BILL ANALYSIS                                                                                                                                                                                                    Ó




                                                                  SB 805
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          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).  









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          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 









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               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 









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               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.  
              









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              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 









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               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.