BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 107 - Walters
As Introduced
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Exempts mandatory gratuities when charged to a
non-profit
EXISTING LAW
Imposes the sales and use tax on the gross receipts on
tangible personal property unless statutorily exempted.
The following chart shows the basic sales and use tax rate
for the state; in addition, cities and counties may levy
transactions and use taxes with a vote of the people for
either general or special purposes in that city.
-----------------------------
|Rate |Jurisdiction |
|-----+-----------------------|
|5.75%|State (General Fund) |
| | |
|-----+-----------------------|
|0.25%|State (Fiscal Recovery |
| |Fund) |
|-----+-----------------------|
|0.50%|State (Local Revenue |
| |Fund) |
|-----+-----------------------|
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|0.25%|State (General Fund) |
| | |
|-----+-----------------------|
|0.50%|State (Local Public |
| |Safety Fund) |
|-----+-----------------------|
|1.00%|Local (County/City) |
| | 0.25% County |
| |transportation funds |
| | 0.75% City and |
| |county operations |
|-----+-----------------------|
|8.25%|Total Statewide Base |
| |Sales/Use Tax |
-----------------------------
State law distinguishes between gratuities in food and
beverage sales: voluntary tips which are generally not
taxable and mandatory tips that are subject to the sales
and use tax. For example, voluntary tips are given for
service at a restaurant, carrying luggage or parking a car.
In these instances there is no prior arrangement for the
tip and the tips are not subject to the sales and use tax.
When customers are required to give tips for a service,
those tips are generally taxable. In these instances,
restaurants, hotels and others add amounts to the bill for
a meal and the customer has agreed, either orally or in
writing, in advance of the event. While this often happens
at large events, a tip is also considered mandatory when it
is noticed on the menu; for example, "gratuity of 18% shall
be added for parties of six or more."
The Sales and Use Tax law provides no general
exemption for charitable organizations. There are several
separate sales and use tax exemptions designed to support
various kinds of nonprofit groups engaged in charitable
activities but there is no general exemption.
THIS BILL
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Provides an exemption from the sales and use tax
for a mandatory gratuity that is charged by a hotel,
caterer, restaurant or similar establishment for
meals, food or beverages purchased by a nonprofit
organization.
Defines "nonprofit organization" as an organization
exempt from taxation under Section 501(c)(3) or
Section 501(c)(4) of the Internal Revenue Code.
Takes effect immediately as a tax levy, but would
become operative on the first day of the first
calendar quarter commencing more than 90 days after
the bill's effective date.
FISCAL EFFECT:
BOE estimates approximately $2 million in total state
and local loss with approximately $1.34 million
attributable to the state's general fund (annually?).
COMMENTS:
A. Purpose of the Bill
This bill is sponsored by the California State
National Association for the Advancement of Colored People
(NAACP), a nonprofit organization that qualifies for tax
exempt status under Section 501(c)(3) of the Internal
Revenue Code. The sponsor and author state that because
nonprofits depend on charitable giving to pay for their
critical community programs and fundraising events it is
important that they be able to use every dollar possible
for direct public benefit service costs.
In the current economic downturn, nonprofit
organizations are the most effective entities at providing
services to poor, disadvantaged and displaced people.
When nonprofit organizations use hospitality industry
venues and services, the transaction provides jobs,
contributes to economic growth in the state, and
facilitates important health, educational, entrepreneurial
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and social outcomes.
B. Not all non-profits qualify
This bill would only exempt mandatory tips and service
charges made to nonprofit organizations qualifying for tax
exempt status under Sections 501(c)(3) and (c)(4). Section
501(c)(3) organizations include religious, educational,
charitable, scientific, literary, testing for public
safety, to foster national or international amateur sports
competition, and prevention of cruelty to children or
animals organizations. Section 501(c)(4) organizations
include civic leagues, social welfare organizations, and
local associations of employees. Besides these two types
of nonprofit organizations, there are an additional 24
other nonprofit organizations with tax-exempt status under
Section 501(c). It is unclear why this bill is limited to
just these two Sections.
Support and Opposition
Support:NAACP
Oppose:California Tax Reform Association
---------------------------------
Consultant: Gayle Miller
SB 107 - Walters
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