BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
107 (Walters)
Hearing Date: 08/27/2009 Amended: 06/16/2009
Consultant: Mark McKenzie Policy Vote: Rev&Tax 7-0
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BILL SUMMARY: SB 107 would generally exempt mandatory
gratuities charged to a nonprofit organization for the purchase
of meals from sales and use taxes until 2014.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Sales/use tax exemption$670 $1,339 $1,339 General
$28 $56 $56 Special*
$307 $614 $614 Local**
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* Fiscal Recovery Fund
** Includes city, county, and district revenues
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STAFF COMMENTS: SUSPENSE FILE.
Existing law generally imposes a sales and use tax on the gross
receipts of tangible personal property, with specified
exemptions. Board of Equalization (BOE) regulations related to
taxable sales of food products specify that voluntary tips on
the sale of food and beverages are not taxable, but mandatory
tips are subject to tax. Voluntary tips include amounts paid by
a customer when there is no advance arrangement with the
business regarding the amount of the tip and the employee
retains the tip. However, when a customer agrees, either orally
or in writing, to provide a gratuity for a service that
contributes to a taxable sale, the sales and use tax applies to
both the tip and the meals and drinks served. While current law
provides several sales and use tax exemptions for specific
nonprofit organizations engaged in charitable activities, there
is no general statutory exemption for sales of meals, or the
related service charges, to nonprofit organizations.
SB 107 would provide a sales and use tax exemption for a
mandatory gratuity, tip, or service charge that is charged by a
hotel, caterer, restaurant, or similar establishment for a meal,
food, or beverages purchased by Section 501(c)(3) and 501(c)(4)
nonprofit corporations. The bill specifies that the exemption
would not be operative until the first calendar quarter
commencing more than 90 days after the effective date of the
bill and the exemption would sunset on January 1, 2014.
BOE indicates that there are approximately 124,000 nonprofit
organizations that would qualify for this sales and use tax
exemption. The actual revenue loss associated with this
exemption is unknown, but if each qualified organization
purchased $1,000 worth of food and drinks each year, and was
charged a mandatory tip of 18 percent, SB 107 would exempt
$22.32 million from the sales and use tax. This would result in
a total annual revenue loss of approximately $2 million, of
which $1.34 million would be on the General Fund.