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 SB 688 (Galgiani) Page 1 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 SB 688 (Galgiani) Page 2 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. SB 688 (Galgiani) Page 3 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."