BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1210 |Hearing |4/27/16 |
| | |Date: | |
|----------+---------------------------------+-----------+---------|
|Author: |Gaines |Tax Levy: |Yes |
|----------+---------------------------------+-----------+---------|
|Version: |2/18/16 |Fiscal: |Yes |
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|Consultant|Bouaziz |
|: | |
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Sales and use taxes: exemption: school supplies
Provides an annual two day partial "sales and use tax holiday"
for back to school supplies.
Background
State law imposes a sales and use tax (SUT) on the sale,
storage, or use of tangible personal property unless exempted by
state law. Cities and Counties may increase the SUT rate up to
2% as a transactions and use tax for either specific or general
purposes with a vote of the people.
The current state SUT is 7.5%, but beginning January 1, 2017,
the state SUT rate on tangible personal property will be 7.25%
and imposed as follows:
-------------------------------------------------------------
| | | |
| Rate | Jurisdiction | Purpose/Authority |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|3.9375%|State (General |State general purposes |
| |Fund) | |
| | | |
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|-------+--------------------+--------------------------------|
| | | |
|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. Dedicated to county |
| | |transportation purposes |
| |1.00% City and | |
| |County | |
| | | |
| |0.25% County | |
|-------+--------------------+--------------------------------|
| | | |
| 7.25% |Total Statewide | |
| |Rate | |
| | | |
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State law fully exempts many items from SUT (prescription drugs,
food, poultry litter), while other items 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.
SB 1210 (Gaines) 2/18/16 Page 3
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Proposed Law
Senate Bill 1210 provides an annual two day partial "sales and
use tax holiday" for back to school supplies. Specifically, the
bill:
Provides a General Fund (3.9375% rate) sales and use tax
exemption for the sale of, and the storage, use, or other
consumption in this state of clothing, footwear, school
supplies, books, computers, and educational computer
software.
Requires purchases to be made at the retailer's physical
place of business.
Applies to transaction beginning at 12:01 a.m. on the
second Saturday of August and ending at 11:59 p.m. on the
following day each year, beginning 2017.
State Revenue Impact
According to the Board of Equalization, SB 1210 results in
yearly revenue losses of $16 million.
Comments
1. Purpose of the bill. According to the author, "For many
families in California, back-to-school expenses can be a heavy
financial burden. Parents are required to provide the classroom
with an increasing number of school supplies, ensure that their
children have clothes and shoes that fit and meet dress codes,
and purchase multiple high-cost items like backpacks and even
computers. Simply providing their children with these bare
necessities to be successful during the school year is often
financially undoable. Senate Bill 1210 is modeled after
successful programs in other states. By lessening the financial
burden on parents, our state's children benefit. Additionally,
this tax holiday weekend brings in significant revenue for
retailers, while giving parents a much needed tax break. Senate
Bill 1210 only exempts the portion of sales and use tax which is
deposited into the state's general fund, ensuring that local
SB 1210 (Gaines) 2/18/16 Page 4
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governments' budgets are not impacted. By lessening the
financial burden on parents, California is setting students up
for success and investing in our state's future."
2. A new 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). This bill would create new tax expenditure, costing
the general fund almost $16 million dollars in foregone revenue
each year. The tradeoff for providing new tax expenditure,
resulting in revenue losses, is higher taxes or reductions to
other services or programs.
3. How is 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. This can offer taxpayers greater certainty,
but 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, 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, without a supermajority vote.
4. Incentive? Generally, tax expenditures are enacted to
encourage socially beneficial behavior that would not take place
without a financial incentive. This bill may instead shift
behavior that would have otherwise occurred and incentivize all
school supply shopping to occur in a small time period, costing
the state without growing sales overall. Given that parents and
students are required to purchase schools supplies, it is
unclear whether the tax incentive ultimately encourages new
behavior or rewards behavior that was going to occur regardless.
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5. 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
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. Increased sales activity
during this period could potentially offset those costs.
Additionally, under current law, when merchandise is returned
for other merchandise, 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 computer and exchanges the
computer for a laptop, the transaction is regarded under the law
as a separate sale of the laptop and a rescission of the
original sale of the computer. To report the correct amount of
tax, the retailer may deduct the sales price of the computer
from taxable sales, and must include the sales price of the
laptop. Under the proposed holiday period, if the same computer
is purchased during the sales tax holiday period and exchanged
for the laptop 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.
6. Other states. Currently, fourteen states will hold a sales
tax holiday in 2016: Alabama, Arkansas, Connecticut, Iowa,
Louisiana, Maryland, Mississippi, Missouri, New Mexico,
Oklahoma, South Carolina, Tennessee, Texas, and Virginia.
Eligible items include clothing, computers, school supplies,
energy star products, firearms and hunting supplies, hurricane
preparedness items, and severe weather preparedness kits. For
most states, the exemption applies to specified items.
7. Let's get clear. SB 1210 establishes an annual two day
partial "sales and use tax holiday" for back to school supplies.
Specifically, the bill exempts sales of clothing, footwear,
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school supplies, books, computers, and educational computer
software if that sale is transacted at the retailer's physical
place of business from the General Fund portion (3.9375%) of
SUT. However, the bill does not define the type of items within
each category, nor does the bill limit the number of items in
each category that may be purchased. Furthermore, the bill does
not require an individual to prove the purchase is by or for a
student. The Committee may wish to consider limiting the types
and number of items that may be purchased, and requiring some
proof that the items are being purchased by a or for a current
student.
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Support and
Opposition (4/21/16)
Support : California Catholic Conference.
Opposition : California Tax Reform Association.
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