BILL ANALYSIS                                                                                                                                                                                                    




                                                                  AB 163
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          Date of Hearing:  April 1, 2013

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Raul Bocanegra, Chair

                  AB 163 (Atkins) - As Introduced:  January 23, 2013
           
           Majority vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Sales and Use Tax Law:  exemption:  military thrift  
          stores

           SUMMARY  :  Extends indefinitely the current sales and use tax  
          (SUT) exemption for tangible personal property (TPP) sold by  
          thrift stores that are both located on a military installation  
          and operated by a "military welfare society" for specified  
          purposes.  Specifically,  this bill  :  

          1)Deletes the January 1, 2014, sunset date for the military  
            thrift store exemption statute, thereby extending the  
            exemption indefinitely.   

          2)Takes immediate effect as a tax levy. 

           EXISTING FEDERAL LAW  defines the term "military welfare society"  
          to mean one of the following organizations:  

          1)Army Emergency Relief;

          2)Air Force Aid Society, Inc.;

          3)Navy-Marine Corps Relief Society (Society); or, 

          4)Coast Guard Mutual Assistance.  
           
          EXISTING STATE 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  









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            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)Provides no general exemption from SUT simply because the  
            seller or purchaser is engaged in charitable activities.  

          4)Provides a SUT exemption, until January 1, 2014, for TPP sold  
            by a thrift store that is both:

             a)   Located on a military installation; and,

             b)   Operated by a military welfare society that, in  
               partnership with the United States (U.S.) Department of  
               Defense, provides financial, educational, and other  
               assistance to members of the Armed Forces, eligible family  
               members, and survivors in need.  

          5)Provides that the state will reimburse counties and cities for  
            revenue losses caused by the enactment of SUT exemptions.   

           FISCAL EFFECT :  The BOE estimates that this exemption results in  
          $15,610 in annual state and local SUT revenue losses.  

           COMMENTS  :

          1)The author has provided the following statement in support of  
            this bill:

               [The Society] is a private non-profit charitable  
               organization that operates thrift stores on Navy or Marine  
               Corps bases across California.  The income generated  
               through thrift store sales is used to provide financial,  
               educational and other general assistance to active duty  
               personnel and military veteran families.  The sales tax  
               exemption for [Society] thrift stores is an important part  
               of California's commitment to its veterans. 

               To date, [Society] thrift stores have provided $13.4  
               million in financial assistance to active duty and retired  
               military personnel, and have provided 3,500 military  
               families with financial education classes.  [The Society]  
               will be unable to provide their current level of service if  
               they are required to pay California sales taxes. 









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               This bill will bring the exemption for [Society] thrift  
               stores in line with exemptions for other thrift stores such  
               as the Goodwill, which is permanently exempted from  
               California sales tax.  

          2)This bill is supported by the Society, which notes:

               Since 1904, [the Society], a nonprofit charitable  
               organization, has provided emergency financial assistance  
               and support to our Marines, Sailors and their families.  In  
               2012, our 3,600 trained volunteers and small cadre of  
               employees disbursed nearly $42 million in interest-free  
               loans and grants to 63,929 clients around the world.  This  
               need-based assistance [has] addressed such immediate needs  
               as basic food and shelter, vehicle repairs, household  
               set-up, medical and dental, funeral expenses, and emergency  
               transportation.  [. . .]  

               Our ability to generate funds is, of course, critical to  
               our mission of providing needed assistance to our Marines,  
               Sailors and their families in California, the United  
               States, and around the world.  Our twenty-seven thrift  
               shops, [including] seven thrift shops located on Naval  
               Installations in California, not only enable [the Society]  
               to meet the needs of service members, but also allow their  
               families to shop on-base for articles at economical prices,  
               thereby allowing them to save more of their limited  
               military income to pay for other living necessities.  

          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 1960s, 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  
               indefinitely extend an existing tax expenditure in the form  
               of a SUT exemption for military thrift stores. 

              b)   How is a tax expenditure different from a direct  
               expenditure?  :  As the Department of Finance notes in its  









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               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. 
              
              c)   History of the military thrift store exemption  :  SB 765  
               (Dutton), Chapter 615, Statutes of 2009, first established  
               the SUT exemption for military thrift stores.  SB 765 was  
               specifically designed to exempt sales at thrift stores  
               operated by the Society.<1>  The Society, in turn, is a  
               nonprofit, charitable organization that provides financial  
               and educational assistance to members of the U.S. Naval  
               Services.  The Society, working in partnership with the  
               Navy and Marine Corps, operates 27 thrift stores, seven of  
               which are located at naval or marine bases in California.   
               These thrift stores sell used clothing, uniforms, and  
               household items to service members and their families.   
               Income realized from these stores is returned to the Navy  
               and Marine Corp community in the form of relief services.

               As originally introduced, SB 765 provided for an indefinite  
               SUT exemption.  BOE sponsored the measure out of a belief  
               that service members should not be required to bear the  
               additional expense of sales tax added to the price of  
               thrift store purchases.  SB 765 was amended in this  
               Committee, however, to provide a sunset date of January 1,  
               2014.  This bill seeks to delete this sunset date, thereby  
               extending the exemption indefinitely.  

               -------------------------
          <1> Revenue and Taxation Code Section 6363.4 technically applies  
          to military welfare societies from all branches of the military.  
           According to the BOE, however, only the Society currently  
          operates thrift stores.  








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              d)   A note on sunsets  :  As set forth above, tax expenditures  
               like the instant SUT exemption, may be enacted by a simple  
               majority vote.  Absent a built-in sunset date, however, tax  
               expenditures cannot be rescinded without a supermajority  
               vote.  For this reason, this Committee has a longstanding  
               policy in favor of including sunset dates in tax  
               expenditure programs, to ensure the opportunity for  
               periodic legislative oversight.  

               The author correctly notes that current law provides a  
               permanent SUT exemption for TPP made or assembled by  
               certain charitable organizations engaged in the relief of  
               poverty and distress.  This exemption, commonly referred to  
               as the "Goodwill" exemption, has been in place since 1959.   
               More recent exemptions, however, have been enacted with  
               built-in sunset dates to ensure a degree of oversight.  For  
               example, existing law provides a similar SUT exemption for  
               retail items sold by thrift stores operated by nonprofit  
               organizations to assist individuals with human  
               immunodeficiency virus (HIV) or acquired immune deficiency  
               syndrome (AIDS).  This exemption was established by AB 3187  
               (Martinez), Chapter 781, Statutes of 1996.  As originally  
               enacted, the exemption provisions included a sunset date of  
               January 1, 2002.  In 2001, legislation was introduced [AB  
               180 (Cedillo), Chapter 383] to delete permanently the  
               exemption's sunset date.  Prior to enactment, however, AB  
               180 was amended in the Senate to instead extend the sunset  
               date to January 1, 2007.  In 2006, legislation was again  
               introduced [SB 1341 (Cedillo), Chapter 373] to delete the  
               sunset date outright.  The bill was subsequently amended to  
               delay the sunset date to January 1, 2012.  Finally, in  
               2011, legislation was again introduced [AB 289 (Cedillo),  
               Chapter 289] to delete the exemption's sunset date.  AB 289  
               was instead amended in this Committee to extend the repeal  
               date to January 1, 2019.  Given this precedent, and the  
               policy implications involved, the author may wish to amend  
               this bill to provide for a reasonable extension of the  
               current SUT exemption for military thrift stores.     

              e)   Potential technical amendment  :  Section 2 of this bill  
               provides that this act shall take immediate effect as a tax  
               levy.  Section 3, however, contains an identical  
               duplication of this language.  Based on the Legislative  
               Counsel digest, Committee staff assumes that the author's  
               intent was to reserve one of these sections for language  









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               providing that the state shall not reimburse counties and  
               cities for revenues losses caused by the continued  
               exemption.  If this is the case, appropriate amendments  
               should be taken in Committee.     

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Navy-Marine Corps Relief Society
          State Board of Equalization
          State Board of Equalization Member George Runner

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098