BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 919 (Williams) - Sales and Use Tax: Itinerant Vendors: Repayment Amended: June 24, 2014 Policy Vote: G&F 6-1 Urgency: No Mandate: No Hearing Date: June 30, 2014 Consultant: Robert Ingenito This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 919 would allow veteran vendors, as specified, to receive repayments of sales taxes paid to the Board of Equalization (BOE) between April 1, 2002 and April 1, 2010. Fiscal Impact: The bill contains a one-time $50,000 General Fund appropriation to the State Controller's Office (SCO) for repayments, as specified. A cost pressure could result to the extent that total claims for repayments exceed $50,000 (See Staff Comments). BOE indicates the bill would result in one-time costs of less than $10,000 (General Fund). Background: The sales and use tax (SUT) is imposed on retail sales of tangible personal property (TPP) unless specifically exempted. The SUT is generally not applied to sales between wholesalers and retailers, but rather is imposed on the retailer at the point of final sale to its customers. Persons selling TPP generally must obtain a seller's permit and report the tax on a BOE-prescribed return. Current law allows about 15 entities that purchase products for resale to be designated as "consumers," and not retailers, of certain TPP that they purchase for resale. Thus, under a "consumer" reporting status, current law eliminates the need for the retailer to obtain a seller's permit and report the tax on his or her sales. Rather, these retailers are regarded as consumers, and they must pay tax on their purchases of taxable AB 919 (Williams) Page 1 products they intend to sell. These include certain items purchased by optometrists, physicians, pharmacists, veterinarians, and others where the sales are, to varying degrees, incidental to their main businesses. For these entities, sales taxes are due when they purchase the product from the wholesaler, instead of when they resell the products to their customers. The benefit is that these businesses and BOE avoid the recordkeeping and auditing burdens on an incidental amount of sales. The cost to the State is that it loses the sales tax on the mark-up between the wholesale and retail price of the products being sold. In the case of cooked food, the state loses the full value of the product since the raw food materials are generally exempt from the tax. Under current law, qualified itinerant vendors (QIVs) are classified as consumers instead of retailers. A QIV is a person that (1) was a member of the United States Armed Forces who received an honorable discharge or release from active duty under honorable conditions, (2) is unable to obtain a livelihood by manual labor due to a service-connected disability, (3) is a sole proprietor with no employees, and (4) has no permanent place of business in the State. The provisions granting consumer reporting status to QIVs were added to current 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 collecting and remitting 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 AB 919 (Williams) Page 2 supervisors shall issue to such soldier, sailor or marine, without cost, a license therefor. This provision was added in 1893 (40 years before enactment of the Sales and Use Tax 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 in Chapter 2 of Part 1 of Division 7 of the B&PC, entitled Licensing by Counties. Consequently, 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. This interpretation has been supported by Legislative Counsel opinions and a Los Angeles Superior Court Decision (No . BC 210257). 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. SB 809's provisions would have sunset at the end of 2011, but were extended until the end of 2021 by subsequent legislation. Proposed Law: This bill would, among other things, do the following: Enable a "qualified veteran" to receive from the state a "qualified repayment" of state and local sales taxes paid to the BOE during the eight-year period beginning April 1, 2002, and ending April 1, 2010. Define a "qualified veteran" as a person who met the requirements of a QIV during the period in which the sales were made, and paid to the BOE state and local sales taxes during the period beginning April 1, 2002, to April 1, 2010. To qualify, the QIV must also not have collected sales tax from customers. Define a "qualified repayment" as an amount equal to the state and local sales taxes paid during the period beginning April 1, 2002, and before April 1, 2010, less any amounts previously refunded, credited or paid through any means. Before January 1, 2016, authorize a qualified veteran to AB 919 (Williams) Page 3 file a claim with BOE. By March 1, 2016, require BOE to certify to SCO the qualified repayment amount to be made. Appropriate $50,000 to SCO to make payments of qualified repayments to qualified veterans. Require BOE to report to the Legislature by May 1, 2016, the name of each qualified veteran who was issued a repayment and the repayment amount. Require SCO to transfer back any used portion of the bill's appropriation back to the General Fund. Staff Comments: This bill largely results from the efforts of a single individual whose interpretation of current law as it existed prior to the passage of SB 809 has been consistently rejected. Specifically, the individual filed three separate lawsuits between 1999 and 2008 against BOE seeking a sales tax refund for the period dating back to 1993. He failed all three times. Nevertheless, BOE entered into a settlement agreement with the individual in April, 2010. Specifically, under the settlement, BOE agreed to refund him an undisclosed amount of money, while he (1) was required to refrain from further litigation or administrative claims against BOE, and (2) agreed to waive "any known or unknown claims." The individual is now advocating for legislation to provide additional relief. Essentially, in enacting this bill, the Legislature would be retroactively conforming the law to support his notion that QIVs were never under legal obligation to collect sales tax, despite the fact that this position was repeatedly rejected by the courts, by BOE, and by Legislative Counsel. This bill's ultimate fiscal impact is not completely known. Though the bill appropriates $50,000, the actual costs to provide comprehensive repayments to QIVs could be higher. BOE indicates that it is aware of a small number of veterans that over the years have filed appeals on the issue related to the AB 919 (Williams) Page 4 Business and Professions Code discussed above. The number of those veterans (and potentially others) that would seek repayments is not known. If a single QIV had average daily sales of about $215 over the 8-year period covered in the bill, the resulting sales tax due to BOE (and now repaid under the provisions of the bill) would exceed $50,000. Thus, to the extent that BOE is correct and veterans who have filed appeals previously were to come forward and request repayments, the $50,000 might not be adequate, with a cost pressure being the result.