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 partially 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, and whose property line abuts or faces the rail corridor or a designated construction staging or construction storage area of the Crenshaw/LAX Transit Corridor Light Rail Line, the Regional Connector Transit Corridor Light Rail Line, or the Westside Subway Extension Light Rail Line, as specified. The bill would require a small business to provide a written certification to the Board of Equalization that it has suffered a negative financial impact during construction of those rail lines in order to receive the partial exemption, as provided. The bill would also make related findings and declarations in this regard. declarations.

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 generally 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.

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

The Personal Income Tax Law, in conformity with federal income tax laws, allows a deduction from gross income for the taxable year in an amount equal to the interest paid by the taxpayer, not to exceed $2,500, during the taxable year on a qualified education loan. That law provides for a phase out at certain modified adjusted gross income levels.

This bill, for taxable years beginning on or after January 1, 2016, would increase the dollar amount limit to $4,000, thereby no longer conforming to that limitation of the federal income tax law.

This bill would take effect immediately as a tax levy.

Date of Hearing: May 18, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 755 (

Author:Ridley-Thomas) – As Amended Ver:May 13, 2015

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: small businesses: Los Angeles County transit projects.

SUMMARY: Provides a partial sales and use tax (SUT) exemption for sales made by a small business whose property line abuts or faces the rail corridor of specified Los Angeles County transit construction projects. Specifically, this bill:

1. Provides a partial - 3.9375% - SUT exemption for sales of tangible personal property (TPP) sold by a small business, as specified, during the period in which each project is under construction.
   
   

2. Grants the SUT exemption only to small businesses whose property line abuts or faces the rail corridor or a designated construction area of any project, as described in the Final Environmental Impact Reports and as approved by the Los Angeles County Metropolitan Transportation Authority (MTA).
   
   

3. Provides that the exemption is not allowed unless a small business demonstrates that is has suffered a negative financial impact as a result of the project.
   
   

4. Requires a small business to provide to the State Board of Equalization (BOE) with a written certification, along with evidence in support of that certification, that it has suffered a negative financial impact by a project. Evidence of a negative financial impact shall include, but not be limited to, financial records that show a loss of business revenue during the period a project is under construction.
   
   

5. Requires the Los Angeles MTA to notify the BOE of the date construction ends for each project and the date construction ends for the last project.
   
   

6. Defines a "project" as any of the following projects:
   
   

   1. The Crenshaw/LAX Transit Corridor Light Rail Line;
      
      

   2. The Regional Connector Transit Corridor Light Rail Line; or,
      
      

   3. The Westside Subway Extension Light Rail Line.
      
      

7. Defines "small business" as a retailer that either:
   
   

   1. Remitted to the State Board of Equalization (BOE) less than $200,000 in tax for the previous four calendar quarters; or,
      
      

   2. 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.
      
      

8. Contains legislative findings and declarations regarding the Crenshaw/LAX Transit project and the need for the state to assist the LA County MTA in mitigating the short term impacts of the project on small businesses located in the construction zone.
   
   

9. Provides that no reimbursement is required because the only costs that may be incurred by a local agency or school district are the result of a program for which legislative authority was requested by that local agency or school district, as specified.
   
   

10. Takes effect immediately as a tax levy but will become operative on January 1, 2016. It will cease to be operative on the last day of the calendar month following, or 14 days after, the date construction ends for the last project, as provided, whichever is later.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
   
   

2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).

FISCAL EFFECT: Unknown.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:
   
   "The Los Angeles County Metropolitan Transportation Authority (LAC MTA) is currently engaged in the largest public transit expansion in the country, a program that will fundamentally transform Los Angeles County and will have significant long-term economic benefits for the entire region.
   
   "LACMTA is currently constructing three future rail transit lines: the Crenshaw/LAX Corridor Light Rail Line, the Regional Connector and the Westside Subway Extension. As a part of this massive construction project, LACMTA has adopted locally preferred alternatives for these projects which describe the alignment of the projects including station locations.
   
   "While these projects will create long-term economic benefits for the local communities and the County of Los Angeles as a whole, there will be temporary impacts to the local communities, particularly small businesses, from the construction of the projects. As such it is incumbent upon the state to partner with LACMTA and assist in mitigating these short term impacts by providing tax relief to businesses affected by the construction of these rail lines."
   
   

2. Arguments in Support. The proponents state that the Los Angeles County MTA is currently engaged in "the largest public transit expansion in the country, a program that will fundamentally transform Los Angeles County and will have significant long-term economic benefits for the entire region." However, as noted by the proponents, there "will be temporary impacts to the local communities, particularly small businesses, from the construction of the projects." The proponents argue that it is "appropriate for the state to partner with LACMTA to assist in mitigating these short term impacts by providing tax relief to business affected by the construction of these rail lines." They mention that, in the past, the Legislature "has considered so called 'sales-tax holidays' as an incentive to patronize businesses during certain periods" and contend that a similar model could be used to provide relief to businesses impacted by Metro's transit project construction.
   
   

3. Arguments in Opposition. The opponents of this bill state that providing tax relief "to one group of taxpayers and not similarly situated taxpayers is not sound tax policy." They argue that one of the primary purposes of taxes "is to raise needed revenue, not to micromanage the economy; and the tax system should not favor certain industries, activities, or products." Furthermore, the opponents note that the "MTA has funding mechanisms in place to address business inequities brought on by its transportation projects, and the bill seems to do circles around these existing funding mechanisms." Finally, they assert that the construction of the three rail transit lines "is a local transportation issue, and the bill should be amended to provide an exemption, not from the statewide sales and use tax, but from the local district tax."
   
   

4. Crenshaw/LAX Transit Project: Background. According to the author, the Crenshaw/LAX Transit Project is an 8.5-mile light rail line, with eight stations. The rail line will be between the Expo Line on Exposition Boulevard and the Metro Green Line. The 8.5-mile line will be from Exposition and Crenshaw boulevards to Aviation and Century boulevards, and will include eight new stations — four of them on Crenshaw. This project will serve the Crenshaw District, Inglewood, Westchester and surrounding area with eight stations. Construction of these light rail lines began in 2014. The construction is expected to be completed between 2018 and 2023. The author's office states that the project will provide not only alternative transportation option to congested roadways, but also significant environmental benefits, economic development and employment opportunities throughout Los Angeles County.
   
   According to Los Angeles Times, there are about 550 businesses, mostly "mom-and-pop" operations with fewer than four workers, that would probably be affected by the construction on the Crenshaw/LAX project. (LA Times, November 27, 2014.) To mitigate the impact on small business located within the construction zone, LA Metro created a Business Interruption Fund. It is expected that the $10 million annual fund will compensate affected businesses for as much as $50,000 or 60% of their annual revenue losses. This Fund is administered in partnership with the Pacific Coastal Regional Small Business Development Corporation. The Fund provides financial assistance to small businesses directly affected by the rail construction for their fixed operating expenses, such as utilities, insurance, rent or mortgage and payroll. For these purposes, a "small business" is defined as a "business with at least two years of continuous operating history and 25 or fewer total employees." The eligible business must be in good standing with local, state and federal taxing and licensing authorities and be able to produce relevant financial records demonstrating a loss of business revenue during the period of construction. On April 6, 2015, LA Metro delivered the first checks totaling $66,310 to four merchants: Lili Wigs; 1st Choice Driving & Traffic School; Design Studio 27; and Parisian Wigs, Inc.
   
   Metro has taken other steps to help businesses that have been hurt by construction. The agency launched an "Eat, Shop, Play Crenshaw" campaign in October to encourage residents to support the local businesses, and a business solution center was created at the Urban League to provide free technical advice, business planning, bookkeeping and marketing assistance, as well as web development. Most business owners, though aggravated by the construction, agree that the Crenshaw/LAX line ultimately will be good for the area. "It might be disruptive and inconvenient today," said Teri Williams, president of One United Bank, which is located in the strip mall. "That's a small price for the long-term benefits." (LA Times, November 27, 2014.)

5. Construction Mitigation. The 2009 American Recovery and Reinvestment Act, which was designed to stimulate the economy, allocated a large amount of construction funds to state and municipal projects. As the economy began to improve, a new wave of public works projects has raised a new concern for public officials and business groups: a negative impact of construction on local businesses. Many of the construction projects affect surrounding businesses by limiting access to potential customers. Thus, a new term – "construction mitigation" – was coined to refer to the measures that cities could take to counteract the negative effects of construction. As noted by several researchers, the need for construction mitigation is obvious: "a major impact of construction projects on local businesses comes from the disruption of traffic patterns and available parking."¹ A long-lasting construction project that "does not provide for continued access to businesses can even result in permanent behavioral shifts within a community, as residents find alternative sources for goods and services."² However, while the short-term impact of construction projects may negatively impact the surrounding businesses, "public construction projects in general (and infrastructure improvement projects in particular) have the potential to engender significant long-term economic benefits, including reductions in transportation costs and increases in economic activity."³ The challenge, of course, is to ensure that local businesses survive during the construction period to enjoy the long-term benefits of construction. Thus, cities have a strong incentive to implement programs designed to mitigate the impact of construction projects on surrounding businesses.
   
   The study conducted by the University of Wisconsin reviewed the mitigation programs implemented by 46 cities across the United States, including San Jose and Sacramento, and identified a number of cost-effective mitigation programs.⁴ These services that exist in other cities include a provision of alternate parking locations and free parking, underwriting the cost of advertising, facilitation of business promotions to encourage residents to visit local businesses, loans, direct compensation and grants. The County of Los Angeles has already implemented many of these services, including the Business Interruption Fund program. The Committee may wish to consider whether the services implemented by the county so far would provide sufficient benefits to local businesses to outweigh the potential negative impacts of the construction. The Committee may also wish to consider whether services utilized in other states would be more effective in mitigating the construction impact on surrounding businesses as compared to a state tax subsidy.
   
   

6. What Does This Bill Do? California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California and must generally be remitted to the BOE.
   
   This bill would provide a partial exemption from the SUT for sales of TPP by small businesses affected by the LA County MTA's construction projects. Only small retailers, defined as those that collect less than $200,000 in sales tax for the previous four calendar quarters, would be eligible for the exemption. The intent of this bill is to provide tax relief from the state portion of the SUT for businesses affected by the construction of the rail lines.
   
   Under current law, the statewide base SUT rate is 7.5%, which is comprised of 3.9375% General Fund (GF) state rate, 0.25% Fiscal Recovery Fund rate, 0.50% Local Revenue Fund rate, 0.50% Local Public Safety Fund rate, 0.25% Education Protection Account rate, 1.0625% Local Revenue Fund 2011 rate, 0.75% city and county operations rate and 0.25% county transportation rate. In addition to the statewide base rate of 7.5%, cities and counties are authorized to impose additional voter-approved taxes.
   
   This bill would eliminate only the GF portion of the SUT rate - 3.9375% - which means that eligible sales would still be subject to a SUT at the rate of 3.5625%, in addition to the taxes imposed by a county, city, or district pursuant to the Bradley-Burns Uniform Local SUT Law or the Transactions and Use Tax Law. [Revenue &Taxation Code Parts 1.5, 1.6 and 1.7 (commencing with Section 7200).]
   
   

7. SUT Exemptions and the State's Reduced Reliance on SUT Revenues. The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen a dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21^st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base.

It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy.

8. Slippery Slope. A sales tax is considered to be a "consumption" tax, meaning that it is theoretically imposed on consumption of TPP. While the legal incident of the tax is imposed on the retailer, the tax is collected from the purchaser. A retailer does not bear the actual burden of the sales tax, but is only required to collet it from the purchasers and remit it to the BOE. The existing law does not differentiate between retailers located in the construction zone and retailers located everywhere else. In other words, the geographical location of retailers is not factored into the calculations of the SUT, nor does it impact the retailer's eligibility for an exemption from the SUT.
   
   The proposed SUT exemption would place eligible small businesses at a competitive advantage vis-à-vis other retailers, which must collect and remit sales tax. Arguably, this competitive advantage would provide enough of an incentive for customers to patronize those businesses during the construction period. Such an exemption, however, would set a "slippery slope" precedent. Should the Legislature routinely provide a SUT exemption to businesses impacted by a construction project? If not, then what criteria should the Legislature utilize in determining which construction projects, and businesses located adjacent to the construction site, are more worthy than others for a tax exemption? What is the rationale for exempting sales made by impacted businesses in Los Angeles but not in Sacramento, for example? Where should the Legislature draw the line for providing a SUT exemption for certain projects and entities and not others? An approval of a construction project is generally done at a local level and it is a decision made by the local government. Should the State expand the GF revenues for the benefit of a local community when the State had no say in the decision making process?

9. Alternative Approach? As acknowledged by the author, the construction projects at issue will ultimately create substantial long-term benefits not just for LA County but for the entire region and its business community. While this bill requires the State to participate in mitigating the negative impacts of the project on the surrounding businesses, it is silent with respect to any future benefits to the businesses and/or the region in which the State may share, once the construction project is completed. The Committee may wish to consider whether a short-term loan provided by the State to either the County or an individual business, instead of a partial SUT exemption, would be a more appropriate vehicle to deliver the much needed financial help.

10. Partial Exemptions: Administrative Complications. Most exemptions apply to the total applicable SUT. However, purchases of certain TPP, such as farm equipment and teleproduction equipment, are eligible for partial exemptions only. The administration of partial exemptions is challenging for both retailers and the BOE. As noted by the BOE staff in its analysis, many retailers rely on electronic registers or other computer software to compute the applicable tax. As such, they may need to hire outside programmers to modify the electronic system to adjust rates during and after construction. It is unclear whether the "Business Interruption Fund" would cover these costs.

REGISTERED SUPPORT / OPPOSITION:

Support

Greater Los Angeles African American Chamber of Commerce

Los Angeles County Metropolitan Transportation Authority

Opposition

California Taxpayers Association

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098

Date of Hearing: May 4, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 755

Author:(Ridley-Thomas) – As Amended Ver:April 14, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: small businesses: Los Angeles County transit projects

SUMMARY: Provides a partial sales and use tax (SUT) exemption for sales made by a small business whose property line abuts or faces the rail corridor of specified Los Angeles County transit construction projects. Specifically, this bill:

1. Provides a partial - 3.9375% - SUT exemption for sales of tangible personal property (TPP) sold by a small business, as specified, during the period in which each project is under construction.
   
   

2. Grants the SUT exemption only to small businesses whose property line abuts or faces the rail corridor or a designated construction area of any project, as described in the Final Environmental Impact Reports and as approved by the Los Angeles County Metropolitan Transportation Authority (MTA).
   
   

3. Defines a "project" as any of the following projects:
   
   

   1. The Crenshaw/LAX Transit Corridor Light Rail Line;
      
      

   2. The Regional Connector Transit Corridor Light Rail Line; or,
      
      

   3. The Westside Subway Extension Light Rail Line.
      
      

4. Defines "small business" as a retailer that either:
   
   

   1. Remitted to the State Board of Equalization (BOE) less than $200,000 in tax for the previous four calendar quarters; or,
      
      

   2. 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.
      
      

5. Contains legislative findings and declarations regarding the Crenshaw/LAX Transit project and the need for the state to assist the LA County MTA in mitigating the short term impacts of the project on small businesses located in the construction zone.
   
   

6. Takes effect immediately as a tax levy but will become operative on January 1, 2016.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
   
   

2. Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE).

FISCAL EFFECT: The BOE staff estimates that this bill will result in an annual revenue loss of $1.7 million during the construction period.

COMMENTS:

1. Author's Statement. The author has provided the following statement in support of this bill:
   
   "The Los Angeles County Metropolitan Transportation Authority (LAC MTA) is currently engaged in the largest public transit expansion in the country, a program that will fundamentally transform Los Angeles County and will have significant long-term economic benefits for the entire region.
   
   "LACMTA is currently constructing three future rail transit lines: the Crenshaw/LAX Corridor Light Rail Line, the Regional Connector and the Westside Subway Extension. As a part of this massive construction project, LACMTA has adopted locally preferred alternatives for these projects which describe the alignment of the projects including station locations.
   
   "While these projects will create long-term economic benefits for the local communities and the County of Los Angeles as a whole, there will be temporary impacts to the local communities, particularly small businesses, from the construction of the projects. As such it is incumbent upon the state to partner with LACMTA and assist in mitigating these short term impacts by providing tax relief to businesses affected by the construction of these rail lines."
   
   

2. Arguments in Support. The proponents state that the Los Angeles County MTA is currently engaged in "the largest public transit expansion in the country, a program that will fundamentally transform Los Angeles County and will have significant long-term economic benefits for the entire region." However, as noted by the proponents, there "will be temporary impacts to the local communities, particularly small businesses, from the construction of the projects." The proponents argue that it is "appropriate for the state to partner with LACMTA to assist in mitigating these short term impacts by providing tax relief to business affected by the construction of these rail lines." They mention that, in the past, the Legislature "has considered so called 'sales-tax holidays' as an incentive to patronize businesses during certain periods" and contend that a similar model could be used to provide relief to businesses impacted by Metro's transit project construction.
   
   

3. Crenshaw/LAX Transit Project: Background. According to the author, the Crenshaw/LAX Transit Project is an 8.5-mile light rail line, with eight stations. The rail line will be between the Expo Line on Exposition Boulevard and the Metro Green Line. The 8.5-mile line will be from Exposition and Crenshaw boulevards to Aviation and Century boulevards, and will include eight new stations — four of them on Crenshaw. This project will serve the Crenshaw District, Inglewood, Westchester and surrounding area with eight stations. Construction of these light rail lines began in 2014. The construction is expected to be completed between 2018 and 2023. The author's office states that the project will provide not only alternative transportation option to congested roadways, but also significant environmental benefits, economic development and employment opportunities throughout Los Angeles County.
   
   According to Los Angeles Times, there are about 550 businesses, mostly "mom-and-pop" operations with fewer than four workers, that would probably be affected by the construction on the Crenshaw/LAX project. (LA Times, November 27, 2014.) To mitigate the impact on small business located within the construction zone, LA Metro created a Business Interruption Fund. It is expected that the $10 million annual fund will compensate affected businesses for as much as $50,000 or 60% of their annual revenue losses. This Fund is administered in partnership with the Pacific Coastal Regional Small Business Development Corporation. The Fund provides financial assistance to small businesses directly affected by the rail construction for their fixed operating expenses, such as utilities, insurance, rent or mortgage and payroll. For these purposes, a "small business" is defined as a "business with at least two years of continuous operating history and 25 or fewer total employees." The eligible business must be in good standing with local, state and federal taxing and licensing authorities and be able to produce relevant financial records demonstrating a loss of business revenue during the period of construction. On April 6, 2015, LA Metro delivered the first checks totaling $66,310 to four merchants: Lili Wigs; 1st Choice Driving & Traffic School; Design Studio 27; and Parisian Wigs, Inc.
   
   Metro has taken other steps to help businesses that have been hurt by construction. The agency launched an "Eat, Shop, Play Crenshaw" campaign in October to encourage residents to support the local businesses, and a business solution center was created at the Urban League to provide free technical advice, business planning, bookkeeping and marketing assistance, as well as web development. Most business owners, though aggravated by the construction, agree that the Crenshaw/LAX line ultimately will be good for the area. "It might be disruptive and inconvenient today," said Teri Williams, president of One United Bank, which is located in the strip mall. "That's a small price for the long-term benefits." (LA Times, November 27, 2014.)

4. Construction Mitigation. The 2009 American Recovery and Reinvestment Act, which was designed to stimulate the economy, allocated a large amount of construction funds to state and municipal projects. As the economy began to improve, a new wave of public works projects has raised a new concern for public officials and business groups: a negative impact of construction on local businesses. Many of the construction projects affect surrounding businesses by limiting access to potential customers. Thus, a new term – "construction mitigation" – was coined to refer to the measures that cities could take to counteract the negative effects of construction. As noted by several researchers, the need for construction mitigation is obvious: "a major impact of construction projects on local businesses comes from the disruption of traffic patterns and available parking."¹ A long-lasting construction project that "does not provide for continued access to businesses can even result in permanent behavioral shifts within a community, as residents find alternative sources for goods and services."² However, while the short-term impact of construction projects may negatively impact the surrounding businesses, "public construction projects in general (and infrastructure improvement projects in particular) have the potential to engender significant long-term economic benefits, including reductions in transportation costs and increases in economic activity."³ The challenge, of course, is to ensure that local businesses survive during the construction period to enjoy the long-term benefits of construction. Thus, cities have a strong incentive to implement programs designed to mitigate the impact of construction projects on surrounding businesses.
   
   The study conducted by the University of Wisconsin reviewed the mitigation programs implemented by 46 cities across the United States, including San Jose and Sacramento, and identified a number of cost-effective mitigation programs.⁴ These services that exist in other cities include a provision of alternate parking locations and free parking, underwriting the cost of advertising, facilitation of business promotions to encourage residents to visit local businesses, loans, direct compensation and grants. The County of Los Angeles has already implemented many of these services, including the Business Interruption Fund program. The Committee may wish to consider whether the services implemented by the county so far would provide sufficient benefits to local businesses to outweigh the potential negative impacts of the construction. The Committee may also wish to consider whether services utilized in other states would be more effective in mitigating the construction impact on surrounding businesses as compared to a state tax subsidy.
   
   

5. What Does This Bill Do? California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California and must generally be remitted to the BOE.
   
   This bill would provide a partial exemption from the SUT for sales of TPP by small businesses affected by the LA County MTA's construction projects. Only small retailers, defined as those that collect less than $200,000 in sales tax for the previous four calendar quarters, would be eligible for the exemption. The intent of this bill is to provide tax relief from the state portion of the SUT for businesses affected by the construction of the rail lines.
   
   Under current law, the statewide base SUT rate is 7.5%, which is comprised of 3.9375% General Fund (GF) state rate, 0.25% Fiscal Recovery Fund rate, 0.50% Local Revenue Fund rate, 0.50% Local Public Safety Fund rate, 0.25% Education Protection Account rate, 1.0625% Local Revenue Fund 2011 rate, 0.75% city and county operations rate and 0.25% county transportation rate. In addition to the statewide base rate of 7.5%, cities and counties are authorized to impose additional voter-approved taxes.
   
   This bill would eliminate only the GF portion of the SUT rate - 3.9375% - which means that eligible sales would still be subject to a SUT at the rate of 3.5625%, in addition to the taxes imposed by a county, city, or district pursuant to the Bradley-Burns Uniform Local SUT Law or the Transactions and Use Tax Law. [Revenue &Taxation Code Parts 1.5, 1.6 and 1.7 (commencing with Section 7200).]
   
   

6. The Scope of the Proposed SUT Exemption. This bill recognizes that a major construction project undertaken by a local government, while providing significant long-term economic benefits for the region, may nonetheless create a substantial financial burden for local businesses located near or within the construction zone. Under this bill, the State would step in to ease the burden experienced by some businesses affected by the construction project. The proposed exemption, however, is broad. The exemption would apply to all purchases of TPP sold by eligible businesses, without regard to the type of items sold. Furthermore, while this bill is intended to provide tax relief to small businesses negatively impacted by the construction project, it would allow a partial SUT exemption to any small business based on a geographical location near or within the construction zone regardless of whether the business has been actually affected by the construction. For purposes of receiving a grant from the Business Interruption Fund, an eligible small business must meet certain requirements, including the production of financial records evidencing the loss of business revenue directly related to the period of construction disruption. The Committee may wish to consider whether the same requirement of "direct impact" should apply to the retailers that would be eligible for the proposed partial SUT exemption.

Additionally, one of the eligibility requirements for the exemption is that the retailer's property "abuts or faces the rail corridor or a designated construction staging or construction storage area, including a small business located in a mall or strip-mall that is similarly situated." It is unclear whether the affected retailers would need a certification from the BOE or whether a self-certification would suffice. Finally, the proposed exemption would be operative for the period during which the project is "under construction." The phrase "under construction" is not defined, which may lead to disputes between the retailers and BOE. The author may wish to clarify the meaning of this phrase.

7. SUT Exemptions and the State's Reduced Reliance on SUT Revenues. The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen a dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21^st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base.

It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy.

8. Slippery Slope. A sales tax is considered to be a "consumption" tax, meaning that it is theoretically imposed on consumption of TPP. While the legal incident of the tax is imposed on the retailer, the tax is collected from the purchaser. A retailer does not bear the actual burden of the sales tax, but is only required to collet it from the purchasers and remit it to the BOE. The existing law does not differentiate between retailers located in the construction zone and retailers located everywhere else. In other words, the geographical location of retailers is not factored into the calculations of the SUT, nor does it impact the retailer's eligibility for an exemption from the SUT.
   
   The proposed SUT exemption would place eligible small businesses at a competitive advantage vis-à-vis other retailers, which must collect and remit sales tax. Arguably, this competitive advantage would provide enough of an incentive for customers to patronize those businesses during the construction period. Such an exemption, however, would set a "slippery slope" precedent. Should the Legislature routinely provide a SUT exemption to businesses impacted by a construction project? If not, then what criteria should the Legislature utilize in determining which construction projects, and businesses located adjacent to the construction site, are more worthy than others for a tax exemption? What is the rationale for exempting sales made by impacted businesses in Los Angeles but not in Sacramento, for example? Where should the Legislature draw the line for providing a SUT exemption for certain projects and entities and not others? An approval of a construction project is generally done at a local level and it is a decision made by the local government. Should the State expand the GF revenues for the benefit of a local community when the State had no say in the decision making process?

9. Alternative Approach? As acknowledged by the author, the construction projects at issue will ultimately create substantial long-term benefits not just for LA County but for the entire region and its business community. While this bill requires the State to participate in mitigating the negative impacts of the project on the surrounding businesses, it is silent with respect to any future benefits to the businesses and/or the region in which the State may share, once the construction project is completed. The Committee may wish to consider whether a short-term loan provided by the State to either the County or an individual business, instead of a partial SUT exemption, would be a more appropriate vehicle to deliver the much needed financial help.

10. Partial Exemptions: Administrative Complications. Most exemptions apply to the total applicable SUT. However, purchases of certain TPP, such as farm equipment and teleproduction equipment, are eligible for partial exemptions only. The administration of partial exemptions is challenging for both retailers and the BOE. As noted by the BOE staff in its analysis, many retailers rely on electronic registers or other computer software to compute the applicable tax. As such, they may need to hire outside programmers to modify the electronic system to adjust rates during and after construction. It is unclear whether the "Business Interruption Fund" would cover these costs.

11. BOE's Implementation Concerns. The BOE staff notes that the proposed exemption would continue while rail lines are "under construction." While actual construction may be completed on a certain date, "there may be equipment obstacles, barriers, testing, etc. that continues after construction that prolong the impact on businesses adjacent to these rail lines." The BOE staff suggests that the phrase "under construction" be clearly defined to avoid any misunderstanding and/or underreporting. In addition, the staff suggests that the bill specify that the proposed exemption shall cease to be operative on the last day of the month following the date construction ends, or 14 days after construction ends, whichever ends later. This amendment is necessary to provide the BOE with sufficient time to notify affected retailers.
    
    

REGISTERED SUPPORT / OPPOSITION:

Support

The Greater Los Angeles African American Chamber of Commerce

Los Angeles County Metropolitan Transportation Authority

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098