's economy that they are important. California needs small businesses to thrive and create desperately needed jobs, as well as generate critical tax revenue year round. This measure will help to draw attention to small businesses as viable places to shop, and will be a huge incentive for consumers to turn out and support their local "mom and pop" stores.

4. Opponents of this bill note the following:

Despite their political popularity, sales tax holidays are based on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform. Sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy. They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers.

5. The BOE notes the following in its staff analysis of this bill:

   1. Definition of "small business": "The definition of 'small business' may benefit certain larger businesses that remit less sales tax in proportion to their total sales as a result of their nontaxable sales, such as sales for resale (wholesale sales) or sales made in interstate commerce. These larger businesses may qualify as a 'small business,' and thus benefit from the sales tax holiday. To accomplish the author's intent, further limits on the definition of 'small business' may be needed.

"In addition, the bill defines 'small business' as one that remitted to the BOE less than $200,000 in tax for the previous four calendar quarters. Retailers that remitted no taxes due to delinquency would qualify as small businesses. Similarly, a retailer that reports $1 million in taxes due, but only remits $199,999 in the previous four calendar quarters, may qualify. BOE staff is available to work with the author's office to resolve this concern.

"This bill should also clarify whether a retailer with multiple locations qualifies under the aggregate for all business locations."

2. Exemption will not apply to next day merchandise exchanges and rain checks: "Under current law, merchandise exchanges are considered two separate transactions: a rescission of the original sale and a sale of the replacement merchandise. For example, if a customer purchases a medium-sized shirt and exchanges it for a small-sized shirt, the transaction is regarded as a separate sale of the small-sized shirt and a rescission of the original sale of the medium-sized shirt. The retailer is allowed to deduct from taxable sales an amount for the sales price of the medium-sized shirt, and is also required to include in the taxable sales amount, the sales price of the small-sized shirt. Under the proposed holiday period, if the medium-sized shirt is purchased during the sales tax holiday period, and is exchanged for the small-sized shirt after the holiday period, the proposed exemption would not apply to the small-sized shirt, since that transaction occurred after the exempt holiday period. This may result in reporting errors by retailers and added customer inquiries and confusion.

"Rain checks similarly cause confusion. A retailer's rain check does not constitute a sale. Therefore, a rain check redeemed for taxable property outside the proposed holiday period would not be eligible for the exemption."

3. Partial exemptions complicate administration: "Currently, most sales and use tax exemptions are applied to the total applicable sales and use tax. However, a few partial exemptions exist in which only the state tax portion of the sales and use tax rate is exempted, such as the farm equipment and teleproduction equipment exemptions. These partial exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently. This results in additional return processing workload for the BOE."

4. Other states: "Fifteen states will hold a sales tax holiday in 2015: Alabama, Arkansas, Connecticut, Georgia, Iowa, Louisiana, Maryland, Mississippi, Missouri, New Mexico, Oklahoma, South Carolina, Tennessee, Texas, and Virginia. Eligible items include clothing, computers, school supplies, energy star products, firearms and hunting supplies, hurricane preparedness items, and severe weather preparedness kits. For most states, the exemption applies to specified items. Most states also place dollar limits on the amount exempt from sales tax.

"Only Louisiana exempts most individual tangible personal property purchases. The exemption applies to the first $2,500 spent on individual items of tangible personal property for non-business use. Vehicles and meals are excluded from the exemption."

6. Committee Staff Comments

   1. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). This bill would enact a new tax expenditure, in the form of an annual SUT holiday for "small businesses" on the Saturday immediately following Thanksgiving.

2. How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining a part of the tax code without demonstrating any public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote. To that end, the author may wish to consider adding an appropriate sunset date to this bill to allow the Legislature to review this tax expenditure in the future.
   
   

3. Incentive or reward? California currently exempts certain sales, either partially or completely, from the SUT. Each additional exemption further erodes the tax base and reduces governmental revenues. Because individual exemptions establish a precedent for future legislation, it is important to examine whether a particular tax expenditure actually changes behavior or simply subsidizes existing behavior. While a state SUT holiday may induce consumers to spend more on a particular day, it is unclear whether this exemption would increase the overall number of sales during the calendar year. Put differently, the proposed exemption may incentivize consumers to buy things they would have bought anyway but on a different day.
   
   

4. This bill provides a very broad exemption: This bill's proposed exemption is very broad in scope as it applies to every conceivable item of TPP, from vehicles to luxury watches, (assuming the items are purchased from a qualifying "small business"). In addition, this exemption is not targeted to low- and moderate-income consumers, but is available to all consumers regardless of income. This Committee may wish to consider excluding purchases of certain expensive items from this SUT exemption.

5. No price cap: This bill does not limit the amount of the purchase price that would be exempt from the SUT. Without such a price cap, consumers would likely delay purchasing expensive items, such as appliances or jewelry, until the annual tax holiday. The perceived tax savings for such large purchases would be so great that many taxpayers would simply forego making such purchases any other day of the year. A price cap would not impact low-income consumers as greatly as their higher income peers and would introduce a measure of progressivity into the state SUT. Most of the states that offer sales tax holidays place dollar limits on the amount exempt from the sales tax.
   
   This Committee has considered similar bills in the past that included price caps ranging from $100 to $500. The Committee may wish to consider imposing a cap on the purchase amount that would be eligible for the sales tax exemption.

6. California has little cross-border retail competition: Many states with higher sales tax rates than their neighbor states have enacted sales tax holidays to combat cross-border retail competition. Unlike such states, California lacks significant cross-border retail competition for its physical businesses. California's large population centers are far from neighbors with lower sales tax rates. For example, New York has sales tax holidays. The New York City metropolitan area is adjacent to both New Jersey and Connecticut and the Albany metropolitan area is adjacent to Massachusetts. In contrast, Los Angeles and San Francisco are over 100 miles away from California's neighbors. New York faces a near-constant battle to encourage its residents to shop in-state. California does not. For this reason, the sales tax holiday provided by this bill is unlikely to impact Californians' geographical decisions about where to shop or draw consumers from out-of-state.

7. A burden on retailers: This bill creates a one-day SUT holiday. The administrative burden on retailers is quite high with short-term exemptions as retailers must change the tax rate twice in a single week.

8. Related legislation:

   1. AB 718 (Melendez), of the 2013-14 Legislative Session, would have provided an annual sales tax exemption for TPP sold on April 15. AB 718 was held on this Committee's Suspense File.

   2. AB 1007 (Cook), of the 2011-12 Legislative Session, would have provided a sales tax holiday for specified back-to-school products. AB 1007 was held on the Assembly Committee on Appropriations' Suspense File.

   3. AB 548 (Garcia), of the 2005-06 Legislative Session, would have provided a sales tax holiday for specified back-to-school products. AB 548 was held on this Committee's Suspense File.

   4. AB 1185 (Mountjoy), of the 2001-02 Legislative Session, would have provided a partial sales tax exemption for clothing or footwear sold during a specified annual period. AB 1185 was held by this Committee.

   5. AB 944 (Cardenas), of the 1999-2000 Legislative Session, would have established a three-day sales tax holiday for specified articles of clothing and footwear purchased for $100 or less. AB 944 was never heard by the Senate Committee on Revenue and Taxation.

   6. AB 1320 (Ashburn), of the 1999-2000 Legislative Session, would have provided a one-week sales tax holiday for any item of TPP purchased for less than $500. AB 1320 failed passage in this Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Small Business California (Sponsor)

California Asian Pacific Chamber of Commerce (Co-Sponsor)

National Federation of Small Business (Co-Sponsor)

Opposition

American Federation of State, County and Municipal Employees, AFL-CIO

California Tax Reform Association

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098