BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 659 - Hayashi
Amended: May 11, 2009
Hearing: July 8, 2009 Fiscal: Yes
SUBJECT: Excludes certain garment cleaners from the sales
and use tax.
EXISTING LAW Generally, the sales tax is imposed on
all retailers for the privilege of selling tangible
personal property at retail in this state; services are
generally not subject to the sales and use tax, including
alterations of new clothing.
With respect to garment cleaning establishments,
there are special provisions relating to their charges for
alterations. Unlike other garment-alteration
establishments, the law provides that cleaners who provide
garment alterations to their customers (whether the
alterations are to new or used garments) are providing
nontaxable services and, therefore, are the consumers of
items furnished or used in altering the garments as long as
the alteration activities represent a small percentage, as
specified by law, of their business. When meeting this
condition, cleaners are generally not required to hold
seller's permits under existing law.
EXISTING LAW defines cleaners as those who (1)
operate a location or locations as a pickup and delivery
point for garment cleaning; or (2) provide spotting and
pressing services on the premises but not garment cleaning;
or (3) operate a garment cleaning or dyeing plant on the
AB 659 - Hayashi
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premises.
Cleaners that meet one of the three provisions above
must also satisfy both of the following two conditions for
the exclusion to apply:
75 percent or more of the cleaner's total gross
receipts must come from their clothes cleaning or
dyeing services.
20 percent or less of the cleaner's total gross
receipts during the prior calendar year came from the
alteration of new and used garments.
For purposes of the calculation, total gross
receipts include all charges made by cleaners, including
the cleaner's charges for cleaning or dyeing customer
items, charges for altering garments, charges for altering
other personal and household items, charges for creating
new items such as wearing apparel, and the cleaner's sales
of miscellaneous products (e.g., lint brushes, abandoned
clothing, or collar stays).
THIS BILL provides that garment cleaning establishments, as
described in existing law, shall be regarded as consumers
and not retailers of other tangible personal property they
sell, provided such sales are less than one half of one
percent of their total gross receipts.
The bill would specify that if the sales of other
tangible personal property by a garment cleaning
establishment exceed one half of one percent or more of the
establishment's total gross receipts during the preceding
calendar year, establishment shall be regarded as a
retailer of the tangible personal property and sales tax
shall apply to the gross receipts from those sales.
FISCAL EFFECT:
AB 659 - Hayashi
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According to BOE, this bill will result in an annual
revenue loss of $12,257.
COMMENTS
A. Purpose of the Bill
This bill is sponsored by the BOE in order to
relieve dry cleaning establishments from the burdensome and
time-consuming task of maintaining records and filing sales
tax returns for negligible sales of tangible items. Some
dry cleaners make incidental sales of items such as lint
brushes and collar stays simply as a matter of convenience
to customers with very little profit margin, and the burden
associated with complying with the tax law far outweighs
the economic benefit to California.
B. Dry Cleaning is a service; lint brushes are a good
The sales and use tax law has long been
confusing to the operators of dry cleaning establishments.
Representatives from the industry expressed their
understanding that dry cleaners are not required to hold
seller's permits because they provide services and are
consumers of products they use in their clothes cleaning
and alteration activities. Consequently, even though a
small percentage of these establishments make infrequent
sales of inexpensive items, such as lint brushes and collar
stays as a matter of convenience to customers with little
markup, some of the establishments were unaware of their
tax reporting obligations. Given the state of the law,
these operators were unknowingly breaking the law.
C. You're very special
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Through enactment of a 1983 measure
specifically directed towards dry cleaning establishments
and their charges for alterations (AB 1997, Stats. 1983,
Ch. 605), the Legislature recognized the need for special
tax treatment for this industry. It recognized that these
are traditionally service establishments, rather than
retail outlets, and that most are small businesses where
sales tax compliance costs and necessary recordkeeping are
unduly burdensome. Enactment of this measure would further
support this concept by classifying these establishments as
consumers of any incidental sales of tangible property they
make, provided they do not exceed the limitations set forth
in the bill. As consumers, the dry cleaning
establishments would be required to pay tax on their
purchases of any tangible personal property sold, and the
subsequent sales of these items would be excludable from
tax.
D. What about services?
There are two ways to clarify this rule: the first is
the way this bill proposes which is to make dry cleaners
the sellers of incidental goods. The other is for the
state to examine taxing some services. Almost one-half of
the states with sales taxes levy the tax on a broad array
of entertainment services - like movies, concerts, health
club memberships and professional sporting events. In
addition, many states tax automobile repair, household
goods, equipment repair and dry cleaning and laundry. Some
economists argue that the best way to tax services is to
require taxation in locations that must currently have
seller's permits; this bill would eliminate dry cleaners
from that list.
E. Sunset
This committee has a policy to impose sunsets on all bills
that extend tax expenditures. The committee may wish to
consider adding a sunset of one year to this bill in the
event that the Tax Commission on the 21st Century or the
Legislature decides that it is worthwhile to tax services
in which case dry cleaning would be included.
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Support and Opposition
Support: Board of Equalization (sponsor)
Michelle Steel, Member Board of Equalization
California Senior Legislature
Korean Drycleaners-Laundry Association
Korean Drycleaners Association of Northern California
Opposition:None reported.
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Consultant: Gayle Miller