BILL ANALYSIS                                                                                                                                                                                                    




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  SB 688                      HEARING:  5/8/13
          AUTHOR:  Galgiani                     FISCAL:  Yes
          VERSION:  4/1/13                      TAX LEVY:  Yes
          CONSULTANT:  Miller                   

              SALES AND USE TAXES: EXEMPTIONS: ANIMALS: DRUG AND 
                                   MEDICINES.
          

          Exempts certain animal related drugs from the sales and use  
                                      tax.


                           Background and Existing Law  

           Sales Tax
           
          The state sales and use tax rate is 7.50% as detailed below  
          and is general imposed on all tangible personal property  
          unless specifically exempt.  Cities and Counties may  
          increase the sales and use tax rate up to 2% for either  
          specific or general purposes with a vote of the people. 


          
                   ------------------------------------------------------------- 
                  |       |                    |                                |
                  | Rate  |    Jurisdiction    |       Purpose/Authority        |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |3.9375%|State (General      |State general purposes          |
                  |       |Fund)               |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |1.0625%|Local Revenue Fund  |Realignment of local public     |
                  |       |2011                |safety services                 |
                  |       |                    |                                |
                  |       |                    |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.25% |State (Fiscal       |Repayment of the Economic       |




          SB 688 -- 4/1/13 -- Page 2



                  |       |Recovery Fund)      |Recovery Bonds                  |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.25% |State (Education    |Schools and community college   |
                  |       |Protection Account) |funding                         |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local        |Local governments to fund       |
                  |       |Revenue Fund)       |health and welfare programs     |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local Public |Local governments to fund       |
                  |       |Safety Fund)        |public safety services          |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 1.00% |Local (City/County) |City and county general         |
                  |       |                    |operations. Dedicated to county |
                  |       |                    |transportation purposes         |
                  |       |0.75% City and      |                                |
                  |       |County              |                                |
                  |       |                    |                                |
                  |       |0.25% County        |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 7.50% |Total Statewide     |                                |
                  |       |Rate                |                                |
                  |       |                    |                                |
                   ------------------------------------------------------------- 
                  
          Many items are fully exempted from the sales and use tax in  
          this state (prescription drugs, food, poultry litter) but  
          only a handful are partially exempted from the sales tax at  
          the rate of 5.5%; specifically: Farm equipment and  
          machinery; Diesel fuel used for farming and food  
          processing; Teleproduction and postproduction equipment;  
          Timber harvesting equipment and machinery; and Racehorse  
          breeding stock. 

           Sales and use taxes: animals:

           Veterinarians are generally treated as "consumers" under  
          the sales and use tax laws and are required to pay the tax;  





          SB 688 -- 4/1/13 -- Page 3



          however, a licensed veterinarian's drug and medicine  
          purchases are exempt from the sales and use tax when he or  
          she administers them directly to the animals or as an  
          additive to feed or drinking water to prevent or control  
          disease.

          Animal shelters and animal rescue organizations are  
          generally obligated to pay sales taxes on their drug and  
          medicine sales, unless those sales are made in connection  
          with a pet adoption.     


                                   Proposed Law 

          Senate Bill 688 exempts drugs and medicines used, furnished  
          or sold for the treatment of animals by any of the  
          following persons: 
             1.   A licensed veterinarian, 
             2.   A city, city and county, county, or other local  
               government animal shelter, or 
             3.   A nonprofit animal welfare or rescue organization. 

          SB 688 defines different terms including "animal," "drugs  
          and medicines," "licensed veterinarian," and "nonprofit  
          animal welfare or rescue organization."


                               State Revenue Impact
           
          According to the BOE, SB 688 results in a $10.2 million  
          annual revenue loss for both the state and local  
          governments;  This loss represents a statewide loss of $5.2  
          million and a local government loss of at least $5 million  
          depending on the additional transactions and use tax in  
          that jurisdiction..  


                                     Comments  

          1.   Purpose of the bill  .  The BOE and the California  
          Veterinary Medical Association are the co-sponsors of this  
          measure and provide the following statement: "This bill  
          enables California veterinarians to reduce medical costs  
          and improve pet health. The BOE believes that medication  
          provided by a licensed veterinarian offers more quality  
          assurance than medication obtained elsewhere. Other outlets  





          SB 688 -- 4/1/13 -- Page 4



          often are not well regulated and may not remit California  
          sales tax. Exempting drugs and medicines sold by licensed  
          veterinarians, local animal shelters, and animal welfare  
          and rescue organizations will reduce the cost of purchasing  
          medication under a veterinarian's supervision, and will  
          discourage consumers from going to other outlets to  
          purchase medicine for their pets."  The sponsors have  
          further found that in addition to the unregulated, cheaper  
          medicines, pet owners are often not treating their animals  
          due to the rising costs of veterinary medicine and the low  
          take up rate of insurance (7% of pet owners have  
          insurance).  

          2.   Yes, but  .  Generally, tax exemptions are meant to  
          change behavior or encourage economic activity in a state.   
          This exemption, while for a worthy cause, would do neither.  
           Instead, the bill simply reduces the costs of these  
          products to veterinarians and pet owners.    
                                         

                        Support and Opposition  (5/2/13)

           Support  :  Board of Equalization (BOE) and California  
          Veterinary Medical Association (sponsors); American Society  
          of the Prevention of Cruelty to Animals (ASPCA); California  
          Animal Medical Center; Equine Solutions; Myrtle Avenue  
          Veterinary Hospital; State Humane Association of  
          California; PawPAC.

           Opposition  :  California Teacher's Association  
          (CTA).