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. Those laws provide various exemptions from those taxes.

This bill, on or after the effective date and until January 1, 2025, would exempt from those taxes the gross receipts from the sale in this state of, and the storage, use, or other consumption in this state of, specified bicycles purchased by the City of Santa Monica.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Santa Monica.

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 Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy.

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. Those laws provide various exemptions from those taxes.

This bill, on or after the effective date and until January 1, 2025, would exempt from those taxes the gross receipts from the sale in this state of, and the storage, use, or other consumption in this state of, specified bicycles purchased by the City of Santa Monica.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Santa Monica.

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 Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Santa Monica.

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 Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for use tax revenues lost by them pursuant to this bill.

This bill would take effect immediately as a tax levy.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Santa Monica.

This bill would take effect immediately as a tax levy.

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, measured by sales price.

The Sales and Use Tax Law defines a sale to include the lease of tangible personal property for consideration, except for tangible personal property leased in substantially the same form as acquired by the lessor, as to which the lessor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. Existing law requires, if tax has not been paid based on the purchase price, tax to be reported based on rental receipts.

This bill would, until January 1, 2020, allow the City of Santa Monica to apply as a credit the amount the City of Santa Monica paid to the California Department of Tax and Fee Administration for the taxes imposed pursuant to this part, as measured by rental receipts, for the lease or rental of bicycles as part of a publicly shared regional bicycle system within the County of Los Angeles against an amount equal to what the City of Santa Monica would have paid as sales tax reimbursement or use tax for the taxes imposed pursuant to this part on the sale of, or on the storage, use, or other consumption in this state of, those bicycles, as measured by the sales or purchase price, as provided.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Santa Monica.

This bill would take effect immediately as a tax levy.

 THIRD READING  

Bill No: AB 2938

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 6-1, 8/8/18

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Lara

NOES: Moorlach

SENATE APPROPRIATIONS COMMITTEE: 6-0, 8/13/18

AYES: Portantino, Bates, Beall, Bradford, Hill, Wiener

NO VOTE RECORDED: Nielsen

ASSEMBLY FLOOR: 71-0, 5/3/18 (Consent) - See last page for vote

SUBJECT:

SOURCE: City of Santa Monica

DIGEST:

This bill exempts from the state and local share of the Sales and Use Tax bicycles purchased by the City of Santa Monica.

ANALYSIS:

Existing law:

1. Imposes the sales tax on every retailer engaged in business in this state that sells tangible personal property, requires them to collect the appropriate tax from the purchaser, and remit the amount to the California Department of Tax and Fee Administration (CDTFA).
2. Applies a state sales and use tax rate of 7.25%, and additionally allows cities and counties to increase the sales and use tax rate up to 2%, with some exceptions, for either specific or general purposes pursuant to the California Constitution’s vote requirements.
3. Exempts from the state and local sales and use tax some items, such as prescription drugs and cold food, while exempting other from the state sales tax, but not the local share, such as farm equipment and machinery, and diesel fuel used for farming and food processing.
4. Provides an irrevocable election for lessors of most tangible personal property, who can choose to:
   1. Remit tax based on the purchase price of the equipment they subsequently lease, so long as the equipment is in substantially the same form when they subsequently lease it, and either the retailer or purchaser timely pays the tax, or
   2. Remit tax based on a percentage of the rental and lease payments it receives from lessees.

This bill:

1. Exempts from the state and local share of the sales and use tax the 500 bicycles purchased by the City of Santa Monica in calendar year 2015.
2. Takes effect immediately, is not retroactive, and sunsets on January 1, 2025.
3. Contains legislative findings and declarations justifying the need for special legislation.

Background

To remit tax, state law offers lessors of property an “irrevocable election,” a term often used in tax law that offers taxpayers a one-time option to decide a specific tax treatment that cannot be subsequently undone. The lessor must pay tax based on rental receipts for as long as they lease the property if they do not pay based on the purchase price at the time they acquire it. For example, a construction equipment leasing company wants to purchase ten electric generators from a manufacturer for subsequent lease. If the purchase price of the generators is $5,000 and the applicable tax rate 8%, the construction equipment leasing company can elect to pay up front by remitting the $400 tax to the manufacturer at purchase, of if the manufacturer is not a California retailer, timely pay that amount to CDTFA as use tax. If the construction equipment leasing company does not pay the tax to the manufacturer, the law assumes that they have made the irrevocable election to instead charge each of its customers who lease the generators a use tax equal to 8% of the lease charge each time they lease the equipment.

In 2013, the City of Santa Monica made two purchases of bicycles for its bike sharing program, known as “Breeze,” which launched in 2015. Individuals seeking to use a bike can do so in real time using the Internet or a mobile internet application under several pricing options, including per minute, month, or year. Breeze offers bikes across the City of Santa Monica, and individuals can rent and drop them off in different locations. The City of Santa Monica acquired 500, 8-speed “smart bikes” in 2015 at a cost of $1,465 each for a total of $732,500. The City of Santa Monica did not pay the tax at purchase, which would have been $69,588 at the City of Santa Monica’s 9.5% rate, thereby defaulting to the option to collect the tax as a percentage of rental receipts. For 2017 only, the City of Santa Monica’s total use tax liability ($100,300) significantly exceeded the amount it would’ve paid had it elected to do so at purchase. Additionally, in April of this year, the City of Santa Monica integrated its system with similar programs in the Cities of West Hollywood and Beverly Hills, plus the University of California Los Angeles, who paid taxes at purchase and do not charge sales tax on rental receipts. At first, the City added tax when calculating bike share prices. Today, the City of Santa Monica no longer charges sales tax to the user, and pays the tax amount to CDTFA out of its own pocket.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, “The California Department of Tax and Fee Administration (CDTFA) indicates that this bill would result in a six-year annual state and local revenue loss of $100,270, $42,000 of which would be from the General Fund. CDTFA would incur minor and absorbable administrative costs.”

SUPPORT: (Verified 8/15/18)

City of Santa Monica (source)

OPPOSITION: (Verified 8/15/18)

None received

ARGUMENTS IN SUPPORT: According to the author, “Bike share has become a popular strategy for encouraging active transportation, decreasing vehicle trips, and helping cities, counties, and regional agencies achieve local and state transportation and emission reduction goals. AB 2938 is critical to overcoming barriers to county wide integration of bike share services.”

ASSEMBLY FLOOR: 71-0, 5/3/18

AYES: Acosta, Aguiar-Curry, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Travis Allen, Caballero, Choi, Cristina Garcia, Grayson, Quirk-Silva, Voepel

Prepared by:

8/15/18 16:07:06

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2938 (Bloom) - Sales and usetaxes: exemption: bicycles: City of Santa Monica

This bill does not meet the criteria for referral to the Suspense File.

Bill Summary:

AB 2938 would exempt bicycles purchased in 2015 by the City of Santa Monica from both the state and local components of the Sales and Use Tax (SUT).

Fiscal Impact:

The California Department of Tax and Fee Administration (CDTFA) indicates that this bill would result in a six-year annual state and local revenue loss of $100,270, $42,000 of which would be from the General Fund. CDTFA would incur minor and absorbable administrative costs.

Background:

Except where a specific exemption or exclusion is provided, current law imposes SUT on all retailers for the privilege of selling tangible personal property (TPP) at retail in California, or on the storage, use, or other consumption in this state of TPP purchased from a retailer.

After CDTFA collects SUT revenue ($54 billion in 2015-16), it allocates the money to various state and local funds. Roughly half—collected from an approximately 3.9 percent rate—goes to the General Fund and can be spent on any state program, such as education, health care, and criminal justice. Another 1.25 percent, known as the Bradley-Burns rate, goes to cities and counties for general purposes. Three sales tax funds have uniform state rates and support specified programs—an approximately 1.1 percent rate for 2011 realignment (county-administered criminal justice, mental health, and social service programs); a 0.5 percent rate for 1991 realignment (county-administered health and social services programs); and a 0.5 percent rate for city and county public safety programs pursuant to Proposition 172 (1993). Additionally, some local governments levy optional local rates—known as Transactions and Use Taxes (TUTs)—and a small portion of these funds are used for general purposes. As of January 1, 2017, the average statewide SUT rate was 8.21 percent.

State law fully exempts many items from SUT (such as prescription drugs, food, electricity, and poultry litter), while other items are exempted from the state sales tax, but not the local share, such as farm equipment and machinery, diesel fuel used for farming and food processing, teleproduction and postproduction equipment, timber harvesting equipment and machinery, and racehorse breeding stock. Partial SUT exemptions are difficult for both retailers and the CDTFA, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently, resulting in additional return processing workload. Finally, state law does not exempt public agencies (such as cities, counties, and special districts from SUT), but does contain exemptions and specified treatment for specific groups.

As mentioned above, retail sales of TPP in California are subject to sales tax. However, the specific application of tax depends on the sales agreement between the customer and retailer. Normally, the retailer adds the sales tax reimbursement to the sales price as indicted on a sales receipt; however, current law generally holds the retailer responsible for remitting sales tax to CDTFA regardless of whether they collect reimbursement. When property is leased, the tax is generally a use tax on the lessee measured by lease receipts paid to the lessor.

Generally, lessors can choose between two options. First, they can choose to remit SUT based on the purchase price of the equipment they subsequently lease; however, the equipment must be in substantially the same form when they subsequently lease it, and either the retailer or purchaser timely pays the tax. Otherwise, lessors must remit tax based on a percentage of the rental and lease payments it receives. Because this choice is an “irrevocable election,” a term often used in tax law that offers taxpayers a one-time option to decide a specific tax treatment that cannot be subsequently undone, the lessor is obligated to pay tax based on rental receipts for as long as they lease the property if they do not pay based on the purchase price at the time they acquire it.

Proposed Law:

This bill would exempt from the state and local share of the SUT the 500 bicycles purchased by the City of Santa Monica in calendar year 2015. The measure (1) would take effect immediately, (2) is not retroactive, and (3) would sunset on January 1, 2025.

Staff Comments:

In 2013, the City of Santa Monica made two purchases of bicycles for its bike sharing program, known as “Breeze,” which launched in 2015. Individuals seeking to use a bike can do so in real time using the Internet or a mobile internet application under several pricing options, including per minute, month, or year. Breeze offers bikes across the City, and individuals can rent and drop them off in different locations.

To implement the program, the City of Santa Monica acquired 500, 8-speed “smart bikes” in 2015 at a per-unit cost of $1,465, for a total of $732,500. The City did not pay SUT at purchase, which would have been $69,588 its 9.5 percent SUT rate, thereby defaulting to the option to collect the tax as a percentage of subsequent rental receipts by individuals. In 2017, the City’s total use tax liability ($100,300) exceeded the amount it would have paid had it elected to do so at the time purchase. Last April, the City integrated its bicycle system with similar programs in the Cities of West Hollywood and Beverly Hills, and the University of California Los Angeles. All three of these entities paid SUT at the time of purchase, and thus do not charge sales tax on rental receipts. At first, the City of Santa Monica added tax when calculating bike share prices. Today, because of integration with the other three entities, the City no longer charges sales tax to the user, and pays the tax amount to CDTFA out of its own pocket. The City of Santa Monica made the decision not to pay SUT on the bicycle purchases in 2015; however, it has paid more tax based on rental receipts than it would have had it paid at the time of purchase.

CDTFA indicates that the City of Santa Monica paid $100,270 in use tax in 2017, and assumes that this annual amount would remain unchanged during the forecast period.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Sales and use taxes: exemption: bicycles: City of Santa Monica

Exempts from the state and local share of the Sales and Use Tax bicycles purchased by the City of Santa Monica.

Background

Sales taxes. State law imposes the sales tax on every retailer engaged in business in this state that sells tangible personal property, requires them to collect the appropriate tax from the purchaser, and remit the amount to the California Department of Tax and Fee Administration (CDTFA). Sales tax applies whenever a retail sale is made, which is basically any sale other than one for resale in the regular course of business. Unless the person pays the sales tax to the retailer, he or she is liable for the use tax, which is imposed on any person consuming tangible personal property in the state. The use tax rate is the same rate as the sales tax rate, and must be remitted on or before the last day of the month following the quarterly period in which the person made the purchase. The current rate is 7.25% as shown in the table below.

Part of the 7.25%, the Bradley-Burns Uniform Sales Tax Act allows all local agencies to apply its own sales and use tax on the same base of tangible personal property. This tax rate currently is fixed at 1.25% of the sales price of tangible personal property sold at retail in the local jurisdiction, or purchased outside the jurisdiction for use within the jurisdiction. Cities and counties use this 1% tax to support general operations, while the remaining 0.25% is used for county transportation purposes. In California, all cities and counties have Bradley-Burns taxes.

State law also allows cities, counties, and special districts to impose their own transactions and use tax within its jurisdiction subject to voter approval, known as “local add-ons” or “district taxes,” so long as they relied on the same base and procedures as the sales and use tax. State law caps the total rate for any county at 2%, with some exceptions.

State law does not exempt public agencies such as cities, counties, and special districts from the sales and use tax, but does contain exemptions and specified treatment for specific groups. However, many specific items are fully exempted from the sales and use tax in this state (prescription drugs, food, poultry litter, among others), while others are exempted from the state sales tax, but not the local share (farm equipment and machinery, diesel fuel used for farming and food processing, teleproduction and postproduction equipment, racehorse breeding stock, among others).

Leases. As mentioned above, retail sales of tangible personal property in California are subject to sales tax. However, the application of tax depends solely on the terms of the sales agreement between the customer and retailer. Normally the retailer adds the sales tax reimbursement to the sales price as evidenced by the tax shown on the sales check or other proof of sale, but the Sales and Use Tax Law generally holds the retailer responsible for the sales tax regardless of whether they collect reimbursement. When property is leased, the tax is generally a use tax on the lessee measured by lease receipts paid to the lessor.

Generally, lessors can choose to remit tax based on the purchase price of the equipment they subsequently lease, so long as the equipment is in substantially the same form when they subsequently lease it, and either the retailer or purchaser timely pays the tax. If not, lessors must remit tax based on a percentage of the rental and lease payments it receives. Because this choice is an “irrevocable election,” a term often used in tax law that offers taxpayers a one-time option to decide a specific tax treatment that cannot be subsequently undone, the lessor is obligated to pay tax based on rental receipts for as long as they lease the property if they do not pay based on the purchase price at the time they acquire it.

For example, a construction equipment leasing company wants to purchase ten electric generators from a manufacturer for subsequent lease. If the purchase price of the generators is $5,000 and the applicable tax rate 8%, the construction equipment leasing company can elect to pay up front by remitting the $400 tax to the manufacturer at purchase, of if the manufacturer is not a California retailer, timely pay that amount to CDTFA as use tax. If the construction equipment leasing company does not pay the tax to the manufacturer, CDTFA assumes that they have made the irrevocable election to instead charge each of its customers who lease the generators a use tax equal to 8% of the lease charge each time they lease the equipment.

The City of Santa Monica. In 2013, the City of Santa Monica made two purchases of bicycles for its bike sharing program, known as “Breeze,” which launched in 2015. Individuals seeking to use a bike can do so in real time using the Internet or a mobile internet application under several pricing options, including per minute, month, or year. Breeze offers bikes across the City, and individuals can rent and drop them off in different locations.

To implement the program, the City of Santa Monica acquired 500, 8-speed “smart bikes” in 2015 at a cost of $1,465 each for a total of $732,500. The City of Santa Monica did not pay the tax at purchase, which would have been $69,588 at the City’s 9.5% rate, thereby defaulting to the option to collect the tax as a percentage of rental receipts. For 2017 only, the City’s total use tax liability ($100,300) significantly exceeded the amount it would’ve paid had it elected to do so at purchase. Additionally, in April of this year, the City integrated its system with similar programs in the Cities of West Hollywood and Beverly Hills, plus the University of California Los Angeles, who paid taxes at purchase and do not charge sales tax on rental receipts. At first, the City added tax when calculating bike share prices. Today, the City no longer charges sales tax to the user, and pays the tax amount to CDTFA out of its own pocket.

Having already paid far more tax based on rental receipts than it would have had it paid at the time of purchase, the City of Santa Monica wants to exempt its initial purchase of bicycles used in its bike sharing program from the Sales and Use Tax.

Proposed Law

Assembly Bill 2938 exempts from the state and local share of the sales and use tax the 500 bicycles purchased by the City of Santa Monica in calendar year 2015. The measure takes effect immediately, is not retroactive, and would sunset on January 1, 2025. The bill also contains legislative findings and declarations justifying the need for special legislation.

State Revenue Impact

According to CDTFA, AB 2938 results in state and local revenue losses of $100,270 per year for six years.

Comments

1. Purpose of the bill. According to the author, “Bike share has become a popular strategy for encouraging active transportation, decreasing vehicle trips, and helping cities, counties, and regional agencies achieve local and state transportation and emission reduction goals. AB 2938 is critical to overcoming barriers to county wide integration of bike share services.”

2. Precedent. A key legal principle generally states that a person who is unaware of a law cannot be absolved from sanctions resulting from violating it. AB 2938 departs from this tenet by enacting a sales and use tax exemption for bicycles that would be taxable under any other circumstance, thereby absolving one city of its ongoing tax obligation when it could have chosen to pay the tax at purchase. While bike sharing programs can have important community and environmental benefits, the Committee may wish to consider the precedent set by AB 2938, and whether it invites other taxpayers who also regret their decision to ask the Legislature for similar treatment.

3. Revenue loss. AB 2938 would enact a new sales and use tax exemption, which would result in the City of Santa Monica not collecting and remitting taxes currently imposed by law. As a result, the state and affected local agencies will have to reduce spending or increase taxes to match the amount of foregone revenue.

4. Special legislation. The California Constitution prohibits special legislation when a general law can apply (Article IV, §16). AB 2938 contains findings and declarations explaining the need for legislation that applies only to the City of Santa Monica.

Assembly Actions

Assembly Revenue and Taxation Committee: 9-0

Assembly Appropriations Committee: 17-0

Assembly Floor: 71-0

Support and Opposition

(8/6/18)

Support: City of Santa Monica.

Opposition: Unknown.

-- END --

Date of Hearing: April 25, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2938

Author:(Bloom) – As Amended Ver:April 16, 2018

Urgency: Yes State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill exempts 500 bicycles purchased by the City of Santa Monica in 2015 from the sales and use tax until January 1, 2025.

FISCAL EFFECT:

Annual General Fund revenue loss of approximately $38,500.

COMMENTS:

1. Taxing leases. When a lessor, such as a bike share program, purchases property to rent, such as bicycles, the lessor may either pay a sales tax on that purchase or pay the use tax based on the rental receipts. Whatever the lessor opts to pay is considered an irrevocable election and cannot be changed.
2. Santa Monica case. Santa Monica’s bike share program, which began in November 2015, was one of the first of its kind in the Los Angeles region. Called “Breeze,” the program has 500 bikes located across the city, and the public can rent bikes and drop them off at different locations. When the city first started the program, it opted not to pay the sales tax on the $730,000 purchase of bikes, which at the time would have been $69,600. Instead, the city opted to collect use tax whenever the bikes were rented. In 2017, the Santa Monica’s total use tax liability was $100,300.
3. Purpose. According to the author, AB 2938 will align Santa Monica’s tax treatment of its bike share program with neighboring cities. The city is attempting to integrate its bike share program with those in other cities, but neighboring cities opted to pay the upfront sales tax instead of including the use tax in the price. This has made it difficult to integrate a payment system that works across different bike share programs.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 2, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 2938 (

Author:Bloom) – As Introduced Ver:February 16, 2018

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Sales and use taxes: credit: City of Santa Monica

SUMMARY: Allows the City of Santa Monica (City) to apply use tax previously paid to the California Department of Tax and Fee Administration (DTF) for the taxes imposed as measured by rental receipts for the renting of bicycles against the amount equal to what the City would have paid as sales tax based on the original purchase price of those bicycles, and deems the City as having paid the sales tax on those bicycles. Specifically, this bill:

1. Allows the City to apply, as a credit, the use tax the City has remitted to DTF based on the renting of bicycles, as part of a publicly shared regional bicycle system, against an amount equal to what the City would have paid as sales tax on the purchase price of those bicycles.
2. Provides that the City shall be deemed to have paid the sales tax on the bicycles purchased by the City.
3. Applies the deemed tax to bicycles purchased before the date this bill becomes law.
4. Repeals the provisions of this bill on January 1, 2020.
5. Provides findings and declarations as to the need for special legislation.
6. Takes effect immediately as a tax levy.

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 California.
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 DTF.
3. Allows lessors, such as bike rental businesses, the option to choose between paying the sales tax on the bikes' original purchase price or remitting the use tax as measured by rental receipts, provided the election is made timely.
4. Provides that the lessee is liable for the use tax as measured by the rentals payable.
5. Requires the lessor to collect the use tax from the lessee at the time rentals are paid by the lessee, give the lessee a receipt, and report and remit the use tax to DTF.

FISCAL EFFECT: Unknown

COMMENTS:

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

Bike share has become a popular strategy for encouraging active transportation, decreasing vehicle trips, and helping cities, counties, and regional agencies achieve local and state transportation and emission reduction goals. AB 2938 is critical to overcoming barriers to county wide integration of bike share services.

1. According to the sponsors of this bill state that "[t]he City of Santa Monica and other local agencies in Los Angeles County have created their own bike share systems and are working to integrate these distinct systems into one regional program. A barrier to the regionalization of these systems is the difference in tax elections at the time of purchase of these bikes amongst the local agencies. Once integrated, the bike share technology is unable to collect sales tax from users at different rental locations. Some agencies have made the election to pay sales taxes on leasing revenue. Existing state law, which calls for an irrevocable election, makes it impossible to use integrated software to integrate separate bike share systems regionally if there are differences in their tax elections." As such, this bill "would allow the City of Santa Monica to align with other local agencies and adjust their election of how to pay sales tax on their existing bike share system without collecting excess sales tax from users or being required to pay sales tax from agency operating budgets to cover uncollected tax from users."
2. Committee Staff Comments:
   1. Background: Beginning its bike share program on November 12, 2015, the City was one of the first in the Los Angeles region to launch a bike share program. The City's bike share program, known as Breeze, locates 500 bicycles in 75 hubs across the city and some additional bonus hubs in Venice. The program allows the public to rent bicycles that can be picked up and dropped off at various locations. Rental rates depend on the plan selected, with options for monthly and yearly subscription or simple hourly rates. The City is currently attempting to integrate their bike share program with other programs in surrounding cities. Unfortunately, most of the other cities do not collect the use tax when renting their bicycles; most cities chose to pay the upfront sales tax instead of collecting the use tax based on rental receipts. The disparate tax treatment makes it very difficult to integrate many of the Breeze bikes with other programs. It appears that the City would like to reverse its initial tax election for the 500 bicycles it purchased to more easily integrate with other bike sharing programs.
   2. Taxing leases: In general, the tax imposed in lease transactions is a use tax on the lessee measured by rental receipts. This is true when the lease is one that is considered a continuing sale and purchase. Despite the use tax being imposed on the lessee, the lessor must collect the use tax from the lessee at the time rentals are paid by the lessee, give the lessee a receipt, and report and pay the tax to DTF. The general default rule of collecting a use tax is, however, not mandatory. If the lessor chooses to make a payment of tax as measured by the purchase price at the time the property is acquired, the payment is considered to be an election not to pay tax measured by rental receipts. Once the lessor elects to pay the tax based on the purchase price of the property, the lessor cannot change their reporting method to a tax based on rental receipts. The decision to pay the sales tax on the purchase price is considered to be an irrevocable election.

At the time of purchasing its bicycles, the City chose not to pay sales tax on the purchase price of the fleet of bicycles, which at the time was valued at about $730,000. The sales tax on the purchase would have amounted to about $70,000. Instead, the City chose to collect the use tax whenever the bikes were rented. The City has been collecting the use tax since launching the program in 2015.

• 1. What does this bill do? This bill attempts to reverse the City's original election to collect the use tax based on bike rental receipts. Specifically, this bill would allow the City to apply the use tax that the City has been remitting to DTF since 2015 against the amount the City would have paid as sales tax on the original purchase price of the bicycles. The language specifies that the amounts remitted would be applied as a "credit." However, according to the City, the amount of use tax remitted has averaged around $100,000 per year, which is far more than the estimated sales tax on the original purchase price of the bicycles. It is unclear if the City would be receiving a credit for amounts in excess of the estimated sales tax. Furthermore, the second provision of this bill deems the City as having paid the sales tax on the purchase of the bicycles. If the second provision deems the City as having paid the sales tax, it is unclear why the first provision, applying the use tax against the estimated sales tax of the original purchase price, would be needed. As such, the Committee may wish to simplify matters by providing a prospective use tax exemption for the bicycles purchased in 2015.
  2. Irrevocable to revocable: In general, taxpayers are not allowed to go back and forth between elections. Creating irrevocable elections makes it easier for entities to administer taxes and it prevents taxpayers from potentially gaming the tax code. In this case, however, the City is not wedded to a specific collection method. The City's desire to switch from a use tax to a sales tax is based on their desire to integrate with the surrounding cities. The surrounding cities, for the most part, are not collecting the use tax, and bike share technology is currently unable to collect the use tax from some customers but not others depending on which bike is being rented. If the roles were reversed and the City had paid the sales tax on the original purchase price but the surrounding cities were collecting the use tax on rental receipts, the City would likely still be pushing for legislation to change their original election. Once the various systems are integrated, users will be able to sign-up for a membership that will provide access to the entire region as if it were one system.

REGISTERED SUPPORT / OPPOSITION:

Support

City of Santa Monica (Sponsor)

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098