BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 533 |Hearing |4/22/15 |
| | |Date: | |
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|Author: |Pan |Tax Levy: |No |
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|Version: |2/26/15 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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CITIES AND COUNTIES: SALES AND USE TAX AGREEMENTS
Prohibits a local agency from entering into an agreement that
would result in the payment of Bradley-Burns tax proceeds to a
retailer if the agreement results in a reduction in revenue that
is received by another local agency.
Background and Existing Law
State law authorizes counties, under the Bradley-Burns law, to
impose a local sales and use tax of up to 1 percent on tangible
personal property sold at retail in the county, or purchased
outside the county for use in the county. All cities and
counties within California have adopted ordinances under the
terms of the Bradley-Burns Law and levy the 1 percent local tax.
Cities can impose a sales and use tax rate of up to 1 percent,
credited against the county rate so that the combined rate does
not exceed 1 percent. The State Board of Equalization (BOE)
administers these taxes. Of the 1 percent tax, 0.75 percent is
used to support general operations and the remaining 0.25
percent is designated by statute for county transportation
purposes.
Bradley-Burns law specifies the "place of sale" for purposes of
the local sales tax. In general, all retail sales in California
are consummated at the place of business of the retailer. If a
retailer has only one place of business in California, the local
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sales tax derived from sales consummated at that place of
business is transmitted to the city, county, or city and county
in which the retailer's place of business is located. If a
retailer has more than one place of business in the State, BOE
regulation specifies that the sale occurs at the place of
business where the principal negotiations are carried on.
Out of state retailers that negotiate sales outside of
California, allocate the local tax in one of two ways. If the
out of state retailer is engaged in business in this state, the
local tax is allocated to the location of the retailer's
in-state location. If the out of state retailer is not engaged
in business in this state, the local tax is allocated to the
location of the headquarters of the California based business
the retailer has contracted with.
Allocating Bradley-Burns sales taxes at the place of sale leads
to competition among cities and counties to attract land uses
that generate local revenues. This "fiscalization of land use"
distorts local land use decisions by emphasizing tax revenues,
but discounts traffic, air quality, open space, and affordable
housing.
Some large retailers take advantage of the fiscalization of land
use to play one community against others. They ask local
officials to give them subsidies so they can relocate, moving
their sales tax revenues from a "sending" community to a
"receiving" community. The receiving community gets new
revenue, but spends some of it on the retailer; the subsidy to
the retailer lowers its costs; and the sending community suffers
the revenue loss.
SB 27 (Hancock, 2009) sought to remedy the fiscalization of land
use by prohibiting a local agency from entering into an
agreement that results in the payment, transfer, diversion, or
rebate of any Bradley-Burns local tax proceeds, when the
agreement results in a reduction of Bradley-Burns tax proceeds
received by another local agency from a retailer, and that
retailer continues to maintain a physical presence within the
jurisdiction of the originating local agency. However
exceptions to the above prohibition have allowed the practice to
continue. Specifically, SB 27 did NOT apply to certain
agreements related to:
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A retailer that expands its operations into another
jurisdiction with the result that the retailer is
conducting a comparable operation within the jurisdiction
of both local agencies.
A reduction in the use tax proceeds that are distributed
to the originating local agency through one or more
countywide pools.
Any agreement to pay or rebate Bradley-Burns local tax
revenue related to a buying company, which is defined as a
legal entity that is separate from another legal entity
that owns, controls, or is otherwise related to, the buying
company and which has been created for the purpose of
performing administrative functions, including acquiring
goods and services for the other entity, as defined in
specified revenue and taxation code (RTC) statutes and
regulations.
Any agreement to pay or rebate any local use tax revenue
related to a use tax direct payment permit issued under RTC
7051.3.
Bradley-Burns tax proceeds provided by a local agency to
a retailer if those proceeds are used to reimburse the
retailer for the construction of public works improvements
that serve all or a portion of the territorial jurisdiction
of that local agency.
Despite the passage of SB 27 in 2009, local officials continue
to engage in competition involving sales taxes. For example, a
county or city can offer a sales tax rebate to a business that
consolidates all of its California sales into that county or
city by opening a buying company in that jurisdiction. Cities
like West Sacramento no longer receive tax dollars they had once
relied upon. Much like the problem sales office created that
lead to SB 27 (Hancock, 2012), buying companies are
consolidating statewide sales all in one location.
The City of West Sacramento wants the Legislature to prohibit
counties or cities from entering into similar Bradley-Burns
sales tax rebate agreements that draw sales tax revenues away
from other communities.
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Proposed Law
Senate Bill 533 prohibits a local agency, on or after the bill's
effective date, from entering into any form of agreement or
taking any action that would result, directly or indirectly, in
the payment, transfer, diversion or rebate of any amount of
Bradley-Burns local tax proceeds to any person for any purpose
when:
The agreement results in a substantial reduction in the
amount of Bradley-Burns tax proceeds received by another
local agency from a retailer within that other local
agency; and ,
The retailer continues to maintain a physical presence
and location within that other local agency.
SB 533 does not apply to taxpayers with a "use tax direct
payment permit" and to local agencies entering into agreements
with other local agencies.
Additionally, SB 533 requires local governments to post online
any agreements it has entered into that results in a reduction
of the amount of revenue under the Bradley-Burns Uniform Local
Sales and Use Tax Law that, in the absence of the agreement,
would be received by another local agency, including any
agreements entered into prior to the effective date of this
section that are still in effect: A local government entering
into a new agreement must post the agreement online as well as
notify the other local agency by certified mail addressed to the
attention of the chief executive of that other local agency at
least 60 days prior to ratification or approval of that
agreement by its governing body.
State Revenue Impact
None.
Comments
1. Purpose of the bill. According to the author, "It is
becoming increasingly common practice for companies to pressure
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local agencies to provide a sales tax revenue rebate on the
promise to book all sales from multiple sites with that local
agency. There is a growing cottage industry of consultants who
appear to specialize in helping companies pursue this strategy.
This practice is fundamentally unfair. When the sales tax
revenue from commercial activity in one jurisdiction is booked
in another, the local agency that is losing the sales tax
revenue must continue to provide police and fire protection
services to the company since it maintains a physical presence
within the territory of the local agency, and the local agency
streets and other services are used and must be maintained.
Making this practice even more nefarious, this is often done
without the knowledge of the citizens, businesses and employees
within the jurisdiction of the local agency agreeing to the
"deal" and without any notice to the local agency that is losing
sales tax revenue as a result of the agreement. It is
significant to note that many of these sales tax rebate deals
result in sales tax revenue leaving the State of California and
going to corporations in other states. Yet, California local
agencies are still responsible for providing the police and fire
protections services and maintaining the roads and other
infrastructure needs for these companies."
2. Righting a wrong. A scheme in which a retailer consolidates
all statewide sales by relocating a buying company to divert
another city's local sales tax revenues is simply wrong. SB 533
imposes a narrowly-tailored prohibition on the use of
Bradley-Burns tax rebates. The bill eliminates exceptions in
current law that some businesses and local governments have been
taking advantage of.
3. Treating the symptom, not the disease. Buying company
schemes are a manifestation of the aggressive competition for
sales tax dollars that local officials engage in as a result of
the situs-based sales tax allocation system. The Legislative
Analyst's Office has suggested replacing situs-based allocation
with a population based allocation system to reduce incentives
for local governments to use their economic development powers
to promote retail developments. The LAO also suggested that
replacing local government sales tax revenues with a different
tax base could achieve similar results. Yet, because Section
25.5 of Article XIII of the California Constitution prohibits
the Legislature from enacting a statute that would change the
method of distributing revenues derived under Bradley-Burns
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Uniform Local Sales and Use Tax Law, as it read on November 3,
2004, except to comply with federal law or to allow the state to
participate in an interstate compact, moving away from a
situs-based sales tax allocation system would require a
Constitutional Amendment or enacting a new local tax scheme.
4. Race to the bottom. The current buying company exception
allows retailers to purchase in bulk for companywide supplies,
allowing the company to benefit from economies of scale.
Unfortunately, some retailers that take advantage of the buying
company exception do so to play one community against others.
This incentivizes communities with little sales tax revenues to
offer huge rebates, sometimes more than half of the total sales
tax revenue received. The loss of sales tax revenue is
compounded when a local government entices a buying company to
relocate and that retailer was already receiving a sales tax
rebate from the local jurisdiction of origin. As this race to
the bottom continues, more and more tax dollars are being
rebated to retailers with buying companies.
Support and
Opposition (4/17/15)
Support : City of West Sacramento.
Opposition : Unknown
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