BILL ANALYSIS Ó SB 805 Page A Date of Hearing: June 13, 2011 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Henry T. Perea, Chair SB 805 (Committee on Veterans Affairs) - As Introduced: February 18, 2011 Majority vote. Tax levy. Fiscal committee. SENATE VOTE : 37-0 SUBJECT : Sales and use taxes: consumers: veterans: itinerant vendors SUMMARY : Deletes the sunset date for the provisions of the Sales and Use Tax (SUT) Law that currently classify a qualified itinerant vendor (QIV) as a consumer, and not a retailer, of specified tangible personal property (TPP) the QIV sells. Specifically, this bill : 1)Deletes the January 1, 2012 sunset date for the provisions of the SUT Law granting special tax treatment to QIVs, thereby extending the provisions indefinitely. 2)Provides that, notwithstanding existing law, the state shall not reimburse local agencies for SUT revenues lost as a result of this bill. 3)Takes immediate effect as a tax levy. 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 California's use tax, the purchaser remains liable for the tax. 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). SB 805 Page B 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. 4)Classifies a QIV as a consumer, and not a retailer, of TPP owned and sold by the QIV, except for alcoholic beverages or TPP sold for more than $100. 5)Specifies that a person is a QIV when all the following conditions apply: a) The person was a member of the Armed Forces of the United States (U.S.), who received an honorable discharge or release from active duty under honorable conditions; b) The person is unable to obtain a livelihood by manual labor due to a service-connected disability; c) For purposes of selling TPP, the person is a sole proprietor with no employees; and, d) The person has no permanent place of business in this state. 6)Specifies that this preferential tax treatment does not apply to a person: a) Engaged in the business of serving meals, food, or SB 805 Page C drinks to a customer at a location owned, rented, or otherwise supplied by the customer (i.e., a caterer); or, b) Operating a vending machine. FISCAL EFFECT : The BOE estimates state and local revenue losses of roughly $22,000 annually. COMMENTS : 1)This bill has been introduced by the Senate Committee on Veterans Affairs, which notes that the original sunset date was inserted to guard against unknown revenue losses. Given the minimal revenue losses that have actually resulted, the Committee on Veterans Affairs argues that the favorable tax treatment for QIVs should be extended indefinitely. 2)The BOE notes the following in its staff analysis of this bill: a) Sponsor and purpose . "This bill is sponsored by the BOE in order to enable qualifying veterans to retain their consumer status with respect to their itinerant sales. This provision represents one small step towards recognizing our disabled veterans who have already made, or are making the transition from military to civilian employment, and it should not be allowed to sunset. This provision assists in this transition by simplifying reporting requirements under the Sales and Use Tax Law for those qualifying disabled veterans that are honorably discharged or released from service that desire to engage in the business of selling goods they own. For qualifying disabled veterans without employees or a permanent place of business, this provision eliminates the need for them to hold a seller's permit, file sales tax returns, and remit sales tax on their sales." b) What are a qualifying veteran's tax obligations ? "Under these provisions, a qualifying itinerant disabled veteran making taxable sales of goods, wares or merchandise owned by him or her is not required to report sales tax on his or her sales of these items. Instead, the veteran is only required to pay tax on his or her cost of any taxable purchases of the items or the component parts of the items he or she sells. For example, when a veteran is selling SB 805 Page D his or her own paintings, the veteran would pay tax on his or her purchase of the paint, brushes, and canvas used to make the painting. The sale of the painting, itself, would thereafter be exempt from tax. Under this provision, if the qualifying veteran makes no sales of alcoholic beverages or sales that exceed the $100 cap, the veteran is not required to obtain a seller's permit, file sales tax returns, or remit sales tax on his or her sales of the goods he or she sells. This essentially eliminates the sales tax compliance costs and associated recordkeeping that can be unduly burdensome for disabled veterans." 3)Committee Staff Comments: a) What is a "tax expenditure"? : Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960's, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). This bill would permanently extend a tax expenditure, in the form of a consumer status classification, to assist honorably discharged itinerant veterans. b) How is a tax expenditure different from a direct expenditure? : As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining a part of the tax code without demonstrating any public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it generally takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote. SB 805 Page E c) Retailers and consumers : The sales tax is imposed on retailers for the privilege of selling TPP. As such, retailers of TPP must generally obtain a sellers permit and report and remit the tax to the BOE. Existing law, however, classifies a variety of retailers as consumers, and not retailers, of specified TPP they sell. These retailers are not required to obtain sellers permits or to report tax on their qualifying sales. Instead, these retailers are only required to pay tax on the taxable goods used to produce the property they sell. As the BOE notes in its staff analysis of this bill, "consumer reporting status" is primarily designed to alleviate reporting burdens for small businesses, while minimizing the revenue losses associated with complete SUT exemptions. d) How did we get here? : The provisions granting consumer reporting status to QIVs were added to law by SB 809 (Committee on Veterans Affairs), Chapter 621, Statutes of 2009. For several years preceding SB 809's enactment, a number of veterans argued that existing law already exempts honorably discharged veterans from sales tax on sales of food and carbonated beverages from a mobile cart. Specifically, these veterans pointed to Business and Professions Code (B&PC) Section 16102, which provides in its entirety: Every soldier, sailor or marine of the United States who has received an honorable discharge or a release from active duty under honorable conditions from such service may hawk, peddle and vend any goods, wares or merchandise owned by him, except spirituous, malt, vinous or other intoxicating liquor, without payment of any license, tax or fee whatsoever, whether municipal, county or State, and the board of supervisors shall issue to such soldier, sailor or marine, without cost, a license therefor. This provision was added in 1893 (long before enactment of the SUT Law), and was described in the chaptering bill as "An act to establish a uniform system of county and township government." Moreover, this statute is contained SB 805 Page F in Chapter 2 of Part 1 of Division 7 of the B&PC, entitled Licensing by Counties. As such, BOE adopted the position that, while this statute exempts honorably discharged veterans from locally imposed license taxes and fees, it does not provide an exemption from SUT. Thus, SB 809 was passed in an effort to address this issue, and explicitly granted preferential treatment to honorably discharged itinerant veterans under the SUT Law.<1> e) Should the sunset date be deleted outright ? This bill would delete the January 1, 2012 sunset date for the provisions of the SUT Law granting special tax treatment to QIVs, thereby extending the provisions indefinitely. While such a deletion would offer QIVs a degree of certainty regarding their future tax treatment, this Committee has a longstanding policy of including sunset dates for tax expenditure programs to ensure effective legislative oversight. As such, the Committee may wish to consider extending the current sunset date for an appropriate period instead of deleting the sunset date outright. REGISTERED SUPPORT / OPPOSITION : Support State Board of Equalization (sponsor) Opposition None on file Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098 --------------------------- <1> It should be noted that SB 809 was similar to AB 3009 (Brownley) of the 2007-08 Legislative Session, which would have conferred consumer status to similarly situated QIVs, but only with respect to food products and nonalcoholic beverages. AB 3009 was held in this Committee.