BILL ANALYSIS                                                                                                                                                                                                    Ó




                                   RECONSIDERATION
          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 890                           |Hearing    |5/4/16   |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Gaines                           |Tax Levy:  |Yes      |
          |----------+---------------------------------+-----------+---------|
          |Version:  |4/5/16                           |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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             Sales and use taxes:  no-tax weekends:  firearms, ammunition,  
                                and hunting supplies



          Enacts a "sales and use tax holiday" for firearms, ammunition,  
          and hunting supplies for two two-day periods.


           Background 

           State law imposes the sales tax on every retailer engaged in  
          business in this state that sells tangible personal property,  
          and requires them to collect the appropriate tax from the  
          purchase and remit the amount to the Board of Equalization  
          (BOE).  Sales tax applies whenever a retail sale is made, which  
          is basically any sale other than one for resale in the regular  
          course of business.  Unless the person pays the sales tax to the  
          retailer, he or she is liable for the use tax, which is imposed  
          on any person consuming tangible personal property in the state.  
           The use tax rate is the same rate as the sales tax rate, and  
          must be remitted on or before the last day of the month  
          following the quarterly period in which the person made the  
          purchase.  The current rate is 7.50%, but beginning January 1,  
          2017, the sales and use tax rate decreases to 7.25% (Proposition  
          30, 2012.  The rate breakdown is detailed below).  Additionally,  
          cities and counties may increase the sales and use tax rate up  









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          to 2% for either specific or general purposes pursuant to the  
          California Constitution's vote requirements. 


          
                   ------------------------------------------------------------- 
                  |       |                    |                                |
                  | Rate  |    Jurisdiction    |       Purpose/Authority        |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |3.9375%|State (General      |State general purposes          |
                  |       |Fund)               |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |1.0625%|Local Revenue Fund  |Realignment of local public     |
                  |       |2011                |safety services                 |
                  |       |                    |                                |
                  |       |                    |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local        |Local governments to fund       |
                  |       |Revenue Fund)       |health and welfare programs     |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local Public |Local governments to fund       |
                  |       |Safety Fund)        |public safety services          |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 1.25% |Local (City/County) |City and county general         |
                  |       |                    |operations.                     |
                  |       |                    |                                |
                  |       |1.00% City and      |                                |
                  |       |County              |                                |
                  |       |                    |                                |
                  |       |0.25% County        |                                |
                  |       |                    |Dedicated to county             |
                  |       |                    |transportation purposes         |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |









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                  | 7.25% |Total Statewide     |                                |
                  |       |Rate                |                                |
                  |       |                    |                                |
                   ------------------------------------------------------------- 
          Many items are fully exempted from the sales and use tax in this  
          state (prescription drugs, food, poultry litter), while others  
          are exempted from the state sales tax, but not the local share,  
          such as farm equipment and machinery, diesel fuel used for  
          farming and food processing, teleproduction and postproduction  
          equipment, timber harvesting equipment and machinery, and  
          racehorse breeding stock. 


           Proposed Law

           Senate Bill 890 enacts a sales and use tax exemption from the  
          state share (3.9375%), but not the local, for firearms,  
          ammunition, and hunting supplies, purchased during two two-day  
          periods, set as: 

                 From 12:01 am on the first Saturday in September and  
               ending on midnight the next day.  

                 From 12:01 am on the first Saturday in October, and  
               ending on midnight the next day.

          To claim the exemption, a purchaser must present a copy of his  
          or her valid hunting license issued under specified provisions  
          of the Fish and Game Code.  

          The measure defines its terms, including:

                 "Firearm" as a shotgun, rifle, pistol, revolver, or  
               other handgun that may be legally sold or purchased in the  
               state.

                 "Ammunition" means that ammunition designed and intended  
               to be fired from a firearm.

                 "Hunting supplies" include:

                  o         Archery items, 

                  o         Off-road vehicles including all-terrain  
                    vehicles designed and intended primarily for hunting,  









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                    but not golf carts, go-carts, dirt bikes, mini-bikes,  
                    motorcycles, tractors, motor vehicles that may be  
                    legally driven on California's streets and highways,  
                    or heavy equipment, as defined,

                  o         Vessels designed and intended for hunting such  
                    as airboats and pirogues,

                  o         Accessories designed and intended for hunting,

                  o         Animal feed manufactured and marketed for  
                    consumption by game that can be legally hunted, but  
                    not pet food,

                  o         Apparel, such as safety gear, camouflage  
                    coating, jackets, hats, gloves, mittens, face masks,  
                    and thermal underwear manufactured and marketed as  
                    being primarily for wear or use while hunting,

                  o         Hunting shoes or boots designed and intended  
                    for hunting,

                  o         Bags designed and intended to carry game or  
                    hunting gear,

                  o         Float tubes if purchased to be used in  
                    hunting,

                  o         Binoculars if purchased to be used in hunting,

                  o         Tools manufactured and marketed as primarily  
                    for use in hunting,

                  o         Firearm and archery accessories and cases,

                  o         Range Finders,

                  o         Knives manufactured and marketed as primarily  
                    for use in hunting, but not knives purchased for  
                    household, business, or other recreational uses,

                  o         Decoys, tree stands, and blinds,

                  o         Chairs to be used for hunting, but not ones  
                    used for household, business, or other recreational  









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                    uses,

                  o         Optics such as rifle scopes and impact  
                    resistant glasses for shooting,

                  o         Optics such as rifle scopes and impact  
                    resistant glasses for shooting,

                  o         Hearing protection gear and enhancements,

                  o         Holsters, belts that are primarily used in  
                    hunting, and slings, and

                  o         Other miscellaneous hunting gear manufactured  
                    and marketed as primarily for use in hunting, but not  
                    toy guns, vessels, and off-road vehicles utilized as  
                    children's toys.

          As a tax levy, the measure would take effect immediately.


           State Revenue Impact

           According to BOE, SB 890 results in revenue losses of $363,000  
          annually.


           Comments

           1.  Purpose of the bill  .  According to the author, "Hunting has a  
          rich and meaningful history in California. Hunting trips provide  
          opportunities for relaxation, quality time with friends, family  
          bonding, and respect for the outdoors for many of California's  
          citizens.  Additionally, for many rural parts of our state,  
          hunting season creates essential revenue for otherwise often  
          financially depressed areas.  Senate Bill 890 would encourage  
          our citizens to enjoy the beauty that California is  
          internationally known for and increase tourism in areas which  
          desperately need an economic boost to recover from the recent  
          recession.  This tax-free weekend would be a boon to sporting  
          goods stores, outfitters, as well as the hotels, gas stations,  
          restaurants and myriad other businesses which benefit from the  
          hunting economy.  In addition, by exempting sales and use tax  
          preceding the start of two popular hunting seasons, Senate Bill  
          890 would encourage annual hunters to purchase more while  









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          drawing new hunters to the activity, creating new tourists and  
          new state revenue from hunting licenses."    

          2.   Will it work  ?  Tax benefits directed at specific products do  
          two things:  First, they reward behavior that would have  
          occurred without the subsidy, so-called "deadweight loss."  Some  
          taxpayers will buy guns, ammunition, and hunting supplies for  
          hunting season without any incentive, so the bill will give  
          these taxpayers a windfall benefit equal to the sales tax not  
          paid, providing no marginal benefit.  Second, the bill may alter  
          consumer decisions at the margin; the incentive of not paying  
          sales tax may spur a taxpayer to purchase more of these items  
          than they otherwise would have, triggering increased  
          consumption, and sales for the retailer.  A successful tax  
          incentive causes more economic activity at the margin than its  
          deadweight loss, but no tax credit has yet conclusively  
          demonstrated that its benefits outweigh its costs.  Another  
          possible outcome for this bill is for retailers to raise prices  
          of firearms, ammunition, and hunting supplies while marketing  
          the incentive, leaving consumers no better off, which basically  
          transfers revenue from the state to retailers.  The Committee  
          may wish to consider how much additional economic activity SB  
          890 will spur versus its deadweight loss, and whether retailers  
          may increase prices to pocket the difference.

          3.   One big holiday  .  Although California has never offered a  
          sales tax holiday, up to 14 other states do, mostly for clothing  
          and school supplies.  Studies find that taxpayers simply shift  
          the timing of purchases to take advantage of holidays without an  
          overall increase in sales, holidays mislead consumers about  
          savings, and are costly and confusing for retailers.<1>  Another  
          study didn't find any shifting, instead showing increased  
          consumption, but found that sales tax holidays only benefit  
          wealthier families.<2>  The Committee may wish to consider the  
          merits of establishing sales tax holidays.

          4.   Burden on retailers.  Sales tax holidays create complexities  
          for tax code compliance.  Specifically, creating a sales tax  
          exemption that only lasts for two days would place an additional  
          ---------------------------
          <1> "Sales Tax Holidays: Politically Expedient but Poor Tax  
          Policy" Tax Foundation, July, 2013.

          <2> "The Effect of Sales Tax Holidays on Household Consumption  
          Patterns."  Federal Reserve Bank of Chicago, July, 2010.









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          burden on retailers to program their cash registers to exempt  
          certain products on certain dates. This may require retailers to  
          incur costs to accommodate the change; however, increased sales  
          activity during this period could potentially offset those  
          costs.  Additionally, under current law, when merchandise is  
          exchanged, the law considers the transaction as two separate  
          transactions: (1) a rescission of the original sale and (2) a  
          separate sale of the replacement merchandise. For example, if a  
          customer purchases a rifle and exchanges it for a pistol, the  
          transaction is regarded under the law as a separate sale of the  
          pistol and a rescission of the original sale of the rifle. To  
          report the correct amount of tax, the retailer may deduct the  
          sales price of the rifle from taxable sales, and must include  
          the sales price of the pistol.  Under the proposed holiday  
          period, if the same rifle is purchased during the sales tax  
          holiday period and exchanged for the pistol after the holiday  
          period, the proposed exemption would not apply to the exchange;  
          the law recognizes that transaction as occurring after the  
          exempt holiday period.  This complexity may lead to retailer  
          reporting errors.  Rain checks could also create confusion.   
          Current law provides that a retailer-issued rain check does not  
          constitute a sale of tangible personal property. Therefore, the  
          exemption would not apply when a retailer issues a rain check to  
          the customer for an out of stock item during the holiday period  
          and the customer uses the rain check to purchase the item after  
          the proposed holiday period.

          5.   New tax expenditure  .  Enacting a new tax exemption results  
          in foregone revenue, which requires cuts in spending or higher  
          taxes, all else equal.  Tax credits do not pay for themselves:  
          the state's last effort of "dynamic revenue analysis" indicates  
          that while dynamic effects are definitely present and visible,  
          their effects are generally relatively modest.<3>   The  
          Committee may wish to consider whether the benefits resulting  
          from this incentive are worth the tradeoff of cuts in spending  
          or taxes on other activities.

          6.   Consistent  ?  California has been one of the nation's leaders  
          in enacting legislation intended to prevent gun violence,  
          putting in place many laws that seek to reduce death and injury  
          that where firearms are involved.  According to the 2007 Small  
          Arms Survey, there are already 88.8 guns per 100 American, and  

          ---------------------------
          <3> "Whatever Happened to Dynamic Revenue Analysis in  
          California?"  John David Vasche, prepared for the Federation of  
          Tax Administrators, September, 2006. 








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          data from the University of Sydney shows that America's rate of  
          3.54 firearm homicides per 100,000 people is more than three  
          times that of any other nation.  A recent American Journal of  
          Medicine study states Americans are 10 times more likely to be  
          killed with a gun than citizens of any other nation.  SB 890's  
          sales tax holiday seeks to increase firearm and ammunition  
          purchases in the state by allowing a sales and use tax exemption  
          during two two-day periods.  While the bill requires a purchaser  
          to show a hunting license to avoid the sales tax, possessing a  
          license doesn't necessarily mean the gun will be used to hunt.   
          The Committee may wish to consider the merits of enacting tax  
          exemptions intended to increase firearm purchases given the  
          state's efforts to reduce firearm violence.

          7.   Vague terms  .  SB 890 allows sales and use tax exemptions for  
          specified purchases of firearms, ammunition, and hunting  
          supplies during two two-day periods, and applies to a broad set  
          of items that can be used in hunting, but could also be used for  
          many other activities.  The measure restricts many of its exempt  
          items by setting use and intention standards; however, these  
          restrictions don't apply to all possible exempt items, the terms  
          vary considerably, and require the purchaser or seller to know  
          at purchase that an item was designed, manufactured, or marketed  
          in a specific way, or will be used, or primarily used, for  
          hunting to be exempt.  The bill's standards also vary  
          considerably.  The measure uses all of the following  
          restrictions: "used for and designed and intended for hunting,"  
          "designed and intended for hunting," "designed and intended  
          primarily for hunting," "manufactured and marketed as being  
          primarily for wear use in hunting," "if purchased to be use in  
          hunting," "primarily for use in hunting," and "manufactured and  
          marketed as primarily for use in hunting."  Vague and  
          inconsistent terms could lead to inconsistent application  
          throughout the state, and disagreements between purchasers,  
          retailers, and BOE.  


           Support and  
          Opposition   (4/28/16)


           Support  :  California Rifle and Pistol Association, California  
          Sportsman's Lobby, California Waterfowl Association, National  
          Shooting Sports Foundation, Outdoor Sportsmen's Coalition of  
          California, Safari Club International, Safari Club International  









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          Foundation.

           Opposition  :  California Tax Reform Association.



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