BILL ANALYSIS                                                                                                                                                                                                    






                                                                     AB 755


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          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:  











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          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, 












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             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  











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          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  











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            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,  











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            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.) 














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           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.










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            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. 










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            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.  
            












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            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.   











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            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--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  











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            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  











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            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













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          None on file


          


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