BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                                     AB 155


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          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. 











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          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  











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            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.  










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           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  











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            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  











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            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  











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            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,  



















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            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").










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            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












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          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 















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          Opposition


          California Tax Reform Association 




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