Existing sales and use tax laws impose a tax 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. These laws provide various exemptions from these taxes, including an exemption for food products, which, pursuant to Proposition 163, approved by the voters on November 3, 1992, are required to include, among other items, candy, confectionery, and snack foods.

Assembly Constitutional Amendment 2 of the 201718 Regular Session, if approved by the voters, on and after April 1, 2019, a specified date, would instead require that any sales or use taxes levied by the state or any of its political subdivisions apply to the sale of, or the storage, use, or other consumption in this state of, certain food products for human consumption, which include candy, confectionery, and snack foods. Assembly Constitutional Amendment 2, if approved by the voters, would authorize the Legislature to exempt the sale of, or the storage, use, or other consumption in this state of, any food product from sales and use taxes by a statute that becomes operative on or after November 7, 2018.

This bill, on and after April July 1, 2019, would exempt from those taxes the gross receipts from the sale of, and the storage, use, or other consumption in this state of those certain, food products for human consumption subject to those taxes pursuant to Assembly Constitutional Amendment 2 of the 201718 Regular Session, except for food products that are candy, candy or confectionery, as defined, or processed snacks, as defined.

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 laws authorize districts, as specified, to impose transactions and use taxes in accordance with the Transactions and Use Tax Law, which generally conforms to the Sales and Use Tax Law. Amendments to the Sales and Use Tax Law are automatically incorporated into the local tax laws.

Existing law requires the state to reimburse counties and cities for revenue losses caused by the enactment of sales and use tax exemptions.

This bill would provide that, notwithstanding these provisions, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy, but would become operative on November 7, 2018, only if Assembly Constitutional Amendment 2 of the 201718 Regular Session is submitted to, and approved by, the voters.

Existing sales and use tax laws impose a tax 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. These laws provide various exemptions from these taxes, including an exemption for food products for human consumption, as provided. products, which, pursuant to Proposition 163, approved by the voters on November 3, 1992, are required to include, among other items, candy, confectionery, and snack foods.

Existing sales and use tax laws impose a tax 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. These laws provide various exemptions from these taxes, including an exemption for food products for human consumption, as provided.

This bill would state the intent of the Legislature to enact legislation that defines the term snack food for the purposes of these laws.

Date of Hearing: January 8, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chair

ABPCA Bill Id:AB 274 (

Author:Cristina Garcia) – As Amended Ver:May 1, 2017

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: food products

SUMMARY: Exempts food products, except for candy, confectionery, and processed snacks, from the sales and use tax (SUT) that would be imposed on such products if ACA 2 (Cristina Garcia) is approved by the voters. Specifically, this bill:

1. Exempts from the SUT, on and after July 1, 2019, the gross receipts from the sale of, and the storage, use, or other consumption in this state of, food products for human consumption that would be imposed if ACA 2 (adding Article XIII Section 34(b), California Constitution) is approved by the voters.
2. Provides that the exemption from the SUT applying to food products for human consumption does not apply to food products that are candy or confectionery or processed snacks.
3. Defines "candy or confectionery" as all of the following, regardless of whether sold as an ingredient:
4. Food products with sugar, honey, chocolate, corn syrup, or sugar substitute as the first listed ingredient;
5. Food products that are sugared, candied, or covered or coated in caramel, chocolate, honey, sprinkles, or other similar coatings;
6. Food products that are labeled or marketed as "candy" or "confectionery"; or,
7. Granola, trail mix, or other mixes that contain the aforementioned food products.
8. Provides that "candy or confectionery" does not include any of the following:
9. Cereal, cereal bars, protein bars, or meal replacement bars;
10. Jams, jellies, or other preserves;
11. Maple sugar products, unless labeled or marketed as "candy" or "confectionery";
12. Baked goods;
13. Food products that require refrigeration;
14. Beverages; or,
15. Fruit, unless covered or coated in caramel, chocolate, honey, sprinkles, or other similar coatings.
16. Defines a "processed snack" as a food product that is ready for consumption without further preparation, not including toasting.
17. Provides that a "processed snack" does not include healthy choice snacks, frozen products, fresh or dried fruit or vegetables unless the fruit or vegetables contain added sugar, dairy products, dairy substitutes, nuts and seeds, nut butters, canned products, bread products, meat products, meat substitutes, prepared food, or beverages.
18. Defines a "healthy choice snack" as a food product that meets all of the following requirements:
19. Contains not more than 200 calories per serving;
20. Not more than 35% of its total calories are from fat per serving;
21. Less than 10% of its total calories are from saturated fat per serving;
22. Not more than 35% of its total weight is composed of sugar per serving;
23. Contains no trans fat; and,
24. Contains not more than 200 milligrams of sodium per serving.
25. Provides, notwithstanding Revenue and Taxation Code (R&TC) Section 2230, that no appropriation or reimbursement is made to any local agency for any SUT revenues lost.
26. Takes immediate effect as a tax levy, except that this bill is to become operative only if ACA 2 is submitted to, and approved by, the voters of California, and in that event would become operative on November 7, 2018.

EXISTING LAW:

1. Imposes the SUT on the sale of, or the storage, use, or other consumption of, tangible personal property (TPP), unless specifically exempted, and provides that the SUT must be computed based on the sales price or gross receipts of TPP, unless specifically excluded.
2. Authorizes cities and counties to impose a local SUT, pursuant to the Bradley-Burns Uniform Local SUT Law, fixed at 1.25% of the sales price or gross receipts of TPP.
3. Authorizes cities and counties to impose a transactions and use tax (TUT) for general or special purposes if approved by the requisite threshold of voters. The TUT Law is administered in conformity with the SUT Law.
4. Exempts from the SUT food products for human consumption. (Article XIII Section 34, California Constitution.)
5. Defines "food products" to include all of the following:
6. Cereals and cereal products, oleomargarine, meat and meat products, fish and fish products, eggs and egg products, vegetables and vegetable products, fruit and fruit products, spices and salt, sugar and sugar products, candy, gum, confectionery, coffee and coffee substitutes, tea, and cocoa and cocoa products;
7. Milk and milk products, milkshakes, malted milks, and any other similar type beverages that are composed at least in part of milk or a milk product and that require the use of milk or a milk product in their preparation; and,
8. All fruit juices, vegetable juices, and other beverages, whether liquid or frozen, including bottled water, but excluding spirituous, malt, or vinous liquors or carbonated beverages. (R&TC Section 6359(b).)
9. Provides that "food products" do not include medicines and preparations in liquid, powdered, granular, tablet, capsule, lozenge, and pill form sold as dietary supplements or adjuncts. (R&TC Section 6359(c).)
10. Provides that the SUT exemption does not apply to specified sales, such as food and beverages sold for consumption at a retailer's place of business (such as restaurants and hotels), food and beverages sold for consumption in places where admission is charged (such as movie theaters and amusement parks), food products sold as hot prepared food products (such as hot sandwiches or soup), and food products sold through a vending machine. (R&TC Section 6359(d).)

FISCAL EFFECT: The State Board of Equalization (BOE) previously estimated state and local revenue gains of $878 million in fiscal year (FY) 2019-20 and $884 million in FY 2020-21.

COMMENTS:

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

A lot has changed in the past 24 years, where fatty, high sugar, high fat snacks are no longer considered essential, especially to poorer communities, as was argued by the snack food industry in 1992.

We have seen the results of the explosion of processed snack food consumption on our society and the negative health repercussions. Obesity, diabetes, hypertension, tooth decay, these and so many other conditions are directly attributable to the poor modern diet made up of high calorie, ultra-processed foods.

A recent UCLA Study entitled Prediabetes: Generation in Jeopardy highlights the toll that poor nutrition and unhealthy lifestyles are having on Californians. An alarming 55% of the adult population in California is affected by diabetes, with 33% of young adults being diagnosed as prediabetic. The cities of Southeast Los Angeles, a region comprised of disadvantaged communities, makes up 50% of the top ten most overweight cities in California. The cities Assemblywoman Garcia represents are located in the same region.

Reinstituting a tax on processed snack foods and candy will encourage a reduction in consumption [of] these foods. Additionally, the tax is projected to generate $900 million in revenue a year for the general and local funds. This will help fund the enormous societal costs of obesity in addition to funding health services and programs to promote healthy eating and lifestyles, particularly for children and families living in poverty.

1. The California Tax Reform Association states the following in support of this bill:

The food and candy items outlined in these bills have been shown to contribute to a high calorie, ultra-processed diet that has been linked to a number of severe health consequences. The sales and use taxes in ACA 2 and AB 274 will encourage a reduction in consumption of unhealthy foods and help fund health services and programs that promote healthy eating and lifestyles, and help Californians thrive.

1. A coalition of organizations states the following in opposition to this bill:

The legislation would impose new taxes on "candy or confectionary" items and "processed snacks" yet defines these food products in an arbitrary and confusing manner. To cite just a few examples, food items labeled as candy would be taxed unless they are maple sugar products labeled as candy which would not be taxed. Granola would be taxable in some cases, yet granola cereal bars are specifically exempted from taxation. A candy bar would be taxed but a frozen version of the same product would be exempt. Making sense of contradictions like these will present government tax agencies with an enormous amount of work as they attempt to provide guidance for retailers.

1. Committee Staff Comments:
2. California's Eroding SUT Base: The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In FY 2014-15, SUT revenues were estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51.

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 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, SUT exclusions and 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. This bill, if implemented along with ACA 2, would expand the SUT base by including candies, confectioneries, and processed snacks as taxable food products.

1. Taxation of Food Products across Other States: According to the Center on Budget and Policy Priorities, as of March 1, 2017, 32 states and the District of Columbia exempt most food purchased for consumption at home from the state sales tax. Six states^[1] tax groceries at lower rates than other goods. Four states^[2] tax groceries fully but offer credits or rebates offsetting some of the taxes paid on food by some portions of the population. Lastly, three states^[3] apply their sales tax fully to food purchased for home consumption without providing any offsetting relief. However, the definition of “food” subject to sales tax can vary considerably from state to state. For example, Maine imposes sales tax on specified foods sold for consumption without further preparation, such as chips and dips, granola bars, nuts, cookies, and ice cream. New York imposes sales tax on candy and confectionery but exempts snack items such as chips and cookies. Additionally, a number of other states that impose sales tax on candy specify that products with flour listed as an ingredient (such as a Kit Kat or Twix) are not considered "candy."

Generally, states that impose sales tax on food products cite as justification revenue needs or simplicity of administration. Taxation of food products also has disadvantages, such as placing a disproportionate burden on lower income households. As a share of income, food taxes are regressive and can be four to five times higher for lower income families than for higher income families.^[4] Research on taxation of candy or snack foods generally focuses on the impact of excise taxes, but finds that small taxes are likely to yield substantial revenue but unlikely to affect obesity rates. However, high taxes may lead to measurable decreases in obesity, particularly amongst children, low-socioeconomic status populations, and those most at risk for being obese, and if combined with additional interventions such as healthy food subsidies or health education programs.^[5]

1. Taxation of Food Products in California: As property necessary to sustain life, sales of food for human consumption are generally exempt from the SUT unless served as meals, consumed at or on the seller's facilities, sold in a heated condition, or sold for consumption where there is an admission charge. In an effort to eliminate a $14 billion state budget deficit in 1991, the SUT exemptions for candy, snack food, and bottled water were eliminated, effective July 15, 1991. However, in 1992, 66.62% of voters supported Proposition 163, which amended the California Constitution to prohibit state and local governments from imposing the SUT on food products, and defined candy, snack foods, and bottled water as food products. As such, a subsequent vote of the People is needed to make food products such as candy and processed snacks subject to the SUT.

As noted by the BOE in its analysis of this bill, both retailers and the BOE had significant difficulty with the ambiguous definition of "snack foods" that were taxed prior to passage of Proposition 163. The BOE compiled voluminous lists of "snack foods" (such as cookies and pretzels) and "non-snack foods" (such as graham crackers and peanuts) that it deemed to be consistent with the statutory definition to help retailers comply with the law. Nonetheless, retailers expressed significant difficulties with immediately determining food products subject to tax. Complying with the law was particularly problematic in stores that did not use electronic scanners at check-out counters. Retailers that utilized manual check-out processes had to rely on clerks to remember each food product's tax status, which inherently led to reporting errors.

1. What Does This Bill Do? This bill would only become operative on November 7, 2018 if ACA 2 is approved by the voters. ACA 2 would impose, beginning July 1, 2019, the SUT on food products for human consumption and authorize the Legislature to exempt any food product from SUT by a statute that becomes operative on or after November 7, 2018. This bill, beginning July 1, 2019, would then generally exempt food products for human consumption from the SUT imposed by ACA 2, except for candies, confectioneries, and processed snacks. Thus, the purpose of this bill is to apply the SUT to candies, confectioneries, and processed snacks.
2. Implementation Considerations: As noted in the BOE's analysis of this bill, a distinction is made between "candy or confectionery" and a "processed snack", although candies and confectioneries are essentially processed snacks. As such, there is some overlap between what is included and excluded from each classification. For example, nuts and seeds are excluded from the definition of "processed snack" but some nuts are sugared, candied, or covered in chocolate, and food products with such coatings meet the definition of "candy or confectionery." Would chocolate-covered nuts be subject to tax? As another example, a "processed snack" excludes fresh or dried fruit or vegetables unless the fruit or vegetables contain added sugar, and also excludes canned products. Thus, it appears that canned fruit in syrup would be exempt from the SUT, but it is unclear whether the same fruit mixture packaged in a cup would be similarly exempt.

In addition to definitions for "candy or confectionery" and a "processed snack," this bill defines a "healthy choice snack" that is excluded from the SUT imposed on processed snacks. While the United States Food and Drug Administration generally requires packaged foods to have a nutrition label, several of the standards outlined in this bill for healthy choice snacks are not required to be specified on the nutrition label. As noted in the BOE's analysis of this bill, retailers would need to examine the nutrition labels and make a calculation for many products to determine whether a serving complies with the standards. For example, nutrition labels generally state grams of sugar in a food product but do not provide what percentage of its total weight is composed of sugar per serving, thus requiring the retailer to calculate the product's sugar weight compared to its total weight to determine if tax may apply to the product.

Larger retailers will likely be able to rely on computerized scanners to identify, once classified, which food products are subject to or exempt from the SUT. However, smaller retailers will be more likely to rely on store clerks to identify the application of tax on an item-by-item basis. The Committee may wish to consider whether there is a more efficient method to apply the SUT to specified food products.

1. Related Legislation: ACA 2 would impose the SUT on food products for human consumption and authorize the Legislature to exempt any food product from the SUT by a statute that becomes operative on or after November 7, 2018. ACA 2 will be heard by this Committee today.

REGISTERED SUPPORT / OPPOSITION:

Support

CaliforniaHealth+ Advocates

California Association for Health, Physical Education, Recreation and Dance

California Dental Association

California Federation of Teachers, AFT, AFL-CIO

California State Association of Counties

California Tax Reform Association

Common Sense Kids Action

Public Health Advocates

Service Employees International Union

State Board of Equalization Member, Fiona Ma

Opposition

American Petroleum and Convenience Store Association

California Automatic Vendors Council

California Chamber of Commerce

California Distributors Association

California Grocers Association

California Independent Oil Marketers Association

California League of Food Processors

California Manufacturers and Technology Association

California Retailers Association

California Taxpayers Association

Capitol Convenience Services

Coalition of Sensible Taxpayers

G&M Oil Company, Inc.

Grocery Manufacturers Association

Howard Jarvis Taxpayers Association

Kern County Taxpayers Association

National Association of Theater Owners of California/Nebraska

National Automatic Merchandising Association

National Confectioners Association

National Federation of Independent Business

North Orange County Chamber

See’s Candy

SNAC International

Snak King

Solano County Taxpayers Association

Spidell

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

1. Food sales tax rates in these states are as follows: Arkansas, 1.5%; Illinois, 1%; Missouri, 1.225%; Tennessee, 5%; Utah, 3%; and Virginia, 2.5%. ↑

2. Hawaii, Idaho, Kansas, and Oklahoma. ↑

3. Alabama, Mississippi, and South Dakota. ↑

4. Nicholas Johnson and Iris J. Lav, "Should States Tax Food? Examining the Policy Issues and Options," Center on Budget and Policy Priorities, April 1998. ↑

5. Caroline Franck, Sonia M. Grandi, and Mark J. Eisenberg, "Taxing Junk Food to Counter Obesity," American Journal of Public Health. 2013 November; 103(11): 1949-1953. ↑

Date of Hearing: May 15, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 274 (

Author:Cristina Garcia) – As Amended Ver:May 1, 2017

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: exemption: food products

SUMMARY: Exempts food products, except for candy, confectionery, and processed snacks, from the sales and use tax (SUT) that would be imposed on such products if ACA 2 is approved by the voters. Specifically, this bill:

1. Exempts from the SUT, on and after July 1, 2019, the gross receipts from the sale of, and the storage, use, or other consumption in this state of, food products for human consumption that would be imposed if ACA 2 (adding Article XIII Section 34(b), California Constitution) is approved by the voters.
2. Provides that the exemption from the SUT applying to food products for human consumption does not apply to food products that are candy or confectionery or processed snacks.
3. Defines a "candy or confectionery" as all of the following, regardless of whether sold as an ingredient:
4. Food products with sugar, honey, chocolate, corn syrup, or sugar substitute as the first listed ingredient;
5. Food products that are sugared, candied, or covered or coated in caramel, chocolate, honey, sprinkles, or other similar coatings;
6. Food products that are labeled or marketed as "candy" or "confectionery"; or,
7. Granola, trail mix, or other mixes that contain the aforementioned food products.
8. Provides that "candy or confectionery" does not include any of the following:
9. Cereal, cereal bars, protein bars, or meal replacement bars;
10. Jams, jellies, or other preserves;
11. Maple sugar products, unless labeled or marketed as "candy" or "confectionery";
12. Baked goods;
13. Food products that require refrigeration;
14. Beverages; or,
15. Fruit, unless covered or coated in caramel, chocolate, honey, sprinkles, or other similar coatings.
16. Defines a "processed snack" as a food product that is ready for consumption without further preparation, not including toasting.
17. Provides that a "processed snack" does not include healthy choice snacks, frozen products, fresh or dried fruit or vegetables unless the fruit or vegetables contain added sugar, dairy products, dairy substitutes, nuts and seeds, nut butters, canned products, bread products, meat products, meat substitutes, prepared food, or beverages.
18. Defines a "healthy choice snack" as a food product that meets all of the following requirements:
19. Contains not more than 200 calories per serving;
20. Not more than 35% of its total calories are from fat per serving;
21. Less than 10% of its total calories are from saturated fat per serving;
22. Not more than 35% of its total weight is composed of sugar per serving;
23. Contains no trans fat; and,
24. Contains not more than 200 milligrams of sodium per serving.
25. Provides, notwithstanding Revenue and Taxation Code (R&TC) Section 2230, that no appropriation or reimbursement is made to any local agency for any SUT revenues lost.
26. Takes immediate effect as a tax levy, except that this bill is to become operative only if ACA 2 of the 2017-18 Regular Session is submitted to, and approved by, the voters of California, and in that event would become operative on November 7, 2018.

EXISTING LAW:

1. Imposes the SUT on the sale of, or the storage, use, or other consumption of, tangible personal property (TPP), unless specifically exempted, and provides that the SUT must be computed based on the sales price or gross receipts of TPP, unless specifically excluded.
2. Authorizes cities and counties to impose a local SUT, pursuant to the Bradley-Burns Uniform Local SUT Law, fixed at 1.25% of the sales price or gross receipts of TPP.
3. Authorizes cities and counties to impose a transactions and use tax (TUT) for general or special purposes if approved by the requisite threshold of voters. The TUT Law is administered in conformity with the SUT Law.
4. Exempts from the SUT food products for human consumption. (Article XIII Section 34, California Constitution.)
5. Defines "food products" to include all of the following:
6. Cereals and cereal products, oleomargarine, meat and meat products, fish and fish products, eggs and egg products, vegetables and vegetable products, fruit and fruit products, spices and salt, sugar and sugar products, candy, gum, confectionery, coffee and coffee substitutes, tea, and cocoa and cocoa products;
7. Milk and milk products, milkshakes, malted milks, and any other similar type beverages that are composed at least in part of milk or a milk product and that require the use of milk or a milk product in their preparation; and,
8. All fruit juices, vegetable juices, and other beverages, whether liquid or frozen, including bottled water, but excluding spirituous, malt, or vinous liquors or carbonated beverages. (R&TC Section 6359(b).)
9. Provides that "food products" do not include medicines and preparations in liquid, powdered, granular, tablet, capsule, lozenge, and pill form sold as dietary supplements or adjuncts. (R&TC Section 6359(c).)
10. Provides that the SUT exemption does not apply to specified sales, such as food and beverages sold for consumption at a retailer's place of business (such as restaurants and hotels), food and beverages sold for consumption in places where admission is charged (such as movie theaters and amusement parks), food products sold as hot prepared food products (such as hot sandwiches or soup), and food products sold through a vending machine. (R&TC Section 6359(d).)

FISCAL EFFECT: The State Board of Equalization (BOE) estimates state and local revenue gains of $878 million in fiscal year (FY) 2019-20 and $884 million in FY 2020-21.

COMMENTS:

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

A lot has changed in the past 24 years, where fatty, high sugar, high fat snacks are no longer considered essential, especially to poorer communities, as was argued by the snack food industry in 1992.

We have seen the results of the explosion of processed snack food consumption on our society and the negative health repercussions. Obesity, diabetes, hypertension, tooth decay, these and so many other conditions are directly attributable to the poor modern diet made up of high calorie, ultra-processed foods.

A recent UCLA Study entitled Prediabetes: Generation in Jeopardy highlights the toll that poor nutrition and unhealthy lifestyles are having on Californians. An alarming 55% of the adult population in California is affected by diabetes, with 33% of young adults being diagnosed as prediabetic. The cities of Southeast Los Angeles, a region comprised of disadvantaged communities, makes up 50% of the top ten most overweight cities in California. The cities Assemblywoman Garcia represents are located in the same region.

Reinstituting a tax on processed snack foods and candy will encourage a reduction in consumption on these foods. Additionally, the tax is projected to generate $900 million in revenue a year for the general and local funds. This will help fund the enormous societal costs of obesity in addition to funding health services and programs to promote healthy eating and lifestyles, particularly for children and families living in poverty.

1. The California Tax Reform Association states the following in support of this bill:

The food and candy items outlined in these bills have been shown to contribute to a high calorie, ultra-processed diet that has been linked to a number of severe health consequences. The sales and use taxes in ACA 2 and AB 274 will encourage a reduction in consumption of unhealthy foods and help fund health services and programs that promote healthy eating and lifestyles, and help Californians thrive.

1. A coalition of organizations states the following in opposition to this bill:

The legislation would impose new taxes on "candy or confectionary" items and "processed snacks" yet defines these food products in an arbitrary and confusing manner. To cite just a few examples, food items labeled as candy would be taxed unless they are maple sugar products labeled as candy which would not be taxed. Granola would be taxable in some cases, yet granola cereal bars are specifically exempted from taxation. A candy bar would be taxed but a frozen version of the same product would be exempt. Making sense of contradictions like these will present government tax agencies with an enormous amount of work as they attempt to provide guidance for retailers.

1. Committee Staff Comments:
2. California's Eroding SUT Base: The SUT represents the state's second largest source of General Fund (GF) revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on personal income tax revenues. In FY 2014-15, SUT revenues were estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51.

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 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, SUT exclusions and 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. This bill, if implemented along with ACA 2 (C. Garcia), would expand the SUT base by including candies, confectioneries, and processed snacks as taxable food products.

1. Taxation of Food Products across Other States: According to the Center on Budget and Policy Priorities, as of March 1, 2017, 32 states and the District of Columbia exempt most food purchased for consumption at home from the state sales tax. Six states^[1] tax groceries at lower rates than other goods. Four states^[2] tax groceries fully but offer credits or rebates offsetting some of the taxes paid on food by some portions of the population. Lastly, three states^[3] apply their sales tax fully to food purchased for home consumption without providing any offsetting relief. However, the definition of food subject to sales tax can vary considerably from state to state. For example, Maine imposes sales tax on specified foods sold for consumption without further preparation, such as chips and dips, granola bars, nuts, cookies, and ice cream. New York imposes sales tax on candy and confectionery but exempts snack items such as chips and cookies. Additionally, a number of other states that impose sales tax on candy specify that products with flour listed as an ingredient (such as a Kit Kat or Twix) are not considered "candy."

Generally, states that impose sales tax on food products cite as justification revenue needs or simplicity of administration. Taxation of food products also has disadvantages, such as placing a disproportionate burden on lower income households. As a share of income, food taxes are regressive and can be four to five times higher for lower income families than for higher income families.^[4] Research on taxation of candy or snack foods generally focuses on the impact of excise taxes, but finds that small taxes are likely to yield substantial revenue but unlikely to affect obesity rates. However, high taxes may lead to measurable decreases in obesity, particularly amongst children, low-socioeconomic status populations, and those most at risk for being obese, and if combined with additional interventions such as healthy food subsidies or health education programs.^[5]

1. Taxation of Food Products in California: As property necessary to the sustenance of life, sales of food for human consumption are generally exempt from the SUT unless served as meals, consumed at or on the seller's facilities, sold in a heated condition, or sold for consumption where there is an admission charge. In an effort to eliminate a $14 billion state budget deficit in 1991, the SUT exemptions for candy, snack food, and bottled water were eliminated, effective July 15, 1991. However, in 1992, 66.62% of voters supported Proposition 163, which amended the California Constitution to prohibit state and local governments from imposing the SUT on food products, and defined candy, snack foods, and bottled water as food products. As such, a subsequent vote of the People is needed to make food products such as candy and processed snacks subject to the SUT.

As noted by the BOE in its analysis of this bill, both retailers and the BOE had significant difficulty with the ambiguous definition of "snack foods" that were taxed prior to passage of Proposition 163. The BOE compiled voluminous lists of "snack foods" (such as cookies and pretzels) and "non-snack foods" (such as graham crackers and peanuts) that it deemed to be consistent with the statutory definition to help retailers comply with the law. Nonetheless, retailers expressed significant difficulties with immediately determining food products subject to tax. Complying with the law was particularly problematic in stores that did not use electronic scanners at check-out counters. Retailers that utilized manual check-out processes had to rely on clerks to remember each food product's tax status, which inherently led to reporting errors.

1. What Does This Bill Do? This bill would only become operative on November 7, 2018 if ACA 2 (C. Garcia) is approved by voters. ACA 2 would impose, beginning July 1, 2019, the SUT on food products for human consumption and authorize the Legislature to exempt any food product from SUT by a statute that becomes operative on or after November 7, 2018. This bill, beginning July 1, 2019, would then generally exempt food products for human consumption from the SUT imposed by ACA 2, except for candies, confectioneries, and processed snacks. Thus, the purpose of this bill is to apply the SUT on candies, confectioneries and processed snacks.
2. Implementation Considerations: As noted in the BOE's analysis of this bill, a distinction is made between "candy or confectionery" and a "processed snack", although candies and confectioneries are essentially processed snacks. As such, there is some overlap between what is included and excluded from each classification. For example, nuts and seeds are excluded from the definition of "processed snack" but some nuts are sugared, candied, or covered in chocolate, and food products with such coatings meet the definition of "candy or confectionery." Would chocolate-covered nuts be subject to tax? As another example, a "processed snack" excludes fresh or dried fruit or vegetables unless the fruit or vegetables contain added sugar, and also excludes canned products. Thus, it appears that canned fruit in syrup would be exempt from the SUT, but it is unclear whether the same fruit mixture packaged in a cup would be similarly exempt.

In addition to definitions for "candy or confectionery" and a "processed snack," this bill defines a "healthy choice snack" that is excluded from the SUT imposed on processed snacks. While the United States Food and Drug Administration generally requires packaged foods to have a nutrition label, several of the standards outlined in this bill for healthy choice snacks are not required to be specified on the nutrition label. As noted in the BOE's analysis of this bill, retailers would need to examine the nutrition labels and make a calculation for many products to determine whether a serving complies with the standards. For example, nutrition labels generally state grams of sugar in a food product but do not provide what percentage of its total weight is composed of sugar per serving, thus requiring the retailer to calculate the product's sugar weight compared to its total weight to determine if tax may apply to the product.

Larger retailers will likely be able to rely on computerized scanners to identify, once classified, which food products are subject to or exempt from the SUT. However, smaller retailers will be more likely to rely on store clerks to identify the application of tax on an item-by-item basis. The Committee may wish to consider whether there is a more efficient method to apply the SUT on specified food products.

1. Related Legislation: ACA 2 (C. Garcia) would impose the SUT on food products for human consumption and authorize the Legislature to exempt any food product from the SUT by a statute that becomes operative on or after November 7, 2018. ACA 2 will be heard by this Committee today.

REGISTERED SUPPORT / OPPOSITION:

Support

CaliforniaHealth+ Advocates

California Association for Health, Physical Education, Recreation and Dance

California Dental Association

California Tax Reform Association

Common Sense Kids Action

Service Employees International Union

State Board of Equalization Member, Fiona Ma

Opposition

American Petroleum and Convenience Store Association

California Automatic Vendors Council

California Chamber of Commerce

California Distributors Association

California Grocers Association

California Independent Oil Marketers Association

California League of Food Processors

California Retailers Association

California Taxpayers Association

Capitol Convenience Services

Coalition of Sensible Taxpayers

G&M Oil Company, Inc.

Grocery Manufacturers Association

Howard Jarvis Taxpayers Association

Kern County Taxpayers Association

National Association of Theater Owners of California/Nebraska

National Automatic Merchandising Association

National Confectioners Association

National Federation of Independent Business

North Orange County Chamber

SNAC International

Solano County Taxpayers Association

Spidell

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098

1. Food sales tax rates in these states are as follows: Arkansas, 1.5%; Illinois, 1%; Missouri, 1.225%; Tennessee, 5%; Utah, 3%; and Virginia, 2.5%. ↑

2. Hawaii, Idaho, Kansas, and Oklahoma. ↑

3. Alabama, Mississippi, and South Dakota. ↑

4. Nicholas Johnson and Iris J. Lav, "Should States Tax Food? Examining the Policy Issues and Options," Center on Budget and Policy Priorities, April 1998. ↑

5. Caroline Franck, Sonia M. Grandi, and Mark J. Eisenberg, "Taxing Junk Food to Counter Obesity," American Journal of Public Health. 2013 November; 103(11): 1949-1953. ↑