BILL ANALYSIS Ó SB 598 Page 1 Date of Hearing: June 22, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair SB 598 (Hill) - As Amended April 15, 2015 Majority vote. Tax levy. Fiscal committee. SENATE VOTE: 35-0 SUBJECT: Sales and use taxes: consumer designation: all volunteer fire department SUMMARY: Designates an all-volunteer fire department (AVFD) as a consumer, and not a retailer, of all tangible personal property (TPP) it sells if the profits are used solely and exclusively in furtherance of the AVFD's purposes. Specifically, this bill: SB 598 Page 2 1)Designates, for purposes of the Sales and Use Tax (SUT) Law, an AVFD as a consumer of all TPP it sells, including hot prepared food products and clothing, if the profits are used solely and exclusively in furtherance of the purposes of the AVFD. 2)Defines an "AVFD" as an organization that meets all the following requirements: a) All members shall not be paid a regular salary, but may be compensated on an hourly or per incident basis; b) The organization's purpose is to protect the lives, property, and environment within a designated geographical area from fires, disasters, and emergency incidents through education, prevention, training, and emergency response; c) The organization is regularly organized for volunteer fire department purposes that qualifies [sic] as an exempt organization, either under Revenue and Taxation Code (R&TC) Section 23701d or 23701f or under Internal Revenue Code (IRC) Section 501(c)(3) or 501(c)(4); d) The organization enjoys official recognition and full or partial support of the government of the county, city, or district in which the volunteer fire department is located; and, e) The organization's functions have an exclusive connection with the prevention and extinguishing of fires within the area of the county, city, or district extending official recognition for the benefit of the public generally and to lessen the burdens of the entity of SB 598 Page 3 government that would otherwise be obligated to furnish that fire protection. 3)Provides that this preferential tax status shall not apply if an AVFD, in each of the two preceding calendar years, has receipts from the sale of TPP of $100,000 or more. 4)Provides that this section shall remain in effect until January 1, 2026, and is repealed as of that date. 5)Provides that, notwithstanding existing law, the state shall not reimburse any local agency for any SUT revenues lost as a result of this bill. 6)Takes immediate effect as a tax levy, but only becomes operative on the first day of the first calendar quarter commencing more than 90 days after the bill's effective date. 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 California. 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). SB 598 Page 4 3)Designates the following entities as consumers, and not retailers, of specified TPP they use or furnish in the performance of their professional services: a) Licensed optometrists, physicians, pharmacists, and registered dispensing opticians (R&TC Section 6018); b) Licensed veterinarians (R&TC Section 6018.1); c) Licensed chiropractors (R&TC Section 6018.4); d) Specified garment cleaning establishments that received no more than 20% of their total gross receipts from the alteration of garments during the preceding calendar year (R&TC Section 6018.6); e) Licensed hearing aid dispensers (R&TC Section 6018.7); and, f) Producers of X-ray films or photographs used to diagnose human medical or dental conditions (R&TC Section 6020). 4)Provides a property tax exemption for the property of a volunteer fire department that is used exclusively for volunteer fire department purposes, provided the department qualifies for exemption under R&TC Section 23701d or 23701f or under IRC Section 501(c)(3) or 501(c)(4). (R&TC Section 213.7). FISCAL EFFECT: The BOE estimates that this bill would reduce state and local revenues by $42,000 annually. COMMENTS: 1)The author has provided the following statement in support of this bill: SB 598 Page 5 SB 598 is the winner of my annual "Ought to Be a Law Contest" winner. All-volunteer fire departments across the state solely rely on fundraisers to buy lifesaving equipment. The La Honda Fire Brigade in my district is no different. Their livelihood relies exclusively on volunteers, from the 14 individuals who serve as firefighters, to the board members who organize fundraising efforts like the annual pancake breakfast and crab cioppino dinner. Unfortunately any fundraisers dealing with selling hot/prepared food or tangible goods are subject to California sales tax. SB 598 would simply exempt All-volunteer fire departments from having to pay sales tax on their fundraising efforts. All of the money raised would be able to stay with them. If they are able to raise $1000 at a pancake breakfast - they will keep the full $1000 and not have to send $92.50 (San Mateo County has a sales tax rate of 9.25%) to the State. Everyday these volunteers put their lives on the line and provide an important resource to the communities they serve. We should help them any way we can and allowing them to keep all of their fundraising dollars is an important first step. 2)This bill is supported by the California State Firefighters' Association, which notes: Currently, California's All-Volunteer Fire Departments (AVFDs) have to pay sales tax for fundraising activities like pancake breakfasts, BBQ's and T-shirt sales. Sales tax on fundraising activities siphons critical dollars from the Departments' primary mission to protect Californian lives and property. An [AVFD] is an organization whose purpose is to protect SB 598 Page 6 the lives and property within a geographical area from fires, disasters, and emergency incidents through education, prevention, training, and emergency response. We estimate that [29%] of California's 835 fire departments are [AVFDs]. Approximately 25,000 volunteer firefighters currently serve California. Volunteers are not paid a regular wage but may be compensated on an hourly or per incident basis. California's volunteer fire departments truly are the safety-net for our state. Volunteers are an important part of our emergency services often supporting other areas throughout the state when called upon during major incidents. 3)The BOE notes the following in its staff analysis of this bill: a) Effect of the bill : "[AVFDs] that make sales of taxable food, clothing, or other [TPP] will not be required to report sales tax on those sales, hold a BOE-issued seller's permit, or file sales tax returns. Instead, they will only be required to pay tax reimbursement on the cost of the taxable items they intend to sell for fund-raising purposes." b) This bill does not materially impact the BOE's tax audit or administrative functions : "According to the author's office, about 250 [AVFDs] exist in California. However, generally, the BOE seldom audits [AVFDs] due to their low sales volume and lack of complexity." 4)Committee Staff Comments SB 598 Page 7 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 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 SB 598 Page 8 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 are 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 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 preferences 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 SB 598 Page 9 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) How does the SUT Law generally apply to nonprofit organizations ? The law does not generally exempt from the SUT sales by nonprofit organizations, persons engaged in charitable work, or those who enjoy certain income or property tax benefits. Therefore, nonprofit organizations' TPP sales are generally subject to tax to the same extent as any other retailer's sales. Generally, persons engaged in the business of selling TPP must obtain a seller's permit and report SUT on a BOE-prescribed return. California law does, however, designate certain charitable organizations as consumers, rather than retailers, under the SUT Law. Statutorily, this is done on a case-by-case basis. For example, R&TC Section 6359.3 confers consumer status on nonprofit veterans' organizations with respect to United States flags sold, provided the profits are used exclusively in furtherance of the organization's purposes. R&TC Section 6360, in turn, confers consumer status on specified charities with respect to bracelets distributed to commemorate American prisoners of war. Once again, any profits must be used solely and exclusively in furtherance of the organization's purposes. As one last example, R&TC Section 6361.1 confers consumer status on qualified organizations that sell handcrafted items made by individuals with developmental disabilities or children with severe emotional disturbances. The price of each item sold must not exceed $20. f) AVFDs : There are numerous AVFDs throughout California. These entities, which primarily serve rural areas, protect lives and property by fighting fires and responding to other emergency incidents. These organizations often SB 598 Page 10 operate on limited budgets, with funds obtained through public financial support, fundraising activities, and grants. For example, the La Honda Fire Brigade notes that its cash expense budget for the year is $44,500, and that SUTs paid in 2013 and 2014 were $1,946 and $1,985. The La Honda Fire Brigade further notes that if it were relieved of this SUT liability, it would use those funds for capital asset acquisition, station maintenance, and operational expenses. g) What would this bill do ? This bill would designate an AVFD as a consumer, rather than a retailer, of TPP it sells if the profits are used solely and exclusively in furtherance of the AVFD's purposes. Therefore, an AVFD would not be liable for sales tax on its retail sales of food products, clothing, or other items. Rather, an AVFD would be regarded as a consumer of the TPP it sells. Thus, AVFDs would be required to pay tax reimbursement on the purchase price of any taxable items acquired for resale in their fundraising activities. As the BOE notes, statutory "consumer status" is generally conferred to minimize reporting burdens for specified organizations, while minimizing the revenue losses associated with a complete SUT exemption. The BOE notes that, "Other statutory consumers classified in law include [Parent Teacher Associations], nonprofit veterans' organizations, nonprofit youth organizations, various charitable organizations, [and] schools and school districts . . . ." This bill seeks to enable AVFDs to maximize scarce resources by exempting their own fundraising sales from the SUT. AVFDs rely primarily on membership drives and fundraising activities to support their operational budgets. The Committee may wish to consider whether providing SB 598 Page 11 preferential tax treatment to AVFDs may inadvertently set a precedent for future organizations seeking consumer status due to the beneficial nature of their work or the administrative burdens inherent in complying with the law. h) Providing greater statutory clarity : Some of the language contained in this bill could benefit from greater clarity. For example, this bill provides that to qualify as an AVFD "[a]ll members shall not be paid a regular salary, but may be compensated on an hourly or per incident basis." Does this mean that no member of the AVFD may be paid a regular salary? If an AVFD contained five members, with only one receiving a regular salary, clearly all members would not be paid a regular salary. Would this AVFD potentially qualify for consumer status? The author may wish to consider amendments providing greater definitional clarity. i) Sunset dates : Absent a sunset date, tax expenditure programs like the one this bill proposes cannot be revoked without a supermajority vote. Thus, this Committee has a longstanding practice of including sunset dates in tax expenditure bills to allow the Legislature periodically to review the cost and efficacy of such expenditures. This bill currently contains a 10-year sunset. In keeping with Committee practice, the author may wish to consider shortening the sunset date to five years. j) Recommended technical amendments : Committee staff suggests the following technical amendments to this bill: i) On page 2, strike lines 12 and 13, and insert "(1) No member shall be paid a regular salary, but a member may be compensated on an hourly or per incident basis."; SB 598 Page 12 ii) On page 2, in line 19, strike "that" and insert "and"; iii) On page 3, in line 2, strike "which" and insert "that"; iv) On page 3, in line 6, strike "receipts" and insert "gross receipts"; and, v) On page 3, in line 8, strike "January," and insert "January". REGISTERED SUPPORT / OPPOSITION: Support California State Firefighters' Association County of San Mateo La Honda Fire Brigade Opposition SB 598 Page 13 None on file Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098