BILL ANALYSIS Ó
AB 2540
Page 1
Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2540 (Gatto) - As Amended: April 16, 2012
2/3 vote. Fiscal committee.
SUBJECT : Sales and use taxes: services: Veterans' Home of
California
SUMMARY : Expands the Sales and Use Tax (SUT) Law to cover
"specified services" and annually appropriates $210 million for
specified purposes from the revenues collected. Specifically,
this bill :
1)Imposes a tax upon all retailers for the privilege of selling
"specified services." The tax is set at 7.5% of the
retailer's gross receipts from the sale of "specified
services" sold in California on or after January 1, 2013.
2)Imposes a complementary use tax on the storage, use, or other
consumption in this state of "specified services."
3)Defines a "specified service" as any of the following:
a) Yacht and boat repair;
b) Private aircraft pilot or private jet services;
c) Astrology, tarot, and palm reading;
d) Personal shopping;
e) Party planning services not provided by the facility
where the party occurs;
f) Spa services provided to pets;
g) Elective cosmetic surgery, defined as the surgical
reshaping of normal structures on the body to improve the
body image, self-esteem, or appearance of an individual, or
any medical procedure performed on an individual which is
directed at improving the procedure subject's appearance
and which does not meaningfully promote the proper function
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of the body or prevent or treat illness or disease;
h) Membership fees to private country clubs;
i) Marina services;
j) Limousine rental;
aa) Nonmedical massage;
bb) Pet grooming where the buyer is charged $50 or more for
the grooming;
cc) Nonmedical personal fitness training;
dd) Access to the facilities of a ski resort through the
imposition of a charge;
ee) Access to storage facilities, not including storage
facilities used for the storage of food or self-service
storage facilities, through the imposition of a charge of
$1,000 a month or more;
ff) Furniture repair;
gg) Watch repair;
hh) Support activities for metal mining;
ii) Passenger charter-party carriers as defined in Public
Utilities Code Section 5351 et seq.;
jj) Access to live theater productions through the purchase
of a ticket or membership fees or dues;
aaa) Access to the facilities of a billiard parlor through
the imposition of a charge; or,
bbb) Access to private, telephonic chat lines through the
imposition of a charge to callers.
4)Provides rules for determining the place at which the sale or
purchase of specified services occurs.
5)Appropriates annually, from the tax revenues collected, $90
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million to the Department of Veterans Affairs (VA) to operate
the following Veterans' Homes:
a) The Veterans' Home of California, Redding;
b) The Veterans' Home of California, Fresno;
c) The Veterans' Home of California, West Los Angeles;
d) The Veterans' Home of California, Lancaster; and,
e) The Veterans' Home of California, Ventura.
6)Appropriates annually, from the tax revenues collected, $15
million to the Department of VA to fund county veterans
service officers.
7)Appropriates annually, from the tax revenues collected, $85
million to the Department of Food and Agriculture for ongoing
pest eradication and invasive species eradication programs,
including ongoing asian citrus psyllid (ACP)/huanglongbing
(HLB) eradication efforts.
8)Appropriates annually, from the tax revenues collected, $20
million to the Department of Fish and Game for ongoing pest
eradication and invasive species eradication programs,
including ongoing ACP/HLB eradication efforts.
EXISTING LAW imposes a:
1)Sales tax on retailers for the privilege of selling tangible
personal property (TPP), absent a specific exemption. The tax
is based upon the retailer's gross receipts from TPP sales in
this state.
2)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).
FISCAL EFFECT : The BOE's fiscal estimate for this bill is
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pending.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
As California faces ongoing fiscal crisis, many programs
that have not benefitted from ongoing constitutional
protection have suffered. Among these are services to
California's veterans, to whom we all owe a debt of
gratitude and whose numbers continue to grow with recent
conflicts. Currently beds in many of our state's veterans'
homes sit unused because there is no funding to service
them. These brave men and women deserve better.
As well, funding to programs that protect our state's vital
agriculture industry has suffered. The result has been a
deterioration of programs designed to protect crops from
invasive species that have the potential to destroy entire
sectors of the industry. One recent threat has been from
Asian Citrus Psyllid (ACP)/Huanglongbing (HLB), which will
destroy California's citrus industry. In Florida, HLB has
resulted in about 200,000 acres of commercial citrus groves
being uprooted and another 40,000 acres being abandoned.
In comparison, California has more than 285,000 acres of
commercial citrus groves, with about 119,000 of those acres
in Tulare County. This is a real threat to the state.
AB 2540 would provide much needed funding for our state's
veterans services, including: $90 million to operate the
Veterans Homes in Redding, Fresno, West Los Angeles,
Ventura, and Lancaster and $15 million to fund county
veteran services officers statewide. The measure also
helps our state's agriculture industry by funding ongoing
programs that deal with pest and invasive species
eradication by providing $85 million to the Department of
Food and Agriculture and $20 million to the Department of
Fish and Game for such efforts.
In order to pay for these important programs, the measure
would expand the current state sales tax on 21 services by
adding a small set of discretionary, mostly luxury services
to the current list. Some of these services include:
country club memberships, elective cosmetic surgery, and
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yacht repairs. For most middle-class Californians, this
tax will never be noticed as it only applies to luxury
services that are not essential to everyday life.
Many states already charge sales tax on a number of
services. The list of states includes Texas (83), New York
(57), Arizona (55), Kansas (74), and Iowa (94).
2)Opponents of this bill state:
While AB 2540 currently taxes only a specified number of
services, this bill would open the door to a major shift in
state tax policy. By setting the precedent of taxing
services, AB 2540 would make many other key services
vulnerable to a sales tax. This would threaten many of
California's critical industries, including high-tech
research and development, the financial sector, legal
services, and advertising. The Tax foundation ranks
California as the third worst business climate in the
nation due to the state's high taxes, high energy costs,
restrictive labor laws, and onerous regulations. A sales
tax on services would further adversely impact California's
business climate and kill jobs - and the threat of such a
tax already is sending a negative message to those still
considering doing business here.
3)The BOE notes the following in its staff analysis of this
bill:
a) Sponsor and purpose : "This bill is sponsored by the
author. According to the author's office, a tax on
services such as those listed in this bill is progressive.
These services are purchased primarily by individuals in
higher income brackets whose discretionary income would be
less impacted by a tax on the selected services. The
author notes that people who can afford personal and
professional services, such as those described in this
measure, can better afford to bear a larger share of the
tax burden."
b) The bill is not specific as to whether tangible personal
property purchased for use in the course of providing a
service would be subject to sales or use tax : "With
respect to sales of goods, tax applies to the Ŭsale] of any
property to persons who purchase the goods for the purpose
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of using them in the provision of a service. Tax does not
apply to sales of any property to persons who purchase the
goods for the purpose of reselling them - whether the goods
are incorporated into the manufactured article to be sold,
such as any raw material becoming an ingredient or
component part of a manufactured article, or whether the
goods themselves are simply resold. It is unclear whether
property purchased for use in the provision of a service
will still be taxable if the service itself is subject to
tax, or if the use of a good in the provision of a taxable
service would be considered to be a form of reselling, in
which case the purchase of the property would not be
subject to tax. For example, would the purchase of
champagne by a limousine driver who provides the champagne
to clients as part of the service be considered an item
resold in the course of providing the service, so that the
limousine driver may properly purchase the champagne
without payment of sales tax? . . . The application of
tax on such purchases should be made clear in the bill,
particularly with regard to service industries for which
special rules already exist."
c) The imposition of use tax on out-of-state purchases
could pose some administrative issues : "The bill would
impose a complementary use tax for out-of-state purchases
of the specified services, when purchased for storage, use,
or other consumption in this state. Some issues could arise
with respect to whether a specific service was purchased
for use in this state. Some states that impose a use tax
on out-of-state purchases of services base this on whether
the purchaser derives a benefit from the service in the
state. Also, it is unclear how a service could be
purchased for "storage" in California. These are areas
that may pose administrative problems in enforcement and
compliance in the use tax. For example, if a California
resident had his or her palm read in Nevada while on a
weekend getaway, would the charge for the palm reading be
regarded as a service purchased for use in California? If
a California resident's yacht needed repair while cruising
outside the territorial waters of Mexico, and the yacht was
moored in a California marina a week later, would those
charges be subject to use tax?"
d) More complexities are associated with sellers of both
services and tangible personal property : "For example, a
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pet groomer may provide pet grooming services as well as
sell pet grooming products, such as brushes, pet shampoo,
etc. When a customer purchases both the service and
products, the groomer would be required to perform two
calculations to reimburse him or herself for the proper
amount of tax - 7.5% for the service, and 7.25% to 9.25%
(depending on the location) on the sale of the product.
This would add another level of complexity for the affected
service providers and a possible increase in cash register
programming costs that must be borne by the affected
service providers. Also, these complexities tend to be more
prone to errors in reporting the proper amount of tax,
which results in additional BOE administrative workload."
e) The language will need to be refined as the bill
progresses : "This bill provides some basic language to
impose a tax on services. However, in order to clarify
specific areas of the law, some contradictory references
will need to be amended. BOE staff is willing to work with
the author to refine the language as the bill progresses."
4)Committee Staff Comments
a) The current proposal : AB 2540 would expand the state's
SUT to cover a list of selected services ranging from yacht
repair to elective cosmetic surgery. From the revenues
raised, this bill would annually appropriate $210 million
for specified purposes including the support of veterans'
homes in Redding, Fresno, West Los Angeles, Lancaster, and
Ventura.
b) California's SUT Law: an overview : California's SUT
Law 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
California.
While the SUT represents the state's second largest source of
General Fund (GF) revenues, the past 60 years have seen a
dramatic reduction in the state's reliance on the SUT and a
corresponding increase in its reliance on personal income
tax revenues. For example, in fiscal year (FY) 2011-12,
SUT revenues are estimated to comprise 21% of the state's
GF revenues, down from nearly 60% in FY 1950-51.
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c) What explains the decreased reliance on the SUT ?: The
SUT Law was enacted in a very different era. In the 1930s,
California's economy was largely dominated by manufacturing
and agriculture, and residents mostly bought and sold
tangible goods. Thus, it made sense to impose a
consumption tax on sales of TPP - defined as personal
property that may be "seen, weighed, measured, felt, or
touched . . . ." Over the past 80 years, however,
California's economy has seen a dramatic increase in the
service and technology sectors, resulting in a significant
erosion of the SUT base. As a result, the ratio of taxable
sales to income is currently about 35%, compared to 55% in
1980.
d) Proposals to expand the SUT base : The state's decreased
reliance on the SUT has led to various proposals for
expanding the SUT base. Such an expansion could be
accomplished through two principal means: (1) expanding
the SUT to cover so-called digital equivalents (e.g.,
downloaded movies and music); and, (2) expanding the SUT to
selected services.
It should be noted that California currently imposes a tax
on only 21 services, while some other states tax nearly all
services (e.g., Hawaii and New Mexico). Thus, in his
budget proposal for FY 2009-10, Governor Schwarzenegger
proposed extending the SUT to various services, ranging
from appliance and furniture repair to veterinarian
services. More recently, the Think Long Committee for
California released a proposal to expand the SUT to most
services at a rate between 5% and 5.5%, with an exemption
for educational and medical services.
e) Policy considerations for any service tax proposal : Any
proposal to extend the SUT to services calls for a careful
weighing of numerous policy considerations, ranging from
the proposal's administrative feasibility to its likely
economic consequences. Thus, the following discussion
highlights some of the main issues to consider in assessing
AB 2540's SUT expansion proposal:
i) Administrative feasibility : In reviewing any
proposal to expand the SUT to services, it is important
to consider the proposal's administrative feasibility.
Namely, one should consider how difficult it would be for
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the BOE, which administers the existing SUT, to identify
new taxpayers. Some have argued that any expansion of
the SUT to services should begin with service providers
already registered with the BOE. For example, a provider
of palm reading services has likely never been registered
with the BOE or filed a SUT return. It would take
significant effort on the part of the BOE to identify
such service providers, register them as taxpayers, and
inform them of their obligations under the new service
tax regime. This, however, would likely not be the case
for other service providers, like watch repairers.
Ostensibly, a large percentage of such repairs are
undertaken by retail jewelers, who are already registered
with the BOE and familiar with the SUT. These retailers
would simply have to begin reporting their gross receipts
from such services. In any event, any expansion of the
SUT to services will require the BOE to expend
significant time and resources drafting new regulations,
training staff, registering new taxpayers, and informing
the public of the change in law. Thus, the author may
wish to consider amendments delaying the implementation
of the service tax from January 1, 2013 to a later date
to provide both the BOE and the public sufficient lead
time to adapt.
ii) Avoiding perverse incentives : In assessing a
proposal to expand the SUT base, one should also consider
the degree to which taxing a specific service would
encourage consumers to purchase the service out-of-state,
thereby creating a competitive disadvantage for
California businesses. For example, if the state were to
tax a service that is both expensive and can be obtained
out-of-state (e.g., elective cosmetic surgery), some
customers would have a large incentive to purchase the
service outside California. This same incentive does not
exist, however, in the case of services that nearly all
people purchase, for reasons of necessity or convenience,
instate. For example, if California were to expand the
SUT to pet grooming services, it is unlikely many people
would drive to Nevada to avoid the California tax.
iii) Avoiding the taxation of services used primarily by
businesses : Most economists and tax experts agree that
states should avoid expanding the SUT to cover services
used primarily by businesses. This is because any sales
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tax paid by a business will be factored into the prices
it charges for goods and services, which, in turn, may
again be subject to taxation. This results in consumers
paying a tax on a tax (i.e., pyramiding), making the tax
system less transparent. It would appear that this
proposal largely avoids the problems inherent in
pyramiding, by targeting services either primarily or
exclusively consumed by individuals (with the exception
of 'support services for metal mining.')
iv) Promoting progressivity : One should also consider
the fact that California's SUT is already inherently
regressive, because lower-income individuals typically
spend a larger percentage of their earnings on taxable
goods. This bill attempts to address this issue by
selecting services that are mainly consumed by
higher-income earners (skiing, yacht repair, etc.).
v) Avoiding definitional ambiguity : As noted above,
this bill would expand the SUT to cover a list of
selected services, ranging from yacht repair to
astrology. Some of the service categories are
self-explanatory, and the BOE would likely have little
trouble interpreting the intended scope of services
covered. Other categories, however, could benefit from
further clarification. For example, this bill would
impose a service tax on "elective cosmetic surgery" as
defined. While this bill does specify certain procedures
that would be covered (e.g., hair transplants, cosmetic
dentistry), this list is not meant to be exhaustive.
Would the BOE be responsible for promulgating regulations
specifying which additional cosmetic surgeries are
elective and which are not? Is the BOE really in the
best position to determine whether a particular procedure
"meaningfully promoteŬs] the proper function of the
body"? Such terminology seems inherently subjective,
potentially requiring case by case analysis. Moreover,
how would BOE field auditors properly conduct such case
by case determinations? Would they seek to review
confidential patient files to assess whether a particular
procedure was truly designed to "treat illness or
disease"? It might make more sense to simply enumerate
an exhaustive list of medical procedures that will be
subject to tax rather than provide language susceptible
to varying interpretations. In the end, many of the
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service categories listed in this bill would benefit from
greater definitional precision to avoid ambiguity,
uncertainty, and potential litigation.
f) Related legislation :
i) AB 1963 (Huber), of the current legislative session,
would, among other things, reduce the state SUT rate to
4% and impose a new service tax at the rate of 4%. AB
1963 is set to be heard in this Committee on May 14,
2012.
ii) AB 9 (Coto), of the 2005-06 legislative session,
would have imposed a sales tax on specified services to
increase funding for K-12 education. AB 9 was held in
this Committee.
g) Technical Amendments : Committee staff recommends the
following technical amendments to this bill:
i) On page 7, line 35, strike "means" and insert
"defined as"; and,
ii) On page 12, line 4, strike "determinations" and
insert "overpayments and refunds".
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
American Council of Engineering Companies of California
American Massage Therapy Association
Building Owners and Managers Association of California
California Aerospace Technology Association
California Alliance for Golf
California Asian Chamber of Commerce
California Bankers Association
California Building Industry Association
California Business Properties Association
California Chamber of Commerce
California Delivery Association
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California Healthcare Institute
California Manufacturers and Technology Association
California Retailers Association
California Ski Industry Association
California Society of Enrolled Agents
California State Club Association
California Yacht Brokers Association
Greater California Livery Association
Howard Jarvis Taxpayers Association
Independent Maintenance Contractors Association
International Council of Shopping Centers
Investment Company Institute
Marina Recreation Association
Messenger Courier Association of America
NAIOP of California, the Commercial Real Estate Development
Association
National Federation of Independent Business
Pacific Association of Building Service Contractors
Spidell Publishing
TechAmerica
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098