BILL ANALYSIS Ó
SB 598
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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:
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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
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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January 1, 2026, and is repealed as of that date.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).
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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:
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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
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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
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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
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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
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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
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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
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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.";
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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
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None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098