BILL ANALYSIS                                                                                                                                                                                                    






                                                                      AB 89


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          Date of Hearing:  May 18, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 89  
          (Travis Allen) - As Amended March 26, 2015


          


          Majority vote.  Tax levy.  Fiscal committee. 


          SUBJECT:  Sales and use taxes: exemptions: public schools.


          SUMMARY:  Provides a temporary sales and use tax (SUT) exemption  
          for items purchased by a K-12 public school or a K-12 public  
          school district.  Specifically, this bill:  


          1)Provides a partial exemption from the SUT for any items  
            purchased by a K-12 public school or a K-12 public school  
            district for use by that school or district in California.


          2)Specifies that the exemption does not apply to local sales and  











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            use taxes, transactions and use taxes, and specified state  
            taxed from which revenues are deposited into the Fiscal  
            Recovery Fund, the Local Public Safety Fund, the Education  
            Protection Account, the Local Revenue Fund, and the Local  
            Revenue Fund of 2011. 


          3)Takes effect immediately as a tax levy, but will be operative  
            from January 1, 2016 until January 1, 2021. 


          EXISTING LAW:  


          1)Imposes a sales tax on retailers for the privilege of selling  
            tangible personal property (TPP), absent a specific exemption.  
             The tax is based upon the retailer's gross receipts from TPP  
            sales in this state.

          2)Imposes a complementary use tax on the storage, use, or other  
            consumption in this state of TPP purchased from any retailer.   
            The use tax is imposed on the purchaser, and unless the         
                  purchaser pays the use tax to a retailer registered to  
            collect the California use tax, the purchaser remains liable  
            for the tax, unless the use is exempted.  The use tax is set  
            at the            same rate as the state's sales tax and must  
            generally be remitted to the State Board of Equalization  
            (BOE).<1> 





          3)Requires local government agencies, including school districts  
            and public schools, to pay a SUT on their purchases of TPP.   
          ---------------------------


          <1> As an alternative to reporting use tax directly to the BOE,  
          existing law allows purchasers to report use tax on their state  
          personal income tax returns or their state corporation franchise  
          or income tax returns.  








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            However, sales of TPP to the federal government are generally  
            exempt from the SUT. 


          4)Allows a credit against the use tax to the extent that a  
            purchaser has paid a retail sales or use tax on the TPP in  
            another state, political subdivision thereof, or the District  
            of Columbia prior to the TPP's storage, use, or other  
            consumption in California.  


          FISCAL EFFECT:  The BOE staff estimates that this bill will  
          result in an annual General Fund revenue loss of $37 million in  
          fiscal year (FY) 2015-16 and $76 million in FY 2016-17. 


          COMMENTS:  


           1)The Author's Statement  .  The author has provided the following  
            statement in support of this bill:



          "AB 89 exempts public schools from the state sales and use tax.   
            This would include receipts from items purchased by a K-12  
            public school or a K-12 public school district subject to the  
            sales tax.
            "Reforming and updating the current tax system will allow  
            taxpayer dollars to remain in the local school districts and  
            directly invest in the education of our children.


            "This bill will help local schools provide better resources  
            and materials inside the classroom by allowing them to retain  
            all of their funds without being forced to pay the state tax."


           2)An Overview of SUT  .  California's SUT Law imposes a sales tax  











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            on retailers for the privilege of selling TPP, absent a  
            specific exemption.  The tax is based upon a retailer's gross  
            receipts from TPP sales in California.  The SUT Law also  
            imposes a mirror "use tax" on the storage, use, or other  
            consumption of TPP purchased out-of-state and brought into  
            California.  The use tax is imposed on the purchaser; and  
            unless the purchaser pays the use tax to an out-of-state  
            retailer registered to collect California's use tax, the  
            purchaser remains liable for the tax.  The use tax is set at  
            the same rate as the state's sales tax and must generally be  
            remitted to the BOE.  According to the Department of Finance,  
            the SUT Law contains separately identifiable state tax GF  
            expenditures worth about $13 billion in FY 2014-15.  Examples  
            of these include food, prescription medicines, gas,  
            electricity, and water, farm equipment, fuel sold to common  
            carriers, and rental of linen supplies.



           3)The Proposed SUT Exemption  .  This bill proposes to provide a  
            partial 3.9375% SUT exemption for any item purchased by a  
            public school or a school district for use by that school or  
            district.  Thus, a purchase of office supplies, medical  
            supplies, playground equipment, or a copy machine would  
            qualify for the exemption.  Generally, the sales and use tax  
            applies to purchases of TPP.  The author may wish to amend the  
            bill to replace the word "items" with TPP, to be consistent  
            with existing law. 


           4)School Districts  :  Existing law does not define the term "K-12  
            public district," but provides definitions for elementary,  
            unified, and high school districts.  Since this bill refers to  
            "K-12 school district" and "K-12 public school," it is unclear  
            to Committee staff which schools and districts would qualify  
            for the proposed SUT exemption.  The author may wish to  
            consider amending this bill to clarify the eligibility of  
            schools and districts.












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           5)Slippery Slope:  Where Does One Draw the Line  ?  A sales tax is  
            considered to be a "consumption" tax, meaning that it is  
            theoretically imposed on consumption of TPP.  Under existing  
            law, all public, non-profit and volunteer organizations pay  
            sales or use tax for their purchases, with an exception of  
            only voluntary thrift stores.  Some government entities, such  
            as libraries and "volunteer fire departments", for example,  
            have asked for similar exemptions in the past.  The  
            Legislature, however, decided that such exemptions would set a  
            "slippery slope" precedent insofar as it is difficult to  
            determine which of the purchases would be considered more  
            worthy than others for a tax exemption.  Where should the  
            Legislature draw the line when providing the SUT exemption  
            only for certain government entities and not others?  For  
            example, what is the rationale of exempting purchases made  
            only by school districts and public schools, and not community  
            colleges? 


           6)Proposition 30  .  In general, Proposition 30 increased the  
            marginal tax rate for those making above $250,000 and  
            increased the statewide sales tax rate from 7.25% to 7.5%.   
            Proposition 30 was estimated to increase General Fund (GF)  
            revenue by about $6 billion per year, which would primarily be  
            used to restore funding to California's public school system.   
             As noted in the Governor's Budget Summary, the budget for FY  
            2014-15 provides $61.6 billion in Proposition 98 funding, an  
            increase of $6.3 billion over the 2013 budget act level.   
            Thus, new revenues, provided in part because of the passage of  
            Proposition 30, have translated into additional funding for  
            California's K through 12 school system.

           7)Proposition 98 Uncertainty  .   Proposition 98 requires that a  
            minimum amount of funding be allocated to K-14 education  
            programs each year.  The calculation of that amount is based  
            on various formulas and different factors, including the  
            amount of GF revenue.  As such, a significant decrease in GF  











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            revenue, as proposed by this bill, could potentially reduce  
            the amount of funding allocated to schools under the  
            Proposition 98 guarantee.  And, while the proposed SUT  
            exemption could help K-12 public schools, it would provide no  
            benefit to community colleges that would receive less GF  
            funding. 


           8)Partial Exemptions:  Administrative Complications  .  As noted  
            by the BOE staff in its analysis, most exemptions apply to the  
            total applicable SUT.  The administration of partial  
            exemptions is challenging for both retailers and the BOE.  


           9)Prior Legislation  . 


             a)   AB 1077 (Mountjoy), of the 2001-02 Legislative Session,  
               would have provided for a similar SUT exemption.  AB 1077  
               was held on this Committee's Suspense File. 


             b)   AB 2636 (Leonard), of the 2001-02 Legislative Session,  
               would have provided a SUT exemption for the sale and the  
               use of instructional materials purchased by any public  
               school, public school district, or county office of  
               education, including any charter school, serving  
               Kindergarten and Grades 1 to 12.  AB 2636 was held on this  
               Committee's Suspense File.


             c)   SB 546 (McClintock), of the 2001-02 Legislative Session,  
               would have provided a SUT exemption for the sale of and the  
               use of textbooks purchased by a K-12 public school or  
               school district, or an accredited private school, or sold  
               to a student of an accredited private school or institution  
               of higher education.  SB 546 failed passage in the Senate  
               Revenue and Taxation Committee. 












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             d)   SB 1064 (Polanco), of the 2001-02 legislative session,  
               would have provided a SUT exemption for the sale of and the  
               use of TPP purchased for educational purposes by any K-12  
               public school or school district.  SB 1064 was never heard  
               by the Senate Revenue and Taxation Committee.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          Board of Equalization


          Small School Districts' Association




          Opposition


          None on file




          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098

















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