BILL ANALYSIS AB 1265 Page 1 Date of Hearing: May 18, 2009 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Charles M. Calderon, Chair AB 1265 (Ma) - As Introduced: February 27, 2009 Majority vote. Tax levy. Fiscal committee. SUBJECT : Sales and use taxes: consumer status: qualified itinerant vendors SUMMARY : Provides that a "qualified itinerant vendor" (QIV) is a consumer, and not a retailer, of tangible personal property (TPP) the QIV owns, except alcoholic beverages. Specifically, this bill : 1) Provides that a person is a QIV when all of the following apply: a) The person was a member of the United States Armed Forces, who received an honorable discharge or a release from active duty under honorable conditions; b) The person is unable to obtain a livelihood by manual labor due to a service-connected disability; c) For the purposes of selling TPP, the person is a sole proprietor with no employees; and, d) The person has no "permanent place of business" in this state. 2) Defines "permanent place of business" as "any building or other permanently affixed structure, including a residence, that is used in whole or in part for the purpose of making sales of, or taking orders and arranging for shipment of, [TPP]." Provides that a permanent place of business does not include any building or other permanently affixed structure, including a residence, used for any of the following: AB 1265 Page 2 a) The storage of TPP; and, b) The cleaning or storage of equipment or other property used in connection with the manufacture or sale of TPP. 3) Provides that the preferential classification shall not apply to a person: a) Engaged in the business of serving meals, food, or drinks to a customer at a location owned, rented, or otherwise supplied by the customer (i.e., a caterer); or, b) Operating a vending machine. 4) Takes immediate effect as a tax levy, but becomes operative on the first day of the first calendar quarter beginning more than 90 days after its effective date. EXISTING LAW : 1)Imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon the gross receipts from sales of TPP in this state. 2)Imposes a use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer for storage, use, or other consumption in this state, absent a specific exemption. 3)Designates the following entities as consumers, and not retailers, of specified TPP they use or furnish in the performance of their professional services: a) Licensed optometrists, physicians, pharmacists, and registered dispensing opticians; AB 1265 Page 3 b) Licensed veterinarians; c) Licensed chiropractors; d) Specified garment cleaning establishments that received no more than 20% of their total gross receipts from the alteration of garments during the preceding calendar year; e) Licensed hearing aid dispensers; and, f) Producers of X-ray films or photographs used to diagnose human medical or dental conditions. FISCAL EFFECT : The Board of Equalization (BOE) estimates that this bill would reduce state and local revenues by $24,855 annually. COMMENTS : 1)The author states: AB 1265 represents one small step towards recognizing our disabled veterans who have already made, or are making the transition from military to civilian employment. Enactment of this bill would assist in this transition in two ways: (1) by making the law specific with regard to sales tax obligations of qualifying disabled veterans, and (2) by simplifying reporting requirements that can be unduly burdensome for these small businesses. By placing qualifying itinerant veterans in the 'consumer' status for sales and use tax purposes, the veterans would not be required to obtain a seller's permit, file sales tax returns, or remit sales tax on [their] sales . . . . Instead, the veterans would simply pay tax up front on their purchases of the goods they intend to sell. 2)BOE Chairwoman Betty T. Yee, who supports this bill, states: AB 1265 would provide that a disabled, honorably discharged veteran engaged in business as an itinerant vendor is the consumer, rather than the retailer, of any tangible personal property they sell, if the veteran's activity lacks a fixed retail location, works as a sole proprietor, and is unable to obtain a livelihood by manual labor. As a AB 1265 Page 4 consumer, such an itinerant vendor would pay tax upon purchase of any items sold rather than collecting the tax upon sale of the food or beverages. (Emphasis in original) In recent years, we have seen large numbers of veterans return home from two major foreign conflicts in which the United States Armed Forces are actively engaged. Many of these returning veterans face continuing challenges from disabilities directly related to their military service. The BOE has learned in public hearings that some of these veterans seek to make a modest living from the itinerant sales of small items, such as food, artwork, incense, or t-shirts. The BOE also has been informed that those veterans seeking to support themselves in this way have found the sales tax collection obligation to be a barrier to entry. 3) BOE notes the following in its staff analysis of this bill: a) Sponsor and purpose . "This bill is sponsored by the author to specifically address the application of the Sales and Use Tax Law to itinerant disabled veterans who themselves make sales of goods they own, such as handcrafted items, paintings, memorabilia, and blankets. Specifically, this bill would deem these veterans to be consumers of the products they sell, and provide for the payment of taxes at the point these veterans purchase the component parts of the items they sell, to the extent the tax applies. The purpose of this bill is to recognize and honor service-disabled veteran survivors that are seeking to make a living by itinerant sales of goods. This bill would apply to veterans of past conflicts as well as veterans returning from foreign conflicts in which the United States is currently engaged." b) What would a qualifying veteran's tax obligations be ? "Under this bill, a qualifying itinerant disabled veteran making taxable sales of goods, wares or merchandise owned by him or her would not be required to report sales tax on his or her sales of these items. Instead, those veterans would only be required to pay tax on their cost of any taxable purchases of the items or the component parts of the items he or she sells. For example, if a veteran were selling his or her own paintings, the veteran would pay tax on his or her purchase of the paint, brushes, and canvas AB 1265 Page 5 used to make the painting. The sale of the painting, itself, would thereafter be exempt from tax. Under this measure, if the qualifying veteran makes no sales of alcoholic beverages, the veteran would not be required to obtain a seller's permit, file sales tax returns, or remit sales tax on his or her sales of the goods he or she sells. This essentially eliminates the sales tax compliance costs and associated recordkeeping that can be unduly burdensome for disabled veterans." c) Qualifying veterans would need to provide evidence of disability to qualify . "Up until January 1, 2009, Business and Professions Code authorized cities to issue business licenses to honorably discharged or honorably relieved United States veterans without payment of any business license tax or fee for their sales of goods they own, provided, among other things, the veteran was physically unable to obtain a livelihood through manual labor (however, the law did not require that the veteran have a service-connected disability). Although this qualification is no longer necessary through enactment of AB 1952 (Stats. 2008, Ch.435), we contacted several cities to determine how they administered Section 16001.5 prior to January 1, 2009. The cities that we contacted indicated that they required the veteran to provide confirmation from a physician that he or she had such a physical impairment. If this bill becomes law, we expect that we would require a similar physician confirmation of the veteran's disability. Also, since the bill would require that the disability be service-related, we would require that a qualifying veteran also provide written confirmation of that disability from the Department of Veteran Affairs." 4)Committee Staff Notes: a) What is "consumer" status? : "Consumer" reporting status is conferred on specified entities to alleviate the burden of registering with BOE as a retailer of TPP. At the same time, consumer status minimizes the revenue losses often associated with outright exemptions from tax. As noted above, consumer status has been conferred on a wide range of entities, including optometrists, veterinarians, AB 1265 Page 6 licensed hearing aid dispensers, and others with respect to certain TPP sales. b) How did we get here? : For several years, certain veterans have argued that Business and Professions Code (B&PC) Section 16102 exempts honorably discharged veterans from sales tax on sales of food and carbonated beverages from a mobile cart. B&PC Section 16102 provides in its entirety: Every soldier, sailor or marine of the United States who has received an honorable discharge or a release from active duty under honorable conditions from such service may hawk, peddle and vend any goods, wares or merchandise owned by him, except spirituous, malt, vinous or other intoxicating liquor, without payment of any license, tax or fee whatsoever, whether municipal, county or State, and the board of supervisors shall issue to such soldier, sailor or marine, without cost, a license therefore. This provision was enacted in 1893 [long before enactment of the Sales and Use Tax (SUT) Law], and was described in the chaptered bill as "An act to establish a uniform system of county and township government." Moreover, this statute is contained in Chapter 2 of Part 1 of Division 7 of the B&PC, entitled Licensing by Counties. As such, BOE has taken the position that this statute exempts honorably discharged veterans from locally imposed license taxes and fees, and does not provide an exemption from SUT. BOE notes that its determination was challenged unsuccessfully in Los Angeles County Superior Court, and is consistent with two opinions provided by the Office of Legislative Counsel. This bill seeks to address the issue by explicitly granting preferential treatment to honorably discharged itinerant AB 1265 Page 7 veterans under the SUT Law. It should be noted that this bill is similar to AB 3009 (Brownley) of the 2007-08 Legislative Session, which would have conferred consumer status to similarly situated QIVs, but only with respect to food products and nonalcoholic beverages. AB 3009 was held in this Committee. c) Related legislation : Committee staff note the following related bills also introduced in the current Legislative Session: i) AB 659 (Hayashi): Provides that specified garment cleaning businesses shall be regarded as consumers, rather than retailers, of TPP they sell, provided those sales do not exceed 0.5% of their total gross receipts for the preceding calendar year. AB 659 (Hayashi) is currently in the Assembly Appropriations Committee. ii) AB 676 (Jeffries): Designates a qualified destination management company as a consumer, and not a retailer, of the TPP it provides a client under a qualified contract for destination management services. AB 676 (Jeffries) is set to be taken up today on this Committee's suspense file. iii) AB 1486 (Furutani): Provides that specified tax-exempt organizations shall be deemed consumers, rather than retailers, with respect to certain transfers of TPP to their members. AB 1486 (Furutani) is set to be heard by this Committee today. iv) SB 809 (Veteran Affairs Committee): Contains provisions identical to this bill, except that SB 809 also provides that the state shall not reimburse local agencies for lost sales and use tax revenues. SB 809 passed out of the Senate Revenue and Taxation Committee on May 13, 2009 with a vote of 7-0. d) Potential amendments : AB 1265 Page 8 i) Revenue and Taxation Code Section 2230 requires the state to reimburse cities and counties for the net loss of revenue from each statute that provides a SUT exemption. All of the other related bills noted above contain language stating that, "Notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made by this act and the state shall not reimburse any local agency for any sales and use tax revenues lost by it under this act." The author may wish to consider a similar amendment to mitigate revenue losses to the state. ii) Committee staff suggests a technical amendment to insert "and sold" after "owned" on page 2, line 5. In addition, a space should be added before "when" on page 2, line 7. REGISTERED SUPPORT / OPPOSITION : Support Board of Equalization Board of Equalization Chairwoman Betty T. Yee Department of Foreign Wars of the United States, Department of California Opposition None on file Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098