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 23, 2013 Consultant: Robert Ingenito
SUSPENSE FILE.
Bill Summary: SB 688 would establish a sales and use tax (SUT)
exemption for certain animal-related drugs, until January 1,
2018.
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
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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
services.
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
disease.
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
services.
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."