BILL ANALYSIS
AB 9
Page 1
Date of Hearing: April 25, 2005
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Johan Klehs, Chair
AB 9 (Coto) - As Amended: April 18, 2005
2/3 Vote. Fiscal Committee
SUBJECT : Education Finance: Sales and use taxes: Services
SUMMARY : Requires the Legislature and the Governor to ensure
that the current per pupil level of funding for California's
K-12 public schools grows by at least 20% annually, beginning in
fiscal year (FY) 2006-07, until it reaches a level of at least
$10,200 per pupil in current dollars. Requires that additional
funding first be used to reduce teacher-pupil ratios so that
they are equal to or less than the average teacher-pupil ratio
of the 10 states with the lowest ratios for public elementary
and high schools. Requires that per pupil funding equals or
exceeds the average of the top 10 states by FY 2011-12, and that
it remain among the top 10 each year thereafter. Establishes a
sales tax on specialized services to increase funding for K-12
education, and specifies the services that fall within that
category. Specifically, this bill :
1)States legislative findings and declaration as follows:
a) Section 8.5 of Article XVI of the State Constitution
clearly expresses the will of the people of California to
support public elementary and high schools at a level that
is equal to or greater than the average annual per pupil
expenditure of the 10 states with the highest annual
expenditures, and to reduce the average class size so that
it is equal to or less than the average class size of the
10 states with the lowest class size.
b) The average current expenditures per pupil for 2004 of
the 10 highest spending states is $10,300 compared with
$7,100 in California.
c) The average teacher-pupil ratio for the 10 states with
the lowest class sizes is 14 pupils compared with 20 pupils
per classroom in California.
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d) To achieve the constitutional goals for raising per
pupil spending and lowering class size in California, it is
the intent of the Legislature to commit additional state
resources annually in order to achieve these goals by 2011.
2)Requires the Legislature and the Governor to ensure that the
average per pupil level of funding for California's public
elementary and high schools increases annually, beginning in
FY 2006-07, by at least 20% of the difference between the
average annual expenditure per pupil in 2004 of California
school districts and the average annual expenditure per pupil
in 2004 of the 10 states with the highest current expenditures
per pupil, reaching a level of no less than $10,200 per pupil
in 2004 dollars by FY 2010-11.
3)Requires that increased per pupil funding provided pursuant to
this act shall first be used to reduce teacher-pupil ratios so
that they are equal to or less than the average teacher-pupil
ratios of the 10 states with the lowest teacher-pupil ratios
for public elementary and high schools.
4)Requires the Legislature to ensure that, for FY 2011-12 and
each FY thereafter, the average per pupil level of funding for
California's public elementary and high schools remains equal
to or greater than the average of the 10 states with the
highest current expenditures per pupil.
5)Extends the state sales tax to specified services, effective
January 1, 2006, either separately or as part of a retail
sale, as follows:
a) Includes the total amount for which a specialized
service is provided, valued in money,
in the definition of "sales price".
b) Includes the provision of a specialized service by a
retailer, valued in money, in the definition of "gross
receipts".
c) Includes every person providing a specialized service of
a kind of which the gross receipts are required to be
included in the measure of sales tax in the definition of
"seller".
d) Includes every seller who furnishes or provides a
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specialized service in the definition of "retailer".
e) Defines "specialized services" to include:
i) Cost of membership to any private club.
ii) Information-access services provided through any
prefixed telephone, including telephone numbers with the
prefix 900 or 976.
iii) Marina services, including boat slips and docking
services, fuel for watercraft, and watercraft rentals.
iv) Custom computer program services.
v) Cost to charter an aircraft or limousine to
transport passengers in this state.
vi) Accounting or bookkeeping services.
vii) Legal services.
viii) Security and detective services.
ix) Telephone services, other than residential telephone
services.
x) Engineering, architectural, or surveying services.
xi) Management, scientific, or technical consulting
services.
f) Specifies that all tangible personal property (TPP)
physically transferred to the customer in connection with
the furnishing or provision of the specified services that
is not incidental is a sale separate from the service and
is subject to sales tax.
g) Requires every person desiring to engage in or conduct
business providing specialized services within the state to
file an application with the Board of Equalization (BOE)
for a permit for each place of business.
h) Provides that any person who engages as a provider of a
specialized service in California without a permit or after
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a permit has been suspended or revoked, and each officer of
any corporation which so engages is business, is guilty of
a misdemeanor.
i) Authorizes BOE to revoke the permit of a person found to
be not actively engaged in or conducting business as a
provider of a specialized service.
j) Provides that any person who knowingly issues a resale
certificate while the person is not actively engaged in
business as a provider of a specialized service, for
personal gain or to evade the payment of taxes, is liable
for the taxes that would otherwise have been due on the
transaction, plus a penalty of 10% or $500, whichever is
greater.
6)Requires that all revenues derived from the sales tax imposed
on specialized services be deposited in the Education Finance
Account, established for that purpose.
7)Requires that funds in the Education Finance Account be used
only for the purposes of meeting the funding and pupil-teacher
ratio goals set by this bill.
EXISTING LAW :
1)The State Constitution requires all of the following:
a) Allocates half of revenues received in excess of the
state appropriations limit to school districts and
community college districts in equal amounts per pupil
enrolled;
b) Continues this allocation until expenditures per pupil
are among the top 10 states with the highest annual
expenditures per pupil, and, for K-12 school districts,
that the average class size is less than or equal to the
average class size of the 10 states with the lowest class
size;
c) Specifies that these allocated revenues be used solely
for the purposes of instructional improvement and
accountability; and
d) Establishes a minimum level of per pupil support that
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must be annually maintained for the support of school
districts and community college districts (Proposition 98).
2)Sales and Use Tax Law (SUTL) imposes a tax on the sale or the
storage, use, or other consumption in this state of TPP unless
the property is exempted or excluded by statute. Services are
not subject to SUT as they are not tangible goods.
FISCAL EFFECT : At the time this Committee prepared this
analysis, an estimate of the additional state revenues resulting
from broadening the sales tax to selected services had not been
received. However, Committee staff estimate that taxing
selected services could generate significant state revenue.
Based on the estimated sales receipts for FY 2005-06, sales tax
on legal services alone would generate approximately $2.1
billion in total sales tax revenue.
Proposition 98 Fiscal Effect : Unknown.
COMMENTS :
1)This bill has been referred to both the Assembly Revenue and
Taxation Committee and the Assembly Education Committee, and
passed out of the Education Committee with a vote of 7 to 4.
This analysis focuses on the provisions of the bill related to
the Revenue and Taxation Code.
2)According to the author, the purpose of this bill is to
provide per pupil funding for education at a level equal to
the top 5 states in the nation.
3)According to the Legislative Analyst's Office (LAO), because
services are largely exempt from sales tax, the tax base is
less reflective of total spending than it once was. This
means that:
a) Not all consumption is treated the same, creating
inequities in the treatment of consumption;
b) Tax rates are higher than they would otherwise need to
be to raise a given amount of revenue; and
c) Taxable sales as a percent of consumption has declined
markedly, from 48% in 1981 to about 38% presently.
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4)In its survey of sales taxation of services, the Federation of
Tax Administrators found that in 1996, California taxed only
13 of the 164 services surveyed. Only four states taxed fewer
services.
5)Proponents of taxing selected services argue that there is
nothing sacred about services that should immunize them from
sales tax. Proponents also argue that broadening the tax base
could reduce the regressivity of the sales tax since those in
lower income brackets can generally be expected to spend a
larger share of their budget on goods and less on services
than those in higher income brackets.
6)Opponents of a sales tax on services argue that many service
jobs are provided by small independent contractors who do not
have extensive accounting and bookkeeping skills. Keeping
track of and collecting sales tax would be difficult for them.
Sales taxation of retail services might be burdensome enough
that small independent contractors and small firms might leave
the business or evade the tax. In addition, taxing services
might give large firms an incentive to provide these services
in-house to avoid taxation.
7)Committee staff note that:
a) Extending the state sales tax to specialized services
would substantially broaden the sales tax, and a broad tax
base with a relative low tax rate is generally thought to
represent better tax policy than the alternative.
b) The extension of the sales tax to services such as
lawyers, accountants, engineers and consultants could
change incentives for cities and counties. It would not
improve incentives to cities and counties to build housing,
but might give the cities greater incentives to build
office buildings.
c) This bill does not fully define each of the specialized
services which would be subject to sales tax, which could
cause confusion and implementation issues. For example, it
is unclear whether "accounting services" include tax
preparation services. Using the North American Industry
Classification System (NAICS) industry codes could help
clarify which services are subject to sales tax.
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d) This bill does not require service providers with a
business presence in California to collect sales or use tax
on any sales made to California, as retailers of goods are
required to under the current SUTL. This may compel
service providers to divert their service transactions with
California clients through out-of-state offices in order to
avoid the tax.
e) Expanding the sales tax to specialized services can
create an elastic tax effect of state revenue growing with
the rate of economic growth.
f) "Tax pyramiding" may occur when services are taxed, as
businesses "buy" services as inputs into the production of
goods and other services that are effectively taxed again
when the goods produced are sold at retail. TPP used in
the manufacturing of a product sold at retail is not
subject to sales tax.
g) BOE would incur significant costs to identify and
register thousands of new business entities and to process
an increased volume of tax returns as a result of extending
the state sales tax to selected services.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California School Administrators
California Federation of Teachers
California School Boards Association
California School Employees Association
California Teachers Association
Metropolitan Education District
Opposition
California Family Alliance
Consulting Engineers and Land Surveyors of California
Analysis Prepared by : Sabrina Landreth / REV. & TAX. / (916)
319-2098