BILL ANALYSIS Ó AB 163 Page A 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 AB 163 Page B 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. AB 163 Page C 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 AB 163 Page D 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. AB 163 Page E 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 AB 163 Page F 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