BILL ANALYSIS Ó
AB 1190
Page 1
Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1190 (Jeffries) - As Introduced: February 18, 2011
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 for tourism in California and local destinations;
g) Does not own any equipment used to provide destination
management services, including dance floors, decorative
props, lighting, podiums, sound or video systems, stages,
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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,
d) The destination management services occur on two or more
consecutive days.
4)Provides that, notwithstanding existing law, the state shall
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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 only 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
retailer's gross receipts from TPP sales in this state.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
the California use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must be remitted to the
State Board of Equalization (BOE).
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.
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FISCAL EFFECT : The BOE estimates that this bill would reduce
state and local revenues by approximately $158,000 each year.
COMMENTS :
1)The author's office has not provided this Committee with any
statements or background materials in support of this bill.
2)Proponents state, "ŬDMCs] are currently classified as
retailers, which Ŭrequires] them to collect sales tax from
their clients on both the products they provide as part of
their services, as well as the time that they spend preparing
for events. However, ŬDMCs] have traditionally viewed
themselves as consumers of these food and beverages and
typically charge their customers on a per person basis,
without an itemized price breakdown."
3)The BOE notes the following in its staff analysis of this
bill:
a) "Other event planners' business activities are 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 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."
c) "Other businesses have fees and charges for professional
services that are related to the sale of ŬTPP] and subject
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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
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 Comments:
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."
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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
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, this bill
requires the qualified DMC to be accredited by ADME or
enrolled in an accreditation program.
iii) As the BOE notes, under current law, event planners
like DMCs are treated like caterers when providing meals,
food, and beverages. Specifically, under BOE SUT
Regulation 1603(h)(3)(C), 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 the 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
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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
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
questions 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 1687 (Jeffries), introduced in the 2009-10
Legislative Session, contained provisions nearly
identical to this bill. AB 1687 was held in the Assembly
Appropriations Committee.
ii) AB 676 (Jeffries), introduced in the 2009-10
Legislative Session, contained provisions nearly
identical to this bill. AB 676 was held in the Assembly
Appropriations Committee.
iii) 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.
iv) SB 700 (Ducheny), introduced in the 2007-08
Legislative Session, contained provisions nearly
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identical to this bill. SB 700 was held in the Senate
Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
California Travel Industry Association
Destination PROS
Mana, Allison & Associates, Inc.
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098