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
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<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