BILL ANALYSIS Ó
AB 755
Page A
Date of Hearing: May 4, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 755
(Ridley-Thomas) - As Amended April 14, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use taxes: exemption: small businesses:
Los Angeles County transit projects
SUMMARY: Provides a partial sales and use tax (SUT) exemption
for sales made by a small business whose property line abuts or
faces the rail corridor of specified Los Angeles County transit
construction projects. Specifically, this bill:
AB 755
Page B
1)Provides a partial - 3.9375% - SUT exemption for sales of
tangible personal property (TPP) sold by a small business, as
specified, during the period in which each project is under
construction.
2)Grants the SUT exemption only to small businesses whose
property line abuts or faces the rail corridor or a designated
construction area of any project, as described in the Final
Environmental Impact Reports and as approved by the Los
Angeles County Metropolitan Transportation Authority (MTA).
3)Defines a "project" as any of the following projects:
a) The Crenshaw/LAX Transit Corridor Light Rail Line;
b) The Regional Connector Transit Corridor Light Rail Line;
or,
c) The Westside Subway Extension Light Rail Line.
4)Defines "small business" as a retailer that either:
a) Remitted to the State Board of Equalization (BOE) less
than $200,000 in tax for the previous four calendar
quarters; or,
AB 755
Page C
b) Has been in operation for less than four calendar
quarters and remitted less than an average of $50,000 in
tax for each calendar quarter of operation.
5)Contains legislative findings and declarations regarding the
Crenshaw/LAX Transit project and the need for the state to
assist the LA County MTA in mitigating the short term impacts
of the project on small businesses located in the construction
zone.
6)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 complimentary 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 State Board of Equalization (BOE).
FISCAL EFFECT: The BOE staff estimates that this bill will
AB 755
Page D
result in an annual revenue loss of $1.7 million during the
construction period.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"The Los Angeles County Metropolitan Transportation Authority
(LAC MTA) is currently engaged in the largest public transit
expansion in the country, a program that will fundamentally
transform Los Angeles County and will have significant
long-term economic benefits for the entire region.
"LACMTA is currently constructing three future rail transit
lines: the Crenshaw/LAX Corridor Light Rail Line, the
Regional Connector and the Westside Subway Extension. As a
part of this massive construction project, LACMTA has adopted
locally preferred alternatives for these projects which
describe the alignment of the projects including station
locations.
"While these projects will create long-term economic benefits
for the local communities and the County of Los Angeles as a
whole, there will be temporary impacts to the local
communities, particularly small businesses, from the
construction of the projects. As such it is incumbent upon
the state to partner with LACMTA and assist in mitigating
these short term impacts by providing tax relief to businesses
affected by the construction of these rail lines."
2)Arguments in Support . The proponents state that the Los
Angeles County MTA is currently engaged in "the largest public
AB 755
Page E
transit expansion in the country, a program that will
fundamentally transform Los Angeles County and will have
significant long-term economic benefits for the entire
region." However, as noted by the proponents, there "will be
temporary impacts to the local communities, particularly small
businesses, from the construction of the projects." The
proponents argue that it is "appropriate for the state to
partner with LACMTA to assist in mitigating these short term
impacts by providing tax relief to business affected by the
construction of these rail lines." They mention that, in the
past, the Legislature "has considered so called 'sales-tax
holidays' as an incentive to patronize businesses during
certain periods" and contend that a similar model could be
used to provide relief to businesses impacted by Metro's
transit project construction.
3)Crenshaw/LAX Transit Project: Background . According to the
author, the Crenshaw/LAX Transit Project is an 8.5-mile light
rail line, with eight stations. The rail line will be between
the Expo Line on Exposition Boulevard and the Metro Green
Line. The 8.5-mile line will be from Exposition and Crenshaw
boulevards to Aviation and Century boulevards, and will
include eight new stations - four of them on Crenshaw. This
project will serve the Crenshaw District, Inglewood,
Westchester and surrounding area with eight stations.
Construction of these light rail lines began in 2014. The
construction is expected to be completed between 2018 and
2023. The author's office states that the project will
provide not only alternative transportation option to
congested roadways, but also significant environmental
benefits, economic development and employment opportunities
throughout Los Angeles County.
According to Los Angeles Times, there are about 550 businesses,
mostly "mom-and-pop" operations with fewer than four workers,
AB 755
Page F
that would probably be affected by the construction on the
Crenshaw/LAX project. (LA Times, November 27, 2014.) To
mitigate the impact on small business located within the
construction zone, LA Metro created a Business Interruption
Fund. It is expected that the $10 million annual fund will
compensate affected businesses for as much as $50,000 or 60%
of their annual revenue losses. This Fund is administered in
partnership with the Pacific Coastal Regional Small Business
Development Corporation. The Fund provides financial
assistance to small businesses directly affected by the rail
construction for their fixed operating expenses, such as
utilities, insurance, rent or mortgage and payroll. For
these purposes, a "small business" is defined as a "business
with at least two years of continuous operating history and 25
or fewer total employees." The eligible business must be in
good standing with local, state and federal taxing and
licensing authorities and be able to produce relevant
financial records demonstrating a loss of business revenue
during the period of construction. On April 6, 2015, LA Metro
delivered the first checks totaling $66,310 to four merchants:
Lili Wigs; 1st Choice Driving & Traffic School; Design Studio
27; and Parisian Wigs, Inc.
Metro has taken other steps to help businesses that have been
hurt by construction. The agency launched an "Eat, Shop, Play
Crenshaw" campaign in October to encourage residents to
support the local businesses, and a business solution center
was created at the Urban League to provide free technical
advice, business planning, bookkeeping and marketing
assistance, as well as web development. Most business owners,
though aggravated by the construction, agree that the
Crenshaw/LAX line ultimately will be good for the area. "It
might be disruptive and inconvenient today," said Teri
Williams, president of One United Bank, which is located in
the strip mall. "That's a small price for the long-term
benefits." (LA Times, November 27, 2014.)
AB 755
Page G
4)Construction Mitigation. The 2009 American Recovery and
Reinvestment Act, which was designed to stimulate the economy,
allocated a large amount of construction funds to state and
municipal projects. As the economy began to improve, a new
wave of public works projects has raised a new concern for
public officials and business groups: a negative impact of
construction on local businesses. Many of the construction
projects affect surrounding businesses by limiting access to
potential customers. Thus, a new term - "construction
mitigation" - was coined to refer to the measures that cities
could take to counteract the negative effects of construction.
As noted by several researchers, the need for construction
mitigation is obvious: "a major impact of construction
projects on local businesses comes from the disruption of
traffic patterns and available parking."<1> A long-lasting
construction project that "does not provide for continued
access to businesses can even result in permanent behavioral
shifts within a community, as residents find alternative
sources for goods and services."<2> However, while the
short-term impact of construction projects may negatively
impact the surrounding businesses, "public construction
projects in general (and infrastructure improvement projects
in particular) have the potential to engender significant
long-term economic benefits, including reductions in
transportation costs and increases in economic activity."<3>
The challenge, of course, is to ensure that local businesses
survive during the construction period to enjoy the long-term
benefits of construction. Thus, cities have a strong
incentive to implement programs designed to mitigate the
impact of construction projects on surrounding businesses.
The study conducted by the University of Wisconsin reviewed the
mitigation programs implemented by 46 cities across the United
States, including San Jose and Sacramento, and identified a
---------------------------
<1> City of Milwaukee: Construction Mitigation Program,
University of Wisconsin-Madison, La Follette School of Public
Affairs, Bo MccCready, Ian Ritz, Spring 2010, p. 3.
<2> Id.
<3> Id.
AB 755
Page H
number of cost-effective mitigation programs.<4> These
services that exist in other cities include a provision of
alternate parking locations and free parking, underwriting the
cost of advertising, facilitation of business promotions to
encourage residents to visit local businesses, loans, direct
compensation and grants. The County of Los Angeles has
already implemented many of these services, including the
Business Interruption Fund program. The Committee may wish to
consider whether the services implemented by the county so far
would provide sufficient benefits to local businesses to
outweigh the potential negative impacts of the construction.
The Committee may also wish to consider whether services
utilized in other states would be more effective in mitigating
the construction impact on surrounding businesses as compared
to a state tax subsidy.
5)What Does This Bill Do ? 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 and must generally be
remitted to the BOE.
This bill would provide a partial exemption from the SUT for
sales of TPP by small businesses affected by the LA County
MTA's construction projects. Only small retailers, defined as
those that collect less than $200,000 in sales tax for the
previous four calendar quarters, would be eligible for the
exemption. The intent of this bill is to provide tax relief
from the state portion of the SUT for businesses affected by
the construction of the rail lines.
Under current law, the statewide base SUT rate is 7.5%, which is
comprised of 3.9375% General Fund (GF) state rate, 0.25%
Fiscal Recovery Fund rate, 0.50% Local Revenue Fund rate,
0.50% Local Public Safety Fund rate, 0.25% Education
Protection Account rate, 1.0625% Local Revenue Fund 2011 rate,
---------------------------
<4> Id., pp. 8-14.
AB 755
Page I
0.75% city and county operations rate and 0.25% county
transportation rate. In addition to the statewide base rate
of 7.5%, cities and counties are authorized to impose
additional voter-approved taxes.
This bill would eliminate only the GF portion of the SUT rate -
3.9375% - which means that eligible sales would still be
subject to a SUT at the rate of 3.5625%, in addition to the
taxes imposed by a county, city, or district pursuant to the
Bradley-Burns Uniform Local SUT Law or the Transactions and
Use Tax Law. [Revenue &Taxation Code Parts 1.5, 1.6 and 1.7
(commencing with Section 7200).]
6)The Scope of the Proposed SUT Exemption. This bill recognizes
that a major construction project undertaken by a local
government, while providing significant long-term economic
benefits for the region, may nonetheless create a substantial
financial burden for local businesses located near or within
the construction zone. Under this bill, the State would step
in to ease the burden experienced by some businesses affected
by the construction project. The proposed exemption, however,
is broad. The exemption would apply to all purchases of TPP
sold by eligible businesses, without regard to the type of
items sold. Furthermore, while this bill is intended to
provide tax relief to small businesses negatively impacted by
the construction project, it would allow a partial SUT
exemption to any small business based on a geographical
location near or within the construction zone regardless of
whether the business has been actually affected by the
construction. For purposes of receiving a grant from the
Business Interruption Fund, an eligible small business must
meet certain requirements, including the production of
financial records evidencing the loss of business revenue
directly related to the period of construction disruption.
The Committee may wish to consider whether the same
requirement of "direct impact" should apply to the retailers
that would be eligible for the proposed partial SUT exemption.
AB 755
Page J
Additionally, one of the eligibility requirements for the
exemption is that the retailer's property "abuts or faces the
rail corridor or a designated construction staging or
construction storage area, including a small business located
in a mall or strip-mall that is similarly situated." It is
unclear whether the affected retailers would need a
certification from the BOE or whether a self-certification
would suffice. Finally, the proposed exemption would be
operative for the period during which the project is "under
construction." The phrase "under construction" is not
defined, which may lead to disputes between the retailers and
BOE. The author may wish to clarify the meaning of this
phrase.
7)SUT Exemptions and the State's Reduced Reliance on SUT
Revenues . 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 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.
It could be argued that, while well-intentioned, additional
SUT exemptions further erode an already shrinking SUT base.
AB 755
Page K
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.
8)Slippery Slope . A sales tax is considered to be a
"consumption" tax, meaning that it is theoretically imposed on
consumption of TPP. While the legal incident of the tax is
imposed on the retailer, the tax is collected from the
purchaser. A retailer does not bear the actual burden of the
sales tax, but is only required to collet it from the
purchasers and remit it to the BOE. The existing law does not
differentiate between retailers located in the construction
zone and retailers located everywhere else. In other words,
the geographical location of retailers is not factored into
the calculations of the SUT, nor does it impact the retailer's
eligibility for an exemption from the SUT.
The proposed SUT exemption would place eligible small businesses
at a competitive advantage vis-à-vis other retailers, which
must collect and remit sales tax. Arguably, this competitive
advantage would provide enough of an incentive for customers
to patronize those businesses during the construction period.
Such an exemption, however, would set a "slippery slope"
precedent. Should the Legislature routinely provide a SUT
exemption to businesses impacted by a construction project? If
not, then what criteria should the Legislature utilize in
determining which construction projects, and businesses
located adjacent to the construction site, are more worthy
than others for a tax exemption? What is the rationale for
exempting sales made by impacted businesses in Los Angeles but
not in Sacramento, for example? Where should the Legislature
draw the line for providing a SUT exemption for certain
AB 755
Page L
projects and entities and not others? An approval of a
construction project is generally done at a local level and it
is a decision made by the local government. Should the State
expand the GF revenues for the benefit of a local community
when the State had no say in the decision making process?
9)Alternative Approach ? As acknowledged by the author, the
construction projects at issue will ultimately create
substantial long-term benefits not just for LA County but for
the entire region and its business community. While this bill
requires the State to participate in mitigating the negative
impacts of the project on the surrounding businesses, it is
silent with respect to any future benefits to the businesses
and/or the region in which the State may share, once the
construction project is completed. The Committee may wish to
consider whether a short-term loan provided by the State to
either the County or an individual business, instead of a
partial SUT exemption, would be a more appropriate vehicle to
deliver the much needed financial help.
10)Partial Exemptions: Administrative Complications . Most
exemptions apply to the total applicable SUT. However,
purchases of certain TPP, such as farm equipment and
teleproduction equipment, are eligible for partial exemptions
only. The administration of partial exemptions is challenging
for both retailers and the BOE. As noted by the BOE staff in
its analysis, many retailers rely on electronic registers or
other computer software to compute the applicable tax. As
such, they may need to hire outside programmers to modify the
electronic system to adjust rates during and after
construction. It is unclear whether the "Business
Interruption Fund" would cover these costs.
11)BOE's Implementation Concerns . The BOE staff notes that the
proposed exemption would continue while rail lines are "under
construction." While actual construction may be completed on
a certain date, "there may be equipment obstacles, barriers,
testing, etc. that continues after construction that prolong
AB 755
Page M
the impact on businesses adjacent to these rail lines." The
BOE staff suggests that the phrase "under construction" be
clearly defined to avoid any misunderstanding and/or
underreporting. In addition, the staff suggests that the bill
specify that the proposed exemption shall cease to be
operative on the last day of the month following the date
construction ends, or 14 days after construction ends,
whichever ends later. This amendment is necessary to provide
the BOE with sufficient time to notify affected retailers.
REGISTERED SUPPORT / OPPOSITION:
Support
The Greater Los Angeles African American Chamber of Commerce
Los Angeles County Metropolitan Transportation Authority
Opposition
AB 755
Page N
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098