BILL ANALYSIS                                                                                                                                                                                                    Ó

                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair

          SB 688 (Galgiani) - Sales and Use Tax: Exemption: Animals: Drugs  
          and Medicine
          Amended: April 1, 2013          Policy Vote: G&F 7-0
          Urgency: No                     Mandate: Yes
          Hearing Date: May 13, 2013      Consultant: Robert Ingenito
          This bill meets the criteria for referral to the Suspense File.

          Bill Summary: SB 688 would establish a sales and use tax (SUT)  
          exemption for certain animal-related drugs, until January 1,  

          Fiscal Impact: The Board of Equalization (BOE) estimates that  
          this bill would result in a revenue loss of about $10 million  
          (General Fund and special funds). BOE's costs to administer the  
          bill's provisions would be minor and absorbable. 

          Background: The SUT is a tax on final sales of tangible personal  
          property, such as clothing, household furnishings, appliances,  
          and motor vehicles. Intermediate sales of goods (from a  
          wholesaler to a retailer, for example) are not taxed and, in  
          addition, certain individual items are specifically exempted  
          from the SUT. The largest of these tax expenditure programs  
          (TEPs) involve utilities and home-consumed food. California's  
          state-level SUT was established in the 1930s and its local SUT  
          in 1955.

          Currently, most sales and use tax exemptions apply to the total  
          applicable SUT. However, current law contains five partial  
          exemptions, currently at a 5.50 percent rate:

          (1) Farm equipment and machinery,
          (2) Diesel fuel used for farming and food processing,
          (3) Teleproduction and postproduction equipment,
          (4) Timber harvesting equipment and machinery, and
          (5) Racehorse breeding stock.

          The SUT rates in California differ by county and locality, and  
          range from 7.50 percent to 10.00 percent, depending on whether  
          optional taxes are levied. The current statewide SUT rate is  


          SB 688 (Galgiani)
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          8.38 percent (weighted by sales). This includes:

                 A state rate of 6.50 percent-3.9375 percent for the  
               General Fund, 2.0625 percent for specified local purposes,  
               0.25 percent for schools and community college funding, and  
               0.25 percent to pay off the deficit-financing bonds.

                 A weighted average local rate of 1.88 percent, including  
               0.75 percent for general purposes, 0.25 percent for county  
               transportation purposes, and the remaining 0.88 percent  
               from optional SUTs largely used for transportation.

          Generally, persons engaged in the business of selling tangible  
          personal property must obtain a seller's permit. These persons  
          must also report the tax on a BOE-prescribed return. However,  
          under various statutes, some smaller or service-based businesses  
          and certain nonprofit organizations that make certain types of  
          sales are regarded as consumers and not sellers. These entities  
          are referred to as a "statutory consumers." Qualifying sales by  
          a statutory consumer are not considered retail sales. Therefore,  
          a statutory consumer need not report or pay tax on his or her  
          sales or obtain a seller's permit (unless he or she makes other  
          non-qualifying retail sales). Rather, tax generally is owed on  
          the sale to the statutory consumer of the products intended for  
          resale to the statutory consumer's customer. 

          Under current law, licensed veterinarians are considered  
          statutory consumers of drugs or medicines used or furnished when  
          they perform professional services. Under this provision, as  
          consumers, licensed veterinarians pay sales tax reimbursement to  
          their suppliers or use tax on purchases of drugs and medicines  
          they use or furnish when they perform their professional  

          For food animals, such as cows, chickens, and pigs, existing law  
          exempts sales and purchases of drugs and medicines administered  
          directly to the animals or as an additive to feed or drinking  
          water when the drug's or medicine's primary purpose is to  
          prevent or control disease. Also, current law exempts sales and  
          purchases of drugs and medicines administered to nonfood animals  
          as an additive to feed or drinking water when the animal or its  
          offspring is to be sold in the regular course of business.  
          Therefore, a licensed veterinarian's drug and medicine purchases  


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          and subsequent sales 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  

          Existing law requires animal shelters and animal rescue  
          organizations to report and pay sales tax on their drug and  
          medicine sales, unless those sales are made in connection with a  
          pet adoption. For sales made in connection with a pet adoption,  
          such as vaccinations, existing law requires these organizations  
          either to pay sales tax reimbursement or use tax on sales or  
          purchases of drugs and medicines used in connection with those  

          Proposed Law: This bill would exempt 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."

          The bill contains a January 1, 2018 sunset and would require the  
          Legislative Analyst's Office to conduct a study as described.


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          Staff Comments: Veterinarians need not currently register with  
          the BOE to sell drugs and medicines used or furnished in the  
          course of their professional services; however, most are likely  
          registered as retailers. Many veterinarians sell pet supplies or  
          other products in addition to drugs and medicines. Such  
          veterinarians are required to hold a BOE-issued seller's permit  
          and file returns with the BOE to report and pay the tax.  
          Moreover, current law requires a "qualified purchaser" to  
          register with the BOE and annually report and pay use tax to the  
          BOE. A "qualified purchaser" includes businesses without  
          seller's permits that have at least $100,000 in annual gross  
          receipts from business operations. Those veterinarians that are  
          not required to hold seller's permits that meet the required  
          gross receipts also may be registered with the BOE to report use  
          tax as a "qualified purchaser."