Existing law defines the term board to mean the State Board of Equalization for purposes of the Revenue and Taxation Code.

This bill would make a technical, nonsubstantive change to that law.

Date of Hearing: May 18, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 89 (

Author:Travis Allen) – As Amended Ver:March 26, 2015

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemptions: public schools.

SUMMARY: Provides a temporary sales and use tax (SUT) exemption for items purchased by a K-12 public school or a K-12 public school district. Specifically, this bill:

1. Provides a partial exemption from the SUT for any items purchased by a K-12 public school or a K-12 public school district for use by that school or district in California.

2. Specifies that the exemption does not apply to local sales and use taxes, transactions and use taxes, and specified state taxed from which revenues are deposited into the Fiscal Recovery Fund, the Local Public Safety Fund, the Education Protection Account, the Local Revenue Fund, and the Local Revenue Fund of 2011.

3. Takes effect immediately as a tax levy, but will be operative from January 1, 2016 until January 1, 2021.

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 complementary 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 the California use tax, the purchaser remains liable for the tax, unless the use is exempted. 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).¹

3. Requires local government agencies, including school districts and public schools, to pay a SUT on their purchases of TPP. However, sales of TPP to the federal government are generally exempt from the SUT.

4. Allows a credit against the use tax to the extent that a purchaser has paid a retail sales or use tax on the TPP in another state, political subdivision thereof, or the District of Columbia prior to the TPP's storage, use, or other consumption in California.

FISCAL EFFECT: The BOE staff estimates that this bill will result in an annual General Fund revenue loss of $37 million in fiscal year (FY) 2015-16 and $76 million in FY 2016-17.

COMMENTS:

1. The Author's Statement. The author has provided the following statement in support of this bill:
   
   "AB 89 exempts public schools from the state sales and use tax. This would include receipts from items purchased by a K-12 public school or a K-12 public school district subject to the sales tax.

"Reforming and updating the current tax system will allow taxpayer dollars to remain in the local school districts and directly invest in the education of our children.

"This bill will help local schools provide better resources and materials inside the classroom by allowing them to retain all of their funds without being forced to pay the state tax."

2. An Overview of SUT. 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. The SUT Law also imposes a mirror "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 BOE. According to the Department of Finance, the SUT Law contains separately identifiable state tax GF expenditures worth about $13 billion in FY 2014-15. Examples of these include food, prescription medicines, gas, electricity, and water, farm equipment, fuel sold to common carriers, and rental of linen supplies.

3. The Proposed SUT Exemption. This bill proposes to provide a partial 3.9375% SUT exemption for any item purchased by a public school or a school district for use by that school or district. Thus, a purchase of office supplies, medical supplies, playground equipment, or a copy machine would qualify for the exemption. Generally, the sales and use tax applies to purchases of TPP. The author may wish to amend the bill to replace the word "items" with TPP, to be consistent with existing law.

4. School Districts: Existing law does not define the term "K-12 public district," but provides definitions for elementary, unified, and high school districts. Since this bill refers to "K-12 school district" and "K-12 public school," it is unclear to Committee staff which schools and districts would qualify for the proposed SUT exemption. The author may wish to consider amending this bill to clarify the eligibility of schools and districts.
   
   

5. Slippery Slope: Where Does One Draw the Line? A sales tax is considered to be a "consumption" tax, meaning that it is theoretically imposed on consumption of TPP. Under existing law, all public, non-profit and volunteer organizations pay sales or use tax for their purchases, with an exception of only voluntary thrift stores. Some government entities, such as libraries and "volunteer fire departments", for example, have asked for similar exemptions in the past. The Legislature, however, decided that such exemptions would set a "slippery slope" precedent insofar as it is difficult to determine which of the purchases would be considered more worthy than others for a tax exemption. Where should the Legislature draw the line when providing the SUT exemption only for certain government entities and not others? For example, what is the rationale of exempting purchases made only by school districts and public schools, and not community colleges?

6. Proposition 30. In general, Proposition 30 increased the marginal tax rate for those making above $250,000 and increased the statewide sales tax rate from 7.25% to 7.5%. Proposition 30 was estimated to increase General Fund (GF) revenue by about $6 billion per year, which would primarily be used to restore funding to California's public school system. As noted in the Governor's Budget Summary, the budget for FY 2014-15 provides $61.6 billion in Proposition 98 funding, an increase of $6.3 billion over the 2013 budget act level. Thus, new revenues, provided in part because of the passage of Proposition 30, have translated into additional funding for California's K through 12 school system.

7. Proposition 98 Uncertainty. Proposition 98 requires that a minimum amount of funding be allocated to K-14 education programs each year. The calculation of that amount is based on various formulas and different factors, including the amount of GF revenue. As such, a significant decrease in GF revenue, as proposed by this bill, could potentially reduce the amount of funding allocated to schools under the Proposition 98 guarantee. And, while the proposed SUT exemption could help K-12 public schools, it would provide no benefit to community colleges that would receive less GF funding.

8. Partial Exemptions: Administrative Complications. As noted by the BOE staff in its analysis, most exemptions apply to the total applicable SUT. The administration of partial exemptions is challenging for both retailers and the BOE.

9. Prior Legislation.

   1. AB 1077 (Mountjoy), of the 2001-02 Legislative Session, would have provided for a similar SUT exemption. AB 1077 was held on this Committee's Suspense File.

   2. AB 2636 (Leonard), of the 2001-02 Legislative Session, would have provided a SUT exemption for the sale and the use of instructional materials purchased by any public school, public school district, or county office of education, including any charter school, serving Kindergarten and Grades 1 to 12. AB 2636 was held on this Committee's Suspense File.

   3. SB 546 (McClintock), of the 2001-02 Legislative Session, would have provided a SUT exemption for the sale of and the use of textbooks purchased by a K-12 public school or school district, or an accredited private school, or sold to a student of an accredited private school or institution of higher education. SB 546 failed passage in the Senate Revenue and Taxation Committee.

   4. SB 1064 (Polanco), of the 2001-02 legislative session, would have provided a SUT exemption for the sale of and the use of TPP purchased for educational purposes by any K-12 public school or school district. SB 1064 was never heard by the Senate Revenue and Taxation Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Board of Equalization

Small School Districts' Association

Opposition

None on file

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