BILL ANALYSIS Ó
AB 1562
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1562
(Kim) - As Amended March 3, 2016
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Sales and use taxes: exemptions: disaster
preparedness products
SUMMARY: Establishes a two-day exemption under the Sales and
Use Tax (SUT) Law for any "qualified disaster preparedness
product", as specified. Specifically, this bill:
1)Contains the following findings and declarations:
a) A tax break is a great way to make readiness supplies
more affordable for families;
b) A sales tax holiday is a good opportunity for retailers
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to help raise awareness of the need for California
residents to be ready for emergencies and natural disasters
such as storms or earthquakes;
c) Californians should take the opportunity to create or
restock disaster supply kits and develop emergency plans
for their families and businesses; and,
d) Preparing for emergencies and storms today can save
lives and property in the event of a disaster.
2)Establishes a SUT exemption for any "qualified disaster
preparedness product" that is any of the following:
a) Sold or purchased during the "qualified exemption
period";
b) Sold or purchased pursuant to a "layaway" agreement that
is entered into, and for which the purchaser has made a
deposit of at least 10% of the gross receipts from the sale
or purchase, during the "qualified exemption period";
c) Sold or purchased pursuant to a raincheck issued for the
product during the "qualified exemption period"; or,
d) Sold or purchased pursuant to an order placed by the
purchaser, and paid for in full, during the "qualified
exemption period", for a product not already existing or
identified, regardless of the time of identification or
delivery of the product.
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3)Defines a "qualified disaster preparedness product" as any of
the following tangible personal property (TPP):
a) A portable self-powered light source, if the gross
receipts or sales price from the sale or purchase of the
product is $30 or less;
b) A portable self-powered radio, two-way radio, or
weather-band radio, if the gross receipts or sales price
from the sale or purchase of the product is $60 or less;
c) A preassembled first-aid kit, if the gross receipts or
sales price from the sale or purchase of the product is $30
or less;
d) A gas or diesel fuel tank, if the gross receipts or
sales price from the sale or purchase of the product is $25
or less;
e) A package of AA cell, C cell, D cell, 6-volt, or 9-volt
batteries, but not automobile or boat batteries, if the
gross receipts or sales price from the sale or purchase of
the product is $30 or less;
f) A nonelectric food storage cooler, if the gross receipts
or sales price from the sale or purchase of the product is
$30 or less;
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g) A portable generator that is used to provide light or
communications or preserve food in the event of a power
outage, if the gross receipts or sales price from the sale
or purchase of the product is $750 or less;
h) A water purification system, if the gross receipts or
sales price from the sale or purchase of the product is $40
or less;
i) A battery-operated emergency beacon, if the gross
receipts or sales price from the sale or purchase of the
product is $50 or less; or,
j) Emergency flares, if the gross receipts or sales price
from the sale or purchase of the product is $20 or less.
4)Defines a "qualified exemption period" as the two-day period
beginning at 12:01 a.m. on the second Saturday in October
2017, and ending at 12:00 midnight the following Sunday.
5)Defines a "layaway" by reference to Civil Code Section 1749.1.
6)Defines a "raincheck" as a document issued to a customer when
a product is out of stock that allows the customer to purchase
the product at a later time at the product's price at the time
the document is issued.
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7)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for any SUT revenues lost by it
as a result of this exemption.
8)Takes immediate effect as a tax levy.
EXISTING LAW:
1)Imposes a sales tax on retailers for the privilege of selling
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 has estimated that this bill will reduce
state and local revenues by $5.1 million.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
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Preparing for emergencies and storms today can save lives
and property in the event of a disaster. A sales tax
holiday for disaster preparedness supplies is a good
opportunity to raise awareness of the need for California
residents to be ready for emergencies, such as natural
disasters, storms, or earthquakes. Not only will consumers
be incentivized to accomplish safety goals, we can free up
our first responders to handle more immediate dangers when
disaster strikes. We must recognize the importance of
disaster readiness and Californians need to make prudent
steps to prepare for these emergencies and storms. AB 1562
will not only incentivize preparedness, but it will relieve
families and homeowners from bearing the full burden in
doing so. This strategy has been successful in other
states where severe weather and natural disasters are
common. California would benefit from this culture of
preparedness.
2)This bill is supported by The Home Depot, which notes the
following:
Natural disasters can strike with little to no warning.
Ensuring that disaster preparedness supplies are easily
accessible and readily available combined with organizing a
steadfast emergency plan, both help in facilitating the
protection of yourself, your family, and your neighborhood.
Employing this sales tax holiday will assist in raising
awareness on disaster readiness in California. Moreover,
it will alleviate Californians from having to shoulder the
full burden in doing so.
3)This bill is opposed by the California Tax Reform Association,
which notes the following:
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We appreciate the intent to stimulate disaster
preparedness, but there is no evidence that tax holidays do
more than change the timing of purchases rather than
stimulating them. Thus, a significant amount of the
revenue loss from this bill, if not all of it, would serve
no public purpose. Further, many of these purchases are
ordinarily made in any case, such as flashlights, batteries
and coolers, and it is unlikely that a tax holiday will
generate additional purchases but will only diminish state
revenues.
4)Committee Staff Comments
a) What is a "tax expenditure" ? Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures" since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues).
b) How is a tax expenditure different from a direct
expenditure ? As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. While this affords taxpayers greater financial
predictability, it can also result in tax expenditures
remaining a part of the tax code without demonstrating any
public benefit. Second, there is generally no control over
the amount of revenue losses associated with any given tax
expenditure. Finally, it should also be noted that, once
enacted, it takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date. This effectively
results in a "one-way ratchet" whereby tax expenditures can
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be conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy or cost, without a
supermajority vote.
c) An overview of the SUT Law : 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
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 BOE.
The SUT represents the state's second largest source of
General Fund (GF) revenues. Nevertheless, the past 60
years have seen a dramatic reduction in the state's
reliance on the SUT and a corresponding increase in its
reliance on personal income tax revenues. In fiscal year
(FY) 2014-15, SUT revenues were estimated to comprise 23%
of the state's GF revenues, down from nearly 60% in FY
1950-51.
d) What accounts for 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
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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.
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.
e) What would this bill do ? This bill would establish a
two-day SUT holiday for qualified disaster preparedness
products sold on October 14 and 15, 2017.
f) Incentive or reward ? California currently exempts
certain sales, either partially or completely, from the
SUT. Each additional exemption further erodes the tax base
and reduces governmental revenues. Because individual
exemptions establish a precedent for future legislation, it
is important to examine whether a particular tax
expenditure actually changes behavior or simply subsidizes
existing behavior. While a state SUT holiday may induce
consumers to spend more on a particular day, it is unclear
whether this exemption would increase the overall number of
sales during the calendar year of disaster preparedness
products. Put differently, the proposed exemption may
incentivize consumers to buy things they would have bought
anyway but on a different day.
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g) Legislative history :
i) AB 1120 (Tran), of the 2007-08 Legislative Session,
would have exempted from sales tax the sale of qualified
disaster preparedness products. AB 1120 was held in this
Committee.
ii) AB 2089 (Tran), of the 2005-06 Legislative Session,
would have exempted from sales tax the sale of qualified
disaster preparedness products. AB 2089 was held in this
Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
American Red Cross
California Hospital Association
California Retailers Association
The Home Depot
Opposition
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California State Association of Counties
California Tax Reform Association
League of California Cities
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098