BILL ANALYSIS Ó AB 155 Page A Date of Hearing: May 18, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 155 (Dababneh) - As Introduced January 16, 2015 Majority vote. Tax levy. Fiscal committee. SUBJECT: Sales tax: exemption: food products: vending machines SUMMARY: Exempts from the sales or use tax (SUT) a sale of certain food products through vending machines. Specifically, this bill: 1)Repeals the existing partial exemption from the SUT for food products sold at retail through a vending machine and, instead, provides a full SUT exemption, on and after January 1, 2016, for the gross receipts of any retailer from the sale at retail of food products sold through a vending machine. AB 155 Page B 2)Defines the term "food products" as all of the following: a) "Food products for human consumption" as defined for purposes of Revenue and Taxation Code (R&TC) Section 6359, excluding any hot prepared food products; and, b) Hot coffee, hot tea, and hot chocolate if those hot beverages are actually sold through a vending machine for a separate price. 3)Makes conforming changes to other related statutory provisions. 4)Provides that, notwithstanding existing law, the state shall not reimburse any local agency for any SUT revenues lost as a result of this act. 5)Takes effect immediately as a tax levy, but will become operative on January 1, 2016. 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 AB 155 Page C 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)Provides a SUT exemption for the sales of food products for human consumption. (Article XIII Section 34, California Constitution.) This exemption does not apply to certain sales of food and beverages such as food and beverages sold for consumption at a retailer's place or business, in places where admission is charged, or through a vending machine. (Revenue and Taxation Code (R&TC) Section 6359(d).) 4)Provides that only 33% of the gross receipts from the retail sale of food products are subject to SUT when sold through a vending machine. Food products include cold food products, hot coffee, hot tea, and hot chocolate. (R&TC Section 6359.2). FISCAL EFFECT: The BOE staff estimates that this bill will result in an annual General Fund (GF) revenue and local revenue loss of over $5 million, beginning with the 2016-17 fiscal year (FY). COMMENTS: --------------------------- <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. AB 155 Page D 1)The Author's Statement . The author has provided the following statement in support of this bill: "It is the position of the vending operators in California that their companies and their customers should not be forced to pay tax on food products that would be exempt if they were purchased at a retail location rather than through a vending machine. AB 155 would fix this inequity in California's tax code by ensuring that the tax exemption on food products applies regardless of whether the food products are sold through a grocery store, convenience store, catering truck or vending machine." 2)The Arguments in Support . The proponents state that this bill is needed to "eliminate an inequity under current tax law." They note that under existing law "food products, except carbonated beverages, liquor, and hot prepared foods that are sold for human consumption through retailers such as grocery stores, convenience stores, and other retail outlets are exempt from sales tax." However, "those same food products when sold through a vending machine are subject to sales tax on 33 percent of gross receipts." The proponents view this tax treatment as unfair and are "seeking parity with other retailers in the state that do not pay sales tax on food products." The proponents argue that vending machine operators "are forced to either absorb the sales tax or pass it onto consumers" and that their customers "should not be forced to pay tax on food products that would be exempt if they were purchased at a retail location rather than through a vending machine." 3)The Arguments in Opposition. The opponents of this bill assert that current law "represents an effort to provide some administrative simplicity by assuming that only 33% of purchases are taxable, thereby exempting many of these food products." They argue that, "while the cost of this bill is low, the purpose is questionable, because the 33% of sales AB 155 Page E already exempts an approximation of the food products that would otherwise be exempt." Furthermore, "the likelihood that consumers will benefit is small, as the tax is included in the cost of the products and is unlikely to be passed on to the consumer." 4)An Overview of SUT: Vending Machines . California's SUT Law imposes a sales tax 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 set at the same rate as the state's sales tax and must generally be remitted to the BOE. Sales of cold food products for home consumption and individual hot drinks "to go" are generally not subject to sales tax. When food is sold for consumption at facilities provided by the retailer, however, the sale is taxable. As noted by BOE, in the case of vending machine sales, the retailer is unable to determine whether food sold is consumed on or off the premises where the vending machine is located. Therefore, a standard approximation of the amount of food consumed at the vending machine site was established in law. Specifically, to minimize the vending machine operators' reporting problems, the Legislature added R&TC Section 6359.2 to the Revenue and Taxation Code to provide that 67% of cold food products sold through vending machines are exempt from tax and that 33% of cold food products are considered to be consumed at facilities of the retailer, i.e. a vending machine operator, and are therefore taxable. In 1983, R&TC Section 6359.2 was repealed; but a few years later, in 1988, that section was again added to the R&TC to provide a partial exemption for cold food products sold through vending machines. As explained by the BOE staff, due AB 155 Page F to revenue considerations, "the exemption was phased in during 1988 and 1989." Thus, in 1988, 77% of vending machine food products sales were subject to tax and, in 1989, 55% were subject to sales tax. In 1990, the current 33% partial exemption was established. 5)The Scope of this Bill . This bill is intended to equalize the tax treatment applied to the sales of certain food products. Under current law, some products that would be exempt from the tax if purchased from a grocery store (e.g., candy, snack foods, and bottled water) are partially taxed if sold through vending machines. This bill would create a full SUT exemption for cold food products (including bottled water), as well as for hot beverages (such as coffee, tea and chocolate) sold through vending machines. However, sales of carbonated beverages and hot food products sold through vending machines would remain 100% taxable, which is consistent with sales made by other retailers. Currently, vendors must segregate sales from vending machines between food products and non-food products. This bill would require vendors to separately account for sales of hot beverages and would create a third category of items that vending machine operators would have to segregate in their records. 6)Proposition 163 . In 1992, voters adopted Proposition 163, which repealed the state's brief attempt to tax candy, snack foods, and bottled water, which was intended to alleviate the budgetary shortfall of the early 1990s. Taxation of these items was not only viewed as highly regressive, but extremely bothersome to consumers faced with confusing definitional inconsistencies (e.g., whole cakes and pies were not taxable, but individually wrapped pies and cakes were taxed). Proposition 163 was a constitutional amendment, added as Section 34 to Article XIII of the California Constitution, and prohibits the state and political subdivisions to impose a sales or use tax on sales of food products for human AB 155 Page G consumption, except as provided by statute as of January 1, 1993. 7)Vending Machines: a Grocery Store or Cafeteria? The supporters of this bill argue that sales of food for human consumption should be treated similarly, regardless of whether the sale is made by a grocery store or through a vending machine. Thus, in seeking parity with other retailers in California that do not collect sales tax on food products, the supporters analogize vending machines to grocery or convenience stores. However, while grocery stores and vending machines do sell some of the same products, "this factor alone does not necessarily make them part of the same class for sales-tax purposes." (Associated Food Services, Inc. v. Commissioner of Taxation (1974) 298 Minn. 277, 282.) Rather, as several state courts have held, the test should be "whether a vending machine, in its method of merchandising and the consumer market it serves, is more like a grocery store or a restaurant. [Ibid (emphasis added).] This distinction is not based upon the nature of the items sold. Vending machines are often located in office or other commercial buildings, industrial facilities, universities, colleges, and sports centers and are mostly intended to supply consumers "with refreshment in places of employment, educational institutions or the like." (CRH Catering Co., Inc. v. Commonwealth of Pennsylvania (1983) 521 A.2d 497, 502.) Their competitors are more likely to be "restaurants, coffee shops or snack bars, AB 155 Page H than grocery stores." (Ibid.)<2> Currently, 67% of cold food products sold through vending machines are exempt from the sales tax and only 33% of cold food products are taxable. In contrast, sales of food items by restaurants, coffee shops and snack bars are fully subject to SUT. Viewed in this context, this bill would provide operators of vending machines with a competitive advantage relative to restaurants, bakeries, or snack bars if the existing partial exemption is replaced with a full SUT exemption. The Committee may wish to consider whether the sales of food items through vending machines are more like sales of such items at snack bars (where they would be taxed on the full price) or sales of such items at grocery stores or supermarkets. 8)Erosion of the SUT Tax Base . The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen a dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21st Century Economy noted that spending on --------------------------- <2> The Supreme Court of Minnesota in Associated Food Services relied on "Vending and Food Service Management Review," a publication that clearly points out that the vending machine owners consider themselves to be a part of the fast-food service industry. Specifically, the publication noted that "[V]ending machine installations have benefited especially from the trend toward lighter meals and from the proven benefits of work breaks, now often taken at the employee's discretion during his work day." Service firms that employ vending machines, mobile catering trucks, in-office coffee service and conventional lunchroom serving methods have received more acceptance from Americans ( p. 283, quoting from the "Review"). AB 155 Page I taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base. 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. It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy. 9)BOE Technical Amendments . The BOE staff suggests the following technical amendment to the bill: On page 6, line 20, delete "Section 6359.4" and insert "Section 6359.2" REGISTERED SUPPORT / OPPOSITION: Support AB 155 Page J Rendezvous Music and Vending Atnip Co., Inc. Canteen Vending / Compass Group Consumer Vending & Coffee Service Business Vending and Coffee Service Vending Plus, Inc. Gourmet Coffe Service D/B/A/ World Wide Vending Biscomera Corporation First Class Vending, Inc. Vend Mart Canteen of Coastal California California Automatic Vendors Council AB 155 Page K Opposition California Tax Reform Association Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098