BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 717 (Gonzalez) - Sales and use taxes: exemption: diapers ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: January 21, 2016 |Policy Vote: GOV. & F. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: June 20, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 717 would provide a temporary sales and use tax (SUT) exemption for diapers used by infants and toddlers. Fiscal Impact: The Board of Equalization (BOE) indicates that this bill would result in an annual state and local revenue loss of $35 million, $17 million of which would be General Fund. The agency would incur absorbable implementation costs. Background: Except where a specific exemption or exclusion is provided, current law imposes the SUT on all retailers for the privilege of selling tangible personal property (TPP) at retail in AB 717 (Gonzalez) Page 1 of ? California, or on the storage, use, or other consumption in this state of TPP purchased from a retailer. After the State collects SUT revenue ($48 billion in 2013-14), it allocates the money to various state and local funds. Roughly half-collected from an approximately 3.9 percent rate-goes to the General Fund and can be spent on any state program, such as education, health care, and criminal justice. Another 1.25 percent, known as the Bradley-Burns rate, goes to cities and counties for general purposes. Three sales tax funds have uniform state rates and support specified programs-an approximately 1.1 percent rate for 2011 realignment (county-administered criminal justice, mental health, and social service programs); a 0.5 percent rate for 1991 realignment (county-administered health and social services programs); and a 0.5 percent rate for city and county public safety programs pursuant to Proposition 172 (1993). Additionally, some local governments levy optional local rates-known as Transactions and Use Taxes (TUTs)-and a small portion of these funds are used for general purposes. As of January 1, 2017, the average statewide SUT rate will be 8.21 percent. State law fully exempts many items from SUT (such as prescription drugs, food, electricity, and poultry litter), while other items are exempted from the state sales tax, but not the local share, such as farm equipment and machinery, diesel fuel used for farming and food processing, teleproduction and postproduction equipment, timber harvesting equipment and machinery, and racehorse breeding stock. Partial SUT exemptions are difficult for both retailers and the BOE, and complicate return preparation and processing. Moreover, errors attributable to these partial exemptions occur frequently, resulting in additional return processing workload for BOE. Proposed Law: This bill would establish a temporary SUT exemption for diapers designed, manufactured, processed, fabricated, or packaged for use by infants and toddlers, designated size 3 or under. The bill provides that (1) the State shall not reimburse any local agency for SUT revenues lost as a result of this exemption, and (2) the exemption shall remain in effect until January 1, 2022. AB 717 (Gonzalez) Page 2 of ? Related Legislation: AB 1291 (Hollingsworth, 2001), provided a SUT exemption for diapers. The bill was held on the Suspense File in the Assembly Committee on Revenue and Taxation. Staff Comments: The BOE revenue estimate assumes that 92.5 percent of diapers sold in the State are disposable, while the other 7.5 percent are cloth. BOE assumes disposable diaper usage of 6.7 diapers per day. The Department of Finance currently estimates that there are about 1 million Californians under the age of two. Put together, BOE estimates that total diaper sales for newborn to size three totals about $431 million annually. Of this amount, about $2 million represent sales of cloths diapers. -- END --