BILL ANALYSIS
AB 1687
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1687 (Jeffries) - As Amended: April 20, 2010
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: consumer status: destination
management companies
SUMMARY : Designates a qualified destination management company
(DMC) as a consumer, and not a retailer, of the tangible
personal property (TPP) it provides a client under a qualified
contract for destination management services. Specifically,
this bill :
1)Defines a "qualified DMC" as a corporation that:
a) Is substantially engaged in the business of providing
destination management services. (The term 'substantially'
is defined to mean that 80% or more of the business' gross
sales are derived from the provision of destination
management services.);
b) Is designated as an Accredited DMC by the Association of
Destination Management Executives (ADME), or is an
executive member of the ADME and enrolled in the ADME
accreditation program;
c) Is not doing business as a caterer;
d) Maintains a permanent nonresidential office in
California from which the destination management services
are provided;
e) Has three or more full-time employees;
f) Expends at least 1% of its gross revenue annually to
market California and local destinations for tourism;
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g) Does not own any equipment used to provide destination
management services, including dance floors, decorative
props, lighting, podiums, sound or video systems, stages,
or equipment for catered meals. (This condition does not
apply to office equipment.); and,
h) Does not provide services for weddings.
2)Defines "destination management services" as the provision of
four or more of the following services:
a) Transportation;
b) Entertainment;
c) Meals;
d) Recreational activities;
e) Tours;
f) Registration; and,
g) Staffing.
3)Defines a "qualified contract" as a contract between a
qualified DMC and its client for destination management
services that meets all of the following conditions:
a) The client is a corporation, partnership, limited
liability company, trade association, or other business
entity principally located outside of the county in which
the destination management services are provided. (The
client cannot be an individual, social club, or fraternal
organization.);
b) The client is responsible for paying the qualified DMC
for all the destination management services provided;
c) The qualified DMC is responsible for paying all the
vendors that sell or lease TPP to the qualified DMC for the
contract services, including vendors' charges for sales tax
reimbursement or collection of use tax; and,
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d) The destination management services occur on two or more
consecutive days.
4)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for any sales and use tax (SUT)
revenues lost as a result of this bill.
5)Takes immediate effect as a tax levy, but becomes operative on
the first day of the first calendar quarter commencing more
than 90 days after its effective date.
6)Sunsets on January 1, 2016.
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;
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
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this bill would reduce state and local revenues by approximately
$231,000 each year.
COMMENTS :
1)The author states, "Currently, the legal staff at [BOE] has
taken the position that any and [all] services provided by
[DMCs] that are related to food and beverage service are
subject to California sales tax; essentially making them
retailers of food and beverages. This creates two very basic
problems: (1) restaurants will not accept resale exemption
certificates from DMCs and (2) DMCs do not have liquor
licenses. Furthermore, the California Alcoholic Beverage
Control Board (ABC) has said that it will not issue liquor
licenses to DMCs because DMCs do not have stand-alone business
premises that serve alcoholic beverages." The author goes on
to state, "As a result of the confusion, there is a need to
have DMCs statutorily defined as "consumers" rather than
"resellers" for purposes of sales tax. This solution will
permit [DMCs] to charge for their creative services without
the fear in the future that the transfer of incidental [TPP]
in the course of the event will jeopardize their status of
independent service providers."
2)The sponsor of this bill states, "[DMCs] are incorporated,
independent service providers that market, promote and
showcase California as a tourism and meetings destination to
associations and corporations and provide full service detail
planning to their clients." Furthermore, the sponsor states,
"There are approximately forty-five DMCs in California today,
most of which are small, women-owned businesses. DMCs have
operated for nearly 40 years as independent service providers.
DMCs have always been treated as independent service
providers by [BOE]. For the past forty years, BOE considered
DMCs to be the consumers of any [TPP] incidentally acquired to
create client programs. To resolve the issue, AB 1687
clarifies that DMCs continue to be deemed consumers, rather
than resellers, for purposes of sales tax."
3)BOE notes the following in its analysis of this bill:
a) "Other event planners' business activities are very
similar to the activities of DMCs. They also design,
coordinate, plan, produce, and manage special events for
individuals and groups. These event planners go by many
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different titles, including conference and meeting planner,
convention coordinator, festival organizer, wedding
planner, special event or occasion organizer, and trade
show planner. The type of services and items they provide
varies depending on the event they are planning, and
include the following:
1) advertising and marketing, 2) furnishing of food and
beverages, 3) planning and providing of entertainment,
decorations, security and parking, 4) coordinating travel,
transportation, and hotel accommodations, and 5) hiring,
supervising, and training of support staff."
b) "Under current law, other event planners like DMCs are
treated similarly to a caterer when providing meals, food
and beverages. The event planner is making retail sales of
these items and any charges for services related to the
furnishing and serving of the food and beverages are
subject to tax. Since other event planners' business
transactions are very similar to DMCs, should the bill be
amended to give them the same tax treatment?"
c) "Along the same lines, [BOE] staff notes that the bill
would essentially give preferential tax treatment to
qualified DMCs. Qualified DMCs would not be liable for
sales tax on their retail sales of food and beverages,
including any mark ups associated on such sales. DMCs
would also not be liable for sales tax on their charges for
planning, designing, and coordination that are made in
connection with the sale of food and beverages.
Consequently, other event planners may believe they are
being unjustly treated and may question why legislation was
enacted that gave special tax reporting privileges for
qualified DMCs over all event planners."
d) "Other businesses have fees and charges for professional
services that are related to the sale of [TPP] and subject
to tax. These businesses have to segregate their charges
for professional services directly related to the sale of
merchandise from charges for services that have no relation
to the sale of merchandise."
"One such example is interior designers and decorators, who
typically perform design, repair, reupholstering, color
coordination, and planning. They also sell merchandise
such as furniture, window coverings, carpeting, home
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accessories, and samples. Their professional services
typically include consulting, design, layout, selection of
color schemes, coordinating furniture and fabrics, and
supervising installation. For interior designers and
decorators, tax applies to any charges for their
professional services that are directly related to the sale
of merchandise. Conversely, tax does not apply to charges
for professional services that are not directly related to
the sale of merchandise."
"For these businesses, it's not always easy to determine the
point at which their professional services are related to a
sale and subject to tax or unrelated to a sale and
nontaxable. While enactment of this measure will simplify
the DMCs' tax reporting and record keeping, it could set a
precedent for other businesses whose business activities
also involve nontaxable professional services and taxable
services related to a sale."
4)Committee Staff Notes:
a) What exactly is a DMC? :
i) The ADME notes that a DMC is a "professional
services company" that specializes in the planning and
implementation of events, activities, and tours.
Specifically, ADME states that, "DMCs provide services to
Incentive Companies, which are generally affiliates of
large travel agencies, as well as to corporate clients
and groups. These services include extensive pre-program
planning and design, transportation services, arrangement
of tours and activities and arrangement of events
including theme parties or awards dinners." Finally,
ADME notes, "Typically, clients are billed on a per
person or flat fee basis, without the DMC specifically
showing the charges for the creative services."
ii) This bill defines a qualified DMC as a corporation
that is substantially engaged in the business of
providing "destination management services." The term
"destination management services," in turn, is defined as
the provision of four or more of the following services:
transportation, entertainment, meals, recreational
activities, tours, registration, and staffing. This bill
specifically provides that a qualified DMC cannot be
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doing business as a caterer, or provide services for
weddings. Moreover, a qualified DMC must maintain a
permanent nonresidential office in California, have three
or more full-time employees, and expend at least 1% of
its gross revenue annually to market California and local
destinations for tourism. A qualified DMC may not own
any equipment used to provide destination management
services except "office equipment." Finally, recent
amendments require the qualified DMC to be accredited by
ADME or enrolled in an accreditation program.
iii) As BOE notes, under current law, event planners like
DMCs are treated like caterers when providing meals,
food, and beverages. Specifically, BOE SUT Regulation
1603(h)(3)(C) provides that tax applies to charges made
by a caterer for event planning, design, coordination,
and/or supervision if those charges are made in
connection with the furnishing of meals, food, or drinks
for the event. Tax does not apply to separately stated
charges for services unrelated to the furnishing and
serving of meals, food, or drinks, such as optional
entertainment, or the provision of parking attendants and
security guards.
b) What would this bill do? : This bill would designate a
qualified DMC as a consumer, rather than a retailer, of TPP
it provides to a client under a qualified contract for
destination management services. Therefore, as BOE notes,
a qualified DMC would not be liable for sales tax on its
retail sales of food and beverages, or other items related
to the sale of food and beverages (e.g., centerpieces,
flowers, candles, ice sculptures, etc.). Moreover, DMCs
would not be liable for sales tax on their charges for
planning, design, and coordination that are related to the
sale of TPP. Rather, a DMC would be regarded as a consumer
of the TPP it uses in providing its services, and tax would
apply to the sale made to the DMC.
c) Service providers, retailers, and those in between : In
general, service providers are considered consumers of any
TPP incidentally transferred in providing their services.
As consumers, tax applies to the service provider's
purchase of TPP. BOE SUT Regulation 1501 provides that, to
determine whether a particular transaction involves the
sale of TPP or the incidental transfer of TPP in providing
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a service, one must look to the true object of the
contract. That is to say, one must determine whether the
buyer's true objective was obtaining the service or the
property produced by the service.
d) A precedent for future legislation? : Committee staff
question whether this bill might inadvertently establish a
precedent for future bills. Indeed, there are a number of
businesses in California that receive revenues from both
taxable TPP sales and non-taxable services. Should these
businesses also be considered consumers of TPP they sell,
if those sales are deemed "incidental" in nature? As
California's economy continues to shift toward the
service-sector, might this lead to an erosion of the sales
tax base upon which this state relies for revenues?
e) Related legislation :
i) AB 676 (Jeffries), introduced in the current
Legislative Session, contained provisions nearly
identical to this bill. AB 676 was held in the Assembly
Appropriations Committee.
ii) SB 1628 (Ducheny), introduced in the 2007-08
Legislative Session, contained provisions nearly
identical to this bill. SB 1628 was held in the Senate
Appropriations Committee.
iii) SB 700 (Ducheny), introduced in the 2007-08
Legislative Session, contained provisions nearly
identical to this bill. SB 700 was held in the Senate
Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of Destination Management Executives (sponsor)
Access Destination Services
Arrangements Unlimited
Brier & Dunn
California Restaurant Association
California Travel Industry Association
Santa Monica Convention and Visitors Bureau
State Board of Equalization Member Michelle Steel
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Destination PROS
Fun is First
Kuoni Destination Management
Laguna Beach Visitors & Conference Bureau
PRA Destination Management
Sonoma County Tourism Bureau
TMM
Viviani, Inc.
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098