BILL ANALYSIS Ó
SB 898
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Date of Hearing: June 20, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
SB
898 (Nguyen) - As Amended May 31, 2016
Majority vote. Fiscal committee.
SENATE VOTE: 39-0
SUBJECT: Sales and use taxes: exemption: animal blood
SUMMARY: Establishes a sales and use tax (SUT) exemption for
animal whole blood, plasma, blood products, and blood
derivatives, sold by a nonprofit animal blood banking business
for use in the cure, mitigation, treatment, or prevention of
injury or disease in animals pursuant to Food and Agricultural
Code Section 9241. Specifically, this bill:
1)Contains legislative findings noting that animals have
emergencies and illnesses that present a critical need for
blood products, and that it is in the public interest to
relieve from liability those nonprofit animal blood banking
businesses that have not paid sales tax or collected sales tax
reimbursement on their sales of animal blood products, thereby
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preventing undue hardship on those nonprofit animal blood
banking businesses that offer this vital life service.
2)Directs the State Board of Equalization (BOE) to cancel any
notice of determination and any related penalties and
interest, and not to issue any future notices, with respect to
sales of animal whole blood, plasma, blood products, and blood
derivatives, sold by a nonprofit animal blood banking business
for use in the cure, mitigation, treatment, or prevention of
injury or disease in animals pursuant to Food and Agricultural
Code Section 9241.
3)Contains legislative findings that the cancellation of
existing BOE notices of determination serves a public purpose
and does not constitute a gift of public funds within the
meaning of Section 6 of Article XVI of the California
Constitution.
4)Provides that, notwithstanding existing law, the state shall
not reimburse cities and counties for any SUT revenues lost by
them under this bill.
EXISTING LAW:
1)Imposes a sales tax on retailers for the privilege of selling
tangible personal property (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 BOE.
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3)Provides that human whole blood, plasma, blood products, and
blood derivatives, or any human body parts held in a bank for
medical purposes, are exempt from taxation for any purpose.
(Revenue and Taxation Code (R&TC) Section 33).
4)Exempts from SUT any container used to collect or store human
whole blood, plasma, blood products, or blood derivatives that
are exempt from taxation under R&TC Section 33, including
blood collection units and blood pack units. (R&TC Section
6364.5).
5)Prohibits any person from offering for sale or use any of the
following:
a) Any biologic unless it is manufactured pursuant to the
terms of a valid license or permit issued by the United
States Department of Agriculture; or,
b) Any blood or blood component product unless it is
produced in a licensed establishment. (Food and
Agricultural Code Section 9241).
FISCAL EFFECT: Unknown. The BOE notes that this bill would
result in annual state and local SUT revenue losses of $78,980.
This amount, however, does not include any unpaid liabilities
that this bill would direct the BOE to relieve. BOE staff notes
that, at present, this bill would only apply to one taxpayer in
the state of California. The author's office, in turn, has
provided documentation showing a SUT liability for this single
taxpayer of $81,830.27 for the period from January 1, 2008 to
June 30, 2011. In addition, the BOE's Report of Field Audit
disclosed interest of $23,428.71 through July 31, 2014. Thus,
assuming these amounts have not been paid, this bill would
result in a one-time loss of at least $105,258.98 for past due
taxes and interest.
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COMMENTS:
1)The author has provided the following statement in support of
this bill:
Senate Bill 898 amends the California Revenue and Taxation
[C]ode to clarify that the sale and use of animal blood,
blood products, and derivatives by a licensed CDFA-licensed
nonprofit animal blood bank are not subject to tax when
sold for use in the cure, mitigation, treatment or
prevention of injury or disease in animals.
Animal blood banks serve an important role in saving the
lives of animals that are in need of surgical procedures.
Human blood banks, such as the American Red Cross, enjoy a
similar exemption, partly in recognition that human blood
banks help save lives. This same exemption does not apply
to nonprofit animal blood banks.
SB 898 will help ensure that animal blood banks continue to
be treated under the law the same as human blood banks.
2)This bill is supported by the Humane Society Veterinary
Medical Association, which notes the following:
Historically, human blood transfers have been exempt from
sales and use tax. However, it has been unclear whether
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sales and use tax applies to the sales of animal blood
products. SB 898 amends the California Revenue and
Taxation [C]ode, clarifying that transfers of animal blood
by licensed non-profit animal blood banks are not subject
to these taxes.
We urge all of your colleagues in the Legislature to join
in support of this commonsense bill which will help
safeguard (1) the viability of nonprofit California animal
blood banks providing essential resources to veterinarians
statewide, (2) the health and well-being of our companion
animal patients, and (3) the peace of mind of their human
family members who love them.
3)This bill is opposed by the California State Association of
Counties, which notes the following:
After the past thirty years of changes to sales and use tax
allocations, counties now receive almost half of sales and
use tax revenues. About two-thirds of that revenue is
constitutionally dedicated to providing local public safety
services and federal and state programs, including social
services, incarceration, and rehabilitation.
Unfortunately, SB 898 would erode an important revenue
source for counties. The total estimated losses could be
considered minor when compared to the State budget. For
counties, though, the combined potential losses proposed in
the current legislative session are not insignificant.
More troubling than the direct revenue losses is the
forgiveness provision in SB 898 for unpaid sales and use
tax liabilities from prior years. This represents further
losses and a troubling possible precedent for other sales
and use tax exemptions.
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4)The BOE notes the following in its staff analysis of this
bill:
a) Effect of the bill : "Nonprofit licensed animal blood
banks will not be required to report sales or use tax on
their sales of animal blood products when those sales are
for the cure, mitigation, treatment or prevention of injury
or disease in animals. In addition, they will be relieved
of liability for any unpaid sales and use tax related to
these sales."
b) "Nonprofit animal blood banking business" should be
defined : "California currently has one nonprofit licensee;
however, for purposes of clarity, the bill should define
"nonprofit." For example, an appropriate definition, such
as "an organization that qualifies for tax-exempt status
under section 501(c)(3) of the Internal Revenue Code" would
suffice."
c) This bill does not materially impact the BOE's tax audit
or administrative functions : "Since this bill applies to
one nonprofit licensed animal blood bank that currently
exists in California, this bill would not materially impact
the BOE's administrative responsibilities."
5)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
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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. 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
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
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(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 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 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 provide a
complete SUT exemption for animal whole blood, plasma,
blood products, and blood derivatives, sold by a nonprofit
animal blood banking business for use in the cure,
mitigation, treatment, or prevention of injury or disease
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in animals.
The BOE notes that, according to the California Department
of Food and Agriculture, there are two California animal
blood bank establishments with licenses to produce, market,
and sell animal blood and products. These facilities
provide whole blood, plasma, platelets, and clotting
factors to veterinary hospitals and clinics. The blood
used to make these products is collected from the animal
"blood donors" housed permanently or semi-permanently at
the blood bank. The BOE notes that, under California law,
pet owners are not allowed to volunteer their animals as
donors to these commercial blood banks.
The BOE notes that, of the two licensed animal blood banks
in California, only one of them operates as a nonprofit
business. Thus, it would appear that this bill is designed
to provide relief, through a complete SUT exemption, to a
single entity. The Committee may wish to consider the
policy implications of providing such preferential
treatment to one taxpayer.
In addition, this bill would direct the BOE to cancel any
notice of determination, along with related penalties and
interest, associated with this taxpayer's past sales.
Generally, tax expenditure programs are implemented to
encourage future taxpayer behavior and not to provide
retroactive relief. This bill may establish a precedent
for future legislation in cases where a tax liability is
discovered through audit, and the taxpayer seeks to escape
payment by having legislation introduced to compel the
cancellation of their underlying liability.
To the extent this Committee desires to provide retroactive
relief, it may wish to make the relief contingent upon a
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BOE finding that the taxpayer did not collect sales tax
reimbursement on its past sales.
f) Absence of a sunset date : In its current form, this
bill's proposed tax expenditure lacks an automatic sunset
provision. This Committee has a longstanding policy
favoring the inclusion of sunset dates to allow the
Legislature periodically to review the efficacy and cost of
such programs. The author may wish to consider the
addition of an appropriate sunset provision.
REGISTERED SUPPORT / OPPOSITION:
Support
American Holistic Veterinary Medical Association
California Veterinary Medical Association
Hemopet/Hemolife
Humane Society Veterinary Medical Association
State Board of Equalization Member George Runner
Opposition
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California State Association of Counties
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098